UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
Form 10-Q
(Mark One)
 
x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934


For the quarterly period ended June 30, 20192020
 
OR
 
o☐TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934


FOR THE TRANSITION PERIOD FROM                   TO                   .
 
Commission file number 001-14775


DMC GLOBAL INC.
(Exact name of Registrant as Specified in its Charter)
Delaware84-0608431
(State of Incorporation or Organization)(I.R.S. Employer Identification No.)
11800 Ridge Parkway, Suite 300, Broomfield, Colorado 80021
(Address of principal executive offices, including zip code)
 
(303) 665-5700
(Registrant’s telephone number, including area code)
 

Title of each classTrading SymbolName of exchange on which registered
Common Stock, $0.05 Par ValueBOOMThe Nasdaq Global Select Market


Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x☒  No  o☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  x☒  No  o☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐Smaller reporting company ☐
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
☐


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o☐


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 under the Act).  Yes  o☐  No x☒
 
The number of shares of Common Stock outstanding was 14,646,06514,769,263 as of July 25, 2019.
23, 2020.





CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
 
This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. We intend the forward-looking statements throughout this quarterly report on Form 10-Q to be covered by the safe harbor provisions for forward-looking statements. Statements contained in this report which are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from projected results. These statements can sometimes be identified by our use of forward-looking words such as “may,” “believe,” “plan,” “anticipate,” “estimate,” “expect,” “intend,” and other phrases of similar meaning. Such statements include projections, guidance and other statements regarding the expected impacts of new accounting standards and the timing of our implementation thereof, our business strategy, the level of demand for our perforating products and factors affecting this demandplanned reduction in spending and our backlog.2020 capital budget and our expected liquidity position over the next three quarters. The forward-looking information is based on information available as of the date of this quarterly report and on numerous assumptions and developments that are not within our control. Although we believe that our expectations as expressed in these forward-looking statements are reasonable, we cannot assure you that our expectations will turn out to be correct. Factors that could cause actual results to differ materially include, but are not limited to, those factors referenced in our Annual Report on Form 10-K for the year ended December 31, 20182019 and such things as the following: changes in globalimpacts of COVID-19 and any preventative or protective actions taken by governmental authorities, including economic conditions;recessions or depressions; the ability to obtain new contracts at attractive prices; the size and timing of customer orders and shipments; product pricing and margins; our ability to realize sales from our backlog; fluctuations in customer demand; fluctuations in foreign currencies; competitive factors; the timely completion of contracts; the timing and size of expenditures; the timely receipt of government approvals and permits; the price and availability of metal and other raw material; fluctuations in tariffs or quotas; changes in laws and regulations;regulations, both domestic and foreign, impacting our business and the business of the end-market users we serve; the adequacy of local labor supplies at our facilities; current or future limits on manufacturing capacity at our various operations; our ability to successfully integrate acquired businesses; the impact of pending or future litigation or regulatory matters; the availability and cost of funds; our ability to access our borrowing capacity under our credit facility; and generalchanges in global economic conditions, both domestic and foreign, impacting our business and the business of the end-market users we serve.conditions. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.





INDEX
 
Page
PART I - FINANCIAL INFORMATION
Page
Item 1
34
34
45
56
67
89
910
2023
3235
3235
PART II - OTHER INFORMATION
37
3337
Risk Factors
33
Item 2
3337
3438
3438
3438
3438
3539


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Part I - FINANCIAL INFORMATION


ITEM 1.  Condensed Consolidated Financial Statements
DMC GLOBAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share and Per Share Data)
June 30, 2019 December 31, 2018June 30, 2020December 31, 2019
(unaudited)  (unaudited)
ASSETS 
  
ASSETS  
Current assets: 
  
Current assets:  
Cash and cash equivalents$14,881
 $13,375
Cash and cash equivalents$17,248  $20,353  
Accounts receivable, net of allowance for doubtful accounts of $428 and $513, respectively76,800
 59,709
Accounts receivable, net of allowance for doubtful accounts of $2,882 and $967, respectivelyAccounts receivable, net of allowance for doubtful accounts of $2,882 and $967, respectively33,684  60,855  
Inventories59,980
 51,074
Inventories59,760  53,728  
Prepaid expenses and other6,650
 8,058
Prepaid expenses and other8,419  9,417  
Total current assets158,311
 132,216
Total current assets119,111  144,353  
Property, plant and equipment169,178
 160,725
Property, plant and equipment175,832  174,741  
Less - accumulated depreciation(63,946) (65,585)Less - accumulated depreciation(69,379) (66,507) 
Property, plant and equipment, net105,232
 95,140
Property, plant and equipment, net106,453  108,234  
Purchased intangible assets, net7,375
 8,589
Purchased intangible assets, net4,784  5,880  
Deferred tax assets3,656
 4,001
Deferred tax assets4,157  3,836  
Other assets10,610
 472
Other assets17,512  15,118  
Total assets$285,184
 $240,418
Total assets$252,017  $277,421  
   
LIABILITIES AND STOCKHOLDERS’ EQUITY   LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:   Current liabilities:
Accounts payable$36,179
 $24,243
Accounts payable$21,473  $34,758  
Accrued expenses10,048
 8,967
Accrued expenses5,780  6,903  
Accrued anti-dumping penalties—
 8,000
Dividend payable299
 295
Dividend payable—  1,866  
Accrued income taxes9,419
 9,545
Accrued income taxes5,727  9,651  
Accrued employee compensation and benefits7,170
 9,250
Accrued employee compensation and benefits6,714  10,668  
Contract liabilities2,076
 1,140
Contract liabilities5,226  2,736  
Current portion of long-term debt3,125
 3,125
Current portion of long-term debt3,125  3,125  
Other current liabilities2,016
 —
Other current liabilities1,846  1,716  
Total current liabilities70,332
 64,565
Total current liabilities49,891  71,423  
Long-term debt32,744
 38,230
Long-term debt9,595  11,147  
Deferred tax liabilities458
 379
Deferred tax liabilities2,747  3,786  
Other long-term liabilities18,149
 2,958
Other long-term liabilities19,501  18,924  
Total liabilities121,683
 106,132
Total liabilities81,734  105,280  
Commitments and contingencies (Note 11)
 
Commitments and contingencies (Note 11)
Stockholders’ equity   Stockholders’ equity
Preferred stock, $0.05 par value; 4,000,000 shares authorized; no issued and outstanding shares—
 —
Common stock, $0.05 par value; 25,000,000 shares authorized; 14,647,091 and 14,905,776 shares outstanding, respectively756
 749
Preferred stock, $0.05 par value; 4,000,000 shares authorized; 0 issued and outstanding sharesPreferred stock, $0.05 par value; 4,000,000 shares authorized; 0 issued and outstanding shares—  —  
Common stock, $0.05 par value; 25,000,000 shares authorized; 14,769,310 and 14,652,675 shares outstanding, respectivelyCommon stock, $0.05 par value; 25,000,000 shares authorized; 14,769,310 and 14,652,675 shares outstanding, respectively765  756  
Additional paid-in capital82,853
 80,077
Additional paid-in capital88,501  85,639  
Retained earnings121,107
 89,291
Retained earnings115,576  119,002  
Other cumulative comprehensive loss(33,895) (35,014)Other cumulative comprehensive loss(26,038) (25,803) 
Treasury stock, at cost, and company stock held for deferred compensation, at par; 460,823 and 82,186 shares, respectively(7,320) (817)
Treasury stock, at cost, and company stock held for deferred compensation, at par; 527,981 and 464,532 shares, respectivelyTreasury stock, at cost, and company stock held for deferred compensation, at par; 527,981 and 464,532 shares, respectively(8,521) (7,453) 
Total stockholders’ equity163,501
 134,286
Total stockholders’ equity170,283  172,141  
Total liabilities and stockholders’ equity$285,184
 $240,418
Total liabilities and stockholders’ equity$252,017  $277,421  
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Share and Per Share Data)
(unaudited)




Three months ended June 30, Six months ended June 30,Three months ended June 30,Six months ended June 30,
2019 2018 2019 2018 2020201920202019
Net sales$110,954
 $80,915
 $211,089
 $148,228
Net sales$43,203  $110,954  $116,766  $211,089  
Cost of products sold68,881
 54,140
 132,611
 98,700
Cost of products sold36,599  68,881  85,696  132,611  
Gross profit42,073
 26,775
 78,478
 49,528
Gross profit6,604  42,073  31,070  78,478  
Costs and expenses: 
  
  
  
Costs and expenses:    
General and administrative expenses9,460
 9,743
 18,628
 17,920
General and administrative expenses6,707  9,460  14,831  18,628  
Selling and distribution expenses7,239
 5,795
 13,548
 11,007
Selling and distribution expenses5,488  7,239  14,015  13,548  
Amortization of purchased intangible assets397
 791
 795
 1,596
Amortization of purchased intangible assets353  397  707  795  
Restructuring expenses, net324
 217
 402
 361
Anti-dumping duty penalties—
 —
 —
 3,103
Restructuring expenses, net and asset impairmentsRestructuring expenses, net and asset impairments2,046  324  3,162  402  
Total costs and expenses17,420
 16,546
 33,373
 33,987
Total costs and expenses14,594  17,420  32,715  33,373  
Operating income24,653
 10,229
 45,105
 15,541
Other income (expense): 
  
  
  
Other income (expense), net343
 (327) 322
 (704)
Operating (loss) incomeOperating (loss) income(7,990) 24,653  (1,645) 45,105  
Other (expense) income:Other (expense) income:    
Other (expense) income, netOther (expense) income, net(85) 343  32  322  
Interest expense, net(409) (136) (782) (601)Interest expense, net(156) (409) (394) (782) 
Income before income taxes24,587
 9,766
 44,645
 14,236
Income tax provision7,343
 3,394
 12,231
 3,944
Net income$17,244
 $6,372
 $32,414
 $10,292
(Loss) income before income taxes(Loss) income before income taxes(8,231) 24,587  (2,007) 44,645  
Income tax (benefit) provisionIncome tax (benefit) provision(2,583) 7,343  (514) 12,231  
       
Net income per share 
  
  
  
Net (loss) incomeNet (loss) income$(5,648) $17,244  $(1,493) $32,414  
Net (loss) income per shareNet (loss) income per share    
Basic$1.17
 $0.43
 $2.20
 $0.69
Basic$(0.38) $1.17  $(0.10) $2.20  
Diluted$1.15
 $0.43
 $2.17
 $0.69
Diluted$(0.38) $1.15  $(0.10) $2.17  
Weighted-average shares outstanding: 
  
  
  
Weighted average shares outstanding:Weighted average shares outstanding:    
Basic14,647,019
 14,534,016
 14,624,718
 14,491,569
Basic14,832,242  14,647,019  14,745,661  14,624,718  
Diluted14,899,987
 14,534,016
 14,849,816
 14,491,569
Diluted14,832,242  14,899,987  14,745,661  14,849,816  
       
Dividends declared per common share$0.02
 $0.02
 $0.04
 $0.04
Dividends declared per common share$—  $0.02  $0.125  $0.04  
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Amounts in Thousands)
(unaudited)



 
 Three months ended June 30, Six months ended June 30,
 2019 2018 2019 2018
Net income$17,244
 $6,372
 $32,414
 $10,292
        
Change in cumulative foreign currency translation adjustment1,538
 (4,356) 1,119
 (2,751)
        
Total comprehensive income$18,782
 $2,016
 $33,533
 $7,541
Three months ended June 30,Six months ended June 30,
 2020201920202019
Net (loss) income$(5,648) $17,244  $(1,493) $32,414  
Change in cumulative foreign currency translation adjustment605  1,538  (235) 1,119  
Total comprehensive (loss) income$(5,043) $18,782  $(1,728) $33,533  
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts in Thousands, Except Share Data)
(unaudited)




     OtherTreasury Stock and 
   Additional CumulativeCompany Stock Held for 
 Common StockPaid-InRetainedComprehensive Deferred Compensation 
 SharesAmountCapitalEarningsLossSharesAmountTotal
Balances, March 31, 202015,260,835  $763  $86,832  $121,224  $(26,643) (509,593) (8,487) $173,689  
Net loss—  —  —  (5,648) —  —  —  $(5,648) 
Change in cumulative foreign currency translation adjustment—  —  —  —  605  —  —  $605  
Shares issued in connection with stock compensation plans36,456  2  261  —  —  —  —  $263  
Stock-based compensation—  —  1,408  —  —  —  —  $1,408  
Treasury stock activity—  —  —  —  —  (18,388) (34) $(34) 
Balances, June 30, 202015,297,291  $765  $88,501  $115,576  $(26,038) (527,981) $(8,521) $170,283  


     Other 
   Additional Cumulative 
 Common StockPaid-InRetainedComprehensiveTreasury Stock 
 SharesAmountCapitalEarningsLossSharesAmountTotal
Balances, March 31, 201915,089,080  $755  $81,122  $104,162  $(35,433) (103,384) (1,695) 148,911  
Net income—  —  —  17,244  —  —  —  17,244  
Change in cumulative foreign currency translation adjustment—  —  —  —  1,538  —  —  1,538  
Shares issued in connection with stock compensation plans18,834  1  357  —  —  —  —  358  
Stock-based compensation—  —  1,360  —  —  —  —  1,360  
Dividends declared—  —  —  (299) —  —  —  (299) 
Treasury stock activity—  —  14  —  —  (357,439) (5,625) (5,611) 
Balances, June 30, 201915,107,914  $756  $82,853  $121,107  $(33,895) (460,823) $(7,320) $163,501  

7
         Other Treasury Stock and  
     Additional   Cumulative Company Stock Held for  
 Common Stock Paid-In Retained Comprehensive  Deferred Compensation  
 Shares Amount Capital Earnings Loss Shares Amount Total
Balances, March 31, 201915,089,080
 $755
 $81,122
 $104,162
 $(35,433) (103,384) $(1,695) $148,911
Net income—
 —
 —
 17,244
 —
 —
 —
 17,244
Change in cumulative foreign currency translation adjustment—
 —
 —
 —
 1,538
 —
 —
 1,538
Shares issued in connection with stock compensation plans18,834
 1
 357
 —
 —
 —
 —
 358
Stock-based compensation—
 —
 1,360
 —
 —
 —
 —
 1,360
Dividends declared—
 —
 —
 (299) —
 —
 —
 (299)
Treasury stock activity and transfers of stock to rabbi trust—
 —
 14
 —
 —
 (357,439) (5,625) (5,611)
Balances, June 30, 201915,107,914
 $756
 $82,853
 $121,107
 $(33,895) (460,823) $(7,320) $163,501
         Other Treasury Stock and  
     Additional   Cumulative Company Stock Held for  
 Common Stock Paid-In Retained Comprehensive  Deferred Compensation  
 Shares Amount Capital Earnings Loss Shares Amount Total
Balances, December 31, 201814,987,962
 $749
 $80,077
 $89,291
 $(35,014) (82,186) $(817) $134,286
Net income—
 —
 —
 32,414
 —
 —
 —
 32,414
Change in cumulative foreign currency translation adjustment—
 —
 —
 —
 1,119
 —
 —
 1,119
Shares issued in connection with stock compensation plans119,952
 7
 351
 —
 —
 7,502
 —
 358
Stock-based compensation—
 —
 2,411
 —
 —
 —
 —
 2,411
Dividends declared—
 —
 —
 (598) —
 —
 —
 (598)
Treasury stock activity and transfers of stock to rabbi trust—
 —
 14
 —
 —
 (386,139) (6,503) (6,489)
Balances, June 30, 201915,107,914
 $756
 $82,853
 $121,107
 $(33,895) (460,823) $(7,320) $163,501


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DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts in Thousands, Except Share Data)
(unaudited)

     OtherTreasury Stock and 
   Additional CumulativeCompany Stock Held for 
 Common StockPaid-InRetainedComprehensive Deferred Compensation 
 SharesAmountCapitalEarningsLossSharesAmountTotal
Balances, December 31, 201915,117,207  $756  $85,639  $119,002  $(25,803) (464,532) $(7,453) $172,141  
Net loss—  —  —  (1,493) —  —  —  (1,493) 
Change in cumulative foreign currency translation adjustment—  —  —  —  (235) —  —  (235) 
Shares issued in connection with stock compensation plans180,084  9  254  —  —  —  —  263  
Adjustment for cumulative effect from change in accounting principle (ASU 2016-13)—  —  —  (50) —  —  —  (50) 
Stock-based compensation—  —  2,608  —  —  —  —  2,608  
Dividends declared—  —  —  (1,883) —  —  —  (1,883) 
Treasury stock activity—  —  —  —  —  (63,449) (1,068) (1,068) 
Balances, June 30, 202015,297,291  $765  $88,501  $115,576  $(26,038) (527,981) $(8,521) $170,283  

