DMC Global Inc. — Q3 2014 Form 10-Q
Business context and period: Dynamic Materials Corporation reported unaudited results for the quarter and nine months ended September 30, 2014. Its continuing businesses are NobelClad, which makes explosion-welded clad metal products, and Oilfield Products, which supplies oilfield perforating and related products. Amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions where shown.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $51.9m | $52.3m | $150.6m | $152.7m |
| Gross profit / margin | $15.1m / 29.1% | $16.1m / 30.8% | $45.5m / 30.2% | $45.3m / 29.7% |
| Operating income | $3.4m | $5.2m | $10.2m | $9.9m |
| Net income attributable to DMC | $2.5m | $3.6m | $7.0m | $7.2m |
| Diluted EPS | $0.18 | $0.26 | $0.50 | $0.52 |
| Adjusted EBITDA (non-GAAP) | $7.7m | $8.8m | $23.0m | $21.2m |
- Segments: Q3 NobelClad sales declined 22.4% to $23.6m, while Oilfield Products sales rose 29.0% to $28.3m. For the nine months, NobelClad sales fell 16.4% to $74.4m and Oilfield Products sales grew 19.5% to $76.2m. The company attributed Oilfield Products’ growth in part to product/customer mix and its DynaSelect system.
- Cash flow: Nine-month operating cash flow was $15.8m, down from $30.5m. Investing activities used $6.2m, including $6.5m of property and equipment purchases; financing activities used $4.6m, including $3.2m of net debt repayments and $1.7m of dividends. Cash increased $4.3m to $14.9m.
- Liquidity and debt: At September 30, cash was $14.9m, current assets $106.5m and current liabilities $24.1m. Revolving credit borrowings were $26.0m; the company reported approximately $35.5m of unused facility capacity, subject to covenants. It was in covenant compliance: leverage ratio was 0.89x versus a 2.0x maximum, and fixed-charge coverage was 2.29x versus a 2.0x minimum.
- Other balance-sheet items: Total assets were $229.6m and stockholders’ equity $168.9m at September 30, compared with $240.6m and $172.8m, respectively, at year-end 2013. Nine-month foreign currency translation reduced other comprehensive equity by $12.2m.
Material changes and unusual items
- Q3 operating income fell 35.2%, primarily reflecting lower NobelClad sales and unfavorable manufacturing overhead absorption, plus higher selling and distribution expense. In the nine-month period, operating income increased 3.7%, with Oilfield Products’ improvement and lower unallocated corporate expenses offsetting weaker NobelClad performance.
- Nine-month operating cash flow declined substantially, which management attributed principally to a $15.4m adverse year-over-year working-capital swing. Inventory and prepaid expenses increased and accounts payable decreased; lower receivables and higher customer advances partially offset those uses.
- Q3 2014 included a $0.7m valuation allowance against deferred tax assets in a foreign jurisdiction. The reported effective tax rate was 33.1%; management said it would have been 16.1% excluding the allowance. The nine-month rate was 30.3%.
- 2013 comparisons include unusual items: a $1.2m Oilfield Products inventory-reserve expense in Q3 2013 and $3.0m of first-quarter 2013 management-retirement expense. The 2013 year-to-date tax rate also reflected discrete tax items.
- AMK Technical Services was classified as discontinued operations and sold on October 1, 2014, after quarter-end, for $6.75m subject to adjustments: $4.25m cash and a $2.5m 90-day secured note. The gain over carrying value was expected to be recognized in Q4 2014.
Guidance, outlook, and risks
- Management expected full-year 2014 sales, excluding AMK, to be slightly below to 2% above 2013 sales of $202.1m; projected full-year gross margin was 29%–30%, and the expected blended effective tax rate was 30%–32%.
- NobelClad backlog was $42.6m at September 30, up from $36.9m at December 31, 2013. Management cited weak industrial demand and shipment timing as factors affecting NobelClad results; quarterly margins may fluctuate with sales volume and product/customer mix.
- On October 23, 2014, DMC agreed to buy a German manufacturing facility for $14.0m, expecting it to open by Q2 2015. Management also began discussions on a European consolidation plan, estimating annual after-tax savings of about $2.0m and restructuring charges of $3.0m–$5.0m.
- Management said current cash flow and credit facilities should fund operating needs, debt service and capital spending, but identified risks including backlog conversion, new orders, pricing and margins, customer demand, raw-material availability and cost, foreign currency, manufacturing capacity, contract execution, and access to credit. Dividend continuation remains subject to board discretion and covenant and capital considerations.
- The filing reported no legal proceedings, no significant changes to previously disclosed risk factors, and effective disclosure controls as of September 30, 2014.
Important facts for investors to verify
- Whether NobelClad backlog converts into shipments and whether its demand and margins stabilize.
- Whether Oilfield Products can sustain its sales growth and margins amid increased selling/distribution costs.
- Working-capital and operating-cash-flow trends, and covenant headroom if earnings or cash generation weaken.
- Final proceeds and gain on the AMK sale, including collection of the secured note and purchase-price adjustments.
- Funding, timing, and realized savings and charges from the German facility purchase and proposed consolidation plan.
- Recoverability of deferred tax assets and whether further valuation allowances are required.