UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20212022
OR
☐ 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) | | | | | | | | |
| Delaware | | 84-0608431 |
| (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 class | | Trading Symbol | | Name of exchange on which registered |
| Common Stock, $0.05 Par Value | | BOOM | | The 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 ☒ No ☐
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 ☒ No ☐
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.
Act. | | | | | | | | |
Large accelerated filer ☐☒ | | Accelerated filer ☒ ☐ |
| | | |
| Non-accelerated filer ☐ | | Smaller reporting company ☐ |
| | |
| | Emerging growth company ☐ |
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 ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 under the Act). Yes ☐ No ☒
The number of shares of Common Stock outstanding was 18,724,83119,529,644 as of October 21, 2021.November 3, 2022.
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 expectations regarding improvements tothe resiliency of DynaEnergetics’ end markets and customer pricing, planned price increases at DynaEnergetics, DynaEnergetics’ ability to benefit from strengthening prices, projected growth in Arcadia’s core geographic regions and end markets, plans to install new finishing capacity and targets for such lines to be operational, our ability to access our ATMat-the-market offerings or the capital markets in the future, our expected usethe ability of proceeds from equity offerings,DynaEnergetics to realize the anticipated benefits of its patent strategy and expected continuing litigation costs, expected material and labor cost trends, the timing of shipment and financial impacts of NobelClad’s large titanium clad plate order received in the second quarter of 2021, the impacts of seasonality on DynaEnergetics’ business in the fourth quarter of 2021, our ability to claim the Employee Retention Credit (“ERC”) under the Coronavirus Aid, Relief, and Economic Security Act, as amended, and the availability of funds to support our liquidity position and our expected future liquidity position. 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, 20202021 and such things as the following: impacts of COVID-19geopolitical and any related preventative or protective actions taken by governmental authorities and resulting economic impacts,instability, including recessions or depressions; inflation; supply chain delays and disruptions; the availability and cost of energy; transportation disruptions; 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, aluminum, and other raw material;materials; fluctuations in tariffs or quotas; changes in laws and 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 acquiredArcadia and future-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 or access the capital markets; and global economic conditionsconditions; and politicalwars, terrorism and economic developments.armed conflicts. 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
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) | | | September 30, 2021 | | December 31, 2020 | | September 30, 2022 | | December 31, 2021 |
| | (unaudited) | | | (unaudited) | |
| ASSETS | ASSETS | | | | ASSETS | | | |
| Current assets: | Current assets: | | | | Current assets: | | | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 37,020 | | | $ | 28,187 | | Cash and cash equivalents | $ | 18,486 | | | $ | 30,810 | |
| Marketable securities | 144,932 | | | 25,736 | | |
| Accounts receivable, net of allowance for doubtful accounts of $2,693 and $2,605, respectively | 39,347 | | | 31,366 | | |
| | Accounts receivable, net of allowance for doubtful accounts of $3,361 and $2,773, respectively | | Accounts receivable, net of allowance for doubtful accounts of $3,361 and $2,773, respectively | 94,191 | | | 71,932 | |
| Inventories | Inventories | 62,172 | | | 52,573 | | Inventories | 152,573 | | | 124,214 | |
| Prepaid expenses and other | Prepaid expenses and other | 9,974 | | | 5,448 | | Prepaid expenses and other | 9,977 | | | 12,240 | |
| | Total current assets | Total current assets | 293,445 | | | 143,310 | | Total current assets | 275,227 | | | 239,196 | |
| Property, plant and equipment | Property, plant and equipment | 172,039 | | | 180,278 | | Property, plant and equipment | 199,540 | | | 191,022 | |
| Less - accumulated depreciation | Less - accumulated depreciation | (66,902) | | | (70,867) | | Less - accumulated depreciation | (76,248) | | | (68,944) | |
| Property, plant and equipment, net | Property, plant and equipment, net | 105,137 | | | 109,411 | | Property, plant and equipment, net | 123,292 | | | 122,078 | |
| | Goodwill | | Goodwill | 139,922 | | | 141,266 | |
| | Purchased intangible assets, net | Purchased intangible assets, net | 1,829 | | | 3,665 | | Purchased intangible assets, net | 221,753 | | | 255,576 | |
| Deferred tax assets | Deferred tax assets | 5,747 | | | 4,582 | | Deferred tax assets | 7,887 | | | 6,930 | |
| Other assets | Other assets | 30,217 | | | 18,677 | | Other assets | 97,028 | | | 99,366 | |
| Total assets | Total assets | $ | 436,375 | | | $ | 279,645 | | Total assets | $ | 865,109 | | | $ | 864,412 | |
| | LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
| LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST, AND STOCKHOLDERS’ EQUITY | | LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST, AND STOCKHOLDERS’ EQUITY | |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
| Accounts payable | Accounts payable | $ | 24,436 | | | $ | 17,574 | | Accounts payable | $ | 41,573 | | | $ | 40,276 | |
| Accrued expenses | Accrued expenses | 7,459 | | | 5,301 | | Accrued expenses | 9,575 | | | 13,585 | |
| | Accrued income taxes | Accrued income taxes | 8,101 | | | 7,279 | | Accrued income taxes | 3,206 | | | 9 | |
| Accrued employee compensation and benefits | Accrued employee compensation and benefits | 8,585 | | | 7,160 | | Accrued employee compensation and benefits | 15,535 | | | 9,766 | |
| Contract liabilities | Contract liabilities | 9,759 | | | 4,928 | | Contract liabilities | 30,030 | | | 21,052 | |
| Current portion of long-term debt | Current portion of long-term debt | — | | | 3,125 | | Current portion of long-term debt | 15,000 | | | 15,000 | |
| Other current liabilities | Other current liabilities | 1,648 | | | 1,741 | | Other current liabilities | 6,994 | | | 6,126 | |
| | Total current liabilities | Total current liabilities | 59,988 | | | 47,108 | | Total current liabilities | 121,913 | | | 105,814 | |
| Long-term debt | Long-term debt | — | | | 8,139 | | Long-term debt | 121,409 | | | 132,425 | |
| | Deferred tax liabilities | Deferred tax liabilities | 1,373 | | | 2,254 | | Deferred tax liabilities | 1,547 | | | 2,202 | |
