|Shares Out. (in M):||18||P/E||0||0|
|Market Cap (in $M):||38||P/FCF||0||0|
|Net Debt (in $M):||47||EBIT||0||0|
Arc Group Worldwide is nearing the completion of restructuring actions intended to correct
operational problems, reduce debt by selling assets that are not essential to their strategy to
disrupt metal parts manufacturing, and raise capital for further investment in that core
strategy. That strategy utilizes legacy powdered metal expertise from their metal injection
molding business to enable 3D printing of metal parts. The company is leveraging this
proprietary knowledge to provide metal part rapid-prototyping services synergistic to their
production metals manufacturing business for OEMs. At the same time they are also offering
stand-alone 3D printing services of proprietary alloys they’ve developed for production of
demanding medical, dental, and aerospace parts. The controlling shareholder and several
prominent investors are backstopping a $10 million rights offering to shareholders priced at a
10% discount to the trading price on the yet to be defined rights record date (but not less than
$2 a share). This rights offering may offer an attractive entry price, either by purchasing shares
prior to the record date and oversubscribing in the offering, or by purchasing shares during the
offering where arbitrage selling by rights holders will likely pressure the stock price.
Arc Group Worldwide was formed from a series of acquisitions from 2012 to 2014 of metal
parts manufacturing companies. The intent of the controlling shareholder, $3 billion in assets
hedge fund Quadrant Management, was to create a disruptive force in the metal parts
manufacturing industry by offering a highly automated, digital, and holistic supplier that could
offer everything OEMs needed. This included rapid prototyping of metal parts through 3-D
metal printing, and then production manufacturing via the variety of methods used by the
acquired companies. Currently, many large companies have their own procurement personnel
that work with numerous companies to get their metal parts manufactured, one company to
rapid-prototype, another to make machining tools, another to stamp production parts, another
to metal-injection mold, another for the plastic-injection molded housing etc…. Arc Group
offers all of that in house while accepting three dimensional models over the web and
employing software to make prototypes and production parts in a highly automated manner.
Over time, Arc Group’s holistic offering is intended to take business from the many specialized
mom and pop machining providers.
Important to being a soul source provider is to be able to offer rapid-prototyping of metal parts.
While expensive, 3D printing allows the creation of a prototype metal part in a day. With rapid-
prototyping, engineers can iterate on designs and get the design right and their products ready
for market quickly. Rapid-prototyping is being increasingly adopted by many companies as an
essential part of the product development process. Metal injection molding (MIM) injects a
mixture of powdered metal and a carrier polymer into molds to form the part. The polymer is
then burned off and the powdered metal particles fused together by heating to form the final
part. It takes time to make the mold and develop the injection process so MIM is generally not
a rapid-prototyping method. However, Arc Group’s core metal injection molding business, the
leading MIM company in the United States, was a pioneer in developing unique expertise in the
powdered metallurgy that MIM requires. While anyone can buy a 3D printer, successful
printing of metal parts requires the ability to print parts from metal powder to precise
dimensions resulting in high-strength parts. Cracks in the metal from the printing process are a
big problem that limits what alloys can be successfully printed. Medical or Aerospace
applications often require the ability to 3D print using titanium or high strength aluminum
powder. Arc Group has made significant investment in further development of their legacy
metal powder expertise for 3D printing and considers this materials expertise a competitive
advantage with high barriers to entry.
3D printing capability is important to Arc’s traditional metal manufacturing business as a rapid
proto-typing method for their customer’s product development. However, it is also important
to Arc Group as a production method for high value medical and aerospace parts, some of
which cannot be manufactured in any other way. Arc can print from metal powder high
strength, high temperature ferrous alloys, stainless steel, cobalt, titanium, high strength
aluminum, and other materials for specialized and challenging applications. While operational
problems with the traditional businesses were destroying Arc Groups financials and stock price
the last three years, 3D printing has continued to progress. Revenues in the most recent
quarter tripled over the prior year to $930K and are expected to double in 2018 compared to
2017. With the 2017 expansion of 3D printing facilities, further 3D printing investment being
considered by the board of directors, and their growing revenue from 3D printed parts, Arc
Group’s higher margin 3D printing division may eventually rival in value all of their legacy
BACKGROUND AND HISTORY
Everest Hill, the 48% owner of Arc Group, also owns Quadrant. Quadrant is a $3 billion in assets
hedge fund started by 68 year old Alan Quasha (the current COB of Arc Group) in 1978.
