Adept Technologies ADEP
August 14, 2008 - 3:46pm EST by
oliver1216
2008 2009
Price: 6.30 EPS
Shares Out. (in M): 0 P/E
Market Cap (in M): 59 P/FCF
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT

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Description

Adept Technologies (ADEP) is a growing provider of intelligent robotics systems and services. The company is growing, cash flow positive, trades at 5.2x NTM FCF, has 35% of its market cap in cash, a huge NOL, significant operating leverage, would be buying back stock (which is down 35% on no news) if it weren’t in an long blackout period, whose LTM numbers do not fully reflect the dramatic operational improvement and has a major shareholder incentivized to create shareholder value.  While this is an illiquid stock, we note that there has clearly been a seller in the market (who has been driving down the stock price) and the stock is still cheap even if one buys shares at a big premium to current prices.  As an example, at $10.00 per share (up 55+% from current levels), the stock is trading at 9.9x free cash flow.
 
ADEP provides intelligent robotics systems and services that enables users to achieve precision, speed, quality and productivity in their assembly, handling, packaging, testing and other automated processes.  The company’s end markets include high speed packaged goods, life sciences, solar, electronics, as well as traditional industrial markets, including machine tool automation and automotive electronics.
 
The company has 2 parts of its business
1)      Legacy – 30% of revenue- Primarily industrial, disk drive and auto end markets.  This is the non-sexy, commodity, and low growth (4-5% top line)
2)      New – 70% of revenue - High margin, high growth end markets that management is focusing on including solar, packaging and medical.
 
Estimated end market breakdowns are packaged goods (25%), medical (20), electronics (20), automotive (15), solar (10), other (10%).
 
Current Capitalization
Price                            $6.30 per share
Shares                          8.0
Options                        0.2 (in the $)
Warrants                      1.1  (in the $)
Total shares                  9.3
 
Equity cap                    $58.5mm
 
Cash                            $12.3
Wrrnt/opt proceeds      7.9
Total cash                     $20.2
 
Enterprise value            $38.4
 
Deceiving LTM Figures - At the end of fiscal 2007 (june), ADEP initiated a restructuring to reduce facility and headcount costs. As a result, ADEP has reduced its quarterly expense rate and has focused its resources on its most profitable opportunities (Europe, solar).  The improved profitability has been reflected in the company’s first 3 quarters of this fiscal year, but the LTM figure still has 1 quarter (june 2007) of the old cost structure, which the company will be lapping when it reports results in early September
 
Quarter            June 2007        Sept 2007        Dec 2007         March 2008
 
EBIT ($MM)   -1.9                  0.8                   1.3                   0.8
 
Note: for the June 2007, I excluded $4.1mm of non recurring charges.  Some data providers may not have added them back , which makes the LTM figures even lower.
 
Conservative and deceiving guidance FYE June 2008 Guidance – The high end of company’s guidance is revenue of $60mm (up 22% y/y), net income of $3.4mm (after $1mm of non cash stock expense) and $5.4mm of adjusted EBITDA (excluding non-cash stock expense).  Management acknowledges this is very conservative (see last earnings call) especially since these figures imply Q4 being down sequentially which would be highly atypical.    We also believe that Q4 figures will have some non recurring expenses (legal, marketing) that will not be incurred next year, so as strong as Q4 may look, the normalized Q4 results should be even stronger.  Assuming $5.4mm of adjusted ebitda (which is too low), excluding any cash, minus cash taxes(5.4-2 for dep -1 for stock exp =2.4, @9% cash tax =.3) and capex (800k), free cash flow would be $4.3mm, or ev/fcf of 8.9x…which is cheap, but remember the co is growing so next year will be even better.
 
2009 Estimates
Our FY 2009 (june) estimates are based on conversations with management and industry participants.  Given the company’s big net cash position, we assume no interest income as we have ‘used” the cash to get a lower EV relative to equity market cap:
            Revenue $71.4mm  - 19% growth over $60mm 2008E (lowball) estimate. 
            Gross profit = $34.2=gm of 48%
            SGA :  27.7 - Runrate sga (4*6.4) + a 5% cushion increase
            Non cash stock expense : $1.0mm
            Interest income: $0.0
            Tax at 8%: $0.4
            Net income: $5.1
            +D&A: $2.1
            +Non cash stock exp:$1.0
            -Maintenance Capex: $0.8
 
            Free cash flow: $7.4
            Ev/fcf: 5.2x
 
            Adj ebitda (excl non cash stock exp)=$8.7=$34.2-27.7+2.1
            Ev/adj ebitda = 4.5x (and remember co pays little taxes)
 
Overcapitalized balance Sheet – PF for warrants and options, the company has $2.17 per share of cash on its balance sheet and is cash flow positive.   This cash balance represents 35% of its total equity market cap.  Last year the company almost used some of this cash for an acquisition that ultimately died.  We expect the company to use its excess cash for stock buybacks and opportunistically for acquisitions. 
 
