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)
2 comments:
you really have a gift. nice work. thanks so much!
That was some rough trading Friday.
I hope you are doing well.
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