DMC Global Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unless otherwise noted, financial amounts below are in millions of U.S. dollars. DMC operates NobelClad, which makes explosion-welded clad metal products, and DynaEnergetics, which supplies oil-and-gas perforating products.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $87.9 | $52.2 | $236.1 | $138.3 |
| Gross profit | $29.7 | $17.2 | $79.3 | $41.5 |
| Gross margin | 33.8% | 32.9% | 33.6% | 30.0% |
| Operating income (loss) | $8.8 | $(12.4) | $24.4 | $(12.8) |
| Net income (loss) | $4.9 | $(14.1) | $15.2 | $(16.9) |
| Diluted EPS | $0.33 | $(0.98) | $1.02 | $(1.18) |
| Adjusted EBITDA (non-GAAP) | $17.2 | $8.6 | $42.7 | $15.5 |
Q3 sales rose 68% year over year, led by DynaEnergetics; management attributed margin improvement to a greater share of DynaEnergetics sales, higher average selling prices and volume-related manufacturing efficiencies. Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
- Segments: Q3 DynaEnergetics sales were $66.3 million, up 88%, with operating income of $9.9 million. NobelClad sales were $21.6 million, up 28%, with operating income of $2.1 million. Nine-month sales increased 107% at DynaEnergetics and 14% at NobelClad.
- Cash flow: Nine-month operating cash flow was $6.5 million, versus $0.5 million a year earlier. Receivables and inventory absorbed $16.9 million and $21.6 million, respectively. Investing cash outflow was $26.6 million, primarily for the Blum, Texas expansion; financing provided $22.1 million. Cash ended at $11.1 million.
- Debt and liquidity: Lines of credit were $41.5 million net of issuance costs, versus $18.0 million at year-end 2017; principal borrowings were $42.3 million. The company reported net debt of $30.4 million. It reported approximately $32.7 million of available revolving capacity and compliance with covenants; the actual leverage ratio was 0.85 against a 3.00 maximum.
- Balance sheet: Current assets were $139.9 million and current liabilities $65.1 million at September 30. Inventories increased to $56.5 million from $35.7 million at year-end; accounts receivable rose to $65.6 million from $49.5 million.
- Other: Dividends declared were $0.02 per share for Q3. NobelClad backlog was $36.3 million, down from $37.5 million at December 31, 2017.
Material changes and unusual items
- Results rebounded from 2017 losses, which included a $17.6 million NobelClad goodwill impairment. The 2018 results included $8.0 million of anti-dumping/countervailing-duty penalties, including a $4.9 million Q3 accrual.
- Q3 general and administrative and selling/distribution expenses rose, reflecting patent-defense costs, headcount and compensation increases, commissions and distribution costs.
- The company’s March 2018 credit facility is a five-year, $75 million facility, including a $25 million capital-expenditure facility for the Blum expansion. The facility is secured by company assets and includes financial and other covenants.
- The company adopted the revenue-recognition standard in 2018 without a cumulative financial-statement impact and said it did not expect a material ongoing effect on revenue or net income.
Outlook, commentary and risks
- DynaEnergetics began production and assembly at its new 74,000-square-foot Blum facility in Q4 2018; management expected it to be fully operational during the quarter. NobelClad expected to complete its European manufacturing consolidation and close its Rivesaltes, France facility by year-end. Management expected approximately $0.6 million of restructuring costs for the remainder of 2018.
- Management was exploring strategic alternatives for Russia-based perforating operations, expected to contribute approximately 2% of 2018 sales. No earnings or revenue guidance was provided in the supplied filing text.
- U.S. Customs assessed an $8.0 million mitigated penalty in October 2018. DMC chose not to appeal, had accrued the full amount in Q3 as a recognized subsequent event, and expected to pay it in Q4. The company also reported paying $3.461 million of previously accrued AD/CVD amounts and interest during Q3.
- In U.S. patent litigation, a jury found for DynaEnergetics on all counts in the 394-patent case on October 10, 2018; the plaintiff withdrew its appeal concerning a separate patent whose challenged claims had been invalidated. German proceedings concerning a related patent remained pending, with an infringement trial scheduled for March 2019. DMC said it could not estimate a possible loss and had not accrued one.
- Management said cash flow and credit facilities should cover working capital, debt service, dividends and planned investment for the foreseeable future, but noted exposure to sales and margin performance, working-capital needs, litigation costs, borrowing availability, customer demand, raw-material prices, foreign exchange and execution of expansion plans.
Important facts for investors to verify
- Whether DynaEnergetics’ rapid sales growth and improved margins continue, and how concentrated demand remains: two DynaEnergetics customers each exceeded 10% of Q3 total sales.
- Working-capital conversion, particularly the increase in receivables and inventory, and whether operating cash flow improves as expansion spending moderates.
- Payment and cash-flow effects of the $8.0 million penalty, plus any further developments in the pending European patent litigation.
- Blum facility ramp-up, expected capacity and costs; completion and savings from NobelClad’s European consolidation.
- Debt availability, covenant headroom and the effect of borrowing and capital spending on liquidity. The filing presents net debt using lines of credit net of issuance costs; principal borrowings are separately reported.