    Other 
        Other         Additional Cumulative 
    Additional   Cumulative       Common StockPaid-InRetainedComprehensiveTreasury Stock 
Common Stock Paid-In Retained Comprehensive Treasury Stock   SharesAmountCapitalEarningsLossSharesAmountTotal
Shares Amount Capital Earnings Loss Shares Amount Total
Balances, March 31, 201814,948,294
 $747
 $76,895
 $63,634
 $(29,214) (72,104) $(705) $111,357
Balances, December 31, 2018Balances, December 31, 201814,987,962  $749  $80,077  $89,291  $(35,014) (82,186) $(817) $134,286  
Net income—
 —
 —
 6,372
 —
 —
 —
 6,372
Net income—  —  —  32,414  —  —  —  32,414  
Change in cumulative foreign currency translation adjustment—
 —
 —
 —
 (4,356) —
 —
 (4,356)Change in cumulative foreign currency translation adjustment—  —  —  —  1,119  —  —  1,119  
Shares issued in connection with stock compensation plans24,885
 2
 230
 —
 —
 —
 —
 232
Shares issued in connection with stock compensation plans119,952  7  351  —  —  7,502  —  358  
Stock-based compensation—
 —
 964
 —
 —
 —
 —
 964
Stock-based compensation—  —  2,411  —  —  —  —  2,411  
Dividends declared—
 —
 —
 (300) —
 —
 —
 (300)Dividends declared—  —  —  (598) —  —  —  (598) 
Treasury stock activity—
 —
 —
 —
 —
 (1,348) (40) (40)Treasury stock activity—  —  14  —  —  (386,139) (6,503) (6,489) 
Balances, June 30, 201814,973,179
 $749
 $78,089
 $69,706
 $(33,570) (73,452) $(745) $114,229
Balances, June 30, 2019Balances, June 30, 201915,107,914  $756  $82,853  $121,107  $(33,895) (460,823) $(7,320) $163,501  
         Other      
     Additional   Cumulative      
 Common Stock Paid-In Retained Comprehensive Treasury Stock  
 Shares Amount Capital Earnings Loss Shares Amount Total
Balances, December 31, 201714,821,801
 $741
 $76,146
 $60,074
 $(30,819) (39,783) $(362) $105,780
Net income—
 —
 —
 10,292
 —
 —
 —
 10,292
Change in cumulative foreign currency translation adjustment—
 —
 —
 —
 (2,751) —
 —
 (2,751)
Shares issued in connection with stock compensation plans151,378
 8
 224
 —
 —
 —
 —
 232
Adjustment for cumulative effect from change in accounting principle (ASU 2016-16)—
 —
 —
 (65) —
 —
 —
 (65)
Stock-based compensation—
 —
 1,719
 —
 —
 —
 —
 1,719
Dividends declared—
 —
 —
 (595) —
 —
 —
 (595)
Treasury stock activity—
 —
 —
 —
 —
 (33,669) (383) (383)
Balances, June 30, 201814,973,179
 $749
 $78,089
 $69,706
 $(33,570) (73,452) $(745) $114,229

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

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DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(unaudited)




Six months ended June 30,
 20202019
Cash flows provided by operating activities:  
Net (loss) income$(1,493) $32,414  
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation4,716  3,955  
Amortization of purchased intangible assets707  795  
Amortization of deferred debt issuance costs99  83  
Stock-based compensation2,559  2,666  
Deferred income taxes(1,360) 424  
(Gain) loss on disposal of property, plant and equipment(1) 317  
Restructuring expenses, net and asset impairments3,162  402  
Change in:  
Accounts receivable, net27,245  (16,123) 
Inventories(5,713) (8,636) 
Prepaid expenses and other(1,242) 3,850  
Accounts payable(10,778) 12,657  
Contract liabilities2,477  936  
Accrued anti-dumping duties and penalties—  (8,000) 
Accrued expenses and other liabilities(9,250) (2,438) 
Net cash provided by operating activities11,128  23,302  
Cash flows used in investing activities:  
Acquisition of property, plant and equipment(7,476) (16,283) 
Proceeds on sale of property, plant and equipment14  1,258  
Net cash used in investing activities(7,462) (15,025) 
Cash flows used in financing activities:  
Repayments on bank lines of credit, net—  (3,999) 
Repayments on capital expenditure facility(1,562) (1,562) 
Payment of dividends(3,749) (598) 
Payment of debt issuance costs(84) —  
Net proceeds from issuance of common stock to employees and directors263  358  
Treasury stock purchases(1,068) (956) 
Net cash used in financing activities(6,200) (6,757) 
Effects of exchanges rates on cash(571) (14) 
Net increase (decrease) in cash and cash equivalents(3,105) 1,506  
Cash and cash equivalents, beginning of the period20,353  13,375  
Cash and cash equivalents, end of the period$17,248  $14,881  
 Six months ended June 30,
 2019 2018
Cash flows provided by (used in) operating activities: 
  
Net income$32,414
 $10,292
Adjustments to reconcile net income to net cash provided by (used in) operating activities: 
  
Depreciation3,955
 3,171
Amortization of purchased intangible assets795
 1,596
Amortization of deferred debt issuance costs83
 224
Stock-based compensation2,666
 1,792
Deferred income taxes424
 33
Loss on disposal of property, plant and equipment317
 26
Restructuring expenses402
 361
Transition tax liability—
 (268)
Change in: 
  
Accounts receivable, net(16,123) (14,198)
Inventories(8,636) (18,790)
Prepaid expenses and other3,850
 (513)
Accounts payable12,657
 8,813
Contract liabilities936
 (3,509)
Accrued anti-dumping duties and penalties(8,000) 2,958
Accrued expenses and other liabilities(2,438) 6,433
Net cash provided by (used in) operating activities23,302
 (1,579)
    
Cash flows used in investing activities: 
  
Acquisition of property, plant and equipment(16,283) (16,201)
Proceeds on sale of property, plant and equipment1,258
 —
Net cash used in investing activities(15,025) (16,201)
    
Cash flows provided by (used in) financing activities: 
  
(Repayments) borrowings on bank lines of credit, net(3,999) 4,822
(Repayments) borrowings on capital expenditure facility(1,562) 11,803
Payment of dividends(598) (593)
Payment of debt issuance costs—
 (131)
Net proceeds from issuance of common stock to employees and directors358
 230
Treasury stock purchases(956) (383)
Net cash provided by (used in) financing activities(6,757) 15,748
    
Effects of exchanges rates on cash(14) (322)
    
Net increase (decrease) in cash and cash equivalents1,506
 (2,354)
Cash and cash equivalents, beginning of the period13,375
 8,983
Cash and cash equivalents, end of the period$14,881
 $6,629


Supplemental disclosure of cash flow information:
Non-cash lease liabilities arising from obtaining right-of-use assets (Note 6)8,821
—



The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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DMC GLOBAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
 
1.      BASIS OF PRESENTATION
 
The information included in the condensed consolidated financial statements is unaudited but includes all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the financial statements that are included in our Annual Report filed on Form 10-K for the year ended December 31, 2018.2019.


2.      SIGNIFICANT ACCOUNTING POLICIES
 
Principles of Consolidation
 
The condensed consolidated financial statements include the accounts of DMC Global Inc. (“DMC”, “we”, “us”, “our”, or the “Company”) and its controlled subsidiaries. Only subsidiaries in which controlling interests are maintained are consolidated. All significant intercompany accounts, profits, and transactions have been eliminated in consolidation.


Revenue RecognitionAccounts Receivable

In June 2016, the Financial Accounting Standards Board (FASB) issued a new accounting pronouncement regarding credit losses for financial instruments. The new standard requires entities to measure expected credit losses for certain financial assets held at the reporting date using a current expected credit loss model, which is based on historical experience, adjusted for current conditions and reasonable and supportable forecasts. The Company's financial instruments within the scope of this guidance primarily include accounts receivable.

On January 1, 2018,2020, we adopted the new standard under the modified retrospective approach, such that comparative information has not been restated and continues to be reported under accounting standards in effect for those periods. The Company adopted arecognized the cumulative effect of the new accounting standard as amended, regarding revenue from contractsan adjustment to the January 1, 2020 balance of Retained Earnings in the Condensed Consolidated Balance Sheet, and the adoption of the new accounting standard did not have a material impact on the Company’s financial position and results of operations given limited historical write-off activity within each of the Company’s segments.

In accordance with customers using the modified retrospective approach, which was applied to all contracts with customers. Under the new standard, the Company has disaggregated pools of accounts receivable balances by business, geography and/or customer risk profile, and has used history and other experience to establish an entityallowance for credit losses at the time the receivable is requiredrecognized, rather than the historical approach of establishing reserves when accounts receivable balances age or demonstrate they will not be collected. To measure expected credit losses, we have elected to recognize revenuepool trade receivables by segment and analyze DynaEnergetics and NobelClad accounts receivable balances as separate populations. Within each segment, receivables exhibit similar risk characteristics.

During the six months ended June 30, 2020, we increased our expected loss rate due to depict the transferCOVID-19 pandemic-related
collapse in oil and gas demand and resulting downturn in well completions. In addition, we continued to review receivables outstanding, including aged balances, and in circumstances where we are aware of promised goodsa specific customer’s inability to customersmeet its financial obligation to us, we recorded a specific allowance for credit losses (with the offsetting expense charged to “Selling and distribution expenses” in anour Condensed Consolidated Statements of Operations) against the amounts due, reducing the net recognized receivable to the amount that reflectswe estimate will be collected. In total, provisions of $3,264 were recorded during the consideration to whichsix months ended June 30, 2020. The following table summarizes activity in the entity expects to be entitled in exchangeallowance for those goods.credit losses on receivables from DynaEnergetics and NobelClad customers:



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DynaEnergeticsNobelCladDMC Global Inc.
Allowance for doubtful accounts, December 31, 2019$945  $22  $967  
Adjustment for cumulative effect from change in accounting principle$50  $—  $50  
Current period provision for expected credit losses2,952  312  3,264  
Write-offs charged against the allowance(1,054) (178) (1,232) 
Recoveries of amounts previously reserved(67) (134) (201) 
Impacts of foreign currency exchange rates and other34  —  34  
Allowance for doubtful accounts, June 30, 2020$2,860  $22  $2,882  

Revenue Recognition

The Company’s revenues are primarily derived from consideration paid by customers for tangible goods. The Company analyzes its different goods by segment to determine the appropriate basis for revenue recognition. Revenue is not generated from sources other than contracts with customers and revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. There are no material upfront costs for operations that are incurred from contracts with customers.


Our rights to payments for goods transferred to customers arise when control is transferred at a point in time and not on any other criteria. Payment terms and conditions vary by contract, although terms generally include a requirement of payment within 30 to 60 days. In instances when we require customers to make advance payments prior to the shipment of their orders, we record a contract liability. We have determined that our contract liabilities do not include a significant financing component given the short duration between order initiation and order fulfillment within each of our segments. Please refer to Note 5 “Contract Liabilities” for further information on contract liabilities and Note 9 “Business Segments” for disaggregated revenue disclosures.

For the three months ended June 30, 2019 and 2018, we recorded $114 and $53 of bad debt expense, respectively. For the six months ended June 30, 2019 and 2018, we recorded $174 and $102 of bad debt expense, respectively.


Income Taxes


We recognize deferred tax assets and liabilities for the expected future income tax consequences of temporary differences between the financial reporting and tax basesbasis of assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. The deferred income tax impact of tax credits is recognized as an immediate adjustment to income tax expense. We recognize deferred tax assets for the expected future effects of all deductible temporary differences to the extent we believe these assets will more likely than not be realized. We record a valuation allowance when, based on current circumstances, it is more likely than not that all or a portion of the deferred tax assets will not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, recent financial operations and their associated valuation allowances, if any.


We recognize the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position that it will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit

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that is more likely than not to be realized upon ultimate resolution. We recognize interest and penalties related to uncertain tax positions in operating expense.


Earnings Per Share


The Company computes earnings per share (“EPS”) using a two-class method, which is an earnings allocation formula that determines EPS for (i) each class of common stock (the Company has a single class of common stock), and (ii) participating securities according to dividends declared and participation rights in undistributed earnings. Restricted stock awards are considered participating securities in periods with net income as they receive non-forfeitable rights to dividends similar to common stock. Restricted stock awards do not participate in net losses.


Basic EPS is then calculated by dividing net income available to common stockholders of the Company by the weighted‑weighted average number of shares of common stock outstanding during the period. Diluted EPS adjusts basic EPS for the effects of restricted stock awards, performance share units and other potentially dilutive financial instruments (dilutive securities), only in the periods in which such effect is dilutive. The effect of the dilutive securities is reflected in diluted EPS by application of the more dilutive of (1) the treasury stock method or (2) the two-class method assuming nonvested shares are not converted into
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shares of common stock. For the periods presented, diluted EPS using the treasury stock method was less dilutive than the two-class method; as such, only the two-class method has been included below.


Three months ended June 30,Six months ended June 30,
2020201920202019
Net (loss) income as reported$(5,648) $17,244  (1,493) 32,414  
Less: Distributed net income available to participating securities—  (2) —  (5) 
Less: Undistributed net income available to participating securities—  (136) —  (256) 
Numerator for basic net (loss) income per share:(5,648) 17,106  (1,493) 32,153  
Add: Undistributed net income allocated to participating securities—  136  —  256  
Less: Undistributed net income reallocated to participating securities—  (134) —  (252) 
Numerator for diluted net (loss) income per share:(5,648) 17,108  (1,493) 32,157  
Denominator:
Weighted average shares outstanding for basic net (loss) income per share14,832,242  14,647,019  14,745,661  14,624,718  
Effect of dilutive securities (1)—  252,968  —  225,098  
Weighted average shares outstanding for diluted net (loss) income per share14,832,242  14,899,987  14,745,661  14,849,816  
Net (loss) income per share:
Basic$(0.38) $1.17  $(0.10) $2.20  
Diluted$(0.38) $1.15  $(0.10) $2.17  
 Three months ended June 30, Six months ended June 30,
 2019 2018 2019 2018
Net income as reported$17,244
 $6,372
 32,414
 10,292
Less: Distributed net income available to participating securities(2) (7) (5) (14)
Less: Undistributed net income available to participating securities(136) (141) (256) (225)
Numerator for basic net income per share:17,106
 6,224
 32,153
 10,053
Add: Undistributed net income allocated to participating securities136
 141
 256
 225
Less: Undistributed net income reallocated to participating securities(134) (141) (252) (225)
Numerator for diluted net income per share:17,108
 6,224
 32,157

10,053
Denominator:       
Weighted average shares outstanding for basic net income per share14,647,019
 14,534,016
 14,624,718
 14,491,569
Effect of dilutive securities252,968
 —
 225,098
 —
Weighted average shares outstanding for diluted net income per share14,899,987
 14,534,016
 14,849,816

14,491,569
Net income per share:       
Basic$1.17
 $0.43
 $2.20
 $0.69
Diluted$1.15
 $0.43
 $2.17
 $0.69
(1) For the three and six months ended June 30, 2020, 30,967 and 35,742, respectively, shares have been excluded as their effect would have been anti-dilutive.


Deferred compensation


The Company maintains a Non-Qualified Deferred Compensation Plan (the “Plan”) as part of its overall compensation package for certain employees. Participants are eligible to defer a portion of their annual salary, their annual incentive bonus, and their equity awards through the Plan on a tax-deferred basis. Deferrals into the Plan are not matched or subsidized by the Company, nor are they eligible for above-market or preferential earnings.


The Plan provides for deferred compensation obligations to be settled either by delivery of a fixed number of shares of DMC’s common stock or in cash, in accordance with participant contributions and elections. For deferred equity awards, subsequent to equity award vesting and after a period prescribed by the Plan, participants can elect to diversify contributions of equity awards into other investment options available to Plan participants. Once diversified, contributions of equity awards will be settled by delivery of cash.


During the second quarter, theThe Company has established a grantor trust commonly known as a “rabbi trust” and set asidecontributed certain assets related to the Plan to satisfy the future obligations to participants in the Plan. These assets are subject to the

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the Company’s general creditors. The assets held in the trust include unvested restricted stock awards (RSAs),RSAs, vested company stock awards, and company-owned life insurance (“COLI”) on certain employees.employees, and money market and mutual funds. Unvested RSAs and common stock held by the trust are reflected in the Condensed Consolidated Balance SheetSheets within “Treasury stock, at cost, and company stock held for deferred compensation, at par” at the par value of the common stock or unvested RSAs. These accounts are not adjusted for subsequent changes in the fair value of the common stock. COLI is accounted for at the cash surrender value while money market and mutual funds held by the trust isare accounted for at fair valuevalue. The balances of $6,104 as of June 30, 2020 and is$4,461 as of December 31, 2019 were reflected in the Condensed Consolidated Balance SheetSheets within “Prepaid expenses and other,“Other assets.” and subsequent increases or in the fair values of the assets are recorded as compensation expense or benefit, respectively, within “General and administrative expenses” in the Condensed Consolidated Statements of Operations.


