DMC Global Inc. (formerly Dynamic Materials Corporation) — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Interim financial statements are unaudited; financial amounts below are in U.S. dollars, millions unless stated otherwise.
Business context
DMC operates Explosive Metalworking, Oilfield Products and AMK Welding businesses. Explosive Metalworking makes clad metal products; Oilfield Products supplies perforating equipment and explosives; AMK provides welding and related services for turbine and aircraft-engine customers. The company acquired Texas-based TRX Industries, a perforating-gun manufacturer, on January 3, 2012 for $10.294 million.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $48.687 | $54.165 | $98.899 | $99.740 |
| Gross profit / margin | $13.939 / 28.6% | $15.473 / 28.6% | $28.316 / 28.6% | $25.776 / 25.8% |
| Operating income | $3.650 | $5.897 | $7.787 | $7.393 |
| Net income attributable to DMC | $2.653 | $3.868 | $5.079 | $4.619 |
| Diluted EPS | $0.20 | $0.29 | $0.38 | $0.35 |
| Adjusted EBITDA (non-GAAP) | $7.452 | $9.522 | $15.506 | $14.583 |
- Q2 sales declined 10.1%; operating income fell 38.1% and DMC-attributable net income fell about 31%. H1 sales were down 0.8%, while operating income rose 5.3% and attributable net income rose about 10%.
- Q2 segment sales were Explosive Metalworking $27.374 million, Oilfield Products $18.924 million and AMK Welding $2.389 million. H1 segment sales were $54.908 million, $39.898 million and $4.093 million, respectively.
- H1 operating cash flow was $8.075 million, versus $0.755 million in 2011. Investing cash use was $15.763 million, including the TRX purchase and $5.595 million of capital expenditures; financing provided $7.759 million, including $9.924 million of net credit-line borrowings. Cash ended at $5.215 million, down $0.061 million from year-end.
- At June 30, current assets were $95.337 million and current liabilities $27.144 million. Revolving credit balances totaled $36.094 million; total liabilities were $73.218 million. The company reported about $29.037 million of unused revolving capacity, subject to covenant compliance.
- Actual leverage and fixed-charge coverage ratios were 0.98x and 2.34x, respectively, against maximum leverage of 2.25x and minimum fixed-charge coverage of 2.0x. DMC reported compliance with its debt covenants.
Material changes and management commentary
- Q2 Explosive Metalworking sales fell 23.4%, mainly because of shipment timing and unusually large prior-year shipments. Its backlog was $56.625 million at June 30, up from $44.564 million at December 31, 2011.
- Oilfield Products sales increased 20.4% in Q2 and 21.7% in H1, supported by TRX and demand for perforating products. AMK sales declined 11.4% in Q2 and 20.4% in H1 after a customer discontinued new work on a ground-turbine platform; lower utilization sharply reduced AMK margins.
- H1 consolidated gross margin improved to 28.6%, reflecting product mix and pricing improvements in Explosive Metalworking and favorable product/customer mix in Oilfield Products. AMK’s H1 gross margin fell to 14.6% from 32.2%.
- G&A increased 16.2% in H1 to $9.146 million, and selling and distribution expenses increased 8.9% to $8.319 million. Lower average borrowing rates reduced H1 net interest expense to $0.399 million from $0.893 million.
- Q2 other income included $0.403 million of foreign-exchange gains. H1 comprehensive income attributable to DMC was $1.827 million, including a negative foreign-currency translation adjustment of $3.254 million.
Outlook, risks and contingencies
- Management expected 2012 consolidated sales to be comparable to 2011 sales of $208.891 million, full-year gross margin of 29%–30%, and a blended effective tax rate of 30%–32%.
- Management projected full-year Explosive Metalworking sales down 5%–7% from 2011 and expected slower Oilfield Products growth in the second half than its H1 growth rate.
- The H1 tax rate was 33.0%, above the prior-year 25.4%. Management attributed the increase partly to a German subsidiary tax change and expiration of certain U.S. tax provisions relating to foreign earnings; it said some additional tax expense might be reversed if those provisions were extended.
- Key risks cited include global economic and end-market cyclicality, order and shipment timing, conversion of backlog, customer demand and concentration, pricing and competition, foreign-exchange movements, raw-material availability and cost, manufacturing capacity, permits, and acquisition integration. Management said there were no significant changes to previously disclosed risk factors, no legal proceedings, and disclosure controls were effective at the reasonable-assurance level.
- Future dividends were not assured and remained subject to capital needs, debt covenants and board discretion. The company reported no material change in market-risk disclosures from its prior annual report.
Most important facts for investors to verify
- Whether the $56.625 million Explosive Metalworking backlog converts to shipments and revenue on the expected schedule.
- Whether Oilfield Products growth moderates as forecast and whether AMK replaces the discontinued ground-turbine work.
- Whether margins, cash generation and working-capital needs support management’s full-year outlook, particularly after H1 inventory rose to $48.850 million.
- Credit-facility availability and covenant headroom, including the fixed-charge coverage requirement; unused capacity is conditional on continued compliance.
- The ultimate tax rate and any reversal of the additional tax expense related to foreign earnings provisions.