Ultrak Report
Here is the report from JC Bradford...their estimates are conservative too. Enjoy
After the close on Tuesday Oct 22 ULTK reported 3Q EPS of 14 cents including a one time gain on the sale of its investment in Lenel Systems. Excluding the gain, earnings were 12 cents. A 40% decline from the same period last year but two cents above our estimate on higher expected revenue and profitability. Revenue increased 44.2% over the last year and 15% sequentially to 50.7 million dollars, $2.3 million or 5% higher than our forecast. The revenue growth was driven entirely by acquisitions made over the last 12 months as Ultrak's core business remained relatively flat.
Gross profit increased 45% over last year to 16 million and was approximately $1 million or 7% higher than our estimates due to higher than expected revenues and gross margins. Gross margins at 31.6% was 60 basis pts higher than our assumption. ULTK's gross margins have been negatively impacted by competitive pricing in the commodity CCTC markets which has been offset by some of the acquired businesses particularly MDI (Monitor Dynamics). Gross margins also continue to be impacted by the strength of the dollar but management noted that it is focused on reducing production costs of the commodity type products to stabilize or improve gross margins.
Operating income decline 35% yr. to yr., to $2.3 million as operating expenses grew 75% compared with the 42% revenue growth leading to a 560 basis pt decline in operating margin. Ultrak's operating expenses have grown faster than sales due to increased R&D and marketing expenses incurred in developing and introducing new products. Operating income did increase over 200% sequentially and was 37% higher than forecasts. Operating expenses as a percentage of sales declined 290 basis points sequentially to 25.8% and was 40 bp lower than assumption due to higher sales volume. Operating margin improved approx. 300 bp from the June quarter of 4.6%.
Net interest and other income was $455,000 higher than expected due in part to a one time gain on the sale of ULTK's investment in Lenel, an access control software developer. Pretax income of $3.3 million was $1.1 million or 50% higher than expected. Net income declined 14% yr. To yr. To $2million and was negatively impacted by a higher tax rate of 38.7% compared with the 37.3% estimate and 35% in the previous year. EPS excluding the gain decline 40% due to an additional 3.5 million shares outstanding following the secondary offering in 4Q 1996 and acquisitions made over the last year. The only notable change in the balance sheet occurred where cash dropped to $21.6 million for $29.9 million in the June quarter. Ultrak remained debt free with only $286,000 in notes payable. ***Also, during the conference call the CEO (George Broady said that they were near to getting a $40 million dollar line of credit with a bank).
Outlook
Management noted that Ultrak's core business experienced a slight uptick in Sept which has continued into October. Sales of consumer do it yourself products through Sam's clubs have picked up and the introduction of a new dental camera (Ultracam) appears successful. Ultrak will be introducing a large number of products over the next 6 months that could lead to renewed top line growth. The DAVE system is currently installed in six locations and an additional 15 are planned including Superfresh and Publix supermarkets. Maxpro is in final negotiations for another project with ITT to equip a riverboat in Indiana and has introduced a new product aimed at the prison market. The sales cycle to prisons is expected to be fairly long and is viewed as a negligible growth vehicle in 1998.
Ultrak has continued to acquire security companies consistent with their strategy of adding new technology or entering new markets. They have now either acquired or made investments in companies in Japan, South America and Singapore in the last few months. Most recently they acquired Norbain France (a division of Norbain PLC) a publicly held corp. in the UK. They will be combining this acquisition with their Groupe Bisset Subsidiary. Management said that they are looking for additional partners in South America, China and Eastern Europe.
While we are encouraged by the improvement in 3q operating results and believe new product introductions and global expansion are key drivers of future growth, we remain concerned whether Ultrak can successfully execute its strategic plan in a timely manner. We are reluctant to raise our estimates at this time until we see concrete evidence of top-line growth excluding acquisitions. As Ultrak enters new markets around the world and introduces a large number of new products, revenue and earnings visibility diminishes to a degree particularly in light of the integration problems and product delays the company has experienced in the past. Our 4th quarter and 1998 estimates remain at 15 cents and 64 cents respectively and our 1997 estimate is 50 cents reflecting the 2 cent upside surprise in the 3q. On a positive note we expect the return to positive year over year comparisons to being in 1998 1st quarter. Our 1998 estimate represents a 27% growth rate on approximately 12% revenue growth. Our rating is unchanged at neutral. |
