Friday, February 5, 2010

ACAS: What is WRH, Inc.?

Earlier the Jaded Consumer posted about some apparent duds in ACAS' portfolio. The idea was to identify companies whose listed fair value wasn't holding after investment, the better to understand what was going on with the valuations and to shed some light on whether ACAS' investments were terrible or whether, instead, ACAS' pricing environment was terrible but its investments were not.

ACAS' last 10-Q shows another such company whose data invites inquiry: WRH, Inc.

ACAS lists the industry of "WRH, Inc." as "Life Sciences Tools & Services". Depending whose Google links you trust, the private company WRH Inc. is either an Iowa company with $15m in annual sales involved in water & sewer system construction, or a New Mexico company with revenues between $2.5m and $5m in an industry described by NAICS Code 532412 ("Other Heavy Machinery Rental & Leasing"). The moniker "life sciences" seems a bit closer to water and sewer systems than to heavy machinery leasing, but who knows? If you have a clue, please post. ACAS' site seems bereft of detail. Based on the quarterly interest payments ACAS gets from the company (described below), I think it's clear that if either of these companies is our man, WRH, Inc. has to be the $15m/y water treatment tools and services company.

Two ACAS vice-presidents of buyouts – the Stanford MBA graduate Scott Kauffman, and former KPMG manager Justin Dufour – are observers on the board of WRH Holdings Inc. As of September 30, 2009, ACAS had invested $353.3 million in its "non-control/non-affiliate investment" WRH, Inc. in the following manner:
  • $4m in senior debt (4% coupon and $4m face value, due 9/13, pledged as collateral and not non-performing, for an apparent quarterly income of $40,000 or $0.04m; this is valued at $4.0m which is both the investment's face value and its cost);
  • $86.5m in subordinated debt (14% coupon and $87.1m face value, due over the period 7/14-9/15, pledged as collateral and not non-performing, for an apparent quarterly income of $3.0485m; this is valued at $87.1m or face value, which is above listed cost);
  • $213m in convertible preferred stock, listed as not income-producing and valued at $$86.9m; and
  • $49.8m in common stock, listed as not income-producing and valued at $0 (nil).
ACAS is required to value the investment at $178.0m, approximately half its listed cost of $353.3m. At the listed value of $178m, the still-produced quarterly income of $3.0885m is 1.7%, for an annual yield of about 6.9% (this ignores potential for capital appreciation; based on ACAS' listed cost, the yield is 3.5%). According to the 10-Q the preferred stock had been income-producing as of December 31, 2008 (in some undisclosed amount), and at that time the whole investment was valued at $332.3m. Between the two measurement points, however, the current valuation was not the only thing that changed: ACAS' cost changed. ACAS' cost of preferred stock was reduced by $13m and its cost of senior debt was reduced by $0.3m, and its cost of subordinated debt (the fat 14% notes) climbed $5.5m from $81m to $86.5m. What happened?

I haven't looked at ACAS' internal accounting, but one scenario suggests itself: when WRH informed ACAS that it wouldn't be able to pay dividends on the convertible preferred, ACAS converted some of the preferred (reducing its basis in the remainder of its convertible preferred holdings) to increase its holdings in still-paying sub notes. The reduction in "cost" of ACAS' holdings of WRH's senior notes suggests something similar occurred in the senior notes, but the transaction isn't as easy to guess as in the case of the convertible preferred, which was almost certainly converted to sub debt under the shares' conversion feature at whatever rate applied to the shares. The fact that the change in costs doesn't equal zero means that ACAS realized a loss at the time it exited the non-performing convertible preferred. The face value of the sub debt increased $5.4m in the transaction, quite close to ACAS' change in cost (the least-significant digit's off-by-one issue could result from rounding; or the other digit could represent something having to do with the change in senior debt).

