Although it was only last month that I covered Concurrent Technologies here and with the shares then sitting at 57p, subsequent news flow since, provides an opportunity for me to add some additional comment.
As part of that, I have once again been able to catch up with CEO Miles Adcock and CFO Kim Garrod, following additional new product announcements along with just earlier this week, the revelation of an acquisition being made.
The latter, comes in the shape of the Aerospace and Military divisions of US based Philips Machine & Welding, Inc. that comes for a consideration of £2.64m.
CNC shares, which had trotted up nicely to the 73p range understandably retreated around 8% in early trading on the day of the announcement, as the company revealed a discounted placing at 65p per share to support the purchase.
From a personal perspective, I saw the share fall as an opportunity to add, as unlike some, I don’t have a big issue with such discounts being undertaken, providing they are done for the right deals.
That said, various bulletin board chatter was rightly asking as to why the company wasn’t using its own cash resources which was something I was keen to put to the two key board members.
Adcock was keen to explain and expand where he said “firstly, it is absolutely the right time for us to acquire Philips and we have actually had it in mind for more than a year.”
Indeed it was, as I am further informed that it was actually over a year ago that both CEO and CFO travelled out to the US and shook hands in relation to the deal.
Expanding further, Adcock comments as to why it has taken as long as it has to conclude the deal. “The reason it wasn’t done sooner was because the audit took a lot longer than we had hoped and we also needed to return the boards business to a strong financial position.
It is always much better to make an acquisition on the back of proven strength than not, and now is the right time and so we really have to do that now.”
He comments further that at this moment CNC doesn’t have the cash to comfortably do the deal and whilst they have done a good job stewarding their cash through the component problems it was uncomfortable for the business.
Going on he adds, “to go down to the levels of cash this business went down to will never happen again and while we did a good job, had such circumstances that were out of our control been much worse, then we too would have been in a worse position, so never again will we do that.”
Thankfully, as previously reported the component issues have eased and the business is in an excellent spot on which to grow and do so substantially.
Looking ahead the CEO says, “we are going to manage the boards and systems businesses differently in future, where the cash the boards business is generating, we want to keep aligned to it going forward.”
This will ensure that it continues to grow and where it will need significant investment at some point in the future.
An example of this is the potential introduction of a significantly expanded manufacturing capacity and Adcock adds that the cash from the division will be ring fenced for it.
Likewise, there are plans for the systems business, which now includes the Philips purchase. “It is a great business, but typical of a small business with two or three owners where it has not been cash rich, so there is an opportunity to do some capital investment.”
Adcock stresses that if they are going to take the systems business to considerable size on the back of significant growth within CNC, then it will require capital investment.
Although he says that at present, they can’t be explicit on what they are going to do with their cash, they do want to have the ability to act quite quickly.
CFO Garrod added that further investment across CNC is required and that whilst the projected net cash position highlighted in the last broker note may look substantial, it doesn’t actually go that far if you are looking at both maintaining and growing the business.
“If we had bought Philips out of that cash, we would have been very limited as to what we could then do with the systems or even the boards business.”
More flesh on the bones certainly provides for additional colour and the reasoning behind the raise, where from my perspective it serves to underline the current momentum and the intent on driving on the growth road.
It also clearly provides them with additional room to perhaps add another purchase in due course, along with further boosting the credibility and worthiness of the business as a serious player.
“We need to continue the momentum across the boards business and really go for the systems now”, Garrod concludes.
Speaking further on the raise, Adcock adds, “if we had only gone to raise around three million or something, the burden and costs it would have brought just seemed like a bad call. So, we have raised more than we need arguably, but raising much less than that you have got to really question the value for money.”
Speaking further on the acquisition, the CEO tells me that as a long- established business it was founded by the father of one the current owners. Although there are three owners today, only two have been running the operation as the other is a silent partner.
Indeed, they have actually been managing it in this form for some thirty years and the employee base has also been constant.
There is, Adcock says, bags of experience within the business with exactly the sort of things that they want at CNC.
What Philips doesn’t have however is its own business development and sales and although they do have superb systems and quality standards in place for designing major products, they don’t have practices in place for growing the business.
“In its own right it is significantly underdeveloped through the ownership model” Adcock explains, “but it is actually complimentary to Concurrent Technologies and the leadership we are bringing, with a significant opportunity for growth without doubt.”
In relation to how quickly CNC may gain traction from the acquisition this is a bit of an unknown as yet, but Adcock says that on the back of it, they are already bidding for work now.
An example the CEO tells me, is a bid that CNC has submitted which draws on Philips capability for some systems work related to the US DOD, which when ramped up, would if won, equate to somewhere between $2m to $10m per annum.
Whilst there are other bidders for that in what is a competitive space, Adcock says that they may well want to bid for ten plus of that nature per year and perhaps more, which is why at present predictable benefits from the purchase are as yet unknown.
What does appear apparent though is the potential for CNC with the addition and an increasing footprint and presence across the US.
Having emerged from an extremely difficult period and now in an altogether better place with serious growth aspirations I ask as to how they are managing their headcount and key skills.
To this end, Adcock says that at present it is the right number for the boards business with circa one hundred and thirty four people in place.
There are however a few key skill areas they would like to hire as they are presently still using a few contractors, but overall they are broadly at the right place to see the boards business become a thirty to forty million pound operation with the current prospects.
The systems business in terms of headcount will, Adcock says, depend on what they win and when, which will see them hire accordingly as contracts emerge.
Both the boards and systems businesses will also be reporting separately going forward, providing for increasing clarity for investors.
Despite the acquisition announcement, broker Cenkos has not to date released another note following its very recent upgrade to numbers.
That is likely to remain the case it seems, until the company get together with them ahead of the Interim Results next month, which seems logical.
Aside from the acquisition, CNC also released news on an updated product, which the CEO says is really quite important and internally is known as TR Max.
This, he says, is proving to be incredibly successful and is being designed into opportunities of significant scale as what have been designed into in the past.
As a result, he says that future year’s revenues from that board will, he believes, be by far their most successful board ever.