Image: Dynamic Materials.
A wide variety of companies depend on the health of the energy industry, and explosives specialist Dynamic Materials (BOOM +1.33%) enjoyed the success of the oil and gas boom for years. Yet the plunge in energy prices over the past year have hurt the prospects of companies throughout the industry, and coming into Tuesday afternoon's second-quarter report, Dynamic Materials investors were reluctant to predict just how far the company's fortunes could fall before crude oil finally spurred its customers to start spending on its products again. At least for now, Dynamic Materials continues to see substantial declines from energy's weakness, and it can only hope to contain the damage as it looks for other avenues to growth. Let's look more closely at Dynamic Materials and what could lie ahead for the company.
Dynamic Materials continues to sink
As we've seen in past quarters, Dynamic Materials' second-quarter results came as a disappointment to many investors. Revenue dropped 14% to $44.7 million, and even though the company noted that the drop was less severe than the 15% to 20% decline implied by its previous guidance, investors had hoped for a slightly better number. An unexpected adjusted net loss from continuing operations of $356,000 reversed a substantial profit in the year-earlier period, and the per-share loss of $0.03 was more than a dime per share lower than the $0.08 per share of earnings that investors had wanted to see. That marked the second quarter in a row that investors have had to deal with red ink on Dynamic Materials' bottom line.
Unlike what the company has seen in past quarters, the weakness at Dynamic Materials came fairly consistently from its two main segments. The DynaEnergetics unit, which provides oilfield services for clients, took a 9% hit to its sales compared to last year's second quarter, with the majority of the drop coming from the impact of the strong U.S. dollar. Operating income plunged by more than half, with the company blaming higher commission expenses and client purchases of less profitable products, along with higher costs of advertising and marketing.
The NobelClad explosive-metalworking division also took a big hit, with sales plunging 18% only in part because of falling foreign currencies. Delayed shipments and weak capital spending among its customers also contributed to the revenue declines, and operating income fell by nearly 70% year-over-year.
CEO Kevin Longe tried to emphasize the successes that Dynamic Materials has seen during this tough period. "In the face of challenging market conditions," Longe said, "both of our businesses achieved important strategic and operational objectives during the second quarter." Between the new DynaStage factory-assembled perforating system to reduce cost and increase performance and the new NobelClad manufacturing facility in Germany, Dynamic Materials believes that the investments it has made in its future growth will pay off eventually.
Waiting out a long decline
For now, though, Dynamic Materials sees tough conditions continuing at least for the remainder of the year. For the third quarter, the company believes that sales will fall 8% to 12%, matching the decline in full-year 2015 revenue that Dynamic Materials issued as guidance earlier this year and reiterated in this quarter's report. Gross margins could fall as much as two percentage points in the third quarter, and that will make it even harder for the company to restore its profitability.
Moreover, Dynamic Materials is facing a regulatory inquiry at a terrible time. Last month, Customs officials sought to impose anti-dumping import regulations on some of its steel mechanical tubing, requesting a $1.1 million cash deposit. The company will post a bond or make appropriate cash deposits this quarter, but Dynamic Materials hopes that future administrative proceedings will keep the company from having to pay duties in the future.
Dynamic Materials' results should come as no surprise to investors, and the small-cap stock didn't inspire traders to make big moves in the after-market session following the announcement. The real key is how long poor conditions in the energy sector hold back drilling and other activity among exploration and production companies. The sooner things get back to normal in the sector, the sooner Dynamic Materials can start using its expertise to produce earnings growth.
