DMC Global Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2020; year-to-date figures cover the nine months ended September 30, 2020. Financial amounts below are in U.S. dollars; figures are rounded to millions unless stated otherwise.
Business context
DMC operates DynaEnergetics, which supplies oil- and gas-well perforating products, and NobelClad, which produces explosion-welded clad metal plates for industrial applications. COVID-19-related weakness in oil and gas demand sharply reduced well completions and DynaEnergetics sales. NobelClad performance was affected mainly by project shipment timing and customer delays.
Financial performance
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $55.3m | $100.1m | $172.0m | $311.2m |
| Gross profit | $13.6m | $36.2m | $44.7m | $114.7m |
| Gross margin | 24.6% | 36.2% | 26.0% | 36.9% |
| Operating income (loss) | $1.5m | $12.8m | ($0.2m) | $57.9m |
| Net income (loss) | $1.0m | $6.9m | ($0.5m) | $39.3m |
| Diluted EPS | $0.07 | $0.46 | ($0.03) | $2.64 |
| Adjusted EBITDA | $6.0m | $23.2m | $15.5m | $76.1m |
Q3 sales fell 45% year over year, while improving 28% from Q2 2020. DynaEnergetics Q3 sales were $34.2m, down 56% year over year; NobelClad sales were $21.1m, down 7%. DynaEnergetics’ Q3 operating income was $2.2m versus $14.9m a year earlier. NobelClad’s was $2.5m versus $2.2m. Lower DynaEnergetics volume, under-absorbed fixed costs, lower average selling prices, and a less favorable sales mix compressed consolidated margins.
- Cash flow: Nine-month operating cash flow was $21.4m, compared with $35.1m in 2019; capital expenditures were $9.7m versus $22.4m. Cash increased by $4.3m during the period to $24.6m.
- Liquidity and debt: September 30 cash was $24.6m and total debt was $12.0m, yielding reported net cash of $12.6m. The $50m revolving facility was undrawn and available. The company reported a 0.4x leverage ratio and $63.2m of covenant-defined liquidity; it was in compliance with debt covenants.
- Balance sheet: Total assets were $259.3m, compared with $277.4m at year-end 2019. Accounts receivable was $34.4m versus $60.9m; inventory was $57.0m versus $53.7m. The allowance for doubtful accounts was $2.7m, after $3.3m of nine-month expected-credit-loss provisions.
- Backlog and concentration: NobelClad backlog was $42.6m at September 30, up from $31.7m at December 31, 2019, and flat with Q2. One DynaEnergetics customer represented approximately 11% of Q3 consolidated sales and 12% of nine-month sales.
Material changes, outlook, and risks
- The principal year-over-year deterioration was at DynaEnergetics, reflecting pandemic-related declines in energy demand and well completions. NobelClad’s nine-month sales declined 7%, while operating income was broadly stable.
- Management reduced the workforce by 32%, instituted reduced work weeks at DynaEnergetics, cut selling, general and administrative spending, reduced the capital expenditure budget by 50%, and suspended the quarterly dividend. The board suspended dividends indefinitely in April 2020.
- Management expected North American completions and DynaEnergetics demand through the end of 2020 to remain broadly similar to Q3. NobelClad customers had delayed downstream-energy maintenance projects, and one customer had delayed awarding a large prospective petrochemical order. No quantified full-year earnings or revenue guidance is provided.
- The June 2020 credit amendment waived the debt-service coverage covenant for Q3 2020 through Q1 2021 and imposed a minimum-liquidity covenant during those quarters; the debt-service coverage test was scheduled to resume in Q2 2021. On October 22, 2020, the company also amended the facility to waive repayment from proceeds of eligible ATM sales.
- After quarter-end, DMC commenced an at-the-market common-stock program allowing sales of up to $75m of shares. Proceeds and timing are uncertain; the program may support liquidity but could dilute shareholders.
- Unusual items included $3.3m of nine-month restructuring and asset impairment charges, including $1.2m of manufacturing-asset impairments and workforce-related costs. DynaEnergetics sold its Tyumen, Siberia facility in Q3 for $0.4m, equal to carrying value.
- Key risks include ongoing COVID-19 and energy-market uncertainty, oil and gas customer demand and pricing, customer credit and collections, supply-chain and operational disruptions, delayed NobelClad projects, and the company’s ability to access capital markets or maintain borrowing availability. A German tax audit covering 2015–2017 could also affect future tax expense if resolved adversely to the company’s expectations.
Important facts for investors to verify
- Whether DynaEnergetics demand, margins, and customer collections recover or remain pressured, including developments in the large-customer exposure.
- Actual ATM share sales, proceeds, fees, and resulting dilution; the filing does not report any ATM proceeds as of September 30.
- Continued covenant compliance, availability under the revolving and German credit facilities, and the timing of the debt-service covenant’s return.
- Whether NobelClad’s backlog converts to revenue on schedule and whether delayed maintenance and petrochemical projects proceed.
- Cash generation, credit-loss reserves, and restructuring or impairment charges as the company executes its cost and liquidity measures.