As promised in my post from earlier today, here is a rundown of Q4 guidance based on information from the Q3 earnings release and 10Q.
(all numbers in thousands except EPS)
Sales
Based on the earning release, management expects Q4 sales to be comparable to Q2 sales of $63,183 million.
Guidance in the 10Q is a little more specific.
Explosive Welding – return to Q2 levels $52,996
AMK – consisted with Q1 and Q2. Average of Q1 and Q2 $2,282
Oilfield Products – 20-25% higher than Q3. 1.23 x Q3 $6,756 = $8310
Overall guidance - $63,588
Model Sales - $63,600
Gross Margin/Gross Profit
Earnings release 30%
10Q – comparable to Q1 and Q2 of 30.3% and 30.1%, respectively
Model Gross Margin - 30.2%
Model Gross Profit – $19,207
General & Administrative Expenses
No guidance was given for G&A expenses. G&A is not highly correlated with sales and the last two Qs should be fairly representative of Q4. For my model, I will use an average of Q2 and Q3 G&A.
Model G&A - $3,747
Selling Expenses
Selling expenses include commissions and therefore are more dependent on sales volume. As such, I will estimate selling expenses as a percent of sales. More specifically, I will take the average selling expense as a percent of sales over the last three quarters.
Model Selling Expenses - $2,972 (4.67% of sales)
Amortization Expense
Earnings release - $1,200 million
10Q - $7,500 million for 2008. Taking $7,500 and subtracting the amortization expense from Q1 to Q3 = $1,300.
Amortization will vary depending on the strength of the USD relative to the Euro.
At today’s exchange rate, I think the $1,200 is probably more accurate. The $7,500 in the 10Q was left over from the last 10Q when the USD was considerably weaker.
Model Amortization Expense - $1,200
Operating Expenses
G&A $3,747 + Selling $ $2,972 + Amortization $ $1,200 = $7,919
Operating Income
Gross Profit $19,207 – Operating Expenses $7,919 = $11,289
Interest Expense
Earning release - Pre-tax income will be impacted by approximately $1.2 million in interest expense.
Interest will be impacted somewhat by exchange rates because a portion, not all, of BOOM’s debt and LOCs are denominated in Euros.
In mid-November, BOOM will utilize cash to pay down a portion of the syndicated credit agreement. Assuming the interest rate on the cash deposits is less than the average interest rate of the Euro and USD portion of the syndicated credit agreement, the net effect of the pay down should result in lower interest expense.
It is not clear if the guidance for $1.2 million in interest expense is net of interest income. For purposes of this analysis, I will assume it is net of interest income.
Model Interest Expense – $1,200
Other Income and Equity Interest in JV
These numbers are too hard to predict and have fallen on either side of negative or positive and the past few quarters by modest amounts. I am going to just assume $0.
Model Other Income and Equity Interest in JV - $0
Income before Taxes
Operating Income $11,289 – Interest Expense $1,200 = $10,089
Tax Provision
Earning release and 10Q – Full-year 2008 tax provision to approximate 27%
Model Tax Provision - $3,000 (27.01% full-year 2008 and 29.74% for Q4)
Net Income
Income before Taxes $10,089 – Tax Provision $3,000 = $7,089
Weighted Average Diluted Shares Outstanding
I will assume a modest sequential increase similar to last few quarters.
Model Diluted Outstanding – 12,572 shares
EPS
Net Income $7,089 / Diluted Outstanding 12,572 shares = 56c
Average Estimates
Sales – $6,361
EPS – 60c
Average estimates likely reflect management's history of being conservative when giving guidance.
Sensitivity Analysis
Adjusting the gross margin up 100bps adds approximately 3-4c to EPS
An additional $2,000 in sales adds approximately 3c to EPS
I hope this helps.
Tuff
Tuesday, November 18, 2008
Not Your Father's Commodity Company - BOOM Q3 2008
I just finished taking notes on BOOM’s Q3 conference call and 10Q. Considering the tightness in the credit market, slowdown in the economy and precipitous drop in commodity prices (why has “precipitous drop” become my favorite phrase as of late?), I was pleasantly surprised by the results and guidance. Overall, results were better than expected and guidance was in-line with what was given on the Q2 conference call.
Not Your Father’s Commodity Company
BOOM is not your father’s commodity company….that’s because BOOM is not a commodity company. On the conference call, Yvon Cariou, BOOM’s CEO, made it a point to remind investors of this fact. BOOM is an advanced engineered materials company that manufactures high value components for large infrastructure projects. To this regard, BOOM’s margins are not as leveraged to commodity prices as – oh I don’t know – a commodity producer. Furthermore, BOOM’s cost structure is lower than that of commodity producer because BOOM harnesses the power of explosives to achieve what would otherwise require a great deal of capital equipment.
Despite the fact that BOOM is not a commodity company, it is important to keep in mind that the recent, by recent I mean over the last four years, demand for explosion clad has largely been driven by the infrastructure build-out of commodity businesses. While I firmly believe the bull market in commodities has a long ways to go and significant infrastructure development is required to alleviate the long-term supply and demand imbalances, a prolonged downturn in the economy along with an extended period of lower commodity prices could result in postponements and/or cancellations. If this is the case, I believe it will be a temporary phenomenon and ultimately there will be a continuation of the infrastructure build-out. And, any postponement of infrastructure projects will merely serve to prolong the commodities bull market.
Supply Chain Tightness and Pricing
BOOM’s supply chain remains tight but efforts to diversify its supplier network is starting to pay dividends. The situation in Europe is a little better than the U.S. mainly because, in the U.S., the Department of Defense (DoD) is able to “leapfrog” other customers to get PVQ* plates. As I have mentioned in the past, I am pretty certain the DoD uses PVQ plates for armoring MRAP vehicles.
On the call, Yvon made it clear that the supply chain and pricing for PVQ steel plates are different from that of other steel products. While pricing and demand for a lot of steel products have dropped, the same cannot be said for PVQ plates.
* PVQ: an acronym that stands for Pressure Vessel Quality. The Q3 call was the first time management used the acronym on a conference call to describe the carbon steel backer plates. The carbon steel backer plates are welded to the high alloy cladder plates. Throw this acronym around at cocktail parties and people will think you are an industry insider.
Bookings, Backlog and Demand
BOOM management has not seen any material postponements of projects on the “hot list” or cancellation of projects in the backlog. The “hotlist” is as robust as it has been at anytime in the past year and management is encouraged by customer activity.
The backlog was down 6% sequentially but up 28% from the year-ago quarter. Most ($4 million) of the sequential decrease in backlog was merely a function of a stronger USD relative to the Euro. Furthermore, a $5 million refinery order was booked on the first day of Q4 and not included in the backlog.
Competition
On the conference call, an analyst asked about competition from roll-bond and other traditional manufacturers of clad. Management acknowledged that traditional manufacturers of clad have been more present and have more capacity than they have been/have had in the past. I think this is probably true more so in Europe than in the U.S. and that is why the European operations will never have the same margins as the U.S. operations. It still sounds like traditional manufacturers are not able to compete in BOOM’s sweet spot, but BOOM is less apt to get spillover work from traditional manufacturers. Right now, my biggest concern is not competition from another explosion welding company but advances made by traditional cladding companies.
In particular, my concern is that traditional manufacturers will develop a technique that will produce a clad product capable of competing in BOOM’s sweet spot. I may be way off base on this but I think it is a possibility, and I have been on the lookout for any signs of this actually happening. I haven’t seen anything.
Explosion Clad
Clad sales in Q3 were up 6% from the year-ago quarter but down 19% from Q2. The sequential decline was fully expected. In fact, sales in the quarter were slightly better than expected. Despite lower sales in the quarter, the clad division managed to pull off an impressive gross margin of 32.5%, the highest level since the DYNA acquisition. The better than expected margin performance was a result of the disproportionately higher level of sales from the U.S. operations.
European sales were down as a result of summer vacations and some delayed shipments. I lived in Paris for a couple of years and the city would shut down for the month of August because everyone was on vacation. As such, the vacation bit doesn’t come as much of a surprise. The delayed shipments will get recognized as revenue in Q4. Based on the conference call, it sounds like BOOM was ready to ship the plates but they were waiting for the customer to perform certification and testing.
AMK
As far as I can tell, the $2.9 million in revenues on the quarter represents a record quarter for AMK, but the 37.9% gross margin is what caught my eye. Get this division some more business! I like the margin potential here.
Oilfield Products
The Oilfield Products division posted sales of $6.8 million, down 14.7% sequentially. Stronger margins helped make up for the lower sales. Gross margin in the quarter was 35.6% compared to 33.6% in the prior quarter. Operating margin was 12.9% compared to 7.4% in the prior quarter. Margin improvement was the result of product and customer mix.
Taxes
BOOM’s income tax provision was 7% on the quarter versus the 31-32% guidance given on the last call. An IRS examination and some 2007 “book-to-return” adjustments resulted in a $300,000 tax benefit and a $1.1 million tax adjustment, respectively.
Assuming a tax rate of 31.5% in Q3, BOOM’s tax provision would have been $5.3 million instead of $546,000, and EPS would have been 42c instead of 57c. Nonetheless, BOOM would still have beaten estimates of 36c.
For 2009, management expects a tax rate of 31-32%.
Debt/Capital Structure
At the end of the quarter, BOOM’s debt consisted of the following:
LOC current maturities: $4.785 million
LT debt current maturities: $7.741 million
Total current maturities: $12.256 million
LT LOC: $9.536 million
LT debt: $60.440 million
Total long-term maturities: $69.976
Total debt was down $7.1 million from the prior quarter.
Debt/Equity (total liabilities/stockholders’ equity): 1.13 (versus 1.40 at the end of 2007)
Of the long-term debt classified as current, $4.5 million in U.S. borrowings and $1.5 million in Euro borrowings, under the syndicated credit agreement, will be paid-off in November. Unless, additional working capital is needed to support an increase in business, management expects to pay-off some of the revolving line in the fourth quarter.
In the third quarter, BOOM generated over $12 million in EBITDA (not adjusted EBITDA, which excludes stock based compensation) and net interest expense was a little over $1.3 million. Even though the third quarter will likely represent the weakest quarter in terms of EBITDA, BOOM’s interest coverage (EBITDA/interest expense) was 9.1x, which is more than adequate. In Q4, BOOM should generate significantly more EBITDA and pay less in interest.
As a final note on debt, BOOM entered into a new two-year interest rate swap agreement on the U.S. borrowing of the syndicated credit agreement. The agreement, in effect, will convert the variable LIBOR rate to a fixed rate of 4.87% as of November 17, 2008. I have not seen anything on the pricing of the interest rate swap agreement.
Cash Flow/Free Cash Flow
In the third quarter, BOOM generated nearly $13.0 million in cash flow from operations, almost two times net income. Aside from the $2.6 million in add-backs for depreciation and amortization, receivables added over $6.4 million to cash. While BOOM utilized $4.5 million in cash for inventories, I believe this could be a positive sign that BOOM is getting a handle on the supply chain situation.
In his post, TMFBent mentioned that BOOM has cleared $17.5 million in free cash flow year-to-date. Out of curiosity, I went back to see what BOOM generated for free cash flow during the same period in 2007 – drum roll please – $5.4 million. Wow, that is a 224% improvement.
CapEx of $3.2 million was up pretty good from recent quarters. I was a little surprised this wasn’t brought-up on the conference call. When looking at BOOM’s recent capex, I think it is fair to say that a good chunk of spending has been expansionary as opposed to maintenance. At the same time, the breakdown between expansionary and maintenance might be a little more weighted towards maintenance this year than it was last year.
Guidance
I am going to put together another post on guidance that works through an EPS estimate for Q4 based on management guidance.
Management
About a month ago, I met with Yvon Cariou, CEO; Rick Santa, CFO; and, Geoff High, of Pfeiffer High Investor Relations. After about an hour, I left the meeting with some juicy information that everyone would probably like to hear. Are you ready for this? Management is passionate about the company, proud of its employees, confident about how they have positioned the company for the future, savvy in their decision making process and hungry to grow the business. I have always had faith in BOOM’s management, but I have to admit that I came away from this meeting with and even higher level of confidence.
I hope this all helps.
Tuff
Not Your Father’s Commodity Company
BOOM is not your father’s commodity company….that’s because BOOM is not a commodity company. On the conference call, Yvon Cariou, BOOM’s CEO, made it a point to remind investors of this fact. BOOM is an advanced engineered materials company that manufactures high value components for large infrastructure projects. To this regard, BOOM’s margins are not as leveraged to commodity prices as – oh I don’t know – a commodity producer. Furthermore, BOOM’s cost structure is lower than that of commodity producer because BOOM harnesses the power of explosives to achieve what would otherwise require a great deal of capital equipment.
Despite the fact that BOOM is not a commodity company, it is important to keep in mind that the recent, by recent I mean over the last four years, demand for explosion clad has largely been driven by the infrastructure build-out of commodity businesses. While I firmly believe the bull market in commodities has a long ways to go and significant infrastructure development is required to alleviate the long-term supply and demand imbalances, a prolonged downturn in the economy along with an extended period of lower commodity prices could result in postponements and/or cancellations. If this is the case, I believe it will be a temporary phenomenon and ultimately there will be a continuation of the infrastructure build-out. And, any postponement of infrastructure projects will merely serve to prolong the commodities bull market.
Supply Chain Tightness and Pricing
BOOM’s supply chain remains tight but efforts to diversify its supplier network is starting to pay dividends. The situation in Europe is a little better than the U.S. mainly because, in the U.S., the Department of Defense (DoD) is able to “leapfrog” other customers to get PVQ* plates. As I have mentioned in the past, I am pretty certain the DoD uses PVQ plates for armoring MRAP vehicles.
On the call, Yvon made it clear that the supply chain and pricing for PVQ steel plates are different from that of other steel products. While pricing and demand for a lot of steel products have dropped, the same cannot be said for PVQ plates.
* PVQ: an acronym that stands for Pressure Vessel Quality. The Q3 call was the first time management used the acronym on a conference call to describe the carbon steel backer plates. The carbon steel backer plates are welded to the high alloy cladder plates. Throw this acronym around at cocktail parties and people will think you are an industry insider.
Bookings, Backlog and Demand
BOOM management has not seen any material postponements of projects on the “hot list” or cancellation of projects in the backlog. The “hotlist” is as robust as it has been at anytime in the past year and management is encouraged by customer activity.
The backlog was down 6% sequentially but up 28% from the year-ago quarter. Most ($4 million) of the sequential decrease in backlog was merely a function of a stronger USD relative to the Euro. Furthermore, a $5 million refinery order was booked on the first day of Q4 and not included in the backlog.
Competition
On the conference call, an analyst asked about competition from roll-bond and other traditional manufacturers of clad. Management acknowledged that traditional manufacturers of clad have been more present and have more capacity than they have been/have had in the past. I think this is probably true more so in Europe than in the U.S. and that is why the European operations will never have the same margins as the U.S. operations. It still sounds like traditional manufacturers are not able to compete in BOOM’s sweet spot, but BOOM is less apt to get spillover work from traditional manufacturers. Right now, my biggest concern is not competition from another explosion welding company but advances made by traditional cladding companies.
In particular, my concern is that traditional manufacturers will develop a technique that will produce a clad product capable of competing in BOOM’s sweet spot. I may be way off base on this but I think it is a possibility, and I have been on the lookout for any signs of this actually happening. I haven’t seen anything.
Explosion Clad
Clad sales in Q3 were up 6% from the year-ago quarter but down 19% from Q2. The sequential decline was fully expected. In fact, sales in the quarter were slightly better than expected. Despite lower sales in the quarter, the clad division managed to pull off an impressive gross margin of 32.5%, the highest level since the DYNA acquisition. The better than expected margin performance was a result of the disproportionately higher level of sales from the U.S. operations.
European sales were down as a result of summer vacations and some delayed shipments. I lived in Paris for a couple of years and the city would shut down for the month of August because everyone was on vacation. As such, the vacation bit doesn’t come as much of a surprise. The delayed shipments will get recognized as revenue in Q4. Based on the conference call, it sounds like BOOM was ready to ship the plates but they were waiting for the customer to perform certification and testing.
AMK
As far as I can tell, the $2.9 million in revenues on the quarter represents a record quarter for AMK, but the 37.9% gross margin is what caught my eye. Get this division some more business! I like the margin potential here.
Oilfield Products
The Oilfield Products division posted sales of $6.8 million, down 14.7% sequentially. Stronger margins helped make up for the lower sales. Gross margin in the quarter was 35.6% compared to 33.6% in the prior quarter. Operating margin was 12.9% compared to 7.4% in the prior quarter. Margin improvement was the result of product and customer mix.
Taxes
BOOM’s income tax provision was 7% on the quarter versus the 31-32% guidance given on the last call. An IRS examination and some 2007 “book-to-return” adjustments resulted in a $300,000 tax benefit and a $1.1 million tax adjustment, respectively.
Assuming a tax rate of 31.5% in Q3, BOOM’s tax provision would have been $5.3 million instead of $546,000, and EPS would have been 42c instead of 57c. Nonetheless, BOOM would still have beaten estimates of 36c.
For 2009, management expects a tax rate of 31-32%.
Debt/Capital Structure
At the end of the quarter, BOOM’s debt consisted of the following:
LOC current maturities: $4.785 million
LT debt current maturities: $7.741 million
Total current maturities: $12.256 million
LT LOC: $9.536 million
LT debt: $60.440 million
Total long-term maturities: $69.976
Total debt was down $7.1 million from the prior quarter.
Debt/Equity (total liabilities/stockholders’ equity): 1.13 (versus 1.40 at the end of 2007)
Of the long-term debt classified as current, $4.5 million in U.S. borrowings and $1.5 million in Euro borrowings, under the syndicated credit agreement, will be paid-off in November. Unless, additional working capital is needed to support an increase in business, management expects to pay-off some of the revolving line in the fourth quarter.
In the third quarter, BOOM generated over $12 million in EBITDA (not adjusted EBITDA, which excludes stock based compensation) and net interest expense was a little over $1.3 million. Even though the third quarter will likely represent the weakest quarter in terms of EBITDA, BOOM’s interest coverage (EBITDA/interest expense) was 9.1x, which is more than adequate. In Q4, BOOM should generate significantly more EBITDA and pay less in interest.
As a final note on debt, BOOM entered into a new two-year interest rate swap agreement on the U.S. borrowing of the syndicated credit agreement. The agreement, in effect, will convert the variable LIBOR rate to a fixed rate of 4.87% as of November 17, 2008. I have not seen anything on the pricing of the interest rate swap agreement.
