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Skullcandy, Inc. (SKUL) Message Board

deanmortensen 124 posts  |  Last Activity: Jun 26, 2015 8:29 PM Member since: Feb 15, 2009
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  • Reply to

    Why bash PGN management?

    by goskiing99 Jun 25, 2015 9:12 AM
    deanmortensen deanmortensen Jun 26, 2015 8:29 PM Flag

    goskiing, we'll soon know if management has stepped up senior bond purchases. I expect PGN to report free cash flow (before capital investment) in 2Q of at least $150 million. It will be interesting to see how they spent that money. If they didn't buy back senior bonds trading at less than half of face value, they are brain-dead.

  • Reply to

    Paragon bankruptcy not immanent....

    by deanmortensen Jun 24, 2015 6:01 PM
    deanmortensen deanmortensen Jun 25, 2015 2:26 PM Flag

    newpikachu, I do intend to drop IR a line to recommend Paragon buy back discounted bonds using its free cash flow. Although, I'm 95% sure management is one, two or three steps ahead of me. Paragon management isn't as clueless as some on this board would have us believe. And, I'm convinced management is highly motivated to keep the company solvent, and to navigate the "rough waters" ahead. Paragon has a good chance to survive current weak industry conditions as long as its floaters stay contracted for the next few years. Key to financial sustainability will be Paragon's ability to retire a large chunk of its senior bond debt during the next two years. If Stilley's strategy is to buy back bonds at a discount, then the worst thing he could do would be to announce he intends to buy back bonds at a discount. If bondholders think Paragon in the market to buy back its bonds in a big way, then the bond price goes up. Stilley shouldn't trumpet his interest in buying back bonds, as that would be self-defeating. Rather, he should feign indifference. Stilley has long experience in negotiating deals, and I'm pretty sure he knows "who's on first". He may be better off waiting until individual bondholders approach Paragon about buying back their bonds.

  • Reply to

    Why bash PGN management?

    by goskiing99 Jun 25, 2015 9:12 AM
    deanmortensen deanmortensen Jun 25, 2015 11:16 AM Flag

    goskiing99, I sympathize with your anxiety, as the stock price has cratered, and that doesn't inspire confidence in Paragon or its management. But, I'm not sure the management actions you propose are truly in the interest of stockholders. The way out of Paragon's existential dilemma is to buy back its senior bonds at a steep discount using its huge free cash flow. In order for that strategy to succeed, the bonds need to continue trading at half of face value or less. So, ironically, it would be counterproductive for management to do anything to reassure bondholders that Paragon will pull through. In other words, it's in shareholders' interest for management to appear to be feckless, so that the senior bonds continue to trade at a steep discount. That will allow management to continue to buy back the bonds for half or less of face value. If management were to buy PGN stock in the open market as a demonstration of their confidence in Paragon's prospects, although it would likely boost shareholder morale, it would also boost bondholder morale, and would likely boost the value of the bonds Paragon needs to buy back. That's why stock purchases by Paragon management are self-defeating. In terms of Paragon's sustainability, it would be more effective if Paragon insiders sell PGN stock, which would serve to fan the flames of investor panic, likely causing both the stock and bonds to trade lower.

  • Reply to

    Paragon bankruptcy not immanent....

    by deanmortensen Jun 24, 2015 6:01 PM
    deanmortensen deanmortensen Jun 25, 2015 11:00 AM Flag

    Management was busy closing the Prospector acquisition. During the last six months it has become clear to management that reducing debt is a top priority. I expect management to ramp up purchases of senior debt at half or less of face value. The free cash flow is available for Paragon to pare its debt, and buying back debt at 43% of face yields a roughly 16% cash-on-cash return on investment. There isn't any other investment that produces a higher ROI. With the paucity of tenders for new contracts, Paragon won't buy rigs on spec.

    I've seen similar situations where the bondholders panic and a company is able to buy back its debt at half of face value, eventually retiring a huge chunk of their debt. This is doable!

  • Reply to

    Paragon bankruptcy not immanent....

    by deanmortensen Jun 24, 2015 6:01 PM
    deanmortensen deanmortensen Jun 24, 2015 11:13 PM Flag

    Again, Paragon isn't even close to being insolvent. Paragon produced $210 million in free cash flow last quarter. I anticipate Paragon will produce at least $150 million in free cash flow in the current quarter, and at least $100 million of quarterly free cash flow for the remaining two quarters in 2015. (The foregoing assumes Paragon doesn't sign a single new contract or extension.)

    Paragon senior debt is selling at 43 cents on the dollar. If Paragon devotes its copious free cash flow to buying back senior debt at half of face value, then it should be able to pay off half of its balance sheet debt by 2021 when it needs to refinance the term loan. This is doable!

    After the Prospector financing closes in 3Q, Paragon will have roughly $1.7 billion of balance sheet debt. If Paragon applies $200 million of free cash flow to buy senior bonds, it should reduce debt to $1.3 billion by the end of this year. I'm guessing that Paragon can reduce the debt balance to $700 million by the end of 2016. Backlog stood at $1.7 billion at the end of April 2015 after reflecting the Pemex contract cancellations. Paragon doesn't actually have to sign new business to pare its debt because the debt is trading at 43% of face value. I've seen other companies do this.

