DMC Global Inc. (then Dynamic Materials Corporation) — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; financial statements are unaudited. Amounts below are in millions of dollars unless otherwise noted. The company operated NobelClad and DynaEnergetics; AMK, sold in October 2014, is presented as discontinued operations.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $40.8 | $46.8 |
| Gross profit / margin | $10.7 / 26.2% | $14.7 / 31.5% |
| Operating income (loss) | $(3.2) | $3.1 |
| Net income (loss) | $(2.4) | $1.5 |
| Diluted EPS | $(0.17) | $0.11 |
| Adjusted EBITDA (non-GAAP) | $2.2 | $7.0 |
| Operating cash flow | $(3.8) | $3.2 |
| Capital expenditures | $0.9 | $2.0 |
Revenue fell 12.7% year over year, including $3.7 million of unfavorable foreign-currency translation. DynaEnergetics sales declined 24.0% to $16.9 million, reflecting lower North American rig counts and E&P spending cuts, as well as currency effects. NobelClad sales decreased 2.5% to $23.9 million. Gross margin contracted 5.3 percentage points; management cited DynaEnergetics’ unfavorable price/product mix and lower relative sales contribution. NobelClad’s margin was 19.0% versus 19.2%; DynaEnergetics’ was 36.7% versus 45.2%.
The reported $3.2 million operating loss included $2.0 million in restructuring and impairment charges. Excluding those charges, management reported an operating loss of $1.2 million, versus operating income of $3.1 million a year earlier. DynaEnergetics had a $0.8 million segment operating loss, including $0.4 million of restructuring charges and increased bad-debt expense; NobelClad segment operating income was $1.8 million.
Balance sheet, liquidity and debt
- Cash was $12.9 million at March 31, up from $9.4 million at year-end. Operating cash use of $3.8 million was more than offset by $8.7 million of financing inflows, principally net line-of-credit borrowings of $10.1 million.
- Outstanding revolving borrowings were $32.4 million: $24.0 million in U.S. dollars and $8.4 million in euros, versus $22.8 million at December 31. Net debt (borrowings less cash) was approximately $19.4 million.
- The new five-year syndicated facility, signed February 23, provides $90 million of U.S.-dollar revolving capacity, $10 million of alternate-currency revolving capacity and a $50 million term-loan facility available for 364 days, plus an accordion feature subject to lender approval. The term loan was not reported as drawn.
- Management reported $70.5 million of available revolving capacity and $50 million of term-loan capacity, subject to covenant compliance. The company was in compliance; its actual leverage ratio was 1.21x against a 3.0x maximum, and debt-service coverage was 30.30x against a 1.35x minimum.
- Current assets were $95.7 million and current liabilities $28.3 million. Inventory increased to $42.9 million from $40.1 million; management attributed the build partly to a rapid, unanticipated demand decline at DynaEnergetics and inventory for specific orders.
Material developments, outlook and risks
- Restructuring charges were $2.0 million in Q1: $1.6 million for corporate-position reductions and accelerated stock compensation, $0.4 million at DynaEnergetics and $0.1 million at NobelClad. Management expected approximately $0.5 million more NobelClad charges and $0.5–$1.0 million more DynaEnergetics charges. NobelClad was shifting European clad-plate production to Liebenscheid, Germany; that plant became operational in Q2 2015. DynaEnergetics closed distribution locations and planned to consolidate North American gun manufacturing in Texas.
- NobelClad backlog was $39.4 million at March 31, down from $41.2 million at December 31, 2014. The company generally expected to fill most backlog within 12 months. No formal revenue or earnings guidance was provided.
- Management said cash flow and available credit were expected to fund working capital, debt service and capital expenditures for the foreseeable future, while noting dependence on backlog conversion, new orders, attractive margins and continued access to credit.
- Foreign exchange was material: Q1 included $1.1 million of net other income, principally $1.1 million of realized and unrealized FX gains, while currency translation reduced comprehensive income by $10.7 million. Currency movements also reduced reported sales.
- The Q1 tax provision was $0.1 million despite a pretax loss; the reported effective tax rate was negative 4.2%. The company recorded a $0.5 million valuation allowance against deferred tax assets in certain foreign jurisdictions with cumulative losses.
- A material weakness in deferred-tax accounting controls, previously disclosed, remained under remediation. Management concluded disclosure controls were not effective as of March 31; timing and success of remediation were not assured.
- Other disclosed risks include cyclical customer markets and demand, order timing and backlog realization, customer concentration, pricing and raw-material availability, foreign-currency movements, manufacturing capacity and funding availability. No legal proceedings were reported, and the filing stated no significant changes to the risk factors in the 2014 Form 10-K.
Important facts for investors to verify
- Whether DynaEnergetics demand, margins and bad-debt levels stabilize after the North American rig-count decline, and whether inventory converts to sales without further write-downs.
- Progress and actual costs of the NobelClad, DynaEnergetics and corporate restructuring plans, including the expected additional charges.
- Backlog conversion, new orders and the impact of currency movements on underlying sales and profitability.
- Cash generation, revolving-credit availability and covenant headroom as borrowings increased; confirm any subsequent term-loan draw or changes to facility terms.
- Remediation of the deferred-tax material weakness and whether the company’s control conclusions or tax-asset valuation allowances change.
- Continuation of the $0.04-per-share quarterly dividend, which remained subject to board discretion, capital needs and debt-covenant restrictions.