Allied Defense Group: Turnaround Progress

Allied Defense Group (ADG) is nearing completion of its 2-year turnaround from a company facing significant liquidity issues due to a lack of corporate focus (i.e. too many acquisitions and too much concentration on one client) to one that is able to fully concentrate on its core ammunition business across the globe.

In the beginning of 2007, the company had several divisions which took management focus away from concentrating on key initiatives: 1) Ammunition division- This included MECAR, MECAR USA, Allied Technology and Titan, 2) Electronic Security- VSK Group (access control, intrusion protection), CMS, NSM (industrial and law enforcement security products) and GMS (miniature digital transmitters and receivers and equipment for surveillance) and 3) What they termed 'other,' which included their environmental safety and security segment termed Seaspace. The company faced significant cash flow issues in 2007 as their largest customer delayed expected ammunition orders which forced credit facility defaults which forced a refinancing of debt.

In order to improve cash flows and reduce reliance on one customer in the future the company has undergone a major restructuring. In the past 18 months, the company has sold Seaspace, VSK, GMS, CMS, Titan and Allied Technology. As of the beginning of the fourth quarter, the company should be focused on its strategic core business divisions of MECAR and MECAR USA along with the electronic security division of NSM.

With the new focus on its core operations, Allied Defense Group has record backlog which as of the end of the second quarter totaled $238 million ($153 million funded and $85 million unfunded) -  more than 4x the market capitalization of the entire company. With the company's recent sale of its GMS unit, its debt structure has cleared up significantly with the ability to pay for the remaining balance due of a cash line due in August as well as some of their other obligations. This will allow the management of the company to focus on the core businesses and to continue to develop additional strategic relationships across the globe much like what has been done with Alliant Techsystems (ATK) and with its new partnership with the country of Jordan.

Based on my financial models and the continued strong backlog of the company going forward, the company has the ability to earn $1.00 per share over the next year with the potential for acceleration in these earnings during 2010 and 2011 with strong cash flow generation especially in the fourth quarter of 2008 into 2009.

Comments

[madoff:]

isn't this the one pirate just dumped due to common holders losing out to convertibles?

2008 Aug 27 03:27 PM

[Dan Weiss:]

Pirate distributed the shares to its hedge fund holders earlier this year which is one of the primary reasons for the decline a couple of months ago.

2008 Aug 27 09:56 PM

[Dan Weiss:]

This stock has been holding up exceptionally well over the past few weeks (actually up for this month so far) as positive news and an improving balance sheet help the company.

2008 Oct 12 05:45 PM