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I haven't dissected all the liabilities, but the best path to recovery for the stock is for the company to split this company up into pieces and auction it off. The US transportation biz is a disaster so let's just shut that down. The rest of the biz has some operating value, particularly the Industrial businesses, but their value gets overshadowed by the operating losses in the US transportation business.
Candidly, the company's operating performance is awful in my estimation. I still own a small fraction of my original stock based purely on option value that the restructuring guys might be able to prolong the BK process enough to produce a decent quarter. That said, I don't think that will likely happen. EBITDA was essentially flat at a low level, but free cash flow (using EBITDA-capex as a proxy given the balance sheet is a mess to decipher due to BK adjustments) is negative.
I think the restructuring team has done a poor job against a decent (admittedly not stellar) backdrop.
I think there is a reasonable chance of recovery for the common. The magnitude of recovery will depend, to a large degree, on the level of EBITDA that the company can achieve on a trailing twelve months basis by the end of the fiscal year (March). Given the December and March quarters are the seasonally strongest periods, a lot will depend on the company's performance in those quarters. Given the fiscal year doesn't end until March, I don't believe the company will present a POR until after the fiscal year end, but that is my opinion. I know others on this board have suggested differently.
There is a public filing from the last BK that details the analysis that the judge employed in determining the enterprise value of the company. If you read that filing, you'll see that the judge looked at three methods of valuation analysis: 1) comparable companies 2) M&A multiples 3) discounted cash flow. The first two explicitly incorporate EBITDA and the third relies on EBITDA to a significant degree (but also projections from the management team).
The company will likely push for a lower valuation than the creditors committee so there will be a wide range of estimates.
That's a fair analysis of the report in my view. We have to keep in mind that these reports only reflect the US operations. Moreover, they incurred ~$3.5mm in professional services fees, which to a large extent goes away post bankruptcy.
The positive cash flow is good and the company operated at close to breakeven on an operating income basis and would have positive EBITDA of a couple million by my estimation (ignoring corporate D&A).
JCI gave reasonably good guidance for 2014 and beyond prior to its analyst day today. Just so everyone is clear, JCI's automotive battery business falls under its Power Solutions segment, not the automotive experience segment.
JCI guided to 7-8% growth in 2014 for the battery segment though growth is likely to be driven outside North America, particularly in China. JCI's operating margin guidance for batteries is for over 16%...obvioulsy Exide is a long way from there and has scale disadvantages, but there is significant room for improvement. Over the medium term, which JCI defines as 2018, they are actually forecasting growth to accelerate modestly to 8-9%, which is encouraging.
JCI's stock is down slightly today because 2014 EPS guidance was slightly weaker than expected. That said, the stock still trades at over 10x LTM EBITDA. That's a healthy multiple and it will be one input into the ultimate valuation of Exide.
ENS also trades at over 10x LTM EBITDA. I've already highlighted Exide's relative performance in industrial batteries...I'll let you form your own opinions as to whether Exide is performing relatively well in that segment.
And your point is what? I just stated a fact...glad you're finally embracing the notion that facts matter, not just assertions...LOL
I'm getting a little tired of you incorrectly characterizing my statements and arguing just based on assertions. Get your facts straight before you make these accusations and inferences.
Your the one who intimated that JCI and ENS were performing great relative to Exide. I just pointed out that factually, that's not a correct statement save for the US transportation business, which we all know isn't doing great for a variety of reasons. Exide has a lot of room for improvement in terms of margins, but it's market share in areas outside US transportation is holding up well despite all that's happened.
Have you ever done a fairness opinion? I have as an investment banker several times...one of the inputs into a valuation analysis is what's called comparable company analysis. ENS and JCI are trading at very healthy multiples of EBITDA and those multiples will be used in determining a value for Exide when the time comes. That was the essence of my argument.