So, ACAS converted preferred into sub debt, and did something with its senior debt that's less clear. ACAS gets $3,088,500 per quarter in interest, could potentially convert more preferred to debt, and holds common stock. Assuming that water treatment is still a valuable industry in Ohio or the nation, it's expected that the long term value of the zero-listed common stock isn't zero, and that the currently-nonperforming preferred stock may have future value either on conversion to debt or after reinstatement of dividends. At currently-listed "fair value" the interest payments are rather better than many of my own holdings, though presumably ACAS entered the deal to profit from equity increases (hence, the equity investment).

Anyone know anything solid on the company? My understanding was that infrastructure was considered a sexy industry and that efforts to improve greenness and sustainability had strong support. A company that provides water treatment tools and services seems well-positioned to benefit from increasing water demands as populations grow and their associated ecological concerns become infrastructure plans.

Is this really a long-term loser? Is the company reinvesting in growth rather than paying dividends in order to capitalize on some present opportunity? Was business horrible after the end of 2008 but picking back up? If ACAS didn't think the preferred shares had value, why would it not have converted them all to get paid interest?

WRH Inc. will be a holding to watch: both for listed fair value and for evidence of ACAS converting investments into different holding types as performance changes. In the meantime, several million a quarter in cash doesn't hurt ACAS' prospects.

If you have insight into WRH Inc. or any other ACAS holding, please post.


Anonymous said...

Hi again. WRH is Wendler Engineering and Construction. Or perhaps a new business they created from this entity.

Anonymous said...

Jaded Consumer said...

I'm willing to consider it, but Wendler calls itself WECI and I don't understand why ACAS would call a construction firm "Life Sciences Tools & Services".

Why do you say WRH Inc. is Wendler Engineering and Construction? I'm trying to follow your idea, but the web site doesn't provide any leads that tend to link it to ACAS.


Anonymous said...

WRH inc...CEO is Randy Reihmann.

Then there is this patent assigment with his name attatched as an assignee

the patent is for some type of navigation and technology assignation

I cant figure it out its making my head hurt. anyways..the patent applies to this it seems

and there is this...

both companies have been around for 40 years..I guess calling Reihmann would solve all this.

Anonymous said...

I cant see how ACAS has so much tied up with the 20mm gross revs Wendler as it just a construction firm. makes more sense to me as it is a company with ''professionals representing a vast array of disciplines, our diverse range of engineering and science solutions allow us to provide a seamless approach to meeting your site development and infrastructure needs'

i dont know. What i do know is the name looks to punch through $5 a share quickly.

Anonymous said...

Check out this SEC filing:
If you look up WRH and look up the address it is for Wil Research - a Contract Research Organization that ACAS bought from Behrman Group in 3Q07. ACAS had been a debt investor in Wil previous to the buyout.

Anonymous said...

WRH is Wil Research - look up the address listed in the SEC filing

Its a Contract Research Company bought from Behrman Group in 3Q07

Anonymous said...

Jaded Consumer:

I have recently encountered the Jaded Consumer. In reviewing the historical entries, I was quite surprised to see the discussion regarding the lack of investor knowledge concerning WRH, Inc., a privately held company where ACAS is the principal shareholder.

The last entry regarding WRH, Inc. was correct: it is a contract research organization situated in Ashland, Ohio, known as WIL Research Laboratories, LLC. It also includes Notox, situated in the Netherlands; QS Pharma, situated outside of Philadelphia; Biotechnics, which is in North Carolina; and Midwest Bio Research, outside of Chicago.

The history of WIL Research Laboratories, LLC (fka WIL Research Laboratories, Inc.) is that the Ashland, Ohio-based company was originally owned by Great Lakes Chemical Company. In 2004, there was a leveraged management buyout supported by investment capitalist, Behrman Capital. The buyout acquired WIL Research Laboratories, along with its long-time senior management team, for approximately $123 million.