Cash Flow/Free Cash Flow
In the third quarter, BOOM generated nearly $13.0 million in cash flow from operations, almost two times net income. Aside from the $2.6 million in add-backs for depreciation and amortization, receivables added over $6.4 million to cash. While BOOM utilized $4.5 million in cash for inventories, I believe this could be a positive sign that BOOM is getting a handle on the supply chain situation.
In his post, TMFBent mentioned that BOOM has cleared $17.5 million in free cash flow year-to-date. Out of curiosity, I went back to see what BOOM generated for free cash flow during the same period in 2007 – drum roll please – $5.4 million. Wow, that is a 224% improvement.
CapEx of $3.2 million was up pretty good from recent quarters. I was a little surprised this wasn’t brought-up on the conference call. When looking at BOOM’s recent capex, I think it is fair to say that a good chunk of spending has been expansionary as opposed to maintenance. At the same time, the breakdown between expansionary and maintenance might be a little more weighted towards maintenance this year than it was last year.
Guidance
I am going to put together another post on guidance that works through an EPS estimate for Q4 based on management guidance.
Management
About a month ago, I met with Yvon Cariou, CEO; Rick Santa, CFO; and, Geoff High, of Pfeiffer High Investor Relations. After about an hour, I left the meeting with some juicy information that everyone would probably like to hear. Are you ready for this? Management is passionate about the company, proud of its employees, confident about how they have positioned the company for the future, savvy in their decision making process and hungry to grow the business. I have always had faith in BOOM’s management, but I have to admit that I came away from this meeting with and even higher level of confidence.
I hope this all helps.
Tuff
Monday, August 11, 2008
Déjà Vu - A BOOM Review
I put together some quick thoughts on BOOM's Q2 results.
Guidance
In the first quarter earnings release, management said they expected to achieve full-year financial forecasts and the company’s financial performance during the second half of the year would be significantly stronger than that of the first. At the same time, management cautioned investors about uncertainty surrounding the future pricing and availability of carbon-steel backer plates. On the conference call, management described the carbon steel situation as “somewhat unprecedented” and admitted they were unsure of the potential near-term impact. Given the uncertainty, management qualified their expectations for the second half of the year as follows:
“…management expects that prior 2008 full-year financial forecasts will be achieved, provided expected customer orders are received under anticipated timeframes and metal supplies are adequate to meet 2008 production goals.”
After reviewing the Q2 earnings release, it was immediately clear why shares of BOOM were trading lower in afterhours. Longer lead times for carbon steel backer plates were going to have a significant impact on third quarter results and management revised their expectations for 2008 accordingly.
“…although year-to-date bookings have been strong, longer lead times on the delivery of carbon steel in the United States are expected to result in sales during the second half of 2008 that will be approximately 5% less than the first half of the year. Sales in the third quarter are expected to be up to 20% less than second quarter sales, while fourth quarter sales are expected to be equal to or above those of the second quarter.”
Sales
Sales guidance in the 10Q reads a little differently from the guidance in the earnings release. According to the 10Q, Q3 Explosive Metalworking sales are expected to be up to 20% less than Q2 (the press release makes it sound like overall sales). With sales of approximately $53.0 million in Q2, Explosive Metalworking sales could be as low as $42.4 million in the third quarter.
On the conference call, management said they expected the Oilfield Products division to report 30% higher sales in the second half of the year compared to the first half of the year. The 10Q gives a range of 20-30% higher. Furthermore, the 10Q indicates that most of the improvement is expected to occur in the fourth quarter. If I take sales in the first half of the year and multiply by 1.3 and then divide by two, I get average quarterly sales of just over $8.0 million for Q3 and Q4. If I assume all of the increase comes in the fourth quarter, I get Q3 sales of $6.2 million (Q3 sales = average quarterly sales in 1H). In my model, I will probably estimate Q3 sales of approximately $7 million, leaving about $9 million for Q4. While this approach is reflective of the information provided by management, my gut tells me Q3 sales will be similar to Q2 and sales in the second half will be better than 30% higher than the first half.
According to the 10Q, management expects AMK sales in the second half of the year to be comparable to or slightly better than the first half of the year. I was hoping to see more from AMK in the second half of the year, but current guidance would put 2008 sales at least 26.5% ahead of 2007. Keep in mind that a majority of AMK sales are tied to GE’s H System turbines. I have not seen any press releases announcing any new installations.
GE’s 7FB and 9FB turbines utilize similar materials as the H System. I can’t help but wonder if AMK does any work on the 7FB or 9FB turbines.
If I take the worse case scenario for Q3 (Explosive sales down 20%, Oilfield Products sales of $7 mil and AMK sales slightly higher), I calculate sales of approximately $51.7 million in Q3 compared to Q2 sales of $63.2 million and year-ago sales of $42.1 million.
Gross Margin
As a result of fixed costs being spread over lower sales, management expects Q3 gross margin to be 28- 29% compared to 30.15% in Q2. While I am not excited about expectations for lower gross margin in Q3, I am not overly concerned. I believe the supply chain issues will be short-lived (in terms of impact on BOOM), sales will move higher and BOOM’s gross margin will improve accordingly. In fact, management expects Q4’s gross margin to be comparable to the first two quarters based on the expectation that Q4 sales will be equal to or somewhat better than sales in the first two quarters.
Amortization and Interest Expense
At the current exchange rate, management expects 2008 amortization expense to total $7.7 million. To date, BOOM has recorded $4.3 million in amortization relating to the acquisition of DYNA. The remaining $2.9 million in amortization expense should be spread evenly over the next two quarters. Amortization will be lower in the second half of the year because the intangibles related to the backlog have been fully amortized.
Management expects pre-tax income to be impacted by $5.5 million in interest expense. To date, BOOM has recorded roughtly half of its expected 2008 interest. The expected interest expense is not net of interest income. Last quarter BOOM recorded just under $100,000 in interest income. Given the $10.8 million increase in cash on the quarter, interest income in Q3 should exceed Q2.
Note: A stronger dollar will have a somewhat favorable impact on amortization and interest expense.
Taxes
For fiscal 2008, management now expects a blended effective tax rate of 32-33%. In the first half of the year, BOOM’s effective tax rate was 34.33%. To be honest, I am not sure how or when the adjustment will occur to bring the overall effective tax rate down to 32-33%. Nonetheless, the effective tax rate in Q3 and/or Q4 should be below the 32-33% range.
Supply Chain Woes
Déjà vu
Just over a year-ago, when BOOM reported Q4 and full-year 2006 results, management warned that Q1 2007 would be negatively impacted by supply chain constraints. Given the tightness in the supply chain at the time, management guided for Q1 revenues of $26 million compared to Q4 revenues of $35.7 million. The market was not particularly fond of the guidance and sent shares of BOOM lower.
Ultimately, BOOM reported Q1 2007 revenues of $33.1 million, significantly better than expectations. On the Q1 2007 conference call, management said they received a shipment of materials late in the quarter and the Mt. Braddock team worked diligently to process orders before the end of the quarter. Sound familiar? As Q1 2007 results were significantly better than management’s expectations and BOOM was still working through its supply chain issues, management said Q2 revenues would approximate Q1 revenues. Once again, the market didn’t like the guidance and sent shares of BOOM lower.
On July 26, 2007, BOOM reported Q2 revenues that were slightly better than expected and earnings that were 16% better than Q1. In the earnings release, management said there was still tension in the supply chain for carbon-steel backer plates but they expected very strong results in the second half of the year.
BOOM delivered as expected on the second half of 2007. Despite the setbacks after BOOM reported Q1 and Q2 results, shares of BOOM were up over 100% in2007.
The Point
This isn’t the first time management has had to deal with supply chain constraints. In 2007 management dealt with the same issue by expanding their supplier network, bringing some of the finish work in-house and eventually re-aligning the timing of raw material shipments with the timing of orders. Having gone through this issue in the past and successfully working through it, management is in a better position to deal with it today.
The supply chain doesn’t have to improve in order for things to get better for BOOM; it only has to stabilize! There was still tension in the supply chain at the end of Q2 2007 and BOOM reported exceptional Q3 and Q4 results. As things stabilize management will once again re-align the timing of raw material shipments with the timing of orders. If you listen to the Q&A session of the most recent conference call, management tried making this point clear to one of the callers. Furthermore, management said that the tightness in the supply chain was probably past its peak, they didn’t expect it to get worse and their might be some modest, though not dramatic, improvement. Again, the situation only has to stabilize.
In 2007, tightness in the carbon-steel supply chain pushed some revenues from Q1 and Q2 into Q3 and Q4. I expect current tightness in the carbon-steel supply chain to shift some revenues from Q2 and Q3 into Q4 and Q1. To be honest, I am just not all that concerned about a modest shift in the timing of revenues. Demand for explosion clad remains strong, the outlook is positive and BOOM is well positioned for the future.
The Hidden Benefit
When supplies are tight and demand is high, prices go up. Given the strong demand and limited supply of carbon-steel backer plates, prices are high and have been moving up.
BOOM systematically passes down the cost of metals to its customers. When metal prices increase, typically there is no deterioration in BOOM’s gross margin (noted on CC). As such, pure gross profit dollars will increase with higher metal prices.
Note: BOOM has to be careful when carbon-steel prices are going up and clad metal prices are going down. Otherwise, the economics might push customers toward solid metal as opposed to explosion clad.
Orders, Backlog, Demand (Explosive Metalworking only)
By my calculations, BOOM booked $53.0 million in new orders in Q2 compared to $42.4 million in the prior quarter and $49.9 million in the year-ago quarter. In the year-ago quarter, BOOM booked a large, $8.3 million, order.
As a result of strong bookings in Q2, BOOM’s backlog increased to $104.9 million compared to $102.1 million in the prior quarter and $84.7 million in the year-ago quarter.
If Q3 revenues are 20% less than Q2 and Q3 booking are in-line with Q2 bookings, BOOM’s backlog will grow to over $118 million.
In reading the press release and listening to the conference call, management is very upbeat about the future prospects of the company. On the call management described its “hot list,” list of potential contracts, as being very robust and spanning a broad array of industries. Based on conversations with end-market customers and the pipeline of projects schedule scheduled for construction in coming years and beyond, management is “very optimistic” about BOOM’s long-term growth prospects.
Bookings in Q1 and Q2 were strong. Despite the strength, management had plenty to say about the timing of orders and how some projects have gone back for re-approval after increases in certain input costs. Call me crazy but I think there are a couple of good sized projects that management expects to book in the near future. I have noticed a number of large projects in BOOM's end-markets that are at or near the procurement phase. I made the same comment after last quarter and there were no large contract announcements. Nonetheless, I still think they are coming (sounds like I am waiting for aliens to land). Keep in mind that BOOM’s new unofficial threshold of significance is now $10 million.
New Markets
In his opening conference call remarks, Yvon Cariou, BOOM’s President and CEO, said the Explosive Metalworking division received a sizeable hydromet contract for processing gold and multiple orders from the solar sector for plates used in the production of highly purified silicon. During the Q&A session of the call, John Banker, BOOM’s VP of Sales & Marketing, provided some additional information on the two orders.
Unlike this contract, past hydromet contracts have been for HPAL nickel projects. According to Mr. Banker, a portion of the hydromet gold contract was for a new application for explosion clad. The other portion of the hydromet contract was for a POX autoclave. I don’t know if the autoclave portion of the contract was for the shell or internal components. I am guessing it was for the internal components but I honestly have no idea. I always thought POX autoclaves were constructed of acid brick lined steel and the internals were solid titanium. Either way, it seems to me that the autoclave portion of the contract would also be a new use. Again, I don’t know for sure.
The sum of the hydromet contracts was $8 million.
The solar sector contract was the second announced contract for this particular end-market. The last announced solar contract was an $11 million contract. The sum of the solar contracts discussed on the conferece call was $8 million. There are a few silicone expansion projects that I know of in the U.S., China and S. Korea. I have to look at the projects closer to see what project might have been responsible for the contract. On a side note, Hemlock Semiconductor is currently selecting a site for a good sized expansion projects.
In the Q&A session, management said they could have issued a press release announcing the gold and silicone contracts but decided against it. They decided against issuing a press release because they did not want to raise expectations beyond what they were. While it would have been nice to have seen a press release, I think management did the right thing.
Some Quick Notes on Financials
BOOM’s organice revenue growth was over 35%.
Gross profit margins were down as a result of product mix in the U.S, and lower margin contribution from DYNA. While gross margins are expected to be lower in Q3, margins are expected to increase with the expected increase in sales in Q4. In my opinion, there is plenty of room for gross margin improvement. As sales increase, BOOM will be in a better position to leverage its fixed cost. Additionally, I expect to see more favorable pricing in Europe over the course of the next year.
Inventories in the quarter were down 12.3%. The lower inventory levels at the end of the quarter are reflective of the supply chain situation discussed in detail above.
Receivables increased 12.3% over last quarter compared to an 8.2% increase in sales. The somewhat faster increase in receivables relative to sales is likely the result of the work done at the end of the quarter to process a shipment of materials received near the end of the quarter.
Cash flow from operations was $4.6 million in the quarter compared to net income of $4.6 million. At a quick glance, it looks like non-cash amortization and depreciation expense along with a reduction in inventories was offset by an increase in receivables, a reduction in notes payables and an increase in prepaid expenses.
For those concerned about BOOM’s debt load, BOOM has a principal payment, equivalent to 10% of the outstanding principal balance, due in November. Additionally, BOOM has a principal payment due after the end of the year that is based on a calculation of excess cash flow defined in financing agreements.
BOOM’s cash increased $10.8 million on the quarter compared to a $6.3 million increase in borrowing (LT and current portion of LT debt and LOC).
Conclusion
I am on page 7 of this post so I think I am done even though I have more to say. Q2 results were strong and better than expected. BOOM took a beating after reporting earnings because of the guidance for the second half of the year. While it is going to take some time to work through the supply chain issues, I think it is just a matter of time. Once management adjusts for the longer lead times, I expect things to improve significantly.
Regards,
Tuff
Disclosure
I own shares of BOOM and I have an open order to purchase additional shares.
Links
Q1 Earnings Release
Q1 Conference Call Transcript
Q2 Earnings Release
Q2 10Q
GE H System Turbine
GE 7FB and 9FB Turbines
(NASDAQ: BOOM)
Guidance
In the first quarter earnings release, management said they expected to achieve full-year financial forecasts and the company’s financial performance during the second half of the year would be significantly stronger than that of the first. At the same time, management cautioned investors about uncertainty surrounding the future pricing and availability of carbon-steel backer plates. On the conference call, management described the carbon steel situation as “somewhat unprecedented” and admitted they were unsure of the potential near-term impact. Given the uncertainty, management qualified their expectations for the second half of the year as follows:
“…management expects that prior 2008 full-year financial forecasts will be achieved, provided expected customer orders are received under anticipated timeframes and metal supplies are adequate to meet 2008 production goals.”
After reviewing the Q2 earnings release, it was immediately clear why shares of BOOM were trading lower in afterhours. Longer lead times for carbon steel backer plates were going to have a significant impact on third quarter results and management revised their expectations for 2008 accordingly.
“…although year-to-date bookings have been strong, longer lead times on the delivery of carbon steel in the United States are expected to result in sales during the second half of 2008 that will be approximately 5% less than the first half of the year. Sales in the third quarter are expected to be up to 20% less than second quarter sales, while fourth quarter sales are expected to be equal to or above those of the second quarter.”
Sales
Sales guidance in the 10Q reads a little differently from the guidance in the earnings release. According to the 10Q, Q3 Explosive Metalworking sales are expected to be up to 20% less than Q2 (the press release makes it sound like overall sales). With sales of approximately $53.0 million in Q2, Explosive Metalworking sales could be as low as $42.4 million in the third quarter.
On the conference call, management said they expected the Oilfield Products division to report 30% higher sales in the second half of the year compared to the first half of the year. The 10Q gives a range of 20-30% higher. Furthermore, the 10Q indicates that most of the improvement is expected to occur in the fourth quarter. If I take sales in the first half of the year and multiply by 1.3 and then divide by two, I get average quarterly sales of just over $8.0 million for Q3 and Q4. If I assume all of the increase comes in the fourth quarter, I get Q3 sales of $6.2 million (Q3 sales = average quarterly sales in 1H). In my model, I will probably estimate Q3 sales of approximately $7 million, leaving about $9 million for Q4. While this approach is reflective of the information provided by management, my gut tells me Q3 sales will be similar to Q2 and sales in the second half will be better than 30% higher than the first half.
According to the 10Q, management expects AMK sales in the second half of the year to be comparable to or slightly better than the first half of the year. I was hoping to see more from AMK in the second half of the year, but current guidance would put 2008 sales at least 26.5% ahead of 2007. Keep in mind that a majority of AMK sales are tied to GE’s H System turbines. I have not seen any press releases announcing any new installations.
GE’s 7FB and 9FB turbines utilize similar materials as the H System. I can’t help but wonder if AMK does any work on the 7FB or 9FB turbines.
If I take the worse case scenario for Q3 (Explosive sales down 20%, Oilfield Products sales of $7 mil and AMK sales slightly higher), I calculate sales of approximately $51.7 million in Q3 compared to Q2 sales of $63.2 million and year-ago sales of $42.1 million.
Gross Margin
As a result of fixed costs being spread over lower sales, management expects Q3 gross margin to be 28- 29% compared to 30.15% in Q2. While I am not excited about expectations for lower gross margin in Q3, I am not overly concerned. I believe the supply chain issues will be short-lived (in terms of impact on BOOM), sales will move higher and BOOM’s gross margin will improve accordingly. In fact, management expects Q4’s gross margin to be comparable to the first two quarters based on the expectation that Q4 sales will be equal to or somewhat better than sales in the first two quarters.
Amortization and Interest Expense
At the current exchange rate, management expects 2008 amortization expense to total $7.7 million. To date, BOOM has recorded $4.3 million in amortization relating to the acquisition of DYNA. The remaining $2.9 million in amortization expense should be spread evenly over the next two quarters. Amortization will be lower in the second half of the year because the intangibles related to the backlog have been fully amortized.
Management expects pre-tax income to be impacted by $5.5 million in interest expense. To date, BOOM has recorded roughtly half of its expected 2008 interest. The expected interest expense is not net of interest income. Last quarter BOOM recorded just under $100,000 in interest income. Given the $10.8 million increase in cash on the quarter, interest income in Q3 should exceed Q2.
