As promised in my post from earlier today, here is a rundown of Q4 guidance based on information from the Q3 earnings release and 10Q.
(all numbers in thousands except EPS)
Sales
Based on the earning release, management expects Q4 sales to be comparable to Q2 sales of $63,183 million.
Guidance in the 10Q is a little more specific.
Explosive Welding – return to Q2 levels $52,996
AMK – consisted with Q1 and Q2. Average of Q1 and Q2 $2,282
Oilfield Products – 20-25% higher than Q3. 1.23 x Q3 $6,756 = $8310
Overall guidance - $63,588
Model Sales - $63,600
Gross Margin/Gross Profit
Earnings release 30%
10Q – comparable to Q1 and Q2 of 30.3% and 30.1%, respectively
Model Gross Margin - 30.2%
Model Gross Profit – $19,207
General & Administrative Expenses
No guidance was given for G&A expenses. G&A is not highly correlated with sales and the last two Qs should be fairly representative of Q4. For my model, I will use an average of Q2 and Q3 G&A.
Model G&A - $3,747
Selling Expenses
Selling expenses include commissions and therefore are more dependent on sales volume. As such, I will estimate selling expenses as a percent of sales. More specifically, I will take the average selling expense as a percent of sales over the last three quarters.
Model Selling Expenses - $2,972 (4.67% of sales)
Amortization Expense
Earnings release - $1,200 million
10Q - $7,500 million for 2008. Taking $7,500 and subtracting the amortization expense from Q1 to Q3 = $1,300.
Amortization will vary depending on the strength of the USD relative to the Euro.
At today’s exchange rate, I think the $1,200 is probably more accurate. The $7,500 in the 10Q was left over from the last 10Q when the USD was considerably weaker.
Model Amortization Expense - $1,200
Operating Expenses
G&A $3,747 + Selling $ $2,972 + Amortization $ $1,200 = $7,919
Operating Income
Gross Profit $19,207 – Operating Expenses $7,919 = $11,289
Interest Expense
Earning release - Pre-tax income will be impacted by approximately $1.2 million in interest expense.
Interest will be impacted somewhat by exchange rates because a portion, not all, of BOOM’s debt and LOCs are denominated in Euros.
In mid-November, BOOM will utilize cash to pay down a portion of the syndicated credit agreement. Assuming the interest rate on the cash deposits is less than the average interest rate of the Euro and USD portion of the syndicated credit agreement, the net effect of the pay down should result in lower interest expense.
It is not clear if the guidance for $1.2 million in interest expense is net of interest income. For purposes of this analysis, I will assume it is net of interest income.
Model Interest Expense – $1,200
Other Income and Equity Interest in JV
These numbers are too hard to predict and have fallen on either side of negative or positive and the past few quarters by modest amounts. I am going to just assume $0.
Model Other Income and Equity Interest in JV - $0
Income before Taxes
Operating Income $11,289 – Interest Expense $1,200 = $10,089
Tax Provision
Earning release and 10Q – Full-year 2008 tax provision to approximate 27%
Model Tax Provision - $3,000 (27.01% full-year 2008 and 29.74% for Q4)
Net Income
Income before Taxes $10,089 – Tax Provision $3,000 = $7,089
Weighted Average Diluted Shares Outstanding
I will assume a modest sequential increase similar to last few quarters.
Model Diluted Outstanding – 12,572 shares
EPS
Net Income $7,089 / Diluted Outstanding 12,572 shares = 56c
Average Estimates
Sales – $6,361
EPS – 60c
Average estimates likely reflect management's history of being conservative when giving guidance.
Sensitivity Analysis
Adjusting the gross margin up 100bps adds approximately 3-4c to EPS
An additional $2,000 in sales adds approximately 3c to EPS
I hope this helps.
Tuff
Tuesday, November 18, 2008
Not Your Father's Commodity Company - BOOM Q3 2008
I just finished taking notes on BOOM’s Q3 conference call and 10Q. Considering the tightness in the credit market, slowdown in the economy and precipitous drop in commodity prices (why has “precipitous drop” become my favorite phrase as of late?), I was pleasantly surprised by the results and guidance. Overall, results were better than expected and guidance was in-line with what was given on the Q2 conference call.
