Third Quarter Earnings Update: Empire Industries

I’m catching up on a few of the later quarterly results that came out.  Empire Industries was typically late with their results, which came out on November 29^th.  They were mostly a non-event.

The company is in transition.  Up until this year the primary business unit of Empire, Dynamic Attractions, developed custom amusement park rides.  Their rides are high end, technologically complicated rides like the Harry Potter & the Forbidden Journey attraction.

In the last year they have transitioned their Dynamic Attractions business model from customer attractions to standard products that they can sell to multiple park operators.  The transition is expected to improve margins, as they focus on more of a manufacturing process than on one-off creations.  So far though it has not.

On the call CEO Guy Nelson said that they expect to be mostly through these growing pains by2017.  He pointed to the Flying Theatre, which I believe was the first standardized product.  They’ve sold 10 Flying Theatres so far, and the last nine have been at much better margins than the first.  As more products get over this hump, margins are expected to improve.

With the spin-off of the hydro-vac business (which I have written previously about here), the other remaining business unit for Empire has been steel fabrication.  Nelson said that they will be changing the direction of the steel fab business, exiting the contract manufacturing business and focusing it on producing parts for Dynamic Attractions.  This is probably a good idea; the Steel Fab business has not been profitable.

Nelson also gave an update on the SpacePark that was announced when Justin Trudeau visited China in the summer.  I mentioned the agreement in this prior post.  Unfortunately my optimism may have been misplaced.   Nelson was quite candid about the agreement, said that they hesitated with the new release, felt some pressure given that the agreement was attended by Trudeau, and that he felt that the Chinese counterpart only had about a 50/50 chance of securing the needed land for the park.

On August 9^th Empire announced a $10 million contract for the design phase of the thirty meter telescope.  On the call they confirmed that this revenue will be seen in 2017.  It’s good to see the telescope, which has been held up by regulatory issues due to its Hawaii location.  Wikipedia describes the backstory well.  I’m not sure that the final location of the telescope has been decided.

The backlog seems to have stabilized after falling from its peak in early 2014.

The improved margins in 2017, the healthy backlog and the additional $10 million contract for the thirty meter telescope design should lead to an improved 2017.

But I want to see how successfully they can transition to this model before I take any more of a position.  Let’s see margins improve, and let’s see orders continue and hopefully increase.

Empire is a typical position.  A decent company, lots of ways to a positive outcome, but nothing has materialized yet.   So it remains a small position as I wait for a catalyst to justify increasing it.