Note: A stronger dollar will have a somewhat favorable impact on amortization and interest expense.
Taxes
For fiscal 2008, management now expects a blended effective tax rate of 32-33%. In the first half of the year, BOOM’s effective tax rate was 34.33%. To be honest, I am not sure how or when the adjustment will occur to bring the overall effective tax rate down to 32-33%. Nonetheless, the effective tax rate in Q3 and/or Q4 should be below the 32-33% range.
Supply Chain Woes
Déjà vu
Just over a year-ago, when BOOM reported Q4 and full-year 2006 results, management warned that Q1 2007 would be negatively impacted by supply chain constraints. Given the tightness in the supply chain at the time, management guided for Q1 revenues of $26 million compared to Q4 revenues of $35.7 million. The market was not particularly fond of the guidance and sent shares of BOOM lower.
Ultimately, BOOM reported Q1 2007 revenues of $33.1 million, significantly better than expectations. On the Q1 2007 conference call, management said they received a shipment of materials late in the quarter and the Mt. Braddock team worked diligently to process orders before the end of the quarter. Sound familiar? As Q1 2007 results were significantly better than management’s expectations and BOOM was still working through its supply chain issues, management said Q2 revenues would approximate Q1 revenues. Once again, the market didn’t like the guidance and sent shares of BOOM lower.
On July 26, 2007, BOOM reported Q2 revenues that were slightly better than expected and earnings that were 16% better than Q1. In the earnings release, management said there was still tension in the supply chain for carbon-steel backer plates but they expected very strong results in the second half of the year.
BOOM delivered as expected on the second half of 2007. Despite the setbacks after BOOM reported Q1 and Q2 results, shares of BOOM were up over 100% in2007.
The Point
This isn’t the first time management has had to deal with supply chain constraints. In 2007 management dealt with the same issue by expanding their supplier network, bringing some of the finish work in-house and eventually re-aligning the timing of raw material shipments with the timing of orders. Having gone through this issue in the past and successfully working through it, management is in a better position to deal with it today.
The supply chain doesn’t have to improve in order for things to get better for BOOM; it only has to stabilize! There was still tension in the supply chain at the end of Q2 2007 and BOOM reported exceptional Q3 and Q4 results. As things stabilize management will once again re-align the timing of raw material shipments with the timing of orders. If you listen to the Q&A session of the most recent conference call, management tried making this point clear to one of the callers. Furthermore, management said that the tightness in the supply chain was probably past its peak, they didn’t expect it to get worse and their might be some modest, though not dramatic, improvement. Again, the situation only has to stabilize.
In 2007, tightness in the carbon-steel supply chain pushed some revenues from Q1 and Q2 into Q3 and Q4. I expect current tightness in the carbon-steel supply chain to shift some revenues from Q2 and Q3 into Q4 and Q1. To be honest, I am just not all that concerned about a modest shift in the timing of revenues. Demand for explosion clad remains strong, the outlook is positive and BOOM is well positioned for the future.
The Hidden Benefit
When supplies are tight and demand is high, prices go up. Given the strong demand and limited supply of carbon-steel backer plates, prices are high and have been moving up.
BOOM systematically passes down the cost of metals to its customers. When metal prices increase, typically there is no deterioration in BOOM’s gross margin (noted on CC). As such, pure gross profit dollars will increase with higher metal prices.
Note: BOOM has to be careful when carbon-steel prices are going up and clad metal prices are going down. Otherwise, the economics might push customers toward solid metal as opposed to explosion clad.
Orders, Backlog, Demand (Explosive Metalworking only)
By my calculations, BOOM booked $53.0 million in new orders in Q2 compared to $42.4 million in the prior quarter and $49.9 million in the year-ago quarter. In the year-ago quarter, BOOM booked a large, $8.3 million, order.
As a result of strong bookings in Q2, BOOM’s backlog increased to $104.9 million compared to $102.1 million in the prior quarter and $84.7 million in the year-ago quarter.
If Q3 revenues are 20% less than Q2 and Q3 booking are in-line with Q2 bookings, BOOM’s backlog will grow to over $118 million.
In reading the press release and listening to the conference call, management is very upbeat about the future prospects of the company. On the call management described its “hot list,” list of potential contracts, as being very robust and spanning a broad array of industries. Based on conversations with end-market customers and the pipeline of projects schedule scheduled for construction in coming years and beyond, management is “very optimistic” about BOOM’s long-term growth prospects.
Bookings in Q1 and Q2 were strong. Despite the strength, management had plenty to say about the timing of orders and how some projects have gone back for re-approval after increases in certain input costs. Call me crazy but I think there are a couple of good sized projects that management expects to book in the near future. I have noticed a number of large projects in BOOM's end-markets that are at or near the procurement phase. I made the same comment after last quarter and there were no large contract announcements. Nonetheless, I still think they are coming (sounds like I am waiting for aliens to land). Keep in mind that BOOM’s new unofficial threshold of significance is now $10 million.
New Markets
In his opening conference call remarks, Yvon Cariou, BOOM’s President and CEO, said the Explosive Metalworking division received a sizeable hydromet contract for processing gold and multiple orders from the solar sector for plates used in the production of highly purified silicon. During the Q&A session of the call, John Banker, BOOM’s VP of Sales & Marketing, provided some additional information on the two orders.
Unlike this contract, past hydromet contracts have been for HPAL nickel projects. According to Mr. Banker, a portion of the hydromet gold contract was for a new application for explosion clad. The other portion of the hydromet contract was for a POX autoclave. I don’t know if the autoclave portion of the contract was for the shell or internal components. I am guessing it was for the internal components but I honestly have no idea. I always thought POX autoclaves were constructed of acid brick lined steel and the internals were solid titanium. Either way, it seems to me that the autoclave portion of the contract would also be a new use. Again, I don’t know for sure.
The sum of the hydromet contracts was $8 million.
The solar sector contract was the second announced contract for this particular end-market. The last announced solar contract was an $11 million contract. The sum of the solar contracts discussed on the conferece call was $8 million. There are a few silicone expansion projects that I know of in the U.S., China and S. Korea. I have to look at the projects closer to see what project might have been responsible for the contract. On a side note, Hemlock Semiconductor is currently selecting a site for a good sized expansion projects.
In the Q&A session, management said they could have issued a press release announcing the gold and silicone contracts but decided against it. They decided against issuing a press release because they did not want to raise expectations beyond what they were. While it would have been nice to have seen a press release, I think management did the right thing.
Some Quick Notes on Financials
BOOM’s organice revenue growth was over 35%.
Gross profit margins were down as a result of product mix in the U.S, and lower margin contribution from DYNA. While gross margins are expected to be lower in Q3, margins are expected to increase with the expected increase in sales in Q4. In my opinion, there is plenty of room for gross margin improvement. As sales increase, BOOM will be in a better position to leverage its fixed cost. Additionally, I expect to see more favorable pricing in Europe over the course of the next year.
Inventories in the quarter were down 12.3%. The lower inventory levels at the end of the quarter are reflective of the supply chain situation discussed in detail above.
Receivables increased 12.3% over last quarter compared to an 8.2% increase in sales. The somewhat faster increase in receivables relative to sales is likely the result of the work done at the end of the quarter to process a shipment of materials received near the end of the quarter.
Cash flow from operations was $4.6 million in the quarter compared to net income of $4.6 million. At a quick glance, it looks like non-cash amortization and depreciation expense along with a reduction in inventories was offset by an increase in receivables, a reduction in notes payables and an increase in prepaid expenses.
For those concerned about BOOM’s debt load, BOOM has a principal payment, equivalent to 10% of the outstanding principal balance, due in November. Additionally, BOOM has a principal payment due after the end of the year that is based on a calculation of excess cash flow defined in financing agreements.
BOOM’s cash increased $10.8 million on the quarter compared to a $6.3 million increase in borrowing (LT and current portion of LT debt and LOC).
Conclusion
I am on page 7 of this post so I think I am done even though I have more to say. Q2 results were strong and better than expected. BOOM took a beating after reporting earnings because of the guidance for the second half of the year. While it is going to take some time to work through the supply chain issues, I think it is just a matter of time. Once management adjusts for the longer lead times, I expect things to improve significantly.
Regards,
Tuff
Disclosure
I own shares of BOOM and I have an open order to purchase additional shares.
Links
Q1 Earnings Release
Q1 Conference Call Transcript
Q2 Earnings Release
Q2 10Q
GE H System Turbine
GE 7FB and 9FB Turbines
(NASDAQ: BOOM)
Monday, May 5, 2008
BOOM Q1 2008 Conference Call
Below are my notes from Dynamic Material Corporation’s Q1 2008 conference call. It is probably more accurate to describe my notes as quotes but let’s stick with calling them notes.
I intended to save my commentary for a more detailed analysis that I was planning on posting later this week but I got a little carried away with my comments at the end of this post.
Opening Comments – Yvon Cariou, CEO and President
Order bookings at our Explosion Welding segment remained strong and this allowed us to raise our high watermark on our order backlog to $102 million
There is considerable demand within all primary end markets
Both refining and upstream oil & gas have been especially active sectors
Global investment activity in large capital equipment projects remains very active and this is evident in the broad range of orders we are booking into backlog
There are new prospect that are regularly appearing on our hot list
Higher energy and input costs have fueled significant price increases for high quality carbon steel. In addition, strong end-market demand is putting added tension on the carbon steel supply chain.
In recent years, we have been working to strengthen our relationship with suppliers and to broaden our sourcing network.
While pricing and supply issues are presenting our industry and our end markets with some renewed challenges, the underlying fundamentals remain very positive
Demand for our products is strong, diverse and global in nature
As the worldwide leader in the explosion welding industry, we remain very optimistic about our long-term prospects.
Financial Results – Rick Santa, CFO and Vice President
Sales for the quarter were $58.4 million for an increase of $25.3 million over Q1 last year. $15.2 million of the increase was attributable to the DYNA acquisition
Gross margins were lower as a result of: 1) the higher proportion of explosion welding revenue out of Europe, where margins have been historically lower than our U.S. operations; 2) lower margin sales contribution from our new Oilfield Products segment.
Most notable Q over Q changes in expense items were related to our DYNA acquisition
Amortization – There was no amortization or interest expense in last year’s Q1. This year Q1 included amortization expense related to the acquired intangible asses of $2.4 million or 4% of revenue.
Net Interest Expense– This Q1 was $1 million (the year-ago Q had positive net interest)
Adjusted EBITDA was up 66% ($13.5 million from $8.2 million last year)
Guidance – We expect Q2 sales and earnings results to be comparable to Q1. We expect we will meet the full year guidance we provided at the end of last quarter assuming we receive customer orders under anticipated timeframes and metal supplies are adequate to meet our 2008 production goals.
We obviously believe our results in the second half of fiscal 2008 will be significantly stronger than those of the first half.
Q&A – My notes from the Q&A includes all of the “A”s but none of the “Q”s. I have arranged the answers by topic and not by the order that they were given.
Supply Chain Constraints (Carbon Steel)
Renewed and increased tension on the supply chain
Suppliers have strong demand in their natural end markets and from other areas such as the DoD in the U.S. Also, with the USD situation, suppliers have more opportunity to export.
Early in this phase of tightness
Not sure if it will affect anything. All we are saying is that we sense new tightness on the capacity of steel suppliers
We have been and remain active in diversifying our steel providers. We have been diversifying our mix of sources from distributors to mills. Our teams have been very creative with this. We may be able to swell (?) with this as we have in the past but we just think it is fair to present (to shareholders) this added stress on our situation…”that is all.”
Higher Metal Prices (Carbon Steel)
Expecting more price increases
Price increases have not been a negative for us. Traditionally price increases have been more of an opportunity than a problem. We are just taken back by the magnitude.
It is structural….it is beyond supply and demand…it is a structural shift
The magnitude of price increases in the pipeline is uncharted territory
Not in a position today to have a definitive view on how the price increases will impact business
Price increases are not having an impact on quoting activity and we are not seeing things being delayed or pushed back
The total cost of steel in a large project is significant but not the major factor. Even if the price of steel was to double, I am not sure it would alter in a significant way how those projects would be executed. In a total project, the base material is minor.
Not protected against surcharges. There are some cases where previously committed fixed priced (contracts) are being revised unilaterally…so we are dealing with that. As far as going forward there will be surcharges so we are in the process of establishing our protocol there. In our business model we are blessed in the way that we pass-on ALL metal increases. Obviously we are going to try hard to continue that.
Margins and Expenses
Higher sales in the second half of 2008 should result in more efficient absorption of manufacturing overhead (= higher margins).
On the pricing side…once the DYNA backlog gets worked-off, we should see improved margins from the DYNAplat division of DYNAenergetics.
Don’t want to give any specific guidelines on the timing of “more disciplined pricing in Europe” because there are clients and accounts with a history and we don’t want to go in and do the wrong thing but certainly I would hope that by 2009 and 2010 there should be some movement there, but we are very active in spotting opportunities.
Newer equipment (see CapEx below) in Europe will translate into higher capacity and productivity
G&A expenses were at about 10% of sales. It is reasonable to use that % going forward but hopefully it will come down with the increase in revenue we expect in the second half of 2008.
Interest guidance of $5 million is just expense and not net of interest income. Interest income in Q1 was on the high side because they collected interest on a customer account (while the interest collected on the customer account is non-recurring, cash levels are higher now than they were at the beginning of the year).
“Other expenses” on the income statement relate to foreign exchange losses from European operations.
We give guidance for a tax rate of 36-37% because the proportion of sales between the U.S. vs. Europe as well as between Germany vs France or Sweden can fluctuate. We don’t expect the tax rate to fall below 36%.
Explosion Clad vs. Other
Rollbond, weld-overlay, and explosion clad are not interchangeable. They each have their own domains. When the various cladding methods compete it is on the bond areas of the domain. Most of the time when it is explosion welding it is going to stay that way.
(In other words, explosion clad is a viable substitute for roll-bond and weld-overlay but rollbond and weld-overlay are not normally a viable substitute for explosion clad.)
Guidance
Amortization – same amortization in Q2 as Q1. Amortization should fall off in second half (after BOOM works through the inherited backlog of DYNAplat). Amortization should be $2.3 million in Q2, which is adjusted upward for the higher foreign exchange rate.
There is no slowdown in number or level of quotes. Absolutely no slowdown. We remain optimistic that all of that quoting activity will transform into bookings.
The feel of quotations is extremely good.
The near-term project is of very good quality (This comments seems kind of strange. Was Mr. Cariou referring to a specific project? The comment was made at the 15:35 mark on the call. Have a listen and let me know what you think.)
We need the backlog to step-up by the end of Q2 in order to deliver the results we expect to deliver in the second half.
With the booking activity in April and the quoting activity that is on-going, we were comfortable (when we issued the Q1 press release) with the guidance that we provided at the end of last Q (as such, we are still standing by the full-year guidance).
CapEx and Capacity
$10 million CapEx budget for 2008 includes a lot of European divisions. There is some building expansions and replacement of older generation, large pieces of equipment with new generation (equipment) so that will translate into capacity and also productivity.
Mt. Braddock capacity utilization is probably somewhere around the mid 70% level
Acquisition
Not a lot of surprises from the acquisition. Very comfortable that the (DYNA) clad team is quickly embracing some of the DMC way of life (pricing, quoting, fast servicing customer, analyzing markets, bringing new things on a couple market applications that we didn’t know about). They have a couple of things in their operations related to explosives that we like very much.
We have a couple of interesting JVs that we are not in a position to talk about too much yet. Just to indicate, Canada and Russia is the location for those things. We’re trying to see how our general strategy can be fielded for that division
We would like to see more financial impact immediately but the fundamentals, the team, the operations, their potential, their markets….we feel rather encouraged by that.
Other Divisions
Oilfield Products - Sales from Oilfield Products division was slower than expected in Q1. That business is impacted by the general flow of orders and the timing of large orders, like our cladding business. Management at the Oilfield Products division is optimistic they can deliver against full-year expectations.
AMK – expect regular increases in sales over the year. The conditions seem to be in place for us to have a significant up-tick but we will see….we have been burned in the past. Certainly this level will stay or go up. We don’t anticipate it will slow down. Can it go up much faster, much higher…..it is too early to say.
Quick Thoughts
Countless times on the conference call management referenced the strength they are seeing in their end markets and that the level of quoting activity remains very strong. I recently started an inventory of projects in BOOM’s end markets that are likely to appear on BOOM’s “hot list.”. In looking at my inventory, I have no doubt BOOM is busy quoting not only a large number of projects but also some very large projects.
While there are some unknowns and risks associated with the rising price of carbon steel and the tightness in the supply chain, management continues to believe they will achieve their full-year guidance for 2008. Furthermore, BOOM has been working for the past year or more towards expanding their supplier network and bringing some of the prep work in-house. As for higher prices, Mr. Cariou said that rising metal prices has traditionally provided more of an opportunity than a problem. These risks should be kept in mind but also in perspective. Management has given no indication that these risks are in anyway impacting the level of activity that they are seeing in the market place and cannot say if they will have any impact going forward. Management merely felt it was reasonable to inform the investment community of what they are seeing in the marketplace.
If management is expecting a significant improvement in the second half of the year, does it really matter if Q2 results are similar to Q1? And, were Q1 results really that bad? After all, BOOM generated $7.3 million in operational cash flow, added about $8.5 million in cash to the balance sheet, and increased EBITDA 62% (I prefer to use EBITDA instead of Adjusted EBITDA, which increased 66 %.).
BOOM is the worldwide leader in explosion clad. BOOM recently acquired its only significant competitor in Europe and the only competition that remains is from a company in Japan that mostly operates and competes locally. I encourage any investor interested in BOOM to look at BOOM’s end markets and consider the number and size of some of the projects that are planned for the next 5 years or more.
The most recent earnings report does not change my expectations for BOOM in the long-term. Sure my investment is worth a little less today than it was last Thursday but I am already looking to the first half of next year. Management is expecting the second half of 2008 to be significantly stronger than the first half of 2008 and I would be willing to bet that trend continues into the first half of 2009. When we get into the first half of 2009, the year-over-year comparisons should be impressive.
If you are a long-term investor, forget about the analysts that can only focus on one quarter at a time. Forget about the analysts that call into the conference calls looking for management to build-out their models for next quarter. Look at the big picture and you will see a strong management team that is preparing BOOM, the market leader in explosion welding technology, for the growth that lies ahead.