Deferred compensation obligations that will be settled in cash are accounted for on an accrual basis in accordance with the terms of the PlanPlan. The balances of $6,110 as of June 30, 2020 and are$6,143 as of December 31, 2019 were reflected in the Condensed Consolidated Balance SheetSheets within “Other long-term liabilities.” These obligations are adjusted based on changes in value of the underlying investment options chosen by Plan participants. Deferred compensation obligations that will be settled by delivery of a fixed
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number of previously vested shares of the Company’s common stock are reflected in the Condensed Consolidated Statements of Stockholders’ Equity within “Common stock” at the par value of the common stock or unvested RSAs. These accounts are not adjusted for subsequent changes in the fair value of the common stock.


Fair Value of Financial Instruments


Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We are required to use an established hierarchy for fair value measurements based upon the inputs to the valuation and the degree to which they are observable or not observable in the market. The three levels in the hierarchy are as follows:                   


•Level 1 — Inputs to the valuation based upon quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date.


•Level 2 — Inputs to the valuation include quoted prices in either markets that are not active, or in active markets for similar assets or liabilities, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data.


•Level 3 — Inputs to the valuation that are unobservable inputs for the asset or liability. 


The highest priority is assigned to Level 1 inputs and the lowest priority to Level 3 inputs.


The carrying value of accounts receivable and payable, accrued expenses, revolving loans under our credit facility and borrowings under our capital expenditure facility approximate their fair value. Our revolving loans and borrowings under our capital expenditure facility reset each month at market interest rates.

Our foreign currency forward contracts are valued using quoted market prices or are determined using a yield curve model based on current market rates. As a result, we classify these investments as Level 2 in the fair value hierarchy. The cash surrender valueMoney market funds and mutual funds of COLI$4,097 as of June 30, 2020 and $2,420 as of December 31, 2019 were held to satisfy the future deferred compensation obligations isare valued based upon the market values of underlying securities, and therefore we classify these assets as Level 2 in the fair value hierarchy.


We did not hold any Level 3 assets or liabilities as of June 30, 20192020 or December 31, 2018.2019.


Recently Adopted Accounting Standards

On January 1, 2019, the Company adopted a new accounting standard, as amended, that requires the Company to record assets and liabilities on the balance sheet for lease-related rights and obligations and disclose key information about its leasing arrangements. The Company elected the modified retrospective approach upon adoption and elected the package of practical expedients available under the new standard. This new standard establishes a right-of-use (“ROU”) model that requires the Company to recognize ROU assets and lease liabilities on the balance sheet for all leases with a term longer than 12 months at commencement of the lease.

Leases are classified as financing or operating, with classification affecting the pattern of expense recognition in the Statement of Operations. Refer to Note 6 “Leases” for further information.

Recent Accounting Pronouncements

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In June 2016, the FASB issued a new accounting pronouncement regarding credit losses for financial instruments. The new standard requires entities to measure expected credit losses for certain financial assets held at the reporting date using a current expected credit loss model, which is based on historical experience, adjusted for current conditions and reasonable and supportable forecasts. The Company is required to adoptadopted the new standard on January 1, 2020. ManagementThe Company's financial instruments within the scope of this guidance primarily include trade receivables. Please refer to “Accounts Receivable” for further information.

Recent Accounting Pronouncements

In December 2019, the FASB issued a new accounting pronouncement regarding accounting for income taxes. The new standard removes certain exceptions to the general principles in ASC 740 Income Taxes and also clarifies and amends existing guidance to provide for more consistent application. The new standard will become effective for the Company in the first quarter of fiscal 2021 and early adoption is currentlypermitted. We are evaluating the potential impact that the adoption of this standardupdate will have on the Company'sour consolidated financial position, results of operations, and related disclosures.statements.


3.      INVENTORIES
 
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Significant cost elements included in inventory are material, labor, freight, subcontract costs, and manufacturing overhead. As necessary, we adjust inventory to its net realizable value by recording provisions for excess, slow moving and obsolete inventory. We regularly review inventory quantities on hand and values, and compare them to estimates of future product demand, market conditions, production requirements and technological developments.


Inventories consisted of the following:
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June 30,
2019		 December 31,
2018		June 30, 2020December 31, 2019
Raw materials$31,773
 $26,544
Raw materials$26,180  $26,173  
Work-in-process8,757
 7,157
Work-in-process16,170  12,194  
Finished goods19,107
 16,904
Finished goods17,153  15,045  
Supplies343
 469
Supplies257  316  
$59,980
 $51,074
 $59,760  $53,728  


4.      PURCHASED INTANGIBLE ASSETS
 
Our purchased intangible assets consisted of the following as of June 30, 2019:2020:
Gross 
Accumulated
Amortization
 NetGrossAccumulated
Amortization		Net
Core technology$18,803
 $(11,428) $7,375
Core technology$17,374  $(12,590) $4,784  
Customer relationships36,725
 (36,725) —
Customer relationships35,131  (35,131) —  
Trademarks / Trade names2,017
 (2,017) —
Trademarks / Trade names1,994  (1,994) —  
Total intangible assets$57,545
 $(50,170) $7,375
Total intangible assets$54,499  $(49,715) $4,784  
 
Our purchased intangible assets consisted of the following as of December 31, 2018:2019:
Gross 
Accumulated
Amortization
 NetGrossAccumulated
Amortization		Net
Core technology$18,916
 $(10,866) $8,050
Core technology$17,717  $(11,837) $5,880  
Customer relationships37,122
 (36,583) 539
Customer relationships35,091  (35,091) —  
Trademarks / Trade names2,031
 (2,031) —
Trademarks / Trade names1,988  (1,988) —  
Total intangible assets$58,069
 $(49,480) $8,589
Total intangible assets$54,796  $(48,916) $5,880  
 
The change in the gross value of our purchased intangible assets from December 31, 20182019 to June 30, 20192020 was due to foreign currency translation and an adjustment due to the recognition of tax benefit of tax amortization previously applied to certain goodwill related to the NobelClad and DynaEnergetics reporting units. After the goodwill was written off at September 30, 2017 and December 31, 2015, respectively, the tax amortization reduces other noncurrent intangible assets related to the historical acquisition.


5.      CONTRACT LIABILITIES
 
On occasion, we require customers to make advance payments prior to the shipment of goods in order to help finance our inventory investment on large orders or to keep customers’ credit limits at acceptable levels. Contract liabilities were as follows:

June 30, 2020December 31, 2019
NobelClad$4,639  $1,427  
DynaEnergetics587  1,309  
Total$5,226  $2,736  
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 June 30, 2019 December 31, 2018
NobelClad1,714
 922
DynaEnergetics362
 218
    
Total$2,076

$1,140


We expect to recognize the revenue associated with contract liabilities over a time period no longer than one year. Of the $1,140$2,736 recorded as contract liabilities at December 31, 2018, $5602019, $1,988 was recorded to net sales during the six months ended June 30, 2019.2020.


6.      LEASES


The Company leases real properties for use in manufacturing and as administrative and sales offices, and leases automobiles and office equipment. Until the end of 2018, leases of property, plant and equipment were classified as operating leases. Payments made under operating leases were charged to the Condensed Consolidated Statement of Operations on a straight-line basis. Upon adoption of the new lease standard, the Company recognized ROU assets and lease liabilities in relation to leases which had previously been classified as operating leases.

The Company determines if a contract contains a lease arrangement at the inception of the contract. For leases in which the Company is the lessee, leases are classified as either finance or operating. ROURight of use (ROU) assets are initially measured at the present value of lease payments over the lease term plus initial direct costs, if any, with the
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classification affecting the pattern of expense recognition. If a lease does not provide a discount rate and the rate cannot be readily determined, an incremental borrowing rate is used to determine the future lease payments. Lease and non-lease components within the Company’s lease agreements are accounted for together. The Company has no material leases in which the Company is the lessor.    


The significant majorityNearly all of the Company’s leasing arrangements are classified as operating leases. As of June 30, 2019, the total ROU asset and lease liability balances were as follows for operating leases were $10,436 and $11,522, respectively. the periods presented:

June 30, 2020December 31, 2019
ROU asset11,055  10,423  
Current lease liability1,846  1,716  
Long-term lease liability10,430  9,777  
Total lease liability$12,276  $11,493  

The ROU asset was included in “Other assets”“Other assets” while $2,016 of the current lease liability was reported in “Other“Other current liabilities”liabilities” and $9,506the long-term lease liability was reported in “Other“Other long-term liabilities”liabilities” on the Company’s Condensed Consolidated Balance Sheet. The Company’s financing leases were not material as of June 30, 2019. Cash paid for operating lease liabilities are recorded as cash flows from operating activities in the Company’s Condensed Consolidated Statements of Cash Flows. For the three months ended June 30, 2020 and 2019, operating lease costs were $894 and $751, respectively. For the six months ended June 30, 2020 and 2019, operating lease costs were $751$1,996 and $1,436, whichrespectively. Operating lease costs were included in the Company’s Condensed Consolidated Statements of Income.Operations. Short term and variable lease costs were not material for the three and six months ended June 30, 2020 and 2019.


Certain of the Company’s leases contain renewal options and options to extend the leases for up to five years, and a majority of these options are reflected in the calculation of the ROU asset and lease liability due to the likelihood of renewal.


The following table summarizes the weighted average lease terms and discount rates for operating lease liabilities:
June 30, 20192020
Weighted average remaining lease term (in years)9.06
8.62
Weighted average discount rate5.25.5 %


The following table represents maturities of operating lease liabilities as of June 30, 2019:2020:
Due within 1 year$1,846 
Due after 1 year through 2 years1,924 
Due after 2 years through 3 years1,766 
Due after 3 years through 4 years1,609 
Due after 4 years through 5 years1,538 
Due after 5 years6,148 
Total future minimum lease payments14,831 
Less imputed interest(2,555)
Total$12,276 
Due within 1 year$2,476
Due after 1 year through 2 years1,826
Due after 2 years through 3 years1,388
Due after 3 years through 4 years1,293
Due after 4 years through 5 years1,159
Due after 5 years6,526
Total future minimum lease payments14,668
Less imputed interest(3,146)
Total$11,522



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7.      DEBT
 
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Outstanding borrowings consisted of the following:
June 30, 2020December 31, 2019
Syndicated credit agreement:  
U.S. Dollar revolving loan$—  $—  
Capital expenditure facility13,313  14,875  
Outstanding borrowings13,313  14,875  
Less: debt issuance costs(593) (603) 
Total debt12,720  14,272  
Less: current portion of long-term debt(3,125) (3,125) 
Long-term debt$9,595  $11,147  
 June 30,
2019		 December 31,
2018
Syndicated credit agreement: 
  
U.S. Dollar revolving loan$13,129
 $17,128
Capital expenditure facility23,438
 25,000
Outstanding borrowings36,567
 42,128
Less: debt issuance costs(698) (773)
Total debt35,869
 41,355
Less: current portion of long-term debt(3,125) (3,125)
Long-term debt$32,744
 $38,230


Syndicated Credit Agreement


On March 8, 2018, we entered into a five-yearfive-year $75,000 syndicated credit agreement (“credit facility”) which replaced in its entirety our prior syndicated credit facility entered into on February 23, 2015. The new credit facility allows for revolving loans of up to $50,000 with a $20,000 US dollar equivalent sublimit for alternative currency loans. In addition, the new agreement providesprovided for a $25,000 Capital Expenditure Facility (“Capex Facility”) which was used to assist in financing our DynaEnergetics manufacturing expansion project in Blum, Texas. At the end of year one, the Capex Facility converted to a term loan which is amortizable at 12.5% of principal per year with a balloon payment for the outstanding balance upon the credit facility maturity date in year five.2023. The newCapex Facility bears interest at a LIBOR-based variable rate which at June 30, 2020 was 2.49%. In 2019, we prepaid an additional $7,000 above the required amortization amount. The credit facility has a $100,000 accordion feature to increase the commitments under the revolving loan class and/or by adding a term loan subject to approval by applicable lenders. We entered into the credit facility with a syndicate of three3 banks, with KeyBank, N.A. acting as administrative agent. The syndicated credit facility is secured by the assets of DMC including accounts receivable, inventory, and fixed assets, as well as guarantees and share pledges by DMC and its subsidiaries.
Borrowings under the $50,000 revolving loan can be in the form of one, two, three, or six month London Interbank Offered Rate (“LIBOR”)LIBOR rate loans. Additionally, US dollar borrowings on the revolving loan can be in the form of Base Rate loans (Base Rate borrowings are based on the greater of the administrative agent’s Prime rates, an adjusted Federal Funds rate or an adjusted LIBOR rate). LIBOR loans bear interest at the applicable LIBOR rate plus an applicable margin (varying from 1.50% to 3.00%). Base Rate loans bear interest at the defined Base rate plus an applicable margin (varying from 0.50% to 2.00%). All revolver loan borrowings and repayments have been in the form of one-month or two-month loans and are reported on a net basis in our Condensed Consolidated Statements of Cash Flows.

Borrowings under the $20,000 alternate currency sublimit can be in euros, Canadian dollars, pounds sterling, and in any other currency acceptable to the administrative agent. Alternative currency borrowings denominated in euros, pounds sterling, and any other currency that is dealt with on the London Interbank Deposit Market shall be comprised of LIBOR loans and bear interest at the LIBOR rate plus an applicable margin (varying from 1.50% to 3.00%).


On June 25, 2020, we entered into an amendment ("Amendment") to the credit facility. The Amendment waives the debt service coverage ratio covenant for the quarters ending September 30, 2020, December 31, 2020, and March 31, 2021. The debt service coverage ratio minimum of 1.35 to 1 was applicable for the quarter ending June 30, 2020 and will resume beginning with the quarter ending June 30, 2021 and thereafter. The debt service coverage ratio is defined in the credit facility as the ratio of Consolidated Pro Forma EBITDA less the sum of capital distributions paid in cash, cash income taxes and Consolidated Unfunded Capital Expenditures (as defined in the credit facility) to Debt Service Charges (as defined in the credit facility).

Additionally, the Amendment added a Minimum Liquidity covenant requiring the total of cash and cash equivalents held by U.S. subsidiaries and available borrowing capacity under the credit facility to exceed $10,000 for the quarters ending September 30, 2020, December 31, 2020, and March 31, 2021. The Minimum Liquidity covenant is not required after the quarter ending March 31, 2021.

During the period from the Amendment through August 31, 2020, borrowings outstanding under the credit facility will bear interest at LIBOR plus a margin of 1.75% or at a Base Rate (as defined in the credit facility) plus a margin of 0.75%. For the period from September 1, 2020 through the date of receipt of the covenant compliance certificate for the quarter ending March 31, 2021, borrowings outstanding under the credit facility will bear interest at LIBOR plus a margin of 1.75% to 3.00% or at a Base Rate plus a margin of 0.75% to 2.00%. In each case, the margin is based on the Company's Leverage Ratio of
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Consolidated Funded Indebtedness (as defined in the credit facility) on the last day of such period to Consolidated Pro Forma EBITDA for such period. Additionally, the Amendment sets the minimum LIBOR at 0.75%.

The credit facility, as amended, includes various covenants and restrictions, certain of which relate to the payment of dividends or other distributions to stockholders; redemption of capital stock; incurrence of additional indebtedness; mortgaging, pledging or disposition of major assets; and maintenance of specified ratios. As of June 30, 2019,2020, we were in compliance with all financial covenants and other provisions of our debt agreements.


We also maintain a line of credit with a German bank for certain European operations. This line of credit provides a borrowing capacity of €4,000, of which €1,478€243 is available as of June 30, 20192020 after considering outstanding letters of credit.


Included in lines of creditlong-term debt are deferred debt issuance costs of $698$593 and $773$603 as of June 30, 20192020 and December 31, 2018,2019, respectively. Deferred debt issuance costs are being amortized over the remaining term of the credit facility which expires on March 8, 2023.



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8.     INCOME TAXES


The effective tax rate for each of the periods reported differs from the U.S. statutory rate primarily due to variation in contribution to consolidated pre-tax income from each jurisdiction for the respective periods, differences between the U.S. and foreign tax rates (which range from 20% to 34%), permanent differences between book and taxable income, and changes to valuation allowances on our deferred tax assets.


