Electronic Systems Technology (ELST.OB) is the maker of the ESTeem line of wireless modems.

It has been a public company since 1984, and filed several patents (since expired) around wireless modem technology.

The company has built a nice cash pile on the balance sheet, and continues to trade at a discount to book value and only slightly above net cash despite being profitable in 8 out of the last 10 years.

Financial Overview

ELST reported results for the 2010 fourth quarter and full year. Annual revenues were up 18%, to $2.24m from $1.89m in 2009.

Sales dropped sharply during the 2008/2009 recession – they are still down 26% from the 2007 high water mark – but are showing signs of improvement across all product lines and geographic regions.

The domestic business increased 20% to $1.68m, and continues to make up roughly 3/4 of total sales.

Foreign revenues increased 17% at a much higher operating margin (42% margins vs. 16.5% for the domestic side).

Mobile data computer terminals (MDC) applications are marketed to public safety agencies such as police stations and now make up only 5% of total sales. The company is shifting its product mix towards more industrial automation projects, both domestic and internationally.

ELST’s strategy is to maintain low levels of inventory to provide maximum cash liquidity, as the company’s products do not require much lead time. The latest inventory balance of $421k is the lowest in the last ten years – hopefully this shows that management is prudently monitoring the available inventory.

Operating expenses increased slightly to $1.18m from $1.09m due to higher bad debt expense, professional services, and salaries. The company expects to cautiously lift wage reductions put in place in 2008/2009 due to improved revenues and profitability.

Operating profits came in at $174k, up from a slight loss last year.

Net income was $129k, up 437% from 2009, albeit from a very low comparable. EPS was $0.03.

Business Ratios

ROE was 4.18%, a number that is depressed due to the large cash balance sitting on the company’s balance sheet.

There are many different methods for calculating excess cash, but I use this formula:

Excess Cash = Total Cash – MAX (0, Current Liabilities-Current Assets)

While most companies need to keep cash on the balance sheet for day-to-day operations, it is probably a nominal amount for ELST – capex requirements are very low and the company does not keep a large amount of inventory on-hand.

Since the company has so much excess cash, ROIC and CROIC provide a better picture, coming in at 25.84% and 31.10% in 2010 respectively.

5-year average ROIC and CROIC are 17.16% and 33.41%.

ELST’s business is definitely in a niche market with capped upside, but it appears that the company remains a solid choice within this niche.

Excess Cash

Unfortunately, the large cash balance is earning very low returns due to the current interest rate environment.

The company paid a small dividend from 2003-2008, so that is the most likely course of action – the current cash balance is the highest in the last ten years.

Paying a small dividend would at least serve to return some of this excess cash to shareholders.

Valuation

On an asset basis, there is no doubt that the company remains cheap. Market cap is currently $2.8m, meaning the company is selling at a discount to its working capital.

NCAV is $0.57 per share, while NNWC is $0.54. At these prices, you are basically picking up a profitable business for free.

With the stock price at $0.55, current EV/EBIT is 1.3x and EV/FCF is 1.5x, or 1.85x and 1.65x using the 5-year average EBIT and FCF numbers.

Conclusion

While still cheap, the stock has appreciated since my original entry point. The biggest risks are product obsolescence or increased competition, as the world of technology can change very rapidly.

The company is certainly not in hyper-growth mode, as 2010 sales numbers were roughly even with 2004.

If the business is in a steady decline (meaning management cannot open up new markets), then the most important consideration is what will happen to the cash balance.

Unless management can find ways to re-invest the capital into the business at acceptable rates of returns – which does not appear to be the case – then excess cash should be returned to shareholders.

More likely, another way to unlock value would be at the hands of an acquirer. The company’s president, T.L. Kirchner, founded the company in 1984 and is now in his early 60’s.

The cash balance would be very attractive in any deal, but the question remains is the ELST’s niche worth pursuing by a larger company? Or is Kirchner thinking about parting with his legacy?

Not sure, but I think I’ll hold to see what happens.

Disclosure

Long ELST

I’ve written quite a bit about Techprecision (TPCS.OB) over the past few months (see posts here and here). The company has announced a number of large sales orders in the recent months, and remains poised to capture strong tailwinds across a broad range of industries.

Recent Sales Announcements

• $1.2 Million Purchase Order from New Solar Customer
• $1.19 Million Defense Contract Order
• $900,000 Order from CleanTech Customer
• Continues Accelerated Booking Trend with $1.25 Million in New Orders

For some perspective, the company had revenues of $28m last year – within the last month, they have announced $4.5m in new orders.

Even better, the orders are broadly diversified across a range of industries including Solar, Defense, Medical, and Industrials.

