DMC Global Inc. (formerly Dynamic Materials Corporation) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. Financial amounts below are in U.S. dollars, millions, unless otherwise stated. The filing identifies the registrant as Dynamic Materials Corporation.
Financial results
- Revenue: $46.27 million, down 7.9% from $50.21 million. Sales declined in all three segments: Explosive Metalworking $26.18 million (down 4.9%); Oilfield Products $18.66 million (down 11.1%); AMK Welding $1.44 million (down 15.8%).
- Profit and margins: Gross profit was $12.72 million, down 11.5%; gross margin fell to 27.5% from 28.6%. Operating loss was $1.06 million versus operating income of $4.14 million. Net income attributable to DMC was $0.22 million, or $0.02 per diluted share, versus $2.43 million, or $0.18 per diluted share.
- Segment operating results: Explosive Metalworking reported $2.44 million, Oilfield Products $1.72 million, and AMK Welding a $0.29 million loss. These figures precede unallocated corporate expenses and stock-based compensation.
- Cash flow: Operating cash flow was $6.29 million, compared with $6.73 million. Investing used $4.41 million, principally capital expenditures of $4.45 million, including $2.40 million for greenfield projects in Russia and North America. Financing used $1.66 million. Cash ended the quarter at $8.17 million, down $0.03 million from year-end.
- Liquidity and debt: Current assets were $95.55 million and current liabilities $21.36 million. Revolving credit lines totaled $38.26 million; long-term debt was $0.04 million, with $0.06 million of current debt obligations. The company reported $23.56 million of unused revolving capacity, subject to covenants. It was in compliance with debt covenants; actual leverage was 1.22x against a 2.25x maximum, and fixed-charge coverage was 2.14x against a 2.00x minimum.
- Other metrics: Adjusted EBITDA, a non-GAAP measure, was $3.34 million, down 58.5% from $8.06 million. The company declared a $0.04-per-share dividend, consistent with Q1 2012.
Material changes and notable items
- Consolidated operating performance deteriorated by $5.19 million year over year, reflecting lower segment operating income and a $3.01 million increase in unallocated corporate expenses and stock-based compensation. This increase included a one-time $2.97 million charge for management retirements, mostly related to the former CEO; $0.89 million of the charge was stock-based compensation.
- Excluding the retirement charge, general and administrative expenses still increased 14.8% to $5.17 million. Explosive Metalworking gross margin declined to 22.5% from 26.2%, primarily due to product mix; Oilfield Products margin improved to 37.3% from 33.5%; AMK Welding recorded a negative 6.7% gross margin.
- Q1 2013 included a $0.91 million tax benefit from U.S. tax-law changes enacted retroactively for 2012. The reported income tax benefit was $1.17 million; management said the effective tax rate excluding the $0.91 million benefit would have been 27.5%.
- Foreign currency translation reduced comprehensive income by $3.63 million. Net other income included $0.32 million of foreign-exchange gains.
Outlook, risks and contingencies
- Management expected Q2 2013 consolidated sales to rise 17%–20% from Q1 and projected full-year 2013 sales growth of 8%–10% from 2012 revenue of $201.57 million. It forecast a 27%–29% full-year gross margin and a 21%–23% blended effective tax rate; excluding the Q1 tax benefit, the projected tax-rate range was 26%–28%.
- Explosive Metalworking backlog rose slightly to $47.56 million from $46.40 million at year-end; the company generally expected to fill most backlog within 12 months. Management attributed the Oilfield Products sales decline partly to shipment timing for an Indian tender order, with the approximately $3.2 million 2013 order scheduled for Q2 shipment.
- Management described 2013 as a transition year for AMK and did not expect full-year sales to exceed 2012’s $8.83 million, although it expected progressive improvement during the remaining quarters.
- Risks cited include economic and end-market cyclicality, order and shipment timing, converting backlog to sales, pricing and competition, customer concentration, foreign exchange, raw-material prices and availability, manufacturing capacity, permits, contract execution, acquisitions, and access to funding. Management stated that operating cash flow and available credit were expected to fund foreseeable needs, but warned that weaker sales, pricing, execution, or credit availability could affect liquidity.
- The filing reported no legal proceedings and no significant changes to the risk factors in the 2012 Form 10-K. Disclosure controls were considered effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether the projected Q2 sales rebound and full-year 8%–10% growth were achieved, including shipment of the Indian tender order.
- Whether margins and segment performance recovered as expected, especially at Explosive Metalworking and AMK Welding.
- How much of the Q1 operating deterioration was temporary: the $2.97 million retirement charge versus the increase in underlying corporate and administrative costs.
- Whether covenant headroom remains adequate, particularly given fixed-charge coverage only modestly above its 2.00x minimum.
- Whether reported cash generation, capital spending, and the dividend remain supportable if sales or operating cash flow weaken.