DMC Global Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 24, 2020. Amounts are in U.S. dollars; financial statement amounts are in thousands unless otherwise noted. The filing also reports unaudited quarterly results, including Q4 2019.
Business context
DMC Global is a diversified holding company with two segments: DynaEnergetics, which makes perforating products for the oil and gas industry, and NobelClad, which produces explosion-welded clad metal plates for industrial applications. DynaEnergetics generated 78% of 2019 sales; NobelClad generated 22%.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $397.550 million | $326.429 million | +22% |
| Gross profit | $144.923 million | $110.695 million | +31% |
| Gross margin | 36.5% | 33.9% | +2.6 percentage points |
| Operating income | $58.425 million | $37.424 million | +56% |
| Net income | $34.041 million | $30.473 million | +12% |
| Diluted EPS | $2.28 | $2.04 | +12% |
| Adjusted EBITDA | $93.753 million | $59.638 million | +57% |
DynaEnergetics sales increased 31% to $310.424 million, driven by U.S. unconventional well-completion activity and demand for its advanced perforating systems. NobelClad sales declined 2% to $87.126 million, primarily reflecting foreign-exchange effects; its gross margin improved to 26.2% from 22.9% on project mix.
Operating margin was approximately 14.7% versus 11.5%; net margin was approximately 8.6% versus 9.3%. The higher income tax provision, $22.661 million versus $4.134 million, included tax effects of the Siberia closure and a valuation allowance against certain German deferred tax assets.
Cash provided by operating activities was $64.594 million, up from $27.638 million. Investing activities used $25.947 million, including $27.210 million of property, plant and equipment purchases; financing activities used $30.562 million, including debt repayments and dividends. Cash was $20.353 million at year-end versus $13.375 million. Total debt was $14.272 million, down from $41.355 million; management reported net cash of $6.081 million. Current assets were $144.353 million and current liabilities $71.423 million.
Material changes and unusual items
- North American completion activity slowed in the second half and declined sharply in Q4. Quarterly sales fell from $100.094 million in Q3 to $86.367 million in Q4; Q4 net loss was $5.288 million, versus net income of $6.915 million in Q3.
- 2019 restructuring and asset-impairment expense was $19.503 million, mainly associated with closing and substantially liquidating DynaEnergetics’ Tyumen, Siberia operation. This included a $10.420 million foreign-currency translation loss reclassified to earnings and $6.231 million of asset impairment charges. The company will not resume operations in Russia.
- The 2019 tax provision also reflected $6.193 million of tax expense associated with the Siberia shutdown and a valuation allowance related to the change in German legal structure.
- The $8.0 million anti-dumping duty penalty accrued in 2018 was paid in Q2 2019; no such expense was recorded in 2019.
- Capacity expansion in Germany and Texas supported manufacturing efficiencies. DynaEnergetics also closed distribution facilities in Canada and Oklahoma and planned to consolidate Pennsylvania assembly operations into Blum, Texas.
Outlook, risks and contingencies
Management said operating cash flow and available credit were expected to fund working capital, debt service, dividends and capital needs for the foreseeable future, while noting that liquidity depends on sales, orders, margins and cost execution. The filing provides no specific quantified 2020 revenue or earnings guidance. NobelClad year-end backlog was $31.660 million, up from $29.879 million; management cautioned that orders can be delayed or canceled and backlog is not assured future sales.
Key risks include oil and gas activity and commodity-price volatility; cyclical industrial markets; customer order changes and concentration; metal costs, tariffs and supply disruptions; foreign-exchange exposure; explosive-material safety and regulatory obligations; and execution of restructuring and capacity changes. The company reported compliance with debt covenants at year-end, with a 0.2-to-1.0 leverage ratio against a 3.0 maximum and an 8.7-to-1.0 debt-service coverage ratio against a 1.35 minimum. Its $50 million revolving facility was undrawn. The filing disclosed no known legal proceeding expected to have a material adverse effect; the AD/CVD matter was resolved with payment of the penalty.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective as of December 31, 2019.
Important facts for investors to verify
- How the steep Q4 slowdown in North American completions affected subsequent orders, utilization and margins.
- Whether the improved cash generation and lower debt persist after restructuring costs and capital spending.
- The remaining costs and timing to complete the Siberia wind-down and the Pennsylvania-to-Texas consolidation.
- Whether NobelClad can sustain margin improvement and convert its backlog into revenue on schedule.
- The assumptions behind the elevated 2019 tax provision, German deferred-tax valuation allowance and future cash taxes.