Tii Network Technologies, Inc. (NASDAQ:TIII) design, manufacture and sell products to service providers in the communications industry for use in their networks. Their products are sold primarily to telephone operating companies (“Telcos”), multi-system operators (“MSOs”) of communications services, including cable and satellite service providers, and original equipment manufacturers ("OEMs").
On May 19, 2010 they announced the acquisition of the assets of the Copper Products Division (“CPD”) of Porta Systems Corp. for $8.2 of available cash on hand plus the assumption of certain operating obligations (primarily accounts payable).
With this acquisition, TIII expects annualized sales going forward to be in excess of $55 million, which is well above sales in the 12 months ended March 31, 2010 ($29.4 million) and the calendar year 2008 ($35.2 million). Management expects the acquisition to be accretive to earnings beginning in the quarter ended September 30, 2010 (presumably the current quarter will be impacted by acquisition related costs).
The Company experienced its share of ups and downs over the years. Thru 2005 the Company had a fiscal year that ended in June and commencing in 2006 adopted a December 31 year end. Sales dropped sequentially in each year from the FYE 06-30-2000 ($49.6 million) through the FYE 06-27-2003 ($24.1 million) and net losses were recorded in each fiscal year. Thereafter, sales and earnings increased with sales topping out at $46.8 million in 2007 and net income before taxes reaching a high of $1.97 million in 2006.
In 2007 they reported net income after taxes of $6.4 million but that included a one time income tax benefit that increased earnings by $4.8 million. Sales and net income dropped off significantly in 2008 and 2009 due to the severe economic recession. As explained later, TIII emerged from the downturn in excellent financial condition, which allowed them to make the cash acquisition of CPD that should result in significant future growth.
By the end of fiscal 2003, TIII had total assets of $15.1 million (including cash and equivalents of $772 thousand), shareholders equity of $13.8 million (net book value of $1.18) and a market cap of approximately $5 million based on the June 27, 2003 stock price of $0.43 and approximately 11.7 million diluted shares outstanding. By March 31, 2010 total assets had increased to $42.2 million (including cash and equivalents of $11.6 million), shareholders equity was $38.5 million (net book value of $2.75) and a market cap of $19.6 million based on the March 31, 2010 closing stock price of $1.40 and approximately 14 million diluted shares outstanding.
As of the close on May 21, 2010, the stock price was $1.50, which does not appear to reflect any significant premium for the CPD acquisition announced on May 19, 2010. However, based on the recent trading activity in TIII shares it appears that investor interest is picking up as reflected in the table showing the trading activity for months in 2010:
Month High Low Close Avg Vol
May $1.63 $1.29 $1.50 98,000
Apr 1.45 1.30 1.40 27,000
Mar 1.45 1.29 1.40 26,900
Feb 1.36 1.25 1.31 11,600
Jan 1.34 1.20 1.28 18,900
The number of shares traded jumped significantly to 312,700 shares on May 17, 2010 corresponding to the Company reporting favorable Q-1 2010 results prior to the market opening. The favorable results included an increase in sales of 34.7% ($7.7 million vs $5.7 million) with corresponding increases in operating income ($757 thousand vs a loss of -$196 thousand); net income before taxes ($763 thousand vs a loss of -$193,000; net income ($463 thousand vs a loss of -$232 thousand); and EPS ($0.03 vs a loss of -$.02), when comparing Q-1 2010 with Q-1 2009. The tax provision for Q-1 2010 was at a rate of approximately 39%, indicating management’s expectations that TIII will continue at a higher level of profitability during the remainder of 2010.
An area of caution in reviewing Q-1 operating results was the atypically high gross profit margin (41.2%) versus their historical average gross profit margins of approximately 33% from 2006-2009 and the Q-1 2010 net income before taxes margin of 9.9% versus a range of 1.8% to 5.7% in the period from 2004 through 2009. Presumably, part of this improvement was due to serious cost cutting measures most microcap companies executed in response to the severe economic downturn in 2008-2009. Also, going forward, the CPD acquisition will lower the gross margins on total sales, which was addressed in the May 19, 2010 press release as follows:
"One of the key aspects to the success of this acquisition will be our ability to execute our plans with our manufacturing partner to improve the margins of these new product lines. We believe that, although these products have had a lower gross margin and will initially negatively impact our overall gross margin as a percent of sales, this acquisition will be accretive to our earnings beginning in the third quarter of 2010 and will contribute to the profitable growth of our company."