Well, that is the end of my little pep talk. I intended on making only a few quick comments…so much for that idea. For fun let’s see when the analysts start telling us to get back into the BOOM. Something tells me it will be at a higher price than what they told us to get out at. Although, I have to admit, Sidoti made a good call prior to earnings.
I hoped this helped. I have to go through the 10Q in more detail tomorrow.
Regards,
Tuff
Links
Q1 Earnings Report
Q1 Conference Call
I intended to save my commentary for a more detailed analysis that I was planning on posting later this week but I got a little carried away with my comments at the end of this post.
Opening Comments – Yvon Cariou, CEO and President
Order bookings at our Explosion Welding segment remained strong and this allowed us to raise our high watermark on our order backlog to $102 million
There is considerable demand within all primary end markets
Both refining and upstream oil & gas have been especially active sectors
Global investment activity in large capital equipment projects remains very active and this is evident in the broad range of orders we are booking into backlog
There are new prospect that are regularly appearing on our hot list
Higher energy and input costs have fueled significant price increases for high quality carbon steel. In addition, strong end-market demand is putting added tension on the carbon steel supply chain.
In recent years, we have been working to strengthen our relationship with suppliers and to broaden our sourcing network.
While pricing and supply issues are presenting our industry and our end markets with some renewed challenges, the underlying fundamentals remain very positive
Demand for our products is strong, diverse and global in nature
As the worldwide leader in the explosion welding industry, we remain very optimistic about our long-term prospects.
Financial Results – Rick Santa, CFO and Vice President
Sales for the quarter were $58.4 million for an increase of $25.3 million over Q1 last year. $15.2 million of the increase was attributable to the DYNA acquisition
Gross margins were lower as a result of: 1) the higher proportion of explosion welding revenue out of Europe, where margins have been historically lower than our U.S. operations; 2) lower margin sales contribution from our new Oilfield Products segment.
Most notable Q over Q changes in expense items were related to our DYNA acquisition
Amortization – There was no amortization or interest expense in last year’s Q1. This year Q1 included amortization expense related to the acquired intangible asses of $2.4 million or 4% of revenue.
Net Interest Expense– This Q1 was $1 million (the year-ago Q had positive net interest)
Adjusted EBITDA was up 66% ($13.5 million from $8.2 million last year)
Guidance – We expect Q2 sales and earnings results to be comparable to Q1. We expect we will meet the full year guidance we provided at the end of last quarter assuming we receive customer orders under anticipated timeframes and metal supplies are adequate to meet our 2008 production goals.
We obviously believe our results in the second half of fiscal 2008 will be significantly stronger than those of the first half.
Q&A – My notes from the Q&A includes all of the “A”s but none of the “Q”s. I have arranged the answers by topic and not by the order that they were given.
Supply Chain Constraints (Carbon Steel)
Renewed and increased tension on the supply chain
Suppliers have strong demand in their natural end markets and from other areas such as the DoD in the U.S. Also, with the USD situation, suppliers have more opportunity to export.
Early in this phase of tightness
Not sure if it will affect anything. All we are saying is that we sense new tightness on the capacity of steel suppliers
We have been and remain active in diversifying our steel providers. We have been diversifying our mix of sources from distributors to mills. Our teams have been very creative with this. We may be able to swell (?) with this as we have in the past but we just think it is fair to present (to shareholders) this added stress on our situation…”that is all.”
Higher Metal Prices (Carbon Steel)
Expecting more price increases
Price increases have not been a negative for us. Traditionally price increases have been more of an opportunity than a problem. We are just taken back by the magnitude.
It is structural….it is beyond supply and demand…it is a structural shift
The magnitude of price increases in the pipeline is uncharted territory
Not in a position today to have a definitive view on how the price increases will impact business
Price increases are not having an impact on quoting activity and we are not seeing things being delayed or pushed back
The total cost of steel in a large project is significant but not the major factor. Even if the price of steel was to double, I am not sure it would alter in a significant way how those projects would be executed. In a total project, the base material is minor.
Not protected against surcharges. There are some cases where previously committed fixed priced (contracts) are being revised unilaterally…so we are dealing with that. As far as going forward there will be surcharges so we are in the process of establishing our protocol there. In our business model we are blessed in the way that we pass-on ALL metal increases. Obviously we are going to try hard to continue that.
Margins and Expenses
Higher sales in the second half of 2008 should result in more efficient absorption of manufacturing overhead (= higher margins).
On the pricing side…once the DYNA backlog gets worked-off, we should see improved margins from the DYNAplat division of DYNAenergetics.
Don’t want to give any specific guidelines on the timing of “more disciplined pricing in Europe” because there are clients and accounts with a history and we don’t want to go in and do the wrong thing but certainly I would hope that by 2009 and 2010 there should be some movement there, but we are very active in spotting opportunities.
Newer equipment (see CapEx below) in Europe will translate into higher capacity and productivity
G&A expenses were at about 10% of sales. It is reasonable to use that % going forward but hopefully it will come down with the increase in revenue we expect in the second half of 2008.
Interest guidance of $5 million is just expense and not net of interest income. Interest income in Q1 was on the high side because they collected interest on a customer account (while the interest collected on the customer account is non-recurring, cash levels are higher now than they were at the beginning of the year).
“Other expenses” on the income statement relate to foreign exchange losses from European operations.
We give guidance for a tax rate of 36-37% because the proportion of sales between the U.S. vs. Europe as well as between Germany vs France or Sweden can fluctuate. We don’t expect the tax rate to fall below 36%.
Explosion Clad vs. Other
Rollbond, weld-overlay, and explosion clad are not interchangeable. They each have their own domains. When the various cladding methods compete it is on the bond areas of the domain. Most of the time when it is explosion welding it is going to stay that way.
(In other words, explosion clad is a viable substitute for roll-bond and weld-overlay but rollbond and weld-overlay are not normally a viable substitute for explosion clad.)
Guidance
Amortization – same amortization in Q2 as Q1. Amortization should fall off in second half (after BOOM works through the inherited backlog of DYNAplat). Amortization should be $2.3 million in Q2, which is adjusted upward for the higher foreign exchange rate.
There is no slowdown in number or level of quotes. Absolutely no slowdown. We remain optimistic that all of that quoting activity will transform into bookings.
The feel of quotations is extremely good.
The near-term project is of very good quality (This comments seems kind of strange. Was Mr. Cariou referring to a specific project? The comment was made at the 15:35 mark on the call. Have a listen and let me know what you think.)
We need the backlog to step-up by the end of Q2 in order to deliver the results we expect to deliver in the second half.
With the booking activity in April and the quoting activity that is on-going, we were comfortable (when we issued the Q1 press release) with the guidance that we provided at the end of last Q (as such, we are still standing by the full-year guidance).
CapEx and Capacity
$10 million CapEx budget for 2008 includes a lot of European divisions. There is some building expansions and replacement of older generation, large pieces of equipment with new generation (equipment) so that will translate into capacity and also productivity.
Mt. Braddock capacity utilization is probably somewhere around the mid 70% level
Acquisition
Not a lot of surprises from the acquisition. Very comfortable that the (DYNA) clad team is quickly embracing some of the DMC way of life (pricing, quoting, fast servicing customer, analyzing markets, bringing new things on a couple market applications that we didn’t know about). They have a couple of things in their operations related to explosives that we like very much.
We have a couple of interesting JVs that we are not in a position to talk about too much yet. Just to indicate, Canada and Russia is the location for those things. We’re trying to see how our general strategy can be fielded for that division
We would like to see more financial impact immediately but the fundamentals, the team, the operations, their potential, their markets….we feel rather encouraged by that.
Other Divisions
Oilfield Products - Sales from Oilfield Products division was slower than expected in Q1. That business is impacted by the general flow of orders and the timing of large orders, like our cladding business. Management at the Oilfield Products division is optimistic they can deliver against full-year expectations.
AMK – expect regular increases in sales over the year. The conditions seem to be in place for us to have a significant up-tick but we will see….we have been burned in the past. Certainly this level will stay or go up. We don’t anticipate it will slow down. Can it go up much faster, much higher…..it is too early to say.
Quick Thoughts
Countless times on the conference call management referenced the strength they are seeing in their end markets and that the level of quoting activity remains very strong. I recently started an inventory of projects in BOOM’s end markets that are likely to appear on BOOM’s “hot list.”. In looking at my inventory, I have no doubt BOOM is busy quoting not only a large number of projects but also some very large projects.
While there are some unknowns and risks associated with the rising price of carbon steel and the tightness in the supply chain, management continues to believe they will achieve their full-year guidance for 2008. Furthermore, BOOM has been working for the past year or more towards expanding their supplier network and bringing some of the prep work in-house. As for higher prices, Mr. Cariou said that rising metal prices has traditionally provided more of an opportunity than a problem. These risks should be kept in mind but also in perspective. Management has given no indication that these risks are in anyway impacting the level of activity that they are seeing in the market place and cannot say if they will have any impact going forward. Management merely felt it was reasonable to inform the investment community of what they are seeing in the marketplace.
If management is expecting a significant improvement in the second half of the year, does it really matter if Q2 results are similar to Q1? And, were Q1 results really that bad? After all, BOOM generated $7.3 million in operational cash flow, added about $8.5 million in cash to the balance sheet, and increased EBITDA 62% (I prefer to use EBITDA instead of Adjusted EBITDA, which increased 66 %.).
BOOM is the worldwide leader in explosion clad. BOOM recently acquired its only significant competitor in Europe and the only competition that remains is from a company in Japan that mostly operates and competes locally. I encourage any investor interested in BOOM to look at BOOM’s end markets and consider the number and size of some of the projects that are planned for the next 5 years or more.
The most recent earnings report does not change my expectations for BOOM in the long-term. Sure my investment is worth a little less today than it was last Thursday but I am already looking to the first half of next year. Management is expecting the second half of 2008 to be significantly stronger than the first half of 2008 and I would be willing to bet that trend continues into the first half of 2009. When we get into the first half of 2009, the year-over-year comparisons should be impressive.
If you are a long-term investor, forget about the analysts that can only focus on one quarter at a time. Forget about the analysts that call into the conference calls looking for management to build-out their models for next quarter. Look at the big picture and you will see a strong management team that is preparing BOOM, the market leader in explosion welding technology, for the growth that lies ahead.
Well, that is the end of my little pep talk. I intended on making only a few quick comments…so much for that idea. For fun let’s see when the analysts start telling us to get back into the BOOM. Something tells me it will be at a higher price than what they told us to get out at. Although, I have to admit, Sidoti made a good call prior to earnings.
I hoped this helped. I have to go through the 10Q in more detail tomorrow.
Regards,
Tuff
Links
Q1 Earnings Report
Q1 Conference Call
Wednesday, March 26, 2008
Just Another Great Q
I have to admit that I was pleasantly surprised by the results that Hurco reported on February 28, 2008. Congrats to all the longs that stayed long despite all the market volatility.
Sales and Bookings
Sales in Q1 of fiscal 2008 increased $20 million, or 30%, to $60.9 million from $46.9 million in the year-ago quarter. Sequentially, sales increased 21.6%. In my Hurco financial model, I have quarterly results going back 15 quarters. Looking at my model, the 21.6% sequential in sales was the largest sequential increase.
In Q4 2007, Hurco’s bookings were a record $54.8 million and that set the stage for the strong sales in Q1 2008. Bookings in Q1 2008 set another record of $61.2 million and would seemingly set the stage for strong sales in Q2. Again looking at my model, the sequential increase in bookings the last two quarters were the best back-to-back quarters for sequential increases going back to the same two quarters two years ago. The sequential increases in both instances can likely be attributed to the EMO.
Here are my list of reasons behind Hurco’s recent growth in sales and bookings:
1) The Exposition Mondiale de la Machine Outil, or EMO, is the largest trade fair for the machine tool industry. It is held every other year around the end of September in Hannover, Germany. Aside from giving Hurco the opportunity to demonstrate new products, the EMO has historically accelerated Hurco’s sales and bookings in subsequent quarters.
2) Over the past couple of years, Hurco has been expanding its geographic footprint with both sales offices and manufacturing facilities. In the Q4 press release, Mr. Doar, Hurco’s CEO, highlighted the importance of the company’s global strategy and how it has contributed to the company’s recent success. About a year-ago we heard the first rumblings about India. Today, we heard some rumblings about Eastern Europe. Despite the slowdown in the U.S., Hurco is reaping the benefits of its global strategy and footprint. International sales were at their highest level this quarter than any other quarter in my model.
In my conversation with Mr. Oblazney, Hurco’s CFO, a couple of quarters back, I asked him about Hurco’s activity in China and India.
Given the difficulty in establishing a business in India, Mr. Oblazney was a little reserved with his expectations for near-term growth in India. As such, it was nice to see that India added to sales in the APAC region. Note that APAC sales were up 29% YoY but down 24% from the prior quarter. As the APAC region only accounts for a few million in sales per quarter, the quarterly fluctuations are to be expected and investors should look for a long-term trend.
3) Hurco released the Winmax control system in 2007. Prior to the release of Winmax, management was seemingly pretty excited about this new control system and made specific mention of it in a couple of press releases. For Hurco management, any press release is a big deal. Management very rarely issues press releases so when they issue a press release and show a hint of excitement, investor take notice. Around the time Winmax was released, Royce and Associates bought a large number of Hurco shares. I speculated that this purchase was at least partially tied to Royce’s expectations for Winmax to boost sales.
Going back to my conversation with Mr. Oblazney, Winmax wasn’t expected to directly boost revenues but it was expected to significantly improve the competitiveness of all Hurco’s products. While Wimnax was released in the U.S. sometime around early May, the EMO marked the global rollout. Based on Hurco’s recent success, Winmax seems to be living up to management’s expectations.
4) In 2007, Hurco also introduced its VMX84, the largest vertical machining center in its product lineup. I am pretty sure this was one of the products on display at the EMO. Note that management recognized sales of higher-end VMX machines as a driver of sales and margins on the quarter.
5) About a year-ago, I wrote my first blog entry on Hurco. In that blog entry, I highlighted the weak U.S. dollar as having a favorable impact on Hurco’s financial results. I also highlighted the weakening dollar as one of the reasons I expected sales to continue to accelerate. In the last few quarters, we have been seeing the benefits of our poor beaten down dollar. In the most recent quarter, the dollar had a favorable impact on sales of $4.6 million. Keep in mind that the favorable impact on sales is offset somewhat by foreign operating and manufacturing expenses.
Margins
Gross margins increased to 40.8% from 37.9% in the prior quarter and 37.0% the year-ago quarter. Management credited the nearly 400 basis point improvement in gross margins to increased sales of higher margin VMX sales in Europe and the favorable impact on the dollar.
SG&A as a percent of sales was 20.31% compared to 22.43% last quarter and 19.43% in the year-ago quarter. The percentage decrease from last quarter was likely the result of fixed costs being spread over a higher level of sales. The dollar increase in SG&A spending of $3.1 million over the year-ago level was the result of increased spending on sales, development and market expansion. Translation of foreign operations back to USD also contributed to the dollar increase in earnings.
Operating margins increased to 20.5% from 15.5% in the prior quarter and 17.22% in the year-ago quarter. Is that right, did they really increase operation margins 500 basis points over Q4 2007? While Q4 2007 operating margins were abnormally low, Q1 2008 operating margins still represent a very nice sequential increase. The improvement in operating margins were the result of the factors listed above.
Hurco’s profit margin of 12.81% for the quarter was an increase of 150 basis points over the prior quarter and 130 basis points over the year-ago quarter. The less drastic jump in sequential profit margins compared to operating margins was due to the higher tax rate in Q1 2008 relative to Q4 2007. The implied tax rate in Q1 was 36.7% compared to 30.3% in Q4.
According to my data, the gross and operating margins for the quarter were records. The profit margin for the quarter was not a record because of the benefit of loss carry-forward in Q4 of 2005.
EPS
I am calculating $3.62 in EPS over the trailing twelve months.
Balance Sheet
The balance sheet looks strong so I won’t go into a lot of detail. Hurco has no long-term debt and $35 million in cash and investments, or nearly $5 per share. Hurco’s strong balance sheets puts it in a healthy position to weather a downturn in the global economy.
DSOs increased to 43 days from 33 days in Q4. While the increase in DSOs might be a bit of concern for some, the 33 days in Q4 was an anomaly and likely a matter of timing of sales, billings and receipts. Looking over the past 15 quarters, the 43 days was easily on the low end of the historical range.
Inventory turns remained flat a 2.00.
Cash Flow Statement
Operational cash flow in the quarter was negative by about $3.7 million. The negative operational cash flow was largely due to the increase in receivables and to a lesser extent the increase in inventories. Given the acceleration of sales in the quarter, I am not overly concerned about either of these items. The increase in receivables was likely the result of both the jump in sales and the timing of shipments, billings, and receipts. Nonetheless, this is something worth watching in the coming quarters.
Other Thoughts
Hurco would seemingly make a nice acquisition for a foreign machine tool manufacturer for a number of reasons:
1) Strong balance sheet
2) High level of international sales
3) Winmax could be leveraged across the acquirer’s products
4) Strength of foreign currency relative to the dollar would make Hurco cheaper
5) Progress already being made in emerging markets (China, India, Eastern Europe, etc.)
I am not sure a buyout would be in the best interest of long-term shareholders but the prospect is at least interesting.
As an alternative to being acquired, Hurco could be on the prowl for an acquisition. The recently announced mixed shelf and the language in the recent 10Q suggest that an acquisition is a very real possibility.
Here is the language from the Executive Overview section of the 10Q:
“Our introduction of new, technologically advanced products, combined with our expansion into new markets, has resulted in our significant growth over the last several years. In addition to this strong organic growth, our recent performance and current financial strength also provide us with the capability to pursue opportunistic acquisitions that are consistent with our strategic focus on expanding our product line and entering new markets.”
And, from the Liquidity and Capital Resources section of the 10Q:
“Although we have not made any significant acquisitions in the recent past, we continue to receive information on businesses and assets, including intellectual property assets that are being sold. Should attractive opportunities arise, we believe that our earnings, cash flow from operations, borrowings under our bank credit facilities, and the sale of securities from our shelf registration would provide sufficient resources to finance any such possible acquisitions.”
Disclosure
I am a long-term holder of Hurco. As always do your own DD and don’t rely on my BS as a basis for making investment decision.
Good luck!