JCI's Americas battery business was up 1% in the most recent quarter. That's a fact. Europe and Asia were up 11-12%..Exide's US business was down (you can form your own opinion based on the numbers, I've stated my case) and the European and ROW business, ex the Australasian unit, was up 14%...
Just arguing based on facts...form your own judgments and opinions...
I'm out for the rest of the day...good luck to all.
JCI's battery business isn't growing much, it's the other parts of their business. Go look at their most recent two quarters.
Exide's industrial business in the US actually outgrew ENS in the most recent quarter. ENS' US business was up 4%, Exide was up 6%. Seems like a favorable comparison to me. In terms of operating margins, ENS is higher at slightly over 15% and Exide was 12.5%, but a lot of that differential is due to scale. On the positive side, there is room for improvement.
I suggest you dig a little further in the MD&A...
Transportation Americas net sales, excluding foreign currency translation impact, decreased 12.6% primarily due to lower OE unit sales and $19.7 million lower third-party lead and tolling sales resulting from the closure of the Company's Frisco, Texas recycling plant and idling of the Company's Reading, Pennsylvania recycling plant in Q4 fiscal 2013.
Transportation Europe and ROW net sales, excluding foreign currency translation impact, were flat year over year as stronger unit sales in both the aftermarket and the original equipment channels were offset by $18.3 million lower sales resulting from sale of Transportation Australasia business in Q4 fiscal 2013. Lead-related pricing actions had a favorable impact of $3.2 million.
If you read the MD&A, they disclose the revenues from Frisco, Reading and the Australasian unit and you can do the same math that I did.
I disagree with you assessment of lack of organic growth across the entire business. The Transportation Europe business had 14% revenue and 19% EBITDA growth on an organic basis. Lead only added $3.2mm to revenue. If I exclude that, the company still had 12% revenue growth. Did currency help? Sure, but one has to keep in mind that European economy is just starting to grow again, so in light of what were declining economies in several parts of the Eurozone, that's a decent result.
The Industrial Energy US business had 6% revenue growth and 65% growth in EBITDA. Read the MD&A and you'll see that the revenue growth there was due to meaningfully higher UNIT sales.
Am I arguing that the transportation businesses are going gangbusters? No, but we're talking about a seasonally slow period and one that included the impact of Vernon still not operating at full capacity. I'm expecting the December and March quarters to be much better given cold weather in the US and ongoing improvement in the Eurozone.
If you believe that the enterprise value has declined 33% or more since the last BK, then you should not own this stock. I personally disagree with that view given the company has $1.9bn of tangible assets and almost $1.2bn of gross PP&E. Management mismanaged the company, but that doesn't mean value can't be resurrected with a good couple of quarters and appropriate actions in terms of cost reductions and potentially asset sales.
Q3 EBITDA
By my math, excluding the Australasian business that was sold last year and restructuring charges, EBITDA was up almost 6% on a year over year basis. Revenues increased 3.6% on an apples-to-apples basis. Before anyone tells me they were down in the financials, I excluded revenue from Frisco and Reading which were both shut down and the Australasian unit. Perhaps most importantly, EBITDA-Capex was a positive $10mm versus break even last year. That's an important metric as it's a good proxy for pretax free cash flow. Given the company won't be paying taxes for a while, it's also a good proxy for free cash flow once working capital normalizes.
The company burned cash and had to draw on the DIP facility because a big % of the accounts payable became due once they filed for CH 11. That should normalize in future periods and once they exit and will provide a big boost to cash flow at that time.
So a number of positives in the past quarter and lead prices have been stable so far this quarter, so let's hope they keep making progress in boosting profits.
You must have misinterpreted what I said. Frisco has already been sold, but the funds have been tied up in escrow due to issues surrounding the clean up of the site. They're hoping to get the funds sometime next calendar year. That would be a big boost to the cash position though the DIP agreement, from what I understand, already states that funds received from Frisco must be used to pay down the DIP facility.
