Market Share
In our last thread (see here), you totalled 31 Bolt vessels and 28 non-Bolt vessels. These numbers did not include WesternGeco, PGS, and a number of other vessels with limited to no information readily available. I have concluded, with a high level of certainty, that all of WesternGeco’s vessels (I get 18 including Western Spirit) and half of PGS’ vessels use Bolt guns. I would also suggest that at least one of the two SeaBird vessels with no listed specifications use Bolt guns. Based on this information, I get 55 Bolt vessels (or 63% of total identified vessels) and 33 non-Bolt vessels. It is my opinion that the limited information above neither proves nor disproves Mr. Soto’s 75% claim. Personally, I tend to believe Mr. Soto.
Furthermore, I think it is important to note that Bolt guns are used on a number of deep crustal research vessels by virtue of Bolt’s large volume guns. The numbers above do not include this market.
Bolt’s High Capacity Experience
WesternGeco has seven high capacity vessels. All seven vessels use Bolt guns. CGV has four high capacity vessels that use Bolt guns. These four vessels came over from Veritas after the acquisition. While Veritas is now a part of CGV, the fact that both Veritas and WesternGeco chose Bolt for their high capacity vessels strongly suggests that Bolt is going to have future success winning contracts for high capacity vessels. To think that Bolt is not going to be competitive in this space, in my opinion, is just plain wrong.
Does High Capacity or Low Capacity Even Matter
Does it matter if a vessel is high capacity or low capacity when selecting an air gun? Short answer…no.
What makes a high capacity vessel a high capacity vessel? When I look at the specifications of high capacity vessels there seems to be little to no emphasis on the source system. Instead the focus is on the recording system, processing system and the vessel itself. The source system is simply not a major factor in what makes a high capacity vessel a high capacity vessel.
What makes Sercel’s G Gun especially well suited for high capacity vessels? Given that the source system is not a major factor in what makes a high capacity vessel a high capacity vessel, the answer is very little, if anything. Furthermore, when I look at Sercel’s Marine Source brochure, there are few, if any, references to features that are specifically designed for high capacity vessels versus low capacity vessels. If Sercel guns had a list of features specific to or especially well suited for high capacity vessels, I would think these features would be big selling points. Instead, the G Gun is described as being suitable for a range of uses from conventional to high resolution surveys. This seems to support the idea that the source system is not what makes a high capacity vessel a high capacity vessel.
(The S12 Watergun is described as being well suited for very high resolution surveys but I haven’t seen this gun on any of the vessels that I have looked at. I don’t even see them on CGV’s high resolution vessels.)
When it comes to selecting the the source system, whether it is for a high capacity vessel or a low capacity vessel, the decision making process and the requirements are mostly the same . So what are some of the factors in the decision making process for a customer selecting an air gun and an air gun manufacturer? For starters, I think it is important to note that the end result of something like a Bolt LL Gun and a Sercel G Gun is substantially the same. As such, the actual end result produced by the source system is not a major consideration in the selection process. Furthermore, it is important to note that air guns operate under harsh conditions on a day-to-day basis and each gun fires approximately 800,000 to 1,000,000 times per year while traversing a total of about 20,000 kms. Given the harsh operating conditions, the guns and peripherals will require repairs and replacement parts on a regular basis. With the above being said, a customer will consider the following factors when selecting a source system and manufacturer: the reliability of the air guns, peripherals and manufacturer; the technical capacity of the air guns (not specific to high capacity or low capacity vessels); the technical capacity and availability of customer support; the availability of spare parts; and cost (up-front and maintenance).
The New Gun
Despite CGV’s press release announcing its new G Gun II, Bolt’s APG Gun is arguably the only genuinely new air gun on the market. The APG gun has several characteristics that make a lot of economic sense in streamer applications. Furthermore, the APG gun can be arranged in a configuration that creates a spot light effect, in terms of acoustic pulses, that makes it especially well suited for Life of Field Seismic (LoFS) applications, often times referred to as 4D.
The link below discusses the Valhall LoFS survey and describes the APG gun as follows:
“During seismic acquisition, a new type of airgun is fired from a standby vessel - the annular port airgun. The new source design is an annulus containing the air chamber and shuttle valve. These surround a hollow passage through which air supply hoses and electrical control cables are routed. Increased acoustic output per unit volume of air is due to increased surface area of the toroidal-shaped bubble (rather than spherical). This design eliminates gun plates, air manifolds, exposed air hoses and electrical cable jumpers. It protects fittings and connectors from the air blast, and results in less drag due to smaller sub-array profiles. These are important considerations, since a field vessel will tow the source arrays, taking two to three weeks and some 50,000 firings to complete one survey - and surveys are to be repeated every three months.”
Valhall LoFS Survey
***WesternGeco***
It has been suggested that WesternGeco favorable impact on Bolt is diminishing. With WesternGeco’s recent acquisition of EasternEcho and organic growth initiatives, I don’t see WesternGeco’s impact diminishing.
Well, that is it for now.
Good luck,
Tuff
Showing posts with label BTJ. Show all posts
Showing posts with label BTJ. Show all posts
Thursday, December 20, 2007
Tuesday, November 6, 2007
Did I Say Explosion?
Don’t ask me how it happened but in my last post covering Bolt Technology Corporation (“Bolt”) (AMEX: BTJ) I incorrectly wrote that some of Bolt’s fiscal 2007 capex spending went towards the replacement of equipment that was lost in an explosion at one of its manufacturing facilities. It must have been pretty late at night when I wrote that section of my post because there was no such explosion. Somehow my twisted little mind butchered the words from the fiscal 2007 10K and substituted “explosion” for “expansion.” At least that is how I think it happened. Either way, its was Bolt’s revenues and earnings exploding in fiscal ’07 and not its manufacturing facility.
Here is what was actually written in Bolt's 10K:
“For fiscal 2007, the Company used $949,000 for capital expenditures funded from operating cash flow which relate to new and replacement equipment and a small expansion of the Cypress, Texas manufacturing facility.”
What’s New?
Since writing my unabridged analysis of Bolt in early October, Bolt released financial results for its first quarter of fiscal 2008 and I had an opportunity to speak with Mr. Raymond Soto, President and Chief Executive Officer. Normally, I like to wait for the 10Q filing before posting my thoughts on a quarterly earnings report but I feel as though I have enough new information to justify writing an updated blog post without the 10Q filing. In this post, I will first cover the results for the quarter and then I will share some of the details from my conversation with Mr. Soto.
Q1 2008 Financial Results
Sales
Sales for the quarter grew an impressive 52.59% to $15.26 million from $10.00 million in the year ago quarter.
I am not overly concerned with sequential quarterly comparisons but I will point out that Bolt’s sales were down slightly from the $15.47 million in the prior quarter. To this regard, it is important to note that Bolts sales growth over the past couple of years has been largely attributable to increased sales of complete seismic source systems, which accounted for 53.88% of sales growth in 2007. These systems are typically sold to customers building or converting new seismic vessels and can run in the millions of dollars. As such, Bolt’s sales from one quarter to the next can fluctuate depending on the timing and delivery of these orders. In the most recent quarter, Bolt’s results were negatively impacted by a delayed shipment of a seismic source system to one of its customers. The order, which is in excess of $1.5 million, was delayed because the seismic vessel was not ready to take delivery of the system. Nonetheless, Bolt management expects the order to ship in the current quarter.
It was not mentioned in the press release, but I am fairly certain the delayed order was for SCAN Geophysical’s (“SCAN’s”) new SCAN Stigandi vessel. On October 17, SCAN announced in a press release that the delivery of the SCAN Stigandi vessel was going to be delayed. I saw the press release when it came out but I was uncertain whether or not it would affect Bolt’s Q1. Here is the press release from SCAN announcing the delay and here are the specifications for the SCAN Stigandi, which list Bolts APG guns in the seismic equipment specs.
Just today, SCAN issued another press release that indicates that the SCAN Stigandi vessel is still on track for the early 2008 delivery.
Margins and Taxes
The press release lumps costs and expenses into one line item so there is not enough detail to calculate gross margins.
Utilizing the information available in the release, I calculate a pre-tax margin of 32.90% up 329 basis points from the year ago quarter and 55 basis points from the prior quarter. The year-over-year and sequential improvements are likely the result of a high level of fixed costs being spread over higher sales, increased operational efficiencies and/or improved product mix.
The implied tax rate for the quarter was 31.19% compared to 32.39% in the year-ago quarter and 32.35% in the prior quarter. Recall from my last post that Bolt’s tax rate has been below the effective tax rate due to tax benefits from export sales and the manufacturer’s deductions.
Profit margins for the quarter increased to 22.64% compared to 20.02% in the year-ago quarter and 21.92% in the prior quarter. The improvement in profit margin for the quarter was a result of higher operating margins, discussed above, and the lower income tax rate.
Net Income and EPS
Bolt’s net income increased 72.58% to $3.46 million compared to $2.00 million in the year-ago quarter. Despite the modest sequential decline in sales, net income increased 1.92% from last quarter.
