DMC Global Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial amounts are in thousands of U.S. dollars unless noted; interim statements are unaudited. DMC operates DynaEnergetics, serving the oil-and-gas well-completion market, and NobelClad, producing explosion-welded clad metal products for industrial markets.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $43.2 million | $111.0 million | $116.8 million | $211.1 million |
| Gross profit / margin | $6.6 million / 15.3% | $42.1 million / 37.9% | $31.1 million / 26.6% | $78.5 million / 37.2% |
| Operating income (loss) | $(8.0) million | $24.7 million | $(1.6) million | $45.1 million |
| Net income (loss) | $(5.6) million | $17.2 million | $(1.5) million | $32.4 million |
| Diluted EPS | $(0.38) | $1.15 | $(0.10) | $2.17 |
| Adjusted EBITDA | $(1.8) million | $29.0 million | $9.5 million | $52.9 million |
- Segment results: Q2 DynaEnergetics sales fell 73% year over year to $23.6 million and its operating loss was $6.9 million. NobelClad sales declined 12% to $19.6 million, while operating income was $2.0 million. NobelClad backlog was $42.9 million at June 30, up from $31.7 million at year-end 2019.
- Cash flow: First-half operating cash flow was $11.1 million, down from $23.3 million. Investing cash outflow was $7.5 million and financing cash outflow was $6.2 million. Cash ended at $17.2 million, versus $20.4 million at December 31, 2019.
- Debt and liquidity: Total debt was $12.7 million, including $13.3 million of Capex Facility borrowings before debt issuance costs; the $50 million revolving facility was undrawn. Management reported $4.5 million of net cash. The credit-facility leverage ratio was 0.3x and trailing-twelve-month debt-service coverage was 2.5x; the company stated it was in covenant compliance at quarter-end.
- Balance sheet: Total assets were $252.0 million and stockholders’ equity was $170.3 million at June 30, 2020. Net accounts receivable was $33.7 million, after a $2.9 million allowance for credit losses.
Material changes and drivers
- Consolidated Q2 sales declined 61% year over year, primarily from the pandemic-driven collapse in oil-and-gas demand and well-completion activity. U.S. completions fell nearly 70%, according to the American Petroleum Institute, as cited by DMC.
- DynaEnergetics’ lower volume, reduced selling prices, inventory reserves and under-absorption of fixed manufacturing costs sharply reduced margins. The quarter included a $2.0 million excess-capacity charge and $1.2 million of impairment charges on manufacturing assets.
- First-half expected-credit-loss provisions were $3.3 million, reflecting pandemic-related risks and identified customer exposures. Selling and distribution expense also rose year over year for the first half, largely because of these provisions.
- Restructuring and asset-impairment expense was $2.0 million in Q2 and $3.2 million for the first half. The company reduced its workforce by 32%, implemented reduced work weeks at DynaEnergetics, and continued preparing its Tyumen, Siberia facility for sale.
Outlook, management commentary and risks
- DMC expected a modest Q3 demand pickup at DynaEnergetics from Q2’s low level, but said the timing and extent of an oil-and-gas recovery remained uncertain. NobelClad reported delayed customer maintenance projects and a delayed prospective petrochemical order amid pandemic effects on bookings.
- Cost-containment measures included a 25% reduction in SG&A spending, a 50% reduction in the capital-expenditure budget, and suspension of the quarterly dividend. The Board suspended dividends indefinitely beginning April 2020.
- A June 25 credit-facility amendment waived the debt-service coverage covenant for Q3 2020 through Q1 2021 and established a minimum-liquidity requirement above $10 million for those quarters. The debt-service covenant resumes in Q2 2021. DMC said it expected liquidity to be sufficient for foreseeable operating needs, while noting that this depended on operating performance and continued access to borrowing.
- DMC registered up to $150 million of securities for potential future sale; availability on acceptable terms was not assured. COVID-19, a prolonged downturn, customer order timing, pricing, receivable collection, backlog conversion and credit availability were identified as material risks.
- Other notable items: DMC expected a $2.7 million U.S. tax refund in Q3 2020; the German tax audit for 2015–2017 could result in future tax adjustments. The filing reported no legal proceedings believed likely to have a material adverse effect.
Important facts for investors to verify
- Whether DynaEnergetics demand, pricing and manufacturing utilization recover as anticipated, and whether its new products translate into orders.
- Whether NobelClad converts its $42.9 million backlog to shipments and whether delayed customer projects or the prospective petrochemical order proceed.
- Trends in receivable collections, customer credit risk, inventory reserves and the adequacy of the $2.9 million allowance.
- Cash generation, capital spending, debt repayments, continued undrawn revolver availability and compliance with amended liquidity and covenant terms.
- Progress and proceeds, if any, from the Siberia facility sale; realized restructuring savings; and whether DMC resumes dividends or issues securities under its shelf registration.