| Other long-term liabilities | Other long-term liabilities | 30,114 | | | 25,230 | | Other long-term liabilities | 62,625 | | | 66,250 | |
| Total liabilities | Total liabilities | 91,475 | | | 82,731 | | Total liabilities | 307,494 | | | 306,691 | |
| Commitments and contingencies (Note 12) | Commitments and contingencies (Note 12) | 0 | | 0 | Commitments and contingencies (Note 12) | |
| Redeemable noncontrolling interest | | Redeemable noncontrolling interest | 194,962 | | | 197,196 | |
| Stockholders’ equity | Stockholders’ equity | | Stockholders’ equity | |
| Preferred stock, $0.05 par value; 4,000,000 shares authorized; no issued and outstanding shares | Preferred stock, $0.05 par value; 4,000,000 shares authorized; no issued and outstanding shares | — | | | — | | 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; 19,294,745 and 15,917,559 shares issued, respectively | 965 | | | 796 | | |
| Common stock, $0.05 par value; 50,000,000 shares authorized; 20,127,679 and 19,920,829 shares issued, respectively | | Common stock, $0.05 par value; 50,000,000 shares authorized; 20,127,679 and 19,920,829 shares issued, respectively | 1,007 | | | 996 | |
| Additional paid-in capital | Additional paid-in capital | 270,993 | | | 117,387 | | Additional paid-in capital | 301,003 | | | 294,515 | |
| Retained earnings | Retained earnings | 118,216 | | | 115,657 | | Retained earnings | 115,016 | | | 111,031 | |
| Other cumulative comprehensive loss | Other cumulative comprehensive loss | (25,803) | | | (22,962) | | Other cumulative comprehensive loss | (33,801) | | | (26,538) | |
| Treasury stock, at cost, and company stock held for deferred compensation, at par; 569,914 and 528,274 shares, respectively | (19,471) | | | (13,964) | | |
| Treasury stock, at cost, and company stock held for deferred compensation, at par; 597,822 and 570,415 shares, respectively | | Treasury stock, at cost, and company stock held for deferred compensation, at par; 597,822 and 570,415 shares, respectively | (20,572) | | | (19,479) | |
| | Total stockholders’ equity | Total stockholders’ equity | 344,900 | | | 196,914 | | Total stockholders’ equity | 362,653 | | | 360,525 | |
| Total liabilities and stockholders’ equity | $ | 436,375 | | | $ | 279,645 | | |
| Total liabilities, redeemable noncontrolling interest, and stockholders’ equity | | Total liabilities, redeemable noncontrolling interest, and stockholders’ equity | $ | 865,109 | | | $ | 864,412 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
| | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Net sales | Net sales | $ | 67,175 | | | $ | 55,281 | | | $ | 188,271 | | | $ | 172,048 | | Net sales | $ | 174,465 | | | $ | 67,175 | | | $ | 479,012 | | | $ | 188,271 | |
| Cost of products sold | Cost of products sold | 50,513 | | | 41,688 | | | 141,725 | | | 127,381 | | Cost of products sold | 123,127 | | | 50,513 | | | 338,669 | | | 141,725 | |
| Gross profit | Gross profit | 16,662 | | | 13,593 | | | 46,546 | | | 44,667 | | Gross profit | 51,338 | | | 16,662 | | | 140,343 | | | 46,546 | |
| Costs and expenses: | Costs and expenses: | | | | | | | | Costs and expenses: | | | | | | | |
| General and administrative expenses | General and administrative expenses | 9,721 | | | 6,911 | | | 26,121 | | | 21,744 | | General and administrative expenses | 19,796 | | | 9,721 | | | 56,330 | | | 26,121 | |
| Selling and distribution expenses | Selling and distribution expenses | 5,593 | | | 4,705 | | | 16,380 | | | 18,720 | | Selling and distribution expenses | 10,748 | | | 5,593 | | | 31,383 | | | 16,380 | |
| Amortization of purchased intangible assets | Amortization of purchased intangible assets | 211 | | | 369 | | | 823 | | | 1,076 | | Amortization of purchased intangible assets | 7,385 | | | 211 | | | 33,154 | | | 823 | |
| | Restructuring expenses and asset impairments | — | | | 143 | | | 127 | | | 3,305 | | |
| Restructuring expenses | | Restructuring expenses | 8 | | | — | | | 53 | | | 127 | |
| | Total costs and expenses | Total costs and expenses | 15,525 | | | 12,128 | | | 43,451 | | | 44,845 | | Total costs and expenses | 37,937 | | | 15,525 | | | 120,920 | | | 43,451 | |
| Operating income (loss) | 1,137 | | | 1,465 | | | 3,095 | | | (178) | | |
| Operating income | | Operating income | 13,401 | | | 1,137 | | | 19,423 | | | 3,095 | |
| Other income (expense): | Other income (expense): | | | | | | | | Other income (expense): | | | | | | | |
| Other (expense) income, net | (198) | | | (148) | | | 304 | | | (118) | | |
| Other income (expense), net | | Other income (expense), net | 120 | | | (198) | | | (35) | | | 304 | |
| Interest expense, net | Interest expense, net | (14) | | | (170) | | | (230) | | | (564) | | Interest expense, net | (1,771) | | | (14) | | | (4,058) | | | (230) | |
| Income (loss) before income taxes | 925 | | | 1,147 | | | 3,169 | | | (860) | | |
| Income tax provision (benefit) | 522 | | | 139 | | | 610 | | | (375) | | |
| Income before income taxes | | Income before income taxes | 11,750 | | | 925 | | | 15,330 | | | 3,169 | |
| Income tax provision | | Income tax provision | 3,537 | | | 522 | | | 4,938 | | | 610 | |
| | Net income (loss) | $ | 403 | | | $ | 1,008 | | | $ | 2,559 | | | $ | (485) | | |
| Net income | | Net income | $ | 8,213 | | | $ | 403 | | | $ | 10,392 | | | $ | 2,559 | |
| Less: Net income attributable to redeemable noncontrolling interest | | Less: Net income attributable to redeemable noncontrolling interest | 1,496 | | | — | | | 1,411 | | | — | |
| Net income attributable to DMC Global Inc. stockholders | | Net income attributable to DMC Global Inc. stockholders | $ | 6,717 | | | $ | 403 | | | $ | 8,981 | | | $ | 2,559 | |
| | | Net income (loss) per share | | | | | | | | |
| Net income per share attributable to DMC Global Inc. stockholders: | | Net income per share attributable to DMC Global Inc. stockholders: | | | | |
| Basic | Basic | $ | 0.02 | | | $ | 0.07 | | | $ | 0.15 | | | $ | (0.03) | | Basic | $ | 0.46 | | | $ | 0.02 | | | $ | 0.20 | | | $ | 0.15 | |
| Diluted | Diluted | $ | 0.02 | | | $ | 0.07 | | | $ | 0.15 | | | $ | (0.03) | | Diluted | $ | 0.46 | | | $ | 0.02 | | | $ | 0.20 | | | $ | 0.15 | |
| Weighted average shares outstanding: | Weighted average shares outstanding: | | | | | | | | Weighted average shares outstanding: | | | | | | | |
| Basic | Basic | 18,728,278 | | | 14,820,881 | | | 17,239,306 | | | 14,759,062 | | Basic | 19,381,489 | | | 18,728,278 | | | 19,352,638 | | | 17,239,306 | |
| Diluted | Diluted | 18,739,085 | | | 14,820,881 | | | 17,250,525 | | | 14,759,062 | | Diluted | 19,381,794 | | | 18,739,085 | | | 19,357,333 | | | 17,250,525 | |
| | Dividends declared per common share | $ | — | | | $ | — | | | $ | — | | | $ | 0.125 | | |
