JPS Industries

JPS Industries (website) trades on the pink sheets. I was reviewing some “dark” pink sheet companies I shortlisted about two years ago and noticed some interesting developments at this company.

The company manufactures extruded urethanes, ethylene vinyl acetates and mechanically formed glass and aramid substrate materials. JPS Industries has two operating subsidiaries: JPS Composite Materials and Stevens Urethane.

JPS Industries does not report to the SEC and does not post financials on OTCMarkets. However, the company has made available the most recent annual reports on their website and they can be found on this page.

I have briefly looked at the most recent annual report and fairly quickly concluded that this company is definitely one for my “too hard”-pile. Still, there have been some interesting recent developments that suggest the company could be undervalued and that there is a catalyst in place to unlock the value. So, I decided to make a quick post and see if some of the many brainier guys out there can figure things out. Perhaps this post can lead to a nice blogpost on another blog somewhere or some comments here.

I like simple, stable companies with a strong balance sheet and JPS Industries is certainly not that. The company has $28.7 million of long-term debt, virtually no cash and a $56.8 million pension liability (and a 8.0% return assumption). The market cap is $52.9 million, based on a stock price of $5.15 and 10,281,460 outstanding shares.

JPS Industries made an acquisition in 2007 when it paid $61.2 million and a contingent earn-out payment for certain assets of Hexcel Reinforcements Corporation. To fund this acquisition JPS entered into a $66.8 million credit facility and $40 million term loan. More details can be found in the 2010 annual report. The company has significantly reduced LT-debt from $56.4 million in 2008 to $28.7 million today.

The company showed net income of $1.3m (EPS: $0.12) for the fiscal year ended October 27, 2012. Revenues dropped to $158.3m in 2012 from $190.3m in 2011. The report explains that this was caused by a decline of the solar panel market and weakness in the soft body armor market. In fiscal 2011 the company lost $917k, but there was a litigation charge of $10.3m that year. This litigation commenced in 2007 and was finally settled in February 2012.

The company has substantial NOLs: “At October 27, 2012, the Company had regular Federal net operating loss carryforwards for tax purposes of approximately $62.0 million. The net operating loss carryforwards expire in years 2019 through 2032.”

Part of the difficulty in evaluating this company for me is that it is hard to get an idea of what a “normal” year could look like from the data I have. Revenues obviously dropped from 2008 levels when the crisis started and with the litigation costs and a difficult fiscal 2012, I feel that the company might not have shown it’s true potential in these last few years.

Steel Partners

A possible catalyst here is that Steel Partners owns 39.3% of the outstanding shares. Interested readers should definitely read the proxy statement that is included in the 2012 Annual Report. It describes some of the history of Steel Partners’ involvement in the company. On September 27, 2011 Steel Partners offered to buy the company for $8.00 per share (later reduced to $7.50), but this did not lead to a transaction. In January 2013, Steel Partners again discussed a few potential transactions, including the sale of the Steel Partners’ shares to the company, a dividend to all shareholders and the acquisition of the company by a subsidiary of Steel Partners. The company offered three alternatives, including the purchase of the Steel Partners shares in exchange for a note and the acquisition of the company by Steel Partners, but again no agreement was reached.

In March 2013, Steel Partners contacted the CEO at the time, Michael L. Fulbright and asked him to resign. Steel Partners wanted to replace him with another person. The Board ultimately rejected this, but they did agree to voluntarily include four Steel Partners Board nominees in the proxy statement for the next annual meeting.

On May 9, the results of the directors election were announced and Steel Partners won four of the five board seats: This meant that Steel Partners was also able to replace the CEO, Fulbright, with Mikel H. Williams. Certain change in control provisions in employment agreements were activated by these developments. I don’t know what the costs will be to the company.

Steel Partners now has control over the company and their actions over the last couple of years clearly show that they want to realize value from their investment. I don’t know what the endgame will be here. Perhaps the company will be sold to an outside party or perhaps one of the existing subsidiaries of Steel Partners will buyout the minority shareholders, although the likelihood of the latter option happening might have decreased now Steel Partners already has effective control over the company.

The company pension plan owns 1.93 million shares of the company’s shares. This is what the Annual Report mentions about the valuation of these shares:

“As noted, the Plan holds Company common stock. The stock is not actively traded on an established securities market and the stock value is estimated by an independent valuation specialist. Company stock is approximately 19% of total Plan assets. Because of the absence of a readily-obtainable market value and the inherent subjectivity in any valuation, the estimated value may differ significantly from the value that would have been used had a ready market for the stock existed. The Plan owns 1,925,685 shares of Company stock valued at $7.15 per share, or $13.8 million, as of October 27, 2012.”

Both the Steel Partners earlier offer of $7.50 per share and the valuation of the “independent valuation specialist” indicate that JPS Industries’ value could be well above today’s stock price of $5.15. I can’t justify buying shares just on that basis though, so for me this company is a pass.

Disclosure: no position.

Posted in Pink Sheet stocks, US stocks and tagged .

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