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
Wednesday, March 26, 2008
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
Wednesday, March 5, 2008
BOOM + DYNAenergetics
On November 16, 2007, Dynamic Materials Corporation (“BOOM”) announced it purchased privately held DYNAenergetics (“Dyna”), a German-based manufacturer of clad metal plates and various oil-field related explosives and associated hardware. Below, I have highlighted some of the information from the 8K filings, BOOM presentation at the Sidoti conference, and Dyna’s web sites. As BOOM reports earnings tomorrow evening, I thought this information might be useful in putting this acquisition into perspective and analyzing the potential impact on BOOM.
In the following, I refer to Dyna’s DYNAPLAT business unit, which manufactures explosion clad metal plates, as the Explosive segment. I refer to Dyna’s DYNAWELL business unit as the Perforating segment. DYNAWELL manufactures, markets and sells explosive and associated hardware for use in oil field perforating equipment and explosives including detonating cords, detonators, bi-directional boosters, and shaped charges, as well as, seismic related explosives and accessories.
Dyna Revenue Growth
For the 12 month period ending September 30, 2007 compared to the 12 month period ending September 30, 2006, Dyna grew its revenues at an overall rate of 51.9%. Dyna’s Explosive segment and Perforating segment increased revenues 73.7% and 30.7%, respectively. During the same period, BOOM grew its revenues 44.0%.
Note that my growth rates are based on sales denominated in Euros. If I convert sales to USD based on the applicable exchange rate over the corresponding periods, I calculate sales growth of 64.1% from 2006 to 2007. In the write-up that follows, I utilize Euros in my growth calculations. Therefore, keep in mind that growth rates would be higher if results were translated to USD. Also, keep in mind that the USD has continued to decline in value relative to the Euro.
Business Segment Diversification
Going forward, Dyna’s Explosive segment will operate under the DMC Clad Metal business segment and Dyna’s Perforating segment will operate as a new business segment, DYNAenergetics. Finally, AMK will continue to operate as AMK Welding.
In the trailing twelve months, 43.72% of Dyna’s revenues were attributable to its Perforating segment. The Perforating segment positions BOOM in the international oil and gas services industry and will have the additional benefit of diversifying BOOM’s revenue. The remaining 56.28% of sales were attributable to the Explosive segment.
Geographic Diversification
Aside from having the effect of diversifying revenues across business segments, the Dyna acquisition will further diversify BOOM’s revenues by geographic region. In the trailing twelve months ending September 30, 2007, Dyna’s sales by geographic regions were as follows:
34.35% to customers located in Germany
11.25% to customers located in U.S.
54.40% to customers located in other foreign countries
The most recent information from BOOM breaking down sales by geographic regions can be found in the 2006 10K. This data indicates that 50% of BOOM’s 2006 revenues were attributable to U.S. fabricators.
It is also important to note that Dyna has joint venture partnerships in Russia, Kazakhstan, and Canada. The JV’s in Russia and Kazakhstan are distributors of products manufactured by the Perforating segment.
53.5% interest in Perfoline – located in Russia
55.0% interest in DYNAenergetics RUS – located in Russia
60.0% interest in KazDYNAenergetics – located in Kazakhstan
One of the joint ventures in Canada is a distribution company and the other is a real estate holding company.
Operating Income and EBITDA Growth
Again looking at Dyna’s year ending September 2007 compared to September 2006, Dyna increased operating income at the Explosive segment 51.8% and its Perforating segment 54.0%. Combining the two business segments, operating income was up 52.8%.
As EBITDA eliminates the affect of financing structure and accounting decisions of a company, EBITDA is a good way to look at an acquired company. For this reason, purchase price is often times calculated as a multiple of EBITDA. I do this calculation a little bit later but for now I will say that EBITDA grew 49.1% from 2006 to 2007.
Margins
Gross margin for 2007 was 24.5% vs. 29.4% in 2006
SG&A as % of sales for 2007 was 8.3% vs. 13.4% in 2006
Operating margin Explosive for 2007 15.1% vs. 17.3% in 2006
Operating margin Perforating for 2007 17.4% vs. 14.8% in 2006
Overall operating margins for 2007 16.1% vs. 16.0% in 2006
EBITDA margin was 18.2% versus 18.5% in 2006.