One of the biggest risks with TPCS has been a major reliance on solar (namely their largest customer, GT Solar), so this diversification is a welcome sign.

The $1.2m solar order is also exciting, as it’s the first order out of the new Chinese subsidiary. According to the press release,

“As this customer ramps, the projected volume in two to three years has the potential to exceed the revenue of TechPrecision’s largest current customer.”

A year ago, GT Solar accounted for approx. 30%, or $7m of the company’s backlog, a glimpse at how much this new customer could be worth as it ramps up.

New Investor Presentation

Techprecision also offers a new investor presentation on its website, updated as of March 2011:

[scribd id=50906001 key=key-1fto0cii7h00mq6loxlq mode=slideshow]

Stock Volatility

The stock has been very volatile over the past week, which could have something to do with the earthquake in Japan and subsequent nuclear scare.

While nuclear is a targeted segment for TPCS, less than 1% of 2011 YTD sales occur in this segment (6.28% in 2010).

The stock price has also been hampered as the two insiders (Youtt and Levy) continue to sell shares. While I’d much prefer insider buying, both directors have been selling all year, regardless of the market price.

This short-term volatility does not affect the long-term prospects for the business.

Conclusion

Techprecision possesses a solid advantage with its history of advanced manufacturing to benefit from some heavy tailwinds in its major industry targets.

I remain long (despite the volatility).

Disclosure

Long TPCS

Acme United (ACU) reported fiscal fourth quarter and annual results for 2010.

Revenues increased after the sharp drop-off in 2009, but the company’s margins remained depressed.

Financial Results

For the year, the company reported a revenue increase of $4m, or 7%, to $63m. Sales increased in all of the company’s geographic regions, led by Europe at 14%.

The European division continues to operate in the red, reporting a loss of 487k, although that loss has narrowed slightly from 2009 and 2008.

The U.S. market continues to dominate the company’s business, with 75% of total sales, so the 5% YoY increase in this segment is good news.

Despite the increase in sales, operating income was flat, coming in at $2.98m.

The decrease in margin was mostly affected by higher air freight expense of approx. $500k, as labor shortages in the company’s Chinese manufacturing facility required expedited shipments to meet customer demand.

Net income was 2.52m, or $0.82 per share, compared to $0.86 per share in 2009. However, 2009 results were positively impacted by a benefit associated with the remediation of the disposed Bridgeport facility.

Adjusting for this benefit, net income was up 3.6%.

For the year, the company negative operating cash flow of $1.1m, due largely to a significant increase in inventory going into 2011. According to management, this is a very deliberate strategy to prevent delays going into the company’s busiest time of year.

Owner earnings came in at $2.5m.

New Acquisition

On March 1, the company announced an acquisition of Pac-Kit Safety Equipment Company, a leading manufacturer of first aid kits. This is another long-standing and storied brand, having been around since 1890.

ACU is paying $3.4m for the company, with annual revenue in 2010 was $5.4m. This revenue stream is stable, falling between $4.8m and $5.4m for each of the last three years.

The company expects the acquisition to be accretive in 2010, with operating earnings of $100-150k before operational synergies.

It is a nice tuck-in acquisition for the firm, but probably won’t move the needle significantly.

However, I view these types of combinations as much more shareholder friendly than a larger alternative (with its associated headache).

Risks

The mishaps at the Chinese manufacturing facility are a blow to management’s credibility, but mistakes happen.

Inventory management is extremely important for this type of business – it remains to be seen if the current inventory stockpile is a smart move for 2011.

According to the CEO, ACU remains firmly committed to its Chinese manufacturing strategy, so the company must prove that it can correct these mistakes going forward.

At the same time, margins have shrunk considerably from the 2005-2007 time period (where operating margin averaged almost 11%).

The good news is that this fact leaves room for improvement from the current numbers – however, a sustained downtrend is concerning.

Management also sounded confident on the conference call that they have taken significant action to shoring up the European division. A reduction in non-sales headcount and other operating expenses is expected to save the company 400-600k in euros in the upcoming year.

Even breakeven for this division would provide a nice boost.

Conclusion

While 2010 was not the greatest year, ACU is still trading with a FCF yield of 8.69%, with return on equity a decent, but not spectacular, 10.13%.

EV/EBIT of 12x and EV/FCF of 14x show that the company is fairly valued, but on are calculated on depressed earnings – 5 yr averages for the two ratios come in at 7x and 10x respectively.

Until proven otherwise, I believe that management will not repeat the same mistakes in 2010. They are incentivized to do that – management did not receive any bonuses for 2010, nor any increase in base pay.

Hopefully the bonus situation will improve in 2011 (on the back of a strong year for shareholders of course).

While I’m not adding to my position at current prices, I continue to hold.

Disclosure

Long ACU