We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use existing deferred tax assets. Additionally, a three-year cumulative loss at a Consolidated Financial Statement level may be viewed as negative evidence impacting a jurisdiction that by itself is not in a three-year cumulative loss position. During the six months ended June 30, 2020, we did not record any adjustments to valuation allowances. At March 31, 2019, the Company was no longer in a three-year cumulative loss position in the U.S. and we believe sufficient future taxable income will be generated to use existing deferred tax assets in that jurisdiction. Accordingly, during the three months ended March 31, 2019, we released valuation allowances of $368 in that jurisdiction and certain states. The Company will continue to monitor the realizability of deferred tax assets and the need for valuation allowances and will record adjustments in the periods in which facts support such adjustments.


The Tax Cuts and Jobs Act (“TCJA”) provides that foreign earnings generally can be repatriated to the U.S. without federal tax consequence. We have reassessed the assertion that cumulative earnings by our foreign subsidiaries are indefinitely reinvested. We continue to permanently reinvest the earnings of our international subsidiaries and therefore we do not provide for U.S. income taxes or withholding taxes that could result from the distribution of those earnings to the U.S. parent. If any such earnings were ultimately distributed to the U.S. in the form of dividends or otherwise, or if the shares of our international subsidiaries were sold or transferred, we could be subject to additional U.S. federal and state income taxes. Due to the multiple avenues in which earnings can be repatriated, and because a large portion of these earnings are not liquid, it is not practical to estimate the amount of additional taxes that might be payable on these amounts of undistributed foreign income.


During the first quarter of 2020, we filed for a quick refund of our 2019 U.S. tax overpayment of $2,700 followed by a tax return filing in the second quarter. We expect to receive the payment during the third quarter of 2020. During the fourth quarter of 2019, our German operating entities commenced a tax audit for fiscal years 2015 through 2017. If any issues addressed in the audit are resolved in a manner not consistent with our expectations, the Company could be required to adjust its provision for income taxes in future periods.

9.      BUSINESS SEGMENTS
 
Our business is organized into two2 segments: DynaEnergetics and NobelClad. DynaEnergetics designs, manufactures and distributes products utilized by the global oil and gas industry principally for the perforation of oil and gas wells. NobelClad is a global leader in the production of explosion-welded clad metal plates for use in the construction of corrosion resistant industrial processing equipment and specialized transition joints.
Our reportable segments are separately managed strategic business units that offer different products and services. Each segment’s products are marketed to different customer types and require different manufacturing processes and technologies.
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Segment information is as follows:
 
Three months ended June 30,Six months ended June 30,
2020201920202019
Net sales
DynaEnergetics$23,643  $88,628  $76,863  $168,464  
NobelClad19,560  22,326  39,903  42,625  
Net sales$43,203  $110,954  $116,766  $211,089  
 Three months ended June 30, Six months ended June 30,
 2019 2018 2019 2018
Net sales       
DynaEnergetics$88,628
 $58,899
 $168,464
 $108,020
NobelClad22,326
 22,016
 42,625
 40,208
Net sales$110,954
 $80,915
 $211,089
 $148,228


Three months ended June 30,Six months ended June 30,
2020201920202019
Operating (loss) income
DynaEnergetics$(6,895) $26,813  $1,711  $49,923  
NobelClad1,985  1,923  $3,459  $3,753  
Segment operating (loss) income(4,910) 28,736  5,170  53,676  
Unallocated corporate expenses(1,639) (2,588) (4,256) (5,905) 
Stock-based compensation(1,441) (1,495) (2,559) (2,666) 
Other (expense) income, net(85) 343  32  322  
Interest expense, net(156) (409) (394) (782) 
(Loss) income before income taxes$(8,231) $24,587  $(2,007) $44,645  


Three months ended June 30,Six months ended June 30,
2020201920202019
Depreciation and amortization
DynaEnergetics$1,772  $1,719  $3,544  $3,118  
NobelClad881  835  1,715  1,632  
Segment depreciation and amortization2,653  2,554  5,259  4,750  
Corporate and other (1)64  —  164  —  
Consolidated depreciation and amortization$2,717  $2,554  $5,423  $4,750  
(1) Prior to Q4 2019, the Company fully allocated corporate and other depreciation to the segments.

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 Three months ended June 30, Six months ended June 30,
 2019 2018 2019 2018
Operating income       
DynaEnergetics$26,813
 $12,228
 $49,923
 $20,948
NobelClad1,923
 1,703
 $3,753
 $1,691
Segment operating income28,736
 13,931
 53,676
 22,639
        
Unallocated corporate expenses(2,588) (2,618) (5,905) (5,306)
Stock-based compensation(1,495) (1,084) (2,666) (1,792)
Other income (expense), net343
 (327) 322
 (704)
Interest expense, net(409) (136) (782) (601)
Income before income taxes$24,587
 $9,766
 $44,645
 $14,236

 Three months ended June 30, Six months ended June 30,
 2019 2018 2019 2018
Depreciation and amortization       
DynaEnergetics$1,719
 $1,575
 $3,118
 $3,134
NobelClad835
 817
 1,632
 1,633
Segment depreciation and amortization$2,554
 $2,392
 $4,750
 $4,767

The disaggregation of revenue earned from contracts with customers based on the geographic location of the customer is as follows.


DynaEnergetics
 Three months ended June 30,Six months ended June 30,
 2020201920202019
United States11,335  75,323  57,607  143,281  
India4,707  47  5,023  77  
Egypt943  872  2,254  1,734  
Malaysia531  123  912  123  
Kuwait520  746  1,029  746  
Indonesia467  941  946  1,180  
Germany87  25  387  80  
United Arab Emirates85  1,594  751  4,098  
Pakistan40  —  384  340  
Canada—  2,919  668  6,376  
Iraq2,188  690  2,189  886  
Rest of the world2,740  5,348  4,713  9,543  
Total DynaEnergetics$23,643  $88,628  $76,863  $168,464  
 Three months ended June 30, Six months ended June 30,
 2019 2018 2019 2018
United States$75,323
 $44,164
 143,281
 80,294
Canada2,919
 8,556
 6,376
 14,341
United Arab Emirates1,594
 365
 4,098
 888
France1
 21
 41
 73
Ukraine1,678
 1,109
 3,410
 1,513
Germany25
 53
 80
 81
Russia570
 1,144
 1,055
 2,426
India47
 195
 77
 829
Egypt872
 534
 1,734
 1,076
Indonesia941
 164
 1,180
 184
Iraq690
 245
 886
 319
China—
 —
 29
 56
Italy—
 21
 18
 31
Hong Kong61
 302
 61
 302
Rest of the world3,907
 2,026
 6,138
 5,607
Total DynaEnergetics$88,628
 $58,899
 $168,464
 $108,020


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NobelClad
 Three months ended June 30,Six months ended June 30,
 2020201920202019
United States10,462  12,304  19,505  21,947  
United Arab Emirates1,881  289  2,620  1,273  
Canada1,693  1,335  3,461  3,359  
Germany802  828  1,788  1,831  
Norway680  1,538  1,640  2,160  
Spain626  285  1,873  346  
France602  896  2,092  1,653  
Netherlands369  378  915  1,012  
Australia357  397  606  845  
Singapore250  —  824  —  
South Korea222  413  1,212  881  
Sweden73  836  556  1,137  
India69  155  146  279  
Belgium46  598  410  1,483  
Greece20  9  188  26  
Rest of the world1,408  2,065  2,067  4,393  
Total NobelClad$19,560  $22,326  $39,903  $42,625  
 Three months ended June 30, Six months ended June 30,
 2019 2018 2019 2018
United States$12,304
 $6,775
 21,947
 12,481
Canada1,335
 1,631
 3,359
 3,424
United Arab Emirates289
 259
 1,273
 390
France896
 1,744
 1,653
 2,695
South Korea413
 828
 881
 1,831
Germany828
 640
 1,831
 2,253
India155
 33
 279
 803
Spain285
 464
 346
 632
Italy142
 872
 664
 1,077
Australia397
 —
 845
 —
China—
 4,386
 —
 7,844
Netherlands378
 821
 1,012
 1,312
Norway1,538
 44
 2,160
 287
Sweden836
 440
 1,137
 578
South Africa273
 30
 1,006
 193
Rest of the world2,257
 3,049
 4,232
 4,408
Total NobelClad$22,326
 $22,016
 $42,625
 $40,208


During the three months ended June 30, 2019 and 2018, one customer in our DynaEnergetics segment2020, no customers accounted for greater than 10% of consolidated net sales. During the six months ended June 30, 2019, one customer in DynaEnergetics was responsible for more than 10% of consolidated net sales. During2020 and the three and six months ended June 30, 2018, no2019, one customer was responsiblein our DynaEnergetics segment accounted for moregreater than 10% of consolidated net sales.
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10.      DERIVATIVE INSTRUMENTS


We are exposed to foreign currency exchange risk resulting from fluctuations in exchange rates, primarily the U.S. dollar to euro, the U.S. dollar to Canadian dollar, the euro to the Russian ruble, and, to a lesser extent, other currencies, arising from inter-company and third-party transactions entered into by our subsidiaries that are denominated in currencies other than their functional currency. Changes in exchange rates with respect to these transactions result in unrealized gains or losses if such transactions are unsettled at the end of the reporting period or realized gains or losses at settlement of the transaction. We use foreign currency forward contracts to offset foreign exchange rate fluctuations on foreign currency denominated asset and liability positions. None of these contracts are designated as accounting hedges, and all changes in the fair value of the forward contracts are recognized in “Other (expense) income, (expense), net” within our Condensed Consolidated Statements of Operations.


We execute derivatives with a specialized foreign exchange brokerage firm. The primary credit risk inherent in derivative agreements is the possibility that a loss may occur from the nonperformance of a counterparty to the agreements. We perform a review of the credit risk of our counterparties at the inception of the contract and on an ongoing basis. We anticipate that our counterparties will be able to fully satisfy their obligations under the agreements but will take action if doubt arises regarding the counterparties’ ability to perform.


As of June 30, 20192020 and 2018,December 31, 2019, the notional amounts of the forward currency contracts the Company held were $5,819$19,163 and $10,824,$22,860, respectively. At June 30, 20192020 and 2018,December 31, 2019, the fair values of outstanding foreign currency forward contracts were $0.


The following table presents the location and amount of net gains (losses) from hedging activities:


Three months ended June 30,Six months ended June 30,
DerivativeStatements of Operations Location2020201920202019
Foreign currency contractsOther (expense) income, net$(706) $(53) $128  $69  
  Three months ended June 30, Six months ended June 30,
DerivativeStatements of Operations Location2019 2018 2019 2018
Foreign currency contractsOther income (expense), net$(53) $(509) $69
 $(301)


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11.   COMMITMENTS AND CONTINGENCIES


Contingent Liabilities


The Company records an accrual for contingent liabilities when a loss is both probable and reasonably estimable. If some amount within a range of loss appears to be a better estimate than any other amount within the range, that amount is accrued. When no amount within a range of loss appears to be a better estimate than any other amount, the lowest amount in the range is accrued.


Anti-dumpingLegal Proceedings

From time to time, we may become involved in various lawsuits and Countervailing Duties

In June 2015, U.S. Customs and Border Protection (“U.S. Customs”) sent us a Noticelegal proceedings which arise in the ordinary course of Action that proposed to classify certain of our imports asbusiness. However, litigation is subject to anti-dumping duties pursuantinherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

12.    RESTRUCTURING AND ASSET IMPAIRMENTS

During the second quarter of 2020 the COVID-19 pandemic-related collapse in oil and gas demand led to a 2010 anti-dumping duty (“AD”) order on Oil Country Tubular Goods (“OCTG”) from China. A companion countervailing duty (“CVD”) order ondownturn in well completions and the same product is in effect as well. The Notice of Action covered one entry of certain raw material steel mechanical tubing made in China and imported into the U.S. from Canada by our DynaEnergetics segment during 2015corresponding demand for use in manufacturing perforating guns.

In July 2015, we sent a response to U.S. Customs outlining the reasons our mechanical tubing imports do not fall within the scope of the AD order on OCTG from China and should not be subject to anti-dumping duties. U.S. Customs proposed to take similar action with respect to other entries of this product and requested an approximately $1,100 cash deposit or bond for AD/CVD.

In August 2015, we posted the bond of approximately $1,100 to U.S. Customs. Subsequently, U.S. Customs declined to conclude on the Company’s assertion that the mechanical tubing the Company has been importing is not within the scope of the AD order on OCTG from China.DynaEnergetics’ products. As a result, DynaEnergetics recorded asset impairment charges of $1,181 on September 25, 2015certain manufacturing assets that will no longer be utilized in production at its Blum, Texas and Troisdorf, Germany facilities. Additionally, both DynaEnergetics and NobelClad further reduced the Company filed a requestrespective workforces during the quarter. Finally, DynaEnergetics continued activities to prepare its Tyumen, Siberia facility for a scope ruling withsale. As of June 30, 2020, total DynaEnergetics Siberia’s assets classified as held for sale were $421. We expect the U.S. Department of Commerce (“Commerce Department”).

On February 15, 2016, the Company received the Commerce Department’s scope ruling, which determined certain imports, primarily used for gun carrier tubing, are included in the scopesale of the AD/CVD orders on OCTG from China and thus are subject to AD/CVD. On March 11, 2016,remaining assets will be finalized during the Company filed an appeal with the U.S. Courtthird quarter.

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Table of International Trade (“CIT”) related to the Commerce Department’s scope ruling. On February 7, 2017, the CIT remanded the scope ruling to the Commerce Department to reconsider its determination. The Commerce Department filed its remand determination with the CIT on June 7, 2017 continuing to find that the Company’s imports at issue are within the scope of the AD/CVD orders on OCTG from China. On March 16, 2018, the CIT issued its decision on the appeal and sustained the Commerce Department’s scope ruling. The Company did not appeal this ruling.Contents


On December 27, 2016, we received notice from U.S. Customs that it may pursue penalties against us related to the AD/CVD issue and demanding tender of alleged loss of AD/CVD in an amount of $3,049, which had previously been accrued for in our financial statements. We filed a response to the notice on February 6, 2017. On February 16, 2017, we received notice that U.S. Customs was seeking penalties in the amount of $14,783. U.S. Customs also reasserted its demand for tender of alleged loss of AD/CVD in the amount of $3,049. We tendered $3,049 in AD amounts on March 6, 2017 into a suspense account pending ultimate resolution of the AD/CVD case. We submitted a petition for relief and mitigation of penalties on May 17, 2017.

On March 27, 2018, we received notice from U.S. Customs Headquarters that it intended to move forward with its pursuit of penalties. The Company engaged in discussions with U.S. Customs Headquarters regarding the scope of penalties asserted and the arguments set forth in the Company’s petition for relief and mitigation of penalties. Based on these discussions and the Company’s assessment of the probable ultimate penalty rate, the Company accrued $3,103 inDuring the first quarter of 2018.2020, DMC reduced its workforce by 264 positions to address a sharp decline in well completions in the Company’s core oil and gas end market principally due to the COVID-19 pandemic. The workforce reduction impacted full-time, part-time and temporary direct-labor roles in manufacturing and assembly at DynaEnergetics as well as general and administrative positions at DynaEnergetics, NobelClad, and at DMC’s corporate office.

On October 11, 2018, we received a decision from U.S. Customs Headquarters in which a mitigated amount of $8,000 in penalties was asserted. In its financial statements for the quarter ended September 30, 2018, the Company accrued an additional $4,897 of penalties. On December 7, 2018, we submitted a supplemental petition requesting a waiver of the penalty under the Small Business Regulatory Enforcement Act in lieu of tendering the penalty amount. On April 12, 2019, we received notice that our waiver request was denied and tendered the $8,000 during the second quarter of 2019.


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12.    RESTRUCTURING

During the fourth quarter of 2017, NobelClad announced plans to consolidate its European production facilities by closing manufacturing operations in France. During the third quarter of 2018, final approval of the proposed measures was granted by the local workers council, in accordance with applicable French law. NobelClad completed the closure of the Rivesaltes production facility in the fourth quarter of 2018 but is maintaining its sales and administrative office in France. During the second quarter of 2019, NobelClad sold its production facility and related assets and recognizedother machinery and equipment to third-parties for a gain of $519. Additionally, it moved certain machinery and equipment to its manufacturing facility in Germany. During the second quarter of 2019, NobelClad also recorded an additional accrual of $712 for known and probable severance liabilities related to employees terminated as part of closing the manufacturing operations in France. The additional severance accrual was recorded based, in part, on a successful appeal of the severance benefits by some terminated employees during the second quarter of 2019.