Not Your Father’s Commodity Company
BOOM is not your father’s commodity company….that’s because BOOM is not a commodity company. On the conference call, Yvon Cariou, BOOM’s CEO, made it a point to remind investors of this fact. BOOM is an advanced engineered materials company that manufactures high value components for large infrastructure projects. To this regard, BOOM’s margins are not as leveraged to commodity prices as – oh I don’t know – a commodity producer. Furthermore, BOOM’s cost structure is lower than that of commodity producer because BOOM harnesses the power of explosives to achieve what would otherwise require a great deal of capital equipment.
Despite the fact that BOOM is not a commodity company, it is important to keep in mind that the recent, by recent I mean over the last four years, demand for explosion clad has largely been driven by the infrastructure build-out of commodity businesses. While I firmly believe the bull market in commodities has a long ways to go and significant infrastructure development is required to alleviate the long-term supply and demand imbalances, a prolonged downturn in the economy along with an extended period of lower commodity prices could result in postponements and/or cancellations. If this is the case, I believe it will be a temporary phenomenon and ultimately there will be a continuation of the infrastructure build-out. And, any postponement of infrastructure projects will merely serve to prolong the commodities bull market.
Supply Chain Tightness and Pricing
BOOM’s supply chain remains tight but efforts to diversify its supplier network is starting to pay dividends. The situation in Europe is a little better than the U.S. mainly because, in the U.S., the Department of Defense (DoD) is able to “leapfrog” other customers to get PVQ* plates. As I have mentioned in the past, I am pretty certain the DoD uses PVQ plates for armoring MRAP vehicles.
On the call, Yvon made it clear that the supply chain and pricing for PVQ steel plates are different from that of other steel products. While pricing and demand for a lot of steel products have dropped, the same cannot be said for PVQ plates.
* PVQ: an acronym that stands for Pressure Vessel Quality. The Q3 call was the first time management used the acronym on a conference call to describe the carbon steel backer plates. The carbon steel backer plates are welded to the high alloy cladder plates. Throw this acronym around at cocktail parties and people will think you are an industry insider.
Bookings, Backlog and Demand
BOOM management has not seen any material postponements of projects on the “hot list” or cancellation of projects in the backlog. The “hotlist” is as robust as it has been at anytime in the past year and management is encouraged by customer activity.
The backlog was down 6% sequentially but up 28% from the year-ago quarter. Most ($4 million) of the sequential decrease in backlog was merely a function of a stronger USD relative to the Euro. Furthermore, a $5 million refinery order was booked on the first day of Q4 and not included in the backlog.
Competition
On the conference call, an analyst asked about competition from roll-bond and other traditional manufacturers of clad. Management acknowledged that traditional manufacturers of clad have been more present and have more capacity than they have been/have had in the past. I think this is probably true more so in Europe than in the U.S. and that is why the European operations will never have the same margins as the U.S. operations. It still sounds like traditional manufacturers are not able to compete in BOOM’s sweet spot, but BOOM is less apt to get spillover work from traditional manufacturers. Right now, my biggest concern is not competition from another explosion welding company but advances made by traditional cladding companies.
In particular, my concern is that traditional manufacturers will develop a technique that will produce a clad product capable of competing in BOOM’s sweet spot. I may be way off base on this but I think it is a possibility, and I have been on the lookout for any signs of this actually happening. I haven’t seen anything.
Explosion Clad
Clad sales in Q3 were up 6% from the year-ago quarter but down 19% from Q2. The sequential decline was fully expected. In fact, sales in the quarter were slightly better than expected. Despite lower sales in the quarter, the clad division managed to pull off an impressive gross margin of 32.5%, the highest level since the DYNA acquisition. The better than expected margin performance was a result of the disproportionately higher level of sales from the U.S. operations.
European sales were down as a result of summer vacations and some delayed shipments. I lived in Paris for a couple of years and the city would shut down for the month of August because everyone was on vacation. As such, the vacation bit doesn’t come as much of a surprise. The delayed shipments will get recognized as revenue in Q4. Based on the conference call, it sounds like BOOM was ready to ship the plates but they were waiting for the customer to perform certification and testing.
