DMC Global Inc. (formerly Dynamic Materials Corporation) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; filed April 28, 2016. Unless otherwise stated, amounts below are in thousands of U.S. dollars. The company operates NobelClad, which makes explosion-welded clad metal products, and DynaEnergetics, which makes oilfield perforating equipment and explosives.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $40,532 | $40,819 |
| Gross profit / margin | $10,385 / 25.6% | $10,703 / 26.2% |
| Operating income (loss) | $(85) | $(3,226) |
| Net income (loss) | $(413); $(0.03) per diluted share | $(2,377); $(0.17) per diluted share |
| Adjusted EBITDA (non-GAAP) | $3,014 | $2,166 |
| Operating cash flow | $3,805 | $(3,832) |
Sales declined 1% year over year. Lower DynaEnergetics sales were partly offset by higher NobelClad sales. Gross margin narrowed, reflecting less favorable NobelClad project mix and a lower relative share of DynaEnergetics sales. The improvement in operating and net results largely reflected lower expenses, including no restructuring charge in Q1 2016 versus $1,996 in Q1 2015. Adjusted EBITDA is a non-GAAP measure and should not be viewed as a substitute for GAAP results.
- NobelClad: Sales of $25,052, up 5%; operating income of $1,508, down 17%. Gross margin fell to 15.8% from 19.0%, primarily due to unfavorable project mix. Backlog was $40,182 at quarter-end, versus $41,832 at December 31, 2015.
- DynaEnergetics: Sales of $15,480, down 8%, amid deteriorating end-market demand; operating income was $920 versus a loss of $794. Gross margin rose to 41.8% from 36.7%, helped by higher-value DynaSelect and DPEX products and cost reductions.
Balance sheet, liquidity, and cash flow
- At March 31, cash was $5,595; total assets were $183,992; total liabilities were $61,680; and stockholders’ equity was $122,312.
- Credit-facility borrowings were $23,500 gross ($22,867 net of debt issuance costs), down from $27,500 gross at year-end. The company reported approximately $51,500 of available revolving capacity, subject to covenants. It was in compliance with debt covenants; reported leverage was 1.65x against a maximum 3.75x, and trailing-twelve-month debt-service coverage was 8.79x against a minimum 1.35x.
- Operating cash flow of $3,805 benefited from working-capital movements, including $4,878 of increased customer advances and $3,612 from lower receivables. Investing cash outflow was $415, primarily capital expenditures. Financing cash outflow was $4,284, including $3,998 of net debt repayments and $284 of dividends.
- Cash declined by $696 during the quarter to $5,595. The board declared a $0.02-per-share quarterly dividend, down from $0.04 per share in Q1 2015.
Outlook, risks, and significant items
- Management said DynaEnergetics’ markets continued to deteriorate; a more than 30% sequential drop in the U.S. rig count and reduced customer capital spending were factors. It warned Q2 and Q3 could be particularly challenging for well-completion businesses. DynaSelect sales reached record levels, while adoption of the DynaStage system slowed.
- In April 2016, DynaEnergetics announced further cost reductions, expecting up to $1,500 of restructuring expense during the rest of 2016 and approximately $750 of annualized savings. These are forward-looking estimates, not reported Q1 results.
- The company had a $6,409 accrued reserve for potential anti-dumping and countervailing duties and interest on certain imported tubing. The Commerce Department ruled certain imports subject to the orders; the company appealed to the U.S. Court of International Trade. Potential penalties were not accrued because they were not considered probable or estimable.
- Management stated that operating cash flow and credit availability should fund foreseeable needs, but identified dependence on backlog conversion, new orders, attractive margins, cost execution, and credit availability. Continued weakness in energy markets could pressure cash generation.
- A previously identified material weakness in deferred-tax accounting for certain foreign entities remained under remediation. Management concluded disclosure controls were not effective as of March 31, 2016; the company could not estimate when remediation would be complete.
- No formal revenue or earnings guidance was provided. The filing highlights risks including economic conditions, order timing, backlog realization, foreign exchange, raw-material prices, manufacturing capacity, and acquisition integration.
Important facts for investors to verify
- Progress and financial exposure in the anti-dumping/countervailing-duty appeal, including any additional interest or penalties.
- Whether DynaEnergetics’ market contraction and planned restructuring affect subsequent sales, margins, cash flow, and expected savings.
- NobelClad backlog conversion, new order intake, and project margins after the quarter-end backlog decline.
- Available borrowing capacity and covenant headroom if operating performance weakens.
- Remediation of the deferred-tax material weakness and whether disclosure controls become effective.
- Whether working-capital benefits, particularly customer advances and receivable collections, are repeatable.