  • Reply to

    Paragon bankruptcy not immanent....

    by deanmortensen Jun 24, 2015 6:01 PM
    deanmortensen deanmortensen Jun 24, 2015 10:56 PM Flag

    Errata: I stated in a previous post that the term loan is due in 2019. That's wrong--it's due in 2021. Basically, Paragon has six (6) years to clean up its balance sheet by buying back senior debt before it has to refinance the term loan.

  • Reply to

    Paragon bankruptcy not immanent....

    by deanmortensen Jun 24, 2015 6:01 PM
    deanmortensen deanmortensen Jun 24, 2015 8:58 PM Flag

    By my reckoning, even if Paragon doesn't sign a single new contract or extension, it will still be kicking off $100 million of free cash flow by 2015 4Q. So, if I were Stilley, my strategy would be to use all of that free cash flow to buy back Paragon's bonds at half of face value or less. The bonds are trading at 43 cents on the dollar or so. If Stilley devotes all of Paragon's free cash flow through the end of 2016 to buying back bonds, he should be able to retire at least $800 million face value of bonds. Look--this is absolutely doable! He needs to ignore the term loan due in 2019, and just put every cent of free cash flow into buying bonds at a steep discount. If he does that, then he'll be able to refinance the term loan when it comes due in 2019, because half of Paragon's current debt will be paid off by then. The balance sheet will be sustainable, and Paragon will be creditworthy enough in 2019 to be able to refinance the term loan.

  • It is noted that in 2015 1Q, Paragon generated $210 million of cash from operations, and spent roughly $51 million on capital investments. In other words, after Paragon spent $51 million on capital investments, the cash left over from the first quarter cash from operations was enough to pay its debt service for the next 3 quarters. I expect Paragon to generate nearly as much cash from operations in 2015 2Q as it generated in 1Q.

  • Reply to

    A sad Fact

    by pride2570 Jun 24, 2015 11:22 AM
    deanmortensen deanmortensen Jun 24, 2015 12:24 PM Flag

    For the record, Stilley bought a pile of PGN shares last December. It might be worth remembering that Stilley's financial well-being is totally dependent on Paragon. Any financial advisor worth his salt would advise Stilley to diversify his investment portfolio, and not to load up on shares of Paragon, because 100% of Stilley's income from employment is derived from Paragon. That is the conventional financial advice that financial advisors give executives like Stilley.

    I believe Stilley is diligently pursuing new business, and is making every effort to secure contract extensions. But, the total number of rigs in service is falling across the industry. Stilley can't win new contracts unless there are tenders. I'm confident that Paragon's standard rigs are competitive for many applications, especially for workovers and development work. The stock price has been crushed and suggests possible bankruptcy. Paragon's existing backlog seems to indicate that bankruptcy isn't in the cards, at least through 2016.

  • It stands to reason that spinoffs of the CLO, online lending and real estate businesses will trade at higher multiples than PSEC does currently. Eliasek stated during the web seminar a week ago that PSEC will look to reinvest the cash it gets from the spinoffs at similar or higher yields than those the spun off businesses were generating, so PSEC's dividend shouldn't be much affected post-spinoffs. The spinoffs all have higher internal ROIC than PSEC does, so should trade at higher multiples than PSEC. Industry comps support this assumption. Investors have a right to be skeptical or even cynical after the dividend cut last December, and considering the fact that the rapid growth in PSEC's assets over the last few years haven't benefited shareholders. But, I still think the planned spinoffs will create shareholder value at the end of the day. And, although many shareholders have questioned management's motives, it can't be denied they have been making large PSEC share purchases recently. So, now John Barry owns over 5.3 million shares after recent purchases. Based on the current PSEC share price, his timing doesn't appear to be prescient. Still, it is noted that he recently bought PSEC shares at their largest discount to book value since the financial crisis, and the spinoffs could be the near-term catalyst for shareholder value creation. It doesn't appear that the market is ascribing any value to the spinoff plan, so it would surprise me if John Barry's PSEC share purchase of last week is in the red a year from now.

  • Reply to

    doing real bad in the courtroom

    by truthbetoldkids May 22, 2015 10:36 AM
    deanmortensen deanmortensen Jun 12, 2015 10:55 AM Flag

    truthbetoldkids, I think there is a basic misconception at work here. The judge is only supposed to decide matters of law, ie what the patents at issue mean. The judge isn't supposed to determine matters of fact, ie "who did what/when". So, the judge just sets up the case parameters by interpreting the applicable law, and what the patents at issue mean. But, only the jury can decide if somebody really infringed those patents. The plaintiff (Finjan) still has to prove that Blue Coat's products were sold in commercial quantities in the market at a time when Finjan's patents were valid. There are timing issues and other considerations. Finjan needs to introduce all sorts of historical evidence dating from the time of the alleged infringement to prove that Blue Coat infringed, and that the infringement involved a material amount of revenue and wasn't trivial.