|
Reconciliation to net income attributable to DMC Global Inc. stockholders after adjustment of redeemable noncontrolling interest for purposes of calculating earnings per share
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net income attributable to DMC Global Inc. stockholders | $ | 6,717 | | | $ | 403 | | | $ | 8,981 | | | $ | 2,559 | |
| Adjustment of redeemable noncontrolling interest | 2,256 | | | — | | | (4,996) | | | — | |
| Net income attributable to DMC Global Inc. common stockholders after adjustment of redeemable noncontrolling interest | $ | 8,973 | | | $ | 403 | | | $ | 3,985 | | | $ | 2,559 | |
| | | | | | | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) INCOME
(Amounts in Thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Net income (loss) | $ | 403 | | | $ | 1,008 | | | $ | 2,559 | | | $ | (485) | |
| | | | | | | |
| Change in cumulative foreign currency translation adjustment | (1,347) | | | 753 | | | (2,841) | | | 518 | |
| | | | | | | |
| Total comprehensive (loss) income | $ | (944) | | | $ | 1,761 | | | $ | (282) | | | $ | 33 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Net income | $ | 8,213 | | | $ | 403 | | | $ | 10,392 | | | $ | 2,559 | |
| | | | | | | |
| Change in cumulative foreign currency translation adjustment | (3,472) | | | (1,347) | | | (7,263) | | | (2,841) | |
| Other comprehensive income (loss) | $ | 4,741 | | | $ | (944) | | | $ | 3,129 | | | $ | (282) | |
| | | | | | | |
| Less: comprehensive income attributable to redeemable noncontrolling interest | 1,496 | | | — | | | 1,411 | | | — | |
| | | | | | | |
| Comprehensive income (loss) attributable to DMC Global Inc. stockholders | $ | 3,245 | | | $ | (944) | | | $ | 1,718 | | | $ | (282) | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
(Amounts in Thousands, Except Share Data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | 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, June 30, 2021 | 19,294,745 | | | $ | 965 | | | $ | 269,375 | | | $ | 117,813 | | | $ | (24,456) | | | (569,737) | | | $ | (17,660) | | | | | $ | 346,037 | |
| Net income | — | | | — | | | — | | | 403 | | | — | | | — | | | — | | | | | 403 | |
| Change in cumulative foreign currency translation adjustment | — | | | — | | | — | | | — | | | (1,347) | | | — | | | — | | | | | (1,347) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Stock-based compensation | ��� | | | — | | | 1,618 | | | — | | | — | | | — | | | — | | | | | 1,618 | |
| | | | | | | | | | | | | | | | | |
| Treasury stock activity | — | | | — | | | — | | | — | | | — | | | (177) | | | (1,811) | | | | | (1,811) | |
| | | | | | | | | | | | | | | | | |
| Balances, September 30, 2021 | 19,294,745 | | | $ | 965 | | | $ | 270,993 | | | $ | 118,216 | | | $ | (25,803) | | | (569,914) | | | $ | (19,471) | | | | | $ | 344,900 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Other | | Treasury Stock, at cost, and | | Total | | Redeemable |
| | | | | | Additional | | | | Cumulative | | Company Stock Held for | | DMC Global Inc. | | Non- |
| | Common Stock | | Paid-In | | Retained | | Comprehensive | | Deferred Compensation, at par | | Stockholders’ | | Controlling |
| | Shares | | Amount | | Capital | | Earnings | | Loss | | Shares | | Amount | | Equity | | Interest |
| Balances, June 30, 2022 | 20,119,929 | | | $ | 1,006 | | | $ | 298,905 | | | $ | 106,043 | | | $ | (30,329) | | | (597,758) | | | $ | (20,570) | | | $ | 355,055 | | | $ | 197,196 | |
| Net income | — | | | — | | | — | | | 6,717 | | | — | | | — | | | — | | | 6,717 | | | 1,496 | |
| Change in cumulative foreign currency translation adjustment | — | | | — | | | — | | | — | | | (3,472) | | | — | | | — | | | (3,472) | | | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Shares issued in connection with stock compensation plans | 7,750 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| Consideration adjustment related to redeemable noncontrolling interest (Note 3) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,783 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Stock-based compensation | — | | | — | | | 2,099 | | | — | | | — | | | — | | | — | | | 2,099 | | | 143 | |
| | | | | | | | | | | | | | | | | |
| Distribution to redeemable noncontrolling interest holder | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,400) | |
| Adjustment of redeemable noncontrolling interest to redemption value | — | | | — | | | — | | | 2,256 | | | — | | | — | | | — | | | 2,256 | | | (2,256) | |
| Treasury stock activity | — | | | — | | | — | | | — | | | — | | | (64) | | | (2) | | | (2) | | | — | |
| | | | | | | | | | | | | | | | | |
| Balances, September 30, 2022 | 20,127,679 | | | $ | 1,007 | | | $ | 301,003 | | | $ | 115,016 | | | $ | (33,801) | | | (597,822) | | | $ | (20,572) | | | $ | 362,653 | | | $ | 194,962 | |
| | | | | | | | | | | | Other | | Treasury Stock and | | | | | | | | | | | | | Other | | Treasury Stock, at cost, and | | Total | |
| | | | | | | Additional | | | | Cumulative | | Company Stock Held for | | | | | | | | | Additional | | | | Cumulative | | Company Stock Held for | | DMC Global Inc. | |
| | | Common Stock | | Paid-In | | Retained | | Comprehensive | | Deferred Compensation | | | | | Common Stock | | Paid-In | | Retained | | Comprehensive | | Deferred Compensation, at par | | Stockholders’ | |
| | | Shares | | Amount | | Capital | | Earnings | | Loss | | Shares | | Amount | | | Total | | Shares | | Amount | | Capital | | Earnings | | Loss | | Shares | | Amount | | Equity | |
| Balances, June 30, 2020 | 15,297,291 | | | $ | 765 | | | $ | 88,501 | | | $ | 115,576 | | | $ | (26,038) | | | (527,981) | | | $ | (8,521) | | | | $ | 170,283 | | |
| Balances, June 30, 2021 | | Balances, June 30, 2021 | 19,294,745 | | | $ | 965 | | | $ | 269,375 | | | $ | 117,813 | | | $ | (24,456) | | | (569,737) | | | $ | (17,660) | | | $ | 346,037 | | |
| Net income | Net income | — | | | — | | | — | | | 1,008 | | | — | | | — | | | — | | | | 1,008 | | Net income | — | | | — | | | — | | | 403 | | | — | | | — | | | — | | | 403 | | |
| Change in cumulative foreign currency translation adjustment | Change in cumulative foreign currency translation adjustment | — | | | — | | | — | | | — | | | 753 | | | — | | | — | | | | 753 | | Change in cumulative foreign currency translation adjustment | — | | | — | | | — | | | — | | | (1,347) | | | — | | | — | | | (1,347) | | |
| Shares issued in connection with stock compensation plans | 2,933 | | | — | | | 3 | | | — | | | — | | | — | | | — | | | | 3 | | |
| | | Stock-based compensation | Stock-based compensation | — | | | — | | | 1,554 | | | — | | | — | | | — | | | — | | | | 1,554 | | Stock-based compensation | — | | | — | | | 1,618 | | | — | | | — | | | — | | | 1,618 | | |
