DMC Global Inc. — Q2 2017 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2017. DMC operates NobelClad, which makes explosion-welded clad metal products, and DynaEnergetics, which makes oil-and-gas well perforation products. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $47.19 | $41.32 | $86.15 | $81.85 |
| Gross profit / margin | $14.02 / 29.7% | $9.91 / 24.0% | $24.38 / 28.3% | $20.29 / 24.8% |
| Operating income (loss) | $1.98 | $(0.82) | $(0.32) | $(0.91) |
| Net income (loss) | $0.19 | $(0.77) | $(2.83) | $(1.18) |
| Adjusted EBITDA (non-GAAP) | $5.96 | $3.31 | $6.89 | $6.32 |
- Q2 basic and diluted EPS were $0.01, versus a loss of $0.05 a year earlier. Six-month EPS was a loss of $0.20, versus a loss of $0.08.
- Q2 revenue rose 14%, led by DynaEnergetics growth; six-month revenue rose 5%. Q2 selling, general and administrative costs were elevated, particularly legal costs, and six-month net loss also reflected foreign-exchange losses, interest and a $1.14 million tax provision.
- At June 30, cash was $8.62; current assets were $83.78 and current liabilities $29.05. Credit-line borrowings were $24.25, making net debt $15.31. Total assets were $173.88 and total liabilities $56.89.
- Operating cash flow was negative $3.13 for the first six months, compared with positive $8.44 in 2016. Investing cash outflow was $2.17; financing provided $7.18, including $8.00 of net borrowings. Capital spending was $2.17.
- The quarterly dividend declared was $0.02 per share. The filing says future dividends are discretionary and subject to capital needs and debt covenants.
Material changes and segment results
- DynaEnergetics: Q2 sales increased 80% to $26.82 million; segment operating income was $2.00 million versus a $2.90 million loss. For the six months, sales rose 61% to $48.85 million and operating income was $2.04 million versus a $1.98 million loss. Management cited stronger North American completion activity, higher selling prices and improved product mix.
- NobelClad: Q2 sales decreased 23% to $20.37 million and segment operating income declined to $2.32 million from $4.13 million. Six-month sales fell 28% to $37.30 million and operating income fell to $2.72 million from $5.64 million. The comparison was affected by soft end markets and a large semiconductor-related shipment in Q2 2016. Backlog was $27.73 million, down from $31.63 million at year-end.
- Consolidated Q2 general and administrative expense increased 39% to $6.08 million, mainly due to patent-litigation legal fees and higher compensation. Q2 foreign-currency transaction losses contributed to other expense of $0.95 million.
- Cash and cash equivalents increased from $6.42 million at year-end to $8.62 million, while debt increased from $16.25 million to $24.25 million. Management attributed higher net debt to working-capital needs, the customs-duty tender and litigation expenses.
Outlook, risks and unusual items
- Management reported expanding North American demand for DynaEnergetics’ DynaSelect detonator and DynaStage perforating system, and said it was increasing DynaStage production capacity for expected second-half 2017 demand. No consolidated numerical earnings or revenue guidance was provided.
- After quarter-end, NobelClad secured a $4 million order for a specialty chemical project in Asia. Management also described potential project opportunities, including one of approximately $9 million; any resulting shipments and revenue would likely occur in 2018 if awarded.
- In March 2017, the company amended its credit facility, reducing the borrowing limit from $75 million to $35 million, increasing the permitted leverage ratio temporarily, waiving the minimum debt-service coverage requirement for specified 2017 quarters, and adding minimum EBITDA tests. At June 30, the company reported compliance, a 2.59-to-1 leverage ratio versus a 5.00-to-1 maximum, and $9.38 million of covenant-defined EBITDA versus a $4 million minimum. It reported approximately $10.75 million of available revolving capacity, subject to covenants.
- U.S. Customs’ antidumping/countervailing-duty dispute remains under appeal. The company tendered $3.049 million into a suspense account; its June 30 reserve for related duties was $3.593 million. Customs separately asserted $14.783 million in penalties, which the company disputed and did not accrue because management did not consider them probable.
- DynaEnergetics prevailed at trial in one GEODynamics patent and trademark case. Two other patent matters remained pending; the company said it could not estimate a loss range, and an adverse outcome could materially affect results. Legal costs were a significant expense.
- DynaEnergetics closed its Kazakhstan operations, recording $0.458 million in restructuring and impairment-related charges in Q2. The company also noted NobelClad goodwill impairment risk: its fair value had exceeded carrying value by approximately 12% at year-end 2016, and management was monitoring indicators.
- Management said cash flow and available facilities should fund foreseeable operating needs, but identified sales, margins, litigation costs, covenant capacity and access to financing as factors that could affect liquidity. Forward-looking statements are subject to market, customer-order, pricing, supply, currency and litigation risks.
Important facts for investors to verify
- Whether DynaEnergetics’ sales and margin gains continue, and whether DynaStage capacity can meet demand.
- Whether NobelClad backlog converts to shipments and whether the announced and potential project orders are realized.
- The outcome and financial exposure of the customs-duty and patent disputes, including any penalties, additional duties or legal costs.
- Debt-covenant headroom, borrowing availability and working-capital cash requirements under the amended facility.
- Whether NobelClad’s operating performance supports its goodwill carrying value and whether dividends remain permissible under liquidity and covenant conditions.