DMC Global Inc. quarterly report, Q2 FY2018

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DMC Global Inc. — Q2 2018 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2018. Unless otherwise noted, dollar amounts below are in millions. DMC operates NobelClad, which makes explosion-welded clad metal products, and DynaEnergetics, which makes oil-and-gas well-perforating products.

Financial performance

  • Q2 revenue: $80.9 million, up 71% from $47.2 million a year earlier. Gross profit was $26.8 million; gross margin was 33.1%, versus 29.7%.
  • Q2 operating income and earnings: Operating income was $10.2 million, compared with $2.0 million. Net income was $6.4 million, or $0.43 per diluted share, versus $0.2 million, or $0.01 per share.
  • Six-month results: Revenue was $148.2 million, up 72%; gross margin was 33.4%, versus 28.3%. Operating income was $15.5 million, compared with an operating loss of $0.3 million. Net income was $10.3 million, versus a net loss of $2.8 million; diluted EPS was $0.69, versus a loss of $0.20.
  • Segment trends: Q2 DynaEnergetics revenue rose 120% to $58.9 million, with segment operating income of $12.2 million versus $2.0 million. NobelClad revenue rose 8% to $22.0 million, but segment operating income declined 27% to $1.7 million. NobelClad backlog was $37.0 million at quarter-end, down from $37.5 million at year-end 2017.
  • Cash flow and investment: Six-month operating cash flow was negative $1.6 million, versus negative $3.1 million. Investing cash outflow was $16.2 million, primarily for the Blum, Texas expansion. Cash declined to $6.6 million from $9.0 million at year-end.
  • Debt and liquidity: Lines of credit were $34.6 million, up from $18.0 million at year-end; reported net debt was $28.0 million, up $19.0 million. The new five-year credit facility totals $75 million; approximately $39.6 million of revolving capacity was available, subject to covenants. DMC reported compliance with covenants; its leverage ratio was 0.88 against a 3.00 maximum.
  • Other metrics: Q2 adjusted EBITDA, a non-GAAP measure, was $13.9 million versus $6.0 million. The company declared a $0.02-per-share quarterly dividend.

Material changes and management commentary

  • Management attributed DynaEnergetics’ growth to stronger North American unconventional well-completion activity, demand for perforating systems, higher selling prices, and improved product mix. Higher volume also improved fixed-cost absorption.
  • Management increased the 2018 capital-expenditure budget to $46 million from $30 million, primarily for in-house component production and long-lead equipment. The company planned to fund the increase through its revolving credit facility.
  • The 74,000-square-foot Blum facility was scheduled to open in Q3 2018; a second automated shaped-charge line was planned for the second half of 2018 and expected to more than double U.S. shaped-charge capacity. DynaEnergetics also added a second automated detonator line in Germany during the first half.
  • Management cited higher material costs and manufacturing-capacity ramp-up challenges as pressures on DynaEnergetics’ sequential gross margin. NobelClad faced weaker project margins and higher expenses; management said bookings activity might recover in the remainder of 2018, while noting tariffs and quotas could hinder U.S. fabricators.
  • Management was exploring strategic alternatives for its Russia-based perforating operations, expected to contribute about 2% of 2018 sales. No specific revenue or earnings guidance was provided.

Risks, contingencies, and unusual items

  • AD/CVD matter: DMC accrued $3.1 million of penalties in Q1; total accrued anti-dumping duties, interest, and penalties were $6.6 million at June 30. Management estimated probable ultimate penalties in a $3.1–$12.4 million range and accrued the low end. Further legal costs and interest may arise.
  • Patent litigation: The PTAB invalidated challenged claims in one GEODynamics patent matter, but GEODynamics appealed. Other U.S. and European patent cases remained pending, with trials expected in late 2018. DMC had not accrued for these matters; it said a material loss was reasonably possible but could not estimate a loss range.
  • Restructuring: NobelClad planned to close French manufacturing operations by year-end 2018. Management expected approximately $0.85 million of additional restructuring costs for the rest of 2018.
  • Cash conversion and funding: Rising receivables and inventory materially consumed cash as sales expanded. The company relied on increased borrowing to support working capital and construction; it identified operating execution, customer demand, margins, covenant availability, and litigation outcomes as factors that could affect liquidity.
  • Taxes and foreign exchange: Accounting for certain Tax Cuts and Jobs Act provisions remained provisional. Currency movements affected other expense; foreign-exchange forwards were used, but were not designated as accounting hedges.

Important facts for investors to verify

  • Whether DynaEnergetics’ rapid sales growth, pricing, margins, and manufacturing ramp-up were sustained after Q2.
  • Actual spending and commissioning progress for the $46 million 2018 capital program, and the resulting debt and cash-flow impact.
  • Subsequent developments, assessments, payments, or changes in the estimated range for the AD/CVD matter.
  • Developments and potential financial exposure in the pending U.S. and European patent litigation.
  • Whether NobelClad bookings and backlog improved, and whether the France closure stayed on schedule and within expected costs.
  • Changes in working-capital needs, available credit under covenant tests, and the final accounting effects of unresolved tax provisions.