Image: Dynamic Materials.
Investors have feared the impact of falling oil prices on companies that rely on the energy industry for their livelihood, and Dynamic Materials (BOOM 0.81%) hasn't been immune to concerns that its business could take a big hit from the end of the energy boom. Coming into Tuesday afternoon's first-quarter report, investors had sent Dynamic Materials stock to its lowest levels since the last energy bust in 2009, and they weren't optimistic about its ability to weather the oil storm.
Sure enough, the explosives maker wasn't able to earn a profit during the quarter and suffered considerable declines in sales, as well. Let's take a closer look at how Dynamic Materials did, and whether times will get better in the near future.
Dynamic Materials makes its profits disappear
As prepared as investors seemed, Dynamic Materials still wasn't able to live up to lowered expectations. Revenue sank 13%, to $40.8 million. Even accounting for the contribution of the strong U.S. dollar to weaker results, currency-neutral sales dropped 5% compared to the year-ago quarter. Dynamic Materials lost $1 million for the quarter, equating to $0.07 per share even after excluding the impact of $2 million worth of restructuring and impairment charges. Most of those following the stock had expected the company to eke out a small profit.
The change in relative performance between Dynamic Materials' two main segments shows the huge impact of the oil production market on the company's results. This quarter, the DynaEnergetics oilfield services unit took the brunt of the sales hit, with revenue plunging 24%, to $22.2 million, as the company cited drops in drilling and well-completion activity as hurting sales.
Sales of Dynamic Materials' high-margin switch detonators fell, weighing especially hard on profitability. Meanwhile, the NobelClad explosive-metalworking division suffered more modest revenue declines of just 3%. Unlike DynaEnergetics, NobelClad managed to produce not only an operating profit, but a bigger one than it did in the previous year. The company cited lower overhead costs as helping the division make more money even as overall revenue fell.
CEO Kevin Longe put the declines in stride, noting that the drop was expected and "reflects the sharp downturn in global oil and gas drilling and completion activity." Longe also noted that restructuring efforts are going according to plan, with DynaEnergetics, in particular, pulling together its Canadian and U.S. manufacturing, storage, and distribution facilities to build greater cost synergies.
Image: Dynamic Materials.
Dynamic Materials could be down for a while
Unfortunately, Dynamic Materials doesn't see much relief coming soon. The company said that it still believes full-year sales will drop 8% to 12% compared to 2014, and gross margins will fall two to four percentage points to between 26% and 28%. As bad as this quarter's declines were, second-quarter sales could drop 15% to 20%, and Dynamic Materials will have to absorb $1 million to $1.5 million more in restructuring expenses in order to keep its long-term turnaround strategy on target.
Still, Dynamic Materials did its best to keep investors focused on the long-term promise for the company. As Longe put it, "Despite the challenges we are facing during the first half of the year, I am encouraged by the progress both DynaEnergetics and NobelClad are making. ... I am confident these efforts will results in DMC finishing 2015 a fundamentally stronger company than at any point in its 50-year history."
Investors took the news in stride, with no substantial trading taking place in the first few hours of after-market trading following the announcement. Until future conditions in the energy market become clearer, it will be hard for Dynamic Materials to mount a huge comeback, especially with so much of its business relying on healthy customers in the oil and gas exploration and production industry. Still, if Dynamic Materials can become more efficient, it will improve its chances of weathering the storm, and being a better investment for long-term shareholders.
