Halifax Corp (NYSE:HALX)

Halifax announced that it will be acquired for $1.25 in an all cash transaction. This is the fourth GeoSpecial/GeoBargain stock to be acquired over the past year. VM, HSR & MRM  were all acquired at attractive premiums from where we began tracking them.  Unfortunately, the HALX acquisition price is below our initial mention price of $1.65. Halifax is obviously being removed from the GeoSpecial list.

Added as a Geo-Special on June 30,  2009.  ($1.65)

The GeoTeam® has coded Halifax as a special situation opportunity. Since 2005 the Company has been taking the necessary steps to transform itself from a stagnant operating entity to a viable growth Company.

Halifax is a 42 year old Company that currently participates in the supply chain management industry. For the past several years Halifax had been operating as a Company with stagnant revenues and inconsistent profitability. In fact, past SEC filings show that from 1997 to 2008 the Company had only three years where it posted an operating profit. Coupling this with an embezzlement incident, discovered in 1999, involving a former controller of one of the Company's subsidiaries initially makes the Halifax story appear unappealing.

However, the future is looking brighter. With new management, the embezzlement incident is behind them and the Company has been taking the necessary steps to transform itself into a consistent growth Company.

The first task at hand was to pay down debt that arose from the fraudulent activities. This was resolved in 2005 when the Company sold its federal services division responsible for designing and installing specified communication systems for governments. The Company was able to pay off a significant portion of its debt from the proceeds.

The second task was to formulate and execute a plan that would set the groundwork for sustained profitability and increasing revenues.

It appears that the Company's efforts are paying off as it has just reported its first annual profit in several years. The Company's optimism is evident in its press releases and conference calls, reasons in part why we feel that Halifax is a special situation opportunity.

Understanding Halifax

Halifax operates in the supply chain management industry. In simple terms, Supply chain management is the management of a portfolio of assets spanning different locations and can include human assets, equipment and components. There are several aspects involved in the process including computer network setup, movement of parts, products tracking, product returns, office relocation and maintenance and repair of equipment. The ultimate goal of supply chain management is to enable companies to manage their business more efficiently. Many firms choose to out source part of or the entire process.

Halifax Has Two Major Divisions

1.  Enterprise Maintenance Solutions (EMS). EMS provides maintenance services on a nationwide basis for major original equipment manufacturers (OEM) . Basically, this division is only addresses a specific aspect of the supply chain management process and targets larger original equipment manufacturing firms. Through its more than 30,000 locations and over 400,000 units of equipment, Halifax is able to quickly address the maintenance, repair and tracking needs of its Global OEM Partner Customers, one of which is the technology and consulting giant IBM (NYSE:IBM). In addition, Halifax is also contracted to perform EMS work for its Partners’ customers. 

Technology Deployment and Integration activities are also part of the EMS division and deal with the movement, installation and support of whole desktop environments.

The EMS division accounts for 85% of Halifax's revenues.

EMS was what was left of the Company after the sale of the government service division in 2005.  Although the EMS division offers the Company a stable revenue stream, the growth opportunities and margins are particularly unattractive, which led to the creation of the Enterprise Logistics Solution (ELS) Division.

2.  Enterprise Logistics Solutions (ELS). Through its R&D process, the Company discovered that the middle sized markets were being underserved when it came to supply chain management. Furthermore, if these smaller companies wanted to embark on such activities in-house, it became a costly and time-consuming endeavor. Thus, Halifax embarked on a mission to fine tune its process by offering a more complete supply chain solution as opposed to just maintenance targeted towards the middle markets. The culmination of this initiative occurred in 2008 when Halifax created the Enterprise Logistics Solutions division that offered logistics and supply chain solutions across the entire supply chain framework.

Halifax states, "We deliver comprehensive, fully integrated services including end-to-end customer support and fulfillment, critical inventory optimization and management, web-based customized reporting, onsite repair services, as well as depot repair and warranty management."

This division already accounts for 15% of revenues and has much higher margins compared to the EMS business.

Halifax's Strategy Going Forward 

The Company’s growth strategy is simple—to maintain its stable EMS business and develop the ELS division which has opened a whole new avenue of growth opportunities.

1.  New markets

• Prior to the establishment of the ELS division Halifax's business was mainly suited for the IT industry. Now that the Company can accommodate the entire supply chain network it can satisfy the needs of a wider variety of customer markets.

• The ELS division will also allow it to expand its reach through its Partner Relationships.

2.  As a result of having access to a much broader customer base the Company may be able to jump start its revenues growth.

3.  Growth in margins should occur.

• As the ELS division begins to account for more of the Company's revenues gross margins should improve.

