DMC Global Inc. (then Dynamic Materials Corporation) — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Financial amounts below are in millions of U.S. dollars unless noted; interim financial statements are unaudited.
Business context and results
DMC operates three segments: Explosive Metalworking (clad metal products), Oilfield Products, and AMK Welding. Explosive Metalworking generated 62% of first-half sales, Oilfield Products 33%, and AMK Welding 5%.
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $54.2 | $38.3 | $99.7 | $68.6 |
| Gross profit | $15.5 | $9.3 | $25.8 | $16.2 |
| Gross margin | 28.6% | 24.2% | 25.8% | 23.7% |
| Operating income | $5.9 | $2.1 | $7.4 | $2.3 |
| Net income attributable to DMC | $3.9 | $3.0 | $4.6 | $2.6 |
| Diluted EPS | $0.29 | $0.23 | $0.35 | $0.20 |
| Adjusted EBITDA | $9.5 | $5.5 | $14.6 | $9.0 |
Financial position and cash flow
- At June 30, cash was $7.6, current assets $97.5, and current liabilities $53.4. Total assets were $230.9 and total liabilities $81.2.
- Interest-bearing debt was approximately $32.6: $8.7 of lines of credit and $23.8 of term and other loans. Cash was $7.6. The company reported $35.0 of unused revolving-credit capacity, subject to covenant compliance.
- First-half operating cash flow was $0.8, down from $9.7 a year earlier. Working-capital changes used $9.9, notably higher receivables and inventory. Investing activities used $2.3, primarily capital expenditures; financing activities provided $4.2, including $5.8 of net line-of-credit borrowings and $1.1 of dividends paid.
- First-half capital expenditures were $2.3. The quarterly dividend declared was $0.04 per share. The company was in compliance with debt covenants at June 30; actual leverage and fixed-charge coverage ratios were 1.24x and 1.51x, respectively.
Material changes versus the prior period
- First-half sales rose 45.4%; Q2 sales rose 41.6%. Oilfield Products’ first-half sales increased 109.3%, including acquired-business contributions; excluding incremental sales from the 2010 acquisitions, management reported growth of 72.6%. Explosive Metalworking sales rose 28.8% in the first half.
- First-half operating income increased to $7.4 from $2.3, and attributable net income rose to $4.6 from $2.6. Improved sales and gross margins drove much of the improvement. Oilfield Products moved from a first-half operating loss to operating income.
- First-half operating cash flow declined sharply as growth absorbed cash in receivables and inventory. Inventory rose to $48.9 from $35.9 at December 31, 2010.
- First-half 2010 results included a $2.1 gain on the step acquisition of Russian joint ventures; there was no comparable gain in 2011. First-half interest expense also fell, partly because 2010 included a nonrecurring $0.3 debt-issuance-cost write-off.
Outlook, commentary, and risks
- Management said 2011 consolidated sales could increase 28%–30% from 2010 sales of $154.7, and forecast a full-year gross margin of 26%–28%. It expected a 2011 effective tax rate of 26%–28%.
- Explosive Metalworking backlog was $54.0 at June 30, down from $56.5 at December 31, 2010. Management cited healthy quoting activity in some markets but noted that order timing is difficult to predict. It expected most firm backlog orders to be filled within 12 months.
- Management attributed Oilfield Products growth to stronger global drilling activity, particularly in North America. Explosive Metalworking margins benefited from product mix and improved pricing versus 2010; management cautioned that segment margins can fluctuate with volume and mix.
- Key risks include cyclical end markets, customer concentration, order and shipment timing, backlog conversion, raw-material prices and availability, foreign-exchange movements, manufacturing capacity, contract execution, and access to financing. One customer represented 22.8% of Q2 sales and 13.6% of first-half sales.
- The credit facility was amended in February 2011 to revise financial covenants and increase capital-expenditure limits. Although the company reported covenant compliance, future borrowing availability remains subject to covenant tests. Management said operating cash flow and available credit should fund foreseeable needs, conditional on business execution and facility availability.
- A currency swap tied to a $2.7 customer order expired April 30, 2011; it generated a $0.1 gain in the first half. The filing reported no legal proceedings and no significant changes to previously disclosed risk factors. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether projected 2011 sales growth and gross-margin guidance are achieved, and how backlog converts into shipments and cash.
- Whether working-capital investment—especially receivables and inventory—translates into stronger operating cash flow.
- Customer concentration, order timing, and the sustainability of Oilfield Products demand and segment profitability.
- Debt-covenant headroom, access to unused credit capacity, and the impact of foreign exchange and raw-material costs.
- The extent to which reported earnings growth reflects underlying operations versus acquisition comparisons, foreign-currency effects, and other nonrecurring items.