Total restructuring and impairment charges incurred for these programs are as follows and are reported in the “Restructuring expenses, net”net and asset impairments” line item in our Condensed Consolidated Statements of Operations:
Three months ended June 30, 2020
SeveranceAsset impairmentEquipment Moving CostsOther Exit CostsTotal
NobelClad$191  $—  $—  $4  $195  
DynaEnergetics121  1,181  126  423  1,851  
Total$312  $1,181  $126  $427  $2,046  
 Three months ended June 30, 2019
 Severance Gain on asset disposal Contract Termination Costs Equipment Moving Costs Other Exit Costs Total
NobelClad$712
 $(519) $4
 $82
 $45
 $324

Three months ended June 30, 2019
SeveranceGain on asset disposalContract Termination CostsEquipment Moving CostsOther Exit CostsTotal
NobelClad$712  $(519) $4  $82  $45  $324  

Six months ended June 30, 2020
SeveranceAsset impairmentContract Termination CostsEquipment Moving CostsOther Exit CostsTotal
NobelClad$244  $—  $—  $—  $10  $254  
DynaEnergetics828  1,181  11  126  643  2,789  
Corporate119  —  —  —  —  119  
Total$1,191  $1,181  $11  $126  $653  $3,162  

Six months ended June 30, 2019
SeveranceGain on asset disposalContract Termination CostsEquipment Moving CostsOther Exit CostsTotal
NobelClad$712  $(636) $43  $227  $56  $402  

21
 Six months ended June 30, 2019
 Severance Gain on asset disposal Contract Termination Costs Equipment Moving Costs Other Exit Costs Total
NobelClad$712
 $(636) $43
 $227
 $56
 $402
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 Three months ended June 30, 2018
 Severance Other Exit Costs Total
NobelClad$182
 $35
 $217
 Six months ended June 30, 2018
 Severance Other Exit Costs Total
NobelClad$235
 $126
 $361

During the six months ended June 30, 2019,2020, the changes to the restructuring liability associated with these programs is summarized below:
December 31, 2018 Net expense (1) Payments and Other Adjustments June 30, 2019December 31, 2019Net expense (1)Payments and Other AdjustmentsCurrency AdjustmentsJune 30, 2020
Severance$1,105
 $712
 $(677) $1,140
Severance$2,404  $1,191  $(1,302) $(168) $2,125  
Contract termination costs—
 43
 (43) —
Contract termination costs—  11  —  (1) 10  
Equipment moving costs8
 227
 (234) 1
Equipment moving costs—  126  (126) —  —  
Other exit costs42
 56
 (96) 2
Other exit costs271  653  (989) 141  76  
Total$1,155
 $1,038
 $(1,050) $1,143
Total$2,675  $1,981  $(2,417) $(28) $2,211  
(1) Excluding gain onExcludes asset disposalimpairment expenses




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ITEM 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with our historical consolidated financial statements and notes, as well as the selected historical consolidated financial data that is included in our Annual Report filed on Form 10-K for the year ended December 31, 2018.2019.
 
Unless stated otherwise, all currency amounts are presented in thousands of U.S. dollars (000s).
 
Overview
 
General


DMC Global Inc. (“DMC”) operates two technical product and process business segments serving the energy, industrial and infrastructure markets. These segments, DynaEnergetics and NobelClad, operate globally through an international network of manufacturing, distribution and sales facilities.
 Our diversified segments each provide a suite of unique technical products to niche sectors of the global energy, industrial and infrastructure markets, and each has established a strong or leading position in the markets in which it participates. With an underlying focus on generating free cash flow, our objective is to sustain and grow the market share of our businesses through increased market penetration, development of new applications, and research and development of new and adjacent products that can be sold across our global network of sales and distribution facilities. We routinely explore acquisitions of related businesses that could strengthen or add to our existing product portfolios, or expand our geographic footprint and market presence. We also seek acquisition opportunities outside our current markets that would complement our existing businesses and enable us to build a stronger and more diverse company.
DynaEnergetics


DynaEnergetics designs, manufactures and distributes products utilized by the global oil and gas industry principally for the perforation of oil and gas wells. These products are sold to oilfield service companies in the U.S., Europe, Canada, South America, Africa, the Middle East, Russia, and Asia. DynaEnergetics also sells directly to end-users. The market for perforating products, which are used during the well completion process, generally corresponds with oil and gas exploration and production activity. Exploration activity over the last several years has led to increasingly complex well completion operations, which in turn, has increased the demand for high quality and technically advanced perforating products.


Cost of products sold for DynaEnergetics includes the cost of metals, explosives and other raw materials used to manufacture shaped charges, detonating products and perforating guns as well as employee compensation and benefits, freight in, depreciation of manufacturing facilities and equipment, manufacturing supplies and other manufacturing overhead expenses.

DynaEnergetics continues to introduce new products and technologies into the marketplace. Recently, DynaEnergetics introduced two new models to its DynaStage® (DS) product family during the second quarter. DS TrinityTM 3.5 is currently in field trials, and is a smaller-diameter version of the DS Trinity 4.0, which was introduced in the first quarter of 2019.


NobelClad


NobelClad is a global leader in the production of explosion-welded clad metal plates for use in the construction of corrosion resistant industrial processing equipment and specialized transition joints. While a significant portion of the demand for our clad metal products is driven by maintenance and retrofit projects at existing chemical processing, petrochemical processing, oil refining, and aluminum smelting facilities, new plant construction and large plant expansion projects also account for a significant portion of total demand. These industries tend to be cyclical in nature and timing of new order inflow remains difficult to predict. We use backlog as a primary means to measure the immediate outlook for our NobelClad business. We define “backlog” at any given point in time as all firm, unfulfilled purchase orders and commitments at that time. Most firm purchase orders and commitments are realized, and we expect to fill most backlog orders within the following 12 months. NobelClad’s backlog increased to $38,841$42,871 at June 30, 20192020 from $29,879$31,660 at December 31, 2018.2019.


Cost of products sold for NobelClad includes the cost of metals and alloys used to manufacture clad metal plates, the cost of explosives, employee compensation and benefits, freight in, outside processing costs, depreciation of manufacturing facilities and equipment, manufacturing supplies and other manufacturing overhead expenses.




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Factors Affecting Results


•Consolidated sales of $43,203 decreased 41% versus the first quarter of 2020 and declined 61% versus the second quarter of 2019. As global crude oil prices and energy demand plunged due to the COVID-19 pandemic, there was a concurrent drop in unconventional drilling and completion activity, which negatively affected sales at DynaEnergetics. Second quarter 2020 well completions in the United States fell by nearly 70% according to the American Petroleum Institute.
•DynaEnergetics sales of $88,628$23,643 in the second quarter of 2019 increased 11% sequentially versus the first quarter of 2019 and 50%2020 decreased 73% compared with the second quarter of 2018 due to higher well-completions2019 and decreased 56% compared with the first quarter of 2020 as the COVID-19 pandemic drove a sharp decline in oil and gas demand and well completion activity in the U.S. unconventional oil and gas market and adding several new customers for its intrinsically safe initiating systems (IS2™) and its family of DS Factory-Assembled, Performance-Assured™ perforating systems.
•NobelClad’s sales of $22,326$19,560 in the second quarter of 2019 increased 10% versus the first quarter of 2019 due to higher project volume and increased 1%2020 decreased 12% compared with the second quarter of 2018. 2019 and 4% compared to the first quarter of 2020 due to the timing of shipment of projects out of backlog.
•Consolidated gross profit of 15.3% in the second quarter of 2020 decreased from 37.9% in the second quarter of 2019 increased from 33.1%2019. The decline primarily was attributable to the 73% year-over-year sales decline at DynaEnergetics, which was also impacted by lower selling prices and an increase in inventory reserves. The magnitude of DynaEnergetics’ sales decrease led to significant under-absorption of fixed overhead and research and development expenses. In addition, low utilization of DynaEnergetics’ manufacturing facilities resulted in an excess-capacity charge of $2,044. U.S. GAAP stipulates that fixed overhead expenses are capitalized as inventory on the balance sheet when incurred, and then expensed to the income statement when the related inventory is sold. However, in periods when manufacturing activity drops significantly below normal levels, a portion of fixed overhead expenses is required to be recognized in the income statement in the period incurred, rather than carried as inventory on the balance sheet. The second quarter of 2018. The improvement primarily was due to2020 also included a higherlower proportion of sales in DynaEnergetics sales relative to NobelClad sales, favorable product mix and productivity improvements in DynaEnergetics, improved project mix in NobelClad andcompared with the favorable impact of higher volume on fixed manufacturing overhead expenses.prior year.
•Consolidated selling, general and administrative expenses were $12,195 in the second quarter of 2020 compared with $16,699 in the second quarter of 2019 compared with $15,5382019. The decrease primarily was due to lower outside service expenses, variable bonus, payroll and payroll-related costs, and travel expenses, partially offset by an increase in the provision for expected credit losses.
•Restructuring expenses, net and asset impairments of $2,046 in the second quarter of 2018. The increase2020 primarily was duerelated to headcount additionsasset impairments and merit increases, as well as higher stock-based compensation, and increased variable incentive compensation.costs related to the anticipated sale of the Tyumen, Siberia manufacturing facility.
•Net debtcash of $20,988$4,528 decreased $6,992$1,553 from $27,980$6,081 at December 31, 2018.2019. Net debtcash is a non-GAAP measure calculated as total debt ($35,869 at June 30, 2019) less cash and cash equivalents ($14,88117,248 at June 30, 2019)2020) less total debt ($12,720 at June 30, 2020).


Outlook

In response to the COVID-19 pandemic, we took substantial steps worldwide to keep our employees safe.This included remote-working arrangements during the second quarter, redesigning our office and manufacturing layouts and workspaces, travel restrictions, adopting new processes for interactions with our suppliers and customers and making additional investments in employee safety equipment and processes. These efforts will continue as the pandemic continues and as we navigate the continually evolving regulatory environment at each of our locations.

In light of the unprecedented downturn in global economic activity and the pandemic-related impact on oil and gas demand, DMC implemented several cost-containment actions in the second quarter to reduce our activity-based cost structure, limit spending and protect our balance sheet. These actions included reducing our workforce by 32%, implementing reduced work weeks at DynaEnergetics, cutting selling, general and administrative expenses by 25%, reducing our capital expenditures budget by 50% and suspending the quarterly dividend. The decline in crude oil prices and oil and gas demand accelerated early in the second quarter of 2020. To further preserve liquidity, we entered into an amendment to our credit facility on June 25, 2020 to, among other provisions, maintain our $50,000 revolving credit facility and to waive the debt service coverage ratio for the quarters ending September 30, 2020, December 31, 2020, and March 31, 2021. We also filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission, which became effective on May 28, 2020, on which we registered up to $150 million of certain of our securities for potential sale from time to time and on terms that we may determine in the future. We believe these actions position us well to preserve liquidity over the next three quarters.

At DynaEnergetics, we expect a modest pick-up in third quarter demand from the low levels in the second quarter; however, the timing and extent to which the global oil and gas market recovers remains uncertain due in part to COVID-19. We have continued to invest in technology, product and market development initiatives to ensure we maintain our competitive advantages and future growth. During the second quarter of 2020, we introduced a series of products that are designed for new well-perforating applications and collectively increase its addressable market by more than 20%. The DS EchoTM perforating system positions DynaEnergetics in the emerging re-frac market, while DS MicroSetTM and DS LiberatorTM address plug setting and tool-string disengagement applications.

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NobelClad achieved a modest sequential improvement in its order backlog in the second quarter, and it is beginning to see effects of the global COVID-19 pandemic on booking activity. Customers in the downstream energy industry have delayed various repair and maintenance projects and the award of a large prospective petrochemical order.
Use of Non-GAAP Financial Measures


Adjusted EBITDA is a non-GAAP (generally accepted accounting principles) measure that we believe provides an important indicator of our ongoing operating performance and that we use in operational and financial decision-making. We define EBITDA as net income plus or minus net interest, taxes, depreciation and amortization. Adjusted EBITDA excludes from EBITDA stock-based compensation, restructuring and impairment charges and, when appropriate, other items that management does not utilize in assessing DMC’s operating performance (as further described in the tables below). As a result, internal management reports used during monthly operating reviews feature Adjusted EBITDA and certain management incentive awards are based, in part, on the amount of Adjusted EBITDA achieved during the year.


Net cash and net debt is aare non-GAAP measuremeasures we use to supplement information in our Condensed Consolidated Financial Statements. We define net cash as total cash and cash equivalents less total debt and net debt as total debt less cash and cash equivalents. In addition to conventional measures prepared in accordance with GAAP, the Company uses this information to evaluate its performance, and we believe that certain investors may do the same.


The presence of non-GAAP financial measures in this report is not intended to be considered in isolation or as a substitute for, or superior to, DMC’s GAAP information, and investors are cautioned that the non-GAAP financial measures are limited in their usefulness. Because not all companies use identical calculations, DMC’s presentation of non-GAAP financial measures may not be comparable to other similarly titled measures of other companies.

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Consolidated Results of Operations


Three months ended June 30, 20192020 compared with three months ended June 30, 20182019


Three months ended June 30,
20202019$ change% change
Net sales$43,203  $110,954  $(67,751) (61)%
Gross profit6,604  42,073  (35,469) (84)%
Gross profit percentage15.3 %37.9 %
COSTS AND EXPENSES:
General and administrative expenses6,707  9,460  (2,753) (29)%
% of net sales15.5 %8.5 %
Selling and distribution expenses5,488  7,239  (1,751) (24)%
% of net sales12.7 %6.5 %
Amortization of purchased intangible assets353  397  (44) (11)%
% of net sales0.8 %0.4 %
Restructuring expenses, net and asset impairments2,046  324  1,722  531 %
Operating (loss) income(7,990) 24,653  (32,643) (132)%
Other (expense) income, net(85) 343  (428) (125)%
Interest expense, net(156) (409) 253  62 %
(Loss) income before income taxes(8,231) 24,587  (32,818) (133)%
Income tax (benefit) provision(2,583) 7,343  (9,926) (135)%
Net (loss) income(5,648) 17,244  (22,892) (133)%
Adjusted EBITDA$(1,786) $29,026  $(30,812) (106)%
 Three months ended June 30,    
 2019 2018 $ change % change
Net sales$110,954
 $80,915
 $30,039
 37 %
Gross profit42,073
 26,775
 15,298
 57 %
Gross profit percentage37.9% 33.1%    
COSTS AND EXPENSES:       
General and administrative expenses9,460
 9,743
 (283) (3)%
% of net sales8.5% 12.0%    
Selling and distribution expenses7,239
 5,795
 1,444
 25 %
% of net sales6.5% 7.2%    
Amortization of purchased intangible assets397
 791
 (394) (50)%
% of net sales0.4% 1.0%    
Restructuring expenses, net324
 217
 107
 49 %
Operating income24,653
 10,229
 14,424
 141 %
Other income (expense), net343
 (327) 670
 205 %
Interest expense, net(409) (136) (273) (201)%
Income before income taxes24,587
 9,766
 14,821
 152 %
Income tax provision7,343
 3,394
 3,949
 116 %
Net income17,244
 6,372
 10,872
 171 %
Adjusted EBITDA$29,026
 $13,922
 $15,104
 108 %


Net sales increaseddecreased $67,751 compared with 20182019. The COVID-19 pandemic-related collapse in oil and gas demand led to a downturn in well completions and demand for DynaEnergetics’ products.

Gross profit percentage decreased to 15.3% compared with 2019 primarily due to higher well completionsthe significant decline in the U.S. unconventional onshore oildemand at DynaEnergetics. The lower volume drove unfavorable absorption of fixed manufacturing overhead expenses, including excess capacity charges, lower average selling prices, and gas sector and growthan increase in customer demandreserves for DynaEnergetics’ advanced perforating systems.

Gross profit percentage increased compared with 2018 primarily due toexcess inventories. The second quarter of 2020 also included a higherlower proportion of sales in DynaEnergetics sales relative to NobelClad sales, favorable product mix and manufacturing efficiencies in DynaEnergetics, improved project mix in NobelClad andcompared with the favorable impactsecond quarter of higher volume on fixed manufacturing overhead expenses.2019.


General and administrative expenses decreased $2,753 compared with 20182019 primarily due to lower outside service costs for patent infringement defense partially offset by increased salariesof $1,248, lower employee benefits expenses and wages from merit increases,payroll taxes of $1,049, and lower variable incentive compensation and stock-based compensation expense.bonus expenses of $1,023.


Selling and distribution expenses increaseddecreased $1,751 compared with 20182019 primarily due to increasedlower salaries, benefits and variable bonus expenses of $850, lower travel expenses of $433, and lower outside services, higher incentive compensation expense, salariesservice costs of $335, and wages from headcount additions as well as merit increases,lower shipping and stock-based compensation expense.freight costs on decreased sales volumes of $330, partially offset by an increase in the provision for expected credit losses of $764.


