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I hold a B.S. in Accounting. "[T]he function of the margin-of-safety is, in essence, that of rendering unnecessary an accurate estimate of the future. If the margin is a large one, then it is enough to assume that future earnings will not fall far below those of the past in order for an... More
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  • CRVP Q1 2014

    CRVP reported earnings today. Q1 is seasonally their worse quarter.

    The press release can be found here. The 10-Q can be found here.

    Being the first quarter after their Q4 2013 acquisition, the gross margin numbers are significantly worse that before. This is because of the products acquired during the Q4 acqusition. In addition, GAAP profits were worse than last year's quarter.

    While a large part of the gross margin decline is attributable to new products, it is likely that the gross margin probably decreased on their core water and coffee products. Their coffee brand is lossing the most ground due to increased k-cup competition.

    Negatives aside, we still see some bright spots in the quarter. First, they paid off more of their debt than required by contract. Second, they had very strong cash generation in the quarter -- a cool $1 million in FCF.

    Further, they mention (and perhaps underplay) that "bad winter weather...shut down distribution several times." If a day of downtime is the equivalent to a day lost of sales (no idea whether this is true) then the weather could have played a big role in some of the declines.

    In any case, our position (on the thesis and our literal investment in the stock) has not changed: this is a turn around which has scale. Depreciation and amortization expenses are still significantly larger than their real cash cost. We expect margins to improve although we imagine their lines of business, from a revenue perspective, will continue to be under pressure.

    We will have to watch closely how the integration of their old lines of businses with their lines works out. As the 10-Q it reads:

    "The acquisition of Universal has had a significant and positive effect on revenues but has presented some issues in terms of integrating our existing sales and distribution personnel with the former Universal sales personnel, a situation that is frequently encountered in connection with an acquisition. We anticipate that achieving better integration will increase both office products sales and gross margin percentage, as various inefficiencies are reduced."

    Disclosure: I am long CRVP.

    Tags: CRVP
    Mar 17 5:54 PM | Link | 1 Comment
  • Yield On Stocks And 10-Year Treasuries: 1871 - 2013

    Below is the long-term relationship between 10-year treasuries and the yield on common stocks. Warren Buffett graudated around 1951 when the yield on the S&P was about 16%. Great timing.

    (click to enlarge)

    Common stocks have sold much closer to the price of the 10-year post 1970 -- although it is unclear what exactly explains the change of the relationship. Is it inflation? Is it globalization? Is it a change of the accounting rules (thereby changing the definition of earnings)? Is it because of the new computational trading architecture? Is it because people who experienced the collapse of stock prices from 1929 through 1932 -- a 90% decline -- died off?

    Nov 07 2:27 PM | Link | 2 Comments
  • Fonar Corporation's Acquisition Of Health Diagnostics

    What: This is a break down of Fonar Corporation's acquisition of Health Diagnostics.

    Why: Because it is not clear how much Fonar gains or losses from the acquisition.

    The Complexities Outlined: The first complexity is that Fonar is only buying 50.5% of the company. The second complexity is that Fonar has multiple classes of stock. The third complexity is that Fonar has been doing business with the acquired company previous to the acquisition. The fourth complexity is how acquisition accounting affects future GAAP results via write-ups and asset invention. In this case, I will ignore the invented intangibles and only point out that writing up the property account increases depreciation -- a non-cash charge.

    Let us try and break this down to see what is a reasonable expectation for increased profits. (The pro forma filings can be found here:

    Annual Pro Forma

    If we start with the pro forma for the year ended June 30, 2012, it is true that the net income available to common stockholders would be negative $19.2 million. Within that, there is a good will impairment charge of $16.8 million.

    But let us start at a different point. We notice that the consolidated post acquisition revenue is $68.7 million for the fiscal year ended June 2012 or a 74% increase over Fonar alone. If we look at the income statement, we see the pro forma adjustments. Some of of the adjustments are due to the fact that Fonar and HD did business together previous to the acquisition. The expenses stand at $76 million - but that includes the $16.8 million of goodwill impairment. Taking out the goodwill impairment, we are left with about $59.2 million in expenses. Therefore, we have an operating income of $9.5 million (verse $7.2 million for Fonar alone).

    If we then take out the "other income and expenses" we have the following:

    Income From Operations:

    $9.5 million

    Less: Other Expense

    $1.070919 million

    Add: Interest Income

    $0.261 million

    Income Before Provision For Income Taxes:

    ~$8.7 million

    Income taxes (there are a lot of NOLs so this will mostly be small:

    $0.141 million

    Consolidated Net Income:

    $8.54 million

    Less: Non-Controlling Interest (Fonar):

    $1.09 million

    Less: Non-Controlling Interest (HD):

    $0.397 million

    Less: Non-Controlling Interest Estimate For The 49.5% interest in HD):

    $0.8325 (this equals a 4% return on a $20 million dollar investment)

    Net Income -- Controlling Interest:

    $6.22 million (before ownership structure is taken into account)

    Ok, Fonar reported controlling interest net income of $5.77 million for the fiscal year ended June 2012. Of that, common stock holders received about $5.392 million; or common stockholders received about 93.4% of controlling interest net income. Going forward, we can expect that ratio to be ( 5,969,132 common stock / 6,351,803 total voting common shares including Class B and Class C ) around 93.9% [1].