| | Treasury stock activity | Treasury stock activity | — | | | — | | | 11 | | | — | | | — | | | (56) | | | (3,661) | | | | (3,650) | | Treasury stock activity | — | | | — | | | — | | | — | | | — | | | (177) | | | (1,811) | | | (1,811) | | |
| Balances, September 30, 2020 | 15,300,224 | | | $ | 765 | | | $ | 90,069 | | | $ | 116,584 | | | $ | (25,285) | | | (528,037) | | | $ | (12,182) | | | | $ | 169,951 | | |
| Balances, September 30, 2021 | | Balances, September 30, 2021 | 19,294,745 | | | $ | 965 | | | $ | 270,993 | | | $ | 118,216 | | | $ | (25,803) | | | (569,914) | | | $ | (19,471) | | | $ | 344,900 | | |
DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
(Amounts in Thousands, Except Share Data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | 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, 2020 | 15,917,559 | | | $ | 796 | | | $ | 117,387 | | | $ | 115,657 | | | $ | (22,962) | | | (528,274) | | | $ | (13,964) | | | | | $ | 196,914 | |
| Net income | — | | | — | | | — | | | 2,559 | | | — | | | — | | | — | | | | | 2,559 | |
| Change in cumulative foreign currency translation adjustment | — | | | — | | | — | | | — | | | (2,841) | | | — | | | — | | | | | (2,841) | |
| Shares issued in connection with equity offering | 2,875,000 | | | 144 | | | 123,317 | | | — | | | — | | | — | | | — | | | | | 123,461 | |
| Shares issued in connection with at-the-market offering program | 397,820 | | | 20 | | | 25,242 | | | — | | | — | | | — | | | — | | | | | 25,262 | |
| Shares issued in connection with stock compensation plans | 104,366 | | | 5 | | | 248 | | | — | | | — | | | — | | | — | | | | | 253 | |
| | | | | | | | | | | | | | | | | |
| Stock-based compensation | — | | | — | | | 4,799 | | | — | | | — | | | — | | | — | | | | | 4,799 | |
| | | | | | | | | | | | | | | | | |
| Treasury stock activity | — | | | — | | | �� | | | — | | | — | | | (41,640) | | | (5,507) | | | | | (5,507) | |
| | | | | | | | | | | | | | | | | |
| Balances, September 30, 2021 | 19,294,745 | | | $ | 965 | | | $ | 270,993 | | | $ | 118,216 | | | $ | (25,803) | | | (569,914) | | | $ | (19,471) | | | | | $ | 344,900 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | 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, 2019 | 15,117,207 | | | $ | 756 | | | $ | 85,639 | | | $ | 119,002 | | | $ | (25,803) | | | (464,532) | | | (7,453) | | | | | $ | 172,141 | |
| Net loss | — | | | — | | | — | | | (485) | | | — | | | — | | | — | | | | | (485) | |
| Change in cumulative foreign currency translation adjustment | — | | | — | | | — | | | — | | | 518 | | | — | | | — | | | | | 518 | |
| Shares issued in connection with stock compensation plans | 183,017 | | | 9 | | | 257 | | | — | | | — | | | — | | | — | | | | | 266 | |
| Adjustment for cumulative effect from change in accounting principle (ASU 2016-13) | — | | | — | | | — | | | (50) | | | — | | | — | | | — | | | | | (50) | |
| Stock-based compensation | — | | | — | | | 4,162 | | | — | | | — | | | — | | | — | | | | | 4,162 | |
| Dividends declared | — | | | — | | | — | | | (1,883) | | | — | | | — | | | — | | | | | (1,883) | |
| Treasury stock activity | — | | | — | | | 11 | | | — | | | — | | | (63,505) | | | (4,729) | | | | | (4,718) | |
| Balances, September 30, 2020 | 15,300,224 | | | $ | 765 | | | $ | 90,069 | | | $ | 116,584 | | | $ | (25,285) | | | (528,037) | | | $ | (12,182) | | | | | $ | 169,951 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Other | | Treasury Stock, at cost, and | | Total | | Redeemable |
| | | | | | Additional | | | | Cumulative | | Company Stock Held for | | DMC Global Inc. | | Non- |
| | Common Stock | | Paid-In | | Retained | | Comprehensive | | Deferred Compensation, at par | | Stockholders’ | | Controlling |
| | Shares | | Amount | | Capital | | Earnings | | Loss | | Shares | | Amount | | Equity | | Interest |
| Balances, December 31, 2021 | 19,920,829 | | | $ | 996 | | | $ | 294,515 | | | $ | 111,031 | | | $ | (26,538) | | | (570,415) | | | $ | (19,479) | | | $ | 360,525 | | | $ | 197,196 | |
| Net income | — | | | — | | | — | | | 8,981 | | | — | | | — | | | — | | | 8,981 | | | 1,411 | |
| Change in cumulative foreign currency translation adjustment | — | | | — | | | — | | | — | | | (7,263) | | | — | | | — | | | (7,263) | | | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Shares issued in connection with stock compensation plans | 206,850 | | | 11 | | | (11) | | | — | | | — | | | — | | | — | | | — | | | — | |
| Consideration adjustments related to redeemable noncontrolling interest (Note 3) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,356 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Stock-based compensation | — | | | — | | | 6,499 | | | — | | | — | | | — | | | — | | | 6,499 | | | 403 | |
| Distribution to redeemable noncontrolling interest holder | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (10,400) | |
| Adjustment of redeemable noncontrolling interest to redemption value | — | | | — | | | — | | | (4,996) | | | — | | | — | | | — | | | (4,996) | | | 4,996 | |
| | | | | | | | | | | | | | | | | |
| Treasury stock activity | — | | | — | | | — | | | — | | | — | | | (27,407) | | | (1,093) | | | (1,093) | | | — | |
| | | | | | | | | | | | | | | | | |
| Balances, September 30, 2022 | 20,127,679 | | | $ | 1,007 | | | $ | 301,003 | | | $ | 115,016 | | | $ | (33,801) | | | (597,822) | | | $ | (20,572) | | | $ | 362,653 | | | $ | 194,962 | |
DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
(Amounts in Thousands, Except Share Data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Other | | Treasury Stock, at cost, and | | Total | | |
| | | | | | Additional | | | | Cumulative | | Company Stock Held for | | DMC Global Inc. | | |
| | Common Stock | | Paid-In | | Retained | | Comprehensive | | Deferred Compensation, at par | | Stockholders’ | | |
| | Shares | | Amount | | Capital | | Earnings | | Loss | | Shares | | Amount | | Equity | | |
| Balances, December 31, 2020 | 15,917,559 | | | $ | 796 | | | $ | 117,387 | | | $ | 115,657 | | | $ | (22,962) | | | (528,274) | | | (13,964) | | | $ | 196,914 | | | |
| Net income | — | | | — | | | — | | | 2,559 | | | — | | | — | | | — | | | 2,559 | | | |
| Change in cumulative foreign currency translation adjustment | — | | | — | | | — | | | — | | | (2,841) | | | — | | | — | | | (2,841) | | | |
| Shares issued in connection with equity offering | 2,875,000 | | | 144 | | | 123,317 | | | — | | | — | | | — | | | — | | | 123,461 | | | |
| Shares issued in connection with at-the-market offering program | 397,820 | | | 20 | | | 25,242 | | | — | | | — | | | — | | | — | | | 25,262 | | | |
| Shares issued in connection with stock compensation plans | 104,366 | | | 5 | | | 248 | | | — | | | — | | | — | | | — | | | 253 | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Stock-based compensation | — | | | — | | | 4,799 | | | | | — | | | — | | | — | | | 4,799 | | | |