In 2007, ACAS purchased WIL Research Laboratories, which by then had added Biotechnics and Notox to the family of companies. The purchase price was $500 million, a premium price, indeed, based upon the uniqueness and success of the business model which had been developed by the senior management team at the company. The company had experienced 23 consecutive years of 18% CAGR, both on the top line and bottom line. What is salient for the investors of ACAS to know is that the senior management team which led to its historical successes, and for which ACAS paid a hefty price, has been systematically dismantled by ACAS. There are a number of legal issues ongoing with some of the members of that senior management team, as four of the six executives have left the company since 2008. The financial strength of the company had been the “study director-centric business model,” which was inexplicably abandoned by ACAS, in my opinion, as the company apparently is now being run by east coast bean-counters who have no familiarity whatsoever with the underlying business. There is by all accounts internal strife and employee turnover. It remains difficult even for those individuals who own stock in the entity to obtain information from ACAS regarding WRH, Inc.’s on-going financial performance.

WIL Research has been a major profit center for ACAS, but the latter has chosen to ignore the very ingredients of the company’s historical financial strength.

Jaded Consumer said...

Thanks for the long and informative comment. It's hard for those of us looking at ACAS through its filings to see a ground-level view of its operations, because the company has maintained a high degree of opacity. Opacity isn't all bad -- look at what Jobs did with opacity at Apple. Still, we end up without local color in our narrative.

I'd appreciate knowing your perspective on this particular portfolio company. It sounds as if you have not only familiarity with it, but a definite position.

After a year and a half has passed following the original post, I'm sure the situation in WRH has changed, and I hadn't tried to follow up on it. However, at the end of 2Q2011 (I don't see a 3Q2011 posted yet), ACAS'holdings related to WRH, Inc. stood at: Senior debt ($3.9m invested, $3.9m fair value, performing), Mezzanine debt ($96.5m invested, $97.2m fair value, performing), Convertible preferred stock ($225.2m invested, $92.1m fair value, listed as non-income-producing), and common stock ($49.9m invested, fair value still listed as nil). Fair value has thus increased from $178.0m to $193.2m. Not a big shift, but certainly not tanking -- and it's still servicing a mezzanine debt with $96.9m face value and a coupon of 14.6%, which is something to consider in its favor. Maybe they aren't keeping up with the preferred dividend, but they're doing something.

The idea that effective management has been lost or dissipated is definitely a concern for the company as an investment. Warren Buffett's own list of buyout criteria, for example, includes the presence of effective management that will stay. Losing management is a real loss.

I've seen companies holding a lot of valuable expertise in its headcount get refactored by MBAs who erroneously believe that the reports on their desks contain all the material information needed to make business decisions about their firms. It can be ugly, and look stupid in light of locally-available wisdom. I'm sorry to hear this sort of thing is at work at WRH, Inc.

Anything you can tell us about the company's operations, the field in which it works, the kinds of firms that become its customers, and so on?

Anything we can learn about ACAS' portfolio companies that help us understand what is going on in the company will help us make sense of the lonely numbers in the public filings.

Thanks for reading, and thanks for sharing!

Anonymous said...

Thanks very much for your response. Your analysis of the numbers I am reviewing with some colleagues, I appreciate the analysis and note the moderation used with the term "opacity". You were correct in a number of regards. In the opinion of myself and others there’s much to "watch out" for in the management of this major asset. You will be receiving further information regarding other items raised in your comments. Thank you for your efforts.

Jaded Consumer said...

If you'd like to discuss something offline rather than here, include your email address. I would never post a comment with an email address without your agreement and a good reason.

Management's disinterest in discussing particular portfolio companies on calls is surely related to their disinterest in being second-guessed live on the phone about individual portfolio companies whose operational details are not familiar to the top few commenting on calls. The other side of the coin – the discussions never held on conference calls because individual portfolio companies aren't discussed – is still of interest to shareholders, of course. I'd be interested in anything you're in a position to discuss.

Thanks again for reading, and more for contributing.