Quadrant also owns Vanterra Capital, which is a private equity firm bringing total assets to
around $4 or $5 billion. Eli Davidai is a 62 year old managing director of Quadrant since 1992.
Prior to that he worked as CEO of Quadrant Amroq Beverages bringing Pepsi products to
Bucharest Romania and then served as Chairman of Quadrant Beverages bringing Pepsi
products to Bulgaria. Davidai became the Arc General Manager of Operations at the request of
COB Alan Quasha earlier this year.
The principals at Quadrant (Quasha and Davidai) are believers in technology disruption. Davidai
at age 62 just finished a program at Harvard Business School and a training class at Berkeley's
Singularity University. Davidai discusses technology disruption in this youtube video
(https://www.youtube.com/watch?v=G3SGJHJHyzE) where he states “I must tell you... if you
don't find the value proposition , something to differentiate you from another business... close it. Leave
it. Don't waste your time"! Arc Group is Quasha’s and Davidai’s attempt at disrupting metal
parts manufacturing. Their idea was to assemble all the metal manufacturing technologies
under one house and become the one source supplier to big manufacturing companies. An
important part of their strategy is the development of 3D printing capabilities. 3D printing is
beginning to significantly change metal parts development through rapid proto-typing as well
as serving as a production solution for high-value parts. They built the business by multiple
acquisitions. Quadrant already owned QMT which included Flowmet LLC (a pioneer in metal
injection molding in Florida), Tekna Seal, General Flange & Forge, and Tubefit. They sold it to
ARC Group (Arc Wireless at the time, a mostly failed company) in 2012 for $31.4 million in
ARCW stock in a reverse acquisition and Quadrant's people took control. About the same time,
Arc Group bought AFT for $43 million. AFT was another MIM company with factories in
Colorado and Hungary. Coupled with Flowmet, Arc Group became the leading MIM provider in
the United States. Just a year or so later in December, 2013 3D printing expert Todd Grimm
joins the board and Arc Group forms a new 3D Materials Technology Division. To broaden their
metal-related manufacturing capabilities, they acquired Advanced Tooling Concepts, a plastic
injection molding company, in April, 2014 for $24 million cash and Thixoforming, a specialist in
injection of magnesium Alloys that was next to their Colorado factory for an undisclosed sum.
To round out their metal capabilities, they acquired Kecy corporation, a metal stamping
company, in June, 2014 for $26 million in cash. Total purchase price for these acquisitions is
$124.4 million not including Thixoforming. At the time they noted the proforma financials for
2013 was $120 million in revenue with $24 million in ebitda, a 20% ebitda margin. Their core
business of metal injection molding is relatively new with earliest significant production around
year 2000. MIM has grown rapidly since and the technology is forecast to continue to grow as
more traditionally-made parts are switched to this lower-cost method.
To run all these acquired business, Quadrant hired a pair of investment bankers. Jason
Young, an economics major at UCLA, worked for Merrill Lynch Investment Banking Group from
2000 to 2005 before joining Quadrant as managing director in 2005. He co-founded Vanterra
Capital while at Quadrant before accepting the CEO job at Arc Group in August 2013. Drew
Kelley, another UCLA grad who also worked for Merrill Lynch at the same time as Young, joined
ARC group as CFO two months after Young took the CEO job. There's no engineering or
operations background with either of these guys and it didn't take long before operations are a
mess. Young noted that the culture was centered around engineering and believed that
needed to change. He endeavored to create a culture centered around sales. And indeed by
2015 the sales were rising but the margins were down. The sales force apparently was selling
more services but the engineers couldn’t make the parts at a profit, or in some cases couldn’t
make the parts at all. This resulted in losses leading to a restructuring.
On March 31, 2016 Alan Quasha takes the COB job from Young and begins a strategic review.
