DMC Global Inc. annual report, FY2014

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DMC Global (then Dynamic Materials Corporation): FY2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014. Unless noted otherwise, financial figures below are in U.S. dollars; filing amounts are generally reported in thousands. The company operated through NobelClad, which makes explosion-welded clad metal, and DynaEnergetics, which makes oilfield perforating products.

Financial performance and position

  • Revenue: $202.6 million, up 0.2% from $202.1 million in 2013. DynaEnergetics sales rose 26.1% to $105.5 million; NobelClad sales fell 18.0% to $97.1 million.
  • Profit: Gross profit was $61.4 million, up 5.7%, and gross margin expanded to 30.3% from 28.8%, principally because DynaEnergetics made up a larger share of sales and improved its pricing and product mix. Operating income was $6.7 million versus $11.0 million; excluding $6.8 million of restructuring charges, it was $13.4 million. Net income attributable to DMC was $2.6 million, down from $6.5 million; diluted EPS was $0.18 versus $0.47.
  • Segment results: DynaEnergetics operating income increased to $14.5 million from $4.5 million, while NobelClad’s was $2.2 million, or $8.9 million excluding restructuring, versus $17.1 million. NobelClad’s lower shipments and overhead absorption weighed on results.
  • Cash flow and investment: Operating cash flow was $23.3 million, down from $32.0 million, with the decline in continuing-operations cash flow largely attributed to unfavorable working-capital movements. Investing cash outflow was $13.4 million after $21.4 million of capital expenditures and $6.8 million of net AMK sale proceeds. Financing cash outflow was $7.9 million, including $6.1 million of net debt repayments and $2.2 million of dividends. Cash ended the year at $9.4 million, versus $10.6 million.
  • Debt and liquidity: Year-end revolving credit borrowings were $22.8 million; the company reported $37.6 million of unused capacity under its then-current facilities, subject to covenant compliance. It was in compliance with covenants at year-end. In February 2015, it replaced its prior facility with a five-year $150 million syndicated facility.
  • Balance sheet: Total assets were $219.3 million and stockholders’ equity was $154.9 million at year-end. The filing reports no scheduled debt maturity as of December 31, 2014.
  • Other measures: Adjusted EBITDA, a non-GAAP measure, was $30.2 million, up 13.7% from $26.6 million; the comparison was influenced by $3.0 million of management-retirement costs in 2013. Dividends declared were $0.16 per share, unchanged from 2013.

Material changes and unusual items

  • The company sold AMK Technical Services on October 1, 2014. AMK was classified as discontinued operations; net sale proceeds were $6.8 million and the sale produced a $0.7 million after-tax gain. The 2014 results include $0.6 million of income from discontinued operations.
  • NobelClad announced a European production consolidation, moving clad-plate production to a newly purchased German facility while retaining reduced transition-joint production in France. The 2014 restructuring charge was $6.8 million, including $3.9 million of non-cash impairment. The company expected further restructuring costs in 2015; estimates differ within the filing, as noted below.
  • Fourth-quarter revenue was $52.0 million versus $49.3 million a year earlier. The quarter recorded an operating loss of $3.6 million and net loss of $3.6 million, principally reflecting the restructuring charge; the quarter also included the AMK sale gain.
  • The company restated 2013 and 2012 financial statements for non-cash errors in German income-tax and deferred-tax accounting. The restatement reduced income from continuing operations by $1.0 million in 2013 and $0.9 million in 2012; it did not affect revenue or cash balances. Previously filed reports for affected periods are superseded and should not be relied upon.
  • 2014 income-tax provision was $3.9 million and the effective tax rate was 67.0%, including $3.7 million of valuation allowances against deferred tax assets. This reflected cumulative losses in certain foreign jurisdictions and uncertainty over realization of tax-loss carryforwards.
  • Foreign-currency translation reduced comprehensive income materially: the 2014 currency translation adjustment was a $22.6 million loss. Sales in non-U.S.-dollar currencies were 32% of total sales.

Outlook, risks, and controls

  • No specific consolidated revenue or earnings guidance is provided. Management expected the new German NobelClad plant to become operational in the second quarter of 2015; the Russian shaped-charge facility was targeted for late 2015, subject to permits and approvals.
  • The filing gives differing estimates for additional NobelClad restructuring costs: approximately $1.0 million in the MD&A and approximately $0.5 million in the restructuring note. Separately, the company expected $1.5–$2.5 million of 2015 DynaEnergetics restructuring and impairment charges and $1.5–$2.0 million of corporate restructuring charges.
  • Key business risks include cyclical industrial and oil-and-gas demand, lower energy prices or reduced drilling, order timing and cancellations, customer concentration, competition, raw-material supply and prices, foreign-exchange movements, and extensive explosives, environmental, safety, and permitting requirements. NobelClad’s 2014 sales were 50.2% below its 2008 peak; year-end backlog rose to $41.2 million from $36.9 million in 2013, but the company cautions that backlog does not reliably predict sales.
  • Management identified a material weakness in internal control over financial reporting related to deferred-tax accounting for certain foreign entities. Management concluded disclosure controls were ineffective, and the independent auditor issued an adverse opinion on internal control over financial reporting. The auditor issued an unqualified opinion on the financial statements. Remediation was underway, but timing and effectiveness were not assured.
  • Work stoppages at the Rivesaltes, France facility totaled 11 days in late 2014; work resumed after a labor agreement in January 2015. The filing reports no pending legal proceedings and no contingency expected to have a material adverse effect.

Important facts for investors to verify

  • Review the restated 2013 and 2012 statements and the full tax-restatement disclosures; do not rely on the superseded filings.
  • Track remediation of the tax-accounting material weakness and any subsequent auditor assessment of internal controls.
  • Reconcile actual restructuring spending with the filing’s inconsistent NobelClad cost estimates and the projected DynaEnergetics and corporate charges.
  • Monitor NobelClad backlog conversion, margins, and utilization, alongside DynaEnergetics demand and whether its 2014 growth and margins are sustained.
  • Verify progress, costs, and required permits for the German and Russian facilities, and assess the covenants and borrowing terms of the February 2015 credit facility.
  • Assess cash generation and working-capital needs against capital spending, debt service, and dividends, including exposure to currencies and oil-and-gas market conditions.