I have now had time to do a more extensive analysis and I concur that the results of last quarter were awful, and that the balance sheet is ugly, though not quite as bad as you paint it.
Regarding margins and inventory, note that they wrote up the inventory of Electrotech when they purchased them, and that as of 12/31 the inventory was still overstated by $7.6m, some of which was presumably written off in Q1. I assume that part of CGS is semi-fixed, and part is completely variable. Thus although the margins look bad in Q1, they should return to the 50% range by the end of the year as volumes increase and the excess inventory gets written off. Both Electrotech and PMAT had margins on the order on 50% prior to the merger.
Regarding the inventory, it is still incredibly high, even taking into account the writeup. At $50million on 3/31 you can adjust for the writeup and it is probably still $44m compared to CGS of under $10million, and more like $7.5m if you factor in the writeup, giving them a 2 year supply (not all of CGS is inventory). Even if sales return to a higher level much of this would seem likely to become obsolete prior to use, so I agree that a writeoff seem likely.
Regarding AR, I note that TRKN has taken a reserve of $3.4m for doubtful accounts already. I also note that PMAT typically ran an AR balance of about 90 days, which is awful in most businesses. But the current situation really isn't that much worse, maybe 130 days. You have to recall that sales in the last half of Q4 1997 were about equal to all of Q1 1997. But even though 4 1/2 months is better than 6 months, it still isn't good. It is certainly possible that some writedowns could happen here, too.
After examining the books, I set the breakeven point at about $33m/quarter, a target which I doubt that they will achieve this year. If they do grow that fast, they will need additional capital for parts and increasing AR, and if they don't, well........
So either way they need additional money. And they need additional Net Tangible Value in order to prevent delisting. So I believe that they will need to either find a bigger partner or do a private placement. Selling out would benefit the existing shareholders, but would also admit failure. Thus I expect that they will pursue the private placement alternative first, and any new investor will surely exact a pound (or more) of flesh, significantly diluting the possibility for upside for existing shareholders.
Carl |