NOL – ADEP has an approximate $83 million federal NOL and a $25mm California, which is rather meaningful given the company’s small market cap.  The company’s cash tax rate (and that on its income statement) is approximately 8%.
 
Non- Cash Expenses Mask True Cash Flow – In this and next Fiscal year, free cash flow (excluding w/c) will be $2mm higher than reported net income.  ADEP will incur approximately $1.0 mm this and next fiscal year of non-cash stock comp expense.  The company also incurs annual d&a of approximately $2.0, much greater than its annual maintenance capex of approximately $0.8mm (the company outsources all manufacturing). 
 
Significant Opportunities for Growth – Management expects revenue to increase approximately 20% annually for the next few years, driven in large part by growth in the solar industry.  In addition, the packaging and medical businesses should experience strong growth as both industries further embrace the benefits of robotics.
 
Sophisticated Major Holder – ADEP’s largest shareholder, Austin Marxe, owns approximately 30% of ADEP’s outstanding shares and warrants for 1.1 mm shares at $6.25/share that expires in November 2008.  Austin Marxe has a board seat and is committed to creating shareholder value.  We believe this is a fairly sizeable investment for them.
 
Significant Int’l Exposure – 78% of revenue is generated from abroad,and that should increase in future years as the Solar business expands.
 
Diverse, Established Customer Base –The company does not have any customer concentration and its customers include Kellogs, Danone, J&J, Nestle, Evergreen Solar, Kraft, and L’oreal.
 
Increasing Demand for Automation – As companies strive to remain competitive, they are increasingly turning to automation because it reduces (increasingly high and unpredictable) labor costs, improves quality, increases output, increases flexibility, reduces waste, etc.  In addition, as a result of several high profile contamination incidents, many companies are turning to automation to insure the safety of their products…this is especially true in the packaged goods and medical industries which combined should represent almost 50% of ADEP’s FY 2009 revenue. 
 
Stock Buyback – Management is actively considering a stock buyback because they realize their stock is undervalued and they have excess cash.  Management has expressed an interest in buying back stock right now, but the company is in a blackout period until earnings are released September 3rd.   The company does not currently have a 10b5 plan in place.
 
Hidden Solar Play – Solar energy market currently represents 10% of the company’s revenue.  The company expects all of its segments to grow next year, but they are especially excited about the solar market which they conservatively expect will represent 20% of next year’s revenue.  Our diligence checks indicate that ADEP’s solar products, sold primarily in Germany and other European countries, have been very well received.
 
 
Uncovered Stock – ADEP currently has no real analyst coverage, although a firm called 21st Century publishes on the company.  We understand ADEP has had conversations with several more well known sell side firms who MAY eventually provide coverage.
 
 
Conservative Management – Management/the Board is incredibly conservative because:  1) they want to underpromise and overperform; 2) the restatement issue has made they very weary of any potential legal/public company issues and 3) they have no incentive to be aggressive since the company does not need to raise equity (so they won’t issue aggressive guidance or talk up their stock) and ADEP’s largest shareholder (who also has a Board seat) most likely exit (since there “pregnant” and own over 30% of an illiquid stock) is the eventual sale of the entire company.

RISKS:
It’s a Micro cap stock

Catalyst

Strong Q4 Results,
Strong Guidance,
Buyback and
Increased investor relations
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    Description

    Adept Technologies (ADEP) is a growing provider of intelligent robotics systems and services. The company is growing, cash flow positive, trades at 5.2x NTM FCF, has 35% of its market cap in cash, a huge NOL, significant operating leverage, would be buying back stock (which is down 35% on no news) if it weren’t in an long blackout period, whose LTM numbers do not fully reflect the dramatic operational improvement and has a major shareholder incentivized to create shareholder value.  While this is an illiquid stock, we note that there has clearly been a seller in the market (who has been driving down the stock price) and the stock is still cheap even if one buys shares at a big premium to current prices.  As an example, at $10.00 per share (up 55+% from current levels), the stock is trading at 9.9x free cash flow.
     
    ADEP provides intelligent robotics systems and services that enables users to achieve precision, speed, quality and productivity in their assembly, handling, packaging, testing and other automated processes.  The company’s end markets include high speed packaged goods, life sciences, solar, electronics, as well as traditional industrial markets, including machine tool automation and automotive electronics.
     
