SCT - Scott Tech

[Ferg]

It is strange the moderators deleted it, rather than just sending you a note to change the formatting if indeed that really was the problem.

Agree 100%. I won't lie but I'm pretty miffed about that given the effort that went into it plus it was all my own work, not copied from anywhere else. And I no longer have the supplementary notes that supported that post.

Anyhoo, here is the table:

	A	B	C = A - B	D = C / A	E	F = E / B	G	H = C x F	I = E + G + H
Project	Contract	Estimated	Estimated	Contract	Costs	Percent	Invoiced	Profit	Contract WIP
	Revenue	Total Costs	Profit	Margin %	To Date	Complete	To Date	Recognised*	Balance
1	$1,000	$750	$250	25%	$750	100%	-$1,000	$250	$0
2	$2,000	$1,900	$100	5%	$950	50%	-$2,000	$50	-$1,000
3	$3,000	$3,200	-$200	-7%	$3,100	97%	-$1,000	-$200	$1,900
4	$4,000	$3,000	$1,000	25%	$0	0%	-$400	$0	-$400
5	$5,000	$4,000	$1,000	20%	$3,500	88%	-$3,000	$875	$1,375
6	$6,000	$5,500	$500	8%	$2,000	36%	$0	$182	$2,182
TOTAL	$21,000	$18,350	$2,650	13%	$10,300		-$7,400	$1,157	$4,057
	OBS	OBS	OBS	Calc.	J1	Calc.	J2	J3	BS
CONTRACT WIP ->					DEBIT		CREDIT	DEBIT	NETT
Balance Sheet:
Contract Asset	$5,457
Contract Liability	-$1,400
Nett Contract WIP	$4,057

Notes:

Calc. = calculated field

OBS = Off Balance Sheet, no journals needed

J1 = Debit Contract WIP, Credit Payables

J2 = Debit Receivables, Credit Contract WIP

J3 = Debit Contract WIP, Credit P&L (profit contracts) - using % of completion method

or Debit P&L, Credit Contract WIP (loss contracts, 100% of loss)

BS = Balance Sheet Value

* The year on year movement in this value is what ends up in the annual P&L.

FERG

[Snoopy]

Snoopy check your logic of "loss making" versus the worked example I provided that has since been deleted. I'm hoping you grabbed a copy or replicated it? Is it a loss-making contract or a profitable contract (or it could be either?) where the costs do not meet the amounts invoiced? Or am I misunderstanding what you mean by "cover"? Also, with the word "never" - can such a situation exist (where total debits never match the credits) in light of the income recognition rules?

Those 'big projects' that Scott tackles are usually done by tender. Granted all tenders like this would have variation/escalation clauses. But sometimes these projects take longer to get operating to standard than expected, or run into unexpected technical hitches, and losses are made. This is the kind of thing that new CEO JK wants to eliminate.

When I said
"We can imagine a third instance of a 'negative WIP' component. That is where the costs of the project never cover (are significantly greater than) the invoices to the customer: i.e. the job is loss making."

I meant a loss making contract. Value is permanently destroyed. Not sure how you balance the debits and credits in such a situation.

I get you don't like the idea of negative WIP. It seems a bit crazy to me too. Perhaps it is better to think of WIP in this context as an 'accounting representation of work', rather than actual work. Thus 'payment in advance' is a payment for future work that, because it has not been done at the time of payment, can be accounted for as 'negative work.' 'Negative work' in general English language terms sounds like sabotage, which is not what I mean to convey! I think if you just accept that any number in the balance sheet can go 'opposite sign' in some circumstances, without worrying too much about what the physical representation of that - negative in this case - sign might mean, the right conclusion should all fall out of the maths in the end.

SNOOPY

[Ferg]

Supplementary notes to support post #951:

Project	Classification	Comment
1	Nil - completed	Completed Contract, profit is in P&L
2	Contract Liability	Where Invoiced > (Costs + Profit) -> Liability
3	Contract Asset	Where (Costs + Profit) > Receivables -> Asset (100% of loss*)
4	Contract Liability	Deposit invoices to clients have no P&L impact (like revenue in advance)
5	Contract Asset	Most of the profit is booked despite not being fully charged to the client
6	Contract Asset	Profit recognised despite nothing invoiced to client (costs like a prepayment)

*Under IFRS a loss making contract must have the full loss recognised immediately.


FERG

[Snoopy]

So how does all this relate to the SCT situation? My next task is to find out!