For the trialing nine months ending September 30, 2007, BOOM reported a gross margin of 34.0% (950 bps better than Dyna) and an EBITDA margin of 25.7% (750 bps better than Dyna). When I first started making these comparisons, I was thinking that the margin differences between Dyna and BOOM were likely the result of lower margin contribution from the Perforating segment. Looking at the operating margins, this is seemingly not the case. In fact, the Perforating segment’s operating margins were actually higher than the Explosive segment’s operating margins.
Dyna’s margins are likely lower than BOOM's for the following reasons:
* Dyna has been more successful in winning contracts on lower margin work than higher margin work, perhaps losing to BOOM on some of the higher margin contracts.
* Dyna sales are less than half of BOOM’s sales. As such, fixed costs are spread over fewer dollars, or Euros in the case of Dyna. Thus, margins are lower.
* As Dyna’s sales are considerably less than BOOM, Dyna does not have the same negotiating capacity when it comes to purchase contracts for raw materials.
It is interesting to note that if I go back over BOOM’s quarterly results and look at the twelve months ending March 31, 2005, BOOM had sales of $61.5 million, which is close to Dyna’s current sales of $63.7 million. At the time, BOOM’s gross margin and operating margin were 25.99% and 14.34%, respectively (I don’t have EBITDA margins because I am too lazy to pull the D&A expenses from those quarters….sorry). In comparing BOOM’s margins from the period above to Dyna’s current margins, BOOM was doing about 140 bps more on its gross margin but 180 bps less on its operating margin.
In the future, I would expect Dyna’s margins to expand as a result of:
* Fixed costs being spread over a higher level of sales
* The reduction and centralization of certain G&A expenses
* Increased purchasing power and greater ability to negotiate more favorable, raw material purchase contracts as a combined entity
* To the extent that BOOM invests in a modernization and/or expansion program at Dyna, like it has at its other European operations, Dyna will be able to operate more efficiently and on a greater scale. Furthermore, it would put Dyna in a better position to win and fill higher margin and/or larger contracts.
* BOOM channeling contracts to Dyna because of proximity to client and/or availability of certain raw materials
EBITDA Multiple
According to the 8K/A, BOOM acquired Dyna for $96 million in cash and stock. If I add Dyna’s debt of $8 million and BOOM’s transaction costs of $3.5 million to the acquisition price, I get a total transaction cost of $107.5 million. If I subtract Dyna’s cash of about $4.5 million, I get a net transaction cost of $103 million.
(The $8 million in debt less the $4.5 million in cash results in net debt of $3.5 million. I obtained this information from the 8K/A filing from January 28th. According to the press release from November 16th announcing the acquisition, Dyna’s net debt was $2.8 million. Because I could not iron out the differences between the two sources, I decided to utilize the higher net debt number.)
I calculate Dyna's EBITDA of $11.59 million for the twelve months ended 9/30/07 (equity interest in JV is included in my EBITDA calc). This gives me a purchase price multiple of 8.89X trailing EBITDA.
Dyna Impact on Q4
I have gone through an analysis of Dyna’s income statement to try and get an idea of what the near-term (Q4) impact will be on BOOM’s earnings. As I look at analysts’ estimates for Q4 it looks like some analysts have figured the acquisition into their estimates and other analysts have not. As such, it is going to be difficult to look at Q4 estimates versus actuals and come away with any reliable conclusions. I think we just have to see what management gives us for guidance and go from there.
In trying to determine the impact of Dyna on Q4, I know that Dyna had $63.7 million in sales for the twelve month period ending September 30, 2007 and $19.1 million in the quarter ended September 30, 2007. This information can be found on page 32 of the 8K/A filed on January 28, 2008. I also know from the BOOM presentation dated January 22, 2008 that Dyna had sales of approximately $73.3 million for the year-end December 31, 2007. So here are the known and unknowns (in millions USD):
Dyna Sales
By putting these numbers into an Excel spreadsheet, I came to the conclusion that Dyna’s revenue range for the fourth quarter is likely to be $20 to $24 million. I am estimating revenues of $22.7 million.
