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  • plancius48 plancius48 Dec 21, 2005 12:12 PM Flag

    Quo Vadis QFAB?

    Purely by accident i stumbled onto QFAB. I was checking if ABN AMRO had ABRI in its trading-sytem and its search-engine delivered QFAB.
    Not sure yet if i really like it, but always interested in potential turn-arounds.
    So, here are some impressions of a complete outsider in the upholstery business........
    When i visited the QFAB website, the first thing i saw was this caption with '2000' and 'CEO', and what have you.
    Not good at all. My first reaction was that the site was probably dead for years, and the Company lingering in a Chapter-11 stalemate.
    ISO-certification IS good and far more important then a CEO-award from years ago!!
    High noon for a website refurbishment!
    In the annual report on 2004 i read that they had fixed their energy costs from 2000-2004!
    That inevitably means they really took the energy-cost explosion in 2005 on the chin in a BIG way, i mean that must have a been a disaster of sorts for them.
    -i wonder whether they foresaw that, communicated it with hareholders, and took appropriate action.
    I dont think they are borrowing themselves out of trouble, which is indeed a classic sign of looming bankruptcy. I would still interpret things as they stand now as 'refinancing'. Maybe i am very naive (yes, i am), but glancing over the 2nd Amendment my first thought was that it was an improvement, but you can view it the opposite way of course.
    Goodwill is written off, which is good. If i recall right they did a second impairment on the land up for sale right now, and there was no further need to impair. The stuff about environmental concerns struck me as fairly standard.
    They did a SIGNIFICANT relocation in 2005 with serious extra-costs and operational hick-ups implied in that.
    Not a sign of a Company on the vierge of bankruptcy, although there could be something brewing which might be extremely disadvantageous to retail-shareholders.
    Currency-translation will not have been in their favor this year. The "china-syndrome" wont have helped either. (Who will be the Jack Lemmon at QFAB?)
    What I DO find troublesome is that some of their US-suppliers are fighting to survive. That points indeed to a Delphi kind of downward spiral: is this kind of home-made textile upholtery business utterly DOOMED?
    Hmm, i doubt it, but trends can kill, if you dont react to them, and they last a few years. And QFAB is LATE in adjusting.
    --------------------------------------- say that QFAB is 'taking a bath' is understating it, to say that it is a bloodbath followed by pre-determined bankruptcy is overstating it.

    Next year will be better, and with energy costs moderating �nd hopefully an acknowledgment from management that they must do something STRUCTURALLY about those costs, i think the first half of 2006 doesnt look so bad. Longer term i dont have an opinion yet, probably never will.
    Buy at $2?


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    • Careful here LTF and new longs -- while from a strict balance sheet analysis at 9/30/05, it might be theoretically possible "freeze" the company, collect all A/Rs, sell inv at cost, and pay off all debt, leaving the PPE a/c to be debated as to the worth and distribution to shareholders (my guess on the looms is basically zero -- talk to Warren Buffett on this one), and the "coveted" real estate that the "value" guys are drooling over has environmental contamination all over it (LTF as a careful value investor, I was surprised that you didn't read the 10-K and 10-Q on this, but go back and read my prior postings on this Board for an analysis of the same).

      But even this net-net working capital analysis is weak (sorry Ben Graham), as QFAB's mgt will justifiably want to stay in business, and can only hope to stay ahead of the domestic fabric market shrinkage.

      Also there is another problem on a go-forward basis -- yes, deprec > capex has permitted QFAB to barely stay above water on a cash flow basis (see CF statement as of 9/30/05), at some point, the looms have to be replaced (as foreign competitors in China and Central America are doing right now). Plus QFAB's mgt has "bet the farm" on the domestic fab biz (while ignoring the China threat until just recently). Therefore, they have to "shrink" their way to profitability, whilst starving capex, and all the while any free cash flow from asset sales or inv reduction or collection of a/r's, all go to reduce the revolver availability, and to meet sheduled principal reductions (which I guess can be re-negotiated, but at some point the bank will say enough is enough).

