DMC Global Inc. — Q1 2018 Form 10-Q
Business context and period. This unaudited quarterly report covers the three months ended March 31, 2018, with comparisons to Q1 2017. DMC operates NobelClad, which makes explosion-welded clad metal products, and DynaEnergetics, which supplies oil-and-gas well-perforating products.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net sales | $67.313 million | $38.962 million; up 73% |
| Gross profit and margin | $22.753 million; 33.8% | $10.366 million; 26.6% |
| Operating income (loss) | $5.312 million | $(2.306) million |
| Net income (loss) | $3.920 million; $0.26 per diluted share | $(3.020) million; $(0.21) per diluted share |
| Adjusted EBITDA | $11.642 million | $0.930 million |
| Operating cash flow | $(2.978) million | $(5.186) million |
| Investing cash flow | $(5.302) million | $(1.647) million |
| Cash at quarter-end | $10.768 million | $8.983 million at Dec. 31, 2017 |
| Debt and net debt | $29.933 million gross borrowings; company-reported net debt $18.582 million | Net debt was $9.001 million at Dec. 31, 2017 |
All financial amounts are in U.S. dollars; financial statement amounts are generally in thousands. Current assets were $125.191 million and current liabilities $54.377 million at March 31, 2018. The company reported $45.067 million of available revolving credit capacity and compliance with debt covenants. Its new five-year credit facility totals $75 million, including a $25 million capital-expenditure facility; the reported leverage ratio was 0.93x against a 3.00x maximum.
Operating cash use reflected higher working-capital needs, including increases in receivables and inventory. Investing cash outflows primarily funded the Blum, Texas expansion. Financing cash inflows included $11.176 million of net bank borrowings. The company declared a $0.02 per-share quarterly dividend.
Changes and segment results
- DynaEnergetics: Sales increased 123% to $49.121 million; operating income was $8.720 million versus $0.040 million. Its 40.0% gross margin, up from 32.5%, benefited from higher volume, pricing and favorable product mix.
- NobelClad: Sales rose 7% to $18.192 million, supported by initial shipments for an Asian petrochemical project. Operating loss was $0.012 million versus income of $0.395 million; gross margin declined to 17.5% from 19.3% due to project mix and higher selling and distribution expenses. Backlog was $35.645 million, down from $37.529 million at year-end.
- Consolidated results also included a $3.103 million anti-dumping penalty accrual and $0.144 million of restructuring expense, neither recorded in Q1 2017. Selling, general and administrative expenses increased, while other expense reflected foreign-currency losses versus gains in the prior-year quarter.
Outlook, risks and unusual items
- Management reported accelerating perforating-market activity and a January global DynaEnergetics price increase generally ranging from 5% to 8%. Planned capacity additions include a 74,000-square-foot Blum facility expected to open in Q3 2018, a second automated DynaSelect line in Germany during the first half of 2018, and a second shaped-charge line in Blum in the second half.
- NobelClad planned to complete the closure of its French manufacturing operations by year-end 2018; management expected approximately $1.3 million of additional restructuring expense for the remainder of 2018. The company noted that repair and maintenance orders remained weak, although it anticipated a possible booking recovery.
- U.S. Customs sustained its pursuit of penalties related to anti-dumping/countervailing duties. DMC estimated a probable penalty range of $3.103 million to $12.410 million and accrued the $3.103 million minimum; total reserved AD/CVD and penalty amounts were $6.712 million. Further legal costs and interest may arise.
- Patent litigation remains a contingency. The Patent Trial and Appeal Board invalidated challenged claims of one patent in March 2018, but denied review of another; U.S. and European proceedings were pending. DMC did not accrue a loss, stating it could not reasonably estimate one, but adverse outcomes could materially affect results.
- The company was still refining certain Tax Cuts and Jobs Act estimates. Its provisional transition-tax liability was reduced to $0.678 million; other effects, including territorial-tax and GILTI provisions, remained under evaluation.
- Management believed operating cash flow and available credit would fund working capital, debt service and planned expansion for the foreseeable future, while cautioning that weaker sales or margins, litigation outcomes, borrowing restrictions and execution of expansion plans could affect liquidity. No formal earnings guidance was provided.
Key facts for investors to verify
- Whether DynaEnergetics’ strong sales, pricing and margin trends persist, and whether planned capacity expansions are completed on time and within budget.
- Conversion of backlog and project shipments into revenue and cash, particularly as operating cash flow was negative despite reported net income.
- Final AD/CVD penalty assessment versus the $3.103 million accrual, and developments in the unresolved patent cases.
- Progress on NobelClad’s French closure, its expected remaining costs and the recovery of bookings.
- Final tax accounting under the TCJA and the impact on cash taxes and future earnings.
- The filing reports company net debt of $18.582 million; verify the calculation and underlying debt measure when comparing with balance-sheet gross borrowings and debt carrying value.