DMC Global Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; financial statements are unaudited. Amounts below are in millions of U.S. dollars unless noted. DMC operates DynaEnergetics, serving the oil and gas well-completion market, and NobelClad, producing explosion-welded clad metal products for industrial markets.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $111.0 | $80.9 | $211.1 | $148.2 |
| Gross profit | $42.1 | $26.8 | $78.5 | $49.5 |
| Gross margin | 37.9% | 33.1% | 37.2% | 33.4% |
| Operating income | $24.7 | $10.2 | $45.1 | $15.5 |
| Net income | $17.2 | $6.4 | $32.4 | $10.3 |
| Diluted EPS | $1.15 | $0.43 | $2.17 | $0.69 |
| Adjusted EBITDA (non-GAAP) | $29.0 | $13.9 | $52.9 | $25.6 |
Q2 sales rose 37%; operating income increased 141% and net income 171%. For the first half, sales rose 42%, operating income 190%, and net income 215%. Margin expansion reflected a greater share of DynaEnergetics revenue, favorable product and project mix, manufacturing productivity, and stronger fixed-overhead absorption. Adjusted EBITDA is a company-defined non-GAAP measure.
Segments and cash flow
- DynaEnergetics: Q2 sales were $88.6 million, up 50% year over year; segment operating income was $26.8 million, up 119%. Management cited higher U.S. unconventional well completions and demand for advanced perforating systems.
- NobelClad: Q2 sales were $22.3 million, up 1%; segment operating income was $1.9 million, up 13%. First-half sales rose 6%, with improved project volume and mix. Backlog was $38.8 million at June 30, versus $29.9 million at December 31, 2018.
- First-half operating cash flow was $23.3 million, compared with a $1.6 million outflow a year earlier. Capital expenditures were $16.3 million; investing cash outflow was $15.0 million. Cash increased to $14.9 million from $13.4 million at year-end.
Balance sheet and liquidity
- Total debt was $35.9 million, down from $41.4 million at December 31, 2018; net debt was $21.0 million, down $7.0 million. The company had $36.9 million of available revolving capacity, subject to covenant compliance.
- Current assets were $158.3 million and current liabilities $70.3 million. Accounts receivable rose to $76.8 million from $59.7 million and inventory to $60.0 million from $51.1 million.
- DMC reported compliance with debt covenants. Its leverage ratio was 0.4x against a 3.0x maximum; debt-service coverage was 12.5x against a 1.35x minimum.
- Adoption of the lease accounting standard resulted in operating lease liabilities of $11.5 million and right-of-use assets of $10.4 million at June 30.
Changes, outlook, and risks
- Growth was concentrated in DynaEnergetics; one customer accounted for more than 10% of consolidated sales in Q2 and the first half of 2019.
- DMC says operating cash flow and available credit should fund working capital, debt service, dividends, and capital expenditures for the foreseeable future, while noting this depends on realizing backlog, securing orders, maintaining attractive margins, and executing cost-effectively. No specific numerical earnings or revenue guidance is provided.
- Management introduced two DynaStage product models in Q2; the DS Trinity 3.5 was in field trials. NobelClad demand is exposed to cyclical industrial markets, and order timing is difficult to predict.
- U.S. Customs denied DMC’s request to waive an $8.0 million anti-dumping penalty; the company tendered the amount in Q2. The liability had been accrued previously, and the balance sheet showed no accrued anti-dumping penalties at June 30.
- NobelClad recorded $0.7 million of additional severance accruals related to its French manufacturing closure and recognized gains on the sale of the facility and related assets. Q2 restructuring expense, net, was $0.3 million.
- Key stated risks include energy-market demand and customer order timing, backlog conversion, pricing and margins, raw-material availability and cost, currency movements, manufacturing capacity, and acquisition integration. Management reported no significant change in the risk factors from its 2018 Form 10-K.
Important facts for investors to verify
- Whether DynaEnergetics’ exceptional growth and margin gains are sustainable, given their exposure to U.S. well-completion activity and customer concentration.
- Backlog conversion at NobelClad, including the timing, margins, and execution of its higher backlog.
- Working-capital demands: receivables and inventory rose materially, despite improved first-half operating cash flow.
- The remaining implications of the $8.0 million customs penalty and the status of related duty matters.
- Capital spending, lease obligations, and deferred compensation: plan participants’ elections increased cash-settled deferred compensation liabilities by approximately $5.5 million.
- Dividend capacity and continued covenant compliance; the declared quarterly dividend was $0.02 per share.