Observational Notes on Rockwood Holdings Inc.

Journal Entry: 29 Sept. 2013

Rockwood Holdings Inc. Capitalization Rate

in millions except shares outstanding

Closing price: $66.97
Shares Outstanding: 74,701,097

Market value of equity: $5,002.73 M
Debt: $1,294.20 M
Cash & Equivalents: $2,734.60 M
Enterprise Value: $3,562.33 M

EBITDA less CapEx: $164.2 M

Pre-tax Cap Rate: 4.61%

Opinion

• opportunity to buy an attractive specialty chemical company poised for takeover
• $80 - $90 LBO target valuation for 2013 & 2014
• Core businesses: lithium & specialty treatment hold high potential given growth in electronic auto industry
• Lithium & Specialty treatment businesses hold high market share leadership; Globally No. 1 & No. 2, respectively
• optimizing pro forma cash on hand through organic growth, accretive acquisitions & return of capital to shareholders

Company

• originally made up of 4 main segments: Specialty Chemicals, Performance Additives, Titanium Dioxide Pigments and Advanced Ceramics
• first 2 phases of company's strategic history centered on organic growth, disciplined strategic acquisitions, seamless integration and cost control
• 2001-2005 mission: exceeded or met standard
• 1.  Change company culture 
• 2.  Service the debt and remain within covenants 
• 3.  Grow through acquisitions
• 4.  Take company public
• 2006-2010 mission: exceeded or met standard
• 1.  Optimize portfolio 
• 2.  Execute bolt-on acquisitions for core businesses 
• 3.  Improve EBITDA margin
• 4.  Pay down debt
• Management philosophy: delivered what's promised within an established track record
• small corporate center
• decentralized, accountable business units with detailed operational goals
• short term incentive plan focused on cash generation
• long term equity plan for executives; generate aligned shareholder ownership mindset
• on-site comms & motivation
• Management team reminds me of teams outlined in "The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success

   

Post Asset Sale Restructuring

• sold Titanium Dioxide Pigments, Color Pigments & Services, Timber Treatment Chemicals, ubber/Thermoplastics Compounding, and Water Chemistry
• Seifi Ghasemi, Chairman and Chief Executive Officer stated, “With the sale of these businesses, we have successfully completed, ahead of schedule, all of our key objectives for 2013...”
• initiatives for 2013 delivered:
• Repurchase $400 million of common shares: Acquired 6.23 million shares at an average price of $64.17/per share, completing the current program on September 5.
• Target dividend yield of 2.8% to 3.2%: Raised our quarterly dividend by nearly 30% to $0.45 per share from $0.35 per share in 2012.
•    Repay debt of up to $600 million: Repaid more than $1.43 billion in principal loans related to secured term debt.
•  Launch strategic process for non-core businesses: Concluded our process with the sale of seven non-strategic businesses for enterprise value aggregating approximately $3.9 billion, including Advanced Ceramics for EUR 1.49 billion, Clay Based Additives for USD 635 million and Titanium Dioxide Pigments and Other Non-Strategic Businesses for USD 1.325 billion, after adjusting for assumed pension obligations.
• Strategic Mission: global market position & industry tech leader, expected future adj. EBITDA margin +25, low exposure to oil-based raw materials
• Pro Forma key financials:
• adj. EBITDA: $319.2 M
• total debt: $1,294.2 M
• Cash: $2,734.6 M
• Net debt / LTM Adj. EBITDA: -4.51 x

Competitors

• Lithium
• FMC Corporation
• Sociedad Quimica y Minera de Chile S.A.
• Tianqi Lithium / Talison
• Cabot Corporation
• Specialty Treatment
• Henkel AG & Co. KGaA
• Nihon Parkeriaing Co., Ltd
• PPG Industries Inc.
• Nippon Paint Co., Ltd

Catalysts

• continued restructuring of core & non-core businesses allowing for a more focused enterprise
• increase in market multiple due to specialized and high cash margin business ops.
• continued goal of maximizing and returning shareholder value from talented executive & operational teams
• M&A interest for newly restructured company due to realized economic growth

Risk Considerations

• electric auto industry growth slower than expected
• Not everyone could do a deal of the company's size, so no M&A interest evolves
• Unexpected macroeconomic downturn particularly to Europe's auto industry
• global currency to US dollar issues; largely denominated in Euros

I have no positions in the above company mentioned, but may initiate a long position over the next 72 hours.

What Observations have you found on ROC?
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Ray Dalio's Syntactical Explanation of the Economic System

Observational Notes on Aqua America Inc.

