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Thermadyne Holdings Corporation (Nasdaq: THMD)

Thermadyne Holdings Corp. (THMD) is a global supplier of cutting and welding products. The Company designs, manufactures, markets, sells and distributes welding and cutting torches, consumables, filler materials, power sources and accessories globally. Its products are used by fabricating, manufacturing, construction and foundry operations to cut and weld ferrous and nonferrous steel, aluminum and other metals. Common applications for its products include shipbuilding, manufacturing of transportation, mining and agricultural equipment; many types of construction, such as offshore oil and gas rigs, fabrication of metal structures; repair and maintenance of processing and manufacturing equipment and facilities; and demolition. Welding and cutting products are critical to the operations of businesses that fabricate metal.

THMD holds a portfolio of leading premium brand names, including Victor(R), Tweco(R)/Arcair(R), Thermal Dynamics(R), Thermal Arc(R), Stoody(R), TurboTorch(R), Firepower(R) and Cigweld(R). THMD markets its products through a network of industrial gas distributors, independent welding distributors, wholesalers and dealers. To service its many worldwide customers, THMD maintains subsidiaries, warehouses and sales offices on six continents, and in more than 25 countries. Manufacturing operations include North American, Latin American, European, Australian and Asian plant sites.

The Company was founded in 1987 and is based in Chesterfield, Missouri.

Source: Reuters.com, SEC Filings.

Financial Summary

THMD’s net sales in the second quarter of 2009 were $84.8 million, a decrease of 40.3% as compared to the second quarter of 2008. Excluding the impact of foreign currency translations, net sales decreased 36% across both the U.S. and international markets. Gross margin from continuing operations for the second quarter of 2009 was $24.9 million, or 29.4% of net sales, decreasing from $47.2 million, or 33.2% of net sales, for the same period in 2008. Gross margin was negatively impacted by previously purchased higher cost materials, and manufacturing inefficiencies arising from the reduced volumes of activity. For the three months ended June 30, 2009, net income was $2.5 million, or $0.18 per diluted share, compared to net income of $6.0 million, or $0.44 per diluted share, for the second quarter of 2008.

Operating activities provided $18.9 million of cash in the second quarter of 2009 with $3.1 million from operational income and $15.8 million primarily from collections of customer receivables and reduced inventory levels. Cash provided by operating activities from continuing operations for the first six months of 2009 was $21.9 million compared to the $20.1 million of cash provided during the same time period in 2008. As of June 30, 2009, combined cash and availability under the Company’s Working Capital Facility was $45 million. The Company’s indebtedness, net of cash, was $199.5 million as of June 30, 2009, compared to $222.1 million at December 31, 2008.

The Company does not foresee significant changes in its sales volumes through the remainder of 2009. It expects to continue to reduce inventory levels while maintaining production volumes at the levels of the second quarter to ensure proper supply for faster moving items. THMD anticipates gross margin to further improve and exceed 30% throughout the second half of 2009 primarily due to further declines in material costs as higher cost purchase commitments have flowed through the supply chain.

Analyst Consensus

No consensus analysis data available.

Investment Highlights

After being hit by the economic downturn, the Company focused on resizing the business by aggressively reducing cost of operations and the cost of making its products while improving its performance for the long-term with better customer service, effective new products, and selective market expansions. In terms of specific actions, the Company reduced variable costs as much, and in many cases, more than the decline in volume in the quarter. THMD has also taken actions to resize its selling, general, administrative and manufacturing costs. With 13% cut of its salaried work force, the Company reduced labor and overhead expenses by more than 30% from the prior year. In addition, the Company aligned the supply chain with the reduced volume. Inventory investment declined to three months of supply from four months in December 2008.

Recent reports indicate increasing global steel consumption, and THMD is seeing some early indications of increased demand for its products in the market place. The demand for the new low cost inverter welding machine the Company has introduced in the U.S. during the second quarter is exceeding its expectations. This product has been very popular with customers in Asia Pacific Region since its introduction there last year. THMD also introduced an automated gas box this year, which completes the range of automated plasma cutting systems that have been selling well globally. In September, the Company will launch an innovative redesign of the gas flow regulator.

The Company has made strides over the last few years as it works to improve its financial position extending debt maturities and having maximum operating flexibility in the terms of debt agreements. In this regard, THMD has $14 million of second lean facility due in late 2010 that would comfortably be repaid out of cash flow and/or liquidity. The Company’s $12 million working capital facility is not due until mid-2012 and is an asset-based facility with fewer covenants than typical cash flow based credit facilities. The largest component of THMD’s debt is $175 million of subordinated debentures that are unsecured and do not have financial maintenance covenants. As such, the debt profile is an advantage in today’s environment.

In June, 2009, THMD amended its Working Capital Facility with General Electric Capital Corp., increasing the interest rate to 90-day LIBOR plus 4%, reducing the fixed charge coverage ratios for 2009, and, at the Company’s request, reducing the commitment from $100 million to $70 million. The Company is also finalizing the amendment of its second lien facility. The amendments are expected to extend the maturity of the facility from November 2010 to November 2012, and increase the borrowings to $25 million.

The economic downturn has affected the global welding industry, particularly in Europe and the Americas. However, there have been positive signs of a global economic recovery in the first half of 2009. According to Frost & Sullivan, high demand in the energy and fabrication industry, as well as increasing order intakes from Asian economies already point to imminent improvement. Sectors like energy and fabrication remain strong across most regions, while APAC and Middle East generate higher demand for welding equipment and consumables. According to BCC Research, the global market for welding equipment and supplies was worth $13.2 billion by the end of 2008. It is expected to increase to $16.8 billion by 2013, a CAGR of 5.0%.

Technical Analysis

Source: http://stockcharts.com/h-sc/ui

THMD’s MACD is indicating a weak bearish signal. Although the indicator is above the critical level of 0, which implies that the underlying moving averages are bullish, the MACD has crossed below its 9-day moving average or signal line. This suggests that positive momentum has begun to slow.

The Company has been relatively stable recently. This is evidenced by the width of its Bollinger Bands which are tighter than normal. Additionally, THMD is trading within its Bollinger Bands. This is a normal condition and suggests that the penny stock is neither overbought nor oversold relative to the recent price action.

Comparative Analysis

Over the past few years, the Company has made significant improvements to its business. In current economic environment, THMD has been aggressive operationally, taking significant costs out of the business, improving customer service, and developing a pipeline of new products. Financially, it succeeded to reduce debt levels and extend maturities. As a result, the Company is well positioned to meet the challenges of the difficult business environment it has ever faced.

The Company is currently trading for $68 million, while its operating income in each of the last two fiscal years was above $43 million.

Source: Thomson Financial, Yahoo! Finance, Analyst estimates.

Insider Trading Activity

Net Share Purchase Activity

Data provided by Thomson Financial

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