Management’s Outlook
Bolt management does not hold conference calls to discuss quarterly results. Furthermore, the press releases only have one or two quick quotes from management about what lies ahead. Here is what management had to say in the most recent press release:
“Incoming orders and requests for quotations continue to be strong and, accordingly, we continue to believe that fiscal 2008 will be another strong year for our Company.”
My Discussion with Mr. Soto
Early last week I had a phone conversation with Mr. Soto to discuss a number of questions I had as both a shareholder and a blogger. As Bolt does not hold conference calls to discuss quarterly earnings, this was my first experience talking with management and I found the conversation to be extremely insightful. While I didn’t ask overly specific questions or seek any kind of guidance, I came away from the conversation with a high level of comfort about my investment in Bolt and the company’s leadership.
Below I will highlight my take-away from my conversation with Mr. Soto. The information below should not be construed to be Mr. Soto’s specific thoughts, opinions, or words. Our conversation was very fluid and didn’t lend itself to careful note taking. As such, the notes below only represent my interpretation and recollection of the conversation along with my thoughts and opinion.
On Bolt’s website it says that Bolt’s Long-Life Air Guns are the most widely used air guns. It also says that by 2000 Bolt sold in excess of 4,000 Long-Life Air Guns, representing over 75% of the world’s seismic fleet. Based on my conversation with Mr. Soto, Bolt likely owns 75-80% of the seismic source market. Bolt invented the air gun and has worked hard to stay on top of the seismic source market. Bolt’s dominant share of the seismic source market is truly impressive.
Bolt has only two real competitors. ION Geophysical designs and manufactures air guns but they are technically inferior to Bolt’s guns. Sercel, a division of CGGVeritas, has a decent gun but lets face it, a customer of Sercel competes with CGGVeritas.
CGGVeritas is one of Bolt’s largest customers. A large percentage of sales to CGGVeritas are for connectors and other equipment sold by Bolt’s A-G operating unit. Nonetheless, Bolt’s air guns can be found on a large number of CGGVeritas’ vessels, including its recently constructed vessels.
With the recent expansion to the manufacturing facility in Cypress, Texas and Bolt’s ability to outsource some of its manufacturing needs, capacity does not seem to be an issue.
I was a little concerned that the delay of the SCAN vessel was a sign of a capacity issue beyond Bolt. While shipyards are very busy, I don’t get the sense that this is a major concern at this time. The construction/conversion of a seismic vessel is a significant undertaking and a few minor glitches can easily result in delays like the one with SCAN.
Most of the R&D spending in recent years has gone towards the development of the APG Air Gun and SSMS. These products are in their final stage of development and so far have been very well received by Bolt’s customers. R&D spending in fiscal 2008 will go towards the final development stage (finishing touches) of these products.
The Long-Life Air Gun and APG Air Gun are competing products. The APG Air Guns are more advanced than the Long-Life Air Guns and have more desirable attributes. The APG Guns are not necessarily going to replace the Long Life Air Guns currently in service but are more apt to compete for sales on newly constructed vessels. Nonetheless, Bolt still gets and will likely continue to get orders for its Long-Life Air Guns on new vessels.
Air guns operate in harsh environments and the regular firing of the guns at 1/3,000 of a second puts tremendous strain on the guns and their parts. While Bolt’s guns are built to be long lasting, hence the name, replacement parts are still an important part of Bolt’s business. With a rapidly growing install base, sales of replacement parts will continue to grow. There was a recent interview with an analyst where the analyst compared the steady stream of income from replacement parts with that of the razor blade business model.
The majority of Bolt’s equipment is sold to customers operating offshore seismic vessels but Bolt sells a fair amount of equipment to customers operating in transition zones. Vessels operating in transition zones require fewer air guns.
Onshore seismic products contribute little, if anything, to sales. In the 1980’s Bolt tried to become a bigger player in the onshore seismic market but it never really worked out. I might be wrong but thinking back on some of my research, I want to say Bolt operated one or maybe more onshore seismic crews back in the 1980s.
Bolt is a small company and does not have the resources to staff a team of in-house economists to predict the future. At the same time, some of Bolt’s customers, especially Schlumberger, are significantly larger and spend large amounts of money on market research. These same customers have aggressively been adding to their seismic fleet and have indicated to Bolt that they plan to continue to add vessels in the future. Investors looking for more research on the oil & gas markets should go to Schlumberger’s website and listen to its conference calls.
As the news is relatively new, I did not discuss WesternGeco’s plan to purchase Eastern Echo with Mr. Soto. As WesternGeco is a customer of Bolt, this news should be considered a positive for Bolt investors. Eastern Echo has four vessels under construction, two vessels scheduled for construction and options for two additional vessels. This news is not only positive for Bolt investors but also a good indicator of industry strength.
Bolt purchased A-G back in 1999. Today, A-G accounts for somewhere around 40% of Bolt’s sales. Wouldn’t it be nice to have that kind of success with RTS? Either way, RTS was a good acquisition and adds nicely to Bolt’s seismic source offering.
As for other acquisition, I wouldn’t be surprised to see additional acquisitions in the future. High margin businesses with proprietary products that will add to Bolt’s seismic source offering would be the ideal fit. No commodity type business for Mr. Soto. I didn’t get the sense from my conversation with Mr. Soto that there was an impending acquisition but I did get the sense that a future acquisition was well within the realm of possibilities.
I mentioned to Mr. Soto that retail investors are likely a little spooked about the pending increase in available shares. Mr. Soto suggested that I go back and look at the proxy statement and he discussed the possible reasons for increasing the available shares. He indicated that the company was not looking to do anything that would be dilutive to or have a negative impact on its shareholders. Personally, I strongly believe based on the number of shares outstanding, proposed increase in available shares and the wording of the proxy statement that the company is planning for an eventual stock split.
Bolt has steadily increased margins over the past couple of years. When I asked Mr. Soto if there was room for additional margin improvement, he indicated that he thought there was still room for some improvement. In particular, Mr. Soto referenced the recent non-recurring professional fees associated with Sarbox compliance and the RTS acquisition as potential drivers of additional margin improvement. Furthermore, I believe Bolt has a high percentage of fixed expenses. As such, any increase in sales will result in higher margins.
In my last post, I talked about advanced survey techniques resulting in more streamers and more guns per vessel. If I understood Mr. Soto correctly, the number of guns per vessels hasn’t really changed all that much and that the number of streamers on a vessel doesn’t drive the number of guns per vessel. Nonetheless, advanced survey techniques require more vessels and the success of advanced survey techniques has increased the demand for seismic surveys and vessels.
Bolt plans to implement a price increase somewhere in the range of 6-7% at the beginning of the calendar year. As Bolt will already have contracts outstanding from 2007, it will take a little while for the full price increases to fully work themselves into its financial results. According to Mr. Soto, Bolt could increase prices more if it wanted to but it wasn’t looking to be a pig. “You know what happens to pigs don’t you?” Mr. Soto asked. Okay. Let me step back a minute and go back to my note on the proposed increase in available shares. If Mr. Soto is cautious about being a “pig” in dealing with customers, wouldn’t you expect him to be equally cautions in dealing with shareholders. If there are any retail holders out there concerned about the proposed increase in available shares, I don’t think Mr. Soto has any plans to do us wrong.
Well, that is all I have for now. Do your own due diligence and don’t go by me. I am just some guy blogging about stocks in my spare time and I own shares of Bolt.
Good luck,
Tuff
Here is what was actually written in Bolt's 10K:
“For fiscal 2007, the Company used $949,000 for capital expenditures funded from operating cash flow which relate to new and replacement equipment and a small expansion of the Cypress, Texas manufacturing facility.”
What’s New?
Since writing my unabridged analysis of Bolt in early October, Bolt released financial results for its first quarter of fiscal 2008 and I had an opportunity to speak with Mr. Raymond Soto, President and Chief Executive Officer. Normally, I like to wait for the 10Q filing before posting my thoughts on a quarterly earnings report but I feel as though I have enough new information to justify writing an updated blog post without the 10Q filing. In this post, I will first cover the results for the quarter and then I will share some of the details from my conversation with Mr. Soto.
Q1 2008 Financial Results
Sales
Sales for the quarter grew an impressive 52.59% to $15.26 million from $10.00 million in the year ago quarter.
I am not overly concerned with sequential quarterly comparisons but I will point out that Bolt’s sales were down slightly from the $15.47 million in the prior quarter. To this regard, it is important to note that Bolts sales growth over the past couple of years has been largely attributable to increased sales of complete seismic source systems, which accounted for 53.88% of sales growth in 2007. These systems are typically sold to customers building or converting new seismic vessels and can run in the millions of dollars. As such, Bolt’s sales from one quarter to the next can fluctuate depending on the timing and delivery of these orders. In the most recent quarter, Bolt’s results were negatively impacted by a delayed shipment of a seismic source system to one of its customers. The order, which is in excess of $1.5 million, was delayed because the seismic vessel was not ready to take delivery of the system. Nonetheless, Bolt management expects the order to ship in the current quarter.