  • Reply to

    Lawyers opinion

    by jaxbootcamp Jun 10, 2015 12:09 PM
    deanmortensen deanmortensen Jun 11, 2015 8:42 PM Flag

    I'm guessing the trial will take 6 months to a year. Look how long the last Symantec trial took. Both sides have to recruit their expert witnesses, and coach them, and prepare graphics to present during the trial, etc.

  • Reply to

    Lawyers opinion

    by jaxbootcamp Jun 10, 2015 12:09 PM
    deanmortensen deanmortensen Jun 11, 2015 8:38 PM Flag

    Who says BlueCoat is amenable to a settlement? Finjan has been offering to settle from Day One, but BlueCoat says "Not interested". Anyway, I don't believe your characterization that "the judge said pretty much Finjan you win, but not on everything" is correct. The judge has interpreted what Finjan's asserted claims mean as matters of law. Now it is up to a jury to determine matters of fact--ie, did or did BlueCoat not infringe the asserted patents with its products.

  • deanmortensen by deanmortensen Jun 11, 2015 6:49 PM Flag

    Silicom closed up 9.5% on no news. What the heck is goin' on? Anybody know anything?

  • Reply to

    Letter to PSEC Investor Relations

    by deanmortensen Jun 10, 2015 2:30 PM
    deanmortensen deanmortensen Jun 11, 2015 6:30 PM Flag

    Agreed. I think the real sticking point is that reducing AUM will reduce management fees in direct proportion (to the reduction in AUM). Another possible sticking point is that PSEC's assets are illiquid. PSEC mostly owns loans made to middle market companies, and each loan is different. IOW, those loans aren't like government bonds that trade in an active market. The only way PSEC can raise cash for its assets is to find a buyer--probably another BDC--that wants to buy them. So, when they say their "mark-to-market" value of the loan portfolio is the current fair market value of the loan portfolio, it's with a wink and a nod. In reality, there isn't an actively traded market for middle market loans. Those are Level 3 assets that are hard to value.

  • Reply to

    Letter to PSEC Investor Relations

    by deanmortensen Jun 10, 2015 2:30 PM
    deanmortensen deanmortensen Jun 11, 2015 6:23 PM Flag

    Yes, because I think the debt/equity ratio is currently 85% or so. So, you are correct.

  • Reply to

    Letter to PSEC Investor Relations

    by deanmortensen Jun 10, 2015 2:30 PM
    deanmortensen deanmortensen Jun 11, 2015 5:23 PM Flag

    Nope. PSEC makes middle market loans to businesses. They aren't a subprime lender.

  • Reply to

    Letter to PSEC Investor Relations

    by deanmortensen Jun 10, 2015 2:30 PM
    deanmortensen deanmortensen Jun 11, 2015 1:13 PM Flag

    Here is my response to Mr. Cimini in PSEC IR:

    Dear Mr. Cimini,

    Thank you for your response to my share buyback proposal. Please note that I'm proposing that Prospect Capital execute a share buyback in conjunction with a concurrent asset liquidation in equal dollar-for-dollar amounts. In other words, I'm proposing that for every dollar of PSEC share purchases, a dollar of PSEC assets will be sold, so the net result will be leverage neutral. As proposed, the buyback will not adversely affect leverage ratios, and will not impact S&P's assigned debt rating.

    This share buyback proposal is clearly in the interest of shareholders who have endured a 30% share price plunge since last Fall. I wish to point out that there is a perception in the investor community that PSEC management appears to put the interests of the management company ahead of shareholder interests. Executing a share buyback will be a strong demonstration that management puts the interests of shareholders first.

    Sincerely,

    Dean Mortensen
    Individual Investor

  • Reply to

    Letter to PSEC Investor Relations

    by deanmortensen Jun 10, 2015 2:30 PM
    deanmortensen deanmortensen Jun 11, 2015 12:25 PM Flag

    Yeah, Mr. Crimini isn't being totally straight with me. He also says "leverage ratios" may preclude a buyback, but actually my buyback proposal is leverage neutral, and won't affect leverage ratios at all. I think the truth is that PSEC won't do a share buyback, even though it's clearly in the interest of PSEC shareholders to do a buyback, because doing so would reduce AUM, which would reduce fees to the management company. The main gripe of PSEC shareholders is that PSEC has a history of appearing to put the profits of the management company ahead of shareholders' interests, and management has done nothing to dispel that concern.

  • Reply to

    Letter to PSEC Investor Relations

    by deanmortensen Jun 10, 2015 2:30 PM
    deanmortensen deanmortensen Jun 11, 2015 11:32 AM Flag

    I received a response from PSEC IR. Here it is:

    Dean,

    We are analyzing the potential effects of a stock buyback and plan to send the required notice to shareholders ASAP. The 40 Act requires that we notice shareholders before we buy back shares and the previous notice we had made expired in March.

    Once that notice is sent, we will be free to buy back shares. Some of the issues to be reviewed with a stock buyback include leverage limits, S&P limits for leverage in maintaining the investment grade rating for our debt, and the alternative uses of the cash for investment, which may have better returns than the buyback.

    If you have any further questions, please do not hesitate to contact me.

    Regards,

    Michael Cimini

    Prospect Capital

    212-792-2095

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