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