Changes become evident early in 2017, including elimination of unprofitable contracts, a 15%
reduction in the labor force to reflect the reduced work, policy changes on accounts payable
and receivables to reduce working capital, and price increases to reflect their high value
offering and restore margins. Further reductions come later in 2017. Assets not core to their
business model of being a sole-source maker of small metal parts by whatever manufacturing
method is best go on the block. In Sept 2016, the sale of Tekna Seal for $10.5 million is
disclosed and their legacy wireless business is sold for an immaterial amount. General Flange &
Forge is sold for $3 million around Sept 18, 2017. The manufacturing operation in Mexico for
more labor-intense work that was opened in February 2016 is closed in July 2017. In 2016,
Quasha had brought in Eli Davidai, a 62 year old managing director of Quadrant with extensive
operations experience, to correct operational problems at some of the facilities. In May, 2017
Davidai becomes Arc General Manager of Operations. In June 2017, Young was out as CEO and
out of Quadrant as well. He’s currently running some type of investment fund in New York.
Drew Kelley who had served as CFO became the interim CEO.
While damage has been done by the operational problems, the company does not believe their
ability to grow with their core strategy is impaired. Comments from interim CEO (formerly the
CFO) Drew Kelley in the 4Q conference call in September are immediately below.
"At the same time let me reiterate. These recent initiatives do not jeopardize the company’s ability
to grow. Rather we are better-positioned both internally and externally to drive customer
satisfaction, bottom-line results and shareholder value. In particular we remain bullish on the
company’s sales pipeline. As we discussed in the press release, ARC recently received customer
approvals on 166 new customer products with many parts already in full production. Included in
these launches are several holistic solutions for our customers in the medical and defense sectors.
These complete solutions use a multitude of our complementary technologies including metal 3D
printing, MIM and plastic injection molding to garner a larger share of the previously untapped
business opportunities. Similarly our metal 3D printing business continues to grow rapidly. With
the addition of four new machines, ARC now operates 15 metal printers. We are especially
excited about our recently-opened new 30,000-square- foot dedicated 3D facility which provides
us with the ability to add up to 40 additional machines. The new facility does not simply improve
our scale, but includes several dramatic improvements to our key capabilities in 3D printing
including designated areas for defense production, controlled environments for medical implants
and in-house heat treatment and machining. As a result we expect 3D revenues to continue to
grow at its recent pace as we are forecasting 3D revenues to double in the current Fiscal 2018
And in response to a question Drew Kelley responds:
"So that really is why we’re very excited about the new facility and again I don’t want to suggest that the
MIM solution and the 3D solution are standalone. They are very much symbiotic and they offer our
customers a unique holistic solution. What we are increasingly seeing is large multinational OEMs
approaching us and looking not simply for a dedicated MIM production facility but one that can provide
MIM with plastic over molding with metal 3D printing, etc. And for that we see our ability to not only
grow our wallet share with our existing customers but for us to again exploit or otherwise develop new
markets and new sizable markets in both the 3D and the greater additive space".
The stock trades at an enterprise value/sales ratio of about 1 despite an expected return to 20%
ebitda margins, that’s a valuation of 5 times ebitda if those margins are achieved. There’s
expected growth in their MIM businesses with the intended capture of mom and pop
machining business through their rapid prototyping and holistic production manufacturing
strategy. While the business has been a loss-maker the last few quarters, management
believes they haven’t loss their profitable strategic customers and the restructuring hasn’t
impaired their ability to grow with their disruptive strategy. I won’t pretend the traditional
manufacturing operations are a great business, but 5 times ebitda is quite reasonable if they
return to 20% ebitda margins.