AMK
As far as I can tell, the $2.9 million in revenues on the quarter represents a record quarter for AMK, but the 37.9% gross margin is what caught my eye. Get this division some more business! I like the margin potential here.
Oilfield Products
The Oilfield Products division posted sales of $6.8 million, down 14.7% sequentially. Stronger margins helped make up for the lower sales. Gross margin in the quarter was 35.6% compared to 33.6% in the prior quarter. Operating margin was 12.9% compared to 7.4% in the prior quarter. Margin improvement was the result of product and customer mix.
Taxes
BOOM’s income tax provision was 7% on the quarter versus the 31-32% guidance given on the last call. An IRS examination and some 2007 “book-to-return” adjustments resulted in a $300,000 tax benefit and a $1.1 million tax adjustment, respectively.
Assuming a tax rate of 31.5% in Q3, BOOM’s tax provision would have been $5.3 million instead of $546,000, and EPS would have been 42c instead of 57c. Nonetheless, BOOM would still have beaten estimates of 36c.
For 2009, management expects a tax rate of 31-32%.
Debt/Capital Structure
At the end of the quarter, BOOM’s debt consisted of the following:
LOC current maturities: $4.785 million
LT debt current maturities: $7.741 million
Total current maturities: $12.256 million
LT LOC: $9.536 million
LT debt: $60.440 million
Total long-term maturities: $69.976
Total debt was down $7.1 million from the prior quarter.
Debt/Equity (total liabilities/stockholders’ equity): 1.13 (versus 1.40 at the end of 2007)
Of the long-term debt classified as current, $4.5 million in U.S. borrowings and $1.5 million in Euro borrowings, under the syndicated credit agreement, will be paid-off in November. Unless, additional working capital is needed to support an increase in business, management expects to pay-off some of the revolving line in the fourth quarter.
In the third quarter, BOOM generated over $12 million in EBITDA (not adjusted EBITDA, which excludes stock based compensation) and net interest expense was a little over $1.3 million. Even though the third quarter will likely represent the weakest quarter in terms of EBITDA, BOOM’s interest coverage (EBITDA/interest expense) was 9.1x, which is more than adequate. In Q4, BOOM should generate significantly more EBITDA and pay less in interest.
As a final note on debt, BOOM entered into a new two-year interest rate swap agreement on the U.S. borrowing of the syndicated credit agreement. The agreement, in effect, will convert the variable LIBOR rate to a fixed rate of 4.87% as of November 17, 2008. I have not seen anything on the pricing of the interest rate swap agreement.
Cash Flow/Free Cash Flow
In the third quarter, BOOM generated nearly $13.0 million in cash flow from operations, almost two times net income. Aside from the $2.6 million in add-backs for depreciation and amortization, receivables added over $6.4 million to cash. While BOOM utilized $4.5 million in cash for inventories, I believe this could be a positive sign that BOOM is getting a handle on the supply chain situation.
In his post, TMFBent mentioned that BOOM has cleared $17.5 million in free cash flow year-to-date. Out of curiosity, I went back to see what BOOM generated for free cash flow during the same period in 2007 – drum roll please – $5.4 million. Wow, that is a 224% improvement.
CapEx of $3.2 million was up pretty good from recent quarters. I was a little surprised this wasn’t brought-up on the conference call. When looking at BOOM’s recent capex, I think it is fair to say that a good chunk of spending has been expansionary as opposed to maintenance. At the same time, the breakdown between expansionary and maintenance might be a little more weighted towards maintenance this year than it was last year.
Guidance
I am going to put together another post on guidance that works through an EPS estimate for Q4 based on management guidance.
Management
About a month ago, I met with Yvon Cariou, CEO; Rick Santa, CFO; and, Geoff High, of Pfeiffer High Investor Relations. After about an hour, I left the meeting with some juicy information that everyone would probably like to hear. Are you ready for this? Management is passionate about the company, proud of its employees, confident about how they have positioned the company for the future, savvy in their decision making process and hungry to grow the business. I have always had faith in BOOM’s management, but I have to admit that I came away from this meeting with and even higher level of confidence.