Keep in mind that the acquisition took place half way through the quarter. Assuming that the sales were evenly distributed throughout the quarter, Dyna would have added $11.35 million to revenues for the period of time that it was operating under BOOM.
Subsequent to estimating revenues, I utilized margins and operating expenses as a percent of sales from Dyna’s quarter ended September 2007 (column (c) of the table on page 32 of the 8K/A) and the adjustments in the pro forma (column (c) of the table on page 33 of the same filing) to determine the impact on EPS. Without going into all the detail, I came to the conclusion that the acquisition will have little to no impact on the Q4s EPS.
Note that a majority of the pro forma adjustements are non-cash adjustements. As such, the acquisition will be more accretive in terms of cash flow.
Looking Ahead
While I have not gone through the process of estimating the full year 2008 impact, I expect the acquisition to be accretive to earnings in 2008 based on my analysis of Q4. If Dyna continues to experience similar rates of growth as it has in the recent past, its impact on BOOM’s 2008 EPS might not be all that insignificant.
Finally, as I look at what is going on in the industries served by BOOM, there are a vast number of projects coming down the pipeline that will require explosion clad. This acquisition further positions BOOM to truly capitalize on the favorable market conditions that should exist for several years. In the past 18 months, BOOM has doubled the capacity of its manufacturing plant in the U.S., undertaken a modernization program at its existing European operation in France and Sweden, purchased a competitor in Germany, and expanded its AMK operations. I still believe BOOM’s best days are ahead.
I hope this information was useful. As always, do your own due diligence and don’t rely on my analysis as a basis for making any investment decisions. I am just some guy locked in a basement trying to kill time.
Good luck,
Tuff
Useful Information
Press Release Announcing Acquisition
8K/A Filed 1/28/2008 (includes pro formas)
8K Filed 11/19/2007
DYNAenergetics Website (links to DYNAPLAT AND DYNAWELL)
BOOM Presentation from Sidoti Conference (Includes some information on DYNAWELL and its’ perforating gun)
Dynamic Materials Corporation (Public, NASDAQ:BOOM)
In the following, I refer to Dyna’s DYNAPLAT business unit, which manufactures explosion clad metal plates, as the Explosive segment. I refer to Dyna’s DYNAWELL business unit as the Perforating segment. DYNAWELL manufactures, markets and sells explosive and associated hardware for use in oil field perforating equipment and explosives including detonating cords, detonators, bi-directional boosters, and shaped charges, as well as, seismic related explosives and accessories.
Dyna Revenue Growth
For the 12 month period ending September 30, 2007 compared to the 12 month period ending September 30, 2006, Dyna grew its revenues at an overall rate of 51.9%. Dyna’s Explosive segment and Perforating segment increased revenues 73.7% and 30.7%, respectively. During the same period, BOOM grew its revenues 44.0%.
Note that my growth rates are based on sales denominated in Euros. If I convert sales to USD based on the applicable exchange rate over the corresponding periods, I calculate sales growth of 64.1% from 2006 to 2007. In the write-up that follows, I utilize Euros in my growth calculations. Therefore, keep in mind that growth rates would be higher if results were translated to USD. Also, keep in mind that the USD has continued to decline in value relative to the Euro.
Business Segment Diversification
Going forward, Dyna’s Explosive segment will operate under the DMC Clad Metal business segment and Dyna’s Perforating segment will operate as a new business segment, DYNAenergetics. Finally, AMK will continue to operate as AMK Welding.
In the trailing twelve months, 43.72% of Dyna’s revenues were attributable to its Perforating segment. The Perforating segment positions BOOM in the international oil and gas services industry and will have the additional benefit of diversifying BOOM’s revenue. The remaining 56.28% of sales were attributable to the Explosive segment.
Geographic Diversification
Aside from having the effect of diversifying revenues across business segments, the Dyna acquisition will further diversify BOOM’s revenues by geographic region. In the trailing twelve months ending September 30, 2007, Dyna’s sales by geographic regions were as follows:
34.35% to customers located in Germany
11.25% to customers located in U.S.