Journal Entry: 23 Sept. 2013

Aqua America Inc. Capitalization Rate

in millions except shares outstanding

Closing price: $24.28
Shares Outstanding: 141,170,775

Market value of equity: $3,427.63 M
Debt: $1,802.64 M
Cash & Equivalents: $4.27 M
Enterprise Value: $5,226 M

EBITDA less CapEx: $-183.47 M

Pre-tax Cap Rate: -3.51%

• Unique Water Utility Industry Consolidation Opportunity; 50,000 systems regulated by EPA; 85% municipal / 15% private
• $384.4 billion needed from 2011-2030; EPA’S ESTIMATE OF THE NATIONAL NEED FOR WATER INFRASTRUCTURE

• barriers to entry, monopoly status w/ Start-ups not successful

• Capex investment is accretive; 50/50 capitalization of debt & equity
• 12/31/11, 52% ofAqua America’s fixed rate long term debt cames from tax exempts and state revolving funds
• utility system investments add income without an immediate impact on customer rates

• Customer growth from acquisitions and organic growth totaled 7,500 customers
• A+ credit rating for Aqua Pennsylvania; 227 electric, gas, and water utilities rated by Standard & Poor’s, only one has a higher rating than Aqua Pennsylvania
• weighted average cost of fixed-rate long-term debt was 5.02 percent

•  announced 5-for-4 stock split and 9 percent dividend increase
• strategy of growth through acquisition, pruning underperforming assets, operational efficiency, and investing in needed infrastructure improvements
• Aqua America Chairman and CEO Nicholas DeBenedictis stated "...repair tax accounting change delivered increased net income in the quarter."
•  repair tax accounting change allows the company to continue investing in needed infrastructure improvements in excess of more than $300 million companywide annually without seeking rate increases from its customers
• repair tax institutes a rate freeze and foregoes revenue from rate increases with the flow-through accounting treatment of income tax benefits

I have no positions in the above company mentioned, but may initiate a long position over the next 72 hours.

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Observational Notes on Polycom Inc.

Journal Entry: 17 Sept. 2013

Polycom Inc. Capitalization Rate

in millions except shares outstanding

Closing price: $10.91

Shares Outstanding: 169,622,827
Market value of equity: $1,850.59 M
Debt: $0
Cash & Equivalents: $609.89 M
Enterprise Value: $1,240.70 M

EBITDA less CapEx: $42.23 M

Pre-tax Cap Rate: 3.4%

Strategic initiatives in 2012

• created Polycom Capital to offer comprehensive and flexible customer financing options to enable sales to customers with limited capital expense budgets
• partnered with Microsoft to develop devices specifically used with Microsoft Lync
• R&D introduced a suite of new products in company history
• Americas, EMEA, and APAC segment revenues accounted for 49%, 25%, and 26%, respectively
• Americas segment impacted by lower U.S. federal and public spending; EMEA declined due to difficult macro environment; APAC affected by reduced government spending and elongated sales cycles in China
• product revenues have been decreasing by $96 million/ 8% offset by service revenues increasing by $86 million/ 33%
• Q2 2013 -accelerated share repurchase program and closed the quarter with total cash and investments of $4 per share and trailing 12 month operating cash flow of $195 million;repurchased $50 million of common stock in Q2 2013, and $84 million year-to-date, leaving $89 million in remaining repurchase authorization as of June 30, 2013
•  repurchase of $400 million, or approximately 20 percent of the Company’s outstanding common stock, through a $250 million modified “Dutch Auction” self-tender offer and subsequent open market purchases or privately negotiated transactions

I have no positions in the above company mentioned, but may initiate a long position over the next 72 hours.

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Observational Notes on Cigna Corp.

Journal entry: 16 Sept. 2013

Cigna Corp. Capitalization Rate

in millions except shares outstanding

Closing price: $83.65

Shares Outstanding: 282,839,284
Market value of equity: $23,659 M
Debt: $5,183 M
Cash & Equivalents: $5,419 M
Enterprise Value: $23,423 M

EBITDA less CapEx: $2,358 M

Pre-tax Cap Rate: 10.07%


From 2009 to 2012

• able to generate 24% revenue CAGR in leading existing markets
• repurchased about 15.9m shares
• 90% retention rate in customers w/ 17% increase in eps per customer
• +20% increase in policies w/ global footprint bring about huge economies of scale in key strategic markets
• important growth strategy is focusing on core markets in Korea and China & improving value for clients; sharing risk & reward

2013 2Q

•  per share op. earnings growth of 19% over second quarter 2012
• CEO David M Cordani commented, "We are creating value for our customers and clients in each of our business segments through sustained investments in capabilities and innovation to deliver on our ongoing commitment to quality, service and affordability"
• long-term outlook with 10% to 13% 3 to 5-year EPS growth

I have no positions in the above company mentioned, but may initiate a long position over the next 72 hours.

