DMC Global Inc. (formerly Dynamic Materials Corporation) — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. Amounts are in thousands of U.S. dollars, except per-share data. The company operates NobelClad, which makes explosion-welded clad metal products, and DynaEnergetics, which manufactures oilfield perforating equipment and explosives. AMK was sold in October 2014 and is presented as discontinued operations.
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $39,508 | $51,886 | $125,068 | $150,566 |
| Gross profit / margin | $10,289 / 26.0% | $15,083 / 29.1% | $33,577 / 26.8% | $45,695 / 30.3% |
| Operating income (loss) | $(941) | $3,406 | $(4,230) | $10,264 |
| Net income (loss) | $(4,233) | $2,342 | $(7,929) | $6,142 |
| Adjusted EBITDA (non-GAAP) | $2,546 | $7,770 | $9,123 | $22,980 |
- Sales fell 23.9% in Q3 and 16.9% year to date. DynaEnergetics sales decreased 35.6% in Q3 and 23.4% year to date; NobelClad sales decreased 9.7% and 10.4%, respectively.
- Gross margin pressure reflected unfavorable product mix and lower volume absorption of fixed manufacturing costs. DynaEnergetics was also affected by pricing and mix.
- Q3 operating loss included $285 of restructuring expense; nine-month operating loss included $3,397. Excluding restructuring, management reported operating losses of $656 for Q3 and $833 year to date.
- Cash and equivalents were $8,574 at September 30, 2015, versus $9,400 at December 31, 2014. Current assets were $96,641 and current liabilities $24,804.
- Operating cash flow was $(6,414) for the first nine months, versus $15,879 provided in 2014. Investing cash use was $4,690, primarily capital expenditures; financing provided $10,965, including $13,446 of net bank borrowings and $1,692 of dividends paid.
- Credit-line borrowings were $35,962, up from $22,782 at year-end. The company reported $66,550 of available revolving capacity and $50,000 of term-loan capacity, subject to covenant compliance. Actual leverage ratio was 2.01x against a 3.0x maximum; debt-service coverage was 12.00x against a 1.35x minimum.
- Shareholders’ equity was $138,262, down from $154,915 at year-end. The nine-month foreign-currency translation loss was $9,676.
Material changes and management commentary
- Management attributed lower sales principally to the steep decline in North American rig count and E&P capital-spending cuts, shipment timing at NobelClad, and unfavorable currency translation. Currency translation reduced Q3 sales by $3,451 and year-to-date sales by $11,072.
- DynaEnergetics’ operating performance deteriorated sharply. Management cited lower sales volume, unfavorable product mix, and higher selling costs, including bad-debt expense and commissions. NobelClad’s backlog was $41,698, compared with $41,244 at December 31, 2014; the company expected to fill most backlog within 12 months.
- Restructuring included NobelClad European production consolidation in Germany, DynaEnergetics facility and distribution-network consolidation, and corporate staff reductions. These programs were described as substantially complete. The company reported $3,397 in restructuring and impairment charges for the first nine months.
- Management said DynaEnergetics completed field trials of its DynaStage perforating system and signed a principal partner agreement with Weatherford International, which became the first oilfield-services company to deploy the product.
- After quarter-end, the company implemented reduced work weeks and further production and distribution cuts, and announced a 12-employee reduction in force in Germany. It anticipated up to $500 of Q4 2015 restructuring expense.
- No formal revenue or earnings guidance was provided. Management said operating cash flow and credit facilities were expected to fund foreseeable needs, while cautioning that this depended on sales, margins, cost execution, energy-market conditions, and borrowing availability.
Risks, contingencies, and unusual items
- Although compliant with debt covenants at September 30, management warned that challenging energy-market conditions could narrow covenant headroom and that compliance over the next 12 months was not assured. A default could permit acceleration of debt; the company said it would seek a lender amendment if needed.
- U.S. Customs proposed anti-dumping/countervailing-duty treatment for certain imported Chinese-origin mechanical tubing used by DynaEnergetics. The company posted an approximately $1,100 bond and requested a scope ruling from the Department of Commerce. No liability was recorded because a loss was not considered probable or estimable.
- The company disclosed a material weakness in deferred-tax accounting for certain foreign entities. Remediation was underway, but management could not estimate completion timing; management concluded disclosure controls were not effective as of September 30, 2015.
- Q3 other expense included $1,484 of net realized and unrealized foreign-exchange losses. The nine-month tax provision was $2,704 despite a pretax loss; management cited jurisdictional tax mix and valuation allowances as factors in the variable effective tax rate.
- The company was evaluating the realization of deferred tax assets in jurisdictions with cumulative losses. It also identified general risks from cyclicality, customer demand and concentration, contract timing, raw-material prices, foreign exchange, and manufacturing capacity.
Important facts for investors to verify
- Whether DynaEnergetics demand and margins stabilize, and whether the DynaStage partnership leads to meaningful orders and revenue.
- Quarterly covenant calculations, lender availability, and compliance headroom as operating results evolve.
- Cash conversion and working-capital trends, particularly inventory, customer advances, and accrued and payable balances.
- The outcome and potential financial exposure of the Customs/Commerce scope ruling and related duties.
- Progress in remediating the deferred-tax accounting material weakness and any resulting revisions to tax balances or reported results.
- Actual restructuring costs and savings, including the expected Q4 charge of up to $500, and the sustainability of the dividend.