Here's the discussion part of a report by Merrill today
Mosaic Group Inc.
Q3 Preview: Acquisition Ready
2 October 2000
What Has Changed?
Acquisition Ready: In August Mosaic extended its debt
facility from $150 million to $400 million. At the end of
the second quarter, Mosaic had debt levels of approximately
$100 million outstanding; net debt stood at $83MM. The
company intends to use the approximately $320 million in
available cash to facilitate its acquisition strategy of
targeting sizeable companies.
Acquisitions continue to be a key portion of Mosaic’s
growth strategy. The company continues to integrate the
six acquisitions made over the twelve months and is
actively pursuing acquisitions in the US and in Europe.
We would expect the initial acquisition target to be US-based.
Mosaic has to date not been successful in expanding
its US marketing services offerings, an area that it has
outlined as important in targeting the major multinational
companies that make up its client base. We would
therefore expect the acquisition to target some form of
marketing servicing company in the US.
Italy and Germany remain targets for Mosaic’s EMS
Chiara Network; progress continues on these fronts and we
would expect an acquisition to be announced regarding at
least one of these countries during the year.
We note that historically Mosaic’s acquisitions have been
done as a combination of equity and cash. We would
expect that this would continue to be the case.
Mosaic Continues to Build Revenue Visibility: During
the quarter Mosaic announced the addition of a second at-home
insurance collection contract, with Wesleyan
Assurance Society. The contract augments Mosaic’s
UK-based FMCG unit, expanding on the existing
Prudential contract.
The number of large wins during the last few quarters
demonstrates the success of Mosaic’s strategy of targeting
larger multi-million, multi-year contracts.
We expect the stream of contract wins that the company
has had to date to continue. As we had indicated in our
European Tour Synopsis, dated June 27 th , the company is
currently pursuing two European-based contracts for its
e-Force division.
Q3 Preview
• Q3E cash earnings of $0.15/sh vs. $0.11/sh last year, a
forecast 38.2% increase. Consensus of $0.14/sh.
• Expected reporting date: Wednesday, November 8 th .
We expect revenues to total $162.3MM, an increase of
40% over the third quarter last year. Acquisitions over the
last year, EMS Booster, M:\Drive, EMS Scandinavia,
Pentagon, IQMP, Medium One and SPG, are included in
the results for this quarter. Our $162.3MM total revenue
estimate assumes approximately 30%-32% organic growth
and roughly $10MM in growth from prior acquisitions. As
a reminder, Mosaic Group reported 19% organic growth
for the first half, not including currency effects. Given the
company’s stated goal of 30% organic growth in revenues
and earnings for the fiscal year, we expect that revenue
growth in the second half will be strong. We note that FX
revenue losses should equal approximately $8-$10MM for
the quarter, but should not affect earnings given Mosaic’s
hedging strategies. We believe that Canadian revenues
should represent approximately $50MM (31%) in the
quarter, while US revenues should represent approximately
$47MM (29%). European revenues should contribute
approximately $65MM (40%), down from previous
quarters due to the weakness in European currencies and
the strategic shift of European training unit, NRC.
We expect gross profits to total $53.3MM or 32.8% of
revenues for the quarter. This represents a YoY increase
of 33%, slightly lower than the anticipated increase in
revenues. SG&A expenses should total $34.0MM, up 26%
over last year due to the added infrastructure from
Mosaic’s acquisitions and internal start-ups. EBITDA
should therefore total $19.3MM, up 47% from last year.
This would result in an improvement in operating margin
from 11.3% to 11.9%, reflecting the integration of various
back-office operations in the US and the stronger revenue
base.
We are projecting pretax income including goodwill of
$14.0MM, up 70.9% over last year. Net income should
equal $10.1MM. |
