Dynamic Materials Sees a Tough 2015 Ahead

By Markets Fool.com


Source: Dynamic Materials.

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The plunge in oil prices has taken its toll on a wide range of companies, and Dynamic Materials investors have worried that demand for its clad-metal products and explosive materials could easily start to wane as drilling and exploration activity diminishes. Coming into the company's fourth-quarter report, investors were nervous about Dynamic Materials' prospects, especially as the company had delayed its initial release date from earlier in the month. As it turned out, Dynamic Materials' shareholders were right to worry, as the company's results painted an ugly picture for the rest of 2015. Let's look more closely at Dynamic Materials and what it said about both its past prospects and its future potential.

Dynamic Materials goes boom
Dynamic Materials disappointed investors with a big miss on its bottom line. Revenue actually climbed 5.4% to $52 million, helping the company eke out a full-year sales gain as well. But restructuring charges of $6.78 million ate into all of Dynamic Materials' operating income and then some, producing a net loss of $0.32 per share. Even when you take out the impact of that huge hit to its bottom line, the company's adjusted earnings of $0.06 per share was just a third of what most investors had wanted to see for the quarter.

Still, a deeper look at Dynamic Materials shows the ongoing disparity between the company's two primary businesses. Things actually looked quite rosy at the DynaEnergetics segment, with sales soaring 47% from year-ago levels. Yet the NobelClad division once again saw a big drop in performance, as revenue slumped 23%. Operating losses of $4.2 million at NobelClad wiped out a $3.4 million profit allocated to DynaEnergetics, and even after allowing for the NobelClad restructuring, DynaEnergetics still outearned the clad-metal division during the quarter. DynaEnergetics also took the lead in generating the majority of Dynamic Materials' overall revenue.

Source: Dynamic Materials.

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The different market conditions that Dynamic Materials' two divisions face explains some of the performance difference. The DynaSelect switch detonator again drove sales for the DynaEnergetics division, with a resulting increase in sales of related explosive components as well. At the same time, demand in the Middle East for perforating and explosive products rose sizably. At NobelClad, though, weakness in infrastructure spending again weighed on the division's results, and even with the poor sales, NobelClad's order backlog fell sequentially from the previous quarter.

CEO Kevin Longe tried to emphasize the positives in Dynamic Materials' results, pointing out the huge results in DynaEnergetics. Yet he warned that even the success of that business could be short-lived, given the energy industry's woes.

Why 2015 could be horrible for Dynamic Materials
Specifically, Longe warned that "the steep drop in oil prices, combined with the rapid decline in the North American rig count and sharp cuts to capital spending budgets in the exploration and production sector, will slow the momentum of our DynaEnergetics business during 2015." The company is taking action to shore up its cost structure in an effort to preserve profits to the greatest extent possible, but the news still came as a shock to Dynamic Materials investors.

Source: Dynamic Materials.

Dynamic Materials' guidance shows the extent of the slowdown. The company now expects revenue to fall 8% to 12% from 2014 levels, with a drop of two to four percentage points in gross margins resulting from the fact that the higher-margin DynaEnergetics business won't have as favorable a sales mix as it has previously. Sales for the first quarter will fall an even more precipitous 10% to 15%, compared to a hoped-for 3% growth rate from investors prior to the announcement. Adding insult to injury, Dynamic Materials will likely need to spend another $3 million to $5 million in restructuring expenses during the first half of 2015 in order to implement cost-cutting measures.

One thing that investors were able to breathe a sigh of relief on was the company's restatement of its past financial statements. The company concluded that the changes were immaterial, although the result of the moves included declines of $879,000 during the first three quarters of fiscal 2014 and similar amounts in the $900,000 to $1 million range for 2012 and 2013.

Investors were initially stunned by the news, as the stock dropped more than 12% in the first 45 minutes of after-hours trading following the announcement. With no end in sight to the drop in oil prices, it's nearly impossible to predict the secondary impact that falling oil will have on Dynamic Materials and other companies in similar positions. All Dynamic Materials can do for now is to hope that it can get through a tough 2015 relatively unscathed and take advantage of better conditions when they materialize.

The article Dynamic Materials Sees a Tough 2015 Ahead originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Dynamic Materials. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.