Tuff
Sales and Bookings
Sales in Q1 of fiscal 2008 increased $20 million, or 30%, to $60.9 million from $46.9 million in the year-ago quarter. Sequentially, sales increased 21.6%. In my Hurco financial model, I have quarterly results going back 15 quarters. Looking at my model, the 21.6% sequential in sales was the largest sequential increase.
In Q4 2007, Hurco’s bookings were a record $54.8 million and that set the stage for the strong sales in Q1 2008. Bookings in Q1 2008 set another record of $61.2 million and would seemingly set the stage for strong sales in Q2. Again looking at my model, the sequential increase in bookings the last two quarters were the best back-to-back quarters for sequential increases going back to the same two quarters two years ago. The sequential increases in both instances can likely be attributed to the EMO.
Here are my list of reasons behind Hurco’s recent growth in sales and bookings:
1) The Exposition Mondiale de la Machine Outil, or EMO, is the largest trade fair for the machine tool industry. It is held every other year around the end of September in Hannover, Germany. Aside from giving Hurco the opportunity to demonstrate new products, the EMO has historically accelerated Hurco’s sales and bookings in subsequent quarters.
2) Over the past couple of years, Hurco has been expanding its geographic footprint with both sales offices and manufacturing facilities. In the Q4 press release, Mr. Doar, Hurco’s CEO, highlighted the importance of the company’s global strategy and how it has contributed to the company’s recent success. About a year-ago we heard the first rumblings about India. Today, we heard some rumblings about Eastern Europe. Despite the slowdown in the U.S., Hurco is reaping the benefits of its global strategy and footprint. International sales were at their highest level this quarter than any other quarter in my model.
In my conversation with Mr. Oblazney, Hurco’s CFO, a couple of quarters back, I asked him about Hurco’s activity in China and India.
Given the difficulty in establishing a business in India, Mr. Oblazney was a little reserved with his expectations for near-term growth in India. As such, it was nice to see that India added to sales in the APAC region. Note that APAC sales were up 29% YoY but down 24% from the prior quarter. As the APAC region only accounts for a few million in sales per quarter, the quarterly fluctuations are to be expected and investors should look for a long-term trend.
3) Hurco released the Winmax control system in 2007. Prior to the release of Winmax, management was seemingly pretty excited about this new control system and made specific mention of it in a couple of press releases. For Hurco management, any press release is a big deal. Management very rarely issues press releases so when they issue a press release and show a hint of excitement, investor take notice. Around the time Winmax was released, Royce and Associates bought a large number of Hurco shares. I speculated that this purchase was at least partially tied to Royce’s expectations for Winmax to boost sales.
Going back to my conversation with Mr. Oblazney, Winmax wasn’t expected to directly boost revenues but it was expected to significantly improve the competitiveness of all Hurco’s products. While Wimnax was released in the U.S. sometime around early May, the EMO marked the global rollout. Based on Hurco’s recent success, Winmax seems to be living up to management’s expectations.
4) In 2007, Hurco also introduced its VMX84, the largest vertical machining center in its product lineup. I am pretty sure this was one of the products on display at the EMO. Note that management recognized sales of higher-end VMX machines as a driver of sales and margins on the quarter.
5) About a year-ago, I wrote my first blog entry on Hurco. In that blog entry, I highlighted the weak U.S. dollar as having a favorable impact on Hurco’s financial results. I also highlighted the weakening dollar as one of the reasons I expected sales to continue to accelerate. In the last few quarters, we have been seeing the benefits of our poor beaten down dollar. In the most recent quarter, the dollar had a favorable impact on sales of $4.6 million. Keep in mind that the favorable impact on sales is offset somewhat by foreign operating and manufacturing expenses.
Margins
Gross margins increased to 40.8% from 37.9% in the prior quarter and 37.0% the year-ago quarter. Management credited the nearly 400 basis point improvement in gross margins to increased sales of higher margin VMX sales in Europe and the favorable impact on the dollar.
SG&A as a percent of sales was 20.31% compared to 22.43% last quarter and 19.43% in the year-ago quarter. The percentage decrease from last quarter was likely the result of fixed costs being spread over a higher level of sales. The dollar increase in SG&A spending of $3.1 million over the year-ago level was the result of increased spending on sales, development and market expansion. Translation of foreign operations back to USD also contributed to the dollar increase in earnings.
Operating margins increased to 20.5% from 15.5% in the prior quarter and 17.22% in the year-ago quarter. Is that right, did they really increase operation margins 500 basis points over Q4 2007? While Q4 2007 operating margins were abnormally low, Q1 2008 operating margins still represent a very nice sequential increase. The improvement in operating margins were the result of the factors listed above.
Hurco’s profit margin of 12.81% for the quarter was an increase of 150 basis points over the prior quarter and 130 basis points over the year-ago quarter. The less drastic jump in sequential profit margins compared to operating margins was due to the higher tax rate in Q1 2008 relative to Q4 2007. The implied tax rate in Q1 was 36.7% compared to 30.3% in Q4.
According to my data, the gross and operating margins for the quarter were records. The profit margin for the quarter was not a record because of the benefit of loss carry-forward in Q4 of 2005.
EPS
I am calculating $3.62 in EPS over the trailing twelve months.
Balance Sheet
The balance sheet looks strong so I won’t go into a lot of detail. Hurco has no long-term debt and $35 million in cash and investments, or nearly $5 per share. Hurco’s strong balance sheets puts it in a healthy position to weather a downturn in the global economy.
DSOs increased to 43 days from 33 days in Q4. While the increase in DSOs might be a bit of concern for some, the 33 days in Q4 was an anomaly and likely a matter of timing of sales, billings and receipts. Looking over the past 15 quarters, the 43 days was easily on the low end of the historical range.
Inventory turns remained flat a 2.00.
Cash Flow Statement
Operational cash flow in the quarter was negative by about $3.7 million. The negative operational cash flow was largely due to the increase in receivables and to a lesser extent the increase in inventories. Given the acceleration of sales in the quarter, I am not overly concerned about either of these items. The increase in receivables was likely the result of both the jump in sales and the timing of shipments, billings, and receipts. Nonetheless, this is something worth watching in the coming quarters.
Other Thoughts
Hurco would seemingly make a nice acquisition for a foreign machine tool manufacturer for a number of reasons:
1) Strong balance sheet
2) High level of international sales
3) Winmax could be leveraged across the acquirer’s products
4) Strength of foreign currency relative to the dollar would make Hurco cheaper
5) Progress already being made in emerging markets (China, India, Eastern Europe, etc.)
I am not sure a buyout would be in the best interest of long-term shareholders but the prospect is at least interesting.
As an alternative to being acquired, Hurco could be on the prowl for an acquisition. The recently announced mixed shelf and the language in the recent 10Q suggest that an acquisition is a very real possibility.
Here is the language from the Executive Overview section of the 10Q:
“Our introduction of new, technologically advanced products, combined with our expansion into new markets, has resulted in our significant growth over the last several years. In addition to this strong organic growth, our recent performance and current financial strength also provide us with the capability to pursue opportunistic acquisitions that are consistent with our strategic focus on expanding our product line and entering new markets.”
And, from the Liquidity and Capital Resources section of the 10Q:
“Although we have not made any significant acquisitions in the recent past, we continue to receive information on businesses and assets, including intellectual property assets that are being sold. Should attractive opportunities arise, we believe that our earnings, cash flow from operations, borrowings under our bank credit facilities, and the sale of securities from our shelf registration would provide sufficient resources to finance any such possible acquisitions.”
Disclosure
I am a long-term holder of Hurco. As always do your own DD and don’t rely on my BS as a basis for making investment decision.
Good luck!
Tuff
Tuesday, March 25, 2008
2008 Guidance
After BOOM reported its Q4 and 2007 earnings, I wrote a couple of blog entries detailing my thoughts and analysis on the earnings release and conference call. In my first blog entry, I went through the process of stripping-out the DYNA impact on BOOM’s Q4 results. In my second blog entry, I highlighted what I considered to be the key points from the earnings release and conference call. In my final blog entry, I will review management’s guidance for 2008 and calculate an EPS based on this guidance. Furthermore, I will venture to give my own estimates for the year.
Before looking at management’s guidance for 2008, I want to go back and review the guidance that management gave for 2007 and compare that guidance with the actual results. In the Q4 and full-year 2006 earnings release from February 22, 2007, Mr. Rick Santa, CFO, gave the following guidance for 2007:
"With more than $68 million in our order backlog and an extensive range of contract opportunities on our hot list, we are looking to achieve revenue growth in the 20% range during fiscal 2007.”
When I compared management’s 2007 guidance with the underlying fundamentals at the time (backlog, recent growth, additional capacity, potential easing in supply chain, etc.), I thought management was being overly conservative with their 2007 guidance. In my blog post from March 28, 2007, I said that I expected revenues to grow 30-35%.
“Given DMC’s current backlog, acceleration in order bookings as evidenced by the record bookings in December, favorable market conditions with regards to the imbalance of supply and demand of commodities, additional capacity coming on-line in the middle of 2007, I believe it is reasonable to assume top-line growth will increase 30-35%.”
In the end, BOOM achieved revenue growth that not only exceeded management’s expectations but also my own loftier expectations. Excluding the DYNA contribution, BOOM grew revenues over 39%, almost double management’s guidance.
With the above being said, management guidance for 2008, taken from the earnings release and conference call, is for:
* Up to 60% revenue growth, including the incremental revenue from DYNAenergetics (“DYNA”). The 60% revenue growth for 2008 assumes 15% to 20% growth for both BOOM and DYNA.
* Gross margins comparable to the 32% achieved in the 2007 Q4.
* $7.3 million of amortization expense associated with DYNA acquisition
* More than $5 million of interest expense associated with the financing of the DYNA acquisition
* A consolidated tax rate of 36% to 37%
Management guidance pretty much covers everything but costs & expenses. As such, it should be pretty easy to work through an EPS estimate that closely reflects management’s guidance. So here goes…
Revenues
Including the incremental revenue from DYNA, management is expecting revenues to grow 60% over 2007. On the conference call, management broke this down by saying they expect each entity, DYNA and BOOM, to achieve 15% to 20% revenue growth.
Excluding the contribution from DYNA, BOOM recorded revenues of $157.97 million in 2007. If I multiply the $157.97 million by 119.0%, I get revenues of $187.98 million in 2008.
According to the 8K/A filed on January 28th, DYNA recorded revenues of $63.73 million for its fiscal year ending September 30, 2007. I am utilizing the revenue total for the fiscal year-end September as opposed to the calendar year-end December because I don’t have the information necessary to determine DYNA’s revenue total for the calendar year. Presumably, revenues for the fiscal year-end September were lower than revenues for the calendar year-end December. As such, I am probably underestimating DYNA’s revenue contribution. Nonetheless, by multiplying the $63.73 million in revenue by 119%, I get revenues of $75.84 million in 2008.
By combining BOOM’s revenues of $187.98 million and DYNA’s revenues of $75.84 million, I get consolidated revenues of $263.82 million for 2008. This amount represents a 60.02% increase in revenues from BOOM’s total revenues in 2007, right in-line with management’s guidance.
Again, keep in mind that management gave similar revenue guidance for 2007 and ended up growing organic revenues by over 39%.
Gross Profit Margin and Gross Profit
Management expects 2008 gross margins to be comparable to the 32% gross margin in Q4 2007, which was lower than the 33.3% recorded for the full year 2007. Management’s expectation for lower gross margins reflects the lower margin contribution from DYNA, especially revenues from its oilfield products business, and a $300K upward adjustment to COGS resulting from the DYNA acquisition. Also, management indicated that the 32% gross margin in Q4 represented a more normalized product mix. As such, I am assuming management’s expectations for 2008 gross margins assume a more normalized product mix.
By more normalized product mix, I believe management is referring to the small to mid-sized projects that currently make-up the majority of BOOM’s $100 million backlog. Usually, large contracts result in certain efficiencies that help reduce manufacturing costs and/or involve complexities that help increase contract price. The combination of lower costs and higher prices result in higher gross margins. Without these large projects, gross margins will likely represent a more normalized product mix of roughly 32% to 33%. If BOOM is able to book and ship some larger contracts in 2008, I believe gross margins will push above management’s expectations.
BOOM’s legacy operations in Europe and DYNA have historically achieved lower gross margins. As the volume of work in Europe increases, I think these operations have the ability to achieve some economies of scale that will result in higher gross margins. I don’t believe management incorporates this thinking into their expectation for gross margins.
As I am setting out to translate management’s guidance into a bottom line EPS estimate, I will utilize management’s 32% estimate for gross margins.
Multiplying 2008 revenues of $263.82 million by 32%, I get a gross profit of $84.42 million.
Costs & Expenses
Management gave little guidance on costs & expenses for 2008. As such, I am going to utilize historical performance as a guide. I will estimate costs & expenses for BOOM and DYNA separately using historical costs & expenses as a percent of sales. I will then combine the results and add management’s guidance for amortization expense.
On BOOM’s P&L, selling, general & administrative (“SG&A”), and amortization expenses are subcategories under costs & expenses. In 2007, BOOM’s SG&A expenses represented 9.05% of sales and the quarterly trend throughout the year was positive. In Q1, SG&A expenses totaled 10.00% of revenues compared to 9.60% in Q2, 8.82% in Q3, and 8.31% in Q4. For purposes of this analysis, I am estimating BOOM’s SG&A expenses at 9.10% of revenues, slightly above the average for 2007. While I believe SG&A expenses as a percent of revenues will continue to decrease, I prefer to have some contingency to cover potential unknowns related to the acquisition.
Unlike BOOM, DYNA has a line item for R&D expense under costs & expenses on its P&L. The R&D expenses are attributable to the product development efforts of DYNA’s DYNAwell business segment. In 2007 and 2008, costs & expenses (SG&A and R&D) represented 7.37% and 11.89% of revenues, respectively. For purposes of my analysis, I am estimating DYNA’s costs & expenses at 8.25% of sales. While my estimate of expenses as a percent of revenues is greater than that in 2007 it is less than that in 2006. Also, my estimate allows for some contingency related to the acquisition and the potential for increased R&D spending. Note that the improvement from 2006 to 2007 was likely the result of fixed expenses being spread over a higher level of revenue.
Management expects $7.3 million in amortization expense relating to the acquisition of DYNA. As such, this amount needs to be added to my estimate for costs & expenses. Note that DYNA, prior to the BOOM acquisition, recorded amortization expense on its P&L that related to the management buyout in 2001. With BOOM’s acquisition of DYNA, this expense goes away.
So again, I am going to estimate BOOM’s costs & expenses as a percent of sales and then DYNA’s costs & expenses as a percent of sales and then add the $7.3 million amortization expense. Keep in mind that I have a breakout of BOOM and DYNA 2008 revenues in the Revenue section of this analysis.
BOOM Revenues: $187.98 million
BOOM Costs & Expenses as % of Revenues: 9.10%
BOOM Costs & Expenses: $17.11 million
DYNA Revenues: $75.84 million
DYNA Costs & Expenses as % of Revenue: 8.25%
DYNA Costs & Expenses: $6.26 million
Total Costs & Expenses = $17.11 mil + $6.26 mil + $7.3 mil = $30.66 million *
*rounding difference
If I subtract the $30.66 million in costs & expenses from $84.42 million in gross profit, I get $53.76 million of income from operations.
Non-Operating Income (Expenses)
Other income, interest expense, and equity in earnings from joint ventures fall under non-operating income (expenses) on BOOM’s P&L.
Management said pre-tax income would be affected by $5 million of interest expense associated with the acquisition. I am assuming that the $5 million interest expense is net of interest income.
Equity in earnings from joint ventures totaled $24K in BOOM’s Q4 or almost $200K annualized ($24K/46 days X 365 days). This amount is well below the $512K reported in DYNA’s fiscal year-end 2007 (see 8K/A filed January 28). For purpose of my analysis, I am going to split the difference and assume $350K in 2008.
I am estimating $200K of other expenses, mainly as a contingency. In 2007 and 2006, BOOM had other expenses of $158K and $115K, respectively.
Non-operating income (expenses) = ($5 million) + $350K + ($200K) = ($4.85 million)
If I subtract the $4.85 million in non-operating expenses from the $53.76 million of income from operations, I arrive at $48.91 million in income before taxes.
Taxes
Management expects the 2008 consolidated tax rate to be in the range of 36% to 37%. For purposes of my analysis, I take the midpoint and apply a tax rate of 36.5%.
With a tax rate of 36.5% and $48.91 million in income before taxes, I calculate a tax provision of $17.85 million.
Net Income
Subtracting a tax provision of $17.85 million from the $48.91 million in income before taxes, I get $31.06 million of net income, a 26.26% increase over 2007.
Diluted Shares
In 2007, BOOM’s weighted average, diluted shares outstanding totaled 12,293,158. As part of the DYNA transaction, BOOM issued 251,041 shares. Excluding the pro rata impact from the DYNA transaction, BOOM’s weighted average diluted shares outstanding totaled 12,264,192. If I assume an additional 1% of dilution in 2008 on the 12,264,192 plus the 251,041 shares from the DYNA transaction, I get 12,637,875 weigthed average diluted shares outstanding in 2008.
Diluted EPS
If I divide net income of $31.06 million by the 12,637,875 shares outstanding, I arrive at a diluted EPS of $2.46.
Scenario Play
Most of my calculations are based on percentages (gross profit, costs & expenses, taxes). As such, I can easily make adjustments to my model based on different scenarios.
Scenario I: DYNA and BOOM each increase revenues by 25% over 2007 instead of 19%
Scenario I Result: Diluted EPS of $2.61
Scenario II: DYNA increases revenues 30% and BOOM increases revenues 25%
Scenario II Result: Diluted EPS of $2.65
Scenario III: DYNA and BOOM each increase revenues by 30% over 2007
Scenario III Result: Diluted EPS of $2.74
Scenario IV: DYNA increases revenues 30%, BOOM increases revenues 25%, and gross margins on the year are 33.00%
Scenario IV Result: Diluted EPS of 2.79
My Take
I think Scenario II represents a modestly conservative yet reasonable estimate for revenues and EPS. Based on Scenario II, I am expecting 2008 diluted earnings per share of $2.65 on $280.31 million in revenue. I will try to re-visit my estimate after each quarter and revise accordingly.
I believe the $100 million backlog, high level of booking activity, potential for large contracts moving from the “hot list” into the backlog, significant expansion to capacity, and the favorable prospects for AMK and Oil Products are all supportive of my 2008 estimate.