I hope this all helps.
Tuff
Not Your Father’s Commodity Company
BOOM is not your father’s commodity company….that’s because BOOM is not a commodity company. On the conference call, Yvon Cariou, BOOM’s CEO, made it a point to remind investors of this fact. BOOM is an advanced engineered materials company that manufactures high value components for large infrastructure projects. To this regard, BOOM’s margins are not as leveraged to commodity prices as – oh I don’t know – a commodity producer. Furthermore, BOOM’s cost structure is lower than that of commodity producer because BOOM harnesses the power of explosives to achieve what would otherwise require a great deal of capital equipment.
Despite the fact that BOOM is not a commodity company, it is important to keep in mind that the recent, by recent I mean over the last four years, demand for explosion clad has largely been driven by the infrastructure build-out of commodity businesses. While I firmly believe the bull market in commodities has a long ways to go and significant infrastructure development is required to alleviate the long-term supply and demand imbalances, a prolonged downturn in the economy along with an extended period of lower commodity prices could result in postponements and/or cancellations. If this is the case, I believe it will be a temporary phenomenon and ultimately there will be a continuation of the infrastructure build-out. And, any postponement of infrastructure projects will merely serve to prolong the commodities bull market.
Supply Chain Tightness and Pricing
BOOM’s supply chain remains tight but efforts to diversify its supplier network is starting to pay dividends. The situation in Europe is a little better than the U.S. mainly because, in the U.S., the Department of Defense (DoD) is able to “leapfrog” other customers to get PVQ* plates. As I have mentioned in the past, I am pretty certain the DoD uses PVQ plates for armoring MRAP vehicles.
On the call, Yvon made it clear that the supply chain and pricing for PVQ steel plates are different from that of other steel products. While pricing and demand for a lot of steel products have dropped, the same cannot be said for PVQ plates.
* PVQ: an acronym that stands for Pressure Vessel Quality. The Q3 call was the first time management used the acronym on a conference call to describe the carbon steel backer plates. The carbon steel backer plates are welded to the high alloy cladder plates. Throw this acronym around at cocktail parties and people will think you are an industry insider.
Bookings, Backlog and Demand
BOOM management has not seen any material postponements of projects on the “hot list” or cancellation of projects in the backlog. The “hotlist” is as robust as it has been at anytime in the past year and management is encouraged by customer activity.
The backlog was down 6% sequentially but up 28% from the year-ago quarter. Most ($4 million) of the sequential decrease in backlog was merely a function of a stronger USD relative to the Euro. Furthermore, a $5 million refinery order was booked on the first day of Q4 and not included in the backlog.
Competition
On the conference call, an analyst asked about competition from roll-bond and other traditional manufacturers of clad. Management acknowledged that traditional manufacturers of clad have been more present and have more capacity than they have been/have had in the past. I think this is probably true more so in Europe than in the U.S. and that is why the European operations will never have the same margins as the U.S. operations. It still sounds like traditional manufacturers are not able to compete in BOOM’s sweet spot, but BOOM is less apt to get spillover work from traditional manufacturers. Right now, my biggest concern is not competition from another explosion welding company but advances made by traditional cladding companies.
In particular, my concern is that traditional manufacturers will develop a technique that will produce a clad product capable of competing in BOOM’s sweet spot. I may be way off base on this but I think it is a possibility, and I have been on the lookout for any signs of this actually happening. I haven’t seen anything.
Explosion Clad
Clad sales in Q3 were up 6% from the year-ago quarter but down 19% from Q2. The sequential decline was fully expected. In fact, sales in the quarter were slightly better than expected. Despite lower sales in the quarter, the clad division managed to pull off an impressive gross margin of 32.5%, the highest level since the DYNA acquisition. The better than expected margin performance was a result of the disproportionately higher level of sales from the U.S. operations.
European sales were down as a result of summer vacations and some delayed shipments. I lived in Paris for a couple of years and the city would shut down for the month of August because everyone was on vacation. As such, the vacation bit doesn’t come as much of a surprise. The delayed shipments will get recognized as revenue in Q4. Based on the conference call, it sounds like BOOM was ready to ship the plates but they were waiting for the customer to perform certification and testing.
