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In Part I of this series on Adept Technology (NASDAQ:ADEP), I talked about the company and the turnaround that is taking place. I also described the robotic market and the main competitors in this area. Now it's time to look ahead and what we think will happen to Adept Technology going forward.

On May 10, the company released its third-quarter results. We saw already a slight improvement in profit margins from 41.1% in the third quarter of fiscal 2012 to a gross margin of 42.7% in the third quarter of fiscal 2013. At the end of its current fiscal year, the company wants to be cash flow break even. A turnaround story can have many hurdles, and achieving profitability is, of course, the main goal.

The company planned further reductions through facility consolidations next fiscal year, beyond the planned reduced IT and communications infrastructure spending. Additionally, the company is focused on product cost reductions. Would that mean Adept's operations in Dortmund are going to be sold to KUKA Actiengesellschaft (OTCPK:KUKAF) in Germany? Kuka is the perfect fit for Adept in Germany.

The transcript of the conference call with new CEO Rob Cain was, in general, upbeat:

In the next 50 days, Adept will complete three objectives. First, we'll ensure that the voice of the customer has drag in our technology road map and have that product road map in place, launching products and product enhancements in Q4. Second, we'll continue to expand our worldwide sales, marketing and applications team.

And third, we'll continue to reinforce cash in a bottom-line culture. Even though we've embarked on right sizing the business and ensuring every dollar we spend is the highest value, we also continue to invest in our products and believe the releases in Q4 will bring the ease of use and connectivity our customers demand.

Of course, not everything in the conference call was upbeat. The company is still worried about the economic situation in Europe, which currently makes up 60% of its revenues. The company is focused on three priorities to grow its business and return it to generating cash flow positive:

  1. Accelerate the launch of mobile robot products in the global marketplace.
  2. Revitalize core business and expand packaging channels with the company's SoftPIC technology.
  3. Continue to grow the company's service business quarter over quarter.

In April, the company announced a new ePLC Robots strategy. This strategy will include new versions of the company's Cobra, Quattro, and Viper robots. The robots will interface directly with customer's existing PLC controllers, including controllers manufactured by Allen Bradley and Siemens. Deploying robots using the customer's existing PLC controllers allows operators to quickly, easily, and inexpensively deploy the robots without the need to learn a new programming language.

Financials

Adept Technology has no bank debt and has an $8 million line of credit with Silicon Valley Bank in place. This credit line is available for possible working capital uses.

Robotic Trading Comps

Robotics

Market

EV/

Current

Profit

Total

Company

Ticker

Currency

Price

Cap

Revenues

Sales

Ratio

P/S

ROE

Margin

Cash

Adept Technology

ADEP

USD

3.64

38.96M

0.56

50.09M

2.27

0.78

-62.65%

-20.74%

6.72M

ABB

ABB

USD

22.39

51.42B

1.32

40.14B

1.54

1.28

15.83%

6.68%

7.05B

KUKA

KU2.DE

EUR

38.17

1.29B

0.70

1.74B

1.60

0.74

20.22%

3.2%

244.30M

iRobot

IRBT

USD

34.51

975.32M

1.78

444.63M

4.20

2.19

9.33%

5.62%

1.33B

Rockwell Automation

ROK

USD

89.65

12.52B

1.94

6.24B

2.34

2.01

35.70%

11.60%

137.45M

source: Yahoo Finance

From a valuation standpoint (EV/revenues and P/S), the company is quite a bit undervalued compared to some competitors in the same space. Competitors such as ABB (NYSE:ABB), KUKA, or Rockwell have enough cash to make an attractive bid for the struggling company.

Why Do We Think the Turnaround at Adept Will Be Successful?

Warren Buffett has famously noted when talking about management that, "I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will." This says more about Buffett's emphasis on business quality and sustainability than his disinterest in top manager's talent. In fact, his own management style in running Berkshire Hathaway puts primary emphasis on identifying first-class managers to run his businesses and getting out of their way in letting them do it. This emphasis on knowing as much as possible about top managers' skills, aspirations, and motivations in running their companies is widely shared among the best investors.

The Man From Hale Capital Partners

CEO Robert Cain was appointed some months ago, but is responsible for much of the turnaround strategy outlined in Part I about the company. At 47, Cain brings over 25 years of experience in the high tech and capital equipment industries to the company, along with a mechanical engineering and graduate business education. Cain has the track record to turn things around and rehabilitate businesses. Two of his successes were Telanetix (telepresence) and Avure Technologies (industrial presses). Adept's letter of agreement with Cain, dated Feb. 22, 2013, entitles the new CEO to an annual salary of $250,000, bonus potential up to $50,000 for attaining performance objectives to be defined, and options to purchase up to 75,000 shares of Adept common stock at an exercise price of $4.60, with one-third of the shares vesting upon achievement of one of three specified Adept financial and new product and customer sales performance targets.

Making judgements about management is important. We think Cain is a proven turnaround specialist who will act in the best interests of the company's shareholders.

Potential Acquirers

KUKA Actiengesellschaft

The company's North American subsidiary, Kuka Systems North America LLC, recently acquired welding equipment and assembly supplier Utica Enterprises for an undisclosed sum. Kuka now holds a near 40% market share of robotics systems in North America, up from almost 25%. The acquisition gives Kuka access to new customers like General Motors and Asian automakers. Utica's roughly 300 employees will remain with the company as part of Kuka's operations, which includes 1,400 employees. Adept Technology also serves car manufacturers such as Ford, Chrysler, and General Motors. Kuka could expand its market share above 40% if it acquires Adept's operations.

ABB

Powerhouse ABB is a leader in power and automation technologies that enable utility and industry customers to improve their performance while lowering environmental impact. The ABB Group of companies operates in around 100 countries and employs about 145,000 people. The company is a leading supplier of industrial robots, modular manufacturing systems and service. A strong solutions focus helps manufacturers improve productivity, product quality and worker safety. ABB has installed more than 200,000 robots worldwide.

The company started this year with a bang following the order of 2,400 robots by BMW Group. Over the next three years the robots will be installed at factories in Regensburg and Leipzig, Germany, as well as in Tiexi, China. The ABB robots will mainly be used for material handling tasks, as well as gluing and spot welding processes. The Swiss firm is always looking for opportunities that add value to its businesses. Adept could provide this value.

What Kind of Acquisition Price Can We Expect?

That's a very difficult question to answer. But we think a 50% premium above Hale Capital's conversion price of $4.60 is a possibility. So that would leave us with a price of $6.90 going forward. As mentioned before, Hale Capital Partners specializes in deal making in the distressed investing, restructuring and turnaround marketplace. The company has a track record as a buyer and partner of choice for leading global enterprises' special situations. It brings a traditional growth equity skill set to non-traditional situations and focus on under-appreciated, under-followed, or under-capitalized businesses, whether they are small public companies, non-core divisions of larger companies, restructurings, or simply good companies in out-of-favor industries.

We believe in Adept Technology and its new CEO. We think the company's transformation will be successful. A possible acquisition will not materialize very soon. We expect that to happen at the end of this year or at the beginning of next year.

Source: Adept Technology, An Acquisition Candidate? - Part II

Additional disclosure: Dutch Trader is managing partner of RJT Capital, a Dutch-based investment fund. RJT Capital is long ADEP.

Disclaimer: Investing in small or micro-caps will be more volatile and loss of principal could be greater than investing in large caps. Investments in value stocks can perform differently from other types of stocks and from the market as a whole and can continue to be undervalued by the market for long periods of time. Loss of principal is a risk of investing.