Amortization of purchased intangible assets decreased compared with 2018 primarily due to fully amortizing certain trademarks in DynaEnergetics as of December 31, 2018.

Restructuring expenses, net and asset impairments of $2,046 in 2019 were2020 primarily related to severance liabilities, equipment moving expensesasset impairment charges on certain manufacturing assets that will no longer be utilized in production at its Blum, Texas and contract terminationTroisdorf, Germany facilities and costs partially offset by a gain on assets sold in connectionassociated with the closureanticipated sale of NobelClad’sDynaEnergetics’ Tyumen, Siberia manufacturing operationsfacility.

Operating loss of $7,990 in France.2020 primarily related to an operating loss reported by DynaEnergetics.


OperatingOther (expense) income, increased net of$85in 2020 primarily due to improved earnings in our DynaEnergetics and NobelClad segments in 2019.

Other income (expense), net in 2019 primarily relates to gain on machinery & equipment sold by DynaEnergetics partially combined with net unrealized and realized currency gains comparedrelated to net unrealized and realized foreign currency exchange losses. Currency gains and losses in

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2018. Ourcan arise when subsidiaries frequently enter into inter-company and third-party transactions that are denominated in currencies other than their functional currency. Changes in exchange rates with respect to these transactions will result in unrealized gains or losses if unsettled at the end of the reporting period or realized gains or losses at settlement of the transaction. We usecurrency, including foreign currency forward contracts generally with maturities up to one month,used to offset foreign exchange rate fluctuations on certain foreign currency denominated asset and liability positions. None

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Table of these contracts are designated as accounting hedges, and all changes in the fair value of the forward contracts are recognized immediately in “Other income (expense), net” within our Condensed Consolidated Statements of Operations.Contents

Interest expense, net increasedof$156decreased compared with 20182019 primarily due to reduced capitalization of interest on DynaEnergetics’ construction of a new manufacturing, assembly and administrative space combined with interest incurred on a higherlower average outstanding debt balance in 2019.2020.


Income tax provision benefit of $7,343$2,583 was recorded on a pretax incomeloss of $24,587.$8,231. The effective rate was impacted unfavorably by a favorable discrete item recordedgeographic mix of pretax income, state taxes, and certain compensation expenses that are not tax deductible in the quarterU.S. The effective rate was also impacted unfavorably by discrete items of $782.$156. We recorded an income tax provision of $3,394$7,343 on pretax income of $9,766$24,587 for the second quarter of 2018.2019. The effective rate for the second quarter of 20182019 was favorably impacted by favorable discrete items recorded in the quarter, including a $164 benefit for vesting of restricted stock. $765.


Net income loss for the three months ended June 30, 20192020 was $17,244,$5,648, or $1.15$0.38 per diluted share, compared to $6,372,net income of $17,244, or $0.43$1.15 per diluted share, for the same period in 2018.2019.


Adjusted EBITDA increaseddecreased compared with 20182019 primarily due to the factors discussed above. See “Overview” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
Three months ended June 30,
 20202019
Net (loss) income$(5,648) $17,244  
Interest expense, net156  409  
Income tax (benefit) provision(2,583) 7,343  
Depreciation2,364  2,157  
Amortization of purchased intangible assets353  397  
EBITDA(5,358) 27,550  
Restructuring expenses, net and asset impairments2,046  324  
Stock-based compensation1,441  1,495  
Other expense (income), net85  (343) 
Adjusted EBITDA$(1,786) $29,026  
 Three months ended June 30,
 2019 2018
Net income$17,244
 $6,372
Interest expense, net409
 136
Provision for income taxes7,343
 3,394
Depreciation2,157
 1,601
Amortization of purchased intangible assets397
 791
EBITDA27,550
 12,294
Restructuring expenses, net324
 217
Stock-based compensation1,495
 1,084
Other (income) expense, net(343) 327
Adjusted EBITDA$29,026
 $13,922



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Six months ended June 30, 20192020 compared with six months ended June 30, 20182019

Six months ended June 30,
20202019$ change% change
Net sales$116,766  $211,089  $(94,323) (45)%
Gross profit31,070  78,478  (47,408) (60)%
Gross profit percentage26.6 %37.2 %
COSTS AND EXPENSES:
General and administrative expenses14,831  18,628  (3,797) (20)%
% of net sales12.7 %8.8 %
Selling and distribution expenses14,015  13,548  467  3 %
% of net sales12.0 %6.4 %
Amortization of purchased intangible assets707  795  (88) (11)%
% of net sales0.6 %0.4 %
Restructuring expenses, net and asset impairments3,162  402  2,760  687 %
Operating (loss) income(1,645) 45,105  (46,750) (104)%
Other income, net32  322  (290) (90)%
Interest expense, net(394) (782) 388  50 %
(Loss) income before income taxes(2,007) 44,645  (46,652) (104)%
Income tax (benefit) provision(514) 12,231  (12,745) (104)%
Net (loss) income(1,493) 32,414  (33,907) (105)%
Adjusted EBITDA$9,499  $52,923  $(43,424) (82)%
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 Six months ended June 30,    
 2019 2018 $ change % change
Net sales$211,089
 $148,228
 $62,861
 42 %
Gross profit78,478
 49,528
 28,950
 58 %
Gross profit percentage37.2% 33.4%    
COSTS AND EXPENSES:       
General and administrative expenses18,628
 17,920
 708
 4 %
% of net sales8.8% 12.1%    
Selling and distribution expenses13,548
 11,007
 2,541
 23 %
% of net sales6.4% 7.4%    
Amortization of purchased intangible assets795
 1,596
 (801) (50)%
% of net sales0.4% 1.1%    
Restructuring expenses, net402
 361
 41
 11 %
Anti-dumping duty penalties—
 3,103
 (3,103) (100)%
Operating income45,105
 15,541
 29,564
 190 %
Other income (expense), net322
 (704) 1,026
 146 %
Interest expense, net(782) (601) (181) (30)%
Income before income taxes44,645
 14,236
 30,409
 214 %
Income tax provision12,231
 3,944
 8,287
 210 %
Net income32,414
 10,292
 22,122
 215 %
Adjusted EBITDA$52,923
 $25,564
 $27,359
 107 %


Net sales increaseddecreased $94,323 compared with 20182019. The decline primarily duerelated to highersharply lower demand for well perforating systems at DynaEnergeticsas the COVID-19 pandemic-related collapse in oil and gas demand led to a downturn in well completions in the U.S. unconventional onshore oil and gas sector and growth in customer demand for DynaEnergetics’ advanced perforating systems combined with improvement in NobelClad’s sales results.


Gross profit percentage increased decreased to 26.6% compared with 20182019 primarily due to the significant decline in demand at DynaEnergetics. The lower volume drove unfavorable absorption of fixed manufacturing overhead expenses, including excess capacity charges, lower average selling prices, and an increase in reserves for excess inventories. The first half of 2020 also included a higherlower proportion of net sales in DynaEnergetics relative to NobelClad favorable product mix and manufacturing efficiencies in DynaEnergetics, improved project mix in NobelClad andcompared with the favorable impactfirst half of higher volume on fixed manufacturing overhead expenses.2019.


General and administrative expenses increaseddecreased $3,797 compared with 20182019 primarily due to increased salaries andlower wages, from merit increases, increased employee benefits expenses and payroll taxes of $2,079 as well as lower variable incentive compensationbonus expenses of $1,390, and stock-based compensationlower outside service costs of $1,357. These decreases were partially offset by higher depreciation expense of $270.

Selling and distribution expenses increased $467 compared with 2019 primarily due to an increase in the provision for expected credit losses of $3,063 in the first half of 2020, partially offset by lower wages, employee benefits expenses and payroll taxes of $1,582, lower variable bonus of $386, lower travel expenses of $308, and lower outside service costs for patent infringement defense.of $275.


Selling and distribution expenses increased compared with 2018 primarily due to higher salaries and wages from headcount additions, merit increases, incentive compensation expense, and increased costs for outside services.

Amortization of purchased intangible assets decreased compared with 2018 primarily due to fully amortizing certain trademarks in DynaEnergetics as of December 31, 2018.

Restructuring expenses, net and asset impairments of $3,162 in 20192020 primarily related to severance liabilities, equipment moving expensesdownsizing our direct labor workforce at DynaEnergetics in response to declining crude oil prices and contract termination costs, partially offset by a gain on assets sold in connection with the closure corresponding demand for well perforating systems at DynaEnergetics.

Operating loss of NobelClad’smanufacturing operations in France.

Anti-dumping duty penalties recorded$1,645 primarily was due to lower earnings at DynaEnergetics in the first quarterhalf of 2018 by the DynaEnergetics segment represent an accrual for penalties related to the anti-dumping and countervailing duties (“AD/CVD”) matter asserted by U.S. Customs Headquarters.2020.


Operating income increased primarily due to improved earnings in our DynaEnergetics and NobelClad segments in 2019 and the accrual for the anti-dumping duty penalty that was recorded in the first quarter of 2018.


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Other income, (expense), net of$32in 20192020 primarily relates to gain on machinery & equipment sold by DynaEnergetics partially combined with net unrealized and realized currency gains comparedrelated to net unrealized and realized foreign currency exchange gains. Currency gains and losses in 2018. Ourcan arise when subsidiaries frequently enter into inter-company and third-party transactions that are denominated in currencies other than their functional currency. Changes in exchange rates with respect to these transactions will result in unrealized gains or losses if unsettled at the end of the reporting period or realized gains or losses at settlement of the transaction. We usecurrency, including foreign currency forward contracts generally with maturities up to one month,used to offset foreign exchange rate fluctuations on certain foreign currency denominated asset and liability positions. None of these contracts are designated as accounting hedges, and all changes in the fair value of the forward contracts are recognized immediately in “Other income (expense), net” within our Condensed Consolidated Statements of Operations.

Interest expense, net increasedof$394decreased compared with 20182019 primarily due to reduced capitalization of interest on DynaEnergetics’ construction of a new manufacturing, assembly and administrative space combined with interest incurred on a higherlower average outstanding debt balance in 2019 partially offset by the non-recurring write off of $159 of deferred debt issuance costs in the first quarter of 2018.2020.


Income tax provision benefit of $12,231$514 was recorded on pretax incomeloss of $44,645.$2,007. The effective rate was impacted unfavorably by favorablegeographic mix of pretax income, state taxes, and certain compensation expenses that are not tax deductible in the U.S. The effective rate was also impacted favorably by discrete items recorded during the year of $1,541.$315. We recorded an income tax provision of $3,944$12,231 on pretax income of $14,236 $44,645 for the same period of 2019. The effective rate for the first half 2019 was impacted by favorable discrete items of $1,541.

Net loss for the six months ended June 30, 2018. The effective rate for this period2020 was favorably impacted by discrete items, including a $286 benefit for vesting of restricted stock, and a $268 adjustment to reduce the provisional Tax Cuts and Jobs Act transition tax amount originally recorded in the fourth quarter of 2017 due to new guidance issued by the Internal Revenue Service regarding the application of loss carryovers to the tax calculation.

Net income for the six months ended June 30, 2019 was $32,414,$1,493, or $2.17$0.10 per diluted share, compared to $10,292,net income of $32,414, or $0.69$2.17 per diluted share, for the same period in 2018.2019.


Adjusted EBITDA increaseddecreased compared with 20182019 primarily due to the factors discussed above. See “Overview” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
Six months ended June 30,
 20202019
Net (loss) income$(1,493) $32,414  
Interest expense, net394  782  
Income tax (benefit) provision(514) 12,231  
Depreciation4,716  3,955  
Amortization of purchased intangible assets707  795  
EBITDA3,810  50,177  
Restructuring expenses, net and asset impairments3,162  402  
Stock-based compensation2,559  2,666  
Other (income), net(32) (322) 
Adjusted EBITDA$9,499  $52,923  
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 Six months ended June 30,
 2019 2018
Net income$32,414
 $10,292
Interest expense, net782
 601
Provision for income taxes12,231
 3,944
Depreciation3,955
 3,171
Amortization of purchased intangible assets795
 1,596
EBITDA50,177
 19,604
Restructuring expenses, net402
 361
Anti-dumping duty penalties—
 3,103
Stock-based compensation2,666
 1,792
Other (income) expense, net(322) 704
Adjusted EBITDA$52,923
 $25,564


Business Segment Financial Information


We primarily evaluate performance and allocate resources based on segment revenues, operating income (loss) and adjusted EBITDA as well as projected future performance. Segment operating income (loss) is defined as revenues less expenses identifiable to the segment. Segment operating income (loss) will reconcile to consolidated income before income taxes by deducting unallocated corporate expenses, including stock-based compensation, net other expense, and net interest expense.



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DynaEnergetics


Three months ended June 30, 20192020 compared with three months ended June 30, 20182019
Three months ended June 30,
20202019$ change% change
Net sales$23,643  $88,628  $(64,985) (73)%
Gross profit1,967  36,341  (34,374) (95)%
Gross profit percentage8.3 %41.0 %
COSTS AND EXPENSES:
General and administrative expenses3,157  4,591  (1,434) (31)%
Selling and distribution expenses3,595  4,637  (1,042) (22)%
Amortization of purchased intangible assets259  300  (41) (14)%
Restructuring expenses, net and asset impairments1,851  —  1,851  n/a
Operating (loss) income(6,895) 26,813  (33,708) (126)%
Adjusted EBITDA$(3,272) $28,532  $(31,804) (111)%
 Three months ended June 30,    
 2019 2018 $ change % change
Net sales$88,628
 $58,899
 $29,729
 50 %
Gross profit36,341
 21,748
 14,593
 67 %
Gross profit percentage41.0%
36.9%    
COSTS AND EXPENSES:       
General and administrative expenses4,591
 5,120
 (529) (10%)
Selling and distribution expenses4,637
 3,711
 926
 25 %
Amortization of purchased intangible assets300
 689
 (389) (56)%
Operating income26,813
 12,228
 14,585
 119 %
Adjusted EBITDA$28,532
 $13,803
 $14,729
 107 %


Net sales were higher$64,985 lower than in 2018 primarily2019 due to increased sales volume from an increasesharply lower demand for well perforating systems at DynaEnergetics as the COVID-19 pandemic-related collapse in crude prices, higheroil and gas demand led to a downturn in well completions in the U.S. unconventional onshore oil and gas market and growth in customer demand for DynaEnergetics’ advanced perforating systems.


Gross profit percentage increasedpercentage decreased to 8.3%compared with 20182019 primarily due to favorable customer and product mix and the favorableunfavorable impact of highersignificantly lower sales volume on fixed manufacturing overhead expenses, including excess capacity charges, lower average selling prices, and an increase in reserves for excess inventories.

General and administrative expenses decreased $1,434 primarily due to lower outside service costs of $848, lower employee benefits expenses and payroll taxes of $510, and lower variable bonus expenses of $368.

Selling and distribution expenses decreased $1,042 compared with 2019 primarily due to lower outside service costs of $904, lower expenses for salaries and wages, variable bonus and other payroll-related costs of $580, and lower travel expenses of $206. The decrease was partially offset by an increase in the provision for expected credit losses of $898.

Restructuring expenses, net and asset impairments of $1,851 in 2020 primarily related to asset impairments and costs associated with the anticipated sale of the Tyumen, Siberia manufacturing facility.

Operating loss of $6,895primarily was due to a sharp decline in unit sales volume, the impact of lower volume on fixed overhead expenses.

Generalcosts, lower average selling prices, and an increase reserves for excess inventories, partially offset by reduced general and administrative expenses and selling and distribution spending.

Adjusted EBITDAdecreased compared with 2018 primarily due to lower patent infringement legal defense costs partially offset by increased salaries and wages due to merit increases as well as variable incentive compensation expense.

Selling and distribution expenses increased compared with 2018 primarily due to higher outside service costs and variable incentive compensation expense.

Amortization of purchased intangibles decreased compared with 2018 primarily due to fully amortizing certain trademarks as of December 31, 2018.

Operating income increasedcompared with 2018primarily due to higher unit volume, partially offset by increased selling and distribution expenses in 2019.