• The Company has a high degree of fixed leverage as SG&A expense can remain relatively stable when revenues increase.

• The Company has been reducing fixed contract arrangements and will not enter contracts with substantial inventory requirements.

4. The Company is virtually debt free which gives it the flexibility to pursue synergistic acquisitions.

5. The Company's international sales accounts for less than 5%.

The GeoTeam® is also attracted to the annuity-like stream of revenues from the Halifax model as well as the notion that businesses, in a quest to become leaner in tough economic times, may utilize supply chain services.

The market has finally taken some notice of the Halifax story. After meandering well under $1.00 for several months, despite three consecutive quarterly profits, the stock finally responded on June 30, 2009, when it reported a profit for its 2009 fourth quarter and full year. Although the GeoTeam® is upset that it did not take a position in the stock under $1.00, we are inclined to believe that if the Company can execute its restructuring plan more upside is available. We are particularly impressed that the company is maintaining profits despite declining revenues and a weakened economy. This tells us that the plan to increase its higher margin ELS business is working, albeit at the sacrifice of its larger revenue and lower margin EMS business.

While maintaining current profitability levels, the Company is optimistic that substantial EPS and revenue growth, needed to achieve P/E expansion, will start to occur in its 2010 third quarter ending in December. After reviewing the Company's conference call transcripts it is evident that the maximization of shareholder value is one of Halifax’s primary goals. The GeoTeam® will continue to track the Halifax story. For more insight into the Company, please see HX potential valuation scenarios.

Valuation Scenarios

Added as a Geo-Special on June 30,  2009.  ($1.65)

Data Inputs:

Fiscal Year Ends in March 

^a Halifax not paying a full U.S. tax rate.  Therefore, all EPS numbers have been adjusted by the GeoTeam® to reflect a U.S. tax rate of 36%.

^b The GeoTeam® has not yet established a formal EPS growth rate. However, due to the company's recent financial performance, we feel fairly confident that the company is on track to meet our 30% preferred EPS growth minimum. 

Short-Term Valuation Scenarios

^a Non-GAAP EPS Figures exclude certain non-operating gains and losses as well as certain non-cash items. Non-GAAP information should not be viewed in isolation or as a substitute for reported, or GAAP information . For a more complete explanation of the company's definition of non-GAAP please refer to its financial press releases. The GeoTeam® non-GAAP figures may, from time to time,  differ from company supplied figures.

^b For valuation purposes, The GeoTeam® prefers to adjust EPS to reflect a standard United States tax rate of 36%

Halifax ($1.65) has been on the GeoTeam® watch list for some time now and may have gotten away from us, as the shares are powering forward this morning. The GeoTeam® will participate in the Halifax 2009 year end conference call today, scheduled to take place at 11:00 am. Until recently the company has not been able to report consistently profitable financial results. It appears that the company has become a leaner operation, sacrificing revenues for higher margin business. furthermore, commentary from its year end press release instills some confidence that profitability can be sustained:

McNew added, 'We have every reason to believe that our return to profitability is sustainable going forward and as noted in a recent announcement, our supply chain services program (Enterprise Logistics Solutions) is being well received by the business process outsourcing community on both a domestic and international basis and is affording us a variety of higher margin growth opportunities. Our legacy maintenance business has its challenges but given the current state of our sales pipeline it appears to be on track for an acceptable performance in the coming year.

While on the conference call the GeoTeam® will attempt to gather information on three topics:

1. What is the potential for significant Pre-tax margin improvements? Pre-tax Margins are still tiny coming in at 1.1% for the fourth quarter.

2. The company commented that sustained profitability is likely. The GeoTeam® would like more insight into the likelihood of actual EPS growth.

3. What is the likelihood that the company will begin to experience revenue growth?

The GeoTeam® will provide more information if warranted.

Source: PR Newswire (June 30, 2009)

The GeoTeam® participated the Halifax conference call this morning.

Recall that the GeoTeam® wanted to gather information on three topics:

1. What is the potential for significant Pre-tax margin improvements? Margins are still tiny coming in at 1.1% for the fourth quarter.

Conference call input: The company appears confident that it can push towards the achievement of substantially improved margins.

2. The company commented that sustained profitability is likely. The GeoTeam® would like more insight into the likelihood of actual EPS growth.

Conference call input: The company appears confident that EPS growth will start to occur in the second half of its 2010 fiscal year ending in March.

3. What is the likelihood that the company will begin to experience revenue growth?

Conference call input: The company appears confident that revenue growth will start to occur in the second half of its 2010 year ending in March.