It was not mentioned in the press release, but I am fairly certain the delayed order was for SCAN Geophysical’s (“SCAN’s”) new SCAN Stigandi vessel. On October 17, SCAN announced in a press release that the delivery of the SCAN Stigandi vessel was going to be delayed. I saw the press release when it came out but I was uncertain whether or not it would affect Bolt’s Q1. Here is the press release from SCAN announcing the delay and here are the specifications for the SCAN Stigandi, which list Bolts APG guns in the seismic equipment specs.
Just today, SCAN issued another press release that indicates that the SCAN Stigandi vessel is still on track for the early 2008 delivery.
Margins and Taxes
The press release lumps costs and expenses into one line item so there is not enough detail to calculate gross margins.
Utilizing the information available in the release, I calculate a pre-tax margin of 32.90% up 329 basis points from the year ago quarter and 55 basis points from the prior quarter. The year-over-year and sequential improvements are likely the result of a high level of fixed costs being spread over higher sales, increased operational efficiencies and/or improved product mix.
The implied tax rate for the quarter was 31.19% compared to 32.39% in the year-ago quarter and 32.35% in the prior quarter. Recall from my last post that Bolt’s tax rate has been below the effective tax rate due to tax benefits from export sales and the manufacturer’s deductions.
Profit margins for the quarter increased to 22.64% compared to 20.02% in the year-ago quarter and 21.92% in the prior quarter. The improvement in profit margin for the quarter was a result of higher operating margins, discussed above, and the lower income tax rate.
Net Income and EPS
Bolt’s net income increased 72.58% to $3.46 million compared to $2.00 million in the year-ago quarter. Despite the modest sequential decline in sales, net income increased 1.92% from last quarter.
Management’s Outlook
Bolt management does not hold conference calls to discuss quarterly results. Furthermore, the press releases only have one or two quick quotes from management about what lies ahead. Here is what management had to say in the most recent press release:
“Incoming orders and requests for quotations continue to be strong and, accordingly, we continue to believe that fiscal 2008 will be another strong year for our Company.”
My Discussion with Mr. Soto
Early last week I had a phone conversation with Mr. Soto to discuss a number of questions I had as both a shareholder and a blogger. As Bolt does not hold conference calls to discuss quarterly earnings, this was my first experience talking with management and I found the conversation to be extremely insightful. While I didn’t ask overly specific questions or seek any kind of guidance, I came away from the conversation with a high level of comfort about my investment in Bolt and the company’s leadership.
Below I will highlight my take-away from my conversation with Mr. Soto. The information below should not be construed to be Mr. Soto’s specific thoughts, opinions, or words. Our conversation was very fluid and didn’t lend itself to careful note taking. As such, the notes below only represent my interpretation and recollection of the conversation along with my thoughts and opinion.
On Bolt’s website it says that Bolt’s Long-Life Air Guns are the most widely used air guns. It also says that by 2000 Bolt sold in excess of 4,000 Long-Life Air Guns, representing over 75% of the world’s seismic fleet. Based on my conversation with Mr. Soto, Bolt likely owns 75-80% of the seismic source market. Bolt invented the air gun and has worked hard to stay on top of the seismic source market. Bolt’s dominant share of the seismic source market is truly impressive.
Bolt has only two real competitors. ION Geophysical designs and manufactures air guns but they are technically inferior to Bolt’s guns. Sercel, a division of CGGVeritas, has a decent gun but lets face it, a customer of Sercel competes with CGGVeritas.
CGGVeritas is one of Bolt’s largest customers. A large percentage of sales to CGGVeritas are for connectors and other equipment sold by Bolt’s A-G operating unit. Nonetheless, Bolt’s air guns can be found on a large number of CGGVeritas’ vessels, including its recently constructed vessels.
With the recent expansion to the manufacturing facility in Cypress, Texas and Bolt’s ability to outsource some of its manufacturing needs, capacity does not seem to be an issue.
I was a little concerned that the delay of the SCAN vessel was a sign of a capacity issue beyond Bolt. While shipyards are very busy, I don’t get the sense that this is a major concern at this time. The construction/conversion of a seismic vessel is a significant undertaking and a few minor glitches can easily result in delays like the one with SCAN.
Most of the R&D spending in recent years has gone towards the development of the APG Air Gun and SSMS. These products are in their final stage of development and so far have been very well received by Bolt’s customers. R&D spending in fiscal 2008 will go towards the final development stage (finishing touches) of these products.
The Long-Life Air Gun and APG Air Gun are competing products. The APG Air Guns are more advanced than the Long-Life Air Guns and have more desirable attributes. The APG Guns are not necessarily going to replace the Long Life Air Guns currently in service but are more apt to compete for sales on newly constructed vessels. Nonetheless, Bolt still gets and will likely continue to get orders for its Long-Life Air Guns on new vessels.
Air guns operate in harsh environments and the regular firing of the guns at 1/3,000 of a second puts tremendous strain on the guns and their parts. While Bolt’s guns are built to be long lasting, hence the name, replacement parts are still an important part of Bolt’s business. With a rapidly growing install base, sales of replacement parts will continue to grow. There was a recent interview with an analyst where the analyst compared the steady stream of income from replacement parts with that of the razor blade business model.
The majority of Bolt’s equipment is sold to customers operating offshore seismic vessels but Bolt sells a fair amount of equipment to customers operating in transition zones. Vessels operating in transition zones require fewer air guns.
Onshore seismic products contribute little, if anything, to sales. In the 1980’s Bolt tried to become a bigger player in the onshore seismic market but it never really worked out. I might be wrong but thinking back on some of my research, I want to say Bolt operated one or maybe more onshore seismic crews back in the 1980s.
Bolt is a small company and does not have the resources to staff a team of in-house economists to predict the future. At the same time, some of Bolt’s customers, especially Schlumberger, are significantly larger and spend large amounts of money on market research. These same customers have aggressively been adding to their seismic fleet and have indicated to Bolt that they plan to continue to add vessels in the future. Investors looking for more research on the oil & gas markets should go to Schlumberger’s website and listen to its conference calls.
As the news is relatively new, I did not discuss WesternGeco’s plan to purchase Eastern Echo with Mr. Soto. As WesternGeco is a customer of Bolt, this news should be considered a positive for Bolt investors. Eastern Echo has four vessels under construction, two vessels scheduled for construction and options for two additional vessels. This news is not only positive for Bolt investors but also a good indicator of industry strength.
Bolt purchased A-G back in 1999. Today, A-G accounts for somewhere around 40% of Bolt’s sales. Wouldn’t it be nice to have that kind of success with RTS? Either way, RTS was a good acquisition and adds nicely to Bolt’s seismic source offering.
As for other acquisition, I wouldn’t be surprised to see additional acquisitions in the future. High margin businesses with proprietary products that will add to Bolt’s seismic source offering would be the ideal fit. No commodity type business for Mr. Soto. I didn’t get the sense from my conversation with Mr. Soto that there was an impending acquisition but I did get the sense that a future acquisition was well within the realm of possibilities.
I mentioned to Mr. Soto that retail investors are likely a little spooked about the pending increase in available shares. Mr. Soto suggested that I go back and look at the proxy statement and he discussed the possible reasons for increasing the available shares. He indicated that the company was not looking to do anything that would be dilutive to or have a negative impact on its shareholders. Personally, I strongly believe based on the number of shares outstanding, proposed increase in available shares and the wording of the proxy statement that the company is planning for an eventual stock split.
Bolt has steadily increased margins over the past couple of years. When I asked Mr. Soto if there was room for additional margin improvement, he indicated that he thought there was still room for some improvement. In particular, Mr. Soto referenced the recent non-recurring professional fees associated with Sarbox compliance and the RTS acquisition as potential drivers of additional margin improvement. Furthermore, I believe Bolt has a high percentage of fixed expenses. As such, any increase in sales will result in higher margins.
In my last post, I talked about advanced survey techniques resulting in more streamers and more guns per vessel. If I understood Mr. Soto correctly, the number of guns per vessels hasn’t really changed all that much and that the number of streamers on a vessel doesn’t drive the number of guns per vessel. Nonetheless, advanced survey techniques require more vessels and the success of advanced survey techniques has increased the demand for seismic surveys and vessels.
Bolt plans to implement a price increase somewhere in the range of 6-7% at the beginning of the calendar year. As Bolt will already have contracts outstanding from 2007, it will take a little while for the full price increases to fully work themselves into its financial results. According to Mr. Soto, Bolt could increase prices more if it wanted to but it wasn’t looking to be a pig. “You know what happens to pigs don’t you?” Mr. Soto asked. Okay. Let me step back a minute and go back to my note on the proposed increase in available shares. If Mr. Soto is cautious about being a “pig” in dealing with customers, wouldn’t you expect him to be equally cautions in dealing with shareholders. If there are any retail holders out there concerned about the proposed increase in available shares, I don’t think Mr. Soto has any plans to do us wrong.