Analysts’ Estimates
On average, analysts are expecting 2008 diluted earnings per share of $2.40 on $262.41 million in revenue. Note that in 2007, BOOM beat estimates three out of four quarters. Furthermore, analysts revised their full-year 2007 estimates higher throughout the year.
Good luck!
Tuff
Before looking at management’s guidance for 2008, I want to go back and review the guidance that management gave for 2007 and compare that guidance with the actual results. In the Q4 and full-year 2006 earnings release from February 22, 2007, Mr. Rick Santa, CFO, gave the following guidance for 2007:
"With more than $68 million in our order backlog and an extensive range of contract opportunities on our hot list, we are looking to achieve revenue growth in the 20% range during fiscal 2007.”
When I compared management’s 2007 guidance with the underlying fundamentals at the time (backlog, recent growth, additional capacity, potential easing in supply chain, etc.), I thought management was being overly conservative with their 2007 guidance. In my blog post from March 28, 2007, I said that I expected revenues to grow 30-35%.
“Given DMC’s current backlog, acceleration in order bookings as evidenced by the record bookings in December, favorable market conditions with regards to the imbalance of supply and demand of commodities, additional capacity coming on-line in the middle of 2007, I believe it is reasonable to assume top-line growth will increase 30-35%.”
In the end, BOOM achieved revenue growth that not only exceeded management’s expectations but also my own loftier expectations. Excluding the DYNA contribution, BOOM grew revenues over 39%, almost double management’s guidance.
With the above being said, management guidance for 2008, taken from the earnings release and conference call, is for:
* Up to 60% revenue growth, including the incremental revenue from DYNAenergetics (“DYNA”). The 60% revenue growth for 2008 assumes 15% to 20% growth for both BOOM and DYNA.
* Gross margins comparable to the 32% achieved in the 2007 Q4.
* $7.3 million of amortization expense associated with DYNA acquisition
* More than $5 million of interest expense associated with the financing of the DYNA acquisition
* A consolidated tax rate of 36% to 37%
Management guidance pretty much covers everything but costs & expenses. As such, it should be pretty easy to work through an EPS estimate that closely reflects management’s guidance. So here goes…
Revenues
Including the incremental revenue from DYNA, management is expecting revenues to grow 60% over 2007. On the conference call, management broke this down by saying they expect each entity, DYNA and BOOM, to achieve 15% to 20% revenue growth.
Excluding the contribution from DYNA, BOOM recorded revenues of $157.97 million in 2007. If I multiply the $157.97 million by 119.0%, I get revenues of $187.98 million in 2008.
According to the 8K/A filed on January 28th, DYNA recorded revenues of $63.73 million for its fiscal year ending September 30, 2007. I am utilizing the revenue total for the fiscal year-end September as opposed to the calendar year-end December because I don’t have the information necessary to determine DYNA’s revenue total for the calendar year. Presumably, revenues for the fiscal year-end September were lower than revenues for the calendar year-end December. As such, I am probably underestimating DYNA’s revenue contribution. Nonetheless, by multiplying the $63.73 million in revenue by 119%, I get revenues of $75.84 million in 2008.
By combining BOOM’s revenues of $187.98 million and DYNA’s revenues of $75.84 million, I get consolidated revenues of $263.82 million for 2008. This amount represents a 60.02% increase in revenues from BOOM’s total revenues in 2007, right in-line with management’s guidance.
Again, keep in mind that management gave similar revenue guidance for 2007 and ended up growing organic revenues by over 39%.
Gross Profit Margin and Gross Profit
Management expects 2008 gross margins to be comparable to the 32% gross margin in Q4 2007, which was lower than the 33.3% recorded for the full year 2007. Management’s expectation for lower gross margins reflects the lower margin contribution from DYNA, especially revenues from its oilfield products business, and a $300K upward adjustment to COGS resulting from the DYNA acquisition. Also, management indicated that the 32% gross margin in Q4 represented a more normalized product mix. As such, I am assuming management’s expectations for 2008 gross margins assume a more normalized product mix.
By more normalized product mix, I believe management is referring to the small to mid-sized projects that currently make-up the majority of BOOM’s $100 million backlog. Usually, large contracts result in certain efficiencies that help reduce manufacturing costs and/or involve complexities that help increase contract price. The combination of lower costs and higher prices result in higher gross margins. Without these large projects, gross margins will likely represent a more normalized product mix of roughly 32% to 33%. If BOOM is able to book and ship some larger contracts in 2008, I believe gross margins will push above management’s expectations.
BOOM’s legacy operations in Europe and DYNA have historically achieved lower gross margins. As the volume of work in Europe increases, I think these operations have the ability to achieve some economies of scale that will result in higher gross margins. I don’t believe management incorporates this thinking into their expectation for gross margins.
As I am setting out to translate management’s guidance into a bottom line EPS estimate, I will utilize management’s 32% estimate for gross margins.
Multiplying 2008 revenues of $263.82 million by 32%, I get a gross profit of $84.42 million.
Costs & Expenses
Management gave little guidance on costs & expenses for 2008. As such, I am going to utilize historical performance as a guide. I will estimate costs & expenses for BOOM and DYNA separately using historical costs & expenses as a percent of sales. I will then combine the results and add management’s guidance for amortization expense.
On BOOM’s P&L, selling, general & administrative (“SG&A”), and amortization expenses are subcategories under costs & expenses. In 2007, BOOM’s SG&A expenses represented 9.05% of sales and the quarterly trend throughout the year was positive. In Q1, SG&A expenses totaled 10.00% of revenues compared to 9.60% in Q2, 8.82% in Q3, and 8.31% in Q4. For purposes of this analysis, I am estimating BOOM’s SG&A expenses at 9.10% of revenues, slightly above the average for 2007. While I believe SG&A expenses as a percent of revenues will continue to decrease, I prefer to have some contingency to cover potential unknowns related to the acquisition.
Unlike BOOM, DYNA has a line item for R&D expense under costs & expenses on its P&L. The R&D expenses are attributable to the product development efforts of DYNA’s DYNAwell business segment. In 2007 and 2008, costs & expenses (SG&A and R&D) represented 7.37% and 11.89% of revenues, respectively. For purposes of my analysis, I am estimating DYNA’s costs & expenses at 8.25% of sales. While my estimate of expenses as a percent of revenues is greater than that in 2007 it is less than that in 2006. Also, my estimate allows for some contingency related to the acquisition and the potential for increased R&D spending. Note that the improvement from 2006 to 2007 was likely the result of fixed expenses being spread over a higher level of revenue.
Management expects $7.3 million in amortization expense relating to the acquisition of DYNA. As such, this amount needs to be added to my estimate for costs & expenses. Note that DYNA, prior to the BOOM acquisition, recorded amortization expense on its P&L that related to the management buyout in 2001. With BOOM’s acquisition of DYNA, this expense goes away.
So again, I am going to estimate BOOM’s costs & expenses as a percent of sales and then DYNA’s costs & expenses as a percent of sales and then add the $7.3 million amortization expense. Keep in mind that I have a breakout of BOOM and DYNA 2008 revenues in the Revenue section of this analysis.
BOOM Revenues: $187.98 million
BOOM Costs & Expenses as % of Revenues: 9.10%
BOOM Costs & Expenses: $17.11 million
DYNA Revenues: $75.84 million
DYNA Costs & Expenses as % of Revenue: 8.25%
DYNA Costs & Expenses: $6.26 million
Total Costs & Expenses = $17.11 mil + $6.26 mil + $7.3 mil = $30.66 million *
*rounding difference
If I subtract the $30.66 million in costs & expenses from $84.42 million in gross profit, I get $53.76 million of income from operations.
Non-Operating Income (Expenses)
Other income, interest expense, and equity in earnings from joint ventures fall under non-operating income (expenses) on BOOM’s P&L.
Management said pre-tax income would be affected by $5 million of interest expense associated with the acquisition. I am assuming that the $5 million interest expense is net of interest income.
Equity in earnings from joint ventures totaled $24K in BOOM’s Q4 or almost $200K annualized ($24K/46 days X 365 days). This amount is well below the $512K reported in DYNA’s fiscal year-end 2007 (see 8K/A filed January 28). For purpose of my analysis, I am going to split the difference and assume $350K in 2008.
I am estimating $200K of other expenses, mainly as a contingency. In 2007 and 2006, BOOM had other expenses of $158K and $115K, respectively.
Non-operating income (expenses) = ($5 million) + $350K + ($200K) = ($4.85 million)
If I subtract the $4.85 million in non-operating expenses from the $53.76 million of income from operations, I arrive at $48.91 million in income before taxes.
Taxes
Management expects the 2008 consolidated tax rate to be in the range of 36% to 37%. For purposes of my analysis, I take the midpoint and apply a tax rate of 36.5%.
With a tax rate of 36.5% and $48.91 million in income before taxes, I calculate a tax provision of $17.85 million.
Net Income
Subtracting a tax provision of $17.85 million from the $48.91 million in income before taxes, I get $31.06 million of net income, a 26.26% increase over 2007.
Diluted Shares
In 2007, BOOM’s weighted average, diluted shares outstanding totaled 12,293,158. As part of the DYNA transaction, BOOM issued 251,041 shares. Excluding the pro rata impact from the DYNA transaction, BOOM’s weighted average diluted shares outstanding totaled 12,264,192. If I assume an additional 1% of dilution in 2008 on the 12,264,192 plus the 251,041 shares from the DYNA transaction, I get 12,637,875 weigthed average diluted shares outstanding in 2008.
Diluted EPS
If I divide net income of $31.06 million by the 12,637,875 shares outstanding, I arrive at a diluted EPS of $2.46.
Scenario Play
Most of my calculations are based on percentages (gross profit, costs & expenses, taxes). As such, I can easily make adjustments to my model based on different scenarios.
Scenario I: DYNA and BOOM each increase revenues by 25% over 2007 instead of 19%
Scenario I Result: Diluted EPS of $2.61
Scenario II: DYNA increases revenues 30% and BOOM increases revenues 25%
Scenario II Result: Diluted EPS of $2.65
Scenario III: DYNA and BOOM each increase revenues by 30% over 2007
Scenario III Result: Diluted EPS of $2.74
Scenario IV: DYNA increases revenues 30%, BOOM increases revenues 25%, and gross margins on the year are 33.00%
Scenario IV Result: Diluted EPS of 2.79
My Take
I think Scenario II represents a modestly conservative yet reasonable estimate for revenues and EPS. Based on Scenario II, I am expecting 2008 diluted earnings per share of $2.65 on $280.31 million in revenue. I will try to re-visit my estimate after each quarter and revise accordingly.
I believe the $100 million backlog, high level of booking activity, potential for large contracts moving from the “hot list” into the backlog, significant expansion to capacity, and the favorable prospects for AMK and Oil Products are all supportive of my 2008 estimate.
Analysts’ Estimates
On average, analysts are expecting 2008 diluted earnings per share of $2.40 on $262.41 million in revenue. Note that in 2007, BOOM beat estimates three out of four quarters. Furthermore, analysts revised their full-year 2007 estimates higher throughout the year.
Good luck!
Tuff
Monday, March 17, 2008
BOOM Q4 Earnings Release and Conference Call
Last Monday, I promised I would put together a few blog entries detailing my thoughts and analysis on Dynamic Materials Coporation’s (“BOOM”) recent earnings release and conference call. In the same blog entry, I went through the process of estimating BOOM’s Q4 financial results excluding the impact of its recent acquisition of DYNAenergetics (“DYNA”). Today, I will highlight and provide commentary on what I consider to be key takeaways from the earnings release and conference call. As I have already gone through the financial results and I intend to discuss guidance in another blog entry, I am going to focus on more general aspects of them both.
Backlog and Bookings
Please note that management reports backlog for its Explosive business only. As such, the discussion and calculations in this section are only applicable to the Explosive business segment.
BOOM reported a backlog of $100 million at the end of Q4. Excluding the $21.5 million contribution from the DYNA acquisition, BOOM’s core backlog was $78.5 million compared to $77.1 million at the end of Q3 and $68.8 million in the year-ago quarter.
On the conference call, Mr. James Bank, an Analyst with Sidoti & Company, questioned why, at a time when BOOM’s end-markets were incredibly strong, the core backlog was essentially flat compared to Q3. In response, Mr. Yvon Cariou, BOOM’s CEO, said quoting and booking activity remained significant but the lack of unusually large contracts and the expanded capacity resulted in a stable backlog.
BOOM’s capacity expansion project, substantially completed in Q3 2007, doubled the capacity of its U.S. operations and contributed to the 33% increase in sales from the first half of 2007 to the second half of 2007 (the 33% increase excludes the DYNA contribution in Q4). While the jump in sales resulted in some backlog contraction from Q2 to Q3, I was pleasantly surprised by the modest increase in core backlog from Q3 to Q4. I was expecting several quarters of contraction before seeing some stabilization. What was even more impressive was the fact that the backlog was stable without the contribution of any announced contracts.
With the increased capacity, I am focusing more on bookings, or new orders, rather than backlog. As management doesn’t report quarterly bookings, I will go over how I calculate quarterly bookings. Change in backlog from the beginning of a quarter to the end of a quarter is largely a function of sales relative to bookings during that quarter. If sales are less than bookings, the backlog will increase. If sales are greater than bookings, the backlog will decrease. In other words:
Beginning Backlog – Sales + Net Bookings = Ending Backlog
Using a little basic Algebra, I get:
Net Bookings = Ending Backlog – Beginning Backlog + Sales
If I apply the above to Q4 and exclude DYNA’s sales and backlog, I get:.
Net Bookings = $78.5 million – $77.1 million + $45.8 million = $47.2 million
The $47.2 million in new bookings in Q4 was substantially higher than the $32.7 million in Q3 and $34.3 million in the year-ago quarter. Looking at BOOM’s quarterly bookings over the past four years, Q4 bookings were well ahead of all the other quarters except for Q2 2007, which benefited from the $8.3 million alternative energy contract.
Don’t let the modest increase in backlog fool you. In order to assess demand, focus on bookings. Furthermore, don’t get carried away looking at bookings in just one quarter. Because the timing of contracts can distort booking activity from quarter-to-quarter, focus on the trend over several quarters.
Alternative Energy
In May of 2007, BOOM announced an $8.3 million alternative energy contract. This was the first alternative energy contract announced by management. On the Q4 conference call, management, for the first time, referenced alternative energy as a key market segment. Later in the call, a “private investor” requested additional information on the opportunities in this market segment. Mr. Cariou commented that the sector was developing and there were a lot of interesting opportunities. Furthermore, he specifically mentioned solar as a key application. He then turned the call over to Mr. John Banker, VP of Sales & Marketing, for comment. John went on to discuss the opportunities in the alternative energy sector that closely mirrored what was written in the 10K:
“Today's high oil and gas prices are driving significant demand for capital equipment in the alternative energy and non-traditional hydrocarbon sectors. Frequently, alternative energy technologies involve conditions which necessitate clad metals. Solar panels predominantly incorporate high purity silicon. Processes for manufacture of high purity silicon utilize a broad range of highly corrosion resistant clad alloys. Many geothermal fields are corrosive, requiring high alloy clad separators to clean the hot steam. Cellulosic ethanol technologies often require corrosion resistant metals such as titanium and zirconium. Many of the non-traditional hydrocarbon processes require equipment similar to the refinery and upstream oil and gas sectors. Coal gasification, tar sands production, and similar operations typically present corrosion issues necessitating clad equipment.”
Two things I will note from all this. First, I think it is clear that the $8.3 million alternative energy contract was for a silicone manufacturing facility. Second, the solution to the global energy crisis needs to encompass traditional hydrocarbon, non-traditional hydrocarbon and alternative energy sources. BOOM, as the leading manufacturer of explosion clad metal plates, is in a strong position to benefit from all aspect of the solution.
As a refresher, BOOM’s key market segments include:
oil and gas;
petrochemicals and chemicals;
alternative energy;
hydrometallurgy;
power generation
aluminum production;
ship building; and,
industrial refrigeration.
Size Matters
It is always exciting when BOOM issues a press release announcing a large contract. Not that I am counting but BOOM hasn’t announced a large contract in 293 days. If BOOM’s end markets are so strong, why hasn’t management announced any new big contracts? For starters, management has an informal threshold range for contract announcements. As revenues have increased, so has the threshold for contract announcements. Second, the price of cladder metals, in particular nickel, went through a correction in 2007. As such, there were some contracts that would have been above the threshold range but were not because of the lower prices for cladder metal. It is important to point out that fluctuations in metal prices don’t have an impact on a contracts contribution to the bottom line (re-confirmed by Mr. Cariou on the conference call). Finally, large contracts are very much a matter of timing. I have no doubt that there are a number of large contracts in the works and they will eventually result in contract announcements. While we haven’t had a contract announcement in 293 days, there could just as easily be several announcements in a short period of time.
Based on management’s comments in the press release and conference call, I expect to see at least one large contract announcements in the near future. While, each member of the management team had a comment about mid to large-sized projects coming down the pipeline, Mr. Banker, as the VP of Sales & Marketing, is probably the best one for me to quote:
“There are quite a number of relatively large projects sitting out there that seem to be cuing up to come through the shoot as we move forward.”
One last note before moving on….management always stresses the importance of the $1 to $5 million contracts that don’t get announced because they would be issuing press releases on a regular basis. Even though there have been no contract announcements in several months, BOOM’s quarterly bookings have been very strong and the backlog has increased. The increase in backlog has come in the face of increased capacity, record sales and the shipment of large contracts already in the backlog. We can thank the smaller contracts for maintaining the high backlog.
Actions Speak Louder than Words
Over the last two years, BOOM has doubled the capacity of its U.S. cladding business, expanded its AMK welding facility, undertaken a modernization program at its European operations, and acquired one of its two major competitors. Capital spending in 2007 was about $14 million and management plans to spend another $10 million in 2008 plus a couple million from what was leftover from the 2007 budget. The majority of the 2008 capital expenditures will be spent on the expansion of its European manufacturing operations (building and equipment additions).
On conference calls, management responsibly exhibits conservative optimism when giving general and specific guidance about the future. Without over-hyping the underlying market fundamentals, management speaks favorably about the high level of booking activity, growing “hot list”, and expectation for continued capital spending from its end markets. In the most recent earnings release, Mr. Cariou said that current explosion-welding quoting volume and end-market activity suggests the robust capital spending taking place across most of DMC's end markets will continue during 2008.
While management’s words give me the warm and fuzzies, it is management’s actions, in the form of market positioning through capital spending and the recent acquisition, that gives me the confidence I need as an investor.
