DMC Global Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. DMC operates DynaEnergetics, which supplies oil-and-gas well-perforating products, and NobelClad, which produces explosion-welded clad metal plates. Amounts below are in millions of U.S. dollars unless noted.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $65.4 | $43.2 | $121.1 | $116.8 |
| Gross profit / margin | $17.0 / 25.9% | $6.6 / 15.3% | $29.9 / 24.7% | $31.1 / 26.6% |
| Operating income (loss) | $2.7 | ($8.0) | $2.0 | ($1.6) |
| Net income (loss) | $1.7 | ($5.6) | $2.2 | ($1.5) |
| Diluted EPS | $0.10 | ($0.38) | $0.13 | ($0.10) |
| Adjusted EBITDA, non-GAAP | $7.5 | ($1.8) | $11.6 | $9.5 |
Q2 sales rose 51% year over year, with DynaEnergetics up 79% and NobelClad up 18%. The rebound reflected improving oil-and-gas activity and higher shipments from NobelClad backlog. For the first half, sales increased 4%, but gross profit declined 4%; DynaEnergetics’ lower average selling prices weighed on margin, partly offset by CARES Act Employee Retention Credits (ERC), favorable NobelClad project mix, and prior-year excess-capacity costs.
Cash flow and liquidity: Operating cash flow was negative $6.0 for the first half, versus positive $11.1 a year earlier, mainly because of working-capital investment, including receivables, inventory and prepaid costs. Investing cash flow was negative $121.4, primarily reflecting purchases of marketable securities funded by equity proceeds. Financing cash flow was positive $134.8, including equity proceeds, partly offset by debt repayment. Cash and marketable securities totaled $181.3 at June 30, compared with $53.9 at year-end 2020.
Debt and balance sheet: DMC repaid its $11.75 capital-expenditure term loan in February and had no outstanding borrowings at June 30. It reported $50.0 available under its revolving facility and was in compliance with covenants. Total assets were $434.3 and stockholders’ equity was $346.0. The May public offering and first-half ATM sales generated net proceeds of $123.5 and $25.3, respectively; shares outstanding increased materially.
Segments and material changes
- DynaEnergetics: Q2 revenue was $42.3 and segment operating income was $3.2, versus a prior-year operating loss of $6.9. First-half revenue was $80.4, up 5%, while gross margin declined amid lower average selling prices. Management cited continued recovery in North American well completions and demand for its DS perforating systems.
- NobelClad: Q2 revenue was $23.2 and segment operating income was $3.4. First-half revenue was $40.7, up 2%, and segment operating income was $5.0. Backlog rose to $45.1 from $39.9 at year-end 2020.
- Q2 consolidated results also benefited from $1.5 of ERC; total first-half ERC benefit was $3.8. The credits are a material, non-recurring support to reported margins and earnings.
- Prior-year comparisons include COVID-related restructuring and impairment charges: $2.0 in Q2 2020 and $3.2 in the first half of 2020, versus $0.1 in the first half of 2021.
Outlook, risks and contingencies
- Management expected the recovery in DynaEnergetics’ upstream oil-and-gas markets to continue in the second half of 2021, while noting persistent pricing pressure that could delay margin recovery. The filing provides no specific earnings or revenue guidance.
- NobelClad received an $8.8 order for titanium-clad plates, scheduled for shipment in Q3 and Q4 2021, and introduced DetaPipe. Timing of larger industrial orders remains uncertain.
- Rising material and labor costs, supply-chain and shipping bottlenecks, labor availability, COVID-19 impacts, customer demand and the ability to convert backlog into shipments could affect sales and margins. Management said ERC eligibility for Q3 2021 was available under the extension, but eligibility for Q4 was not assured.
- DynaEnergetics’ patent-enforcement litigation increased G&A costs; management expected elevated costs through the rest of 2021 and into 2022. The company said it was not aware of legal proceedings expected to have a material adverse effect.
- A German tax audit covering 2015–2017 concluded in Q2; final assessments were pending. Management did not anticipate material adjustments to recorded accruals.
- The quarterly dividend remained suspended. Management said cash, marketable securities, operating cash flow and available credit were expected to fund foreseeable operating and capital needs, while noting that liquidity depends on business performance and access to financing.
Investor facts to verify
- How much of reported margin and earnings improvement is sustainable after the $3.8 first-half ERC benefit and favorable year-over-year comparison to 2020 impairments?
- Whether DynaEnergetics can improve pricing and margins despite ongoing competitive pressure and patent-litigation costs.
- Whether NobelClad converts its $45.1 backlog and $8.8 order to revenue on schedule, and whether new orders replace shipments.
- Working-capital trends and operating cash generation, given first-half operating cash outflow of $6.0 and increased inventory and receivables.
- Use of equity proceeds, potential further ATM issuance and resulting shareholder dilution; the filing notes acquisitions may be among uses of proceeds.