Well, that is all I have for now. Do your own due diligence and don’t go by me. I am just some guy blogging about stocks in my spare time and I own shares of Bolt.
Good luck,
Tuff
Tuesday, October 2, 2007
The Nuts and Bolts of Bolt
For a long time I wanted to post a blog entry about Bolt Technology Corporation (“Bolt”) (Ticker Symbol: BTJ) but I didn’t for a couple of reasons. For starters, Bolt shares had been “bolting” higher through much of 2007 (last pun…I promise). From its 2007 low on January 11th to its high on July 9th, shares were up more than 270%. Furthermore, the run-up from January to July came without a pullback of any real significance. As shares kept moving higher, I was convinced that a pullback was imminent and didn’t feel comfortable blogging about Bolt under the circumstances.
Aside from Bolt’s rapid price acceleration and my fear of an imminent pullback, I hesitated to blog about Bolt because it was at the top of Investor’s Business Daily (“IBD”) weekly list of top 100 stocks. Its high ranking on the IBD list captured the interest of the highly caffeinated “IBD crowd” and momentum traders that often times suffer from A.D.H.D. As I have only blogged about a handful of stocks since starting my blog in early 2007, I didn’t want to blog about such a highly followed stock and come across as a bandwagon investor.
Recently, Bolt experienced a significant pullback that took it nearly 48% off its high from early July. Because of the steep pullback, Bolt was booted from the IBD list. With Bolt well of its highs and nowhere to be found on the IBD list, I decided to mention Bolt in a blog entry last week. At the time, shares of Bolt were trading at $33.70 and I wrote that I was accumulating additional shares and that I would post a complete blog entry in the coming week.
It is now one week later and my blog entry is complete. My timing has never been all that great but in the last week shares of Bolt are up 18.7%. I didn’t know I had such a following. I am kidding of course. Anyways, here it is………..
Seismic Exploration
Higher energy prices have led to a substantial increase in spending on oil and gas exploration, development and production. Given the underlying fundamentals in the energy market, higher energy prices will likely persist for years to come and, in turn, spending will continue to grow.
Spending on oil and gas exploration, development and production has risen at such a rapid pace in recent years that it has pushed up the cost of associated labor and equipment. With the higher cost of labor and equipment, the cost of drilling a well is significant. Add opportunity cost into the mix and it is not surprising that oil and gas companies are willing to go the extra mile on the front-end to avoid drilling a dry well. To this regard, seismic exploration plays an important role in minimizing exploration risks.
Seismic exploration is the use of reflection seismology to identify and evaluate subterranean formations that are favorable for the accumulation of hydrocarbons. There are three basic systems at work in reflection seismology: the source, receiving, and processing systems (Ref.). The source system is responsible for sending elastic waves that travel deep into the earth. As the waves travel through the earth, some of the waves reflect off subterranean formations. Reflected waves are then captured or received as signals by geophones (land) or hydrophones (marine) and sent to a special recorder that converts the signals to a digital format (the receiving system). The processing system, consisting of powerful computers and highly complex software programs, manipulates and processes the data to produce a subsurface profile or map. Geologists interpret the data to determine if and where there are formations favorable for the accumulation of hydrocarbons.
The source, receiving, and processing systems are interactive systems. As interactive systems, an advance in one system enhances the utility of the other systems. In recent years, there have been a number of enhancements across all three systems. Today, advanced survey techniques (3D and 4D) provide clearer and more reliable subsurface profiles that have substantially improved drilling success rates and the demand for seismic exploration.
While seismic exploration is an important tool in mitigating exploration risk, it is also an important tool in field development and reservoir management activities.
Bolt Basics
Bolt's Niche
Seismic exploration can take place on land, over water (marine) and in transition zones. In marine seismic exploration, seismic vessels tow streamers of air guns and hydrophones across a survey area. The air guns, which replaced dynamite several decades ago, are the main component of the marine seismic source system. Air guns use compressed air to create acoustic waves that travel through the water and beneath the surface of the earth. Working with the air guns as part of the source system are source monitoring systems (“SSMS”), source controllers, source synchronizers, cables, and electrical connectors.
Bolt designs, manufactures and sells different components of the seismic source system including the: air guns; seismic source monitoring systems (“SSMS”); source controllers; source synchronizers, cables and electrical connectors. Bolt also designs, manufactures and sells “near-field” hydrophones and pressure transducer. Near-field hydrophones and pressure transducers differ from far-field hydrophones and pressure transducers in that they measure output from the individual air guns and pressure at the air guns, respectively.
A seismic vessel with its streamers looks like this.
Business Segments
Bolt operates two business segments. The geophysical equipment segment consists of two operating units: Bolt Technology Corporation, a manufacturer and seller of air guns and replacement parts; and, A-G Geophysical Products, Inc., a manufacturer and seller of underwater electrical connectors and cables, seismic source monitoring systems and hydrophones.
In 2007, Bolt acquired Real Time Systems (“RTS”). RTS develops, manufactures and sells controllers and synchronizers for marine seismic energy sources (air guns). RTS products are designed to control and synchronize up to 96 air guns in a single seismic exploration vessel. RTS will operate in the geophysical equipment segment but it is not clear whether it will remain a separate operating unit or if Bolt will roll it into Bolt Technology Corporation or A-G.
The second business segment is the industrial products segment. Custom Products Corp. is the only operating unit in the industrial products segment. Custom Products designs, manufactures and sells miniature industrial clutches and brakes and sells sub-fractional horsepower electrical motors. In this blog post, I focus mostly on the geophysical segment because I see this segment as the main driver of past and future growth. Nonetheless, at 7% of revenues in fiscal 2007, the Custom Products division is not insignificant. Furthermore, management is optimistic about this division going into 2008 because of anticipated sales to new customers and higher pricing.
History
Bolt has decades of experience in the seismic source business. The timeline below outlines the major milestones in Bolt’s history that have made Bolt what it is today.
1962 –Bolt organized as a corporation.
1963 –Bolt invented the Marine Air Gun. Before Bolt invented the Marine Air Gun, offshore seismic acquisition crews generated seismic waves using dynamite.
1993 – Bolt introduced the Long-Life Marine Air Gun. Bolt’s Long-Life Marine Air Guns extended the period between routine air gun maintenance cycles. These guns also provided improved high peak sound pressure levels and improved frequency spectrum as compared with older models. These improved characteristics were advantageous to geoscientists in designing 3-D surveys. Bolt’s still sells its Long-Life Air Guns and they range in price from $10,000 to $20,000. The majority of air guns are sold in the $12,000 range. According to Bolt’s website, Bolt’s Long-Life guns have become the most widely used air gun for marine seismic exploration.
1998 – Bolt acquired Custom Products Corp. The acquisition of Custom Products was a deviation from the company’s core business but, in a June 1998 article in Investors Business Daily (“IBD”), Mr. Soto said, “This is a basic business with (manufacturing) operations similar to ours. It's also a big cash generator.”
1999 – Bolt acquired A-G
2003 – From fiscal 2000 to fiscal 2003, Bolt was developing its Annular Port Air Gun (“APG Gun”). Bolt received its first order for its APG Gun in 2003. The configuration of APG Guns offered significant improvements in reliability, operating efficiency, and acoustic output compared to the configuration of all traditional air guns. APG guns typically range in price from $26,000 to $32,000 with the majority of the APG guns sold in the $28,000 price range.
2005 - In fiscal 2004, the Company completed its stage one development of its digital SSMS. SSMS is utilized by marine seismic contractors to measure air gun depth, air pressure, and “near field” energy output for each gun array to enhance the accuracy and therefore the usefulness of 3-D seismic survey data. Subsequently, Bolt developed stage two of SSMS to provide high pressure air flow control to the air guns. The first sales of SSMS were made in fiscal 2005 and amounted to approximately $300,000. SSMS sales increased to over $2,000,000 in fiscal 2007.
2007 – Bolt acquired RTS.
Demand
Seismic exploration contractors are rapidly expanding their seismic fleets through the construction of new vessels and the conversion of existing vessels (i.e. cable layers and fishing boats). According to a survey in the March issue of Offshore Magazine published in March of 2007, there were 140 vessels in the global seismic fleet. For several reasons, the global fleet of seismic vessels is poised to grow at a rapid pace over the next several years.
In a Reuter’s article dated June 13, 2007, Det Norske Veritas (DNV), a ship classifier, said it classified five conversions seismic vessels to date in 2007 and had another eight vessels in the process of being converted and awaiting classification. Furthermore, DNV had another 20 seismic vessels under construction and awaiting classification. According to the article, DNV has been experiencing a tenfold increase in classification requests. Keep in mind that DNV is only one of three large ship classifiers and 50 ship classifiers worldwide (Ref.). The fleet of seismic vessels has been growing at a rapid pace and it appears that this trend is likely to continue into the future. In the article, DNV described the demand for seismic vessels as “booming.”
So what is driving the demand for seismic vessels?
