MRVC Technology in Progress
I finally found some time to do the "Pink Scenario". Clearly the SEC is concerned about excessive writeoffs of "technology in progress", and Pink has latched onto that as impending bad news. IMO he has been lucky to have benefitted so far and is still holding short waiting for the shoe to drop. I don't know if it will happen, but I wanted to know the worst case impact on earnings going forward; so here goes....
For these purposes, first I looked at the writeoffs for Restructuring. MRVC states in their 10Q the Company recorded as restructuring costs, which primarily related to the closing of facilities, a reduction of its workforce, elimination of product lines and the settlement of distribution agreements. The sum of these amounts have been $31.7 million, but I assume that these writeoffs are unquestionably acceptable.
Now onto the TIP .... MRVC says "For projects that will have no alternative future use to the Company and where technological feasibility had not yet been established, the Company allocated ... to technology in progress" If technically proveable, this seems like the reasonable approach the SEC would want (as opposed to AOL and Miribilis). Also MRVC has booked some amounts as Goodwill or Investment when they felt it appropriate.
In total TIP writeoffs have amounted to $54.6 million (Galcom, ACE in 1995 = $6.2m, Fibronics in 1996 = $17.8m, Xyplex in 1998 = $30.6m). And given the magnitude of these amounts, there is a risk that some or all may be questioned. If they are challenged, the SEC would want to see some or all of these amounts capitalized as Goodwill and written off over time.
There are 25,734,000 diluted shares outstanding (I'm excluding the recent convertible offering from all of this analysis just for simplicity and because including it makes the worst case less painful). The company policy on Goodwill is that it be amortized on a straight-line basis over 8 years. So if they redid the statements as contemplated, they would have an extra goodwill charge of $0.265/share per year.
Changing the proportion that is capitalized or the term would change this number, but this is pretty well the worst case as I have included ALL of the TIP expenses. I would suggest that even if they are forced to do this, that MRVC at 16 3/4 is trading at 11.5 times next years projected earnings of $1.45 ($1.72 - 0.27).
Their growth rate remains the same, their book value increases, they still have the cash for acquisitions, and they still have the same great technology and prospects, and the stock is still dirt cheap. The "shocking news" would amount to a 20% and 15% reduction in this years and next years earnings respectively, and I believe that the "kneejerk" reaction may reduce the stock price to $15, but I continue to believe that the price will be in the thirties within a year.
I bought some more today, and am prepared to buy more if they go on sale further.
For discussion only; my opinion not investment advice.
** David |
