Risk mitigation forces profit warning at Pace

11 May 2011

11 May 2011 | Lindsay Clark

Technology manufacturer Pace has warned investors of lower than expected margins because it bought up components in advance to avoid supply chain disruption.

The UK firm, which builds set-top boxes and networking equipment, said that during the first quarter it had been buying components in anticipation of supply chain problems in the wake of the natural disasters in Japan. However, the move has resulted in a squeeze on margins and a fall in profits.

“Pace has built inventory and purchased components ahead of schedule to ensure that it can deliver on customer orders within a tight supply chain environment,” the firm said in an interim management statement. “This has increased costs.”

Meanwhile, the company has also suffered disruption because of the earthquake in Japan. This “further exacerbated the supply chain environment in the period and increased risk for the year,” the firm said.

As a result of both factors, the company said its operating margins would be around 5.5 per cent in the first half of the year, before returning to its medium term 8 per cent operating margin target in the second half of the year. On the day of the announcement [10 May] company shares fell by around 40 per cent, but have since started to recover their value.

Pace CEO Neil Gaydon said: “Although we will now not be able to make up this first half under-performance in the second half we continue to drive long-term growth and profitability. The demand for our products and technologies continues to grow, ensuring our ongoing market leadership.”

While component shipments had been interrupted by the Japanese tsunami in the electronics and automotive sectors, supply chains have been stretched for some time. In July last year, Nissan halted production in three Japanese factories because of a shortage of electronics components.

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