DMC Global Inc. — Q3 2017 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2017, compared with the same 2016 periods. DMC operates NobelClad, which makes explosion-welded clad metal products, and DynaEnergetics, which supplies oil-and-gas perforating products. Financial amounts below are in millions of U.S. dollars unless noted.
Financial performance
- Quarterly revenue: $52.2, up 43% year over year. Gross profit was $17.2; gross margin was 32.9%, versus 23.1%. Operating loss was $12.4, including a $17.6 non-cash goodwill impairment. Net loss was $14.1, or $0.98 per diluted share, versus a $3.1 net loss, or $0.22 per share.
- Nine-month revenue: $138.3, up 17%. Gross profit was $41.5 and gross margin was 30.0%, versus 24.3%. Operating loss was $12.8 and net loss was $16.9, or $1.18 per diluted share, compared with a $4.3 net loss, or $0.31 per share, in 2016.
- Segment trends: Q3 DynaEnergetics sales rose 80% to $35.3, with operating income of $6.9 and gross margin of 38.7%. NobelClad sales were nearly flat at $16.8; excluding the impairment, its segment adjusted EBITDA was $1.5 versus $1.7 a year earlier. For the nine months, DynaEnergetics sales rose 68% to $84.2, while NobelClad sales fell 21% to $54.1.
- Cash flow and investment: Nine-month operating cash flow was $0.5, versus $17.8 in 2016; investing cash outflow was $3.3, primarily capital expenditures. Financing provided $4.8, including $6.0 net line-of-credit borrowings. Cash increased to $8.9 from $6.4 at year-end.
- Debt and liquidity: Lines of credit were $22.0 net of debt issuance costs ($22.3 gross), up from $15.7 net at year-end. Reported net debt was $13.1, up $3.8 from year-end. The company reported $12.75 of available revolving capacity and compliance with covenants; the facility’s leverage ratio was 1.40 against a 3.50 maximum, and covenant-defined EBITDA was $17.0 against a $6.5 minimum.
- Other metrics: Adjusted EBITDA, a non-GAAP measure, was $8.6 in Q3 and $15.5 for nine months, compared with $1.2 and $7.5, respectively. Quarterly dividends declared were $0.02 per share; nine-month dividends were $0.06 per share.
Material changes and management commentary
- DynaEnergetics growth reflected active North American unconventional well completions and demand for its intrinsically safe initiating systems, including DynaSelect and DynaStage. Higher selling prices, improved product mix and volume supported margins.
- NobelClad cited weaker industrial and energy spending, a decline in core maintenance orders, and delays and uncertainty affecting expected large petrochemical projects. Its September 30 backlog was $32.0, slightly above $31.6 at year-end. Management said the maintenance-order decline continued into Q4, while disclosing a $7.4 million Asian petrochemical order received in October.
- Following revised downward long-term forecasts for NobelClad, DMC recorded a $17.6 million impairment that eliminated all reported goodwill. Management attributed the reassessment to weaker end-market activity, reduced maintenance bookings and delayed projects.
- Management said operating cash flow and available facilities should fund foreseeable working capital, interest, dividends and capital needs, but cautioned that cash generation depends on orders, backlog conversion, margins and cost controls; litigation costs or reduced borrowing availability could pressure liquidity.
Outlook, risks and contingencies
- No quantified consolidated earnings or revenue guidance was provided. DynaEnergetics planned capacity expansion: a 40,000-square-foot Blum, Texas facility targeted to open in Q3 2018, a second automated DynaSelect line in Troisdorf, and reopening the Mt. Braddock assembly center in Q4 2017.
- The March 2017 credit amendment reduced facility commitments and temporarily modified covenants. The facility matures February 2020; actual future borrowing availability remains subject to covenant compliance.
- In the AD/CVD dispute, DMC tendered $3.049 million to U.S. Customs, maintained a $3.585 million reserve, and faced a separate $14.783 million penalty demand that was not accrued because management did not consider it probable. The court review and penalty proceedings remained unresolved; legal costs and additional interest or penalties were possible.
- Patent disputes with GEODynamics continued. DMC reported a favorable jury verdict in one U.S. case and cancellation of a related trademark, but other U.S. and German patent claims remained pending. The company had not accrued for those claims and said it could not reasonably estimate a loss range; a material impact was possible if the patents were found valid and infringed.
- Other risks include market cyclicality, customer order and shipment timing, raw-material prices, foreign exchange, manufacturing capacity, and tax audits. DMC began using short-term currency forwards; their fair values were not material at quarter-end. U.S. tax audits for 2012–2015 closed without proposed adjustments; German audits for 2011–2014 were ongoing.
Important facts for investors to verify
- Whether NobelClad demand, backlog conversion and delayed petrochemical projects improve or deteriorate after quarter-end, and how those developments affect forecasts and impairment assumptions.
- Whether DynaEnergetics growth and margins persist, and whether planned capacity investments deliver the expected output and returns.
- Current cash generation, working-capital needs, net debt, borrowing availability and covenant headroom under the amended credit facility.
- Developments in the AD/CVD appeal and Customs penalty matter, including the treatment of the tendered amount and any additional accruals or costs.
- Developments and potential exposure in the remaining U.S. and German patent cases; reported losses are unaccrued and no range was estimable.