DMC Global Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. DMC operates DynaEnergetics, which serves the oil and gas perforating market, and NobelClad, which produces explosion-welded clad metal products. Unless noted otherwise, financial amounts below are in millions of U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $100.1 | $67.3 | +49% |
| Gross profit / margin | $36.4 / 36.4% | $22.8 / 33.8% | Margin +2.6 pts |
| Operating income | $20.5 | $5.3 | +285% |
| Net income | $15.2 | $3.9 | +287% |
| Diluted EPS | $1.01 | $0.26 | +288% |
| Adjusted EBITDA (non-GAAP) | $23.9 | $11.6 | +105% |
| Operating cash flow | $7.0 | $(3.0) | Improved |
| Capital expenditures | $6.6 | $5.3 | — |
Management attributed higher sales mainly to increased DynaEnergetics demand, supported by higher U.S. unconventional well-completion activity and demand for advanced perforating systems. Gross-margin improvement reflected a larger DynaEnergetics sales mix, better NobelClad project mix, and improved fixed-cost absorption. The consolidated operating margin was approximately 20.4%, versus 7.9% a year earlier. Q1 2018 included a $3.1 million anti-dumping penalty accrual; no such expense was recorded in Q1 2019.
Segments and operating trends
- DynaEnergetics: Sales were $79.8 million, up 63%; operating income was $23.1 million versus $8.7 million. Gross margin declined to 39.1% from 40.0%, reflecting lower average selling prices, unfavorable mix, and higher R&D expense, partly offset by higher-volume absorption. Sales increased 26% sequentially from Q4 2018, according to management.
- NobelClad: Sales were $20.3 million, up 12%; operating income was $1.8 million versus a $0.01 million loss. Gross margin improved to 26.4% from 17.5%, with higher project volume and more favorable project mix. Backlog rose to $40.5 million from $29.9 million at year-end, its highest level since Q4 2015.
Cash, liquidity, debt, and capital
- Cash and cash equivalents were $14.9 million at March 31, up $1.5 million from year-end. Operating cash flow was $7.0 million; working-capital investment included a $13.7 million increase in receivables.
- Total debt, net of debt issuance costs, was $43.4 million, including $19.9 million of revolving borrowings and $24.2 million under the capital expenditure facility. Net debt was $28.5 million, up $0.5 million from year-end. Long-term debt was $40.2 million.
- Approximately $30.1 million of revolving capacity was available under the credit facilities. The company reported compliance with covenants: leverage ratio 0.6x against a 3.0x maximum; debt-service coverage 14.5x against a 1.35x minimum.
- Current assets were $146.0 million and current liabilities $66.9 million. The company declared a $0.02-per-share quarterly dividend, paid April 15, 2019.
- Adoption of the lease accounting standard resulted in $8.2 million of operating lease liabilities at quarter-end, including $2.1 million current; operating lease expense was $0.7 million for the quarter.
Outlook, risks, and unusual items
- Management described continued adoption of DynaEnergetics’ factory-assembled DynaStage systems and planned to begin installing another automated shaped-charge line at Blum, Texas, in Q2. Once fully operational, the line was expected to more than triple DynaEnergetics’ U.S. shaped-charge capacity during 2019. A third automated detonator assembly line in Germany had recently commenced production. No quantified earnings or revenue guidance was provided.
- Management cited healthy NobelClad demand in downstream energy and aluminum smelting, but noted that project timing and order inflows can be difficult to predict. It was exploring strategic alternatives for its Russia-based perforating operations, which contributed about 1% of company sales and operating income in Q1.
- AD/CVD contingency: U.S. Customs denied the company’s request to waive an $8.0 million assessed penalty on April 12, 2019. The company expected to tender the amount in Q2. The $8.0 million was accrued at March 31; the filing also describes a separate $3.049 million AD amount previously tendered into a suspense account.
- The company’s effective tax rate reflected favorable discrete items, including benefits for restricted-stock vesting and release of U.S. and state valuation allowances. A $0.4 million restructuring expense related mainly to the France facility closure; sale of that facility was expected in Q2 2019.
- Key stated risks include demand and order timing, pricing and margins, backlog conversion, raw-material costs, foreign exchange, manufacturing capacity and expansion execution, litigation or regulatory matters, and credit-facility availability. One DynaEnergetics customer accounted for more than 10% of consolidated sales in Q1 2019.
Most important facts for investors to verify
- Whether the $8.0 million Customs penalty was paid in Q2 as expected, and the status or treatment of the separately tendered $3.049 million AD amount.
- Whether the Blum capacity expansion was completed on schedule and achieved expected operating levels, and whether demand and margins supported the planned capacity.
- Whether NobelClad’s $40.5 million backlog converted into sales and cash flow, given project timing uncertainty.
- Customer concentration and developments in the Russia operations strategic review.
- Per-share earnings presentation: the statements report basic EPS of $1.02 and diluted EPS of $1.01 for Q1 2019; the MD&A also cites $1.01 per diluted share.
- Working-capital trends, debt and covenant headroom, and the effect of the lease liabilities and planned capital spending on liquidity.