I had a conference call this morning with Major General John Marcello and Deborah Ricci from Allied Defense Group, which has been a holding in the Vestopia portfolio since last December and which has had a slowly increasing weight over time.
You can feel free to read the thesis on why I own the company including some of the potential catalysts and risks by going to www.vestopia.com/danw under the private blog. I wanted to accomplish a few items with today's call: 1) Get a better understanding of the debt position of the company and whether they have sufficient cash in the short term to pay off these debts without requiring further leverage, 2) How quickly the company can turn its unfunded backlog into funded backlog and then finally into revenue, 3) The future of the relationship with Alliant Tech Systems (ATK), 4) Update on any shifts with the business plan going forward. Below, are highlights of the responses to each of these questions:
1) The debt position and cash: As of the end of March, the company had 18 million in cash with the majority being held in Europe (the company has significant/majority operations in Europe). Every 13 weeks, the company runs a cash forecast of what they anticipate for the following quarter with additional weekly cash forecasts run as well. They are presently in week 10 of the cash forecasting cycle with MECAR showing favorable results and no cash issues as they are 2 million Euros ahead of expectations thus far for the quarter. They anticipate cash will be at its lowest point in July as the company has 5.1 million euros due from their facility although they mentioned that at least 3 of the lenders are willing to restructure this debt longer-term. In November, the company will have an additional 5.1 million Euros due although they expect cash to be at higher levels at that time as some of the very large backlog is converted into cash.
The next issue I discussed with the company was related to the put feature that the convertible note holders have which if enacted could force repayment of $19 million ($12 million in late December and $7 million in mid January) next year. The company thinks they will be in a very good position to pay off the debt at that time as they work off their record backlog levels and it is also possible that the bond holders would convert this into equity if shares were to climb above $9.35 (they are currently selling for roughly $7). The company's goal is to be debt-free at the end of the year by using cash flows in the 3rd and 4th quarter to pay off debt and if needed selling one of their subsidiaries.
2) Backlog: As of 3/31 Allied Defense Group had $250 million in backlog (which is a record for the company) of which $161 million could be considered funded backlog and $89 million unfunded which is more than 4 times the current market capitalization of this small cap stock. For definitional purposes, the unfunded backlog is where they have a contract but appropriation has not yet taken place.
It is the team's hope that in the next 45 days they will be able to move approximately 50 million euros of unfunded backlog to funded status which is the largest traunche of the unfunded backlog. In terms of how long it takes for this backlog to move from unfunded to funded to revenue for the company it can vary from just a few hours for brokered ammunition contracts to up to 18 months for some MECAR contracts (electronic security). Based on the 10-Q the company anticipates a significant increase in revenues in profitability and revenues in the third and fourth quarters (last half of the year) as payments are made on these contracts.
3) Relationship with Alliant: When I spoke with John and Deborah and asked them 'why Alliant', they said that the company shares similar values. ADG benefits by potentially increasing their ammunition servicing contracts (which are very small for Alliant) while Alliant can benefit from Adages international footprint. They were also very excited about the recent win of a contract with Alliant in which they were able to beat L-3. Looking forward, they hope to continue to develop and strengthen the relationship with Alliant.
4) Business Plan: John and Deborah pointed out that they have been able to reduce the overall breakeven point of MECAR by 27% since their restructuring started a couple of years ago. They also talked of significant improvements in their management of the supply chain and the usage of SAP. They continue to look hard at corporate expenditures to minimize overall costs while at the same time bringing in new contracts. Looking forward, they would like to focus on what they do best. They emphasized the importance of the ammunition servicing business as they consider themselves experts in this area but they also discussed the continued pursuit of electronic security business.
In terms of adding shareholder value, the company is having a research report prepared and will be going on focused road shows aimed at institutional investors and they are in the process of working on giving more details of future plans and goals when they report second quarter earnings in a couple of months.
Overall, the call went very well. On the positive side, this company has the potential for significant earnings and cash flow power once they work through their backlog, the management team is focused on re-focusing the business on its core competencies and the company is developing strong strategic partnerships. Some of the risks going forward are the paying down of debt and put feature of the convertible note holders and whether management can execute on their strategic plan (although the company has traditionally done very well financially once they begin to turn some of those items of backlog into revenues, cash flow and earnings. Overall, I continue to be impressed with the management and believe strongly in the company's prospects to move the backlog into revenues which should result in significant increases in overall profitability for this turnaround company.