Adjusted EBITDA increased compared with 20182019 due to the factors discussed above. See “Overview” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
29
 Three months ended June 30,
 2019 2018
Operating income$26,813
 $12,228
Adjustments:   
Depreciation1,419
 886
Amortization of purchased intangibles300
 689
Adjusted EBITDA$28,532
 $13,803


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Three months ended June 30,
20202019
Operating (loss) income$(6,895) $26,813  
Adjustments:
Restructuring expenses, net and asset impairments1,851  —  
Depreciation1,513  1,419  
Amortization of purchased intangibles259  300  
Adjusted EBITDA$(3,272) $28,532  

Six months ended June 30, 20192020 compared with six months ended June 30, 20182019

Six months ended June 30,    Six months ended June 30,
2019 2018 $ change % change20202019$ change% change
Net sales$168,464
 $108,020
 $60,444
 56 %Net sales$76,863  $168,464  $(91,601) (54)%
Gross profit67,573
 41,375
 26,198
 63 %Gross profit21,442  67,573  (46,131) (68)%
Gross profit percentage40.1% 38.3%    Gross profit percentage27.9 %40.1 %
COSTS AND EXPENSES:       COSTS AND EXPENSES:
General and administrative expenses8,313
 8,964
 (651) (7%)General and administrative expenses6,988  8,313  (1,325) (16)%
Selling and distribution expenses8,736
 6,971
 1,765
 25 %Selling and distribution expenses9,435  8,736  699  8 %
Amortization of purchased intangible assets601
 1,389
 (788) (57)%Amortization of purchased intangible assets519  601  (82) (14)%
Anti-dumping duty penalties—
 3,103
 (3,103) (100)%
Restructuring expenses, net and asset impairmentsRestructuring expenses, net and asset impairments2,789  —  2,789  n/a
Operating income49,923
 20,948
 28,975
 138 %Operating income1,711  49,923  (48,212) (97)%
Adjusted EBITDA$53,041
 $27,185
 $25,856
 95 %Adjusted EBITDA$8,044  $53,041  $(44,997) (85)%


Net sales were higher$91,601 lower than in 2018 primarily 2019due to increased sales volume from highersharply lower demand for well perforating systems at DynaEnergetics as the COVID-19 pandemic-related collapse in oil and gas demand led to a downturn in well completions in the U.S. unconventional onshore oil and gas market and growth in customer demand for DynaEnergetics’ advanced perforating systems.U.S.


Gross profit percentage increasedpercentage decreased to 27.9%compared with 20182019 primarily due to favorable product mix and the unfavorable impact of lower sales volume on fixed manufacturing overhead absorption from higher sales.expenses, , including excess capacity charges in the second quarter, lower average selling prices, and an increase in reserves for excess inventories.


General and administrative expenses decreased $1,325 compared with 20182019 primarily due to lower patent infringement legal defense costs partially offset by increased salaries and wages, due to merit increases, variable incentive compensation expense as well as higher employee benefit-related costs.bonus and other payroll-related costs of $1,420.


Selling and distribution expenses increased $699 compared with 20182019 primarily due to increasedan increase in the provision for expected credit losses of $2,885 associated with specifically identified at-risk customer balances combined with and increase to our current expected credit loss reserve. The increase was partially offset by lower outside service costs of $1,262 and higher employee benefit-related costs,lower expenses for salaries and wages, variable bonus and other payroll-related costs of $796.

Restructuring expenses, net and asset impairments of $2,789 in 2020 primarily related to measures taken in response to the COVID-19 pandemic-related impact on oil and gas demand. We downsized our direct labor workforce in response to declining crude oil prices and corresponding demand for well perforating systems and recorded asset impairments We also incurred costs associated with the anticipated sale of the Tyumen, Siberia manufacturing facility.

Operating income decreasedby$48,212compared with 2019primarily due to merita sharp decline in unit sales volume, the unfavorable impact of lower volume on fixed overhead expenses, lower average selling prices, and increases in reserves for excess inventories and variable incentive compensation expense.expected credit losses, partially offset by lower general and administrative expenses.


Amortization of purchased intangibles Adjusted EBITDAdecreased compared with 2018 primarily due to fully amortizing certain trademarks as of December 31, 2018.

Anti-dumping duty penalties in 2018 represent an accrual for a mitigated amount of penalties on the AD/CVD matter that was formally asserted by U.S. Customs Headquarters.

Operating income increasedcompared with 2018primarily due to higher unit volume in 2019 and the accrual for penalties on the AD/CVD matter recorded in 2018 partially offset by increased and selling and distribution expenses in 2019.

Adjusted EBITDA increased compared with 2018 due to the factors discussed above. See “Overview” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.

30
 Six months ended June 30,
 2019 2018
Operating income$49,923
 $20,948
Adjustments:   
Anti-dumping duty penalties—
 3,103
Depreciation2,517
 1,745
Amortization of purchased intangibles601
 1,389
Adjusted EBITDA$53,041
 $27,185


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Six months ended June 30,
20202019
Operating income$1,711  $49,923  
Adjustments:
Restructuring expenses, net and asset impairments2,789  —  
Depreciation3,025  2,517  
Amortization of purchased intangibles519  601  
Adjusted EBITDA$8,044  $53,041  

NobelClad


Three months ended June 30, 20192020 compared with three months ended June 30, 20182019
Three months ended June 30,
20202019$ change% change
Net sales$19,560  $22,326  $(2,766) (12)%
Gross profit4,802  5,884  (1,082) (18)%
Gross profit percentage24.6 %26.4 %
COSTS AND EXPENSES:
General and administrative expenses797  1,102  (305) (28)%
Selling and distribution expenses1,731  2,438  (707) (29)%
Amortization of purchased intangible assets94  97  (3) (3)%
Restructuring expenses, net and asset impairments195  324  (129) (40)%
Operating income1,985  1,923  62  3 %
Adjusted EBITDA$3,061  $3,082  $(21) (1)%
 Three months ended June 30,    
 2019 2018 $ change % change
Net sales$22,326
 $22,016
 $310
 1 %
Gross profit5,884
 5,120
 764
 15 %
Gross profit percentage26.4%
23.3%    
COSTS AND EXPENSES:       
General and administrative expenses1,102
 1,135
 (33) (3)%
Selling and distribution expenses2,438
 1,963
 475
 24 %
Amortization of purchased intangible assets97
 102
 (5) (5)%
Restructuring expenses, net324
 217
 107
 49 %
Operating income1,923
 1,703
 220
 13 %
Adjusted EBITDA$3,082
 $2,737
 $345
 13 %


Net sales were flatof $19,560 decreased compared with 2018.

Gross profit percentage increased compared with 20182019 primarily due to more favorable margins on the mixtiming of shipment of projects in the current year versus prior year.out of backlog.


Gross profit percentage of 24.6% decreased compared with 2019 primarily due to less favorable project mix.

General and administrative expenses decreased $305 compared with 20182019 primarily due to lower outside service costs.expenses for salaries and wages, variable bonus and other payroll-related costs of $258.


Selling and distribution expenses increaseddecreased $707 compared with 20182019 primarily due to increasedlower expenses for salaries and wages, from merit increases, increased variable incentive compensation expense, as well as higher employee benefit-relatedbonus and other payroll-related costs and higher outside service costs.of $270 lower travel expenses of $227 combined with a recovery of a previously recorded provision for an expected credit loss of $134.


Restructuring expenses, net and asset impairments of $195 in 2019 primarily2020 related to severance liabilities, equipment moving expenses and contract termination costs, partially offset by a gain on assets sold in connection with the closure of NobelClad’smanufacturing operations in France.costs.


Operating income in 2019 increased $62 compared with 20182019 primarily due to gross profit from improved project mix partiallylower general and administrative and selling expenses offset by higher selling and distribution expenses.lower net sales.


Adjusted EBITDA increased decreased compared with 20182019 primarily due to the factors discussed above. See “Overview” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
31
 Three months ended June 30,
 2019 2018
Operating income$1,923
 $1,703
Adjustments:   
Restructuring expenses, net324
 217
Depreciation738
 715
Amortization of purchased intangibles97
 102
Adjusted EBITDA$3,082
 $2,737


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Three months ended June 30,
20202019
Operating income$1,985  $1,923  
Adjustments:
Restructuring expenses, net and asset impairments195  324  
Depreciation787  738  
Amortization of purchased intangibles94  97  
Adjusted EBITDA$3,061  $3,082  

Six months ended June 30, 20192020 compared with six months ended June 30, 20182019

Six months ended June 30,    Six months ended June 30,
2019 2018 $ change % change20202019$ change% change
Net sales$42,625
 $40,208
 $2,417
 6 %Net sales$39,903  $42,625  $(2,722) (6)%
Gross profit11,244
 8,312
 2,932
 35 %Gross profit9,954  11,244  (1,290) (11)%
Gross profit percentage26.4% 20.7%    Gross profit percentage24.9 %26.4 %
COSTS AND EXPENSES:       COSTS AND EXPENSES:
General and administrative expenses2,346
 2,215
 131
 6%General and administrative expenses1,771  2,346  (575) (25)%
Selling and distribution expenses4,549
 3,838
 711
 19 %Selling and distribution expenses4,282  4,549  (267) (6)%
Amortization of purchased intangible assets194
 207
 (13) (6)%Amortization of purchased intangible assets188  194  (6) (3)%
Restructuring expenses, net402
 361
 41
 11 %Restructuring expenses, net254  402  (148) (37)%
Operating income3,753
 1,691
 2,062
 122 %Operating income3,459  3,753  (294) (8)%
Adjusted EBITDA$5,787
 $3,685
 $2,102
 57 %Adjusted EBITDA$5,428  $5,787  $(359) (6)%


Net sales were higher than in 2018 decreased $2,722 compared with 2019 due to the timing of shipment of projects out of backlog.

Gross profit percentage of 24.9% decreased compared with 2019 primarily due to improvement in several of NobelClad’s end markets and an overall increase in booking activity.

Gross profit percentage increasedcompared with 2018 due to improved fixed overhead absorption from higher sales and betterless favorable project mix. 2018 also was unfavorably impacted by large international jobs with low margins that shipped in Q1 2018.


General and administrative expenses increased slightlydecreased $575 compared with 20182019 primarily due to higher employee benefit-relatedlower expenses for salaries and wages, variable bonus and other payroll-related costs variable incentive compensation expense, and outside service costs.$410.


Selling and distribution expenses increaseddecreased $267 compared with 20182019 primarily due to increasedlower expenses for salaries and wages, due to merit increasesvariable bonus and continued investments in our sales, business development, and marketing functions as well as higher employee benefit-relatedother payroll-related costs and variable incentive compensation expense.

Restructuringof $282, lower travel expenses net in 2019 primarily related to severance liabilities, equipment moving expenses and contract termination costsof $212. The decrease was partially offset by a gain on assets soldprovision for an expected credit loss of $178 associated with a customer that declared bankruptcy during the first quarter of 2020.

Restructuring expenses, net and asset impairments of $254 in connection with the closure of NobelClad’smanufacturing operations in France.2020 related to severance costs.


Operating income increased $294 compared with 20182019 primarily was due to higher project volumelower general and improved gross profit in 2019administrative and selling expenses, partially offset by increased generallower net sales and administrative expenses and selling and distribution expenses in 2019.project mix.


Adjusted EBITDA increased decreased compared with 20182019 primarily due to the factors discussed above. See “Overview” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.

32
 Six months ended June 30,
 2019 2018
Operating income$3,753
 $1,691
Adjustments:   
Restructuring expenses402
 361
Depreciation1,438
 1,426
Amortization of purchased intangibles194
 207
Adjusted EBITDA$5,787
 $3,685


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Six months ended June 30,
20202019
Operating income$3,459  $3,753  
Adjustments:
Restructuring expenses, net and asset impairments254  402  
Depreciation1,527  1,438  
Amortization of purchased intangibles188  194  
Adjusted EBITDA$5,428  $5,787  


Liquidity and Capital Resources
 
We have historically financed our operations from a combination of internally generated cash flow, revolving credit borrowings, and various long-term debt arrangements. We believe that cash flow from operationsThe COVID-19 pandemic drove a sharp decline in our core oil and funds available undergas end market and corresponding well-completion activity and demand for our currentperforating systems late in the first quarter of 2020. In April 2020, DMC announced several cost-containment actions to reduce our activity-based cost structure, limit spending and protect our balance sheet. These actions included reducing our workforce by 32%, implementing reduced work weeks at DynaEnergetics, cutting selling, general and administrative expenses by 25%, reducing our capital expenditures budget by 50% and suspending the quarterly dividend. The decline in crude oil prices and oil and gas demand accelerated early in the second quarter of 2020. Additionally, while NobelClad achieved a modest sequential improvement in its order backlog in the second quarter, it is beginning to see effects of the global COVID-19 pandemic on booking activity. Customers in the downstream energy industry have delayed various repair and maintenance projects and the award of a large prospective petrochemical order. To further preserve liquidity, we entered into an amendment to our credit facilitiesfacility on June 25, 2020 to, among other provisions, maintain our $50,000 revolving credit facility and any future replacement thereof will be sufficient to fundwaive the working capital, debt service dividends, and other capital expenditure requirements of our current business operationscoverage ratio for the foreseeable future. Nevertheless,quarters ending September 30, 2020, December 31, 2020, and March 31, 2021. These measures enabled us to improve our abilitynet cash position from $2,920 at March 31, 2020 to generate sufficient cash flows from operations will depend upon$4,528 at June 30, 2020, maintain our success in executing our strategies. If we are unable to (i) realize sales from our backlog; (ii) secure new customer orders; (iii) continue selling products at attractive margins;fully undrawn and (iv) continue to implement cost-effective internal processes, our ability to meet cash requirements through operating activities could be impacted. Furthermore, any restriction on the availability of borrowings under ouravailable $50,000 revolving credit facilities could negatively affect our ability to meet future cash requirements. In March 2017, wefacility, and provide covenant relief for three quarters. We also filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission, which has been declaredbecame effective andon May 28, 2020, on which we registered for sale up to $150 million of certain of our securities from time to time and on terms that we may determine in the future. Our ability to access this capital may be limited by market conditions at the time of any future potential offering. There can be no assurance that any such capital will be available on acceptable terms or at all.


With due consideration of the COVID-19 global pandemic and severe disruption of our end markets, we believe that cash flow from operations and funds available under our current credit facilities and any future replacement thereof will be sufficient to fund the working capital, debt service, and other capital expenditure requirements of our current business operations for the foreseeable future. Nevertheless, our ability to generate sufficient cash flows from operations will depend upon our success in executing our strategies. If we are unable to (i) realize sales from our backlog; (ii) secure new customer orders; (iii) continue selling products at profitable margins; and (iv) continue to implement cost-effective internal processes, our ability to meet cash requirements through operating activities could be impacted. Furthermore, any restriction on the availability of borrowings under our credit facilities could negatively affect our ability to meet future cash requirements. We will continue to monitor the continuing unprecedented financial and market conditions, including the impacts COVID-19 will have on credit availability and capital markets.

Debt facilities
 
On March 8, 2018, we entered into a five-year $75,000 credit facility which replaced in its entirety our prior syndicated credit facility entered into on February 23, 2015. The new credit facility allows for revolving loans of up to $50,000 with a $20,000 US dollar equivalent sublimit for alternative currency loans. In addition, the new agreement provides for a $25,000 Capex Facility which was used to assist in financing our DynaEnergetics manufacturing expansion project in Blum, Texas. At the end of year one, the Capex Facility converted to a term loan which is amortizable at 12.5% of principal per year with a balloon payment for the outstanding balance upon the credit facility maturity date in year five.2023. In 2019, we prepaid an additional $7,000 above the required amortization amount. The new facility has a $100,000 accordion feature to increase the commitments under the revolving loan class and/or by adding a term loan subject to approval by applicable lenders. We entered into the credit facility with a syndicate of three banks, with KeyBank, N.A. acting as administrative agent. The syndicated credit facility is secured by the assets of DMC including accounts receivable, inventory, and fixed assets, as well as guarantees and share pledges by DMC and its subsidiaries.
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Borrowings under the $50,000 revolving loan can be in the form of one, two, three, or six month London Interbank Offered Rate (“LIBOR”)LIBOR loans. Additionally, US dollar borrowings on the revolving loan can be in the form of Base Rate loans (Base Rate borrowings are based on the greater of the administrative agent’s Prime rates, an adjusted Federal Funds rate or an adjusted LIBOR rate). LIBOR loans bear interest at the applicable LIBOR rate plus an applicable margin (varying from 1.50% to 3.00%). Base Rate loans bear interest at the defined Base rate plus an applicable margin (varying from 0.50% to 2.00%). All revolver loan borrowing and repayments under the credit facility have been in the form of one-month or two-month loans and are reported on a net basis in our Condensed Consolidated Statements of Cash Flows. 

Borrowings under the $20,000 Alternate Currency sublimit can be in euros, Canadian dollars, pounds sterling, and in any other currency acceptable to the administrative agent. Alternative currency borrowings denominated in euros, pounds sterling, and any other currency that is dealt with on the London Interbank Deposit Market shall be comprised of LIBOR loans and bear interest at the LIBOR rate plus an applicable margin (varying from 1.50% to 3.00%).


