1……Margin has reduced in geophysical sales by .7% on a year on year quarterly comparison. This was mentioned in the release but it is deceptive. The accounts don’t provide any more detail into the margin contraction which appears to be occurring. In particular the accounts do not split out RTS or the CGS for those products. At page 18/19 they do make their standard motherhood statement that the change is due to increased costs for labor and materials reduced by increased manufacturing efficiencies.
However in September 2007 quarter the cost was 53.6% of sales so the margin has actually deteriorated by 3.11% (56.71% - 53.6%) in 3 months. Now it is possible that there is a timing factor involved but I doubt it if the accounts have been prepared consistently. In March the costs were 52.3% and in June 53.75%. As noted above September was 53.6% and now the jump to 56.71%. So something significant is afoot.
But its can’t all be due to RTS. Here is why. One way to get an idea of the RTS sales is at page 9 where there is reference to an earnout provision if sales exceed $2m. The company has provided an additional $204k implying that the sales are greater than the limit before the additional payment is due. [“Net Sales” means the total sales price of goods billed to customers, less any taxes, duties, tariffs, freight charges, commissions, discounts or returns in the ordinary course of business. - See page 8 of the July 7th Agreement.].
So working backwards, it seems that RTS sales are at a run rate of about $3.707m per annum. I have done the calculation on an annualized basis by doubling the amount and working backwards for a full year calculation. So over 6 months we could take half of that. Now if my calculation is correct, and if such a low level of sales as a proportion of the total leads to an overall margin contraction of over 3%, that is not good. So the alternative (and probably more sensible) view, is that the sales of larger systems generally is contributing less and the company is relying more on parts sales which have a lower margin. That is more consistent with my overall thesis that the company is selling less large complete systems and is evolving back to principally being a parts supplier.
It is possible that this is a one quarter aberration and that all will become clear next quarter. But maybe it is not.
2…..There is a very substantial increase in debtors. In 6 months they have jumped from 31.96% of current assets to 43.26% of current assets. That may or may not be a cause for concern. Of course they used some funds to pay for RTS. However in the September quarter this percentage was 37.52% and they had paid for RTS by then. So there is a deterioration in the debtors. The only clue is at page 16 where the company says
<<< At December 31, 2007, the Company’s accounts receivable totaled $15,563,000 reflecting a high level of geophysical equipment sales in the latter part of the fiscal 2008 second quarter.>>>
They have not increase their PDD noticeably but they have failed to give a debtors turn. So in the absence of any other explanation, this is probably an aberration.
Overall, it would be appropriate for the company to have a CC so one could question the CFO on these points. Unfortunately this is not BOLT’s practice so the questions will remain.
Just a follow up thought in relation to the December quarter margin. It is possible that there is a cost or provision which is taken up in December which is not detailed in the accounts. For instance, perhaps an end of year employee retirement provision or some such other benefit which is included in cost of goods rather than in overheads. Again though, there is insufficient detail to make this call.