Higher energy prices have led to an increase in exploration activity around the globe. Seismic exploration is the primary method of exploring for hydrocarbons. Furthermore, seismic surveys have improved significantly over the last decade. These improvements have increased success rates of drillers. Finally, new survey techniques require more data and often times multiple vessels in one survey zone or more time per vessel in a survey zone. The combination of increased exploration activity, higher success rates, and more vessels time per survey zone is driving the demand for seismic vessels and Bolt’s geophysical products.
The growing fleet of seismic vessels is not the only factor driving demand for geophysical products. Changes in streamer configurations and new technologies have had a positive impact on the demand for geophysical equipment.
Improved computing capacity and more complex software programs for analyzing seismic data has given birth to advanced survey techniques (3-D, 4-D). These advanced survey techniques provide greater visibility of the subsurface but require significantly more data than traditional surveys. As such, advanced surveys require more vessels, larger streamers, more streamers and more air guns, hydrophones, electrical connectors, etc, per streamer.
Bolt has added new products and made enhancements to existing products that specifically address the requirements of advanced surveys. These enhancements and additions have created an opportunity for Bolt to sell its products for use on existing seismic vessels. Most recently, Bolt has completed the development of its SSMS and APG Gun.
Customers
Bolt’s principal customers for geophysical equipment are worldwide marine seismic exploration contractors, who operate seismic vessels for collection of seismic data in accordance with their customers’ specifications or for their own seismic data libraries, and foreign national oil and gas companies.
During fiscal 2007, 2006 and 2005, approximately 72%, 71% and 48%, respectively, of the Company’s sales were from shipments to customers outside the United States or to foreign locations of United States customers.
A significant portion of Bolt’s sales are attributable to a small number of customers. The loss of any one customer would be significant. Ten percent customers are listed below:
While Bolt’s geographical diversification of revenues is a positive, the customer concentration is a negative. Nonetheless, new customers have replaced old customers on the 10% customer list over the course of the last couple of years.
Competitors
Bolt competes with Sercel, a division of CGG-Veritas, and ION Geophysical Corporation, formerly known as Input/Output. While Sercel is a competitor, its parent company is a large customer of Bolt. ION Geophysical is a manufacturer of onshore and offshore seismic equipment. Several years ago ION Geophysical acquired two seismic source companies to build up its offshore seismic source offering. Both Sercel and ION Geophysical are significantly larger than Bolt and offer a wider array of geophysical products.
Bolt has been in the offshore seismic source business for several decades and they have been at the forefront of the industry with new and innovative products. Bolt’s intense focus on air guns and related products has enabled Bolt to produce high quality products and compete effectively in terms of technology, quality and durability. According to Bolt’s website, Bolt’s Long-Life marine guns are the most widely used air gun for seismic exploration. Furthermore, Bolt sells its products to the largest seismic exploration companies in the business. As evidenced by the success of Bolt’s products and its impressive customer list, Bolt carries a strong reputation in the marketplace.
I don’t know Bolt’s current percent of global market share but in a 1998 IBD article, Mr. Soto, President and CEO, was quoted as saying Bolt guns were on 80% of all seismic vessels.
Financials
Bolt’s fiscal year ends on the last day of June. When I reference a year, I am referring to the fiscal year unless I specify otherwise.
Sales
Over the last three years, Bolt’s sales have grown at an annualized rate of 50.5%. Sales increased 58.3% to $50.46 million in 2007 after increasing 73.4% in 2006. In the most recent quarter, sales increased 60.9%.
Bolt’s sales growth is attributable to the factors mentioned in the Demand section of this analysis. Furthermore, it is important to note that a significant portion of Bolt’s revenues come from replacement parts for its air guns.
The majority of the increase in sales from 2006 to 2007 was attributable to the sale of complete energy source systems. At the end of 2007, Bolt acquired RTS. With the acquisition, Bolt will not only benefit from the unit sales from RTS but also from the ability to provide customers with a more complete energy source system that meets the needs of advanced survey requirements.
Margins
Bolt has posted impressive margins across the board and margins have increased significantly in the last year.
Gross margins improved in 2007 over 206 as a result of manufacturing efficiencies associated with the increase in sales volume. This benefit was partially offset by higher labor and material costs along with sales of third party auxiliary equipment, which carry lower margins.
Research and development spending was down in both percentage terms and dollar terms from 2006 due higher sales levels in 2007 and the completion of certain improvements to its SSMS. While Bolt’s R&D spending in dollar terms has been relatively flat over the years, the level of spending has been adequate enough for the company to continue to provide innovative new products and important enhancements to existing products. At the same time, the company has made a few strategic acquisitions in the last decade, with RTS being the most recent acquisition. In my opinion, the money spent on these acquisitions was acceptable uses of cash that may have otherwise been earmarked for R&D spending. Furthermore, it could be argued that the company was able to acquire certain products, technologies and intangible assets that would have been more expensive to develop in-house.
Selling, general and administrative expenses were 14.79% of sales in 2007 compared to 18.28% in 2006. In percentage terms, SG&A expenses were lower mainly as a result a disproportionately smaller increases in SG&A expenses relative to sales. In dollar terms, SG&A expenses increased due to increased compensation expenses (commissions, staff and bonuses). Given the companies growth, these increases appear more than reasonable. The company also experienced higher professional fees to become compliant with Sarbanes-Oxley.
The effective tax rate in 2007 of 32.24% was lower than the effective tax rate in 2006 of 34.79%. The lower tax rate was the result of tax benefits from export sales and the manufacturer’s deductions.
Net Income/EPS
Over the past three years, Bolt has increased net income at an annualized rate of 131.68%. Net income increased 118.93% to $10.61 million in 2007 after increasing 197.2% in 2006. In the most recent quarter, net income increased 101.69% after increasing 112.69% in the prior quarter.
Bolt has done little to dilute shareholder’s interest over the years. Last year, actual shares outstanding increased by 2.38%. Weighted average diluted shares outstanding increased only 0.91%. In the last three years, total shares outstanding have increased by a very modest 5.66%.
Balance Sheet
At the end of 2007, Bolt had no long-term debt, nearly $10 million in cash (compared to $4.58 million at the end of 2006) and a current ratio of 5.29. Assets totaled $47.51 million including $10.96 million in goodwill. Bolt’s balance sheet is very solid and I don’t see any areas of major concern.
At the end of the quarter, Bolt completed the acquisition of RTS. The initial purchase price was $3.5 million plus the net book value of the acquired assets, estimated to be approximately $1 million. Additional payments will be due at the one and two year anniversary provided RTS reaches certain performance objectives. Bolt will fund the purchase of RTS with cash and this purchase will reduce cash on the balance sheet accordingly.
Statement of Cash Flows
In 2007, cash flow from operations totaled $4.67 million compared to $10.6 million in net income. Normally, I like to see a cash flow to net income ratio of one or better. Nonetheless, there are instances where I find a lower ratio to be acceptable and Bolt happens to be one of those instances. In a lot of cases, this ratio will be sub one when a company is going through a period of rapid expansion that results in growing receivables and inventories.
In the case of Bolt, the change in receivable and inventories was the biggest factor in the lower operational cash flows relative to net income. The increase in receivables and inventories was reasonable considering Bolt’s rapid sales growth from quarter-to-quarter and management’s anticipation of future growth. Receivables increased 39.01% and inventories increased 45.45% compared to the 54.84% increase in sales. Nonetheless, the cash conversion cycle looks a little slow at roughly 155 days (calculated off of Q4) and might require additional investigation. Intuitively, I believe this is partly due to replacement parts that are kept in inventory for extended periods and Bolt’s dependence on larger customers that are capable of negotiating favorable credit terms.
The company spent just under $1 million in capex in 2007. The spending went towards the purchase of new and the replacement of existing equipment. Some of the capex spending in 2007 went towards the replacement of equipment that was lost in an explosion at one of the company’s manufacturing facilities. In 2008, the company expects to spend $750,000 on capex for the purchase of new and replacement manufacturing equipment. The $750,000 in capital spending doesn’t seem like a whole lot of money and this is something I hope to discuss with management. Capital spending is important to maintain and expand capacity or earnings power.
Operational cash flows have been more than adequate for Bolt to fund its growth. As such, the company has not had to tap the debt or equity markets for financing. Nonetheless, the exercise of stock options and the tax benefit of stock options exercised had a positive impact on cash flows in 2007. At the same time, I consider Bolt’s compensation structure and options practice to be very reasonable. Furthermore, I consider the company’s compensation plan to be appropriately structured to align managements’ interests with that of shareholders.
In 2007, Bolt generated enough cash from operations to fund not only its capex needs but also the initial purchase price of RTS. In 2008, I expect Bolt to continue to generate more than adequate cash flow to fund expenditures and build upon its cash position. I would also expect operational cash flows to net income to improve with some moderation in growth.
Return Ratios
Bolt has exceptional return ratios and the increase in these ratios over the last year are noteworthy. Bolt’s ROE is especially impressive considering the company does not employ any leverage. The high ROE is attributable to Bolt’s high margins and sales relative to assets.
