Hi Wally, Jaime, and the "Thread,"
It is obvious that the recent downward pressure on SMU is the result of
revisions in current quarter earnings estimates.
The reasons for the revision are threefold:
1) Revenues from some government contracts have slipped to the right.
Although expenses are fairly regular, percentage of completion accounting
generally results with most of an order's profitability coming with the
tail end of payments. A quarter or two delay in revenue recognition
affects current quarter estimates, although the net effect will generally
be offset over the next few quarters. This is likely to play out here.
2)BABS introduction has been delayed, as government testing took some-
what longer to complete. Accordingly, revenue was lost in quarter three,
but it is just a delay and not a cancellation. My best guess is that
we are about 3-4 months behind the curve. Again, no change in the sit-
uation, other than it will take an additional quarter or two to get
revenue.
3) 16G seat production is currently inefficient, and to get promised
orders out the door has cost the company more money than anticipated.
Unfortunately, current production is split over several factories, and
with business ramping as fast as it has, management was unable to
effectively control the manufacturing process. But, commitments have
to be met in the long-term interest of the product line, and it isn't
yet clear how much "profit" will be contributed to overall results.
This entire problem, which I alluded to in an earlier post, is easily
resolved, albeit with the passage of a few months. The company will
be consolidating its manufacturing facilities within the next few months,
and a long-term lease on a single property will help get these processes
under control and more cost efficient. I think this isn't a severe
problem, nevertheless it is another disappointment for investors, who
have been at least marginally disappointed for the last several quarters
despite the obviously upward trend in sales.
Perhaps it is just a case of "too much, too soon" as far as 16G is
concerned, but the action in SMU's stock is obviously a call to management
to attend to the efficiencies of the business. Mr. Market has a way
of focusing your attention from time to time, and although this will
have only a transitory effect on Simula's overall value, for insiders it
has to have been as painful as it has been for us.
Recap.....: All the problems are transitory, though obviously difficult
for the market to digest given the last couple of quarter's disappoint-
ments.
The fourth quarter will likely be substantially profitable, as high
costs associated with 16G will be worked throough. Consolidation of
plants will be complete by the first quarter, and with lower cost of
materials (SMU is saving some money in that area) 1998 numbers should
be minimally effected.
"Whoever said it would be easy?" |
