About two weeks ago, I wrote about Universal Power Group (UPG) as a potential value investment. The company contacted me to respond to some of the criticisms I had laid out. As such, this post will feature their responses. I was also given the opportunity to ask some follow-up questions, and I asked a couple of tough ones, particularly on the issue of the company's record in being shareholder friendly. To the company's credit, every question was answered, even the rhetorical, sarcastic ones to which I already knew the answer. Here's how it went down:
I originally wrote: UPG already had $11 million in debt against almost no cash, so this acquisition increases the investment's risk as it adds to the company's debt burden.
To which the company responded: With regard to your concerns over acquisitions, the recent agreement to acquire PTI was done to expand an existing UPG business, and is expected to be accretive this year. While investors are naturally interested in how Company resources are invested and utilized, UPG's management team has made it clear they intend to take a very conservative approach toward acquisitions, from both a business and financial perspective. Finally, the primary focus of UPG's growth strategy is on organic growth, rather than growth through acquisitions. In terms of the Company's debt levels, UPG typically does not maintain large idle cash balances, but instead uses its short-term credit lines with Wells Fargo to meet its working capital needs. UPG's management works very closely with its bankers to ensure adequate availability of cash to fund operations.
To which I asked: Seeing as how $3.3 million represents more than 20% of UPG's market cap, this is a material acquisition. As such, I was a bit surprised that Progressive's financials were not disclosed following completion of the deal. Would UPG be willing to post Progressive's balance sheet at the acquisition date, plus a couple of years worth of income and cash flow statements, so UPG shareholders have an idea of what was just purchased?
To which the company responded: Although the purchase price is significant when compared with market capitalization, from a revenue perspective and when compared with UPG's total asset base the purchase was not deemed to be material by UPG's outside auditors or legal counsel.