DMC Global Inc. (Dynamic Materials Corporation) — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Financial amounts below are in U.S. dollars, millions, except per-share data. The company operates Explosive Metalworking, Oilfield Products, and AMK Welding segments.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $50.1 | $54.9 | $149.0 | $154.6 |
| Gross profit | $15.3 | $14.8 | $43.7 | $40.6 |
| Gross margin | 30.6% | 27.0% | 29.3% | 26.3% |
| Operating income | $5.2 | $5.7 | $12.9 | $13.1 |
| Net income attributable to DMC | $3.8 | $4.3 | $8.8 | $8.9 |
| Diluted EPS | $0.28 | $0.32 | $0.65 | $0.67 |
| Adjusted EBITDA (non-GAAP) | $9.0 | $9.6 | $24.5 | $24.1 |
For the first nine months, gross-margin improvement lifted gross profit despite lower sales. Higher operating expenses largely offset that improvement; operating income was nearly flat year over year. Q3 sales and operating income declined, although gross profit and margin increased. Nine-month effective tax rate rose to 30.5% from 22.9%; management attributed the change primarily to jurisdictional earnings mix and tax items affecting the first half.
Cash, debt, and liquidity
- Cash was $11.4 million at September 30, 2012, up from $5.3 million at year-end 2011. Current assets were $104.9 million and current liabilities $25.6 million.
- Nine-month operating cash flow was $12.5 million, versus $2.3 million a year earlier. Working-capital changes used $7.2 million, including higher inventory and receivables and lower payables and customer advances.
- Investing cash outflow was $20.7 million, including $10.5 million of capital expenditures and the $10.3 million TRX acquisition. Financing cash inflow was $14.4 million, including $17.1 million of net bank-line borrowings.
- Lines of credit totaled $43.6 million and other debt was approximately $0.2 million. The company reported $22.3 million of unused revolving capacity, subject to covenant compliance. It was compliant with its debt covenants; reported leverage was 1.23x against a 2.25x maximum, and fixed-charge coverage was 2.46x against a 2.0x minimum.
Material changes and business developments
- Nine-month sales fell 3.6%. Explosive Metalworking sales declined 11.1% and AMK Welding sales declined 18.1%; Oilfield Products sales rose 12.4%, including contributions from TRX, acquired in January 2012.
- Explosive Metalworking backlog was $48.4 million at September 30, up from $44.6 million at December 31, 2011, but below $56.6 million at June 30. Management said Q3 bookings were weaker than anticipated.
- Oilfield Products experienced a Q3 slowdown, particularly in North America, associated with reduced rig counts and a more competitive pricing environment. AMK sales were affected by a customer ending new production work on a major ground-turbine platform.
- TRX was acquired for $10.3 million in cash; acquired customer-relationship intangibles of $5.4 million are amortized over six years.
Outlook, risks, and unusual items
- Management expected full-year 2012 consolidated sales to be 3%–4% below 2011 sales of $208.9 million, Explosive Metalworking sales to decline 9%–10% from 2011, and consolidated gross margin to be 29%–30%. It expected a 30%–32% blended effective tax rate for 2012.
- Key disclosed risks include economic and end-market cyclicality, order timing and backlog conversion, customer demand and concentration, pricing and competition, raw-material costs and availability, foreign-exchange movements, production capacity, permits, and access to financing.
- CEO transition: Kevin T. Longe was appointed CEO effective March 1, 2013, succeeding Yvon Cariou. Cariou’s retirement triggers accelerated vesting on 33,666 restricted shares and recognition of $0.618 million of stock compensation over the following five months.
- The filing reported no legal proceedings and no significant change in previously disclosed risk factors. Disclosure controls were deemed effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether the sales and margin outlook was achieved, especially given the weaker Q3 bookings and the reduction in Explosive Metalworking backlog after June.
- Whether North American oilfield demand, competitive pricing, and the AMK customer program loss continue to affect revenue and margins.
- Availability under the credit facilities and covenant headroom if borrowings or working-capital needs rise.
- The effect of the higher effective tax rate and any change in the tax treatment of foreign earnings.
- The timing and full impact of the CEO succession and accelerated stock-compensation expense.