GAAP Accounting vs. Cash flow
Sorry about my last post..accidentally posted before finishing
To answer your question, I don't pay attention to the book equity or tangible asset value in this instance. There are so many accounting adjustments that have taken place based on historical events (many non-cash), that the book equity really isn't a relevant figure. Book value is very important in the financial sector and some others where you have assets that are traded or priced frequently in markets (ie. securities).
What matters in this case is the market value of the enterprise and the total fixed obligations (debt, accounts payable etc.) that must be satisfied prior to emergence from bankruptcy.
You can't determine the market value of the company entirely from the balance sheet. The only values that approximate market value are the working capital components (ie. current assets and liabilities). Even the PP&E reflects historical costs, which may deviate significantly from current market value (though if land is a big component, it's likely to have appreciated somewhat over time).
GAAP accounting
Because of seasonality, you have to really look at this company on a full year basis. The June and September quarters are the slowest periods from a seasonal perspective. Moreover, we had the Vernon situation this year, so that caused a one-time (hopefully) drag on the results.
It will be more informative to look at numbers after the March quarter, but I will post my view on the latest twelve months after they release the December quarter financials. Unfortunately, that won't be until early February.
It takes some time to calculate a clean EBITDA number for this company because of restructuring charges and impairments as well as asset divestitures (they sold their Australasian business last year).
I would also add that one should look at capex levels too as free cash flow is really what determines the majority of enterprise value. Capex has been coming down a lot in recent periods, which is good for free cash flow.
The judge will solicit opinions on valuation from various parties including investment banks. That's how the process works.
If you look back at the last bankruptcy, the company said that it's value was less than $1bn I believe, but the judge disagreed and said that it was worth $1.5bn.
Like I've repeatedly said, watch EBITDA as it will be a key financial metric used to determine the value of the company. On the positive side, the comparable companies (ie. JCI, ENS) have seen their valuations increase dramatically since June. That helps boost XIDEQ's valuation when all is said and done.
I agree that's a good way to look at it...
It's basically a long-life call option on the company. You're paying a small premium now for that option, but as in all options, if the value doesn't exceed the strike price at expiration, it's worthless.
As you can probably tell, I have a finance "geek" side to me...in simpler terms, if the enterprise value (ie. value of all assets) is determined to be greater than the debt obligations, the equity gets recovery.
It's all publicly available information
The information specific to Exide is from the company's filings, and in particular, the most recent 10-Q for the September quarter. Check out the SEC's website and you'll find the filing. Information on Frisco, in addition to what I've obtained in Exide's filing, is from general Internet searches.
I've analyzed the financials fairly closely. If you read the section "Management Discussion and Analysis", it reveals a lot more about the numbers.
We are in agreement though I would say that from what I've read in the company's filings, the Vernon issue has basically been resolved. I live in the LA area and haven't seen the press discuss the issue in some time.
Frisco is an issue because the company could sorely use the funds that have been tied up ($25-$30mm according to the latest 10-Q), but there is seemingly disagreement on the steps that need to be taken for clean up. A resolution to that issue would be positive as well.
I'll keep posting additional thoughts as they come to mind.
I didn't mean to suggest that the CFO did anything nefarious. In my opinion, he just hasn't made the right decisions in the past and they've hurt the company's financial performance. That said, the CEO and Board are also culpable (perhaps more so) in terms of not running the company properly and at least the CEO was dismissed.
I believe to this point, the restructuring officer (who is now the acting CEO) has done a good job on a number of fronts. I hope he can cut costs where appropriate and the best outcome would be to sell the US Transportation business to another company.
No, the CEO is gone and the head of the US Transportation business is gone as well. So that's good. But the CFO was in theory responsible for the capital structure and hedging. He's still there for some reason.
Not from what I can tell. They viewed themselves as being internally hedged by being vertically integrated. By that I mean that they had smelting operations, like at Vernon, where they'd take used batteries and recover lead for use in manufacturing new batteries. They ran into problems since the termination of the Walmart relationship as Walmart was an important source of used batteries.