| | | | | | | | | | | | | | | | | |
| Treasury stock activity | — | | | — | | | — | | | — | | | — | | | (41,640) | | | (5,507) | | | (5,507) | | | |
| Balances, September 30, 2021 | 19,294,745 | | | $ | 965 | | | $ | 270,993 | | | $ | 118,216 | | | $ | (25,803) | | | (569,914) | | | $ | (19,471) | | | $ | 344,900 | | | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(unaudited)
| | | | | | | | | | | |
| Nine months ended September 30, |
| | 2021 | | 2020 |
| Cash flows provided by operating activities: | | | |
| Net income (loss) | $ | 2,559 | | | $ | (485) | |
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | | | |
| | | |
| Depreciation | 8,400 | | | 7,167 | |
| Amortization of purchased intangible assets | 823 | | | 1,076 | |
| Amortization of deferred debt issuance costs | 168 | | | 154 | |
| Stock-based compensation | 4,904 | | | 4,154 | |
| | | |
| Deferred income taxes | (2,046) | | | (839) | |
| (Gain) loss on disposal of property, plant and equipment | (298) | | | 113 | |
| Restructuring expenses and asset impairments | 127 | | | 3,305 | |
| | | |
| | | |
| | | |
| Change in: | | | |
| Accounts receivable, net | (8,562) | | | 26,890 | |
| Inventories | (10,620) | | | (2,228) | |
| Prepaid expenses and other | (15,892) | | | (2,855) | |
| Accounts payable | 6,861 | | | (10,563) | |
| Contract liabilities | 4,957 | | | 2,376 | |
| | | |
| Accrued expenses and other liabilities | 6,713 | | | (6,911) | |
| Net cash (used in) provided by operating activities | (1,906) | | | 21,354 | |
| | | |
| Cash flows used in investing activities: | | | |
| Investment in marketable securities | (123,984) | | | — | |
| Proceeds from maturities of marketable securities | 4,799 | | | — | |
| | | |
| Acquisition of property, plant and equipment | (6,348) | | | (9,682) | |
| Proceeds on sale of property, plant and equipment | 1,019 | | | 20 | |
| | | |
| Net cash used in investing activities | (124,514) | | | (9,662) | |
| | | |
| Cash flows provided by (used in) financing activities: | | | |
| | | |
| Repayments on capital expenditure facility | (11,750) | | | (2,344) | |
| | | |
| Payment of dividends | — | | | (3,749) | |
| Payment of debt issuance costs | — | | | (88) | |
| Net proceeds from issuance of common stock through equity offering | 123,461 | | | — | |
| Net proceeds from issuance of common stock through at-the-market offering program | 25,262 | | | — | |
| Net proceeds from issuance of common stock to employees and directors | 253 | | | 266 | |
| Treasury stock purchases | (2,476) | | | (1,123) | |
| | | |
| Net cash provided by (used in) financing activities | 134,750 | | | (7,038) | |
| | | |
| Effects of exchange rates on cash | 503 | | | (403) | |
| | | |
| Net increase in cash and cash equivalents | 8,833 | | | 4,251 | |
| Cash and cash equivalents, beginning of the period | 28,187 | | | 20,353 | |
| Cash and cash equivalents, end of the period | $ | 37,020 | | | $ | 24,604 | |
| | | | | | | | | | | |
| Nine months ended September 30, |
| | 2022 | | 2021 |
| Cash flows provided by (used in) operating activities: | | | |
| Net income | $ | 10,392 | | | $ | 2,559 | |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | |
| | | |
| Depreciation | 10,578 | | | 8,400 | |
| Amortization of purchased intangible assets | 33,154 | | | 823 | |
| Amortization of deferred debt issuance costs | 412 | | | 168 | |
| Amortization of acquisition-related inventory valuation step-up | 430 | | | — | |
| Stock-based compensation | 6,891 | | | 4,904 | |
| | | |
| Deferred income taxes | (1,612) | | | (2,046) | |
| Other | (295) | | | (298) | |
| Restructuring expenses | 53 | | | 127 | |
| | | |
| | | |
| | | |
| Change in: | | | |
| Accounts receivable, net | (24,421) | | | (8,562) | |
| Inventories | (31,311) | | | (10,620) | |
| Prepaid expenses and other | 3,736 | | | (15,892) | |
| Accounts payable | 2,925 | | | 6,861 | |
| Contract liabilities | 9,277 | | | 4,957 | |
| | | |
| Accrued expenses and other liabilities | 4,126 | | | 6,713 | |
| Net cash provided by (used in) operating activities | 24,335 | | | (1,906) | |
| | | |
| Cash flows used in investing activities: | | | |
| | | |
| Consideration adjustments related to acquisition of business (Note 3) | (2,034) | | | — | |
| Investment in marketable securities | — | | | (123,984) | |
| Proceeds from maturities of marketable securities | — | | | 4,799 | |
| | | |
| Acquisition of property, plant and equipment | (11,277) | | | (6,348) | |
| | | |
| Proceeds on sale of property, plant and equipment | — | | | 1,019 | |
| | | |
| Net cash used in investing activities | (13,311) | | | (124,514) | |
| | | |
| Cash flows (used in) provided by financing activities: | | | |
| | | |
| Repayments on term loan | (11,250) | | | — | |
| Repayments on capital expenditure facility | — | | | (11,750) | |
| | | |
| | | |
| | | |
| Payments of debt issuance costs | (179) | | | — | |
| Distributions to redeemable noncontrolling interest holder | (10,293) | | | — | |
| Net proceeds from issuance of common stock through equity offering | — | | | 123,461 | |
| Net proceeds from issuance of common stock through at-the-market offering program | — | | | 25,262 | |
| Net proceeds from issuance of common stock to employees and directors | — | | | 253 | |
| Treasury stock purchases | (1,092) | | | (2,476) | |
| | | |
| Net cash (used in) provided by financing activities | (22,814) | | | 134,750 | |
| | | |
| Effects of exchange rates on cash | (534) | | | 503 | |
| | | |
| Net (decrease) increase in cash and cash equivalents | (12,324) | | | 8,833 | |
| Cash and cash equivalents, beginning of the period | 30,810 | | | 28,187 | |
| Cash and cash equivalents, end of the period | $ | 18,486 | | | $ | 37,020 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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 statementsCondensed 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. Certain information and footnote disclosures, including critical and significant accounting policies normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted for this quarterly presentation. These condensed consolidated financialCondensed 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, 2020.2021.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statementsCondensed 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.
Marketable Securities
We typically invest in highly rated securities with the primary objectives of preserving principal, providing access to liquidity to fund the ongoing operations and strategic needs of the Company and its subsidiaries, and achieving a yield that is commensurate with low risk and highly liquid securities.
