Introduction

AirBoss of America Corp. (TSX:BOS) is a manufacturer of rubber compounds and engineered and defense products. Its second-quarter results showed higher sales, slightly lower adjusted EBITDA and negative free cash flow.

The company reported a Dividend Yield of 2.20% on a Trailing Twelve Months basis. The company reports in United States dollars and declared a quarterly dividend of CAD 0.035 per share, which equals CAD 0.14 a year if the rate is held, by my own arithmetic. Because the dividend is in Canadian dollars and results are in United States dollars, a Payout Ratio is not calculated.

Manufacturers are judged on adjusted EBITDA, on free cash flow, and on leverage.

Dividend Sustainability Analysis

Sales rose and profit was mixed. Net sales were US$107.9 million, up 9.4%. Adjusted EBITDA was US$9.5 million, down from US$10.2 million, because the prior-year quarter included a US$3.7 million legal settlement. Net Income was US$2.5 million, or US$0.09 per share.

Free Cash Flow was negative. It was a use of US$2.2 million, compared with a source of US$11.2 million a year earlier, mainly because of working capital.

The dividend is small in absolute terms, but a payout ratio is not calculated because of the currency mismatch. Investors should watch free cash flow, which did not cover cash needs in the quarter.

Dividend Outlook

Leverage rose. Net Debt was US$72.9 million and net debt to trailing adjusted EBITDA was 2.12 times, up from 1.99 times. Cash was US$8.0 million, and the company had US$78.3 million available on its Credit facility.

The segments grew. Rubber Solutions net sales were US$56.4 million, up 10.7%, with Volume up 16.4%. Manufactured Products net sales were US$62.7 million, up 13.9%, and include the defense business.

Investors should not read the yield as a promise. The board declares each dividend, and weaker Demand or higher debt could change it.

Key Growth Drivers

Rubber Solutions is the first driver. Volume rose 16.4%.

Manufactured Products are the second. Net sales rose 13.9%.

Defense is the third. Defense contracts are part of Manufactured Products.

Pricing and mix are the fourth. Gross Profit Margin rose to 17.4%.

Credit availability is the fifth. About US$78.3 million was available.

Potential Catalysts

Third-quarter volumes and cash flow are the main checkpoints. The company expects continued volume Volatility in Rubber Solutions through most of the year.

Tire, automotive and construction demand, defense budgets, tariffs and raw material costs are the main outside influences.

Key Risks to Consider

Cash flow risk is the first. Free cash flow was negative.

Leverage risk is the second. The ratio rose to 2.12 times.

Demand risk is the third. Volumes can be volatile.

Trade risk is the fourth. Tariffs affect cross-border sales.

Currency risk is the fifth. The dividend is in Canadian dollars and results in United States dollars.

Valuation Perspective

Manufacturers are commonly valued on Enterprise value to adjusted EBITDA and on price to earnings. A trailing yield of 2.20% is the income measure, and free cash flow is the better test of coverage.

Investors should compare the share price with Earnings per share and watch whether free cash flow recovers.

Investment Outlook

AirBoss of America Corp. declared a quarterly dividend of CAD 0.035 a share, with sales up 9.4%.

However, free cash flow was negative and Leverage rose to 2.12 times. The income case depends on a recovery in cash flow.

Investors should monitor adjusted EBITDA, free cash flow, net debt and the dividend.