Competition
Competition was addressed briefly on the conference call but I will go into a little more detail as it will not only highlight BOOM’s favorable position in the marketplace but also possible opportunities for acquisitions.
Asahi-Kasei Corporation, a Japanese holding company, has a division that manufactures explosion clad metal plates. Asahi-Kasei’s explosion clad division has been mostly regionally focused. While benefiting from the overall strength in demand for explosion clad, Asahi-Kasei’s explosion clad division has not added significantly to capacity, if at all.
There are several small companies in China that manufacture a less sophisticated, low-end explosion clad product that is intended to compete more with roll bond than explosion clad. There is no evidence that these companies are developing the sophisticated cladding product manufactured by BOOM.
Aside from the division of Asahi-Kasei and with the acquisition of DYNA, BOOM is the only significant provider of explosion clad metal plates in the world. At the same time, BOOM’s explosion clad competes with other cladding processes such as rollbond and weld overlay. Nonetheless, rollbond, weld overlay and explosion clad seem to have their own niches within the overall clad market and most of the time they don’t compete in the same space.
Another Acquisition?
Is another acquisition in the cards for DMC? In the earnings release, Mr. Cariou said:
“From a geographic perspective, activity in our U.S. and European home markets remains strong. We also are seeing considerable demand from global markets such as India, China, Russia and the Middle East. We therefore, will continue to explore opportunities to expand our global presence.”
When I listened to the conference call, the above quote stuck in my mind and I listened for potential clues as to how management might address this growing demand.
Asahi-Kasei’s cladding division would seemingly be the only business worth acquiring. Mr. Cariou referred to Asahi-Kasei’s explosive division as “our Japanese friends” and called them a good competitor of high quality. I think it was the Q2 2007 conference call that Mr. Cariou had similar comments about “our European friends.” Also, there was a funny pause by Mr. Rick Santa, BOOM’s CFO, when he was answering a question from Mr. Bank about primary uses of cash. When I first listened to the call, I thought there was something behind the pause like Mr. Santa was debating what to say and what not to say. When I listened to the call a second time, I wasn’t so sure and thought maybe he was just formulating his response in his head or had just taken a sip of water or something. Have a listen and let me know what you think (minute 19:53 into the call).
If management is not going to address demand outside of its home markets by acquiring Asahi-Kasei, they might also consider an expansion of its sales network or an in-house initiative to create a manufacturing facility in a strategic location. Another possibility might be an acquisition of one of the Chinese explosion cladding companies mentioned above. This approach would alleviate some of the barriers to establishing a physical presence in China and BOOM would provide the acquired company with the technical know how and equipment to produce the same type of explosion clad plates as those produced by BOOM.
Supply Chain
Supply chain constraints have been a concern for both BOOM management and investors for over a year. The issue originated with the availability of cladder plates and once that issue resolved itself there were issues with the availability of high-alloy steel backer plates.
At the end of 2006, management guided 2007 revenue growth in the 20% range, which was seemingly below what most investors were anticipating. Supply chain constraints were probably the most significant reason for management's conservative estimate for top-line growth in 2007. Over the course of 2007, analysts and investors sought details from management on the status of the supply chain. In an effort to relieve some of the pressure, management discussed how they were seeking to expand its supplier network and increase the amount of finishing work done in-house. Unfortunately, there are a limited number of suppliers of the specific type of backer plate used by BOOM. While the situation remained tight throughout the year, the overall impact was not that significant and BOOM reported over 39% organic revenue growth.
On the latest conference call, an analyst asked about the supply chain. Mr. Cariou described the situation as tight, stable and a little more relaxed. Mr. Banker echoed Mr. Carious comments and also suggested that lead times for cladding metals were shortening.
For now, I think the supply chain issues are mostly behind us and not the primary business constraint. I think the most significant constraint at this point is the availability of qualified engineers to work on the vast number of projects that are coming down the pipeline. Engineering and procurement firms have accumulated massive backlogs that are growing every quarter. The backlog of projects will eventually trickle down to BOOM but it will probably take a little more time than it would have otherwise.
Credit Market Turmoil
In light of what has been going-on in the markets as of late, I thought it would be worthwhile to note management’s response to a question about how the turmoil in the credit markets are affecting BOOM (coincidently, Mr. Carious quote also highlights what I wrote in the previous section). Mr. Cariou responded:
“We are not seeing directly any of the effects of the credit crunch you are referring to. We are not seeing that. We are seeing a list of projects that remain healthy. We do hear from the industry that it is difficult to find professional talents to execute the designs, the manufacturing, and the exploration of a number of projects. We do hear about some boards looking at the situation and there has been some inflation in the cost of projects. Although, we have heard about that, we have not seen any direct impacts and our list of project agreements remains very healthy. Maybe I will give the call over to John Banker. He can comment on that. What do you think John?”
To that Mr. Banker replied:
“We are certainly not seeing any evidence in their project list of things being cancelled or slowing down of new things showing up on the list. We are tracking things that are relatively close to purchase. We are generally are looking things forward only four to six months in great detail, but again no evidence of any trends at present.”
AMK
AMK only represents a small portion of BOOM’s overall revenues and, as a result, takes a back seat to the Explosive segment. Nonetheless, AMK increased revenues 48% over the year-ago quarter and management expects improved revenue contribution from AMK over the course of the 2008.
What’s Next
In the time I started writing this post and now, BOOM filed its 10K. I will review the report and write another blog entry if there is something worthwhile to talk about outside of what I have already discussed. Finally, I plan to go through management’s guidance for Q1 2008 and 2007 and put together some estimates.
Disclosure
I have owned shares of BOOM for several years. Last week I added to my BOOM position for the first time in about 22 months.
Good luck,
Tuff
Backlog and Bookings
Please note that management reports backlog for its Explosive business only. As such, the discussion and calculations in this section are only applicable to the Explosive business segment.
BOOM reported a backlog of $100 million at the end of Q4. Excluding the $21.5 million contribution from the DYNA acquisition, BOOM’s core backlog was $78.5 million compared to $77.1 million at the end of Q3 and $68.8 million in the year-ago quarter.
On the conference call, Mr. James Bank, an Analyst with Sidoti & Company, questioned why, at a time when BOOM’s end-markets were incredibly strong, the core backlog was essentially flat compared to Q3. In response, Mr. Yvon Cariou, BOOM’s CEO, said quoting and booking activity remained significant but the lack of unusually large contracts and the expanded capacity resulted in a stable backlog.
BOOM’s capacity expansion project, substantially completed in Q3 2007, doubled the capacity of its U.S. operations and contributed to the 33% increase in sales from the first half of 2007 to the second half of 2007 (the 33% increase excludes the DYNA contribution in Q4). While the jump in sales resulted in some backlog contraction from Q2 to Q3, I was pleasantly surprised by the modest increase in core backlog from Q3 to Q4. I was expecting several quarters of contraction before seeing some stabilization. What was even more impressive was the fact that the backlog was stable without the contribution of any announced contracts.
With the increased capacity, I am focusing more on bookings, or new orders, rather than backlog. As management doesn’t report quarterly bookings, I will go over how I calculate quarterly bookings. Change in backlog from the beginning of a quarter to the end of a quarter is largely a function of sales relative to bookings during that quarter. If sales are less than bookings, the backlog will increase. If sales are greater than bookings, the backlog will decrease. In other words:
Beginning Backlog – Sales + Net Bookings = Ending Backlog
Using a little basic Algebra, I get:
Net Bookings = Ending Backlog – Beginning Backlog + Sales
If I apply the above to Q4 and exclude DYNA’s sales and backlog, I get:.
Net Bookings = $78.5 million – $77.1 million + $45.8 million = $47.2 million
The $47.2 million in new bookings in Q4 was substantially higher than the $32.7 million in Q3 and $34.3 million in the year-ago quarter. Looking at BOOM’s quarterly bookings over the past four years, Q4 bookings were well ahead of all the other quarters except for Q2 2007, which benefited from the $8.3 million alternative energy contract.
Don’t let the modest increase in backlog fool you. In order to assess demand, focus on bookings. Furthermore, don’t get carried away looking at bookings in just one quarter. Because the timing of contracts can distort booking activity from quarter-to-quarter, focus on the trend over several quarters.
Alternative Energy
In May of 2007, BOOM announced an $8.3 million alternative energy contract. This was the first alternative energy contract announced by management. On the Q4 conference call, management, for the first time, referenced alternative energy as a key market segment. Later in the call, a “private investor” requested additional information on the opportunities in this market segment. Mr. Cariou commented that the sector was developing and there were a lot of interesting opportunities. Furthermore, he specifically mentioned solar as a key application. He then turned the call over to Mr. John Banker, VP of Sales & Marketing, for comment. John went on to discuss the opportunities in the alternative energy sector that closely mirrored what was written in the 10K:
“Today's high oil and gas prices are driving significant demand for capital equipment in the alternative energy and non-traditional hydrocarbon sectors. Frequently, alternative energy technologies involve conditions which necessitate clad metals. Solar panels predominantly incorporate high purity silicon. Processes for manufacture of high purity silicon utilize a broad range of highly corrosion resistant clad alloys. Many geothermal fields are corrosive, requiring high alloy clad separators to clean the hot steam. Cellulosic ethanol technologies often require corrosion resistant metals such as titanium and zirconium. Many of the non-traditional hydrocarbon processes require equipment similar to the refinery and upstream oil and gas sectors. Coal gasification, tar sands production, and similar operations typically present corrosion issues necessitating clad equipment.”
Two things I will note from all this. First, I think it is clear that the $8.3 million alternative energy contract was for a silicone manufacturing facility. Second, the solution to the global energy crisis needs to encompass traditional hydrocarbon, non-traditional hydrocarbon and alternative energy sources. BOOM, as the leading manufacturer of explosion clad metal plates, is in a strong position to benefit from all aspect of the solution.
As a refresher, BOOM’s key market segments include:
oil and gas;
petrochemicals and chemicals;
alternative energy;
hydrometallurgy;
power generation
aluminum production;
ship building; and,
industrial refrigeration.
Size Matters
It is always exciting when BOOM issues a press release announcing a large contract. Not that I am counting but BOOM hasn’t announced a large contract in 293 days. If BOOM’s end markets are so strong, why hasn’t management announced any new big contracts? For starters, management has an informal threshold range for contract announcements. As revenues have increased, so has the threshold for contract announcements. Second, the price of cladder metals, in particular nickel, went through a correction in 2007. As such, there were some contracts that would have been above the threshold range but were not because of the lower prices for cladder metal. It is important to point out that fluctuations in metal prices don’t have an impact on a contracts contribution to the bottom line (re-confirmed by Mr. Cariou on the conference call). Finally, large contracts are very much a matter of timing. I have no doubt that there are a number of large contracts in the works and they will eventually result in contract announcements. While we haven’t had a contract announcement in 293 days, there could just as easily be several announcements in a short period of time.
Based on management’s comments in the press release and conference call, I expect to see at least one large contract announcements in the near future. While, each member of the management team had a comment about mid to large-sized projects coming down the pipeline, Mr. Banker, as the VP of Sales & Marketing, is probably the best one for me to quote:
“There are quite a number of relatively large projects sitting out there that seem to be cuing up to come through the shoot as we move forward.”
One last note before moving on….management always stresses the importance of the $1 to $5 million contracts that don’t get announced because they would be issuing press releases on a regular basis. Even though there have been no contract announcements in several months, BOOM’s quarterly bookings have been very strong and the backlog has increased. The increase in backlog has come in the face of increased capacity, record sales and the shipment of large contracts already in the backlog. We can thank the smaller contracts for maintaining the high backlog.
Actions Speak Louder than Words
Over the last two years, BOOM has doubled the capacity of its U.S. cladding business, expanded its AMK welding facility, undertaken a modernization program at its European operations, and acquired one of its two major competitors. Capital spending in 2007 was about $14 million and management plans to spend another $10 million in 2008 plus a couple million from what was leftover from the 2007 budget. The majority of the 2008 capital expenditures will be spent on the expansion of its European manufacturing operations (building and equipment additions).
On conference calls, management responsibly exhibits conservative optimism when giving general and specific guidance about the future. Without over-hyping the underlying market fundamentals, management speaks favorably about the high level of booking activity, growing “hot list”, and expectation for continued capital spending from its end markets. In the most recent earnings release, Mr. Cariou said that current explosion-welding quoting volume and end-market activity suggests the robust capital spending taking place across most of DMC's end markets will continue during 2008.
While management’s words give me the warm and fuzzies, it is management’s actions, in the form of market positioning through capital spending and the recent acquisition, that gives me the confidence I need as an investor.
Competition
Competition was addressed briefly on the conference call but I will go into a little more detail as it will not only highlight BOOM’s favorable position in the marketplace but also possible opportunities for acquisitions.
Asahi-Kasei Corporation, a Japanese holding company, has a division that manufactures explosion clad metal plates. Asahi-Kasei’s explosion clad division has been mostly regionally focused. While benefiting from the overall strength in demand for explosion clad, Asahi-Kasei’s explosion clad division has not added significantly to capacity, if at all.
There are several small companies in China that manufacture a less sophisticated, low-end explosion clad product that is intended to compete more with roll bond than explosion clad. There is no evidence that these companies are developing the sophisticated cladding product manufactured by BOOM.
Aside from the division of Asahi-Kasei and with the acquisition of DYNA, BOOM is the only significant provider of explosion clad metal plates in the world. At the same time, BOOM’s explosion clad competes with other cladding processes such as rollbond and weld overlay. Nonetheless, rollbond, weld overlay and explosion clad seem to have their own niches within the overall clad market and most of the time they don’t compete in the same space.
Another Acquisition?
Is another acquisition in the cards for DMC? In the earnings release, Mr. Cariou said:
“From a geographic perspective, activity in our U.S. and European home markets remains strong. We also are seeing considerable demand from global markets such as India, China, Russia and the Middle East. We therefore, will continue to explore opportunities to expand our global presence.”
When I listened to the conference call, the above quote stuck in my mind and I listened for potential clues as to how management might address this growing demand.
Asahi-Kasei’s cladding division would seemingly be the only business worth acquiring. Mr. Cariou referred to Asahi-Kasei’s explosive division as “our Japanese friends” and called them a good competitor of high quality. I think it was the Q2 2007 conference call that Mr. Cariou had similar comments about “our European friends.” Also, there was a funny pause by Mr. Rick Santa, BOOM’s CFO, when he was answering a question from Mr. Bank about primary uses of cash. When I first listened to the call, I thought there was something behind the pause like Mr. Santa was debating what to say and what not to say. When I listened to the call a second time, I wasn’t so sure and thought maybe he was just formulating his response in his head or had just taken a sip of water or something. Have a listen and let me know what you think (minute 19:53 into the call).
If management is not going to address demand outside of its home markets by acquiring Asahi-Kasei, they might also consider an expansion of its sales network or an in-house initiative to create a manufacturing facility in a strategic location. Another possibility might be an acquisition of one of the Chinese explosion cladding companies mentioned above. This approach would alleviate some of the barriers to establishing a physical presence in China and BOOM would provide the acquired company with the technical know how and equipment to produce the same type of explosion clad plates as those produced by BOOM.
Supply Chain
Supply chain constraints have been a concern for both BOOM management and investors for over a year. The issue originated with the availability of cladder plates and once that issue resolved itself there were issues with the availability of high-alloy steel backer plates.
At the end of 2006, management guided 2007 revenue growth in the 20% range, which was seemingly below what most investors were anticipating. Supply chain constraints were probably the most significant reason for management's conservative estimate for top-line growth in 2007. Over the course of 2007, analysts and investors sought details from management on the status of the supply chain. In an effort to relieve some of the pressure, management discussed how they were seeking to expand its supplier network and increase the amount of finishing work done in-house. Unfortunately, there are a limited number of suppliers of the specific type of backer plate used by BOOM. While the situation remained tight throughout the year, the overall impact was not that significant and BOOM reported over 39% organic revenue growth.
On the latest conference call, an analyst asked about the supply chain. Mr. Cariou described the situation as tight, stable and a little more relaxed. Mr. Banker echoed Mr. Carious comments and also suggested that lead times for cladding metals were shortening.
For now, I think the supply chain issues are mostly behind us and not the primary business constraint. I think the most significant constraint at this point is the availability of qualified engineers to work on the vast number of projects that are coming down the pipeline. Engineering and procurement firms have accumulated massive backlogs that are growing every quarter. The backlog of projects will eventually trickle down to BOOM but it will probably take a little more time than it would have otherwise.
Credit Market Turmoil
In light of what has been going-on in the markets as of late, I thought it would be worthwhile to note management’s response to a question about how the turmoil in the credit markets are affecting BOOM (coincidently, Mr. Carious quote also highlights what I wrote in the previous section). Mr. Cariou responded:
“We are not seeing directly any of the effects of the credit crunch you are referring to. We are not seeing that. We are seeing a list of projects that remain healthy. We do hear from the industry that it is difficult to find professional talents to execute the designs, the manufacturing, and the exploration of a number of projects. We do hear about some boards looking at the situation and there has been some inflation in the cost of projects. Although, we have heard about that, we have not seen any direct impacts and our list of project agreements remains very healthy. Maybe I will give the call over to John Banker. He can comment on that. What do you think John?”
To that Mr. Banker replied:
“We are certainly not seeing any evidence in their project list of things being cancelled or slowing down of new things showing up on the list. We are tracking things that are relatively close to purchase. We are generally are looking things forward only four to six months in great detail, but again no evidence of any trends at present.”
AMK
AMK only represents a small portion of BOOM’s overall revenues and, as a result, takes a back seat to the Explosive segment. Nonetheless, AMK increased revenues 48% over the year-ago quarter and management expects improved revenue contribution from AMK over the course of the 2008.
What’s Next
In the time I started writing this post and now, BOOM filed its 10K. I will review the report and write another blog entry if there is something worthwhile to talk about outside of what I have already discussed. Finally, I plan to go through management’s guidance for Q1 2008 and 2007 and put together some estimates.
Disclosure
I have owned shares of BOOM for several years. Last week I added to my BOOM position for the first time in about 22 months.
Good luck,
Tuff
Monday, March 10, 2008
Q4 BOOM - DYNA
On Thursday evening, Dynamic Materials Corporation (“BOOM”) announced its financial results for the fourth quarter ended December 31, 2007. After the release and conference call, BOOM shares traded substantially lower in after hours Thursday and continued to fall in regular market hours on Friday. By the time all was said and done, BOOM closed down $10.22, or over 19%, to $43.38. While it is never fun to get smacked off the side of the head with this type of one-day decline, I am keeping a level head about the situation and I still feel quite confident about BOOM’s future.