* My calculation of ROIC takes after tax operating income divided by (tangible assets less non-interest bearing current liabilities less goodwill). Sort of a Foolish approach.
Comparables
OYO Geospace Corporation (“OYOG”) designs, manufactures and sells instruments and equipment used in the acquisition and processing of seismic data and in the monitoring of producing oil and gas reservoirs.
ION Geophysical Corporation (“IO”) provides seismic products and services primarily to the oil and natural gas industry worldwide.
OYOG and IO are probably the best comparables for Bolt.
Notes to Table
OYOG’s fiscal year ended September 30 and the company has reported results through the third quarter of its fiscal year. As such, I calculated sales growth and EPS growth by comparing the first nine months of 2007 with the first nine months of 2006. I calculated margins based on the first nine months of fiscal year 2007.
IO’s fiscal year ended December 30, 2006 and the company has reported results through the second quarter of its fiscal year. I was going to take the same approach with IO as I did with OYOG but IO’s profit growth was negative through the first six months of the year. As I do not know the reason for the decline in profits in the first half of 2007, I elected to calculate IO’s sales growth and EPS growth by comparing the full year 2006 to 2005. I calculated margins based on 2006 full year results. This approach makes IO look a little better than it would have otherwise.
Bolt’s fiscal year ended on June 30 and Bolt has reported results for the full fiscal year. Sales growth and EPS growth were calculated by comparing 2007 to 2006. Margins were calculated for the full year 2007.
ROA data was taken from Yahoo. I calculated a higher ROA for Bolt but utilized the Yahoo ROA for comparison purposes.
Analysis of Table
Bolt has no debt, the highest current ratio, the highest rate ofsales growth, second highest rate of EPS growth and by far the highest margins, ROE and ROA. At the same time, Bolt has the lowest EV/EBITDA, trailing PE multiple and forward PE multiple. Note the different dates being used to calculate the forward multiple as this makes a difference.
Based on the information in the table above and all the other information I presented in this blog, I believe a trailing PE of 25 to 30 to be reasonable. Prior to the recent correction, Bolt was trading at a PE above 30 and just yesterday OYOG was trading at a PE of 30.95. A PE of 30 on trailing earnings would equate to a share price of $56.10, an increase of 40.25% over today’s closing price.
Analysts’ estimates for fiscal 2008 are for $3.13 per share, a 67.38% increase over 2007. Given, Bolts recent growth rates, its acquisition of RTS, and the current market conditions, I think analysts’ estimates are well within reason. At a PE multiple of 25 one year out, I get a one year price target of $78.25 for an increases of 95.63% over today’s closing price. Maybe Bolt doesn’t hit the $3.13 estimate or maybe investors will only be willing to tag Bolt with a PE of 20, with a potential gain of 95.63% over the twelve months, there is a little wiggle room for some errors.
RTS Acquisition
According to management’s pro forma income statement in the 10K, RTS would have added $5.24 million in revenues and $0.27 in diluted earnings per share if the transaction had taken place at the end of fiscal 2006. The above analysis does not take management’s pro forma estimates into consideration.
Conclusion
This has been one long blog post and I think I said everything I wanted to say so I am going to forgo a conclusion. Just be sure to do your own due diligence, read the risks section of the 10K and consider other possible risks. Finally, I am just a hack blogging about stocks in my spare time, so you really can’t go by me.
Good luck,
Tuff
Sources
The company’s most recent 10K was my primary source of information for this blog. In some cases, I have copied or paraphrased information directly from the 10K. I posted links to some of my sources right in my blog post. Below are additional sources or links of interest.
2007 10K
RTS Press Release
Bolt's Website
Aside from Bolt’s rapid price acceleration and my fear of an imminent pullback, I hesitated to blog about Bolt because it was at the top of Investor’s Business Daily (“IBD”) weekly list of top 100 stocks. Its high ranking on the IBD list captured the interest of the highly caffeinated “IBD crowd” and momentum traders that often times suffer from A.D.H.D. As I have only blogged about a handful of stocks since starting my blog in early 2007, I didn’t want to blog about such a highly followed stock and come across as a bandwagon investor.
Recently, Bolt experienced a significant pullback that took it nearly 48% off its high from early July. Because of the steep pullback, Bolt was booted from the IBD list. With Bolt well of its highs and nowhere to be found on the IBD list, I decided to mention Bolt in a blog entry last week. At the time, shares of Bolt were trading at $33.70 and I wrote that I was accumulating additional shares and that I would post a complete blog entry in the coming week.
It is now one week later and my blog entry is complete. My timing has never been all that great but in the last week shares of Bolt are up 18.7%. I didn’t know I had such a following. I am kidding of course. Anyways, here it is………..
Seismic Exploration
Higher energy prices have led to a substantial increase in spending on oil and gas exploration, development and production. Given the underlying fundamentals in the energy market, higher energy prices will likely persist for years to come and, in turn, spending will continue to grow.
Spending on oil and gas exploration, development and production has risen at such a rapid pace in recent years that it has pushed up the cost of associated labor and equipment. With the higher cost of labor and equipment, the cost of drilling a well is significant. Add opportunity cost into the mix and it is not surprising that oil and gas companies are willing to go the extra mile on the front-end to avoid drilling a dry well. To this regard, seismic exploration plays an important role in minimizing exploration risks.
Seismic exploration is the use of reflection seismology to identify and evaluate subterranean formations that are favorable for the accumulation of hydrocarbons. There are three basic systems at work in reflection seismology: the source, receiving, and processing systems (Ref.). The source system is responsible for sending elastic waves that travel deep into the earth. As the waves travel through the earth, some of the waves reflect off subterranean formations. Reflected waves are then captured or received as signals by geophones (land) or hydrophones (marine) and sent to a special recorder that converts the signals to a digital format (the receiving system). The processing system, consisting of powerful computers and highly complex software programs, manipulates and processes the data to produce a subsurface profile or map. Geologists interpret the data to determine if and where there are formations favorable for the accumulation of hydrocarbons.
The source, receiving, and processing systems are interactive systems. As interactive systems, an advance in one system enhances the utility of the other systems. In recent years, there have been a number of enhancements across all three systems. Today, advanced survey techniques (3D and 4D) provide clearer and more reliable subsurface profiles that have substantially improved drilling success rates and the demand for seismic exploration.
While seismic exploration is an important tool in mitigating exploration risk, it is also an important tool in field development and reservoir management activities.
Bolt Basics
Bolt's Niche
Seismic exploration can take place on land, over water (marine) and in transition zones. In marine seismic exploration, seismic vessels tow streamers of air guns and hydrophones across a survey area. The air guns, which replaced dynamite several decades ago, are the main component of the marine seismic source system. Air guns use compressed air to create acoustic waves that travel through the water and beneath the surface of the earth. Working with the air guns as part of the source system are source monitoring systems (“SSMS”), source controllers, source synchronizers, cables, and electrical connectors.
Bolt designs, manufactures and sells different components of the seismic source system including the: air guns; seismic source monitoring systems (“SSMS”); source controllers; source synchronizers, cables and electrical connectors. Bolt also designs, manufactures and sells “near-field” hydrophones and pressure transducer. Near-field hydrophones and pressure transducers differ from far-field hydrophones and pressure transducers in that they measure output from the individual air guns and pressure at the air guns, respectively.
A seismic vessel with its streamers looks like this.
Business Segments
Bolt operates two business segments. The geophysical equipment segment consists of two operating units: Bolt Technology Corporation, a manufacturer and seller of air guns and replacement parts; and, A-G Geophysical Products, Inc., a manufacturer and seller of underwater electrical connectors and cables, seismic source monitoring systems and hydrophones.
In 2007, Bolt acquired Real Time Systems (“RTS”). RTS develops, manufactures and sells controllers and synchronizers for marine seismic energy sources (air guns). RTS products are designed to control and synchronize up to 96 air guns in a single seismic exploration vessel. RTS will operate in the geophysical equipment segment but it is not clear whether it will remain a separate operating unit or if Bolt will roll it into Bolt Technology Corporation or A-G.
The second business segment is the industrial products segment. Custom Products Corp. is the only operating unit in the industrial products segment. Custom Products designs, manufactures and sells miniature industrial clutches and brakes and sells sub-fractional horsepower electrical motors. In this blog post, I focus mostly on the geophysical segment because I see this segment as the main driver of past and future growth. Nonetheless, at 7% of revenues in fiscal 2007, the Custom Products division is not insignificant. Furthermore, management is optimistic about this division going into 2008 because of anticipated sales to new customers and higher pricing.
History
Bolt has decades of experience in the seismic source business. The timeline below outlines the major milestones in Bolt’s history that have made Bolt what it is today.
1962 –Bolt organized as a corporation.
1963 –Bolt invented the Marine Air Gun. Before Bolt invented the Marine Air Gun, offshore seismic acquisition crews generated seismic waves using dynamite.