    Applying that ratio to the controlling interest net income above, we get $5.84 million -- or the increase in net income from the acquisition, as described in the June 2012 pro forma, is about $457,000 directly due to the acquisition and assuming no synergies.

    However, the trouble with that estimate is that HD's revenue was declining in 2011 as compared with 2010 (by about negative 3.3%). If we look at the nine-months ended September 30th, 2012, we see that revenues have been increasing in the most recent period (by about 16%). Because of this, it would seem prudent to look at a nine-month pro forma. Unfortunately, Fonar and HD have not provided this, but we do have a 3-month pro forma. I am going to walk through that one, as I did the 12 month pro forma above.

    Quarterly Pro Forma

    Net Revenues:

    $19.194 million

    Less: Cost & Expenses

    $32.227 million

    GAAP Loss From Operations:

    ($13.083 million)

    Add: Goodwill impairment:

    $16.809 million

    Adjusted Income From Operations:

    $3.72 million

    (Ignore the "Gain from legal settlement)

    Less: Other expense

    $0.2309 million

    Add: Interest expense

    $0.077 million

    Income Before Provision for Income Taxes:

    $3.55 million (Fonar had income of $1.849 million as a standalone)

    Less: Provision For Income Taxes


    Consolidated Net Income

    $3.49 million

    Less: Non-Controlling Interest (Fonar)


    Less: Non-controlling Interest (HD)


    Less: Estimated Non-Controlling Interest In HD:

    $0.8155 million (this assumes Fonar's common stockholder's share is the same)

    Net Income To Controlling Interest

    $2.26 million

    Now, as above, we assume that the common stockholders get say, 93.9% of that, or, $2.12 million -- this is opposed to the $1.355 million reported on September 30, 2012. Or the difference here is about $0.765 million -- annualized, the improvement in net income is $3.06 million.

    Other Modifications -- Depreciation

    Obviously, this is pretty messy and it is for illustrative purposes only. If we look at the annual pro forma, the improvement is rather small, at about $410,000. If we look at the quarterly pro forma, the improvement is significant, at about $3,020,000.

    If we think the corporation will sell at an earnings yield of 12% going forward, the acquisition would increase the value of Fonar common stock in a range of $3.4 million to $25 million.

    Since that is a HUGE range, we have to be skeptical. But, at the same time, these pro-forma assume increased expenses in terms of depreciation because, under acquisition accounting the property acquired is written up to its "fair-value." In this case, for the 3-months ended September 30, 2012, the increase in depreciation charge is huge: $0.290 million (annualized $1.16 million). These will likely help with taxes but it will make GAAP net income appear smaller. On a cash basis (the only important basis) these charges are fabricated and don't exist. Therefore, we can SAFELY add back the $0.290 million to the "Adjusted Income From Operations" line item in the quarterly pro forma above. Let us do that.

    Adjusted Income From Operations:

    $3.72 million

    Add: Increased Depreciation Charges

    $0.29 million

    Adjusted Cash Income From Operations:

    $4.01 million

    (Ignore the "Gain from legal settlement)

    Less: Other expense

    $0.2309 million

    Add: Interest expense

    $0.077 million

    Income Before Provision for Income States:

    $3.85 million (Fonar had income of $1.849 million as a standalone)

    Less: Provision For Income Taxes


    Consolidated Cash Net Income

    $3.78 million

    Less: Non-Controlling Interest (Fonar)


    Less: Non-controlling Interest (HD)


    Less: Estimated Non-Controlling Cash Interest In HD:

    $0.961 million (this assumes Fonar's common stockholder's share is the same)

    Cash Net Income To Controlling Interest:

    $2.412 million

    Common Stock Holders Interest is around 93.9% of that:

    $2.26 million (verse $1.355 for Fonar by itself)


    If we judge from the quarterly figures, this acquisition looks good. From the annual figures, the acquisition looks pretty bland.

    Using the quarterly figures, it looks like the increase in net income could be around $3.0 million as a result of the acquisition. Using the annual figures, it looks like the increase in net income could be around only half a million or less. Given the revenue growth, it seems like in the near term the quarterly figures are more accurate.


    1. This percentage, according to historical income statements, has been slightly different than my calculated. The ratio has changed overtime as more ordinary common stock has been created through issuance. I believe 93.9% to be the most concrete and accurate estimate, although that figure is slightly higher than it has been historically.


    The opinions expressed in this article are those of the author as of the date the article was published. These opinions have not been updated or supplemented and may not reflect the author's views today. The information provided in the article does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular stock or other investment.

    Disclosure: I am long FONR.

    Tags: FONR
    Jun 28 2:58 PM | Link | Comment!
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