	FY2016	FY2017	FY2018	FY2019	FY2020	HY2021
'Contract Liabiliities' {A}	NM	NM	$21.418m	$16.529m	$29.052m	$16.385m
'Contract Assets' {B}	NM	NM	$24.495m	$32.863m	$25.381m	$12.264m
Work In Progress {A}-{B}	NM	NM	-$3.077m	-$16.334m	$3.671m	$4.121m
'Contract Work In Progress'	$1.137m	-$4.108m	-$3.077m	NM	NM	NM
Recent Past and Current Work {A}+{B}	NM	NM	$45.913m	$49.342m	$54.433m	$28.649m
Annual Long Term Contract Revenue	$67.704m	$81.282m	$104.756m	$127.934m	$92.620m	$59.275m (*)

(*) = half year figure

Notes

1/ NM = 'Not Mentioned' in the annual report directly.
2/ I have used the convention that when 'Contract Liabilities' exceed 'Contract Assets' we have a positive value of 'Work In Progress'
3/ It was only in FY2019 where the 'Contract Liabilities' and 'Contract Assets' were separately listed. Prior to that a calculated 'Contract Work In Progress' was given. If I use the 'Contract Liabilities' and 'Contract' Assets' for FY2018, as back referenced in the FY2019 year and do the subtraction myself I get the same 'Work In Progress' figure listed in AR2018. This confirms Ferg's way to calculate 'Work In Progress' from those latter reports is correct.
4/ In those earlier years Scott's seem quite happy to list their 'Contracted Work In Progress' as either a 'Current Asset' or a 'Current Liability'. That means WIP can be either a positive or negative value. In the above table, I am listing Work in Progress as 'positive' when the 'Contract Liabilities' (a promise of signed up work to do) exceed the 'Contract Assets' (the completed work).

The declared position of WIP is most likely a combined summary position of many projects currently active at balance date. My natural instinct says that having lots of 'positive' work in progress is good, as that means the workforce is busy. However, in a strict snapshot balance sheet sense, having positive work in progress (by this definition) is bad because such WIP cannot be invoiced at balance sheet date. Positive WIP by this definition is a liability on the balance sheet, notwithstanding the fact that this 'liability' will -hopefully- turn into a profit source over the ensuing financial year as the work it represents is completed.

The above thinking is consistent with the tone of the Chairman and CEOs comments in AR2020 being rather negative (remember this period includes the sub period from End of February 2020 to the end of August 2020 where the effects of Covid-19 were at their worst). However, apart from the $6.295m of project impairments - which I presume are removed from WIP by balance sheet date already - I can find no specific comments on the difficulty and profit viability of current projects.

From a particular contract perspective, the timing of the end of the Scott financial year is arbitrary. So perhaps a better indicator of Scott's profitability might be to add the Contract Revenue to the Contract Liabilities TOGETHER, as that would represent work recently completed AND that still underway?

SNOOPY

[Ferg]

I meant a loss making contract. Value is permanently destroyed. Not sure how you balance the debits and credits in such a situation.

Understood. Refer example #3 per the table I posted. Small values but it is a loss nonetheless and under IFRS one must recognise 100% of the loss immediately as I showed per the example.
FERG

[Snoopy]

https://www.odt.co.nz/business/some-...w-unpaid-leave

New CEO JK looks to have handled this in a sub-optimal way.

Perhaps JK needs to learn that a glib Covid 19, 19th March update which states:

"Scott’s first commitment is to the health and safety of its people."

is not consistent with sending some workers home with absolutely no pay, while saying that:

-----

"the executive and broader leadership team at Scott had agreed to a pay cut."

" "It comes at a time when we’re working very hard ... we just thought it was the right thing to do to show empathy and understanding with the group."

"He would not say how much the pay cut was but that it was a "meaningful number" and "an absolute sign that we’re all in this together"."

-------

This article is particularly worrying, because Dunedin is Scott's back yard. If they can't get it right 'at home', what does that say for what is happening in Scott's staff in the USA and Europe?

"Dear John" may have been having a 'kip' when all the Covid-19 business started, being a bit tardy to get onto the wage subsidy bandwagon. But it appears our CEO Kippenberger has come to the end of his kip and is finally wide awake accumulating SCT shares on the sharemarket. 20,000 shares bought by JK in the latter half of June. Then we find out 5,000 shares were bought on 5th July disclosed today. 73,232 shares held now by JK. SCT closed up 6c today at $2.66, the highest close in almost two years.

SNOOPY

[Snoopy]

An open day at the Finegand Meat Works near Dunedin was held for Australasian industry players in June 2010. MD Chris Hopkins was uncharacteristically enthusiastic at the reception they got from showing that dream on paper 7 years ago was now a working reality. The robotic beef processing line has been squarely aimed at the NZ and Australian markets so far. But there are now potential customers in England and Brazil that are showing interest. Hopkins envisages selling lots and lots of these systems now. Processing of lamb would require some robot re-engineering, but remains another growth avenue for the future.