AMK
As far as I can tell, the $2.9 million in revenues on the quarter represents a record quarter for AMK, but the 37.9% gross margin is what caught my eye. Get this division some more business! I like the margin potential here.
Oilfield Products
The Oilfield Products division posted sales of $6.8 million, down 14.7% sequentially. Stronger margins helped make up for the lower sales. Gross margin in the quarter was 35.6% compared to 33.6% in the prior quarter. Operating margin was 12.9% compared to 7.4% in the prior quarter. Margin improvement was the result of product and customer mix.
Taxes
BOOM’s income tax provision was 7% on the quarter versus the 31-32% guidance given on the last call. An IRS examination and some 2007 “book-to-return” adjustments resulted in a $300,000 tax benefit and a $1.1 million tax adjustment, respectively.
Assuming a tax rate of 31.5% in Q3, BOOM’s tax provision would have been $5.3 million instead of $546,000, and EPS would have been 42c instead of 57c. Nonetheless, BOOM would still have beaten estimates of 36c.
For 2009, management expects a tax rate of 31-32%.
Debt/Capital Structure
At the end of the quarter, BOOM’s debt consisted of the following:
LOC current maturities: $4.785 million
LT debt current maturities: $7.741 million
Total current maturities: $12.256 million
LT LOC: $9.536 million
LT debt: $60.440 million
Total long-term maturities: $69.976
Total debt was down $7.1 million from the prior quarter.
Debt/Equity (total liabilities/stockholders’ equity): 1.13 (versus 1.40 at the end of 2007)
Of the long-term debt classified as current, $4.5 million in U.S. borrowings and $1.5 million in Euro borrowings, under the syndicated credit agreement, will be paid-off in November. Unless, additional working capital is needed to support an increase in business, management expects to pay-off some of the revolving line in the fourth quarter.
In the third quarter, BOOM generated over $12 million in EBITDA (not adjusted EBITDA, which excludes stock based compensation) and net interest expense was a little over $1.3 million. Even though the third quarter will likely represent the weakest quarter in terms of EBITDA, BOOM’s interest coverage (EBITDA/interest expense) was 9.1x, which is more than adequate. In Q4, BOOM should generate significantly more EBITDA and pay less in interest.
As a final note on debt, BOOM entered into a new two-year interest rate swap agreement on the U.S. borrowing of the syndicated credit agreement. The agreement, in effect, will convert the variable LIBOR rate to a fixed rate of 4.87% as of November 17, 2008. I have not seen anything on the pricing of the interest rate swap agreement.
Cash Flow/Free Cash Flow
In the third quarter, BOOM generated nearly $13.0 million in cash flow from operations, almost two times net income. Aside from the $2.6 million in add-backs for depreciation and amortization, receivables added over $6.4 million to cash. While BOOM utilized $4.5 million in cash for inventories, I believe this could be a positive sign that BOOM is getting a handle on the supply chain situation.
In his post, TMFBent mentioned that BOOM has cleared $17.5 million in free cash flow year-to-date. Out of curiosity, I went back to see what BOOM generated for free cash flow during the same period in 2007 – drum roll please – $5.4 million. Wow, that is a 224% improvement.
CapEx of $3.2 million was up pretty good from recent quarters. I was a little surprised this wasn’t brought-up on the conference call. When looking at BOOM’s recent capex, I think it is fair to say that a good chunk of spending has been expansionary as opposed to maintenance. At the same time, the breakdown between expansionary and maintenance might be a little more weighted towards maintenance this year than it was last year.
Guidance
I am going to put together another post on guidance that works through an EPS estimate for Q4 based on management guidance.
Management
About a month ago, I met with Yvon Cariou, CEO; Rick Santa, CFO; and, Geoff High, of Pfeiffer High Investor Relations. After about an hour, I left the meeting with some juicy information that everyone would probably like to hear. Are you ready for this? Management is passionate about the company, proud of its employees, confident about how they have positioned the company for the future, savvy in their decision making process and hungry to grow the business. I have always had faith in BOOM’s management, but I have to admit that I came away from this meeting with and even higher level of confidence.
I hope this all helps.
Tuff
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