DMC Global Inc. (Dynamic Materials Corporation) — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Amounts below are in millions of U.S. dollars unless otherwise noted. DMC operates NobelClad, which produces explosion-welded clad metal products, and DynaEnergetics, which makes oilfield perforating equipment and explosives. The AMK business, sold in October 2014, is presented as discontinued operations.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $44.7 | $51.9 | $85.6 | $98.7 |
| Gross profit / margin | $12.6 / 28.1% | $15.9 / 30.6% | $23.3 / 27.2% | $30.6 / 31.0% |
| Operating income (loss) | $(0.1) | $3.8 | $(3.3) | $6.9 |
| Net income (loss) | $(1.3) | $2.3 | $(3.7) | $3.8 |
| Adjusted EBITDA* | $4.4 | $8.2 | $6.6 | $15.2 |
Sales and operating drivers: Q2 sales fell 13.8%; first-half sales fell 13.3%. Management attributed declines to unfavorable foreign-exchange translation ($3.9 million in Q2; $7.6 million in the first half), weaker North American rig activity and E&P spending cuts affecting DynaEnergetics, and order timing affecting NobelClad. First-half segment sales declined 10.6% at NobelClad and 16.1% at DynaEnergetics. Lower volumes, product mix and fixed manufacturing overhead reduced gross margins. First-half DynaEnergetics gross margin was 37.1%, versus 40.6%; NobelClad was 18.8%, versus 22.2%.
Restructuring charges were $1.1 million in Q2 and $3.1 million in the first half. Excluding these charges, operating income was $1.1 million in Q2, while the first-half operating loss was $0.2 million. Adjusted EBITDA declined 46.0% in Q2 and 56.8% in the first half. The first-half income tax provision was $1.1 million despite a pretax loss; management cited the geographic mix of results and valuation allowances on certain foreign deferred tax assets. Effective tax rates were highly variable.
Cash, liquidity and capital
- Cash was $10.9 million at June 30, 2015, versus $9.4 million at year-end 2014. Current assets were $101.7 million and current liabilities $31.2 million.
- Operating cash flow was negative $4.7 million in the first half, compared with positive $0.7 million in the prior-year period. Working capital absorbed cash, including inventory growth associated with a DynaEnergetics product launch, restructuring payments and lower customer advances. Capital expenditures were $2.5 million.
- Financing provided $9.3 million, including $11.2 million of net bank borrowings. Credit-line borrowings were $33.7 million, up from $22.8 million at year-end. DMC reported approximately $69.3 million of available revolving capacity and $50 million of term-loan capacity, subject to covenants.
- The new five-year syndicated facility, entered into in February 2015, has stated commitments of $150 million and is secured by company assets. DMC reported compliance with covenants at quarter-end: leverage ratio 1.44x versus a 3.0x maximum, and debt-service coverage 24.04x versus a 1.35x minimum.
- The quarterly dividend was $0.04 per share. Management said cash from operations and available facilities should fund foreseeable needs, while noting that this depends on sales, margins, execution and continued borrowing availability.
Material developments, outlook and risks
- Restructuring: NobelClad shifted European clad-plate production to its new Liebenscheid, Germany facility, operational in Q2; the Wurgendorf site closed and Rivesaltes continues with reduced operations. DynaEnergetics consolidated North American perforating-gun production in Texas and closed or reorganized several distribution locations. Management said the programs were substantially complete at June 30.
- Backlog: NobelClad backlog was $37.7 million at June 30, down from $41.2 million at December 31, 2014. Management generally expects to fill most backlog within 12 months but cautioned that order timing and realization are uncertain.
- Customs matter: U.S. Customs proposed applying anti-dumping/countervailing duties to certain Chinese-origin mechanical tubing used by DynaEnergetics. The company disputed applicability, expected to provide an approximately $1.1 million cash deposit or bond in Q3, and had not accrued a liability because a loss was considered neither probable nor estimable.
- Controls: A previously identified material weakness in deferred-tax accounting for certain foreign entities remained under remediation. Management concluded disclosure controls were not effective at the reasonable-assurance level as of June 30. The filing also cites incremental audit and legal costs related to restatement of previously issued financial statements.
- Other risks and outlook: No quantified revenue or earnings guidance was provided. Risks cited include global economic conditions, customer demand and order timing, backlog conversion, oilfield activity, foreign exchange, raw-material availability and prices, execution of restructuring, financing availability and covenant limits. The filing reported no known pending or threatened litigation expected to materially affect the financial statements and no significant change to previously disclosed risk factors.
*Adjusted EBITDA is a non-GAAP measure; compare it with GAAP results and the reconciliation in the filing.
Investor verification priorities
- Track whether sales, segment margins and NobelClad backlog stabilize, and assess the effect of rig activity and currency movements.
- Verify restructuring savings and any remaining transition costs after facility and distribution-network consolidation.
- Monitor operating cash flow, inventory and customer advances, borrowings, available facility capacity and covenant headroom.
- Follow the U.S. Customs duty proceeding, including the deposit or bond and any eventual duty exposure.
- Review remediation of the deferred-tax control weakness and the reliability of tax balances and future tax provisions.
- Assess whether dividend payments remain supportable under cash needs and credit-agreement restrictions.