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