On 2/28/2014, we provided the reasons for tracking Evans & Sutherland (OTCPK:ESCC) to our GeoInvesting premium members when the stock was trading around $0.14. On 3/7/2013, we disclosed our long position when the stock was trading around $0.24.
Here was our original note:
The company engages in the production and sale of visual display systems used primarily in full-dome video projection applications, dome projection screens, and dome architectural treatments in the United States and internationally.
Our reasons for tracking are as follows:
- We believe ESCC presents a potential special situation opportunity rather than a growth opportunity. The company had good Q3 2013 financial results.
- Sales for the third quarter were $8.5 million, compared to sales of $5.4 million for the third quarter of 2012.
- Net profit for the quarter was $1.0 million or $0.09 per share compared to a net loss for the third quarter 2012 of $1.1 million or $0.10 per share.
- This appears to be the first time ESCC has reported a quarterly profit since going public in 2002. Company guidance infers that it will report EPS of at least $0.07 for the fourth quarter of 2013, and that it may be able to maintain profitability going forward.
- Unfortunately, this story is not without significant risk, as is the case for stocks with depressed valuation. The company's balance sheet reveals a $33 million pension liability that has resulted in stockholder equity being negative. A special situation opportunity arises from a possibility, through negotiations with relevant regulatory bodies (ERISA), that the company may be permitted to settle its pension liability, thereby removing it from the balance sheet.
- We presume that if the company is successful with this endeavor, and given its improved cost structure, shares would see a significant lift somewhere between its cash per share near $0.40 and to its tangible book value of $0.90.
- Another positive aspect to the story is that an increasing interest rate environment should lower the pension liability.
It is still unclear to us if the company can maintain profitability at a lower level of sales revenue that it reported in the third quarter of 2013. ESCC is also not ready to commit to consistent growth. Please see link for full management commentary.
Today's Special Situation Update
Yesterday, the company released year-end 2013 results. In the company's 3Q 2013 press release management mentioned that it expected breakeven result for 2013. The company easily surpassed expectations. The company reported:
- 2013 revenue of $29.6 million, compared to $24.9 million for the same quarter 2012.
- 2013 EPS of $0.11, compared to a loss of $0.21 for 2012.
- fourth quarter 2013 revenue of $11.2 million, compared to $6.7 million for the same quarter 2012.
- fourth quarter EPS of $0.18, compared to a loss of $0.08 for the same quarter 2012.
ESCC did not provide Q4 numbers, so we think that it will take a little time for investors to realize how significant a quarter it was. This is the highest quarterly financial performance since Q4 2008. Since then, revenues had generally not eclipsed $7 million. More importantly, it appears that the company is very close to resolving its pension liability obligation issue.
"We have made significant progress toward the settlement of our Pension Plan liabilities through the distress termination application process. Recent correspondence with the Pension Benefit Guaranty Corporation indicates that the application process will result in a settlement of the Pension Plan liabilities on terms that will enable the Company to continue to operate as a going concern. However, the Company is uncertain of the timing or the ultimate outcome as of the date of our 10-K filing."
Previous verbiage from management has only alluded to the possibility of the settlement of the pension plan liability. It looks like resolving this issue has taken the company from a negative to a positive shareholder equity position and added annual EPS of $0.07. It also appears the company's commentary is more positive than it was in the past. From the 2013 10K:
"We expect variable but reasonably consistent future sales and gross profits from our current product line at annual levels sufficient to cover or exceed operating expenses excluding the current expense of the Pension Plan. We believe an improved financial position as a result of relief from the burden of the Pension Plan may present opportunities for better results through the availability of credit and stronger qualification for customer projects."
"Customer interest in all of our products remains strong and we intend to continue to aggressively pursue opportunities in the digital theater and other markets served by our products, as well as development and improvement of new and innovative products. We expect variable but consistent future sales and gross profits from our current product line at annual levels sufficient to cover or exceed operating expenses, not including the expense of the Pension Plan. With relief from the burden of the Pension Plan, we believe an improved financial position may present opportunities for better results through the availability of credit and stronger qualification for customer projects.
"Our outlook for the business remains positive."
December 31 2013 backlog was up 10.7% (to $17.2 million) compared to the same period last year.
We still need to interview management in order to determine if the company is experiencing a new level of operating performance, or if the fourth quarter was an aberration. Still, the resolution of the pension obligation should be seen as a positive catalyst by the market, a scenario that we believe will send shares higher. We have attempted to contact management on several occasions and will ramp up our efforts due to the recent developments.
Valuation scenarios: Only trading at cash per share of $0.40
- Target based on fully taxed P/E of 25: $1.85
- Target based on fully taxed P/E of 15: $1.11
- Target based on fully taxed P/E of 5: $0.74
- EV/adjusted EBITDA of 5, without pension obligation: $1.43
- Tangible Book Value per share assuming without pension obligation: $0.90
We have added to our position. Ultimately, a key determinate to our valuation scenarios will depend on the terms of a potential obligation settlement. We still think an element of uncertainty still exists in the story, but far less than the past.
Disclosure: I am long ESCC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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