DMC Global Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2021. DMC Global operates DynaEnergetics, which supplies oil-and-gas well-perforating products, and NobelClad, which manufactures explosion-welded clad metal plates. Financial amounts below are in thousands of U.S. dollars, except per-share data and percentages.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $55,658 | $73,564 |
| Gross profit / margin | $12,913 / 23.2% | $24,470 / 33.3% |
| Operating income (loss) | $(710) | $6,347 |
| Net income | $432 | $4,155 |
| Diluted EPS | $0.03 | $0.28 |
| Adjusted EBITDA (non-GAAP) | $4,047 | $11,287 |
| Cash from operating activities | $2,176 | $4,920 |
Cash and cash equivalents were $45,837 and marketable securities were $20,943 at quarter-end. DMC reported net cash of $66,780, defined as cash and marketable securities less debt, versus $42,659 at December 31, 2020. It had no outstanding borrowings under its syndicated facility after repaying the remaining $11,750 capital-expenditure loan in February, and reported $50,000 of available revolving capacity. The German bank line had €3,781 available after letters of credit.
Cash from investing activities was $3,715, principally reflecting maturities of U.S. Treasury securities, partly offset by capital expenditures. Financing activities provided $11,077, including $25,262 net ATM proceeds, offset in part by debt repayment and treasury-stock purchases. The quarterly dividend remained suspended. Current assets were $168,188 and current liabilities were $58,373.
Material changes and segment performance
- Sales fell 24% year over year, and gross margin declined to 23.2% from 33.3%. Lower energy demand and North American well-completion activity weighed on DynaEnergetics; lower volume, selling prices and fixed-cost absorption reduced consolidated profitability.
- DynaEnergetics sales declined 28% to $38,172; operating income fell to $1,521 from $8,606. Its gross margin was 22.1%, compared with 36.6% a year earlier.
- NobelClad sales declined 14% to $17,486, largely due to shipment timing and delays. Operating income increased to $1,604 from $1,476, and gross margin improved to 26.4% from 25.3%. Backlog rose to $43,191 from $39,884 at year-end.
- Q1 2021 included approximately $1,000 of patent-litigation expenses in selling and distribution costs. Restructuring expense was $127, versus $1,116 in Q1 2020, which primarily reflected workforce reductions at DynaEnergetics.
- The company issued 397,820 shares through its ATM program for $25,262 net proceeds during the quarter; 1,006,180 shares had been sold under the program since its inception.
Outlook, risks and contingencies
Management said North American unconventional completion activity began accelerating late in Q1 and described DynaEnergetics’ end markets as improving, but tied a sustained recovery to stable oil prices, successful global COVID-19 vaccination and higher prices for perforating systems. The February Texas winter storm caused a one-week production shutdown and pushed approximately $5,100 of DynaEnergetics sales out of the quarter. NobelClad reported inspection and approval delays and European logistics bottlenecks; approximately $1,700 of sales were delayed.
The filing provides no specific earnings or revenue guidance. Management stated it believes operating cash flow, credit availability and potential ATM proceeds can fund foreseeable requirements, while cautioning that funding and results depend on market conditions, orders, backlog conversion, margins, credit access and capital-market access. The company expects increased 2021 costs to protect and enforce intellectual property. It was in compliance with debt covenants at quarter-end; the 1.35-to-1 debt-service coverage minimum resumes beginning with Q2 2021. The German tax audit for 2015–2017 was expected to conclude in Q2 2021. DMC reported no known legal proceedings expected to have a material adverse effect, but litigation outcomes remain uncertain. COVID-19 effects, supply-chain and transportation disruption, customer demand, raw-material availability, currency movements and execution risks are among the identified uncertainties.
Important facts for investors to verify
- Whether improving oil-and-gas activity, pricing and DynaEnergetics sales offset the substantial year-over-year decline and margin pressure.
- Whether delayed DynaEnergetics and NobelClad shipments convert to revenue, and whether NobelClad backlog continues to grow and ships on schedule.
- The cash-flow and earnings effects of working-capital needs, inventory build, patent litigation and any further ATM share issuance.
- Compliance with credit covenants when the debt-service coverage requirement resumes, and continued availability of revolving and capital-market funding.
- The outcome of the German tax audit and any material developments in patent litigation or other contingencies.