DMC Global Inc. (Dynamic Materials Corporation) — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing reports annual results, with selected unaudited quarterly data. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions.
Business context and key financial results
DMC operates two segments: NobelClad, which makes explosion-welded clad metal plates and transition joints for industrial markets, and DynaEnergetics, which makes oilfield perforating products. The company cited severe weakness in oil and gas activity, pricing pressure and currency translation as major factors affecting 2015.
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $166.9 | $202.6 |
| Gross profit / margin | $35.6 / 21.3% | $61.4 / 30.3% |
| Operating income (loss) | $(23.7) | $6.7 |
| Net income (loss) | $(24.0), or $(1.72) per diluted share | $2.6, or $0.18 per diluted share |
| Adjusted EBITDA (non-GAAP) | $13.1 | $31.5 |
| Cash from operating activities | $1.6 | $23.3 |
| Cash and cash equivalents at year-end | $6.3 | $9.4 |
| Assets / stockholders’ equity at year-end | $182.9 / $118.4 | $219.3 / $154.9 |
| Debt outstanding at year-end | $27.5 | $22.8 |
Net sales fell 18% year over year. The gross-margin decline reflected a $6.4 million accrual for antidumping and countervailing duties (AD/CVD), lower sales volume and fixed-cost absorption, lower selling prices and unfavorable product mix. The company recorded $4.1 million of restructuring charges and an $11.5 million goodwill impairment, fully writing off DynaEnergetics goodwill.
Segments and material changes
- NobelClad: Sales were $90.0 million, down 7%; gross margin fell to 19.1% from 22.3%. Operating income was $5.8 million versus $2.2 million, largely reflecting lower restructuring costs; excluding that benefit, operating income declined because of weaker gross margins and project mix. Year-end backlog was $41.8 million, slightly above $41.2 million a year earlier.
- DynaEnergetics: Sales were $76.9 million, down 27%; gross margin fell to 24.3% from 38.0%. The segment recorded an operating loss of $19.2 million versus operating income of $14.5 million. Management attributed the decline to lower rig counts and customer spending, pricing pressure, the AD/CVD accrual, inventory reserves and lower manufacturing absorption. Excluding unfavorable currency translation, segment sales declined 21%.
- Operating cash flow fell sharply, with management citing the net loss and a $9.4 million unfavorable working-capital movement. Investing cash outflow was $5.3 million, including $5.4 million of capital expenditures. Financing cash flow was positive $1.8 million, including $5.0 million net borrowings and $2.3 million of dividend payments.
Liquidity, outlook, risks and unusual items
- The amended syndicated facility had $75 million of total borrowing capacity; $27.5 million was outstanding at year-end. The company reported approximately $31.5 million of available capacity under that facility, subject to covenants. It was in compliance with covenants; reported leverage was 1.83x against a 3.75x maximum, and debt-service coverage was 7.77x against a 1.35x minimum. The amendment increased covenant flexibility for 2016.
- Management said operating cash flow and available credit were expected to fund working capital, debt service, dividends and capital expenditures for the foreseeable future, while warning that weaker sales, margins or borrowing availability could impair that ability. No quantified earnings or revenue guidance was provided.
- Management highlighted growing DynaSelect sales and DynaStage field trials, including a principal-partner agreement with Weatherford. It expected the new Tyumen, Siberia shaped-charge plant to begin supplying the Russian market in the second quarter of 2016 after testing and quality checks. NobelClad reported a post-year-end $6.3 million order expected to ship in the second quarter of 2016.
- The company recorded a $6.4 million reserve for AD/CVD duties and interest after a Commerce Department ruling covering certain imports used primarily for gun carrier tubing. DMC planned to appeal; potential penalties were not accrued because they were not considered probable or estimable. Outcome and additional costs remained uncertain.
- Key risks include continued weakness in oil and gas markets, cyclical industrial demand, customer concentration, pricing and product-mix pressure, foreign-exchange exposure, explosive-material safety and regulatory requirements, and execution of restructuring and new-product initiatives. The annual dividend declined to $0.14 per share from $0.16.
- Financial reporting controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end due to an unremediated material weakness in deferred tax accounting. The prior-period financial statements had been restated; Ernst & Young issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Progress and final financial exposure from the AD/CVD ruling, appeal, interest and any penalties.
- Whether operating cash flow improves as working-capital needs and restructuring payments normalize, and whether covenant headroom remains adequate.
- Recovery in DynaEnergetics demand and margins, including adoption and profitability of DynaStage and DynaSelect and ramp-up of the Tyumen plant.
- Completion and realized savings from restructuring, and whether NobelClad margins recover despite backlog levels.
- Remediation and independent testing of deferred-tax controls and the status of the adverse internal-control opinion.
- The goodwill impairment disclosures state DynaEnergetics fair value was below carrying value by approximately 14% in one section and 16% in another; verify the intended figure and underlying assumptions.