We also maintainOn June 25, 2020, we entered into an amendment ("Amendment") to the credit facility. The Amendment waives the debt service coverage ratio covenant for the quarters ending September 30, 2020, December 31, 2020, and March 31, 2021. The debt service coverage ratio minimum of 1.35 to 1 was applicable for the quarter ending June 30, 2020 and will resume beginning with the quarter ending June 30, 2021 and thereafter.

Additionally, the Amendment adds a lineMinimum Liquidity covenant requiring the total of credit with a German bank for certain DynaEnergetics operations. This line of credit provides acash and cash equivalents held by U.S. subsidiaries and available borrowing capacity under the credit facility to exceed $10,000 for the quarters ending September 30, 2020, December 31, 2020, and March 31, 2021. The Minimum Liquidity covenant is not required after the quarter ending March 31, 2021.

During the period from the Amendment through August 31, 2020, borrowings outstanding under the credit facility will bear interest at LIBOR plus a margin of €4,000. 1.75% or at a Base Rate (as defined in the credit facility) plus a margin of 0.75%. For the period from September 1, 2020 through the date of receipt of the covenant compliance certificate for the quarter ending March 31, 2021, borrowings outstanding under the credit facility will bear interest at a LIBOR plus a margin of 1.75% to 3.00% or at a Base Rate plus a margin of 0.75% to 2.00%. In each case, the margin is based on the Company's Leverage Ratio of Consolidated Funded Indebtedness (as defined in the credit facility) on the last day of such period to Consolidated Pro Forma EBITDA for such period. Additionally, the Amendment sets the minimum LIBOR at 0.75%.


As of June 30, 2019, total loans of $36,567, including2020, U.S. dollar revolving loans of $13,129zero and loansborrowings of $13,313 under our Capex Facility of $23,438, were outstanding under our credit facility. While we had approximately $36,871 ofOur available revolving credit loanborrowing capacity was $50,000 as of June 30, 2019 under our various credit facilities, future2020. Future borrowings are subject to compliance with financial covenants that could significantly limit such availability.
 
There are currentlyAs of June 30, 2020, there were two significant financial covenants under our credit facility, a debt-to-EBITDA leverage ratio (“leverage ratio”) and a debt service coverage ratio. The leverage ratio is defined in the credit facility for any trailing four quarter period as the ratio of Consolidated Funded Indebtedness (as defined in the agreement) on the last day of such period to Consolidated Pro Forma EBITDA for such period. For the June 30, 20192020 reporting period, the maximum leverage ratio permitted by our syndicated credit facility was 3.00 to 1.0. The actual leverage ratio as of June 30, 2019,2020, calculated in accordance with the credit facility, as amended, was 0.40.3 to 1.0.


The debt service coverage ratio, as defined in the credit facility, means, for any period, the ratio of Consolidated Pro Forma EBITDA less the sum of cash dividends, cash income taxes and Consolidated Unfunded Capital Expenditures (as defined in the

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agreement) to Debt Service Charges (as defined in the agreement). The minimum debt service coverage ratio permitted by our credit facility for the June 30, 20192020 reporting period is 1.35 to 1.0. The actual debt service coverage ratio for the trailing twelve months ended June 30, 20192020 was 12.52.5 to 1.0.
 
Our credit facility, as amended, also includes various other covenants and restrictions, certain of which relate to the payment of dividends or other distributions to stockholders, redemption of capital stock, incurrence of additional indebtedness, mortgaging, and pledging or disposition of major assets. As of June 30, 2019,2020, we were in compliance with all financial covenants and other provisions of our debt agreements.

We also maintain a line of credit with a German bank for certain DynaEnergetics operations. This line of credit provides a borrowing capacity of €4,000.
 
Other contractual obligations and commitments
 
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Our long-term debt balance decreased to $32,744$9,595 at June 30, 20192020 from $38,230$11,147 at December 31, 2018. During the second quarter of 2019, some participants in our Non-Qualified Deferred Compensation Plan (the “Plan”), elected to diversify previous contributions of vested company stock awards that were originally granted during 2015 and 2016 into other investment options available to Plan participants. The diversification increased the deferred compensation obligations that will be settled in cash within “Other long-term liabilities” on the Condensed Consolidated Balance Sheet by approximately $5,542.2019. Our other contractual obligations and commitments have not materially changed since December 31, 2018.2019.


Cash flows provided by operating activities
 
Net cash provided by operating activities was $23,302$11,128 for the six months ended June 30, 20192020 compared to a cash outflow of $1,579with $23,302 in the same period last year. The changedecrease primarily was due to highera decline in net income, partially offset by lower working capital in 2020 compared with 2019.


Cash flows used in investing activities
 
Net cash flows used in investing activities for the six months ended June 30, 20192020 of $15,025$7,462 primarily related to acquisitions of property, plant and equipment for DynaEnergetics’ shaped charge lines at its manufacturing site in Blum, Texas and expenditures related to new office space for our corporate headquarters and for NobelClad’s U.S. administrative offices partially offset by proceeds on the sale of NobelClad’s French production facility during the second quarter of 2019.DynaEnergetics. Net cash flows used in investing activities for the six months ended June 30, 20182019 totaled $16,201$15,025 and were primarily duerelated to the acquisitions of property, plant and equipment associated withfor the construction of DynaEnergetics’ new manufacturing, assembly and officeadministrative space on its site in Blum, Texas.Texas and expenditures related to the relocation of DMC Global’s corporate office and NobelClad’s U.S. administrative offices. Net cash flows used in investing activities was partially offset by proceeds from the sale of NobelClad’s production facility in France during the second quarter of 2019.


Cash flows provided byused in financing activities
 
Net cash flows used in financing activities for the six months ended June 30, 2019 totaled $6,757 compared2020 of $6,200 primarily related to $15,748payment of dividends and repayments on the capital expenditure facility. Net cash provided byflows used in financing activities for the six months ended June 30, 2018 and was2019 of $6,757 primarily duerelated to repayments of ouron revolving loans and repayments on the Capex Facility, combined with additional treasury stock purchases.capital expenditure facility.
 
Payment of Dividends
 
On May 7, 2019, our Board of Directors declaredWe paid a quarterly cash dividend of $0.02$0.125 per share which was paid on July 15, 2019. The dividendin the first quarter of $299 was payable to shareholders of record as of June 30, 2019. We2020 and also paid a quarterly cash dividend of $0.02 per share in the first quarter of 2019 and $0.02 per share in the first and second quarters of 2018.2019.
 
We may payOn April 23, 2020, DMC announced that its Board of Directors suspended the quarterly dividends subjectdividend indefinitely due to capital availability and periodic determinations that cash dividends are in the best interests of our stockholders.uncertaineconomic outlook caused by the COVID-19 pandemic. Future dividends may be affected by, among other items, our views on potential future capital requirements, future business prospects, debt covenant compliance considerations, changes in income tax laws, and any other factors that our Board of Directors deems relevant. Any determination to pay cash dividends will be at the discretion of the Board of Directors.
 
Critical Accounting Policies
 
Except as described below, our critical accounting policies have not changed from those reported in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.



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Leases

On January 1, 2019, the Company adopted a new accounting standard, as amended, that requires the Company to record assets and liabilities on the balance sheet for lease-related rights and obligations and to disclose key information about its leasing arrangements. The Company elected the modified retrospective approach upon adoption and elected the package of practical expedients available under the new standard. This new standard establishes a ROU model that requires the Company to recognize ROU assets and lease liabilities on the balance sheet for all leases with a term longer than 12 months at commencement of the lease.

The Company determines if a contract contains a lease arrangement at the inception of the contract. For leases in which the Company is the lessee, leases are classified as either finance or operating. ROU assets are initially measured at the present value of lease payments over the lease term plus initial direct costs, if any, with the classification affecting the pattern of expense recognition. If a lease does not provide a discount rate and the rate cannot be readily determined, an incremental borrowing rate is used to determine the future lease payments. Lease and non-lease components within the Company’s lease agreements are accounted for together. The Company has no material leases in which the Company is the lessor.

ITEM 3.  Quantitative and Qualitative Disclosure about Market Risk
 
There were no material changes in market risk for changes in foreign currency exchange rates and interest rates from the information provided in Item 7A – Quantitative and Qualitative Disclosures About Market Risk in the company's Annual Report on Form 10-K for the year ended December 31, 2018.2019.


ITEM 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures


Our Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report, and they have concluded that these controls and procedures are effective.


Changes in Internal Control over Financial Reporting


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There were no changes that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.



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Part II - OTHER INFORMATION


Item 1. Legal Proceedings
 
Anti-dumping and Countervailing Duties

In June 2015, U.S. Customs and Border Protection (“U.S. Customs”) sent us a Notice of Action that proposed to classify certain of our imports as subject to anti-dumping duties pursuant to a 2010 anti-dumping duty (“AD”) order on Oil Country Tubular Goods (“OCTG”) from China. A companion countervailing duty (“CVD”) order on the same product is in effect as well. The Notice of Action covered one entry of certain raw material steel mechanical tubing made in China and imported into the U.S. from Canada by our DynaEnergetics segment during 2015 for use in manufacturing perforating guns.

In July 2015, we sent a response to U.S. Customs outlining the reasons our mechanical tubing imports do not fall within the scope of the AD order on OCTG from China and should not be subject to anti-dumping duties. U.S. Customs proposed to take similar action with respect to other entries of this product and requested an approximately $1,100 cash deposit or bond for AD/CVD.

In August 2015, we posted the bond of approximately $1,100 to U.S. Customs. Subsequently, U.S. Customs declined to conclude on the Company’s assertion that the mechanical tubing the Company has been importing is not within the scope of the AD order on OCTG from China. As a result, on September 25, 2015 the Company filed a request for a scope ruling with the U.S. Department of Commerce (“Commerce Department”).

On February 15, 2016, the Company received the Commerce Department’s scope ruling, which determined certain imports, primarily used for gun carrier tubing, are included in the scope of the AD/CVD orders on OCTG from China and thus are subject to AD/CVD. On MarchPlease see Note 11 2016, the Company filed an appeal with the U.S. Court of International Trade (“CIT”) related to the Commerce Department’s scope ruling. On February 7, 2017, the CIT remanded the scope ruling to the Commerce Department to reconsider its determination. The Commerce Department filed its remand determination with the CIT on June 7, 2017 continuing to find that the Company’s imports at issue are within the scope of the AD/CVD orders on OCTG from China. On March 16, 2018, the CIT issued its decision on the appeal and sustained the Commerce Department’s scope ruling. The Company did not appeal this ruling.Condensed Consolidated Financial Statements.


On December 27, 2016, we received notice from U.S. Customs that it may pursue penalties against us related to the AD/CVD issue and demanding tender of alleged loss of AD/CVD in an amount of $3,049, which had previously been accrued for in our financial statements. We filed a response to the notice on February 6, 2017. On February 16, 2017, we received notice that U.S. Customs was seeking penalties in the amount of $14,783. U.S. Customs also reasserted its demand for tender of alleged loss of AD/CVD in the amount of $3,049. We tendered $3,049 in AD amounts on March 6, 2017 into a suspense account pending ultimate resolution of the AD/CVD case. We submitted a petition for relief and mitigation of penalties on May 17, 2017.

On March 27, 2018, we received notice from U.S. Customs Headquarters that it intended to move forward with its pursuit of penalties. The Company engaged in discussions with U.S. Customs Headquarters regarding the scope of penalties asserted and the arguments set forth in the Company’s petition for relief and mitigation of penalties. Based on these discussions and the Company’s assessment of the probable ultimate penalty rate, the Company accrued $3,103 in the first quarter of 2018.

On October 11, 2018, we received a decision from U.S. Customs Headquarters in which a mitigated amount of $8,000 in penalties was asserted. In its financial statements for the quarter ended September 30, 2018, the Company accrued an additional $4,897 of penalties. On December 7, 2018, we submitted a supplemental petition requesting a waiver of the penalty under the Small Business Regulatory Enforcement Act in lieu of tendering the penalty amount. On April 12, 2019, we received notice that our waiver request was denied and tendered the $8,000 in the second quarter of 2019.

Item 1A. Risk Factors
 
There have been no significant changes in the risk factors identified as being attendant to our business in our Annual Report on Form 10-K for the year ended December 31, 2018.2019, except as provided below.


Our business, results of operations, financial condition, cash flows and stock price have been and may continue to be adversely affected by pandemics, epidemics or other public health emergencies, such as the recent outbreak of COVID-19.

Our business, results of operations, financial condition, cash flows and stock price have been and may continue to be adversely affected by pandemics, epidemics or other public health emergencies, such as the recent outbreak of COVID-19. In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The outbreak has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, "shelter in place" and "stay at home" orders, travel restrictions, business curtailments, school closures, and other measures. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19.

We are considered a critical infrastructure industry, as defined by the U.S. Department of Homeland Security. Although we have continued to operate our facilities to date consistent with federal guidelines and state and local orders, the outbreak of COVID-19 and any preventive or protective actions taken by governmental authorities have had and may continue to have a material adverse effect on our workforce and operations, supply chain, customers and transportation networks. The impacts of COVID-19 have reduced demand for oil and gas, which has exerted downward pressure on oil and gas prices. This has significantly impacted the demand for our products, product pricing and our ability to collect receivables from our customers, and has had, and may continue to have, a material adverse impact on our financial condition, results of operations and cash flows. The extent to which COVID-19 may adversely impact our business in the future depends on future developments, which are highly uncertain and unpredictable, depending upon the severity and duration of the outbreak and the effectiveness of actions taken globally to contain or mitigate its effects. Any resulting financial impact cannot be estimated reasonably at this time, but may materially adversely affect our business, results of operations, financial condition and cash flows. Even after the COVID-19 pandemic has subsided, we may experience materially adverse impacts to our business due to any resulting economic recession or depression. Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets which has and may continue to adversely impact our stock price and our ability to access capital markets. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in our Annual Report on Form 10-K for the year ended December 31, 2019, such as those relating to our products and financial performance.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


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In connection with the vesting of Company restricted common stock under our equity incentive plans during the second quarter of 2019,2020, we retained shares of common stock in satisfaction of withholding tax obligations. These shares are held as treasury shares by the Company.
Total number of shares purchased (1) (2)Average price paid per share
April 1 to April 30, 2020—  $—  
May 1 to May 31, 20201,988  $25.21  
June 1 to June 30, 2020—  $—  
Total1,988  $25.21  
  Total number of shares purchased (1) (2) Average price paid per share
April 1 to April 30, 2019 815
 $58.95
May 1 to May 31, 2019 314
 $68.10
June 1 to June 30, 2019 75,000
 $73.89
Total 76,129
 $73.71


(1) Share purchases in 2019 included 1,2192020 were to offset tax withholding obligations that occurredoccur upon the vesting of restricted common stock under the terms of the 2016 Equity Incentive Plan and 75.000 share purchases were related to the participant elections to diversify contributionsPlan.
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(2) As of June 30, 2019,2020, the maximum number of shares that may yet be purchased would not exceed the employees’ portion of taxes withheld on unvested shares (448,163 shares)(399,463).


Item 3. Defaults Upon Senior Securities
 
None.
 
Item 4. Mine Safety Disclosures
 
Our Coolspring property is subject to regulation by the Federal Mine Safety and Health Administration (“MSHA”) under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”). Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (The “Dodd-Frank Act”), issuers that are operators, or that have a subsidiary that is an operator, of a coal or other mine in the United States are required to disclose in their periodic reports filed with the SEC information regarding specified health and safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities. During the quarter ended June 30, 2019,2020, we had no such specified health and safety violations, orders or citations, related assessments or legal actions, mining-related fatalities, or similar events in relation to our United States operations requiring disclosure pursuant to Section 1503(a) of the Dodd-Frank Act.
 
Item 5. Other Information
 
None.


Item 6. Exhibits
 
10.1 First Amendment to the Credit Facility dated as of March 26, 2020, among the Company, Key Bank, N.A., as administrative agent, and the other parties named therein.1

31.1 Certification of the President and Chief Executive Officer pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2 Certification of the Chief Financial Officer pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


32.1 Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
101The following materials from the Quarterly Report on Form 10-Q of DMC Global Inc. for the quarter ended June 30, 2019,2020, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statement of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.*
1 Certain confidential information contained in this agreement has been omitted because it (i) is not material and (ii) would be competitively harmful if publicly disclosed.
*Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed

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not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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SIGNATURES
 
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
DMC Global Inc.
(Registrant)
Date:July 25, 201923, 2020/s/ Michael Kuta
Michael Kuta, Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)


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