Better Year Predicted for Ultrasystems
Ultrasystems Chairman Phillip Stevens laughs when reminded of a 1981 interview in which he said Fluor Corp. was an “excellent role model” for the company he had founded 12 years earlier.
In recent months, both Irvine engineering and construction companies have reported quarterly losses and suffered depressed stock prices.
But while Fluor is languishing, Ultrasystems has apparently regained its footing. While the $871,000 in profits earned in the first quarter, ended April 30, were nearly 50% lower than those from the same quarter a year ago, they still represented a big turnaround from the $4.4-million loss in the fourth quarter of 1985, ended Jan. 31.
And on the eve of the company’s annual shareholder’s meeting, Stevens said the current fiscal year “may be the strongest year in the company’s history,” with profits potentially topping fiscal 1984’s record $5.3 million.
Touted by Wall Street as one of the nation’s fastest-growing companies, a combination of factors reduced Ultrasystems’ net income for fiscal 1985 ended Jan. 31 to $394,000, compared with $5.3 million in fiscal 1984. Nearly $3 million in unexpected start-up costs plagued Ultrasystems’ first two wood-burning electric plants in Northern California. At the same time, federal government proposals to withdraw price supports for sugar growers changed the economic feasibility of a proposed corn syrup plant. Ultrasystems put the project on hold and wrote off $3 million in related expenses in the fourth quarter.
At the same time, confusion over federal tax reform proposals affecting energy tax credits spooked investors because Ultrasystems depends on tax credits to increase the profitability of its projects. In response, Ultrasystems stock price has plummeted from about $16 a share in December to $6.75 Tuesday, up 25 cents a share for the day in over-the-counter trading.
Excellent Record
“They had an excellent record and stumbled,” said Timothy Reiland, a special situations analyst with Robert W. Baird in Milwaukee, Wis. “They got a little carried away with growth goals and took the optimistic case for the company. Now, they are doing a lot of soul-searching and reevaluating.”
Reiland said Ultrasystems is restructuring projects to provide a good rate of return even with “worst case” tax scenarios. “It is certainly going to make a number of the marginal projects not economically feasible,” he said.
Stevens that the company has reviewed its energy projects and in the fourth quarter set aside a “several-million-dollar” reserve fund to avoid being hit with unexpected losses in the future.
“Even with the difficulties, our projects are still profitable,” said Stevens in an interview.
He said the company is “combat trim” and “trying to be as austere as possible.” Since February, 50 employees, including two top executives in the Ultrapower energy subsidiary, have resigned or been laid off. However, Stevens said growth in the defense and space systems divisions has actually increased total employment from about 1,200 in February to the current 1,224. He said the company is planning to sell a portion of the equity it now holds in all its power plant projects. It is currently seeking partners to reduce its stake from 33% to 17% in two $45-million wood-burning plants planned for construction in Maine
“We will see a very strong year, maybe the strongest year in the company’s history,” said Stevens, adding that strength “means profits.” He said the company, which has no long-term debt, recently increased its line of credit to $40 million. The Bank of America leads the company’s consortium of banks.
Stevens pointed out that while attention was focused on problems with its energy projects, its defense and space systems group delivered record revenues during fiscal 1985. Revenues increased from $28.5 million to $47.2 million. Operating profit reached $4.8 million and employment increased from 346 to 512 employees in fiscal 1985.
“Thank God for the defense and space business,” said Terence York, a senior construction industry analyst for Drexel Burnham Lambert Inc. in New York. He said Ultrasystems’ phenomenal growth “created high expectations both within the company and in the investment community.” York said Stevens, who serves as chairman, president and chief executive officer, is carrying “a very heavy mantle.”
Other analysts said it will take a while for the company to regain credibility with investors.
“It was not just the problems with the plant start-ups, but there were problems with the way the company communicated with the financial community,” said Michael Carstens, vice president of research for Tucker, Anthony in New York City.
“I think it was a shame they weren’t straight about (the problems),” said Carstens, who doesn’t recommend Ultrasystems stock. Carstens said he believes Stevens was “taken down the primrose path” by subordinates who were reluctant to tell him how bad things really were.
However, Stevens insists he was totally aware of the problems with the wood-burning plants, although he admits “we initially underestimated the start-up costs.”
Despite the growth in revenues and bright predictions for fiscal 1986, Stevens said, “I think the stock is so undervalued, it’s ridiculous.” Stevens, who owns about 13% of the company’s stock, said he placed an order to buy more shares on Monday.
Ultrasystems’ annual meeting of shareholders is scheduled for 8 p.m. tonight at the Irvine Hilton.
