DMC Global Inc. — Q1 2020 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. DMC operates DynaEnergetics, which serves oil and gas well-completion markets, and NobelClad, which makes explosion-welded clad metal products for industrial markets. Amounts below are in U.S. dollars, thousands, except per-share data.
Financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $73,564 | $100,135 | Down 27% |
| Gross profit / margin | $24,470 / 33.3% | $36,405 / 36.4% | Down $11,935 / 3.1 percentage points |
| Operating income | $6,347 | $20,452 | Down 69% |
| Net income | $4,155 | $15,170 | Down 73% |
| Diluted EPS | $0.28 | $1.01 | Down $0.73 |
| Adjusted EBITDA (non-GAAP) | $11,287 | $23,897 | Down 53% |
| Cash from operations | $4,920 | $6,997 | Down $2,077 |
| Capital expenditures | $5,121 | $6,601 | Cash used |
Segment performance: DynaEnergetics sales fell 33% to $53,220; operating income declined 63% to $8,606. NobelClad sales were essentially flat at $20,344, while operating income fell 19% to $1,476. NobelClad backlog rose to $41,301 from $31,660 at year-end 2019.
Liquidity and debt: Cash was $16,451 at March 31, down from $20,353 at December 31, 2019. Debt was $13,531, including $14,094 of Capex Facility borrowings before $563 of issuance costs; there were no U.S. revolving borrowings. Reported net cash was $2,920. The company reported $50,000 of available borrowing capacity, subject to covenant compliance. Its actual leverage ratio was 0.2x against a 3.0x maximum; debt-service coverage was 7.7x against a 1.35x minimum. DMC reported compliance with its debt covenants.
Current assets were $138,441 and current liabilities $63,093. Accounts receivable included a $2,320 allowance for doubtful accounts; inventory was $61,445. Cash flow from operations was below capital expenditures in the quarter.
Material changes and notable items
- Management attributed the sharp DynaEnergetics decline to weaker well-completion activity, lower oil prices, and disruption from COVID-19 and the oil supply-demand imbalance. Consolidated sales were also down 14% sequentially from Q4 2019.
- Gross margin contracted, reflecting lower manufacturing volume and fixed-cost absorption, less favorable NobelClad project mix, and a lower DynaEnergetics share of sales.
- Selling and distribution expense increased, principally from $2,299 of provisions for expected credit losses, including specifically identified customer exposures. A NobelClad customer declared bankruptcy during the quarter.
- DMC recorded $1,116 of restructuring and impairment charges and reduced its workforce by 264 positions, including 97 temporary workers. The reduction represented 32% of its workforce.
- The company adopted the expected-credit-loss accounting standard on January 1, 2020; it reported no material adoption impact, but increased credit-loss provisions during the quarter as conditions worsened.
- After quarter-end, DMC received a $6,700 PPP loan on April 14 and returned the proceeds on April 23 following SBA eligibility guidance for public companies. The board also suspended the quarterly dividend indefinitely on April 23. The Q1 dividend declared was $0.125 per share.
Outlook, commentary, and risks
Management anticipated Q2 2020 well completions would be down more than 60% year over year. It announced reduced work weeks at DynaEnergetics, a targeted 25% reduction in quarterly SG&A from the 2019 run rate beginning in Q2, and a 50% capital-budget reduction to approximately $13 million, focused on maintenance and previously started projects. Management said operating cash flow and credit facilities should fund working capital, debt service, and capital needs for the foreseeable future, while noting that outlook depends on orders, backlog conversion, margins, and access to borrowing.
NobelClad recorded Q1 bookings of approximately $29 million, its second-highest quarter in five years, and management cited long-term growth prospects while noting uncertainty about the pandemic’s medium-term effects. Principal risks include the duration and economic consequences of COVID-19, continued weakness in oil and gas demand, customer credit and collections, supply-chain and operational disruption, margin pressure, and the ability to convert backlog and secure orders. Management stated that the impact of the pandemic could not yet be reasonably estimated.
Important facts for investors to verify
- Whether the projected Q2 well-completion decline and cost reductions materialized, and their effect on cash flow and margins.
- Subsequent changes in customer credit losses, receivables, inventory, and NobelClad backlog conversion.
- Current borrowing availability and covenant headroom under the credit facility as performance changes.
- The status of the dividend suspension and whether the approximately $13 million capital budget was maintained.
- Any material developments in the Siberia facility sale preparations, German tax audit, or other contingencies.