In order to illustrate the reasons why I am optimistic about BOOM, I am going to write a series of posts over the next week or two covering mostly covering the Q4 earnings release, conference call, and acquisition of DYNAenergetics (“DYNA”). I am going to go through this process for a number of reasons. For starters, when I blog about a stock, I find that I am more thorough in my research and analysis. Second, I hope to get some feedback either challenging or supporting my thoughts. Finally, I hope that by sharing my research with other individual investors I will help them make better informed decisions about buying, selling, or holding BOOM. So here goes…
Today, I want to look at BOOM’s earnings excluding the impact of its recent acquisition of DYNAenergetics (“DYNA”). Management didn’t provide non-GAAP financials excluding the impact of DYNA and they may or may not provide this information in their 10K filing. In my opinion, I think it is important to analyze BOOM’s organic results in order to truly assess the overall results from the quarter.
Revenues
For the quarter, BOOM reported $55.21 million in revenues. DYNA contributed $6.90 million to revenues over the six week it was operating under BOOM.
Excluding the impact of DYNA, BOOM reported revenues of $48.31 million. BOOM’s ex-DYNA revenues in Q4 were 14.76% higher than revenues in Q3 of $42.10 million and 35.36% higher than the year-ago quarter of $35.69 million.
After reporting Q3 results, management said they expected Q4 sales and earnings to approximate those of Q3 (Q3 Press Release). Given the 14.76% sequential increase in revenues, BOOM handily beat managements’ guidance from Q3.
On average, analysts were expecting BOOM to report revenues of $48.05 million with a range of $43.1 million to $54.6 million. In looking at the estimates, it would appear that some analysts were including DYNA in their estimates and others were not. Either way, BOOM reported slightly higher revenues than the average estimates.
(Note: In one of my posts to come, I intend to analyze DYNA’s revenue contribution and why, in my mind, DYNA’s contribution in the quarter was seemingly off.)
COGS and Gross Profit
Gross profit margin in the quarter was 32.21% compared to 33.95% in Q3 and 40.69% in the year-ago quarter. Keep in mind that the year-ago quarter benefited from highly favorable terms received on an $11 million contract that helped drive gross margins higher for the quarter.
In order to back out DYNA’s impact on Q4, I started by backing-out the $0.3 million increase in COGS resulting from the purchase accounting adjustment (In summary, my understanding of this adjustment is that it is an acquisition adjustment that marks-up the finished goods in DYNA’s inventory because finished goods have no manufacturing risk).
Next, I backed out the COGS attributable to DYNA’s revenue. For DYNA’s year-ending September 2007 and 2006, DYNA reported gross margins of 24.48% and 29.41%, respectively (8K/A filed January 28). For the purposes of this analysis, I backed out $5.10 million in COGS attributable to DYNA, which equates to a gross margin of 26.09% for DYNA. My gross margin falls within the range of DYNA’s last two fiscal years with more emphasis on the most recent fiscal year.
DYNA Sales – DYNA COGS = DYNA Gross Profit
$6.90 million – $5.10 million = $1.80 million
DYNA Gross Profit / DYNA Sales = DYNA Gross Margin
$1.80 million / $6.90 million = 26.09%
BOOM, including DYNA’s contribution, reported COGS of $37.43 million in Q4. If I subtract the $0.3 million accounting adjustment and DYNA’s COGS of $5.10 million, BOOM had COGS of $32.03 million and a gross profit of $16.29 million. The $16.29 million in gross profit equates to a gross profit margin of 33.71%, which compares to BOOM’s Q3 gross margin of 33.95%.
Total COGS – Accounting. Adjustment – DYNA COGS = BOOM COGS
$37.43 million - $0.30 million - $5.10 million = $32.03 million
BOOM Sales – BOOM COGS = BOOM Gross Profit
$48.31 million - $32.03 million = $16.29 million (rounding difference)
BOOM Gross Profit / BOOM Sales = BOOM Gross Margin
$16.29 million / $48.31 million = 33.71%
Operating Expenses
Including DYNA’s contribution BOOM reported operating expenses of $5.78 million in Q4.
According to the conference call, the $0.70 million sequential increase in G&A expenses was attributable to DYNA and non-capitalized acquisition related expenses (legal and consulting fees associated with organizational structuring in Europe). For purposes of my analysis, I assumed that only $0.60 million of the increase in G&A was attributable to DYNA and non-capitalized costs and the other $0.10 million was attributable to BOOM’s own sequential increase.
I didn’t see or hear any discussion of DYNA’s selling expenses. As such, I allocated a modest $0.05 million of selling expenses to DYNA.
All of the amortization of purchased intangibles, $1.19 million, was attributable to DYNA.
Total Operating Expenses – Adjustments = BOOM Operating Expenses
$5.78 million – $1.84 million = $3.94 million
Operating Income
BOOM Gross Profit – BOOM Operating Expenses = BOOM Operating Income
$16.29 million - $3.94 million = 12.34 million (rounding)
Non-Operating Income (Expenses)
For the quarter, BOOM had $0.74 million in non-operating expenses.
From the press release, $0.8 million of interest expense was attributable to the DYNA acquisition.
DYNA has a few JV’s in Russia, Kazakhstan and Canada. All of the JV income, $24,000, was attributable to DYNA. As such, I backed out the JV income.
In the past, BOOM has reported immaterial amounts of “Other income (expenses)”. For instance, in Q4, BOOM reported $23,000 under “Other income (expenses)”. In Q4, BOOM reported $162,000 under “Other income (expenses)”. Given the historical amounts reported under this line item, I felt it was reasonable to back out the line-item completely.
Adjustments = +0.8 mil – $0.024 mil + $0.162 mil
Total Non-Operating – Adjustments = BOOM Non-Operating
($0.74 million) + $0.94 million = $0.2 million
Income before Taxes
BOOM Operating Income + BOOM Non-Operating Income = BOOM Income before Taxes
$12.34 million + $0.20 million = $12.54 million
Taxes
For the quarter, BOOM’s tax provision represented a tax rate of 38.48%. For my analysis, I applied the same tax rate to BOOM’s ex-DYNA income before taxes of $12.54 million to arrive at a tax provision of $4.83 million.
The provision from income taxes in the quarter of 38.48% was slightly higher than the recent range. In my opinion, the rate was likely higher as a result of the acquisition and allowable expenses. As such, I think I am being conservative by using the 38.48% in my BOOM only analysis.
Net Income
BOOM Income before taxes – BOOM Taxes = BOOM Net Income
$12.54 million - $4.83 million = $7.716 million
The $7.716 million in net income represents an 8.41% sequential increase and a 19.90% increase from the year-ago quarter. When comparing year-over-year results, it is important to keep in mind that the year-ago quarter was exceptionally strong due to the favorable terms on the $11 million contract that shipped in that quarter.
Diluted Shares Outstanding
In Q4, there were 12,455,468 weighted average, diluted shares outstanding. As part of the acquisition, BOOM issued 251,041 shares. The issued shares were outstanding 46 of the 92 days in the quarter and therefore added 125,520 to the weighted average, diluted share count in Q4. In order to isolate BOOM’s EPS, I removed the 125,520 from the weighted average, diluted shares outstanding in Q4 to get 12,329,948 shares.
EPS
Net Income / Diluted Shares Outstanding
$7.71 million / $12.33 million = $0.63
Excluding the impacts of the DYNA acquisition, I believe BOOM earned somewhere around $0.63 per diluted share. This compares to $0.58 in Q3 and $0.54 in the year-ago quarter.
Conclusion
While I consider my analysis to be reasonable, I had to make a number of assumptions and adjustments. Here are some thoughts on those assumptions and adjustments:
Revenue – My adjustment to revenue was clear cut because management specifically provided DYNA revenue in the press release.
COGS – The $0.3 million adjustment to COGS was taken right from the press release. I calculated COGS attributable to DYNA based on an estimate of DYNA’s gross margin. Any adjustment to my gross margin estimate would likely have a significant impact on the end-result. Nonetheless, I think the resulting gross profit margin attributable to the individual entities, BOOM and DYNA, were consistent with past performance.
Operating Expenses – The amortization expense was a no brainer…all DYNA. While management commented on G&A expenses, I was more conservative and only allocated a portion of the sequential increase in G&A to DYNA. Management did not provide any details on the selling expenses attributable to DYNA but my adjustment was very conservative. The majority of my operating expense adjustments were supported by information available in the press release and conference call.
Non-Operating Income – Management provided adequate information regarding interest income and it was clear that the JV income was attributable to DYNA. I removed all of the “Other expenses” because it was inconsistent with BOOM’s historical results. As such, I attributed the “Other expenses” to the acquisition. The portion of Non-Operating Income that I had to estimate was relatively small and unlikely to have much of an impact on my end result.
Taxes – As I mentioned above, I utilized the same tax rate for BOOM as I did for the combined entities. I think my approach was conservative because I suspect the tax rate for the combined entities was a little higher due to allowed expenses for tax reporting purposes.
Overall, I think my analysis gives a reasonable approximation of BOOM’s results excluding the impact of the DYNA acquisition.
Well, that is all I have for today.
Good luck,
Tuff
Q4 Press Release
Q4 Conference Call
SeekingAlpha Conference Call Transcript
8K/A January 28
Q3 Press Release
In order to illustrate the reasons why I am optimistic about BOOM, I am going to write a series of posts over the next week or two covering mostly covering the Q4 earnings release, conference call, and acquisition of DYNAenergetics (“DYNA”). I am going to go through this process for a number of reasons. For starters, when I blog about a stock, I find that I am more thorough in my research and analysis. Second, I hope to get some feedback either challenging or supporting my thoughts. Finally, I hope that by sharing my research with other individual investors I will help them make better informed decisions about buying, selling, or holding BOOM. So here goes…
Today, I want to look at BOOM’s earnings excluding the impact of its recent acquisition of DYNAenergetics (“DYNA”). Management didn’t provide non-GAAP financials excluding the impact of DYNA and they may or may not provide this information in their 10K filing. In my opinion, I think it is important to analyze BOOM’s organic results in order to truly assess the overall results from the quarter.
Revenues
For the quarter, BOOM reported $55.21 million in revenues. DYNA contributed $6.90 million to revenues over the six week it was operating under BOOM.
Excluding the impact of DYNA, BOOM reported revenues of $48.31 million. BOOM’s ex-DYNA revenues in Q4 were 14.76% higher than revenues in Q3 of $42.10 million and 35.36% higher than the year-ago quarter of $35.69 million.
After reporting Q3 results, management said they expected Q4 sales and earnings to approximate those of Q3 (Q3 Press Release). Given the 14.76% sequential increase in revenues, BOOM handily beat managements’ guidance from Q3.
On average, analysts were expecting BOOM to report revenues of $48.05 million with a range of $43.1 million to $54.6 million. In looking at the estimates, it would appear that some analysts were including DYNA in their estimates and others were not. Either way, BOOM reported slightly higher revenues than the average estimates.
(Note: In one of my posts to come, I intend to analyze DYNA’s revenue contribution and why, in my mind, DYNA’s contribution in the quarter was seemingly off.)
COGS and Gross Profit
Gross profit margin in the quarter was 32.21% compared to 33.95% in Q3 and 40.69% in the year-ago quarter. Keep in mind that the year-ago quarter benefited from highly favorable terms received on an $11 million contract that helped drive gross margins higher for the quarter.
In order to back out DYNA’s impact on Q4, I started by backing-out the $0.3 million increase in COGS resulting from the purchase accounting adjustment (In summary, my understanding of this adjustment is that it is an acquisition adjustment that marks-up the finished goods in DYNA’s inventory because finished goods have no manufacturing risk).
Next, I backed out the COGS attributable to DYNA’s revenue. For DYNA’s year-ending September 2007 and 2006, DYNA reported gross margins of 24.48% and 29.41%, respectively (8K/A filed January 28). For the purposes of this analysis, I backed out $5.10 million in COGS attributable to DYNA, which equates to a gross margin of 26.09% for DYNA. My gross margin falls within the range of DYNA’s last two fiscal years with more emphasis on the most recent fiscal year.
DYNA Sales – DYNA COGS = DYNA Gross Profit
$6.90 million – $5.10 million = $1.80 million
DYNA Gross Profit / DYNA Sales = DYNA Gross Margin
$1.80 million / $6.90 million = 26.09%
BOOM, including DYNA’s contribution, reported COGS of $37.43 million in Q4. If I subtract the $0.3 million accounting adjustment and DYNA’s COGS of $5.10 million, BOOM had COGS of $32.03 million and a gross profit of $16.29 million. The $16.29 million in gross profit equates to a gross profit margin of 33.71%, which compares to BOOM’s Q3 gross margin of 33.95%.
Total COGS – Accounting. Adjustment – DYNA COGS = BOOM COGS
$37.43 million - $0.30 million - $5.10 million = $32.03 million
BOOM Sales – BOOM COGS = BOOM Gross Profit
$48.31 million - $32.03 million = $16.29 million (rounding difference)
BOOM Gross Profit / BOOM Sales = BOOM Gross Margin
$16.29 million / $48.31 million = 33.71%
Operating Expenses
Including DYNA’s contribution BOOM reported operating expenses of $5.78 million in Q4.
According to the conference call, the $0.70 million sequential increase in G&A expenses was attributable to DYNA and non-capitalized acquisition related expenses (legal and consulting fees associated with organizational structuring in Europe). For purposes of my analysis, I assumed that only $0.60 million of the increase in G&A was attributable to DYNA and non-capitalized costs and the other $0.10 million was attributable to BOOM’s own sequential increase.
I didn’t see or hear any discussion of DYNA’s selling expenses. As such, I allocated a modest $0.05 million of selling expenses to DYNA.
All of the amortization of purchased intangibles, $1.19 million, was attributable to DYNA.
Total Operating Expenses – Adjustments = BOOM Operating Expenses
$5.78 million – $1.84 million = $3.94 million
Operating Income
BOOM Gross Profit – BOOM Operating Expenses = BOOM Operating Income
$16.29 million - $3.94 million = 12.34 million (rounding)
Non-Operating Income (Expenses)
For the quarter, BOOM had $0.74 million in non-operating expenses.
From the press release, $0.8 million of interest expense was attributable to the DYNA acquisition.
DYNA has a few JV’s in Russia, Kazakhstan and Canada. All of the JV income, $24,000, was attributable to DYNA. As such, I backed out the JV income.
In the past, BOOM has reported immaterial amounts of “Other income (expenses)”. For instance, in Q4, BOOM reported $23,000 under “Other income (expenses)”. In Q4, BOOM reported $162,000 under “Other income (expenses)”. Given the historical amounts reported under this line item, I felt it was reasonable to back out the line-item completely.
Adjustments = +0.8 mil – $0.024 mil + $0.162 mil
Total Non-Operating – Adjustments = BOOM Non-Operating
($0.74 million) + $0.94 million = $0.2 million
Income before Taxes
BOOM Operating Income + BOOM Non-Operating Income = BOOM Income before Taxes
$12.34 million + $0.20 million = $12.54 million
Taxes
For the quarter, BOOM’s tax provision represented a tax rate of 38.48%. For my analysis, I applied the same tax rate to BOOM’s ex-DYNA income before taxes of $12.54 million to arrive at a tax provision of $4.83 million.
The provision from income taxes in the quarter of 38.48% was slightly higher than the recent range. In my opinion, the rate was likely higher as a result of the acquisition and allowable expenses. As such, I think I am being conservative by using the 38.48% in my BOOM only analysis.
Net Income
BOOM Income before taxes – BOOM Taxes = BOOM Net Income
$12.54 million - $4.83 million = $7.716 million
The $7.716 million in net income represents an 8.41% sequential increase and a 19.90% increase from the year-ago quarter. When comparing year-over-year results, it is important to keep in mind that the year-ago quarter was exceptionally strong due to the favorable terms on the $11 million contract that shipped in that quarter.
Diluted Shares Outstanding
In Q4, there were 12,455,468 weighted average, diluted shares outstanding. As part of the acquisition, BOOM issued 251,041 shares. The issued shares were outstanding 46 of the 92 days in the quarter and therefore added 125,520 to the weighted average, diluted share count in Q4. In order to isolate BOOM’s EPS, I removed the 125,520 from the weighted average, diluted shares outstanding in Q4 to get 12,329,948 shares.
EPS
Net Income / Diluted Shares Outstanding
$7.71 million / $12.33 million = $0.63
Excluding the impacts of the DYNA acquisition, I believe BOOM earned somewhere around $0.63 per diluted share. This compares to $0.58 in Q3 and $0.54 in the year-ago quarter.
Conclusion
While I consider my analysis to be reasonable, I had to make a number of assumptions and adjustments. Here are some thoughts on those assumptions and adjustments:
Revenue – My adjustment to revenue was clear cut because management specifically provided DYNA revenue in the press release.
COGS – The $0.3 million adjustment to COGS was taken right from the press release. I calculated COGS attributable to DYNA based on an estimate of DYNA’s gross margin. Any adjustment to my gross margin estimate would likely have a significant impact on the end-result. Nonetheless, I think the resulting gross profit margin attributable to the individual entities, BOOM and DYNA, were consistent with past performance.
Operating Expenses – The amortization expense was a no brainer…all DYNA. While management commented on G&A expenses, I was more conservative and only allocated a portion of the sequential increase in G&A to DYNA. Management did not provide any details on the selling expenses attributable to DYNA but my adjustment was very conservative. The majority of my operating expense adjustments were supported by information available in the press release and conference call.
Non-Operating Income – Management provided adequate information regarding interest income and it was clear that the JV income was attributable to DYNA. I removed all of the “Other expenses” because it was inconsistent with BOOM’s historical results. As such, I attributed the “Other expenses” to the acquisition. The portion of Non-Operating Income that I had to estimate was relatively small and unlikely to have much of an impact on my end result.
Taxes – As I mentioned above, I utilized the same tax rate for BOOM as I did for the combined entities. I think my approach was conservative because I suspect the tax rate for the combined entities was a little higher due to allowed expenses for tax reporting purposes.
Overall, I think my analysis gives a reasonable approximation of BOOM’s results excluding the impact of the DYNA acquisition.
Well, that is all I have for today.
Good luck,
Tuff
Q4 Press Release
Q4 Conference Call
SeekingAlpha Conference Call Transcript
8K/A January 28
Q3 Press Release
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