That leaves their emerging but still low-revenue investment in 3D printing for free. Far more
successful and better managed rapid-prototyping company Proto-labs (ticker PRLB) trades at 8
times sales. Protolabs does mostly rapid prototyping by a variety of methods including 3D
printing for many different industries. Interestingly, they seem to be moving to a more
comprehensive business model including production capabilities to create a more holistic
offering (similar to Arc Group). Arc Group is trying to do rapid proto-typing similar to proto-labs
but specifically for the small metal parts industry. From their 10Q
"Accelerating Speed-to- Market. The traditional prototype-to- production process is often subject to lengthy
bottlenecks and is characterized by inefficient price quoting delays, time-consuming tooling procedures, and
outdated production methodologies. To differentiate itself from competitors, ARC focuses on reducing
inefficiencies in the development cycle by offering the seamless integration of a wide-variety of proprietary
technologies in order to dramatically reduce the time and cost associated with new product
development. Specifically, the Company has developed rapid and instant online quoting solutions, rapid prototype
solutions, short-run production services, in-house rapid and advanced conformal tooling, and rapid full production
"Metal 3D Printing. We offer a variety of 3D printing solutions, with an emphasis on metal 3D printing. In general,
given promising signs of growth and related barriers to entry, we believe the metal 3D printing sector is one of the
more attractive segments of the overall additive manufacturing industry. Furthermore, metal 3D printing, while a
complex technology still in its early stages, shares several fundamental similarities with our MIM business, thereby
helping to accelerate our research and development. Separately, our metal 3D printing capabilities enable ARC to
offer a variety of new services, including rapid prototyping, rapid tooling and short-run production, helping our
customers improve their product speed-to- market. Given our established customer base, diverse metallurgy
background, and scalable injection molding capabilities, we believe we are well-positioned in the industrial metal
3D printing market".
This rapid-protoyping and 3D printing aspect of their business is potentially valuable and
the reason to speculate in a heavily-levered and recently unsuccessful company like Arc Group.
In particular, printing plastic is easy but printing metal parts is very challenging. Among the
many challenges, metal printing is troubled by micro-cracks that form as the powdered metal
bonds together under heat and then cools. These micro-cracks cause fatigue failure as they
gradually enlarge under cyclic loading over time. Only a few metal alloys that are not
proprietary to someone have been successfully 3D printed. Not just anyone can start printing
metal parts. Arc Group claims competitive advantage with high barriers to entry from their
legacy metal powder expertise and their printable metal alloy development the last five years.
They are currently in production with high value aerospace and medical parts and they have
recently expanded facilities and are pondering additional investment. I can’t put a number on
it, but there is potentially more value in their expanding 3D printing business and rapid
prototyping capabilities than all their traditional metal manufacturing businesses combined.
This will be especially true if the rapid-prototyping capabilities take traditional production
business away from mom and pop machining shops as intended.
RIGHTS OFFERING BACKSTOP INVESTORS
Quasha and Davidai are senior members of a $3 billion hedge fund. They are spending a great
deal of effort fixing operations for this $20 million investment that they own through Everest
Hill Group. Everest Hill will backstop the entire $10 million offering after three other backstop
investors who each currently own <1% of Arc Group. Kurt Butenhoff who was a “heavy hitter”
at Bear Stearns and VP at Salomon Brothers now manages his fund Ward Capital. He personally
will backstop $250K of the rights offering. Butenhoff was at Bear Stearns at the same time as
ARC interim CEO and former CFO Drew Kelley. Weintraub Capital Management, a San Francisco
based long-short hedge fund with a terrific track record before returning investors money to
become Jerry Weintraub’s family office, will backstop $1 million. I can’t find any ties between
Weintraub and Arc Group other than participation in this rights offering. Another $250K
backstopper is Zori Investment Limited for which a google search yields nothing.
The participation of backstoppers probably indicates that they are bullish. However, many
rights offerings are done to prop up a bad investment and Everest Hill may be backstopping
because nobody else will. The recent history of Arc Group is not pretty with losses, goodwill
impairments, and debt covenant renegotiations. Is Everest Hill participating because they like
the prospects following the restructuring or because they must put in more money to protect
their existing investment? Comments on the 4 th quarter conference call in September from
interim CEO Drew Kelley appear bullish.
"Finally I note that during today’s ARC board meeting I was informed that various ARC board members
and other senior management personnel intend to purchase ARC shares in the public market when
permissible and in compliance with the company’s share purchase window policy. I appreciate
everyone’s time on the call and I’ll now pause for questions".
