Splashdown — Unitek has landedPosted: November 13, 2013
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Unitek Global Services has touched down
I follow Unitek Global Services and its equity, UNTK, with a lot of interest.
In a posting on July 1st, 2013, I detailed the steps that the company, which I believe — in spite of the company’s considerable debt — yields significant opportunity for value investors, has to take in order to overcome certain difficulties that it had encountered.
As I explained in the posting (here,) my investment in the company, which on April 12th, 2013, announced that it had uncovered fraud in one of its divisions, was based on what I perceived as a strong over-reaction by the market, giving bottom-feeders like myself an opportunity to buy a valuable equity at a significant discount. In the posting I explained the steps to recovery:
From a 70,000 feet perspective the following were the steps that I identified in the path to recovery: (1) the company will refinance its debt, (2) the company’s largest customers will confirm its support of the company, (3) the company will announce its earnings and revenues for fiscal year 2012 and for the first two quarters of 2013, restating earnings and revenues for 2012 with resulting significant earnings loss, (4) the company will focus on operating its business and bringing down its debt, (5) a purported class action lawsuit against the company will be settled or otherwise disposed of, and (6) the debt will be paid off, possibly through a secondary offering once the per share price has normalized.
In a later posting, on October 16th, 2013 (here,) I summarized, the progress, noting that:
[i]n the months since July, Unitek Global Services has been on a non-stop journey towards recovery and yesterday it appears to have final reached safe heaven, entering the financial equivalent of the Earth’s atmosphere.
During its journey, Unitek Global Services has refinanced its revolver and its long term debt, restored its credit rating, cemented its relationship with its largest customer and restated its 2012 financials to reflect the division level fraud (surprisingly, I think, showing only a modest revenue and income impact from the fraud.)
This week, the company took the near-final step, releasing its financial results for the first two quarters of 2013 (showing no restatements.) Subsequently, the company was upgraded by S&P.
This left only two actions outstanding: (1) The disposal of the rather silly class action lawsuit, which I have written about at length in earlier postings, and (2) the refinancing and/or early payoff of the rather severe debt, which, as I have written about in the past, requires the normalization of operations so as to stabilize cash-flow and the per share price of UNTK, the company’s equity.
Yesterday on November 12th, 2013, the company released it financial results for the third quarter of its fiscal year 2013 in a 10Q filing. And, oh boy!, were the some good news.
Class action lawsuit — Poof! Gone
First, pending the court’s approval, the lawsuit, which never really had any bite, was disposed of through a minuscule settlement:
As previously disclosed, a consolidated class action lawsuit was filed against the Company and certain of its current and former officers in the United States District Court for the Eastern District of Pennsylvania. The case, entitled In Re UniTek Global Services, Inc. Securities Litigation, Civil Action NO. 13-2119, alleges that the Company made misstatements and omissions regarding its business, its financial condition and its internal controls and systems in violation of the Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In October 2013, the plaintiffs and the Company reached a preliminary agreement to settle all claims for an amount of $1.6 million , including attorneys’ fees and expenses.
This preliminary settlement is subject to the approval of the court, and the parties intend to submit settlement documents to the court by mid-December. The Company believes that the settlement amount will be covered by insurance and has accrued the $0.3 million deductible.
On the related conference call, today, the company’s Chief Financial Officer confirmed this news:
“As we disclosed in our press release and 10-Q, since the end of Q3, we have a preliminary settlement on the class action shareholder litigation subject for approval.
Our insurance covers a majority of the $1.55 million settlement and we have recorded the expense of $250,000 related to our deductible in our 2013 income statement as a component of the restatement expense.”
As I have written about in the past, this lawsuit was always, in my opinion, borderline idiotic, causing far more damage than the underlying issue, a minor fraud in one of the company’s divisions that originated with an acquisition of a company called Pinnacle.
The company reported nice revenue numbers, removing concerns that the fraud and lawsuit related issues would cause its customers to flee en masse:
Revenues increased $48.4 million, or 15.3% , to $365.1 million from $316.7 million for the nine months ended September 28, 2013 and September 29, 2012, respectively. For the
Fulfillment segment, revenues increased $16.3 million , or 7.2% , to $240.9 million from $224.6 million for the nine months ended September 28, 2013 and September 29, 2012 , respectively. The increase in Fulfillment revenues was primarily attributable to the impact of the Skylink acquisition ($21.2 million) and growth from satellite internet customers ($2.8 million), partially offset by lower volume from our cable fulfillment customers ($8.0 million). For the Engineering and Construction segment, revenues increased $32.1 million , or 34.9% , to $124.2 million from $92.1 million for the nine months ended September 28, 2013 and September 29, 2012 , respectively. The increase in Engineering and Construction revenues was primarily attributable to revenue growth from our AT&T projects in the northeastern United States ($27.0 million).
The events of the last six months were not, of course, without consequences, and the company provided information about an expected reduction in revenues from AT&T, one of its largest customers:
We were notified in the second quarter of 2013 by AT&T that they would reduce the amount of wireless construction work that we would perform for them, the impact of which is expected to reduce our forecasted revenues by $21 million for 2013.
The good news on this, however, was that the company in the third quarter had managed to somewhat compensate for the quarter’s revenue loss by picking up new business:
For the Engineering and Construction segment, revenues decreased $4.4 million, or 9.6% , to $41.5 million from $45.9 million for the three months ended September 28, 2013 and September 29, 2012, respectively. The decrease in Engineering and Construction revenues was primarily attributable to a reduction of AT&T work ($7.9 million) offset by an increase in other construction and systems integration projects.
Let’s get the boys out of the water!
There is now only one challenge left, and the company’s Chief Executive Officer addressed it head-on in his remarks today:
“Refinancing and reducing our debt is among our top priorities. This is our two-step approach: The first was a recent financing, which gave us improved liquidity and flexibility. The second step is to run more efficient operations that will produce better cash flow and operating results that will allow us to refinance these facilities after our year end close.”
When the company’s Chief Financial Officer delivered his remarks, he got more specific:
“As Rocky noted, our debt has increased in the higher interest rates due to the circumstances earlier in the year. This makes our objective clear. We expect to close out the year by continuing to improve the business results and work to refinance by mid-2014.”
Nice! Focus on operations and then refinance or dispose of the debt. In the immortal words of Bob “Bob” Shelby from Haiku Tunnel:
Go back to your desk. Settle down. Focus. And catch up.
Now, let’s take a close look at the moon dust
As I wrote about in an earlier posting (here,) there are at least three possible or probable benefits that might come out of the matter once, so to speak, the dust has settled. One of these, the reclaw of an earn-out related to the Pinnacle acquisition, was addressed by the company’s Chief Executive Officer in his remarks:
“Several questions have arisen related to the Pinnacle earn-out that was paid in 2012, which consisted of both cash and stock. We are actively exploring our alternatives and remedies with respect to this issue.”
As I detailed in an earlier posting (here,) this reclaw has the potential for adding anywhere between $0 and $26 million directly to the bottom-line. If the company is successful, then such reclaw should amply offset the loss of revenues and margins from the AT&T relationship.
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