DMC Global Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing. Unless otherwise noted, dollar amounts below are in millions; filing tables generally present amounts in thousands. The company, formerly Dynamic Materials Corporation, operates NobelClad (explosion-welded clad metal) and DynaEnergetics (oilfield perforating products).
Financial performance and position
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $158.6 | $166.9 |
| Gross profit / margin | $38.7 / 24.4% | $35.6 / 21.3% |
| Operating income (loss) | $(5.3) | $(23.7) |
| Net income (loss) | $(6.5), or $(0.46) per diluted share | $(24.0), or $(1.72) per diluted share |
| Adjusted EBITDA (non-GAAP) | $9.0 | $13.1 |
| Cash provided by operating activities | $18.2 | $1.6 |
| Capital expenditures | $5.7 | $5.4 |
At year-end, cash was $6.4, lines of credit were $15.7 net of debt issuance costs, and reported net debt was $9.3. Total assets were $162.6 and stockholders’ equity was $112.4. The company declared dividends of $0.08 per share in 2016, down from $0.14 in 2015.
Fourth-quarter 2016 sales were $40.2, gross profit $9.9, and net loss $2.2 (loss per share $0.16). Fourth-quarter 2015 sales were $41.9, gross profit $2.0, and net loss $16.0.
Material changes versus prior periods
- Consolidated sales fell 5% year over year. NobelClad sales rose 1% to $91.3, while DynaEnergetics sales fell 13% to $67.3.
- Gross margin increased to 24.4% from 21.3%, in part because 2015 included a $6.2 accrual for anti-dumping and countervailing duties. NobelClad benefited from favorable project mix and lower European manufacturing overhead; DynaEnergetics continued to face lower volume and selling prices.
- Net loss narrowed substantially, mainly because 2015 included an $11.5 DynaEnergetics goodwill impairment, higher restructuring costs, and the duty accrual. Adjusted EBITDA nevertheless declined 31%, primarily reflecting weaker DynaEnergetics profitability.
- Operating cash flow improved to $18.2 from $1.6, driven by a $19.3 year-over-year improvement in net working capital. Inventory and receivables declined during 2016.
- Year-end NobelClad backlog declined to $31.6 from $41.8. DynaEnergetics increased reported market share, but its revenue remained pressured by the oil-and-gas downturn.
Outlook, risks, and unusual items
- Management reported improving North American onshore demand late in 2016 and early in 2017, with year-over-year DynaEnergetics sales growth continuing into early 2017. The company announced DynaEnergetics price increases and anticipated progress on margin recovery, but gave no quantified earnings or revenue guidance.
- Management expected NobelClad sales to be lower in the first half of 2017, partly because orders were accelerated into fourth-quarter 2016 shipments, and anticipated a possible booking recovery in the second half. These expectations are forward-looking and uncertain.
- On March 6, 2017, the company amended its credit facility: total borrowing capacity was reduced from $75 million to $35 million. The amendment relaxed certain leverage and debt-service covenants temporarily, added minimum EBITDA requirements for 2017 quarters, and increased borrowing costs. The company said the facility provided adequate liquidity for anticipated working-capital needs. Availability was approximately $15.6 million on the amendment date.
- U.S. Customs assessed $14.8 million in penalties in February 2017 over disputed import duties. DMC is challenging the assessment; the court had remanded the underlying scope ruling for reconsideration. The company had a $6.6 million duty reserve at year-end and tendered $3.0 million in duties into a suspense account in March 2017. The asserted penalties were not accrued because management did not consider them probable.
- DynaEnergetics faces two GEODynamics patent actions concerning DPEX shaped charges. The company disputes the claims; it did not accrue a loss and said the outcome could not be reasonably estimated.
- Principal operating risks include oil-and-gas spending and pricing, cyclical industrial project demand, backlog conversion, customer concentration, foreign-exchange movements, explosives and environmental regulation, and litigation. No customer represented more than 10% of consolidated sales.
- The company reported that its previously identified deferred-tax control material weakness was remediated as of year-end 2016. Management and Ernst & Young concluded internal control over financial reporting was effective; the financial-statement audit opinion was unqualified.
Key facts for investors to verify
- Whether DynaEnergetics’ demand recovery and announced price increases translate into sustained sales growth and improved margins.
- NobelClad’s backlog conversion and whether bookings recover after the expected weak first half of 2017.
- The final outcome and financial exposure from the AD/CVD dispute, including the $14.8 million penalty assessment and treatment of the existing reserve.
- The status, potential damages, and possible business impact of the GEODynamics patent litigation.
- Liquidity and covenant headroom under the amended $35 million facility as working-capital needs rise; confirm actual borrowing availability and covenant compliance.
- Whether operating cash flow remains strong when working-capital benefits normalize, and whether the reduced dividend is sustainable.