Sunrise, expecting poor 4Q99 financial results, axes 600 jobs

HHBR Staff Writer

Sunrise Medical (Carlsbad, CA) disappointed its investors last week with warnings of low financial results for 4Q99, just as the Home Healthcare and Continuing Care groups disappointed Sunrise with the same message.

The company said its results for 4Q99, which ends July 2, will "fall substantially below" results predicted in a First Call consensus of five analysts, who estimated earnings would be at 12 cents per share, excluding one-time charges. Now, the company is saying it expects to either break even or come close to breaking even before one-time costs. After those costs, the company will report a loss for the quarter.

About 600 employees – 12% of the worldwide staff – will lose their jobs as a result. On April 30, the company announced that it would eliminate 375 positions, but with the current outlook, it decided to expand that number. The layoffs will begin this month and continue until Sept. 1.

The expected loss and layoffs can mostly be blamed on the erosion of the Home Healthcare Group’s (HHG) gross margin and a projected operating loss at the Continuing Care Group (CCG). Even though the HHG made gains in many product lines, those gains were offset by price decreases as a result of industry changes. The CCG is expected to incur a loss because of soft revenues in its nursing home sector relating to changes in Medicare reimbursement. The group should start making "a meaningful profit contribution" in the second half of FY2000, the company said.

Sunrise Chairman/President Richard Chandler said the company will try to raise its gross margins through expense reductions, productivity improvements, new product introductions, and some price increases. "Rather than depending on price relief, however, we are gearing our cost structure to make a reasonable profit even at low pricing levels," he said.

Severance pay for the expected layoffs will have one-time costs of $4 million, 11 cents per share, in 4Q99. The job reductions, however, will generate about $18 million a year in savings for the company.

Sunrise has also decided to redenominate foreign debt into U.S. dollars in order to capitalize on its strength versus the European currency. The company will, therefore, lock in unrealized gains of about $15 million that have been reported as a component of stockholders’ equity. This should strengthen the company’s balance sheet.

A one-time, pre-tax charge of $2.1 million will be posted to 4Q99 earnings for costs to terminate corresponding foreign currency fixed interest rate swaps. The redenomination should help the company facilitate its planned refinancing of the existing bank credit line of $120 million.

Together, the severance and the credit refinancing costs are expected to come to about $6 million, 16 cents per share, in 4Q99.

In one effort to improve financial results, the company will realign its U.S. home care sales force beginning July 6 to give a single point of contact to customers, Chandler said.

"With the re-engineering program and its aftermath finally behind us and our cost structure reduced," he said, "we are confident we have taken the necessary steps to bring Sunrise profit margins back to an acceptable level in the quarters ahead."

FY98 results included a net loss of $13.7 million, 62 cents per share, on sales of $168.6 million.