DMC Global Inc. (formerly Dynamic Materials Corporation) — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Financial statement amounts are in thousands of dollars unless stated otherwise. The company reported two segments: NobelClad and Oilfield Products; AMK Technical Services was combined with Oilfield Products beginning in 2014, with prior segment disclosures restated.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 or prior date |
|---|---|---|
| Net sales | $48.039 million | $46.270 million; up 3.8% |
| Gross profit / margin | $14.329 million / 29.8% | $12.719 million / 27.5% |
| Operating income (loss) | $2.763 million | $(1.055) million |
| Net income attributable to DMC | $1.638 million; $0.12 per diluted share | $0.215 million; $0.02 per diluted share |
| Adjusted EBITDA | $6.929 million | $3.341 million |
| Operating cash flow | $3.098 million | $6.290 million |
| Cash and cash equivalents | $9.130 million | $10.617 million at Dec. 31, 2013 |
| Total assets / stockholders’ equity | $236.875 million / $172.304 million | $240.612 million / $172.792 million at Dec. 31, 2013 |
At March 31, total current assets were $98.234 million and current liabilities were $27.766 million. Credit lines totaled $27.382 million, including $26.900 million under the U.S. revolving facility; $34,000 remained on loans with former LRI owners. Management reported approximately $36.240 million of unused revolving credit capacity, subject to covenant compliance. The company was in compliance with its debt covenants: leverage ratio was 0.91 against a maximum of 2.0, and fixed-charge coverage was 2.63 against a minimum of 2.0.
Cash decreased by $1.487 million during the quarter. Investing activities used $2.025 million, primarily capital expenditures; financing activities used $2.334 million, including $1.863 million of net bank-line repayments and $550,000 of dividends paid. The declared quarterly dividend was $0.04 per share.
Changes versus the prior comparable period
- Sales rose 3.8%, but performance diverged by segment: Oilfield Products sales increased 16.8% to $23.475 million, while NobelClad sales fell 6.2% to $24.564 million.
- Oilfield Products operating income rose to $3.570 million from $1.429 million, helped by higher margins and sales mix, including the higher-margin DynaSelect system. Its gross margin increased to 41.1% from 34.2%.
- NobelClad operating income declined to $1.377 million from $2.444 million. Its gross margin fell to 19.2% from 22.5%, reflecting lower volume and weaker fixed-cost absorption. NobelClad backlog was $35.868 million, down from $36.930 million at year-end.
- Consolidated operating results improved substantially, but the comparison benefited from $2.965 million of one-time management-retirement expense recorded in Q1 2013. Excluding that expense, Q1 2014 G&A increased $529,000, or 10.2%, year over year.
- Other expense was $435,000 versus $296,000 of other income, mainly reflecting $448,000 of foreign-exchange losses versus $320,000 of gains a year earlier. The 2013 tax benefit included a $914,000 benefit from retroactive U.S. tax-law changes, making the reported tax-rate comparison unusual.
- Operating cash flow declined by $3.192 million, mainly because working-capital movements were $4.722 million less favorable. Inventory and prepaid expenses increased, while accounts payable and accrued liabilities decreased; receivables collections and customer advances partly offset these uses.
Outlook, commentary, and risks
Management expected full-year 2014 sales to be flat to up 4% compared with 2013 sales of $209.573 million, and projected a consolidated gross margin of 29%–31% and a blended effective tax rate of 29%–30%. The company said operating cash flow and available credit were expected to fund working capital, debt service, and capital needs for the foreseeable future, while noting that this depends on execution and continued access to credit.
Management described NobelClad demand and order timing as difficult to predict and said quarterly margins may fluctuate with volume and product/customer mix. Risks identified include the ability to win attractive contracts and convert backlog to sales, customer demand and order timing, timely contract completion, foreign exchange, competition, raw-material price and availability, capacity and labor constraints, permits, acquisition integration, funding availability, and general economic conditions. No significant changes to previously disclosed risk factors, no legal proceedings, and no material change in market-risk disclosures were reported. Disclosure controls were assessed as effective at the reasonable-assurance level.
Most important facts for investors to verify
- Whether NobelClad backlog converts to shipments and whether Oilfield Products’ sales and DynaSelect-driven margins persist.
- Whether projected full-year sales and gross-margin ranges are achieved, given NobelClad’s weaker volume and margin performance.
- Whether operating cash flow improves as inventory, prepaid expenses, and other working-capital movements normalize.
- Whether foreign-exchange exposure, credit availability, and covenant headroom remain manageable; unused credit capacity is subject to covenant limits.
- How much of the year-over-year earnings improvement reflects sustainable segment performance versus the nonrecurring Q1 2013 retirement expense and unusual tax comparison.