    The company has 2 parts of its business
    1)      Legacy – 30% of revenue- Primarily industrial, disk drive and auto end markets.  This is the non-sexy, commodity, and low growth (4-5% top line)
    2)      New – 70% of revenue - High margin, high growth end markets that management is focusing on including solar, packaging and medical.
     
    Estimated end market breakdowns are packaged goods (25%), medical (20), electronics (20), automotive (15), solar (10), other (10%).
     
    Current Capitalization
    Price                            $6.30 per share
    Shares                          8.0
    Options                        0.2 (in the $)
    Warrants                      1.1  (in the $)
    Total shares                  9.3
     
    Equity cap                    $58.5mm
     
    Cash                            $12.3
    Wrrnt/opt proceeds      7.9
    Total cash                     $20.2
     
    Enterprise value            $38.4
     
    Deceiving LTM Figures - At the end of fiscal 2007 (june), ADEP initiated a restructuring to reduce facility and headcount costs. As a result, ADEP has reduced its quarterly expense rate and has focused its resources on its most profitable opportunities (Europe, solar).  The improved profitability has been reflected in the company’s first 3 quarters of this fiscal year, but the LTM figure still has 1 quarter (june 2007) of the old cost structure, which the company will be lapping when it reports results in early September
     
    Quarter            June 2007        Sept 2007        Dec 2007         March 2008
     
    EBIT ($MM)   -1.9                  0.8                   1.3                   0.8
     
    Note: for the June 2007, I excluded $4.1mm of non recurring charges.  Some data providers may not have added them back , which makes the LTM figures even lower.
     
    Conservative and deceiving guidance FYE June 2008 Guidance – The high end of company’s guidance is revenue of $60mm (up 22% y/y), net income of $3.4mm (after $1mm of non cash stock expense) and $5.4mm of adjusted EBITDA (excluding non-cash stock expense).  Management acknowledges this is very conservative (see last earnings call) especially since these figures imply Q4 being down sequentially which would be highly atypical.    We also believe that Q4 figures will have some non recurring expenses (legal, marketing) that will not be incurred next year, so as strong as Q4 may look, the normalized Q4 results should be even stronger.  Assuming $5.4mm of adjusted ebitda (which is too low), excluding any cash, minus cash taxes(5.4-2 for dep -1 for stock exp =2.4, @9% cash tax =.3) and capex (800k), free cash flow would be $4.3mm, or ev/fcf of 8.9x…which is cheap, but remember the co is growing so next year will be even better.
     
    2009 Estimates
    Our FY 2009 (june) estimates are based on conversations with management and industry participants.  Given the company’s big net cash position, we assume no interest income as we have ‘used” the cash to get a lower EV relative to equity market cap:
                Revenue $71.4mm  - 19% growth over $60mm 2008E (lowball) estimate. 
                Gross profit = $34.2=gm of 48%
                SGA :  27.7 - Runrate sga (4*6.4) + a 5% cushion increase
                Non cash stock expense : $1.0mm
                Interest income: $0.0
                Tax at 8%: $0.4
                Net income: $5.1
                +D&A: $2.1
                +Non cash stock exp:$1.0
                -Maintenance Capex: $0.8
     
                Free cash flow: $7.4
                Ev/fcf: 5.2x
     
                Adj ebitda (excl non cash stock exp)=$8.7=$34.2-27.7+2.1
                Ev/adj ebitda = 4.5x (and remember co pays little taxes)
     
    Overcapitalized balance Sheet – PF for warrants and options, the company has $2.17 per share of cash on its balance sheet and is cash flow positive.   This cash balance represents 35% of its total equity market cap.  Last year the company almost used some of this cash for an acquisition that ultimately died.  We expect the company to use its excess cash for stock buybacks and opportunistically for acquisitions. 
     
    NOL – ADEP has an approximate $83 million federal NOL and a $25mm California, which is rather meaningful given the company’s small market cap.  The company’s cash tax rate (and that on its income statement) is approximately 8%.
     
    Non- Cash Expenses Mask True Cash Flow – In this and next Fiscal year, free cash flow (excluding w/c) will be $2mm higher than reported net income.  ADEP will incur approximately $1.0 mm this and next fiscal year of non-cash stock comp expense.  The company also incurs annual d&a of approximately $2.0, much greater than its annual maintenance capex of approximately $0.8mm (the company outsources all manufacturing). 
     
    Significant Opportunities for Growth – Management expects revenue to increase approximately 20% annually for the next few years, driven in large part by growth in the solar industry.  In addition, the packaging and medical businesses should experience strong growth as both industries further embrace the benefits of robotics.
     
