Did I Say Explosion?

Don’t ask me how it happened but in my last post covering Bolt Technology Corporation (“Bolt”) (AMEX: BTJ) I incorrectly wrote that some of Bolt’s fiscal 2007 capex spending went towards the replacement of equipment that was lost in an explosion at one of its manufacturing facilities. It must have been pretty late at night when I wrote that section of my post because there was no such explosion. Somehow my twisted little mind butchered the words from the fiscal 2007 10K and substituted “explosion” for “expansion.” At least that is how I think it happened. Either way, its was Bolt’s revenues and earnings exploding in fiscal ’07 and not its manufacturing facility.

Here is what was actually written in Bolt's 10K:

“For fiscal 2007, the Company used $949,000 for capital expenditures funded from operating cash flow which relate to new and replacement equipment and a small expansion of the Cypress, Texas manufacturing facility.”

What’s New?

Since writing my unabridged analysis of Bolt in early October, Bolt released financial results for its first quarter of fiscal 2008 and I had an opportunity to speak with Mr. Raymond Soto, President and Chief Executive Officer. Normally, I like to wait for the 10Q filing before posting my thoughts on a quarterly earnings report but I feel as though I have enough new information to justify writing an updated blog post without the 10Q filing. In this post, I will first cover the results for the quarter and then I will share some of the details from my conversation with Mr. Soto.

Q1 2008 Financial Results

Sales

Sales for the quarter grew an impressive 52.59% to $15.26 million from $10.00 million in the year ago quarter.

I am not overly concerned with sequential quarterly comparisons but I will point out that Bolt’s sales were down slightly from the $15.47 million in the prior quarter. To this regard, it is important to note that Bolts sales growth over the past couple of years has been largely attributable to increased sales of complete seismic source systems, which accounted for 53.88% of sales growth in 2007. These systems are typically sold to customers building or converting new seismic vessels and can run in the millions of dollars. As such, Bolt’s sales from one quarter to the next can fluctuate depending on the timing and delivery of these orders. In the most recent quarter, Bolt’s results were negatively impacted by a delayed shipment of a seismic source system to one of its customers. The order, which is in excess of $1.5 million, was delayed because the seismic vessel was not ready to take delivery of the system. Nonetheless, Bolt management expects the order to ship in the current quarter.

It was not mentioned in the press release, but I am fairly certain the delayed order was for SCAN Geophysical’s (“SCAN’s”) new SCAN Stigandi vessel. On October 17, SCAN announced in a press release that the delivery of the SCAN Stigandi vessel was going to be delayed. I saw the press release when it came out but I was uncertain whether or not it would affect Bolt’s Q1. Here is the press release from SCAN announcing the delay and here are the specifications for the SCAN Stigandi, which list Bolts APG guns in the seismic equipment specs.

Just today, SCAN issued another press release that indicates that the SCAN Stigandi vessel is still on track for the early 2008 delivery.

Margins and Taxes

The press release lumps costs and expenses into one line item so there is not enough detail to calculate gross margins.

Utilizing the information available in the release, I calculate a pre-tax margin of 32.90% up 329 basis points from the year ago quarter and 55 basis points from the prior quarter. The year-over-year and sequential improvements are likely the result of a high level of fixed costs being spread over higher sales, increased operational efficiencies and/or improved product mix.

The implied tax rate for the quarter was 31.19% compared to 32.39% in the year-ago quarter and 32.35% in the prior quarter. Recall from my last post that Bolt’s tax rate has been below the effective tax rate due to tax benefits from export sales and the manufacturer’s deductions.

Profit margins for the quarter increased to 22.64% compared to 20.02% in the year-ago quarter and 21.92% in the prior quarter. The improvement in profit margin for the quarter was a result of higher operating margins, discussed above, and the lower income tax rate.

Net Income and EPS

Bolt’s net income increased 72.58% to $3.46 million compared to $2.00 million in the year-ago quarter. Despite the modest sequential decline in sales, net income increased 1.92% from last quarter.

Management’s Outlook

Bolt management does not hold conference calls to discuss quarterly results. Furthermore, the press releases only have one or two quick quotes from management about what lies ahead. Here is what management had to say in the most recent press release:

“Incoming orders and requests for quotations continue to be strong and, accordingly, we continue to believe that fiscal 2008 will be another strong year for our Company.”

My Discussion with Mr. Soto

Early last week I had a phone conversation with Mr. Soto to discuss a number of questions I had as both a shareholder and a blogger. As Bolt does not hold conference calls to discuss quarterly earnings, this was my first experience talking with management and I found the conversation to be extremely insightful. While I didn’t ask overly specific questions or seek any kind of guidance, I came away from the conversation with a high level of comfort about my investment in Bolt and the company’s leadership.

Below I will highlight my take-away from my conversation with Mr. Soto. The information below should not be construed to be Mr. Soto’s specific thoughts, opinions, or words. Our conversation was very fluid and didn’t lend itself to careful note taking. As such, the notes below only represent my interpretation and recollection of the conversation along with my thoughts and opinion.

On Bolt’s website it says that Bolt’s Long-Life Air Guns are the most widely used air guns. It also says that by 2000 Bolt sold in excess of 4,000 Long-Life Air Guns, representing over 75% of the world’s seismic fleet. Based on my conversation with Mr. Soto, Bolt likely owns 75-80% of the seismic source market. Bolt invented the air gun and has worked hard to stay on top of the seismic source market. Bolt’s dominant share of the seismic source market is truly impressive.

Bolt has only two real competitors. ION Geophysical designs and manufactures air guns but they are technically inferior to Bolt’s guns. Sercel, a division of CGGVeritas, has a decent gun but lets face it, a customer of Sercel competes with CGGVeritas.

