DMC Global Inc. (then Dynamic Materials Corporation) — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unless otherwise noted, amounts are in millions of dollars; the filing presents financial statements in thousands. The company operates Explosive Metalworking, Oilfield Products and AMK Welding businesses.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $57.9 | $48.7 | $104.1 | $98.9 |
| Gross profit | $17.1 | $13.9 | $29.8 | $28.3 |
| Gross margin | 29.5% | 28.6% | 28.6% | 28.6% |
| Operating income | $6.0 | $3.7 | $5.0 | $7.8 |
| Net income attributable to DMC | $3.4 | $2.7 | $3.7 | $5.1 |
| Diluted EPS | $0.25 | $0.20 | $0.27 | $0.38 |
| Adjusted EBITDA | $9.7 | $7.5 | $13.0 | $15.5 |
- Revenue and segments: Q2 sales grew 18.8%; first-half sales grew 5.3%. First-half Explosive Metalworking sales were $58.6 million (+6.7%), Oilfield Products $41.8 million (+4.8%), and AMK Welding $3.7 million (-8.6%). Management attributed Oilfield Products’ first-half growth to market-share gains, geographic expansion and product/customer mix.
- Cash flow: First-half operating cash flow was $15.4 million, versus $8.1 million a year earlier. Investing used $9.5 million, primarily capital expenditures; financing used $11.6 million, including $9.8 million of net credit-line repayments and $1.1 million of dividends. Cash declined $5.9 million to $2.3 million.
- Liquidity and debt: At June 30, current assets were $96.9 million and current liabilities $30.0 million. Lines of credit totaled $28.8 million; other debt and lease obligations were small. The company reported approximately $33.4 million in unused revolving capacity, subject to covenants. It was in compliance; actual leverage was 0.88x against a 2.25x maximum, and fixed-charge coverage was 2.84x against a 2.0x minimum.
- Dividends: The company declared a quarterly dividend of $0.04 per share. Future dividends remain subject to board discretion, capital needs and debt covenants.
Material changes and notable items
- First-half operating income fell 36.3% despite higher sales. Management cited $2.965 million in one-time management-retirement costs, primarily related to the former CEO’s retirement; the charge included $0.894 million of stock compensation. Excluding these retirement costs, management said first-half G&A rose 13.0% year over year.
- Q2 operating income increased 64.7%, largely reflecting higher sales and gross profit. First-half segment operating income was broadly stable overall; corporate and stock-compensation expenses drove the consolidated decline.
- First-half net income included a $0.908 million tax benefit from retroactive U.S. tax-law changes. Q2 included a $0.404 million tax expense related to settlement of a German tax audit. The reported first-half effective tax rate was 17.5%; management estimated 28.8% excluding those two items.
- Other expense included foreign-exchange losses of $0.456 million in Q2 and $0.136 million for the first half. Oilfield Products recorded a $0.300 million increase to its obsolete and slow-moving inventory reserve in Q2.
- Explosive Metalworking backlog was $44.2 million at June 30, down from $46.4 million at year-end 2012. One customer represented 12.9% of Q2 sales; no customer exceeded 10% for the first half.
Outlook, commentary and risks
- Management expected Q3 2013 consolidated sales to be comparable to Q2 sales and projected full-year 2013 sales growth of 6%–8% over 2012. It expected full-year gross margin of 27%–29% and a blended effective tax rate of 24%–26% (28%–30% excluding the noted tax items).
- Management described quoting activity in some Explosive Metalworking markets as healthy, but noted ongoing softness in alternative energy, hydrometallurgy and power generation markets and uncertainty in order timing. AMK’s lost ground-turbine production work made 2013 a transition year; management did not expect its full-year sales to exceed 2012.
- Key risks include cyclicality and global economic conditions, customer/order concentration and timing, converting backlog into shipments, pricing and raw-material availability, foreign-exchange movements, production capacity, permits, and availability or cost of credit. Management said existing risk factors had not changed significantly. No legal proceedings were reported.
Important facts for investors to verify
- Whether projected sales growth and Q3 sales expectations were achieved, and how backlog converted into shipments.
- Whether the first-half earnings decline was primarily temporary retirement and tax items or reflected ongoing expense or margin pressure.
- Cash conversion and working-capital movements, particularly receivables, customer advances and capital spending on greenfield projects.
- Credit availability and covenant headroom, including the effect of operating results on fixed-charge coverage.
- Oilfield Products inventory exposure, customer concentration, foreign-exchange effects, and AMK’s progress replacing lost turbine-platform business.