BOOM Earnings Tomorrow

With BOOM reporting earnings tomorrow, my friend BTUFF thought it would be a good time to review 2005. BTUFF knows BOOM as well as anyone and a quick look at the yahoo BOOM public board will confirm this. His post follows below.


A Look Back at 2005

If there is one thing that is certain, BOOM is about to report nothing less than a phenomenal year for 2005. Assuming the one analyst following BOOM is correct in his estimates for the fourth quarter, BOOM will have increased sales for the full year 2005 by 44% and earnings by about 250%.

We entered 2005 with a backlog for the explosive division of $27.5 million. At the end of the third quarter, the backlog swelled to $34.1 million and that does not include the $7.5 million contract that was announced in December. Other major contracts during the year include the $5.3 million Goro Nickel contract announced in March and the $6 million Kuwait Olefins contract announced with the second quarter earnings report in August.

During the year, the AMK division, located in Windsor, CT, started ramping-up for work on both the GE H system and the expected increase in aircraft engine work. In December of 2005, AMK entered into a five year supply agreement with GE to perform a range of welding, heat treatment and non-destructive testing service on the H System. GE has announced planned installations of the H System in California and Japan. Based on my research, it seems to me that GE might be on the brink of a contract in Canada. It is interesting to note that one of GE’s F class turbines boasts the adoption of technology and materials developed from the H System. It remains to be seen if AMK will also be performing work on some F class turbines as well.

As for aircraft engine work, the company’s website lists all of the major aircraft engine makers as customers, except for Rolls-Royce (“RR”). While RR is not listed as a customer on the company’s website, RR was listed by management as customer in a 2005 press release. Both Boeing and Airbus announced record plane orders in 2005 and that should bode well for AMK.

In order to meet the expected demand for its AMK division, the company increased capital spending in 2005. This capital spending includes a new VAC AERO unit. Furthermore the company announced a “significant” expansion to its facility in Windsor to take place in 2006. After only three quarters, AMK has nearly matched revenues for all of 2004.

When comparing the first three quarters of 2005 with the full year 2004, gross profit margins have increased from 25.12% to 28.75%, operating margins have increased from 12.72% to 18.82%, and profit margins have increased from 8.13% to 12.32%.

Over the past year, cash flow from operations has been more than adequate to fund capital expenditures, eliminate almost all of the $3.2 million bank line-of-credit, and provide for modest pay down of long-term debt. Furthermore, the company arranged to convert $1.2 million, or 25%, of term debt to 200,000 shares. While cash and equivalents are down from $2.4 million to $1.8 million, I am more than happy with how the company has put the cash to work by paying down debt and increasing operational capacity. Despite the higher sales, accounts receivable have only increased modestly from $13.9 million to $14.1 million. Inventories have increased 50% and can be easily explained by the increased sales activity and expected delivery on the remaining Goro contract in the fourth quarter. With continued improvement to the balance sheet, the company declared a $0.20 annual dividend. My guess is that SNPE is behind the dividend.

Estimates for Q4

As BOOM reported exceptional results in the year-ago quarter, which included revenue from the $5 million Ravensthorpe contract and an exceptionally low average tax-rate of 24%, year-over-year comparisons will be far more difficult than the first three quarters of 2005. Nonetheless, BOOM has a few contracts up its sleeve. During Q4, the explosive division continued shipment on the Goro project and began shipment on the Kuwait Olefins project. I expect the AMK division to increase sales over both Q2 and Q3. AMK sales were down sequentially in Q3 because of late stage design changes to the H System. When the Q3 earnings were released, the design changes were completed and I suspect some of the Q3 revenue was pushed into Q4.

Given my expectations of 70% shipment on Goro, 30% shipment on Kuwait Olefins, and 65% shipment on miscellaneous backlog, I anticipate explosive revenue of $21.5 million for the explosive division.

With the continued ramp-up of the AMK division and my expectation that a majority of missed Q3 revenue will be captured in Q4, I anticipate AMK revenue of $1.6 million.

I expect the higher sales level in Q4 to boost margins but at a slower rate than the improvement of the past couple of quarters. I expect gross margins to increase to 32.5% and SG&A as a percent of sales to decrease to 9%. Subsequently, I get a pre-tax margin and pre-tax earnings of 23.19% and $5.36 million, respectively. At a pre-tax margin of 23.19%, the sequential improvement is half that of Q2 vs. Q3.

The company has guided for a full-year average tax bracket of 34%. A 35% tax rate for 2005 would need to accompany my analysis for a full-year tax rate of 34%. In my opinion, the tax rate is likely to be lower (i.e. 27.17% in Q3) but I will stick with my estimate of 35%.

Based on the above, I get $3.482 million in net income or $.28/share with my expected rate of dilution. This represents nearly a 52% increase in net income over the year-ago quarter and a 10.5% increase sequentially. For informational purposes, a tax rate similar to Q3 would yield a net income of $3.9 million or $.31/share. This represents nearly a 67% increase over the year-ago quarter and 23.76% sequentially.

The one analyst covering BOOM expects revenue of $22.06 million and an EPS of $.24/share. I anticipate BOOM to handily beat expectations but there is no saying how the market will react. Last quarter the year-over-year increase was in the triple digits. Will the market punish BOOM if net income increases only 52%? To me, that would be absurd but who knows when it comes to market reaction to earnings. With the high level of short-interest and a decrease in institutional ownership in the last quarter from 35% to 28%, it would appear that some market participants expect the price to go down.

As a sidebar, I think there is a 20% chance of some sort of secondary announcement to accompany the earning release. No science involved in this estimate, just a guess. Nonetheless, I have been tracking activity and project related to BOOM and I think the guesstimate is reasonable. Furthermore, it would not be the first time in 2005 that a BOOM earnings release was accompanied with some other good news.

A Look at Next Q

The first quarter 2006 earnings are bound to be strong. BOOM will recognize revenue on the remainder of the Kuwait Olefins contract and begin recognizing revenue on the $7.3 million North American refinery contract. I expect AMK will continue to show sequential improvement. As an added bonus, the land put that BOOM exercised in early January will add about $1.8 million pre-tax and about $.07 to $.08 to net income as a one-time item. Without the land put, I expect net income to return to triple digit increases when compared to the year-ago quarter.

The Next Few Years

According to Jim Rodgers, in his book Hot Commodities, the last three commodity bull markets have lasted about 17 years. The current bull market started in 1999. I believe we are now entering the point in the bull market where the wheels have been or are being put in motion to increase capacity. As such, I receive article after article from Google highlighting projects in the approval stages or in the bidding stage for the engineering, procurement and construction contracts. Given the explosive division is serving customers in the petroleum refining, chemical processing, hydrometallurgy, aluminum smelting, ship building, electrochemical, oil & gas, power generation, cryogenic processing, pulp & paper, and metal production industries, the outlook is seemingly favorable.

BOOM has a 60% global market share in explosive cladding. The only known competitors of BOOM’s explosive division are a Japanese firm, whose name escapes me, and some other much smaller firms. Furthermore, the process associated with BOOM’s “explosive” division has high barriers to entry given the nature of the process and the availability of explosive sites. While BOOM holds a commanding share of the market for explosive cladding, they do compete with other processes (i.e. rolled-bond) but it would appear that explosive cladding is increasingly being recognized as a superior process.

Good luck all,
Tuff