DMC Global Inc. (then Dynamic Materials Corporation) — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Dollar amounts below are in millions unless otherwise noted. The company reported two segments: NobelClad and Oilfield Products.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $53.6 | $57.9 | $101.7 | $104.1 |
| Gross profit | $16.3 | $17.1 | $30.6 | $29.8 |
| Gross margin | 30.4% | 29.5% | 30.1% | 28.6% |
| Operating income | $4.0 | $6.0 | $6.8 | $5.0 |
| Net income attributable to DMC | $2.9 | $3.4 | $4.5 | $3.7 |
| Diluted EPS | $0.21 | $0.25 | $0.32 | $0.27 |
| Adjusted EBITDA | $8.6 | $9.7 | $15.5 | $13.0 |
Second-quarter sales fell 7.3% year over year and operating income fell 33.6%; net income attributable to DMC declined 16.1%. For the first half, sales declined 2.4%, while operating income rose 36.2% and attributable net income rose 23.8%. First-half adjusted EBITDA increased 19.2%, but Q2 adjusted EBITDA decreased 11.3%.
Segments and material changes
- NobelClad: Q2 sales decreased 19.0% to $26.2 million; first-half sales decreased 13.3% to $50.8 million. First-half segment operating income fell to $4.5 million from $7.7 million. Management attributed the weakness to lower backlog, shipment timing, lower volume, and reduced fixed-cost absorption. Backlog was $40.1 million at June 30, up from $36.9 million at December 31, 2013.
- Oilfield Products: Q2 sales increased 7.5% to $27.4 million; first-half sales increased 11.6% to $50.9 million. First-half segment operating income rose to $7.0 million from $4.0 million. Management cited product/customer mix and demand for DynaSelect, introduced in Q3 2013, as contributors to sales and margin improvement.
- Effective at the start of 2014, AMK Technical Services was combined with DynaEnergetics in the Oilfield Products reporting segment; prior segment disclosures were restated.
- The first-half 2013 comparison included a $2.965 million one-time management-retirement expense and a $914,000 retroactive tax benefit; a $404,000 tax-audit expense was also recorded in Q2 2013.
Cash flow, liquidity, and debt
- First-half operating cash flow was $0.7 million, compared with $15.4 million in 2013. Management cited a $12.6 million unfavorable working-capital movement, including higher inventory and prepaid expenses and lower accounts payable; inventory build included DynaEnergetics customer orders and DynaSelect ramp-up.
- Investing cash outflow was $4.3 million, mostly capital expenditures, including $2.6 million for the Russia capacity expansion. Financing provided $1.7 million, including $2.6 million net bank borrowings, partly offset by $1.1 million of dividends. Cash decreased $1.9 million to $8.7 million.
- At June 30, total lines of credit were $31.8 million, with $31.5 million of stated unused capacity; cash was $8.7 million. The company reported $20,000 of current other debt. It was in compliance with debt covenants. Actual leverage was 1.06x versus a 2.0x maximum; fixed-charge coverage was 2.35x versus a 2.0x minimum.
- Current assets were $104.2 million and current liabilities $23.9 million. Stockholders’ equity was $176.6 million. Quarterly dividend declared was $0.04 per share.
Outlook, risks, and other disclosures
Management expected full-year 2014 sales to be flat to up 4% from 2013 revenue of $209.6 million, gross margin of 29%–30%, and a blended effective tax rate of 29%–30%. The outlook was based on NobelClad backlog and quoting activity and Oilfield Products sales trends. Management said operating cash flow and available credit were expected to fund working capital, debt service, and capital expenditures for the foreseeable future, while noting dependence on backlog conversion, new orders, attractive margins, and access to credit.
Risks highlighted include cyclical and unpredictable end-market demand, customer concentration and order timing, backlog conversion, raw-material cost and availability, foreign currency movements, manufacturing capacity, contract execution, and credit availability. No customer exceeded 10% of sales in the first half of 2014. No significant changes to previously disclosed risk factors or market-risk disclosures were reported. The filing reported no legal proceedings and no defaults; management concluded disclosure controls were effective at a reasonable-assurance level.
Investor facts to verify
- Whether NobelClad backlog converts to shipments and supports the full-year sales outlook.
- Whether Oilfield Products’ growth and DynaSelect-related margins persist as customer and product mix changes.
- Whether working-capital investment unwinds and operating cash flow improves after the first-half decline.
- Available borrowing capacity in practice, covenant headroom, and the effect of additional borrowing on liquidity and dividends.
- How foreign exchange, raw-material costs, and capacity expansion affect margins and reported results.