There’s been no insider buying since that call in September. However, it is likely insiders knew in
September or shortly thereafter that a rights offering was coming as the S-1 was filed on Dec 8th and it
takes time to prepare. I would expect there will be insider participation in the rights offering and that
the backstoppers, including Everest Hill, are participating because of a positive outlook. Finally, I’ll note
that Matthew Drapkin of Northern Right Management is a 5% shareholder declared in April 2017. In the
latest 13F he reduced his position by about 20% however. Stifel Nicoulas declared a 5% position on Nov
3rd , 2017 as well, but I know of no ties to Arc management.
1. This is quite leveraged and recent operating history is poor
2. Motive of already wealthy Davidai and Quasha could be to have something interesting to talk about, 3D printing,
instead of making money
Completion of restructuring and return to profitability
Incipient growth of 3D metal printing business
|Subject||Mim-based 3D printing|
|Entry||01/01/2018 10:40 PM|
Significant changes are coming to metal printing that is predicted to dramatically reduce the cost. 3D printing will likely be used more broadly than just high value defense and medical applications. This could have an effect on Arc Group’s business, probably a favorable one. Google and GE among others supplied $212 million to some MIT professors to form Desktop Metal. This company is producing a newer type of metal printer to go on sale in 2018 based on MIM technology. The printer uses powdered metal with a polymer carrier, prints it into the desired shape, removes the polymer, and then sinters just like MIM. There’s a nice youtube video introducing the technology (https://www.youtube.com/watch?v=wyMgOl8sBew). HP will introduce metal printers in 2018 as well, rumored to also be based on MIM. If you watch the Desktop Metal video you’ll see that they only will offer seven metal alloys initially, but they have plans to develop up to 30 more. They’ll work with you, however, to develop the alloy that you really need if you want. Arc Group pioneered MIM and they already have the materials and the sintering process developed for all kinds of alloys and the expertise to adapt them for 3D printing. It looks like metal 3D printing is about to take off and OEM’s are going to have to pursue it, both as a rapid-prototyping method and, for some, a production method. Arc Group’s expertise in MIM alloys, 3D printing, and every type of small metal mass production method positions them as an attractive partner.
|Subject||Additional reasons to like ARCW|
|Entry||01/02/2018 06:17 PM|
Nice write-up. ARCW is a stock we are also very bullish on. In addition to the many things you pointed out, I would add a few things:
|Entry||01/23/2018 12:21 PM|
1. This won't be very liquid until investors get excited about it again. I do think that's a ways off. This is probably a multi-year hold rather than a quick trade. There is a catalyst in that big changes are coming to 3D printing, specifically the new and potentially disruptive MIM-based printing, but it's a longer-term catalyst. Arc Group is the only publically-traded MIM company I'm aware of. They're positioned with expertise in MIM, specifically all the MIM alloys and the sintering methods required to get dense parts from these alloys. They also have an existing customer base that currently uses powdered metal parts and they have expertise in 3D printing. I also suspect their MIM business may benefit from the potential explosion in Mim-based 3D printing too. With OEM's pursuing new 3D-printed parts there's a lot of those that can be rapid-prototyped by MIM-based 3D printing but made in high volume much cheaper by MIM methods. Arc Group is the largest MIM company in the United States. There's going to be a wait for all this to reflect in the financials but I think it might be worth the wait.
Some evidence of Arc Group's advantage in Mim-based 3D printing can be seen from comments in this article https://www.additivemanufacturing.media/articles/markforged-metal-printer-sintering-can-wait about MarkForged. MarkForged is one of the little companies that have been trying to do their particular version of Mim-based 3D printing.
"But it is the sintering that completes the part, and in a sense, it is during the sintering that the magic happens. And MarkForged is still figuring out this magic. For example, what temperature is needed? What atmospheric composition is required? There is also the question of what polymer should carry the metal powder, since the vaporizing of this polymer will affect the atmospheric composition, and therefore potentially affect the metal alloy. For every different metal, the answers to all of these questions are different—and some metals are far more sensitive than others to control over the different variables. (Also, this detail has recently come to light: Parts prepped in a parts washer are easier to sinter. MarkForged will sell a parts washer as part of its kit.)
