UTStarcom nose-dives on poor first quarter results; TOP Tankers postpones pricing for a week or two

By Sara Rosenberg

New York, May 6 - UTStarcom Inc. was the name of the day in convertible trading as its bond plummeted on disappointing first quarter numbers. On the new issue front, TOP Tankers Inc. pushed off pricing its perpetual convertible offering until the May 9 week or the week after in response to adverse market conditions that were largely the result of the recent auto downgrades.

UTStarcom's convertible fell off by about 13 to 15 points on the day, closing the session around 62 bid, 63 offered, because of "bad earnings that came out last night [Thursday]," according to a trader. "I think it was the heaviest traded bond of the day. The stock was down about 31%. Closed at $7.24."

After the close Thursday, UTStarcom announced first quarter numbers that included net income of $38 million, or $0.29 of diluted earnings per share, compared to net income of $54.8 million, or $0.40 of diluted earnings per share in the first quarter of 2004.

Furthermore, the company said that decline of its wireless service in China will come faster and will be worse than was previously expected.

"...We now expect this year's decline in the PAS business in China to be more significant than we had initially expected due to the maturation of the market and uncertainty around timing of 3G license awards," ," said Hong Lu, chief executive officer and president, in the news release.

"We now expect the decline to be in the range of 40 to 50% from 2004 revenue levels of approximately U.S. $2.0 billion, rather than our originally anticipated decrease of 30%. While we are pleased with the initial momentum of our globalization efforts, we are also realistic that the development of new markets and new products takes time to cultivate consistent revenue streams."

Because of the problem with the PAS business, UTStarcom has come up with a restructuring plan under which it expects to reduce its headcount by approximately 1,400 employees, expand its outsourcing of operations in the areas of supply-chain and IT, reduce overall operating expenses by approximately $40 million per quarter and reduce working capital requirements by $200 million by the end of fiscal year 2005.

"We believe the restructuring plan we announced today will allow us to reduce break-even revenues for each product line, align our investments with key growth opportunities and facilitate the process of globalization. The primary goal of these improvements is to optimize our cost structure and allow UTStarcom to deliver consistent and sustainable profitability for our stockholders beginning in the second half of 2005," said Mike Sophie, chief financial officer, in the release.

Other first quarter results included revenues of $901.8 million, an increase of 44.9% over last year, and overall gross profit margin of 26.4% as compared to gross profit margin of 28.3% of sales in the first quarter of 2004.

For the second quarter, the company anticipates total revenues of approximately $740 million, gross profit margins of 15-18% and a loss per share of approximately $0.70-$0.80 inclusive of non-cash tax and restructuring charges.

UTStarcom is an Alameda, Calif.-based provider of IP-based, end-to-end networking solutions and international service and support.

TOP Tankers delayed

TOP Tankers has postponed pricing of its $300 million perpetual convertible preferred to sometime within the next two weeks, with the new pricing date expected to surface on Monday, according to a market source. The deal was expected to price after the close this past Thursday.

The reason behind the postponement was "market conditions," a source explained, adding that "GM and Ford getting downgraded to junk" definitely jolted the market.

On Thursday, Standard & Poor's downgraded both Detroit, Mich.-based automaker General Motors Corp. and Dearborn, Mich.-based automaker Ford Motor Co. to junk status because of competitive challenges and - in large part - worries that sport utility vehicles would no longer be as profitable for the companies has they had been in the past.

S&P lowered GM's long- and short-term corporate credit ratings to BB/B-1 from BBB-/A-3, with the rating outlook set on negative. Ford's long- and short-term corporate credit ratings were lowered to BB+/B-1 from BBB-/A-3, with the rating outlook set at negative.

TOP Tankers' $300 million convertible deal is talked at a dividend of 5.875% to 6.0% with an initial conversion premium of 30% to 32.5%. Price talk on the deal had been sweetened earlier in the week from a dividend of 5.625% to 5.875% with an initial conversion premium of 32.5% to 37.5%.

Furthermore, in addition to the put option in year five, puts were added in years 10 and 15. The issue will be non-callable for five years. There is full dividend protection, as well as takeover protection, for holders.

A $45 million greenshoe is available.

Cantor Fitzgerald is bookrunner of the Rule 144A offering that is effectively being sold on swap, as the company also said that it has been advised that Kingdom Holdings, one of its shareholders, intends to purchase about $20 million of TOP Tankers common shares from purchasers of the convertible.

Also, the Athens-based shipping company said it plans to use about $50 million of proceeds to repurchase stock.

Remaining proceeds will be used to fund vessel acquisitions and for general corporate purposes.

GM, Ford take backseat

GM and Ford moved out of the spotlight on Friday but not completely as people are now thinking about how to manage their portfolios if a second downgrade comes, such as from Moody's Investors Service or Fitch Ratings, that would push the companies into an all junk status from their current split-rated position.

"People are not talking about GM and Ford as much but talk has started about making room for the second downgrade. Some people say that [the S&P downgrade] was expected but I think it caught some people off guard. I don't think they thought it would happen as soon as it did," a trader remarked.

GM's convertibles mostly had a decent day, with the GBM issue dropping $0.20 or 1.19% to $16.60, the GPM issue gaining $0.22 or 1.17% to $19.09 and the GXM issue gaining $0.20 or 0.87% to $23.19. The stock closed down $0.10 or 0.32% at $30.76.

Meanwhile, Ford's convertible sold off a little on Friday, with the 6.5% convertible trust preferred dropping $0.79 or 2.06% to $37.60. The stock closed up $0.06 or 0.62% at $9.76.

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