    Sophisticated Major Holder – ADEP’s largest shareholder, Austin Marxe, owns approximately 30% of ADEP’s outstanding shares and warrants for 1.1 mm shares at $6.25/share that expires in November 2008.  Austin Marxe has a board seat and is committed to creating shareholder value.  We believe this is a fairly sizeable investment for them.
     
    Significant Int’l Exposure – 78% of revenue is generated from abroad,and that should increase in future years as the Solar business expands.
     
    Diverse, Established Customer Base –The company does not have any customer concentration and its customers include Kellogs, Danone, J&J, Nestle, Evergreen Solar, Kraft, and L’oreal.
     
    Increasing Demand for Automation – As companies strive to remain competitive, they are increasingly turning to automation because it reduces (increasingly high and unpredictable) labor costs, improves quality, increases output, increases flexibility, reduces waste, etc.  In addition, as a result of several high profile contamination incidents, many companies are turning to automation to insure the safety of their products…this is especially true in the packaged goods and medical industries which combined should represent almost 50% of ADEP’s FY 2009 revenue. 
     
    Stock Buyback – Management is actively considering a stock buyback because they realize their stock is undervalued and they have excess cash.  Management has expressed an interest in buying back stock right now, but the company is in a blackout period until earnings are released September 3rd.   The company does not currently have a 10b5 plan in place.
     
    Hidden Solar Play – Solar energy market currently represents 10% of the company’s revenue.  The company expects all of its segments to grow next year, but they are especially excited about the solar market which they conservatively expect will represent 20% of next year’s revenue.  Our diligence checks indicate that ADEP’s solar products, sold primarily in Germany and other European countries, have been very well received.
     
     
    Uncovered Stock – ADEP currently has no real analyst coverage, although a firm called 21st Century publishes on the company.  We understand ADEP has had conversations with several more well known sell side firms who MAY eventually provide coverage.
     
     
    Conservative Management – Management/the Board is incredibly conservative because:  1) they want to underpromise and overperform; 2) the restatement issue has made they very weary of any potential legal/public company issues and 3) they have no incentive to be aggressive since the company does not need to raise equity (so they won’t issue aggressive guidance or talk up their stock) and ADEP’s largest shareholder (who also has a Board seat) most likely exit (since there “pregnant” and own over 30% of an illiquid stock) is the eventual sale of the entire company.

    RISKS:
    It’s a Micro cap stock

    Catalyst

    Strong Q4 Results,
    Strong Guidance,
    Buyback and
    Increased investor relations

    Messages


    Subjectadep update
    Entry09/03/2008 09:23 PM
    Memberoliver1216
    Late today ADEP reported Q4 and FY results. As expected they reported very strong revenue and gross margin, but operating expenses were slightly higher than anticipated as they included certain non-recurring items (legal expenses for a lawsuit, expenses relating to a potential acquisition, and some marketing to support the growing solar business). Net income also benefited from f/x gains. After generating $7+mm of cash flow last year, cash now represents 23% of its market cap. The company announced a $2.5mm stock buyback (~4% of outstanding shares). We were hoping the buyback would be larger but suspect that if the company does not complete an acquisition, mang will do an even larger buyback. The company gave strong, but we believe conservative, guidance for FY 2009 with high end guidance of $73mm revenue, $8.7mm adj ebitda and $4.8 net income. Net income is a bit deceiving because it is after a $2mm non cash stock compensation expense and after $1.8mm of d&a (versus capex of only $1mm). So projected free cash flow will be $7.6mm or 4.8+1.8+2-1. This free cash flow guidance presumably is pro forma the small buyback and still leaves the company, which will generate lots of cash this year, with almost $13mm of cash. You can make different assumptions about this cash in your valuation, but we think, despite the run since we posted this idea, the stock is still very cheap.

    Subjectstock buyback
    Entry09/08/2008 06:14 PM
    Memberoliver1216
    Today was the first day that the company could buy stock in the open market under its new buyback plan, which probably contributed to the stock's move. While the stock has moved significantly in the past few weeks, this rapidly growing company is still trading at less than 10x ntm fcf and below where it had been trading not long ago.

    SubjectUpdate
    Entry02/17/2009 12:10 PM
    Memberzzz007

    Oliver,

    The environment has obviously deteriorated pretty materially since you first posted this.  That said, between the cash and NOLs looks like downside should be limited assuming they can get the cash burn down to something immaterial.  Wondering whether you are still following this and, if so, how you feel about mgmts ability to navigate through this environment without materially depleting the cash reserves.

    Thanks,

    zzz

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