54.40% to customers located in other foreign countries
The most recent information from BOOM breaking down sales by geographic regions can be found in the 2006 10K. This data indicates that 50% of BOOM’s 2006 revenues were attributable to U.S. fabricators.
It is also important to note that Dyna has joint venture partnerships in Russia, Kazakhstan, and Canada. The JV’s in Russia and Kazakhstan are distributors of products manufactured by the Perforating segment.
53.5% interest in Perfoline – located in Russia
55.0% interest in DYNAenergetics RUS – located in Russia
60.0% interest in KazDYNAenergetics – located in Kazakhstan
One of the joint ventures in Canada is a distribution company and the other is a real estate holding company.
Operating Income and EBITDA Growth
Again looking at Dyna’s year ending September 2007 compared to September 2006, Dyna increased operating income at the Explosive segment 51.8% and its Perforating segment 54.0%. Combining the two business segments, operating income was up 52.8%.
As EBITDA eliminates the affect of financing structure and accounting decisions of a company, EBITDA is a good way to look at an acquired company. For this reason, purchase price is often times calculated as a multiple of EBITDA. I do this calculation a little bit later but for now I will say that EBITDA grew 49.1% from 2006 to 2007.
Margins
Gross margin for 2007 was 24.5% vs. 29.4% in 2006
SG&A as % of sales for 2007 was 8.3% vs. 13.4% in 2006
Operating margin Explosive for 2007 15.1% vs. 17.3% in 2006
Operating margin Perforating for 2007 17.4% vs. 14.8% in 2006
Overall operating margins for 2007 16.1% vs. 16.0% in 2006
EBITDA margin was 18.2% versus 18.5% in 2006.
For the trialing nine months ending September 30, 2007, BOOM reported a gross margin of 34.0% (950 bps better than Dyna) and an EBITDA margin of 25.7% (750 bps better than Dyna). When I first started making these comparisons, I was thinking that the margin differences between Dyna and BOOM were likely the result of lower margin contribution from the Perforating segment. Looking at the operating margins, this is seemingly not the case. In fact, the Perforating segment’s operating margins were actually higher than the Explosive segment’s operating margins.
Dyna’s margins are likely lower than BOOM's for the following reasons:
* Dyna has been more successful in winning contracts on lower margin work than higher margin work, perhaps losing to BOOM on some of the higher margin contracts.
* Dyna sales are less than half of BOOM’s sales. As such, fixed costs are spread over fewer dollars, or Euros in the case of Dyna. Thus, margins are lower.
* As Dyna’s sales are considerably less than BOOM, Dyna does not have the same negotiating capacity when it comes to purchase contracts for raw materials.
It is interesting to note that if I go back over BOOM’s quarterly results and look at the twelve months ending March 31, 2005, BOOM had sales of $61.5 million, which is close to Dyna’s current sales of $63.7 million. At the time, BOOM’s gross margin and operating margin were 25.99% and 14.34%, respectively (I don’t have EBITDA margins because I am too lazy to pull the D&A expenses from those quarters….sorry). In comparing BOOM’s margins from the period above to Dyna’s current margins, BOOM was doing about 140 bps more on its gross margin but 180 bps less on its operating margin.
In the future, I would expect Dyna’s margins to expand as a result of:
* Fixed costs being spread over a higher level of sales
* The reduction and centralization of certain G&A expenses
* Increased purchasing power and greater ability to negotiate more favorable, raw material purchase contracts as a combined entity
* To the extent that BOOM invests in a modernization and/or expansion program at Dyna, like it has at its other European operations, Dyna will be able to operate more efficiently and on a greater scale. Furthermore, it would put Dyna in a better position to win and fill higher margin and/or larger contracts.
* BOOM channeling contracts to Dyna because of proximity to client and/or availability of certain raw materials
EBITDA Multiple
According to the 8K/A, BOOM acquired Dyna for $96 million in cash and stock. If I add Dyna’s debt of $8 million and BOOM’s transaction costs of $3.5 million to the acquisition price, I get a total transaction cost of $107.5 million. If I subtract Dyna’s cash of about $4.5 million, I get a net transaction cost of $103 million.
