DMC Global Inc. — Q3 2019 Form 10-Q
Business context and reporting period
For the quarter and nine months ended September 30, 2019. DMC operates DynaEnergetics, which supplies oil-and-gas well perforating products, and NobelClad, which produces explosion-welded clad metal. Dollar amounts below are in millions unless stated otherwise; financial statements are unaudited.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $100.1 | $87.9 | $311.2 | $236.1 |
| Gross profit / margin | $36.2 / 36.2% | $29.7 / 33.8% | $114.7 / 36.9% | $79.3 / 33.6% |
| Operating income | $12.8 | $8.8 | $57.9 | $24.4 |
| Net income | $6.9 | $4.9 | $39.3 | $15.2 |
| Diluted EPS | $0.46 | $0.33 | $2.64 | $1.02 |
| Adjusted EBITDA (non-GAAP) | $23.2 | $17.2 | $76.1 | $42.7 |
Q3 operating and net margins were approximately 12.8% and 6.9%, respectively; nine-month margins were approximately 18.6% and 12.6%. Adjusted EBITDA is a company-defined non-GAAP measure and should be considered alongside GAAP results.
- Cash flow: Nine-month operating cash flow was $35.1 million, versus $6.5 million a year earlier. Investing cash outflow was $21.1 million, including $22.4 million of property and equipment purchases. Financing cash outflow was $15.0 million. Cash ended the period at $12.2 million, down from $13.4 million at year-end 2018.
- Debt and liquidity: Debt borrowings were $28.8 million before $0.7 million of issuance costs; balance-sheet debt was $28.1 million. Net debt, as defined by DMC, was $16.0 million, down from $28.0 million at December 31, 2018. Available revolving capacity was approximately $43.9 million, subject to covenant compliance. The company reported compliance with its debt covenants.
- Balance sheet: Current assets were $152.0 million and current liabilities $64.0 million at September 30. Total assets were $275.8 million and stockholders’ equity $167.1 million.
- Dividend: The board raised the annual cash dividend to $0.50 per share from $0.08 and declared a $0.125 quarterly dividend, paid October 15, 2019.
Changes versus comparable periods
- Q3 sales rose 14% year over year; nine-month sales rose 32%. DynaEnergetics sales increased 17% in Q3 and 41% year to date, primarily on U.S. unconventional well-completion activity and demand for advanced perforating systems. NobelClad sales increased 5% in Q3 and 6% year to date.
- Gross margin improved in both periods, reflecting sales mix, product and project mix, manufacturing productivity, and higher-volume absorption of fixed costs.
- Q3 operating income rose 45% year over year despite $5.9 million of restructuring and impairment expense. Nine-month operating income rose 138%; comparison is affected by the $8.0 million anti-dumping penalty accrued in 2018.
- Nine-month operating cash flow improved substantially, primarily due to higher earnings. Working-capital investment in receivables and inventory remained a cash use.
Outlook, commentary, risks, and unusual items
- Management cited an anticipated slowdown in North American unconventional well-completion activity; DynaEnergetics Q3 sales were down 13% sequentially. No numerical company-wide earnings or revenue guidance is provided in the filing.
- DynaEnergetics completed capacity expansion initiatives and ceased operations in Tyumen, Siberia in September. Q3 charges included $4.6 million of asset impairment and $1.3 million of severance, plus a $0.6 million inventory write-down in cost of products sold. Siberian assets held for sale totaled $4.5 million. Management said further impairment assessment could occur in Q4 and that liquidation may result in reclassification of approximately $8 million of accumulated currency translation losses.
- Commercial shipments of the smaller DS Trinity 3.5 system were expected to begin at the end of October 2019 following field trials. Management reported that DynaStage sales had exceeded one million units.
- NobelClad reported consistent downstream-energy demand, bidding activity for international upstream projects, and customer interest in new composite-metal applications. Its backlog was $33.2 million at September 30, up from $29.9 million at year-end 2018; management said most backlog is expected to be filled within 12 months.
- The $8.0 million U.S. anti-dumping penalty was paid in Q2 2019 after a waiver request was denied; the matter relates to imports used by DynaEnergetics. The filing describes the payment as completed.
- A German tax audit covering 2015–2017 was expected to begin in Q4; an unfavorable resolution could require future tax-provision adjustments. Other cited risks include energy-market demand and order timing, backlog conversion, pricing and margins, raw-material costs, foreign exchange, and manufacturing capacity. Management reported no significant change to the risk factors in its 2018 Form 10-K.
- The company adopted lease accounting in 2019 and recognized $11.4 million of operating lease liabilities at September 30. Management was evaluating the expected impact of the credit-loss accounting standard scheduled for adoption in 2020.
Important facts for investors to verify
- Whether North American completion activity and DynaEnergetics orders weakened further after quarter-end, and whether DS Trinity 3.5 shipments began as planned.
- Subsequent Siberia closure costs, asset-sale proceeds, impairment decisions, and the accounting timing and impact of the approximately $8 million currency-translation reclassification.
- NobelClad backlog conversion, new orders, and the durability of its reported demand improvement.
- Working-capital trends, capital spending, debt reduction, covenant headroom, and the sustainability of the increased dividend.
- Developments in the German tax audit and confirmation that no further amounts are due in the anti-dumping matter.