History has shown that the fully automated beef processing room has stalled, and it is the fully automated lamb processing line that has come to fruition. CEO John Kippenberger is pushing ahead with Bladestop, an excellent safety enhanced bandsaw product in its own right. But it is not part of an automated meat processing solution. There is also a lack of faith in further automation from the meat industry itself.

https://www.ruralnewsgroup.co.nz/rur...bour-nightmare

-------------------------

Karapeeva says many people seem to think that automation is the silver bullet that can compensate for labour shortages in the industry caused by the Covid-19 pandemic.

"I struggle to see how that is possible. In the red meat sector, we have already done all that we can do in terms of the lower hanging fruit in automation," she told Rural News.

---------------------

Those SCT engineers have spent 20 years on the automated beef boning room, and it looks like time looks to have been called. The golden goose is dead! Very unfortunate considering the 'side' project processing lamb carcasses has gone so well. But there are far fewer plants processing lamb around the world than processing beef :-(.

SNOOPY

[Snoopy]

From a profitability perspective almost all profits that are reported have come from ‘Appliance Manufacturing Systems’ and ‘Laboratory Sample Preparation’. The most advanced of the new pipeline businesses, the joint venture lamb automated lamb boning room with Silver Fern Farms (Robotic Technologies Limited) contributed a mere $124k to net profit in FY2011 (AR2011 p36). And that joint venture business was founded eight long years ago!

There are two lessons we can draw from this:

1/ Genuinely new and innovative technology takes a long time to commercialize.
2/ There is little market value attributed to Robotic Technologies Limited, NS Innovations (the Australian market beef chain joint venture), HTS-110 (High Temperature Superconductors), and the Dairy Sector Automation project that is reflected in a Scott Technology share price at $1.55.

The existing profitable businesses have in effect entirely subsidized the new ventures thus far. In accounting terms almost all research and development costs have simply been written off as they were incurred.

If you think this sounds distortionary then take a minute to think about the alternative: that shareholders should continually front up development cash on new ventures until they become profitable. This funding method for new ventures is the essence of why I like Scott Technology.

Here is an established business that over the business cycle generates dividend returns that compare favourably with bank term deposits. Yet underlying everything, we are in effect being given ‘lottery tickets for free’ in some very exciting new business ventures. If even one of these new ventures comes off, there is potential for a significant market revaluation of the prospects of Scott Technology.

It is interesting to reflect on the above post from ten years ago. The reason I reflect on this today is that as an SCT shareholder, I am throwing away another dud lottery ticket. Scott's today announced the sale of their high tech HTS-110 superconducting magnet division to the HTS CEO Donald Pooke, supported by a series of venture capital outfits:

1/ 'New Zealand investment fund', run by venture capitalists Weijing CHEN and Li Yi CHEN,
2/ Booster Tahi Limited Partnership (https://www.booster.co.nz/booster-in...vestments.aspx) and
3/ Venture Capital fund, Matū (https://matu.co.nz/portfolio/hts-110/)/.

No sale price was announced of course. The business has been 'on the block' since John Kippenberger took over as CEO nearly two years ago. Anyway it was good to see HTS-110 not closed down. NS Innovations, an Australian take on the automated beef boning room, and the automated milking shed project were simply shuttered. So three lottery tickets are gone since the 'Kippenbeger coming'. The automated lamb boning room did eventually come good. But it has been hampered from greatness by being such a relatively small target market.

The HTS-110 sale will end up being little more than a footnote in the upcoming SCT annual report. A sad end, as far as SCT shareholders are concerned. Yet somehow, when you are given a lottery ticket for free, that loss doesn't seem quote so bad.

SNOOPY

[kiora]

Wow that is quiet some turn around
"Freshly streamlined automation and robotics company Scott Technology has returned to profit.

The company reported a net profit $9.5m for the year to August after restructuring costs took the company to a $17.5m loss in the prevoius year.

Scott's EBITDA came to $22.1m from a loss of $11.6m loss a year earlier."
https://www.nzherald.co.nz/business/...CSMCCX3YN5H6U/

[Bjauck]

Wow that is quiet some turn around
"Freshly streamlined automation and robotics company Scott Technology has returned to profit.

The company reported a net profit $9.5m for the year to August after restructuring costs took the company to a $17.5m loss in the prevoius year.

Scott's EBITDA came to $22.1m from a loss of $11.6m loss a year earlier."
https://www.nzherald.co.nz/business/...CSMCCX3YN5H6U/

Revenue is only about 4% below the 2019 figure. The net profit is about the same as it was in 2019. It could have been worse in the Covid era.

The share price is up about 24% since October 2019. (NZX50G up about 20% since October 2019)