Therefore, company experimenters and customer beta testers are still working to find the sintering formulas to ensure reliable, predictable formation of one metal alloy after another. So far, the number of metal alloys they have nailed down in this way is two: 17-4 and 303 stainless steel. Today, right now, if a user wants a proven process for 3D printing on the Metal X, then the metal would need to be 17-4 or 303."
2. The recovery of firearms is what will bring their ebitda margins back to 20%. I don't know when that will be. In an e-mail the CEO pretty much warns that it likely will be a while.
3. The ceo notes in an e-mail that they're currently managing for cash flow and utilization, not earnings. I suspect they see the opportunity in 3D printing and they're stabilizing this company and generating cash to invest in it. There has been operational problems. They can't get big programs into production as fast as they thought. Getting parts into production (making molds and tooling) eats cash and cranking out copies generates cash.
4. My thesis is that the Mim-based 3D printing is the longer-term opportunity. The rights offering is to allow them to invest in that. Refinancing the debt as Norris suggests seems like a good idea. A rights offering that allows them to do both makes sense to me. It might also be the last step from their strategic review of the business.
|Subject||Re: Re: Re: Questions|
|Entry||01/23/2018 05:10 PM|
A few notes on the emerging mim-based 3D printing
1. 3D printing using lasers on powder beds costs a lot. A medical implant or a spacecraft part can justify the price but not too much else. Desktop metal claims 95% cost reduction with their mim-based printing. Beta testers are getting printers this year with commercial sales in 2019. HP is coming with mim-based printing on a similar schedule. If these efforts are successful you're going to start seeing parts 3D printed for production for industrial uses. That is, for oems in automotive and firearms and other cost-driven industries like the ones with which Arc Group currently conducts business.
2. Anybody can go buy a 3D printer, including the ones Desktop Metal and HP will sell. But for production parts you better have proven alloys and sintering methods for those 3D printed parts. Arc Group can use the same alloys with the same sintering tricks they've been using for 15 years. So they can 3D print parts the oem's can be confident will have the advertised material properties. Arc Group doesn't even have to necessarily buy any sintering ovens, they can use the ones they've already got. That's potentially a big capital savings.
3. Currently, only certain parts can be made using metal injection molding. The geometry of the part has to be such that you can make it by blowing polymer-carried powdered metal into a mold. That restriction limits the usefulness of Arc Group as a supplier. The mim-based 3D printing is going to open up a whole bunch more parts to be made with powdered metal. This could significantly grow the volume of business for Arc Group.
4. Would be competitors can buy a mim-based 3D printer and go into the business perhaps using the alloys that Desktop Metal and HP are developing. But Arc Group still has an advantage. For parts with high enough volume, it's cheaper to make a mold and tooling and use traditional MIM. So who do you want to work with, the company that can only 3D print or the company that can 3D print and metal injection mold?
5. The COB notes that 3D metal printing space is attractive and the board is currently considering further investment in the space. So this is all perhaps a couple years away before any mim-based 3D printing hits the revenue line. But the stock is cheap enough that you aren't paying anything for this opportunity. And the possibile growth could be crazy. Maybe this company is doing $300 million in revenue and growing fast 5 or 6 years out? There's leverage here so that's on a $50 million market cap after the rights offering. There's 10 bagger potential here. Could go to zero too but I don't need to explain that to VIC members.
|Subject||Zori investment limited|
|Entry||06/15/2018 04:47 PM|
Eli Davidai took Drew Kelley's place on the board of directors. He's the operations expert from Quadrant that became the operations manager of Arc Group about a year ago to clean up the mess. Today he disclosed options grants in a form 4 and the prior holdings information was interesting. He indirectly purchased $250K of Arc Group in the rights offering through the backstop via Zori Investment Limited.
Since the problems here have been operational, Davidai as the new operations manager going out of his way to sign backstop agreements to purchase shares is reassuring. He must believe the operational problems are fixable. The other backstoppers also went out of their way to participate and they're pretty smart guys.