DMC Global Inc. (then Dynamic Materials Corporation) — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited financial figures are in thousands of dollars, except per-share data.
Business context and results
The company operated three segments: Explosive Metalworking, Oilfield Products, and AMK Welding. For the quarter, revenue rose 32.9% year over year, led by higher Explosive Metalworking and Oilfield Products sales. Management attributed Oilfield Products growth mainly to increased oil and gas drilling activity, particularly in North America. AMK Welding sales declined.
Financial performance
| Metric | Q3 2011 | Q3 2010 | First nine months 2011 | First nine months 2010 |
|---|---|---|---|---|
| Net sales | $54,890 | $41,298 | $154,630 | $109,913 |
| Gross profit | $14,832 | $10,853 | $40,607 | $27,094 |
| Gross margin | 27.0% | 26.3% | 26.3% | 24.7% |
| Operating income | $5,666 | $2,943 | $13,059 | $5,273 |
| Net income attributable to DMC | $4,273 | $1,326 | $8,892 | $3,950 |
| Diluted EPS | $0.32 | $0.10 | $0.67 | $0.30 |
| Adjusted EBITDA | $9,554 | $6,674 | $24,137 | $15,631 |
Quarterly revenue increased 32.9%; nine-month revenue increased 40.7%. Nine-month Oilfield Products sales increased 78.6% as reported, or 58.7% excluding incremental sales from 2010 acquisitions. Explosive Metalworking sales grew 30.6% year to date; AMK Welding sales fell 3.4%. Nine-month consolidated operating income rose 147.7%. In Q3, Explosive Metalworking margin improved, while Oilfield Products and AMK Welding margins declined, principally due to product/customer mix and fixed-cost absorption, respectively.
Cash flow, balance sheet and liquidity
- Operating cash flow: $2,258 for the first nine months, down from $10,254. Net income and noncash charges were substantially offset by $16,066 of negative working-capital movements, including increases in receivables ($7,311) and inventory ($11,267).
- Investing and financing: Investing cash outflow was $4,344, almost entirely capital expenditures. Financing provided $1,569, including $3,999 of net borrowings on bank lines and $1,596 of dividends paid.
- Cash: $4,116 at September 30, 2011, versus $4,572 at December 31, 2010.
- Debt: Lines of credit totaled $6,553; long-term debt was $23,536, including $9,405 current maturities. Capital lease obligations totaled $204. The company reported approximately $36,124 of unused revolving capacity, subject to covenant compliance.
- Liquidity and covenants: Current assets were $92,169 and current liabilities $45,239. DMC was in compliance with its debt covenants. Actual leverage ratio was 1.02:1 versus a 1.5:1 limit at September 30; fixed-charge coverage was 1.65:1 versus a 1.0:1 minimum.
Outlook, risks and unusual items
- Management expected 2011 consolidated sales to increase 31%–33% from 2010, full-year gross margin of 26%–27%, and a 2011 effective tax rate of 25%–26%. It said operating cash flow and available credit should fund foreseeable working-capital, debt-service and capital needs, while noting this depends on execution and continued access to borrowing.
- Explosive Metalworking backlog was $47,123 at September 30, down from $56,539 at December 31, 2010. Management generally expected to fill most backlog within 12 months, but order timing and realization remained uncertain.
- Key risks include cyclical end markets and global economic conditions; customer demand, order timing and backlog conversion; pricing and competition; contract execution; raw-material prices and availability; foreign exchange; manufacturing capacity and labor; permits; acquisitions; and availability and cost of financing. The filing reported no significant change to previously disclosed risk factors.
- Q3 comprehensive income attributable to DMC was a loss of $2,971, despite positive net income, chiefly reflecting a $7,241 foreign-currency translation loss. The 2010 comparative period included a $2,117 gain on the step acquisition of Russian joint ventures; that gain did not recur in 2011.
- A new $2,500 currency hedge entered in September had an immaterial fair value at quarter end. The company reported no legal proceedings and said disclosure controls were effective.
Important facts for investors to verify
- Whether backlog converts to shipments and collections, particularly given the sharp inventory and receivables increases and lower operating cash flow.
- Whether Oilfield Products growth and margins hold up as drilling activity and product/customer mix change.
- Whether management’s sales, gross-margin and tax-rate outlook is achieved, and how the higher expected tax rate affects earnings.
- Debt-covenant headroom, availability of revolving credit, and the effect of working-capital needs and dividends on liquidity.
- Foreign-exchange exposure and the impact of currency translation on reported comprehensive income and equity.