DMC Global Inc. — Form 10-Q Summary
Business context and period: Unaudited results for the three months ended March 31, 2017, compared with the first quarter of 2016. DMC operates NobelClad, which makes explosion-welded clad metal products for industrial markets, and DynaEnergetics, which makes oil-and-gas well perforation products. Amounts below are in millions of U.S. dollars unless otherwise stated.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $38.962 | $40.532 |
| Gross profit / margin | $10.366 / 26.6% | $10.385 / 25.6% |
| Operating loss | $(2.306) | $(0.085) |
| Net loss / diluted loss per share | $(3.020) / $(0.21) | $(0.413) / $(0.03) |
| Adjusted EBITDA (non-GAAP) | $0.930 | $3.014 |
| Cash from (used in) operations | $(5.186) | $3.805 |
Revenue fell 4%; gross profit was nearly flat as the consolidated margin improved by one percentage point. Higher legal and selling costs contributed to the larger operating and net losses. The tax provision was $0.630 million despite the pretax loss; management said tax benefits on losses in certain jurisdictions could not be recognized because of valuation allowances.
Segments
- NobelClad: Sales declined 32% to $16.934 million; operating income fell to $0.395 million from $1.508 million. Lower end-market activity and orders shipped in Q4 2016 rather than Q1 2017 weighed on sales. Backlog was $29.589 million at March 31, down from $31.634 million at year-end.
- DynaEnergetics: Sales rose 42% to $22.028 million, mainly on increased North American onshore drilling and completion activity. Gross margin dropped to 32.5% from 41.8%, and operating income declined to $0.040 million from $0.920 million, reflecting lower average selling prices, unfavorable mix, and higher legal costs.
Cash, debt, and liquidity
- Cash was $5.056 million at March 31, versus $6.419 million at December 31, 2016. Net debt, defined by the company as lines of credit less cash, was $16.869 million, up $7.556 million during the quarter.
- Lines of credit were $22.250 million before $0.325 million of debt issuance costs, compared with $16.250 million before costs at year-end. The company used $6.000 million of net borrowings during the quarter.
- Operating cash use included $3.049 million tendered to U.S. Customs in the AD/CVD matter, a $1.792 million inventory increase, and a $1.041 million increase in prepaid expenses and other. Capital expenditures were $1.649 million.
- A March 6 credit-facility amendment reduced commitments to $35 million, raised the leverage limit for specified 2017 quarters, waived the minimum debt-service coverage covenant for those quarters, and introduced minimum EBITDA requirements. At quarter-end, the company reported $12.750 million of available revolving capacity, subject to covenant compliance. Its leverage ratio was 3.07x against a 4.00x maximum, and covenant-defined EBITDA was $7.258 million against a $4.500 million minimum. It reported compliance with all debt covenants.
- Shareholders’ equity was $111.247 million at March 31, versus $112.409 million at December 31. The company declared a $0.02-per-share quarterly dividend.
Outlook, risks, and unusual items
- Management expected NobelClad end markets to remain soft in Q2 2017 but anticipated improving activity and bookings in the second half. It said DynaEnergetics demand continued to expand, particularly for its factory-assembled DynaStage system in North America. No specific full-year revenue or earnings guidance was provided.
- Management said operating cash flow and available credit were expected to fund foreseeable requirements, while noting that weak energy markets, failure to realize backlog or obtain attractive orders and margins, elevated litigation costs, or restricted borrowing capacity could affect liquidity. A shelf registration effective in March permits potential sales of up to $150 million of securities; access and terms are not assured.
- AD/CVD dispute: The company had a $3.547 million reserve at March 31 and tendered $3.049 million to Customs pending resolution. Customs assessed $14.783 million in penalties and separately demanded $3.049 million in alleged unpaid duties. The penalty accrual was not recorded because management did not consider the penalties probable; the dispute and appeals remained unresolved.
- Patent litigation: A jury found for DynaEnergetics on all counts in the ‘431 patent case on March 30, 2017; a later April 20 bench-trial decision invalidated GEODynamics’ REACTIVE trademark. A separate ‘563 patent case was stayed after the USPTO granted DynaEnergetics’ inter partes review request. The company had not accrued a loss for the second matter and said a potential loss could be material but could not be reasonably estimated.
- U.S. tax audits for 2012–2015 were being closed with no proposed adjustments; German audits for 2011–2014 were ongoing. Management said the outcome of audits could require tax-provision adjustments. The company adopted the inventory measurement update in Q1 without material impact and was evaluating other accounting standards, including revenue recognition and leases.
Most important facts for investors to verify
- Whether NobelClad bookings, backlog, and second-half activity recover as management expected.
- Whether DynaEnergetics’ sales growth can translate into stronger margins and operating income amid pricing and product-mix pressure.
- Cash conversion, working-capital needs, net debt, available credit, and compliance with amended 2017 covenants.
- Developments and potential financial exposure in the Customs AD/CVD matter and the remaining patent litigation.
- Whether elevated legal costs decline as anticipated and whether dividend payments remain consistent with liquidity and debt covenants.