(The $8 million in debt less the $4.5 million in cash results in net debt of $3.5 million. I obtained this information from the 8K/A filing from January 28th. According to the press release from November 16th announcing the acquisition, Dyna’s net debt was $2.8 million. Because I could not iron out the differences between the two sources, I decided to utilize the higher net debt number.)
I calculate Dyna's EBITDA of $11.59 million for the twelve months ended 9/30/07 (equity interest in JV is included in my EBITDA calc). This gives me a purchase price multiple of 8.89X trailing EBITDA.
Dyna Impact on Q4
I have gone through an analysis of Dyna’s income statement to try and get an idea of what the near-term (Q4) impact will be on BOOM’s earnings. As I look at analysts’ estimates for Q4 it looks like some analysts have figured the acquisition into their estimates and other analysts have not. As such, it is going to be difficult to look at Q4 estimates versus actuals and come away with any reliable conclusions. I think we just have to see what management gives us for guidance and go from there.
In trying to determine the impact of Dyna on Q4, I know that Dyna had $63.7 million in sales for the twelve month period ending September 30, 2007 and $19.1 million in the quarter ended September 30, 2007. This information can be found on page 32 of the 8K/A filed on January 28, 2008. I also know from the BOOM presentation dated January 22, 2008 that Dyna had sales of approximately $73.3 million for the year-end December 31, 2007. So here are the known and unknowns (in millions USD):
Dyna Sales
| --TTM 12/2007-- | --TTM 9/2007-- | |
| Q4 2006 | X | ? |
| Q1 2007 | ? | ? |
| Q2 2007 | ? | ? |
| Q3 2007 | 19.1 | 19.1 |
| Q4 2007 | ? | X |
| Total | 73.3 | 63.7 |
By putting these numbers into an Excel spreadsheet, I came to the conclusion that Dyna’s revenue range for the fourth quarter is likely to be $20 to $24 million. I am estimating revenues of $22.7 million.
Keep in mind that the acquisition took place half way through the quarter. Assuming that the sales were evenly distributed throughout the quarter, Dyna would have added $11.35 million to revenues for the period of time that it was operating under BOOM.
Subsequent to estimating revenues, I utilized margins and operating expenses as a percent of sales from Dyna’s quarter ended September 2007 (column (c) of the table on page 32 of the 8K/A) and the adjustments in the pro forma (column (c) of the table on page 33 of the same filing) to determine the impact on EPS. Without going into all the detail, I came to the conclusion that the acquisition will have little to no impact on the Q4s EPS.
Note that a majority of the pro forma adjustements are non-cash adjustements. As such, the acquisition will be more accretive in terms of cash flow.
Looking Ahead
While I have not gone through the process of estimating the full year 2008 impact, I expect the acquisition to be accretive to earnings in 2008 based on my analysis of Q4. If Dyna continues to experience similar rates of growth as it has in the recent past, its impact on BOOM’s 2008 EPS might not be all that insignificant.
Finally, as I look at what is going on in the industries served by BOOM, there are a vast number of projects coming down the pipeline that will require explosion clad. This acquisition further positions BOOM to truly capitalize on the favorable market conditions that should exist for several years. In the past 18 months, BOOM has doubled the capacity of its manufacturing plant in the U.S., undertaken a modernization program at its existing European operation in France and Sweden, purchased a competitor in Germany, and expanded its AMK operations. I still believe BOOM’s best days are ahead.
I hope this information was useful. As always, do your own due diligence and don’t rely on my analysis as a basis for making any investment decisions. I am just some guy locked in a basement trying to kill time.
Good luck,
Tuff
Useful Information
Press Release Announcing Acquisition
8K/A Filed 1/28/2008 (includes pro formas)
8K Filed 11/19/2007
DYNAenergetics Website (links to DYNAPLAT AND DYNAWELL)
BOOM Presentation from Sidoti Conference (Includes some information on DYNAWELL and its’ perforating gun)
Dynamic Materials Corporation (Public, NASDAQ:BOOM)
Subscribe to:
Posts (Atom)