CGGVeritas is one of Bolt’s largest customers. A large percentage of sales to CGGVeritas are for connectors and other equipment sold by Bolt’s A-G operating unit. Nonetheless, Bolt’s air guns can be found on a large number of CGGVeritas’ vessels, including its recently constructed vessels.

With the recent expansion to the manufacturing facility in Cypress, Texas and Bolt’s ability to outsource some of its manufacturing needs, capacity does not seem to be an issue.

I was a little concerned that the delay of the SCAN vessel was a sign of a capacity issue beyond Bolt. While shipyards are very busy, I don’t get the sense that this is a major concern at this time. The construction/conversion of a seismic vessel is a significant undertaking and a few minor glitches can easily result in delays like the one with SCAN.

Most of the R&D spending in recent years has gone towards the development of the APG Air Gun and SSMS. These products are in their final stage of development and so far have been very well received by Bolt’s customers. R&D spending in fiscal 2008 will go towards the final development stage (finishing touches) of these products.

The Long-Life Air Gun and APG Air Gun are competing products. The APG Air Guns are more advanced than the Long-Life Air Guns and have more desirable attributes. The APG Guns are not necessarily going to replace the Long Life Air Guns currently in service but are more apt to compete for sales on newly constructed vessels. Nonetheless, Bolt still gets and will likely continue to get orders for its Long-Life Air Guns on new vessels.

Air guns operate in harsh environments and the regular firing of the guns at 1/3,000 of a second puts tremendous strain on the guns and their parts. While Bolt’s guns are built to be long lasting, hence the name, replacement parts are still an important part of Bolt’s business. With a rapidly growing install base, sales of replacement parts will continue to grow. There was a recent interview with an analyst where the analyst compared the steady stream of income from replacement parts with that of the razor blade business model.

The majority of Bolt’s equipment is sold to customers operating offshore seismic vessels but Bolt sells a fair amount of equipment to customers operating in transition zones. Vessels operating in transition zones require fewer air guns.

Onshore seismic products contribute little, if anything, to sales. In the 1980’s Bolt tried to become a bigger player in the onshore seismic market but it never really worked out. I might be wrong but thinking back on some of my research, I want to say Bolt operated one or maybe more onshore seismic crews back in the 1980s.

Bolt is a small company and does not have the resources to staff a team of in-house economists to predict the future. At the same time, some of Bolt’s customers, especially Schlumberger, are significantly larger and spend large amounts of money on market research. These same customers have aggressively been adding to their seismic fleet and have indicated to Bolt that they plan to continue to add vessels in the future. Investors looking for more research on the oil & gas markets should go to Schlumberger’s website and listen to its conference calls.

As the news is relatively new, I did not discuss WesternGeco’s plan to purchase Eastern Echo with Mr. Soto. As WesternGeco is a customer of Bolt, this news should be considered a positive for Bolt investors. Eastern Echo has four vessels under construction, two vessels scheduled for construction and options for two additional vessels. This news is not only positive for Bolt investors but also a good indicator of industry strength.

Bolt purchased A-G back in 1999. Today, A-G accounts for somewhere around 40% of Bolt’s sales. Wouldn’t it be nice to have that kind of success with RTS? Either way, RTS was a good acquisition and adds nicely to Bolt’s seismic source offering.

As for other acquisition, I wouldn’t be surprised to see additional acquisitions in the future. High margin businesses with proprietary products that will add to Bolt’s seismic source offering would be the ideal fit. No commodity type business for Mr. Soto. I didn’t get the sense from my conversation with Mr. Soto that there was an impending acquisition but I did get the sense that a future acquisition was well within the realm of possibilities.

I mentioned to Mr. Soto that retail investors are likely a little spooked about the pending increase in available shares. Mr. Soto suggested that I go back and look at the proxy statement and he discussed the possible reasons for increasing the available shares. He indicated that the company was not looking to do anything that would be dilutive to or have a negative impact on its shareholders. Personally, I strongly believe based on the number of shares outstanding, proposed increase in available shares and the wording of the proxy statement that the company is planning for an eventual stock split.

Bolt has steadily increased margins over the past couple of years. When I asked Mr. Soto if there was room for additional margin improvement, he indicated that he thought there was still room for some improvement. In particular, Mr. Soto referenced the recent non-recurring professional fees associated with Sarbox compliance and the RTS acquisition as potential drivers of additional margin improvement. Furthermore, I believe Bolt has a high percentage of fixed expenses. As such, any increase in sales will result in higher margins.

In my last post, I talked about advanced survey techniques resulting in more streamers and more guns per vessel. If I understood Mr. Soto correctly, the number of guns per vessels hasn’t really changed all that much and that the number of streamers on a vessel doesn’t drive the number of guns per vessel. Nonetheless, advanced survey techniques require more vessels and the success of advanced survey techniques has increased the demand for seismic surveys and vessels.

Bolt plans to implement a price increase somewhere in the range of 6-7% at the beginning of the calendar year. As Bolt will already have contracts outstanding from 2007, it will take a little while for the full price increases to fully work themselves into its financial results. According to Mr. Soto, Bolt could increase prices more if it wanted to but it wasn’t looking to be a pig. “You know what happens to pigs don’t you?” Mr. Soto asked. Okay. Let me step back a minute and go back to my note on the proposed increase in available shares. If Mr. Soto is cautious about being a “pig” in dealing with customers, wouldn’t you expect him to be equally cautions in dealing with shareholders. If there are any retail holders out there concerned about the proposed increase in available shares, I don’t think Mr. Soto has any plans to do us wrong.

Well, that is all I have for now. Do your own due diligence and don’t go by me. I am just some guy blogging about stocks in my spare time and I own shares of Bolt.

Good luck,
Tuff