DMC Global Inc. (formerly Dynamic Materials Corporation) — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; financial statements are unaudited. Unless noted otherwise, amounts are in millions of dollars. The company operates Explosive Metalworking, Oilfield Products, and AMK Welding.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $54.3 | $50.1 | $158.4 | $149.0 |
| Gross profit / margin | $16.6 / 30.5% | $15.3 / 30.6% | $46.4 / 29.3% | $43.7 / 29.3% |
| Operating income | $5.5 | $5.2 | $10.4 | $12.9 |
| Net income attributable to DMC | $3.6 | $3.8 | $7.2 | $8.8 |
| Diluted EPS | $0.26 | $0.28 | $0.52 | $0.65 |
| Adjusted EBITDA | $9.2 | $9.0 | $22.2 | $24.5 |
- Sales and segments: Q3 sales rose 8.2%; nine-month sales rose 6.3%. Q3 Explosive Metalworking sales increased 2.1%, Oilfield Products 21.5%, while AMK Welding declined 17.0%. For the nine months, the respective changes were +5.1%, +10.0%, and -11.7%.
- Profitability: Q3 operating income increased 6.0%, but nine-month operating income fell 19.5%. Nine-month net income attributable to DMC declined 18.3%. Company-wide gross margin was nearly unchanged year over year for both periods.
- Cash flow: Nine-month operating cash flow was $30.7 versus $12.5 in 2012; investing cash use was $13.8, mainly capital expenditures, including $8.1 for greenfield projects in Russia and North America. Financing cash use was $15.7, including $13.3 of net bank-line repayments and $1.6 of dividends. Cash increased to $9.6 from $8.2 at year-end 2012.
- Liquidity and debt: At September 30, cash was $9.6 and current assets were $89.9 versus current liabilities of $22.6. Lines of credit totaled $25.6, down from $38.8 at December 31, 2012; other debt was approximately $0.1. The company reported $37.8 of unused revolving capacity, subject to covenants. It was in compliance; actual leverage ratio was 0.79 to 1.0 against a 2.25 maximum, and fixed-charge coverage was 2.98 to 1.0 against a 2.0 minimum.
- Other balance-sheet items: Total assets were $229.6 and stockholders’ equity $171.2. Inventory declined to $41.7 from $48.3 at year-end 2012.
Material changes and unusual items
- Nine-month unallocated corporate expenses and stock-based compensation increased by a net $3.2, including a one-time $3.0 retirement-related expense, primarily associated with the former CEO’s retirement. This was the main reason operating income fell despite improved aggregate segment operating income.
- A Q3 review increased the Oilfield Products obsolete and slow-moving inventory reserve by $1.245. The charge reduced Q3 and nine-month EPS by $0.06. Management said the review reflected efforts to reduce inventory and rationalize product offerings.
- Q3 and nine-month other expense included foreign-exchange losses of $0.286 and $0.422, respectively; the comparable 2012 periods reported foreign-exchange gains.
- The nine-month 2013 tax provision included a $0.908 benefit from retroactive U.S. tax-law changes and a $0.430 second-quarter charge related to a German tax settlement. The settlement also increased tax basis in amortizable intangibles, with tax deductions expected over nine years.
- Foreign currency translation increased comprehensive income by $1.0 for the first nine months of 2013.
Outlook, risks, and contingencies
- Management expected 2013 consolidated sales to increase 4%–5% from 2012 and projected full-year gross margin of 29%–30%. It expected a 2013 blended effective tax rate of 26%–27%, or 29%–30% excluding the specified tax benefit and German settlement charge.
- Explosive Metalworking backlog was $42.9 at September 30, down from $46.4 at December 31, 2012; management generally expects to fulfill most backlog within 12 months. It cautioned that order timing is difficult to predict.
- Management described AMK as being in a transition year and expected its 2013 sales to fall well short of 2012’s $8.8, following a customer’s decision to discontinue new production work on a major ground-turbine platform.
- Key stated risks include cyclical end markets, uncertain customer demand and order timing, converting backlog to sales, pricing and competition, raw-material availability and cost, foreign-currency fluctuations, manufacturing capacity, permits, and access to financing. Revenue concentration is also a consideration: one customer represented 10.5% of Q3 sales, though no customer exceeded 10% of nine-month sales.
- The company said operating cash flow and available credit should fund foreseeable working-capital, debt-service, and capital-expenditure needs, but noted that performance depends on sales, new orders, cost execution, and continued credit availability. Dividends remain discretionary and subject to capital availability and debt covenants.
- No legal proceedings or significant changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective at the reasonable-assurance level.
Most important facts for investors to verify
- Whether subsequent sales and bookings sustain the projected 4%–5% full-year growth as Explosive Metalworking backlog declines.
- Whether Oilfield Products can maintain improved sales and margins after the inventory-reserve increase and inventory-reduction efforts.
- Whether AMK replaces lost ground-turbine work and how its lower utilization affects results.
- Whether operating cash flow remains strong after the working-capital release, and whether planned capital investment and dividends remain affordable.
- Whether the company continues to meet credit covenants and whether the reported unused borrowing capacity remains accessible.
- How recurring corporate costs, foreign-exchange effects, and the tax-rate outlook affect earnings after the one-time retirement and tax items.