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Source: Dan Weiss Profile at Vestopia
You can feel free to read the thesis on why I own the company including some of the potential catalysts and risks by going to www.vestopia.com/danw under the private blog. I wanted to accomplish a few items with today's call: 1) Get a better understanding of the debt position of the company and whether they have sufficient cash in the short term to pay off these debts without requiring further leverage, 2) How quickly the company can turn its unfunded backlog into funded backlog and then finally into revenue, 3) The future of the relationship with Alliant Tech Systems (ATK), 4) Update on any shifts with the business plan going forward. Below, are highlights of the responses to each of these questions:
1) The debt position and cash: As of the end of March, the company had 18 million in cash with the majority being held in Europe (the company has significant/majority operations in Europe). Every 13 weeks, the company runs a cash forecast of what they anticipate for the following quarter with additional weekly cash forecasts run as well. They are presently in week 10 of the cash forecasting cycle with MECAR showing favorable results and no cash issues as they are 2 million Euros ahead of expectations thus far for the quarter. They anticipate cash will be at its lowest point in July as the company has 5.1 million euros due from their facility although they mentioned that at least 3 of the lenders are willing to restructure this debt longer-term. In November, the company will have an additional 5.1 million Euros due although they expect cash to be at higher levels at that time as some of the very large backlog is converted into cash.
The next issue I discussed with the company was related to the put feature that the convertible note holders have which if enacted could force repayment of $19 million ($12 million in late December and $7 million in mid January) next year. The company thinks they will be in a very good position to pay off the debt at that time as they work off their record backlog levels and it is also possible that the bond holders would convert this into equity if shares were to climb above $9.35 (they are currently selling for roughly $7). The company's goal is to be debt-free at the end of the year by using cash flows in the 3rd and 4th quarter to pay off debt and if needed selling one of their subsidiaries.
2) Backlog: As of 3/31 Allied Defense Group had $250 million in backlog (which is a record for the company) of which $161 million could be considered funded backlog and $89 million unfunded which is more than 4 times the current market capitalization of this small cap stock. For definitional purposes, the unfunded backlog is where they have a contract but appropriation has not yet taken place.
It is the team's hope that in the next 45 days they will be able to move approximately 50 million euros of unfunded backlog to funded status which is the largest traunche of the unfunded backlog. In terms of how long it takes for this backlog to move from unfunded to funded to revenue for the company it can vary from just a few hours for brokered ammunition contracts to up to 18 months for some MECAR contracts (electronic security). Based on the 10-Q the company anticipates a significant increase in revenues in profitability and revenues in the third and fourth quarters (last half of the year) as payments are made on these contracts.
3) Relationship with Alliant: When I spoke with John and Deborah and asked them 'why Alliant', they said that the company shares similar values. ADG benefits by potentially increasing their ammunition servicing contracts (which are very small for Alliant) while Alliant can benefit from Adages international footprint. They were also very excited about the recent win of a contract with Alliant in which they were able to beat L-3. Looking forward, they hope to continue to develop and strengthen the relationship with Alliant.
4) Business Plan: John and Deborah pointed out that they have been able to reduce the overall breakeven point of MECAR by 27% since their restructuring started a couple of years ago. They also talked of significant improvements in their management of the supply chain and the usage of SAP. They continue to look hard at corporate expenditures to minimize overall costs while at the same time bringing in new contracts. Looking forward, they would like to focus on what they do best. They emphasized the importance of the ammunition servicing business as they consider themselves experts in this area but they also discussed the continued pursuit of electronic security business.
In terms of adding shareholder value, the company is having a research report prepared and will be going on focused road shows aimed at institutional investors and they are in the process of working on giving more details of future plans and goals when they report second quarter earnings in a couple of months.
Overall, the call went very well. On the positive side, this company has the potential for significant earnings and cash flow power once they work through their backlog, the management team is focused on re-focusing the business on its core competencies and the company is developing strong strategic partnerships. Some of the risks going forward are the paying down of debt and put feature of the convertible note holders and whether management can execute on their strategic plan (although the company has traditionally done very well financially once they begin to turn some of those items of backlog into revenues, cash flow and earnings. Overall, I continue to be impressed with the management and believe strongly in the company's prospects to move the backlog into revenues which should result in significant increases in overall profitability for this turnaround company.
_____________
Source: Dan Weiss Profile at Vestopia
