Byline: Peter Passi
Jan. 24--If there's one thing markets hate, it's uncertainty. And on Thursday, ASV Inc., a fast-growing Grand Rapids-based manufacturer, took a major step toward removing some of Wall Street's biggest concerns about its future.
The company, which employs 135 Northland residents, announced that it had bought out a contract, known as a warrant, that gave Caterpillar Inc. the right to acquire a majority interest in it.
The cost? $7.2 million in cash plus 500,000 shares of stock having a current market value of about $16.5 million.
In recent weeks, ASV's stock has tumbled amidst concerns of instability.
After Jan. 5, when Caterpillar exercised its right to purchase 1 million shares of newly issued stock in the company, ASV's value dropped more than 30 percent. Shares that sold for $40.25 apiece prior to the transaction had fallen to $27.84 by Wednesday on fears that ASV's ongoing obligations to issue and sell discounted stock to Caterpillar would undermine the value of current investors' holdings.
But Caterpillar still has a considerable stake in ASV's continued health and stability. ASV's patented rubber-tracked undercarriages go into all of Caterpillar's multi-terrain loaders.
Although it has yet to report its fourth-quarter results, Tom Karges, ASV's chief financial officer, estimates that Caterpillar accounted for about half his company's total 2003 sales.
Karges says Caterpillar has played a critical role in ASV's growth, fueling it not only with money but providing technical assistance, as well.
In return for Caterpillar's aid, ASV issued the company a warrant in October 2000 for the purchase of up to 9.8 million new shares at a price of $21 apiece.
To put that offer in perspective, consider that ASV had fewer than 10 million shares in circulation at the time. If the warrant had been fully exercised, the amount of outstanding ASV stock would have nearly doubled, and Caterpillar, which was already a shareholder, would take a majority interest in the company.
During a phone interview Friday, Alexander Blanton, an analyst with Ingalls & Snyder, a New York investment firm that follows ASV, described the repurchase as 'a very positive development' for investors.
'If ASV hadn't done what it did, there would have been substantial dilution from the warrant, even if it was not exercised,' he said, explaining that investors had to weigh the prospect of new shares being issued and sold at a price well below the present market value.
On the positive side, ASV's earlier sale of stock to Caterpillar did generate about $21.8 million for the Grand Rapids company, but it already was in a fairly strong cash position. Blanton noted that as of September, ASV had about $18 million in ready reserves.
In the current low-interest-rate environment, Blanton said there were few apparent advantages to ASV having lots of cash on hand.
But Caterpillar had much to gain by Blanton's estimation. In all likelihood, he said Caterpillar could have made more money exercising its warrant than it received in payment from ASV on Thursday.
'I think that maybe Caterpillar didn't want to be perceived as a big company abusing a supplier just because it's small,' Blanton said.
'Whatever it may be, it's certainly an enlightened attitude if profit isn't all that they're interested in.'
'We're not in this partnership with ASV to make money off their stock. That's not our objective,' said Dick Benson, an officer at Caterpillar who also serves on ASV's board of directors. 'We're in this together to make money producing the best equipment we can.'
As for the prospect of acquiring a controlling interest in ASV, Benson considers that completely unnecessary.
'ASV has some very good, creative people who are fast on their feet.
They're not encumbered by bureaucracy,' Benson said. 'Who knows what affect it would have if Caterpillar gained majority control of ASV?
We're not overly bureaucratic, but we're a big $22 billion company with a few more rigors in place than you'd find at ASV.'
Benson was part of the Caterpillar team that first made contact with ASV. He recalls being impressed with the creativity of its founders, Gary Lemke and Edgar Hetteen, who also launched two successful snowmobile companies: Polaris Industries and Arctic Enterprises.
Caterpillar had successfully developed a rubber track system for its line of large field equipment, but its system was not well suited for smaller loaders. ASV's snow-inspired track system offered even distribution of weight, a less jarring ride and tough durability.
'These two guys, initially working out of a garage in Northern Minnesota, accomplished what others had not been able to do with hundreds of millions of dollars,' Blanton said. 'It's really a great example of American entrepreneurial spirit.'
To its credit, Blanton said Caterpillar recognized a good idea when it saw one. He said the company wasn't infected with the 'not-invented-here syndrome,' that hobbles many other manufacturers.
'They went out to seek the best ideas they could find,' Blanton said. 'That's why Caterpillar is a great company.'
Caterpillar and ASV have recognized they share many common interests, Benson said.
'I've heard Gary Lemke say that what's good for Caterpillar is good for ASV. And I'd add that what's good for ASV is good for Caterpillar, too.'
Karges expects Caterpillar to remain a key customer for ASV, but he projects his company will become less dependent on Caterpillar in the future. In 2004, he expects that about 40 percent of ASV's sales will come from Caterpillar, down from about 50 percent in 2003.
ASV markets a line of all-terrain loaders under its own label, and Karges expects sales of those machines to grow, as its dealer network expands. At present, ASV has about 175 dealers nationwide. He'd like to see that network expanded to about 1,000 dealers in the future.
ASV also provides tracked platforms for all manner of specialty machines: orange pickers, grape harvesting equipment and even gear for military use. Some of ASV's handiwork is incorporated into remote-controlled vehicles that Applied Research Associates Inc. supplies to the U.S. government.
These machines are equipped with cameras and have been used for security, crowd control, firefighting and even the removal of land mines around the world. Some of the remote-controlled vehicles currently are stationed in Iraq.
If ASV's sales grow as Karges predicts, so will its work force. The company recently announced that it will hire 15 to 20 people during the first quarter of this year and has already received more than 200 applications.
In anticipation of future growth, ASV also purchased the former 109,000-square-foot Technimar building in Cohasset.
Although the company has no plans to leave its Grand Rapids plant, it could outgrow the space eventually. Karges said ASV bought the Cohasset building for good reason.
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(c) 2004, Duluth News-Tribune, Minn. Distributed by Knight Ridder/Tribune Business News.
TICKER SYMBOL(S): ASVI, CAT