1993 – Bolt introduced the Long-Life Marine Air Gun. Bolt’s Long-Life Marine Air Guns extended the period between routine air gun maintenance cycles. These guns also provided improved high peak sound pressure levels and improved frequency spectrum as compared with older models. These improved characteristics were advantageous to geoscientists in designing 3-D surveys. Bolt’s still sells its Long-Life Air Guns and they range in price from $10,000 to $20,000. The majority of air guns are sold in the $12,000 range. According to Bolt’s website, Bolt’s Long-Life guns have become the most widely used air gun for marine seismic exploration.
1998 – Bolt acquired Custom Products Corp. The acquisition of Custom Products was a deviation from the company’s core business but, in a June 1998 article in Investors Business Daily (“IBD”), Mr. Soto said, “This is a basic business with (manufacturing) operations similar to ours. It's also a big cash generator.”
1999 – Bolt acquired A-G
2003 – From fiscal 2000 to fiscal 2003, Bolt was developing its Annular Port Air Gun (“APG Gun”). Bolt received its first order for its APG Gun in 2003. The configuration of APG Guns offered significant improvements in reliability, operating efficiency, and acoustic output compared to the configuration of all traditional air guns. APG guns typically range in price from $26,000 to $32,000 with the majority of the APG guns sold in the $28,000 price range.
2005 - In fiscal 2004, the Company completed its stage one development of its digital SSMS. SSMS is utilized by marine seismic contractors to measure air gun depth, air pressure, and “near field” energy output for each gun array to enhance the accuracy and therefore the usefulness of 3-D seismic survey data. Subsequently, Bolt developed stage two of SSMS to provide high pressure air flow control to the air guns. The first sales of SSMS were made in fiscal 2005 and amounted to approximately $300,000. SSMS sales increased to over $2,000,000 in fiscal 2007.
2007 – Bolt acquired RTS.
Demand
Seismic exploration contractors are rapidly expanding their seismic fleets through the construction of new vessels and the conversion of existing vessels (i.e. cable layers and fishing boats). According to a survey in the March issue of Offshore Magazine published in March of 2007, there were 140 vessels in the global seismic fleet. For several reasons, the global fleet of seismic vessels is poised to grow at a rapid pace over the next several years.
In a Reuter’s article dated June 13, 2007, Det Norske Veritas (DNV), a ship classifier, said it classified five conversions seismic vessels to date in 2007 and had another eight vessels in the process of being converted and awaiting classification. Furthermore, DNV had another 20 seismic vessels under construction and awaiting classification. According to the article, DNV has been experiencing a tenfold increase in classification requests. Keep in mind that DNV is only one of three large ship classifiers and 50 ship classifiers worldwide (Ref.). The fleet of seismic vessels has been growing at a rapid pace and it appears that this trend is likely to continue into the future. In the article, DNV described the demand for seismic vessels as “booming.”
So what is driving the demand for seismic vessels?
Higher energy prices have led to an increase in exploration activity around the globe. Seismic exploration is the primary method of exploring for hydrocarbons. Furthermore, seismic surveys have improved significantly over the last decade. These improvements have increased success rates of drillers. Finally, new survey techniques require more data and often times multiple vessels in one survey zone or more time per vessel in a survey zone. The combination of increased exploration activity, higher success rates, and more vessels time per survey zone is driving the demand for seismic vessels and Bolt’s geophysical products.
The growing fleet of seismic vessels is not the only factor driving demand for geophysical products. Changes in streamer configurations and new technologies have had a positive impact on the demand for geophysical equipment.
Improved computing capacity and more complex software programs for analyzing seismic data has given birth to advanced survey techniques (3-D, 4-D). These advanced survey techniques provide greater visibility of the subsurface but require significantly more data than traditional surveys. As such, advanced surveys require more vessels, larger streamers, more streamers and more air guns, hydrophones, electrical connectors, etc, per streamer.
Bolt has added new products and made enhancements to existing products that specifically address the requirements of advanced surveys. These enhancements and additions have created an opportunity for Bolt to sell its products for use on existing seismic vessels. Most recently, Bolt has completed the development of its SSMS and APG Gun.
Customers
Bolt’s principal customers for geophysical equipment are worldwide marine seismic exploration contractors, who operate seismic vessels for collection of seismic data in accordance with their customers’ specifications or for their own seismic data libraries, and foreign national oil and gas companies.
During fiscal 2007, 2006 and 2005, approximately 72%, 71% and 48%, respectively, of the Company’s sales were from shipments to customers outside the United States or to foreign locations of United States customers.
A significant portion of Bolt’s sales are attributable to a small number of customers. The loss of any one customer would be significant. Ten percent customers are listed below:
| ----2007---- | ----2006--- | |
| CGG-Veritas | 19% | 15% |
| SeaBird Exploration | 11% | 4% |
| WesternGeco | 10% | 22% |
| Wavefield Inseis | 10% | 4% |
While Bolt’s geographical diversification of revenues is a positive, the customer concentration is a negative. Nonetheless, new customers have replaced old customers on the 10% customer list over the course of the last couple of years.
Competitors
Bolt competes with Sercel, a division of CGG-Veritas, and ION Geophysical Corporation, formerly known as Input/Output. While Sercel is a competitor, its parent company is a large customer of Bolt. ION Geophysical is a manufacturer of onshore and offshore seismic equipment. Several years ago ION Geophysical acquired two seismic source companies to build up its offshore seismic source offering. Both Sercel and ION Geophysical are significantly larger than Bolt and offer a wider array of geophysical products.
Bolt has been in the offshore seismic source business for several decades and they have been at the forefront of the industry with new and innovative products. Bolt’s intense focus on air guns and related products has enabled Bolt to produce high quality products and compete effectively in terms of technology, quality and durability. According to Bolt’s website, Bolt’s Long-Life marine guns are the most widely used air gun for seismic exploration. Furthermore, Bolt sells its products to the largest seismic exploration companies in the business. As evidenced by the success of Bolt’s products and its impressive customer list, Bolt carries a strong reputation in the marketplace.
I don’t know Bolt’s current percent of global market share but in a 1998 IBD article, Mr. Soto, President and CEO, was quoted as saying Bolt guns were on 80% of all seismic vessels.
Financials
Bolt’s fiscal year ends on the last day of June. When I reference a year, I am referring to the fiscal year unless I specify otherwise.
Sales
Over the last three years, Bolt’s sales have grown at an annualized rate of 50.5%. Sales increased 58.3% to $50.46 million in 2007 after increasing 73.4% in 2006. In the most recent quarter, sales increased 60.9%.
Bolt’s sales growth is attributable to the factors mentioned in the Demand section of this analysis. Furthermore, it is important to note that a significant portion of Bolt’s revenues come from replacement parts for its air guns.
The majority of the increase in sales from 2006 to 2007 was attributable to the sale of complete energy source systems. At the end of 2007, Bolt acquired RTS. With the acquisition, Bolt will not only benefit from the unit sales from RTS but also from the ability to provide customers with a more complete energy source system that meets the needs of advanced survey requirements.
Margins
Bolt has posted impressive margins across the board and margins have increased significantly in the last year.
| ----2007---- | ----2006--- | |
| Gross Margin | 45.93% | 41.55% |
| EBITDA Margin | 31.29% | 23.29% |
| Operating Margin | 30.60% | 22.38% |
| Profit Margin | 21.02% | 14.87% |
Gross margins improved in 2007 over 206 as a result of manufacturing efficiencies associated with the increase in sales volume. This benefit was partially offset by higher labor and material costs along with sales of third party auxiliary equipment, which carry lower margins.
Research and development spending was down in both percentage terms and dollar terms from 2006 due higher sales levels in 2007 and the completion of certain improvements to its SSMS. While Bolt’s R&D spending in dollar terms has been relatively flat over the years, the level of spending has been adequate enough for the company to continue to provide innovative new products and important enhancements to existing products. At the same time, the company has made a few strategic acquisitions in the last decade, with RTS being the most recent acquisition. In my opinion, the money spent on these acquisitions was acceptable uses of cash that may have otherwise been earmarked for R&D spending. Furthermore, it could be argued that the company was able to acquire certain products, technologies and intangible assets that would have been more expensive to develop in-house.
Selling, general and administrative expenses were 14.79% of sales in 2007 compared to 18.28% in 2006. In percentage terms, SG&A expenses were lower mainly as a result a disproportionately smaller increases in SG&A expenses relative to sales. In dollar terms, SG&A expenses increased due to increased compensation expenses (commissions, staff and bonuses). Given the companies growth, these increases appear more than reasonable. The company also experienced higher professional fees to become compliant with Sarbanes-Oxley.
The effective tax rate in 2007 of 32.24% was lower than the effective tax rate in 2006 of 34.79%. The lower tax rate was the result of tax benefits from export sales and the manufacturer’s deductions.