What they should have done is more proactively hedged their lead exposure once Walmart terminated the relationship. ENS hedges its lead and consequently doesn't experience the same level of margin volatility.
I hope the restructuring guys running the company now put in place a better method to manage lead costs. I am a little discouraged that the former CFO, who by all accounts seems incompetent, is still in place. I hope he gets booted once the final POR is approved. He does not deserve to retain his position in my opinion.
If they can figure out how to manage their lead costs better and perhaps sell off the US transportation business to JCI or someone else, this could turn into a similar outcome. That said, even using less optimistic assumptions, I think the equity can have a lot more value provided the company performs well in the next couple of quarters.
This one has been painful so far, but there have been trading opportunities like back in September. I believe there will be at least one more spike like that even if the recovery in the equity isn't as great I envision (if you look at other BKs like STP, Eastman Kodak, it happened a few times).
Not for the faint of heart, but keep watching the financials and see if EBITDA continues to improve.
I have not visited any of their facilities. By the time I got interested, Vernon was shut down by the DTSC. Probably a good idea to go and check it out if you can arrange it.
I am long the stock, though one has to understand that this will probably be a long process to resolve. That said, if the company shows meaningful improvement in EBITDA in the December and March quarters, the bonds and stock should react positively.
I went back through the Pilgrim's Pride (PPC) bankruptcy and aftermath. Obviously two very different businesses, but there were many similarities. First, PPC listed assets about $1bn above liabilities in its original BK filing. PPC had liquidity issues too. Second, PPC ran into cost issues and an excessive debt burden which hurt liquidity. XIDEQ had similar issues with lead and upcoming debt repayments. Third, the language in subsequent filings was very similar.
There will be tax loss selling in the next two weeks...I think if it holds above $0.17-$0.18, that will be a good outcome and the first couple of weeks of January could be very interesting.
Buyout
I doubt anyone would buy the company in its entirety given the US transportation business isn't that good (hoping it gets better). That said, the rest of the business could be split up by business line (industrial and transportation) and geography and perhaps sold off in pieces. The industrial businesses are actually in a very good position and are performing admirably under the new management. Those could potentially be sold to ENS, which has the financial firepower (either cash or stock) to do a deal and I bet it would be highly accretive to them. Perhaps the European transportation business could be sold to JCI or another player. You have to factor in potential buyers from China and India too, but I'm not that familiar with specific companies that would be interested.
What they would do with the US transportation business is an interesting question to ponder. Despite all the hassles that Vernon presented, the restructuring guys running the company managed to hold the operating loss flat in the September quarter despite revenues declining 13%. That's really impressive in my view. Unfortunately, it's still a loss and the other segments are all above breakeven. Moreover, they are spending the most capex on the US segment (though I imagine Vernon had a lot to do with that). All in all, the restructuing guys seem to be doing a great job cutting losses and capex, which is good for all stakeholders. For instance, capex was down $13mm ytd and that includes upgrades for Vernon.
Lead is a huge part of COGS (45-50%) and for some reason XIDEQ has done a really poor job managing that cost item versus competitors. Fortunately, lead is down y/y in the low single digits and the comps for the March quarter should be very good as it's unlikely that lead spikes like it did last year (hard to forecast, but supplies don't seem as tight). So that should help margins. We're having a much colder winter y/y and that should help battery demand too and industrial activity is picking up in virtually every geography that I know of. So demand is there. That needs to be translated into EBITDA and free cash flow.
You asked about other facilities that could be problematic. The only one I'm aware of is Frisco, TX. That facility was shut down a while ago, but there's been a back and forth tug of war on cleanup. This has caused the funds that XIDEQ would have received by now to be tied up (another reason for the liquidity problem and subsequent BK). The press is very negative as you would imagine, but hopefully they can get this situation figured out and get those funds (I believe it's ~$30mm but need to double check).