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Observational notes on Qualcomm Inc.

Journal entry: 14 Sept. 2013

Qualcomm Inc. Capitalization Rate

in millions except shares outstanding

Closing price: $68.58

Shares Outstanding: 1,715,425,829
Market value of equity: $117,644 M
Debt: $0
Cash & Equivalents: $30,456 M
Enterprise Value: $87,187 M

EBITDA less CapEx: $7,678 M

Pre-tax Cap Rate: 8.80%

• focused on return of capital to stockholders and increased our stock repurchases and dividends paid during the quarter
• $3.5 billion remained available for repurchase under current BOD authorization
• technology leadership, with Snapdragon 800 processor powering the world’s first LTE-Advanced smartphone
• President and COO Steve Mollenkopf had this to say about increase Research & Development activities, "We are in a position now where we believe that our ability to invest in technology and our ability to differentiate our products from other people is very-very important in order to position us well for the future. If you look at the future, our view is that, there will be a position from the wired internet into the wireless internet. There will be a proliferation of products that will be -- the phone will be the center of, but there will be a lot of products derived from that. And there will be kind of the winner takes most -- there will be a leader...we are investing very heavy in the areas that are required in order to lead: Modem, application processor connectivity, some of the things that I would broadly call digital sixth sense, with the ability of the phone to talk to other devices...We are trying to balance that and still get double digit growth for our shareholders, and we have been able to do that, and even this year, I mean, we got even that tremendous growth this year in a very-very competitive environment...call it super-invested, meaning that we are going through nodes at a faster rate"

I have no positions in the above company mentioned, but may initiate a long position over the next 72 hours.

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Observational Notes on Francesca's Holding Corp.

Journal Entry: 13 Sept 2013

Francesca's Holding Corp. Capitalization Rate

in millions except shares outstanding

Closing price: $19.74

Shares Outstanding: 44,090,538
Market value of equity: $870.35 M
Debt: $65.00 M unused revolving credit facility
Cash & Equivalents: $39.55 M
Enterprise Value: $895.80

EBITDA less CapEx: $71.64 M

Pre-tax Cap Rate: 8.00%

• expanding domestic boutique concepts, small, flexible format, to 900 stores
• about 150% first year cash-on-cash returns in the past 3 years
• decentralized management operations allow boutique managers to personalize displays for their respective customers
• inspiration and knowledge is provided but boutiques are individualized and enhanced with their own personality
• potential direct to consumer sales; FY2012 generated increased sales by 60% w/ penetration below 2%
• three year CAGR for sales and operating income were 49% and 65%, respectively
• $100 million share repurchase program initiated
• Owen: What standards are there to executing the share repurchase program?
• CEO Neill P. Davis: "We will repurchase shares when our cash on hand, free cash flow, and debt capacity exceed the investment and other strategic needs of our business, and in our view, when the stock is trading below its intrinsic value."

I have no positions in the above company mentioned, but may initiate a long position over the next 72 hours.

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Observational Notes on Lorillard Inc.

Journal Entry: 31 Aug 2013

Lorillard Inc. Capitalization Rate

in millions except shares outstanding

Closing price: $42.30

Shares Outstanding: 373,913,967
Market value of equity: $15,816.56
Debt: $3,571.00
Cash & Equivalents: $1,638.00
Enterprise Value: $17,749.56

EBITDA less CapEx: $2,238.00

Pre-tax Cap Rate: 12.61%

• Launching adjacent new products to accelerate growth
• Continuing to be first and best in e-cigarettes with blu eCigs
• Newport full-flavor menthol in the core continues to remain stable despite increased menthol competition
• Lorillard’s geographic expansion strategy has been successful
• Newport’s launch into non-menthol has worked well
• The blu eCigs acquisition has exceeded expectations and positions Lorillard as the clear leader in the rapidly growing e-cig category
• In combination, New Initiatives have profitably contributed to Lorillard’s continued growth
• Significant enhancements to processes and capabilities have been made with much of the investment behind us
• Lorillard continues to successfully defend its Freedom to Operate
• Lorillard’s capital structure continues to improve for the benefit of shareholders