Our investments in marketable debt securities are classified as either trading, available-for-sale or held-to-maturity based on the nature of the securities and their availability for use in current operations. The Company classifies its marketable debt securities in the Condensed Consolidated Balance Sheet as current or non-current based on related maturities and expectations of sales and redemptions in the subsequent twelve-month period. The Company may sell certain of its marketable debt securities prior to their stated maturities to manage liquidity, credit risk, or asset allocation.
As of September 30, 2021 and December 31, 2020, our investments had maturities ranging from three to twelve months, and all such investments have been classified and accounted for as trading securities.
The Company’s investments in marketable securities consisted of the following:
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
| U.S. Treasury securities | $ | 76,591 | | | $ | 25,736 | |
| Commercial paper (A-1 or P-1 rated) | 68,341 | | | — | |
| Marketable securities | $ | 144,932 | | | $ | 25,736 | |
The Company’s U.S. Treasury securities have annual yields between 0.01% and 0.04% and the commercial paper securities have annual yields between 0.09% and 0.10%. The Company’s investments in marketable securities are measured at fair value with gains and losses recognized in the Condensed Consolidated Statement of Operations within “Other (expense) income, net." For the three and nine months ended September 30, 2021, the net gains on marketable securities were $2 and $12, respectively.
Accounts and Notes Receivable
The Company measures expected credit losses for its accounts receivable using a current expected credit loss model, which is based on historical experience, adjusted for current conditions and reasonable and supportable forecasts. 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 allowance for credit losses at the time the receivable is recognized. To measure expected credit losses, we have elected to pool trade receivables by segment and analyze DynaEnergetics and NobelCladeach segment’s accounts receivable balances as separate populations. Within each segment, receivables exhibit similar risk characteristics.
During the three and nine months ended September 30, 2021,2022, our expected loss rate continued to reflectreflects uncertainties in market conditions present in both ofthat could impact our businesses, due to the ongoingincluding COVID-19 pandemic.related considerations, supply chain disruptions, as well as global geopolitical and economic instability. In addition, we reviewed receivables outstanding, including aged balances, and in circumstances where we are aware of a specific customer’s inability to meet its financial obligation to us, we recorded a specific allowance for credit losses (with the offsetting expense charged to “Selling and distribution expenses” in our Condensed Consolidated Statements of Operations) against the amounts due, reducing the net recognized receivable to the amount we estimate will be collected. During the three and nine months ended September 30, 2021,2022, provisions of $4$568 and $100,$696, respectively, were recorded.
The following table summarizes year-to-date activity in the allowance for credit losses on receivables from DynaEnergetics and NobelClad customers:customers in each of our business segments:
| | | DynaEnergetics | | NobelClad | | DMC Global Inc. | | Arcadia | | DynaEnergetics | | NobelClad | | DMC Global Inc. |
| Allowance for doubtful accounts, December 31, 2020 | $ | 2,590 | | | $ | 15 | | | $ | 2,605 | | |
| Allowance for doubtful accounts, December 31, 2021 | | Allowance for doubtful accounts, December 31, 2021 | $ | — | | | $ | 2,758 | | | $ | 15 | | | $ | 2,773 | |
| | Current period provision for expected credit losses | Current period provision for expected credit losses | 100 | | | — | | | 100 | | Current period provision for expected credit losses | $ | 584 | | | 97 | | | 62 | | | 743 | |
| | Write-offs charged against the allowance | | Write-offs charged against the allowance | | (97) | | | — | | | (97) | |
| Recoveries of amounts previously reserved | Recoveries of amounts previously reserved | (10) | | | — | | | (10) | | Recoveries of amounts previously reserved | $ | — | | | (47) | | | — | | | (47) | |
| Impacts of foreign currency exchange rates and other | Impacts of foreign currency exchange rates and other | (2) | | | — | | | (2) | | Impacts of foreign currency exchange rates and other | $ | — | | | (6) | | | (5) | | | (11) | |
| Allowance for doubtful accounts, September 30, 2021 | $ | 2,678 | | | $ | 15 | | | $ | 2,693 | | |
| Allowance for doubtful accounts, September 30, 2022 | | Allowance for doubtful accounts, September 30, 2022 | $ | 584 | | | $ | 2,705 | | | $ | 72 | | | $ | 3,361 | |
During the third quarter of 2021, the Company entered into a note receivable with terms of repayment over five years, collateralized by certain fixed assets. The note, with an outstanding current balance of $622 as of September 30, 2021 recorded within “Prepaid expenses and other” and an outstanding long-term balance of $4,995 as of September 30, 2021 recorded within “Other Assets”, is considered an arrangement with a variable interest entity for which the Company is not the primary beneficiary and has concluded does not require consolidation.
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 within our DynaEnergetics and NobelClad business segments arise when control is transferred at a point in time and not on any other criteria. Our rights to payments for goods transferred to customers within our Arcadia business segment also generally arise when control is transferred at a point in time; however, at times, control of certain customized, project-based products passes to the customer over time. Payment terms and conditions vary by contract, although terms generally include a requirement of payment within 30 to 60 days.90 days across all of our segments. 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 referRefer to Note 5 “Contract Liabilities”6 "Contract Liabilities" for further information on contract liabilities and Note 10 “Business Segments”"Business Segments" for disaggregated revenue disclosures.
See additional revenue recognition policy disclosures specific to the DynaEnergetics and NobelClad business segments within our Annual Report filed on Form 10-K for the year ended December 31, 2021.
Arcadia
Customers agree to terms and conditions at the time of initiating an order. A significant portion of transactions contain standard architectural building materials that are not made-to-order, which include standard storefronts and entrances, windows, curtain walls, doors and interior partitions. In instances where multiple products are included within an order, each product represents a separate performance obligation given that: (1) the customer can benefit from each product on a standalone basis and (2) each product is distinct within the context of the contract.
The transaction price is readily determinable and fixed at the time the transaction is entered into with the customer. Arcadia is entitled to each product’s transaction price upon the customer obtaining control of the item. For standard architectural building materials that are not made-to-order, such control transfers at a point in time, which is generally when the product has been shipped to the customer and the legal title has been transferred. Upon shipment and title transfer, Arcadia has performed its contractual requirements such that it has a present right to payment, and the customer from that point forward bears all risks and rewards of ownership. In addition, at this date, the customer has the ability to direct the use of, or restrict access to, the asset. Payment discounts, rebates, refunds, or any other forms of variable consideration are typically not granted to Arcadia customers.
For contracts that contain only one performance obligation, the total transaction price is allocated to the sole performance obligation. For contracts which contain multiple distinct performance obligations, judgment is required to determine the standalone selling price (“SSP”) for each performance obligation. However, such judgment is largely mitigated given that standard architectural building materials purchased are generally shipped at the same time. In instances where products purchased are not shipped at the same time, Arcadia uses the contractually stated price to determine SSP as this price approximates the price of each good as sold separately.