Why they entered Ch 11
They entered CH 11 because of a large looming principal payment on the senior notes, but more importantly, the converts were maturing in September as well ($60mm payment). Unfortunately, they had a bad March quarter with lead spiking and then the Vernon issue hit, so their ability to refinance debt was basically non-existent. Thus, they didn't have the liquidity to meet their near-term debt obligations. This was a liquidity issue, in my opinion, much like General Growth and Pilgrim's Pride had back in 2008/2009. Bankruptcies occur for both solvency and liquidity reasons. The former is usually much more problematic to deal with than the latter, particularly in a benign interest rate environment like we currently have.
The frustrating part here is that the company did have availability under its prior revolver to make the necessary payments (at least as of their February earnings call), but the poor March quarter restricted that availability and making the payments would have left them with very little cash (and the Vernon issue to deal with).
Bankruptcy basically allowed them to conserve cash and hopefully to fix the operational problems that were plaguing the company.
As far as timing, I think it's possible that they come out in Q2 2014, but more likely later in 2014. The POR has to be presented to the presiding judge and I'm sure there'll be some negotiating using that as a starting point. As common holders, we need them to boost EBITDA the next two quarters so that LTM EBITDA is something close to $150-$200mm in my opinion.
Additional thoughts
I pay attention to the senior bonds as they obviously stand above the common in terms of recovery. After bottoming in the 50s, they've settled back into the 70s, which is a reasonably good sign. The converts are basically like the common though obviously senior. They are illiquid so I don't view their price movement as that important at this stage.
The biggest problem for this company is the US transportation segment (ie. car batteries). It's the lowest margin business and frankly, it would be good to exit that segment if possible and just focus on the industrial side (competes with ENS) and the European transportation segment too. Those are areas where they can generate decent EBITDA margins and probably lower their capital expenditure requirements in the process.
The last bankruptcy resulted in a ~$1.5bn enterprise value by the presiding judge. There was over $2bn of debt heading into that bankruptcy. Even if the enterprise value is deemed to have declined (due primarily to mismanagement) to say $1.2bn, with less than $700mm of net debt, there should be some recovery for the equity in my opinion. Even if it's only say $100mm, that translates to $1.25 of equity value. I'm just throwing out some numbers, but something to keep in mind.
At the end of the day, the judge's enterprise value determination will be key. That will be predicated on the trailing twelve months EBITDA. I believe the reason that the POR was pushed back to the spring of 2014 was to allow the company to operate for a full fiscal year (ends in March) under the new management.
Thoughts on XIDEQ
New to the Board, but I've been following (and unfortunately own) this company for a while. I've been a financial analyst professionally for a long time. I'm not an expert in bankruptcy situations, but have learned a lot over the past several months having been successful in AAMRQ and unsuccessful (so far) in XIDEQ. What attracted me to XIDEQ is the asset position relative to the debt. I personally believe the bankruptcy was driven by poor capital management and a lack of liquidity, not insolvency. This is similar in many ways to General Growth and Pilgrim's Pride, both of which successfully emerged from bankruptcy. I'm actually shocked the CFO is still around as he did a poor job managing the debt obligations. Blaming the bankruptcy on the loss of Walmart a couple of years ago is just plain silly. The prior management did a poor job managing costs (primarily lead) and didn't reinvest capital properly in facilities.
What gives me hope is that that valuation backdrop has improved tremendously. JCI and ENS, the two primary comps for the transportation and industrial segments, have seen their valuations expand enormously since XIDEQ filed for BK. That will help when the final POR is filed. I also think that the December and March quarters, the two most important ones, will be dramatically better Y/Y given the cold weather and improvement in the Eurozone.
The current stock price implies only ~$16mm of recovery for the equity against an enterprise value of at least $1.5bn-$1.8bn. I find that hard to believe.
I'll have more as the days and weeks go on. The current stock weakness, in my opinion, is really tax loss related.