      As they say, even a blind squirrel can find an acorn, so maybe there is some new must-have fabric being designed by QFAB that will lift them up, but that is a tall order if R&D is being skimped on. So in the meantime, while the bulkhead #4 on the Titanic is being breached, and #5 is straight ahead, sales contine to shrink, and debt obligations loom, and no capex, and domestic fab biz sucks, and energy prices (esp in New England) continue to rise, and China threat continues unabated, and domestic furn retailers (eg LZB), are all overseas in China looking for cheaper cut-n-sew suppliers, and QFAB's captain sleeps in his stateroom, while the second in command sips tea tyring to figure out what is that big shadow hulking in this distance.

      Too little, too late for my $$$$$$. I am neither long nor short QFAB (I am playing this thru CFI, which is tough enough, but CFI joined the China party overseas some 2 years ago), and seriously, I do not want another doemstic employer in Ch 11.

      If you look at your QFAB long purchases as a "Call Option" on future sales and you haven't bet the ranch and you can afford to lose it all, go right ahead. If however, you are trying to persuade me with logic and figures, you will have to do better than a mere "balance sheet" acid test, because remember the bank comes first and calls the shots. Also, on a forced sale basis, don;t be too sure on realizing full value for inv, and even a/r collections can be reduced.

      Fire away, time will tell.


      PS I agree with you that if $2/sh is problematic, I sure wouldn't bite a $1 - "After all, a man is not charmed because a cocker spaniel defaces his lawn, as opposed to a St. Bernard!" Buffett

    • Missed that one. But I agree, if deprecation were a source of cash, everybody on the boards would be rich.

    • "In short, deprecation and amortization will continue to be a significant source for cash."

      With all due respect, Longtime, while there is much deprecation surrounding this company, I have never found it to be a reliable source of cash. ...would that it were...would that it were.


    • Of course you can ignore his outburst if you like. I'm betting that the stock will be influenced more by serious fundamental problems (for example, inability to fund capex) than by name-calling on message boards. The more folks bet against me, the happier I will be.

      Good luck.

    • Well, it'll be interesting to see how your "emotional outburst investing" system performs over the long haul.

      Again, best of luck.

    • Based on your comments, I would advise you think twice about this investment.

      Details. (a) Depreciation and amortization don't generate cash. Cutting capex far below D&A can provide cash temporarily for a company that's losing money, but it's a danger sign and they've been playing that game since 2003. (b) Inventory reductions, like any change in working capital, can only generate one-time cash flows. The more they squeeze out that way, the less there is to draw on in the future. (c) Going concern value for a company that's losing money is questionable. (d) I can't take seriously the idea that tone of voice makes management credible. In fact, contrary to your comments, the more a conference call seems to differ from the picture filed with the SEC, the more I would think twice.

      Good luck ...

    • Let's stick with your liquidation value estimate, not the book value. You didn't subtract any liabilities. Why not?

      In addition, leases can't be cancelled for free, so they constitute an off-balance-sheet liability. What's your rationale for neglecting that?

      Anyway, I'll pass at these prices and take another look if the pps hits 1.00.
      Best of luck.

    • I'm confused by your liquidation estimate. Why don't you deduct liabilities and future lease payments from what you call "total net value?"

      (OK I know why, but can we bypass some of that? Nobody here but us chickens.)

    • Interesting comments, clearly management are good at projecting a positive attitude over the phone. Real estate comments on the message board are also very bullish.

      But the information in the SEC filings is a little more troubling. Have you read through the financials? For example, the company is losing money and has interest payments that will use up all available cash by year end. What do you think about the cash flow problem? How will the company fund interest payments over the next few quarters?

    • So you agree, their only way to survive is to cut capex far below what's needed to sustain operations.

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