At times, Arcadia will also contract with customers to supply customized architectural building materials based on design specifications, measurements, finishes, framing materials, and other options selected by the customer at the time an order is initiated. For these contracts, Arcadia has an enforceable right to payment from its customers at the time an order is received and accepted for all manufacturing efforts expended on behalf of its customers. Due to the customized nature of these products, the Company has concluded that the substantial portion of the related goods produced have no alternative use, and therefore control of these products passes to the customer over time. We have concluded that recognizing revenue utilizing an over-time output method based upon units delivered reasonably depicts the fulfillment of our performance obligations under our contracts and the value received by the customer based upon our performance to date. This conclusion is further supported by the frequency of shipments in fulfilling these contracts. We have elected not to disclose our unsatisfied performance obligations as of September 30, 2022 under the short-term contract exemption as we expect such performance obligations will be satisfied within the next 12 months following the end of the reporting period.
Billings for customized architectural building materials occur at times upon delivery, but also can occur via pre-established billing schedules agreed upon at the commencement of the contract. Therefore, we frequently generate contract liabilities in instances when we have billed the customer in excess of revenue recognized for units delivered.
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 basis 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 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
In periods with net income, 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 of net income as they receive non-forfeitable rights to dividends similar toas common stock. Restricted stock awards do not participate in net losses.
Basic EPS is calculated by dividing net income available(loss) attributable to commonthe Company’s stockholders after adjustment of the Companyredeemable noncontrolling interest by the weighted average number of shares of common stockshares outstanding during the period. Refer to Note 3 "Business Combination" for further discussion of the calculation of the adjustment of the redeemable noncontrolling interest to redemption value as of the end of the period presented. Diluted EPS adjusts basic EPS for the effects of restricted stock awards, restricted stock units, 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. For the applicable periods presented, diluted EPS using the treasury stocktwo-class method was lessmore dilutive than the two-classtreasury stock method; as such, only the two-class method has been included below.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Net income (loss), as reported | $ | 403 | | | $ | 1,008 | | | 2,559 | | | (485) | |
| | | | | | | |
| Less: Undistributed net income available to participating securities | (3) | | | (17) | | | (25) | | | — | |
| Numerator for basic net income (loss) per share: | 400 | | | 991 | | | 2,534 | | | (485) | |
| Add: Undistributed net income allocated to participating securities | 3 | | | 17 | | | 25 | | | — | |
| Less: Undistributed net income reallocated to participating securities | (3) | | | (17) | | | (25) | | | — | |
| Numerator for diluted net income (loss) per share: | 400 | | | 991 | | | 2,534 | | | (485) | |
| Denominator: | | | | | | | |
| Weighted average shares outstanding for basic net income (loss) per share | 18,728,278 | | | 14,820,881 | | | 17,239,306 | | | 14,759,062 | |
| Effect of dilutive securities (1) | 10,807 | | | — | | | 11,219 | | | — | |
| Weighted average shares outstanding for diluted net income (loss) per share | 18,739,085 | | | 14,820,881 | | | 17,250,525 | | | 14,759,062 | |
| Net income (loss) per share | | | | | | | |
| Basic | $ | 0.02 | | | $ | 0.07 | | | $ | 0.15 | | | $ | (0.03) | |
| Diluted | $ | 0.02 | | | $ | 0.07 | | | $ | 0.15 | | | $ | (0.03) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net income attributable to DMC Global Inc. stockholders, as reported | $ | 6,717 | | | $ | 403 | | | 8,981 | | | 2,559 | |
| Adjustment of redeemable noncontrolling interest | 2,256 | | | — | | | (4,996) | | | — | |
| | | | | | | |
| Less: Undistributed net income available to participating securities | (136) | | | (3) | | | (61) | | | (25) | |
| Numerator for basic net income per share: | 8,837 | | | 400 | | | 3,924 | | | 2,534 | |
| Add: Undistributed net income allocated to participating securities | 136 | | | 3 | | | 61 | | | 25 | |
| Less: Undistributed net income reallocated to participating securities | (136) | | | (3) | | | (61) | | | (25) | |
| Numerator for diluted net income per share: | 8,837 | | | 400 | | | 3,924 | | | 2,534 | |
| Denominator: | | | | | | | |
| Weighted average shares outstanding for basic net income per share | 19,381,489 | | | 18,728,278 | | | 19,352,638 | | | 17,239,306 | |
Effect of dilutive securities (1) | 305 | | | 10,807 | | | 4,695 | | | 11,219 | |
| Weighted average shares outstanding for diluted net income per share | 19,381,794 | | | 18,739,085 | | | 19,357,333 | | | 17,250,525 | |
| Net income per share attributable to DMC Global Inc. stockholders | | | | | | |
| Basic | $ | 0.46 | | | $ | 0.02 | | | $ | 0.20 | | | $ | 0.15 | |
| Diluted | $ | 0.46 | | | $ | 0.02 | | | $ | 0.20 | | | $ | 0.15 | |
(1) For the three and nine months ended September 30, 2020, 30,9672022, 128,145 and 19,39469,846 shares, 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. OnceIf diversified, these contributions of equity awards will be subsequently settled by delivery of cash.
The Company has established a grantor trust commonly known as a “rabbi trust” and contributed certain assets to satisfy the future obligations to participants in the Plan. These assets are subject to potential claims of the Company’s general creditors. The assets held in the trust include unvested restricted stock awards (“RSAs”), vested company stock awards, company-owned life insurance (“COLI”) on certain employees, and money market and mutual funds. Unvested RSAs and common stock held by the trust are reflected in the Condensed Consolidated Balance Sheets within “Treasury stock, at cost, and company stock held for deferred compensation, at par” and are recorded 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 are accounted for at fair value.
Deferred compensation obligations that will be settled in cash are accounted for on an accrual basis in accordance with the terms of the Plan. 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 number of previously vested shares of the Company’s common stock are reflected in the Condensed Consolidated Statements of Stockholders’ Equity and Redeemable Noncontrolling Interest 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.
The balances related to the deferred compensation plan were as follows:
| | | Consolidated Balance Sheet location | | September 30, 2021 | | December 31, 2020 | | Balance Sheet location | | September 30, 2022 | | December 31, 2021 |
| Deferred compensation assets | Deferred compensation assets | | Other assets | | $ | 13,261 | | | $ | 7,596 | | Deferred compensation assets | | Other assets | | $ | 13,337 | | | $ | 13,812 | |
| Deferred compensation obligations | Deferred compensation obligations | | Other long-term liabilities | | $ | 15,695 | | | $ | 11,894 | | Deferred compensation obligations | | Other long-term liabilities | | $ | 14,982 | | | $ | 15,944 | |
|
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, and the revolving loans and term loan under our credit facility and borrowings under our capital expenditure facility, when outstanding, approximate their fair value.
Our U.S. Treasury marketable securities are valued using quoted prices in active markets that are accessible as of the measurement date. Our revolving loans and borrowings under our capital expenditure facility, when outstanding, reset each month at market interest rates. Money market funds and mutual funds of $8,629 as of September 30, 2021 and $4,244 as of December 31, 2020 held to satisfy future deferred compensation obligations are valued based upon the market values of underlying securities. We classify these assets as Level 1 in the fair value hierarchy.
