DMC Global Inc. (Dynamic Materials Corporation) — Q2 2016 Form 10-Q
Business context and period: The unaudited filing covers the three and six months ended June 30, 2016, compared with the same 2015 periods. DMC operates NobelClad, which makes explosion-welded clad metal products, and DynaEnergetics, which makes oilfield perforating products. Unless indicated otherwise, financial amounts below are in thousands of U.S. dollars.
Key financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $41,317 | $44,741 | $81,849 | $85,560 |
| Gross profit / margin | $9,908 / 24.0% | $12,585 / 28.1% | $20,293 / 24.8% | $23,288 / 27.2% |
| Operating income (loss) | $(822) | $(63) | $(907) | $(3,289) |
| Net loss | $(766) | $(1,319) | $(1,179) | $(3,696) |
| Diluted loss per share | $(0.05) | $(0.10) | $(0.08) | $(0.27) |
| Adjusted EBITDA (non-GAAP) | $3,307 | $4,411 | $6,321 | $6,577 |
Q2 sales fell 8% year over year and first-half sales fell 4%. Gross margin contracted in both periods. For the first half, operating and net losses narrowed compared with 2015, while Adjusted EBITDA declined modestly. The company declared dividends of $0.02 per share in Q2 2016, versus $0.04 in Q2 2015.
Segments and material changes
- NobelClad: Q2 sales rose 23% to $26,407 and first-half sales rose 13% to $51,459. Q2 operating income increased to $4,130 from $986; first-half operating income rose to $5,639 from $2,807. Results benefited from shipment of a large semiconductor-equipment project, favorable project mix, and lower manufacturing overhead after European facility consolidation. Backlog declined to $34,479 at June 30 from $41,832 at December 31, 2015.
- DynaEnergetics: Q2 sales fell 36% to $14,910 and first-half sales fell 24% to $30,390. The segment recorded a Q2 operating loss of $2,901, versus income of $1,247 a year earlier, and a first-half operating loss of $1,981, versus income of $453. Management attributed the deterioration to weaker oil-and-gas completion activity, unfavorable product mix, and pricing pressure.
- Consolidated SG&A declined year over year, reflecting lower headcount, stock compensation, outside services, and distribution costs. Restructuring charges were $829 in the first half of 2016, compared with $3,112 in the first half of 2015.
Cash, debt, and liquidity
- Cash and cash equivalents were $9,444 at June 30, 2016, compared with $6,291 at year-end 2015. Current assets were $82,233 and current liabilities were $28,720.
- Outstanding revolving borrowings were $23,500 gross ($22,908 net of debt issuance costs), down from $27,500 gross at year-end. Management reported net debt of $14.1 million, down 34% from $21.2 million at year-end. Approximately $51.5 million of revolving capacity was available, subject to covenant compliance.
- The company was in compliance with debt covenants. Trailing-twelve-month leverage was 1.88x against a maximum of 3.75x; debt-service coverage was 8.20x against a minimum of 1.35x.
- First-half operating cash flow was $8,442, compared with cash used of $4,717 in 2015. Investing activities used $1,160, primarily for capital expenditures; financing activities used $4,385, including $4,000 of net debt repayments and $571 of dividends. Cash increased by $3,153 during the period.
Outlook, risks, and unusual items
- Management said cash from operations and available credit were expected to support working capital, debt service, dividends, and capital expenditures for the foreseeable future. It cautioned that continued weakness in energy markets, inability to convert backlog or win orders at attractive margins, or reduced credit availability could impair cash generation. No specific revenue or earnings guidance was provided.
- DynaEnergetics planned to move perforating-gun production from Troisdorf, Germany, to a new Liebenscheid facility and consolidate North American administrative offices in Houston. The facility was purchased in July for $2,188; management expected approximately $750 of additional restructuring costs in the second half of 2016.
- The company had accrued $6.456 million for potential anti-dumping/countervailing duties and interest on certain Chinese-origin tubing imports. Commerce ruled in February 2016 that certain imports were covered by the orders; DMC appealed to the U.S. Court of International Trade. Additional legal costs and interest or penalties may arise; potential penalties were not accrued because they were not considered probable or estimable.
- A material weakness in deferred-tax accounting controls remained unremediated, and management concluded disclosure controls were not effective at the reasonable-assurance level as of June 30, 2016. Remediation work and testing were ongoing.
- Foreign-exchange gains and losses affected other income; first-half other income was lower year over year, primarily due to increased realized currency losses. The company also reported that tax benefits for losses in certain jurisdictions could not be recognized because of valuation allowances.
Important facts for investors to verify
- Whether DynaEnergetics demand, pricing, and margins stabilize, and whether its restructuring delivers expected cost savings.
- Conversion and replenishment of NobelClad backlog, including the timing and profitability of large project shipments.
- Outcome and potential cash exposure of the anti-dumping/countervailing-duty appeal, including interest, penalties, and legal costs.
- Progress in remediating the deferred-tax control weakness and implications for future reporting.
- Availability of credit under the facility and continued covenant compliance if operating performance weakens.
- Actual second-half relocation and restructuring costs and whether dividends remain supportable under operating conditions and debt covenants.