DMC Global Inc. (formerly Dynamic Materials Corporation) — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise stated. Financial amounts are in thousands of dollars, except per-share data. The interim financial statements are unaudited.
Business context and results
DMC operates Explosive Metalworking, Oilfield Products and AMK Welding. It acquired Texas-based perforating-gun maker TRX Industries on January 3, 2012, for $10.294 million in cash.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $50.212 million | $45.574 million |
| Gross profit / margin | $14.377 million / 28.6% | $10.302 million / 22.6% |
| Operating income | $4.138 million | $1.496 million |
| Net income attributable to DMC | $2.428 million | $0.750 million |
| Diluted earnings per share | $0.18 | $0.06 |
| Operating cash flow | $6.733 million | $1.317 million |
| Capital expenditures | $2.633 million | $1.087 million |
| Adjusted EBITDA (non-GAAP) | $8.055 million | $5.061 million |
The income statement reports net income of $2.391 million in Q1 2012, including a $37,000 net loss attributable to non-controlling interests; net income attributable to DMC was $2.428 million.
Liquidity, debt and financial position
- Cash was $7.533 million at March 31, 2012, versus $5.276 million at December 31, 2011. Total assets were $230.037 million and total liabilities were $77.325 million.
- Credit-facility borrowings and other lines of credit totaled $36.555 million; separate debt owed to former LRI owners was $0.167 million. The company reported approximately $30.292 million of unused revolving capacity, subject to covenant compliance.
- Net cash used in investing was $12.811 million, including the TRX acquisition. Net cash provided by financing was $8.173 million, including $9.840 million of net bank borrowings. Cash increased by $2.257 million during the quarter.
- Management said the company was in compliance with debt covenants. Its actual leverage ratio was 0.95x against a 2.25x maximum; fixed-charge coverage was 2.77x against a 2.0x minimum.
Changes versus Q1 2011
- Sales rose 10.2%. Explosive Metalworking sales increased 5.6% to $27.533 million; Oilfield Products increased 23.0% to $20.974 million, including $2.011 million of TRX sales; AMK Welding fell 30.2% to $1.705 million.
- Gross margin improved to 28.6% from 22.6%, with better product mix and pricing in Explosive Metalworking and favorable product/customer mix in Oilfield Products. Operating income increased 176.6%.
- AMK Welding moved from $0.468 million of operating income to an $0.087 million operating loss, amid lower sales following a customer’s decision to discontinue production work on a ground-turbine platform.
- The effective tax rate rose to 35.9% from 16.7%. Management attributed the Q1 2012 rate partly to a $0.256 million deferred-tax-liability adjustment following a local tax increase at a German subsidiary.
- Operating cash flow increased to $6.733 million from $1.317 million, while investing outflows rose substantially because of the TRX acquisition.
Outlook, commentary and risks
- Management expected 2012 consolidated sales to increase 7%–10% from 2011 sales of $208.891 million, and full-year gross margin of 29%–30%. It expected the 2012 effective tax rate to be 28%–32%.
- Explosive Metalworking backlog rose 28% to $57.253 million from December 31, 2011. Management expected Q2 segment sales to be flat to down 10% versus Q1, but full-year segment sales to be flat to slightly higher than 2011.
- Management expected continued organic growth in Oilfield Products during 2012 and incremental sales from TRX. It anticipated gradual improvement in AMK sales and gross margin over the remaining quarters.
- Risks cited include economic and end-market cyclicality, order timing and customer demand, pricing and competition, backlog conversion, raw-material prices and availability, foreign-exchange movements, manufacturing capacity, permits, labor availability, acquisition integration, and access to financing. Management cautioned that forecasts are subject to these and other uncertainties.
- The company declared a quarterly dividend of $0.04 per share, payable April 16, 2012. Future dividends remain discretionary and subject to capital needs and debt covenants. The filing reported no legal proceedings and no significant changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the backlog converts to shipments and whether the stated sales, gross-margin and tax-rate outlook is achieved.
- The sustainability of improved margins, particularly the contribution of product mix and pricing in Explosive Metalworking.
- Oilfield Products growth and TRX’s ongoing contribution, including acquisition integration and amortization costs.
- AMK’s ability to replace lost ground-turbine work and recover sales and margins.
- Borrowing levels, covenant headroom and availability of revolving credit as working-capital and investment needs evolve.
- The effect of the German tax change and jurisdictional earnings mix on the full-year tax rate.