Net Income/EPS
Over the past three years, Bolt has increased net income at an annualized rate of 131.68%. Net income increased 118.93% to $10.61 million in 2007 after increasing 197.2% in 2006. In the most recent quarter, net income increased 101.69% after increasing 112.69% in the prior quarter.
Bolt has done little to dilute shareholder’s interest over the years. Last year, actual shares outstanding increased by 2.38%. Weighted average diluted shares outstanding increased only 0.91%. In the last three years, total shares outstanding have increased by a very modest 5.66%.
| ----2007---- | ----2006--- | |
| Q4 | $0.60 | $0.29 |
| Q3 | $0.50 | $0.23 |
| Q2 | $0.42 | $0.16 |
| Q1 | $0.35 | $0.18 |
| FY | $1.87 | $0.86 |
Balance Sheet
At the end of 2007, Bolt had no long-term debt, nearly $10 million in cash (compared to $4.58 million at the end of 2006) and a current ratio of 5.29. Assets totaled $47.51 million including $10.96 million in goodwill. Bolt’s balance sheet is very solid and I don’t see any areas of major concern.
At the end of the quarter, Bolt completed the acquisition of RTS. The initial purchase price was $3.5 million plus the net book value of the acquired assets, estimated to be approximately $1 million. Additional payments will be due at the one and two year anniversary provided RTS reaches certain performance objectives. Bolt will fund the purchase of RTS with cash and this purchase will reduce cash on the balance sheet accordingly.
Statement of Cash Flows
In 2007, cash flow from operations totaled $4.67 million compared to $10.6 million in net income. Normally, I like to see a cash flow to net income ratio of one or better. Nonetheless, there are instances where I find a lower ratio to be acceptable and Bolt happens to be one of those instances. In a lot of cases, this ratio will be sub one when a company is going through a period of rapid expansion that results in growing receivables and inventories.
In the case of Bolt, the change in receivable and inventories was the biggest factor in the lower operational cash flows relative to net income. The increase in receivables and inventories was reasonable considering Bolt’s rapid sales growth from quarter-to-quarter and management’s anticipation of future growth. Receivables increased 39.01% and inventories increased 45.45% compared to the 54.84% increase in sales. Nonetheless, the cash conversion cycle looks a little slow at roughly 155 days (calculated off of Q4) and might require additional investigation. Intuitively, I believe this is partly due to replacement parts that are kept in inventory for extended periods and Bolt’s dependence on larger customers that are capable of negotiating favorable credit terms.
The company spent just under $1 million in capex in 2007. The spending went towards the purchase of new and the replacement of existing equipment. Some of the capex spending in 2007 went towards the replacement of equipment that was lost in an explosion at one of the company’s manufacturing facilities. In 2008, the company expects to spend $750,000 on capex for the purchase of new and replacement manufacturing equipment. The $750,000 in capital spending doesn’t seem like a whole lot of money and this is something I hope to discuss with management. Capital spending is important to maintain and expand capacity or earnings power.
Operational cash flows have been more than adequate for Bolt to fund its growth. As such, the company has not had to tap the debt or equity markets for financing. Nonetheless, the exercise of stock options and the tax benefit of stock options exercised had a positive impact on cash flows in 2007. At the same time, I consider Bolt’s compensation structure and options practice to be very reasonable. Furthermore, I consider the company’s compensation plan to be appropriately structured to align managements’ interests with that of shareholders.
In 2007, Bolt generated enough cash from operations to fund not only its capex needs but also the initial purchase price of RTS. In 2008, I expect Bolt to continue to generate more than adequate cash flow to fund expenditures and build upon its cash position. I would also expect operational cash flows to net income to improve with some moderation in growth.
Return Ratios
| ----2007---- | ----2006--- | |
| ROA | 25.83% | 15.65% |
| ROE | 30.74% | 18.85% |
| ROIC* | 41.80% | 31.47% |
Bolt has exceptional return ratios and the increase in these ratios over the last year are noteworthy. Bolt’s ROE is especially impressive considering the company does not employ any leverage. The high ROE is attributable to Bolt’s high margins and sales relative to assets.
* My calculation of ROIC takes after tax operating income divided by (tangible assets less non-interest bearing current liabilities less goodwill). Sort of a Foolish approach.
Comparables
OYO Geospace Corporation (“OYOG”) designs, manufactures and sells instruments and equipment used in the acquisition and processing of seismic data and in the monitoring of producing oil and gas reservoirs.
ION Geophysical Corporation (“IO”) provides seismic products and services primarily to the oil and natural gas industry worldwide.
OYOG and IO are probably the best comparables for Bolt.
| -----IO----- | ----OYOG--- | ----Bolt--- | |
| PPS | 15.19 | 88.37 | 40.00 |
| Shares Out. | 80.93M | 5.82M | 5.72M |
| Market Cap | 1.23B | 514.49M | 228.84M |
| LT Debt | 87.61M | 11.20M | N/A |
| Cash | 11.54M | 3.65M | 9.99M |
| EV | 1.31B | 522.04M | 219.64M |
| Current Ratio | 2.29 | 3.96 | 5.28 |
| LT Debt/Equity | 0.226 | 0.119 | N/A |
| Sales (TTM) | 606.42M | 136.40M | 50.46M |
| Sales Growth | 38.84% | 43.80% | 54.84% |
| EPS (TTM) | 0.31 | 3.00 | 1.87 |
| EPS Growth | 57.14% | 128.30% | 117.40% |
| Gross Margin | 27.53% | 37.12% | 45.93% |
| Operating Margin | 6.58% | 20.42% | 30.60% |
| Profit Margin | 4.70% | 13.68% | 21.02% |
| ROE | 7.20% | 21.99% | 30.74% |
| ROA | 4.01% | 14.76% | 23.51% |
| EV/EBITDA | 14.10 | 16.92 | 13.92 |
| PE Trailing | 48.69 | 29.43 | 21.42 |
| PE Forward | 18.30 Dec '08 | 20.31 Sep '08 | 12.05 Jun '09 |
| FY End | Dec 31 | Sep 30 | Jun 30 |
Notes to Table
OYOG’s fiscal year ended September 30 and the company has reported results through the third quarter of its fiscal year. As such, I calculated sales growth and EPS growth by comparing the first nine months of 2007 with the first nine months of 2006. I calculated margins based on the first nine months of fiscal year 2007.
IO’s fiscal year ended December 30, 2006 and the company has reported results through the second quarter of its fiscal year. I was going to take the same approach with IO as I did with OYOG but IO’s profit growth was negative through the first six months of the year. As I do not know the reason for the decline in profits in the first half of 2007, I elected to calculate IO’s sales growth and EPS growth by comparing the full year 2006 to 2005. I calculated margins based on 2006 full year results. This approach makes IO look a little better than it would have otherwise.
Bolt’s fiscal year ended on June 30 and Bolt has reported results for the full fiscal year. Sales growth and EPS growth were calculated by comparing 2007 to 2006. Margins were calculated for the full year 2007.
ROA data was taken from Yahoo. I calculated a higher ROA for Bolt but utilized the Yahoo ROA for comparison purposes.
Analysis of Table
Bolt has no debt, the highest current ratio, the highest rate ofsales growth, second highest rate of EPS growth and by far the highest margins, ROE and ROA. At the same time, Bolt has the lowest EV/EBITDA, trailing PE multiple and forward PE multiple. Note the different dates being used to calculate the forward multiple as this makes a difference.
Based on the information in the table above and all the other information I presented in this blog, I believe a trailing PE of 25 to 30 to be reasonable. Prior to the recent correction, Bolt was trading at a PE above 30 and just yesterday OYOG was trading at a PE of 30.95. A PE of 30 on trailing earnings would equate to a share price of $56.10, an increase of 40.25% over today’s closing price.
Analysts’ estimates for fiscal 2008 are for $3.13 per share, a 67.38% increase over 2007. Given, Bolts recent growth rates, its acquisition of RTS, and the current market conditions, I think analysts’ estimates are well within reason. At a PE multiple of 25 one year out, I get a one year price target of $78.25 for an increases of 95.63% over today’s closing price. Maybe Bolt doesn’t hit the $3.13 estimate or maybe investors will only be willing to tag Bolt with a PE of 20, with a potential gain of 95.63% over the twelve months, there is a little wiggle room for some errors.
RTS Acquisition
According to management’s pro forma income statement in the 10K, RTS would have added $5.24 million in revenues and $0.27 in diluted earnings per share if the transaction had taken place at the end of fiscal 2006. The above analysis does not take management’s pro forma estimates into consideration.
Conclusion
This has been one long blog post and I think I said everything I wanted to say so I am going to forgo a conclusion. Just be sure to do your own due diligence, read the risks section of the 10K and consider other possible risks. Finally, I am just a hack blogging about stocks in my spare time, so you really can’t go by me.
Good luck,
Tuff
Sources
The company’s most recent 10K was my primary source of information for this blog. In some cases, I have copied or paraphrased information directly from the 10K. I posted links to some of my sources right in my blog post. Below are additional sources or links of interest.
2007 10K
RTS Press Release
Bolt's Website
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