Investor Day Webcast & supporting doc

Observational Notes on AAPL

Journal Entry: 31 Aug 2013

Apple Inc. Capitalization Rate
in millions except shares outstanding

Closing price: $487.22

Shares Outstanding: 908,497,000
Market value of equity: $442,637.91
Debt, fair value: $16,958.00
Cash & Equivalents: 42,606.00
Enterprise Value: $416,989.91

EBITDA less CapEx: $46,197.00

Pre-tax Cap Rate: 11.08%

• published study by Kantar measured a 93% loyalty rate among iPhone owners vs competitors
• iPhone holds a 62.5% share of the U.S. commercial market base
• key growth catalysts are products and new services, opportunities with distributions from carrier relationships, expanding of retail and online stores and overall market expansion
• generated $7.8 billion in cash flow from operations during the quarter and returned $18.8 billion in cash to shareholders through dividends and share repurchases 

I have no positions in the above company mentioned, but may initiate a long position over the next 72 hours.

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Observational Notes on CSX Corp.

Journal Entry: 19 Aug 2013

CSX Corp. Capitalization Rate
in millions except shares outstanding

Closing price: $24.89

Shares Outstanding: 1,018,837,313
Market value of equity: $25,358.86
Debt, fair value: $10,417.00
Cash & Equivalents: $1,017.00
Enterprise Value: $34,758.86

TTM EBITDA less CapEx: $2,378.00

Pre-tax Cap Rate: 6.84%

• CSX provides rail, intermodal and rail-to-truck transload services and solutions to customers
• solid growth in many of its markets and sustained track record of operating performance
• company expects annual earnings-per-share growth of 10 to 15 percent through 2015 off 2013 base
• Will require capital investments over time though scalable w/volume increases in goods transported
• New share buyback program of $1.0 billion shares over two years funded through excess cash and free cash flow

I have no positions in the above company mentioned, but may initiate a long position over the next 72 hours.

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Observational Notes On Vornado Realty Trust (VNO)

Journal Entry: 12 Aug 2013

Vornado Realty Trust Capitalization Rate
in millions except shares outstanding

Closing price: $83.46

Shares Outstanding: 186,991,076
market value of equity: $15,606.27
Debt, fair value: $10,024.74
Cash & Equivalents: $2,369.18
Enterprise Value: $23,261.83

EBITDA less CapEx: $2,010.91

Pre-tax Cap Rate: 8.64%

From the 2Q 2013 earnings call:

• cash position today is $1.1 billion, with over $2.4 billion available on $2.5 billion of credit revolvers
• Chairman and CEO Steve Roth stated, "We have an enormous profit in our Washington business at the value that I believe the stock market values Washington, I would be a buyer rather than a seller of that business all day long."
• closed on the sale of 12 assets with proceeds of $586 million and net gain of $65 million, specifically: LNR for $241 million; the plant in San Jose, California for $203 million; the Philadelphia market's retail property for $60 million; our 50% interest in the Downtown Crossing, Boston site for $45 million; and 8 other retail assets for $37 million

I have no positions in the above company mentioned, but may initiate a long position over the next 72 hours.
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Observational Notes on Nordion Inc. (NDZ)

Journal Entry: 12 Aug 2013

Nordion Inc. Capitalization Rate
in millions except shares outstanding

Closing price: $7.59
Shares Outstanding: 61,909,000
market value of equity: $469.89
Debt, fair value: $42.36
Cash & Equivalents: $81.53
Enterprise Value: $430.72

normalized EBITDA less CapEx: $17.23

Pre-tax Cap Rate: 4.00%

Agreement signed on May 23, 2013 to divest the Targeted Therapies business to BTG plc (BTG) for a cash purchase price of $200 million

From Mr.Steve West, Chief Executive Officer, Nordion Inc., "...made progress on our strategic review, reaching an agreement to divest the Targeted Therapies business to BTG, which we believe unlocks value for our shareholders and leaves us with a focused specialty isotopes business going forward."

Company generated an increase of $6.1 million, or 12%, over revenue of $50.0 million for the same period in fiscal 2012

Specialty Isotopes: Sterilization Technologies - $20.2 million revenue up 36% compared to Q2 2012

Cash & Liquidity position bolstered from sale; $51.7 million of deferred tax assets and $185 million additional cash upon close of sale unaccounted in above Pre-tax Cap Rate

I have no positions in the above company mentioned, but may initiate a long position over the next 72 hours.
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