Just three months ago, I said I expected AirBoss's (OTC:ABSSF) share price to double, or to see the company being bought out by a larger (semi-) competitor. I realize that was a bold statement, but I had high expectations for the company's FY 2015 free cash flow. Unfortunately the free cash flow was a bit lower than what I was expecting, on the back of a weak final quarter of the year.
AirBoss of America should be traded in Canada, where the company is listed with BOS as its ticker symbol. As the liquidity on that exchange is much better (the average daily trading volume is almost 100,000 shares, I would recommend you to trade in AirBoss' shares through the facilities of the Toronto Stock Exchange.
How did the final result in 2015 compare with my expectations?
The company seems to be very pleased with its performance in the final quarter of 2015, as the semi-jubilant press release doesn't forget to emphasize a 24% increase of the company's EBITDA in Q4 2015 whilst the adjusted EBITDA increased by 12.6%.
Source: annual report
The consolidated net sales in the fourth quarter of the financial year decreased by $4.5M, primarily on the back of a lower revenue in the Rubber Compounding business, as the commodity prices decreased. The revenue from the AEP division and automotive division increased, but this wasn't sufficient to erase the $10.3M lower revenue from the rubber segment.
In another article about Chicago Rivet I already briefly touched the subject; Chicago said the demand for its products from the automotive sector remained very strong. We see the same thing here at AirBoss as the company has specifically mentioned the strong demand from the automotive sector, so I do hope AirBoss shares the view of the Chicago Rivet management, which thinks the demand for automotive-focused divisions will remain strong.
Source: financial statements
But let's see what the full impact was from the lower revenue in the rubber compounding division. The total revenue for the financial year 2015 actually increased from $303.2M to almost $305M. That's a 0.5% increase, but that's nothing to sneeze at, considering the cost of sales fell by 3%. This caused the gross profit to increase from $45M to $55M (+20%+). Unfortunately this improvement evaporated as the G&A expenses increased by more than 30% to in excess of $26M due to the acquisition of Immediate Response Technologies during the financial year. So, despite this, the net profit remained relatively flat compared to FY 2014, as a 3% reduction in its EPS isn't really a big deal.
But what about the cash flows? One of the central points in my original investment thesis was the fact I was expecting the company to generate a substantial amount of free cash flow, but the effective result was a little bit disappointing.
Source: financial statements
Not only was the full-year free cash flow a little bit on the lower end compared to what I was expecting, the Canadian Dollar has recently also gained some strength, which makes AirBoss a little bit less appealing (the company reports in US Dollar but is trading in Canadian Dollar, so re-calculating its financial results into Canadian Dollar will reduce the attractiveness considering your FCF in CAD will be lower when using an USD/CAD exchange rate of 1.30 compared to 1.44.
But let's cut to the chase here; after deducting the appropriate taxes and interest payments, the adjusted operating cash flow was approximately $24.7M (in USD). That's fine, considering the share price AirBoss is currently trading at, but it doesn't live up to my expectations, as I was expecting a full-year adjusted free cash flow of $1.25/share (the free cash flow in FY 2015 came in at just $1.13/share). Also keep in mind AirBoss has deducted a $1.3M acquisition expense from its profit and free cash flow results, so on a recurring basis, the free cash flow would have been US$26M.
The balance sheet remains robust, and of course, the dividend is still covered
Fortunately AirBoss wasn't in a desperate need to get more cash on its balance sheet. Even after having issued more debt to fund the acquisition of Immediate Response Technologies, the total net debt position remained under control. The net debt did increase to $65M (up from $41M), the adjusted EBITDA is high enough to make sure the net debt/EBITDA ratio remains acceptable.
Source: annual report
With an adjusted EBITDA of $36M, the net debt/EBITDA ratio is now approximately 1.8, which is well below the ratio of 2-2.5 which would be my preferred maximum. I do expect the leverage ratio to decrease further this year as AirBoss will be able to increase its cash position (thereby reducing the net debt) whilst also increasing its EBITDA (or at least keep it stable, as I think the EBITDA from the newly-acquired Immediate Response Technology has only been taken into consideration for half a year).
AirBoss is still paying a quarterly dividend of C$0.06 per share, and as the total cost of the dividend is just in excess of $4.2M, the dividend coverage ratio based on the adjusted free cash flow is approximately 6.
AirBoss' free cash flow in FY 2015 came in lower than I expected, but generating an adjusted free cash flow of $26M is a pretty decent result as well. The company is currently trading at a free cash flow yield of 8.9%, and as the total cost of the dividend is less than 20% of the adjusted free cash flow, I would hope the company will use the majority of this year's free cash flow to reduce the net debt position of $65M.
AirBoss is still attractive, but I will have to keep an eye on the developments in the next few quarters to find out how the situation is developing.
Disclosure: I am/we are long ABSSF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have a small long position in AirBoss
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