The executive management team has been in their current positions with the Company during the period of improved operating results subsequent to the poor performance during the four fiscal years ending June 27, 2003. Kenneth A. Paladino, 53, was the Chief Operating Officer since December 2004. Currently, he is the President and Chief Executive Officer, and has served as a director since August 2006. Jennifer E. Katsch, 34, joined us as Vice President of Finance, Treasurer and Chief Financial Officer in November 2006. David E. Foley, 46, joined TIII in November 2005 and has been Vice President – Technology Development since February 2007. All executive officers and directors as a group (8 persons) have beneficial ownership of approximately 13.8% of TIII shares.
Telco customers represented approximately 89%, 87% and 74% of net sales for the years ended December 31, 2009, 2008 and 2007, respectively. For Q-1 2010 four customers accounted for approximately 65% of total sales vs 74% in Q-1 2009. Three top customers (those with more than 10% of total sales) accounted for 59% of total sales in 2008 and 2009 and 57% of total 2007 sales.
Management has been working to lessen this customer concentration by looking to sell new customers and also expand their overseas sales. International sales were approximately $5.1 million (19% of sales), $3.2 million (9% of sales) and $2.3 million (5% of sales) for the years ended December 31, 2009, 2008 and 2007, respectively. The recent CPD acquisition bodes well for TIII in their plan to diversify their customer base and product offerings, as well as further increase their international sales, as commented on in the May 19, 2010 release:
"The key strategic benefits of this acquisition include:
Porta Systems is a well recognized international brand, and generates significant revenue outside the United States through its strong sales channels into both the UK and Mexico, which represent large potential markets for Tii. We will now be able to leverage our financial resources, existing products and technical expertise to expand sales through these important new channels.
The acquired products expand our current connectivity and protection product lines and will allow us to significantly increase our Central Office product offerings and enter several new market segments including remote access cabinets and the domestic building entrance terminal markets. The CPD's products are complementary and should provide numerous cross selling opportunities into both new and existing sales channels for both product lines.
With the addition of two new significant international customers, we diversify our revenue stream, both in terms of customers and geography, thereby decreasing our historical concentration of sales to primarily one domestic customer."
The Company was in excellent financial condition on March 31, 2010 as reflected by a comparison of certain balance sheet information with the amounts on December 31, 2007. I use December 31, 2007 as a benchmark to shown where the Company was prior to the serious economic challenges faced by all companies in 2008 and 2009. The strong cash position at March 31, 2010 ($11.6 million) allowed the Company to buy the CPD assets for cash and without having to tap into their existing unused credit line.
($ Amounts in Thousands)
Mar. 31, 2010 Dec. 31, 2007
Cash & Equivalents $11,609 $3,261
Accounts Receivable 3,552 6,994
Inventory 10,161 9,219
All Other Assets 16,866 20,177
Total Assets $42,188 $39,651
Total Liabilities $ 3,713 $ 4,157
Stockholders Equity 38,475 35,494
Total Liabilities & Equity $42,188 $39,651
Using the closing price of $1.50 on May 21, 2010, TIII has a market cap of approximately $20 million, which is 0.7 times annual sales, and a PE multiple of 25.4 X EPS in the 12 months ended March 31, 2010 as shown below:
$ Amounts in Thousands
Except Per Share Data
12 Months Ended March 31
Sales $29,431 $32,088
Operating Income 1,449 943
Net Income 768 195
EPS $.06 $0.01
Stock Price May 21, 2010 $1.50
PE Ratio 25.4X
Diluted Shares O/S 13,982
Market Cap $20,983
Market Cap / Sales .71X
Net Book Value $2.75
TIII is a well managed company that emerged from the severe economic downturn in 2008-2009 in very strong financial condition. With the cash acquisition of CPD, and managements track record for operating the business effectively during trying times, I view the investment outlook for the stock as a very interesting speculation, which should materialize into a higher stock price for TIII shares in the future.
Disclosure: LLG Equities, LP has a long position