Our commercial paper marketable securitiesforeign currency forward contracts are valued using quoted market prices in non-active markets. Our foreign currency forward contracts are also valued using quoted market prices in non-active markets or are determined using a yield curve model based on current market rates. As a result, we classify commercial paper marketablethese instruments as Level 2 in the fair value hierarchy. Money market funds and mutual funds of $8,379 as of September 30, 2022 and $9,083 as of December 31, 2021 held to satisfy future deferred compensation obligations are valued based upon the market values of underlying securities and foreign currency forward contractsare classified as Level 2 in the fair value hierarchy.
We did not hold any Level 3 assets or liabilities as of September 30, 20212022 or December 31, 2020.2021. However, the fair value measurements of certain assets and liabilities acquired as part of the Arcadia acquisition were based on significant inputs not observable in the market and represent Level 3 measurements within the fair value measurement hierarchy.
Recent Accounting Pronouncements
The Company reviews recent accounting pronouncements on a quarterly basis. We have considered all recent accounting pronouncements issued, but not yet effective, and we do not expect any to have a material effect on the Company’s Condensed Consolidated Financial Statements.
3. BUSINESS COMBINATION
On December 16, 2021, the Company entered into an equity purchase agreement with Arcadia, Inc., a California corporation, the shareholders of Arcadia, Inc. and certain other parties (the “Equity Purchase Agreement”). On December 23, 2021, pursuant to the Equity Purchase Agreement, the Company completed the acquisition of a 60% controlling interest in Arcadia Products, LLC, a Colorado limited liability company resulting from the conversion of Arcadia, Inc. (collectively, “Arcadia”) for closing consideration of $261,000 in cash (excluding $7,654 in acquired cash) and 551,458 shares of its common stock, par value $0.05 per share. A portion of the cash consideration was placed into escrow and is subject to certain post-closing adjustments.
DMC acquired Arcadia as part of its strategy of building a diversified portfolio of industry-leading businesses with differentiated products and services. Arcadia is a leading U.S. supplier of architectural building products, which include exterior and interior framing systems, windows, curtain walls, doors, and interior partitions for the commercial buildings market, and highly engineered windows and doors for the high-end residential real estate market.
The acquisition was funded by the Company through cash and marketable securities, equity, and debt financing. Assets acquired and liabilities assumed have been recorded at their fair values. Certain fair values were determined by management using the assistance of third-party valuation specialists. The valuation methods used to determine the fair value of intangible assets included the income approach—excess earnings method for customer relationships and the income approach—relief from royalty method for the trade name acquired. A number of assumptions and estimates were involved in the application of these valuation methods, including forecasts of revenues, costs of revenues, operating expenses, tax rates, forecasted capital expenditures, customer attrition rate, discount rates and working capital changes.
The following table sets forth the preliminary components of the fair value of the total consideration transferred and preliminary purchase price allocation of the net assets acquired at the date of acquisition, along with the measurement period adjustments that occurred during the nine months ended September 30, 2022. The assets acquired and liabilities assumed exclude Arcadia's right-of-use asset and lease liabilities, respectively, as they have an immaterial impact on the total net assets acquired. Refer to Note 7 “Leases” for additional discussion of lease accounting. The total consideration transferred is still subject to potential adjustment, with any remaining adjustment not expected to impact long-lived asset balances recorded as of September 30, 2022.
| | | | | | | | | | | | | | | | | |
| Preliminary | | Measurement Period Adjustments | | Preliminary |
| December 23, 2021 | | | September 30, 2022 |
Cash, including cash acquired(1) | $ | 268,654 | | | $ | 2,034 | | | $ | 270,688 | |
Equity(2) | 21,716 | | | — | | | 21,716 | |
| Total fair value of consideration transferred | 290,370 | | | 2,034 | | | 292,404 | |
| | | | | |
| Assets acquired: | | | | | |
| Cash and cash equivalents | $ | 7,654 | | | $ | — | | | $ | 7,654 | |
| Accounts receivable | 31,456 | | | — | | | 31,456 | |
| Inventories | 60,503 | | | — | | | 60,503 | |
| Prepaid expenses and other | 2,438 | | | — | | | 2,438 | |
Property, plant and equipment(3) | 17,323 | | | 4,770 | | | 22,093 | |
Goodwill(4) | 141,266 | | | (1,344) | | | 139,922 | |
Intangible assets(5) | 254,500 | | | — | | | 254,500 | |
| Other long-term assets | 122 | | | (36) | | | 86 | |
| Total assets acquired | 515,262 | | | 3,390 | | | 518,652 | |
| Liabilities assumed: | | | | | |
| Accounts payable | 8,792 | | | — | | | 8,792 | |
| Other current liabilities | 22,520 | | | — | | | 22,520 | |
| | | | | |
| | | | | |
| Total liabilities assumed | 31,312 | | | — | | | 31,312 | |
Redeemable noncontrolling interest(6) | 193,580 | | | 1,356 | | | 194,936 | |
| Total assets acquired and liabilities assumed | $ | 290,370 | | | $ | 2,034 | | | $ | 292,404 | |
(1) Cash sources of funding included $150,000 in new term loan debt and $118,654 of cash and marketable securities on hand. During the quarter ended March 31, 2022, working capital estimates at the time of acquisition were finalized. In April 2022, $640 was returned to the Company from the funds previously placed into escrow. During the quarter ended September 30, 2022, the Company paid the prior shareholders of Arcadia $2,674 in additional consideration to compensate for certain tax impacts of the transaction, as provided in the Equity Purchase Agreement.
(2) Equity consideration included 551,458 shares of DMC common stock.
(3) Property, plant and equipment consists of the following:
| | | | | | | | | |
| | | | | |
| | | | |
| Land | $ | 1,500 | | | | | |
| Buildings and improvements | 6,451 | | | | | |
| Manufacturing equipment and tooling | 12,634 | | | | | |
| Furniture, fixtures, and computer equipment | 211 | | | | | |
| Other | 1,297 | | | | | |
| | | | | |
| Total property, plant and equipment | $ | 22,093 | | | | | |
The useful lives of property, plant and equipment are consistent with the Company's accounting policies.
(4) Amounts recorded for goodwill resulting in a tax basis step-up are generally expected to be deductible for tax purposes. Tax deductible goodwill is estimated to be $85,308.
(5) Intangible assets consist of $210,500 of customer relationships, $22,000 of trade name, and $22,000 of customer backlog. During the quarter ended September 30, 2022, the Company reclassified $500 from customer relationships to customer backlog due to changes in purchase price allocation estimates.
(6) Redeemable noncontrolling interest represents 40% of the total fair value of Arcadia upon acquisition.
The final fair value determination of the assets acquired and liabilities assumed will be completed prior to one year from the transaction completion date, consistent with Accounting Standards Codification (“ASC”) 805 Business Combinations ("ASC 805"). Measurement period adjustments will be recognized in the reporting period in which the adjustments are determined and calculated as if the accounting had been completed as of the acquisition date.
Redeemable noncontrolling interest
The limited liability company operating agreement for Arcadia (the “Operating Agreement”) contains a right for the Company to purchase the remaining interest in Arcadia from the minority interest holder on or after the third anniversary of the acquisition closing date (“Call Option”). Similarly, the minority interest holder of Arcadia has the right to sell its remaining interest in Arcadia to the Company on or after the third anniversary of the acquisition closing date (“Put Option”). Both the Call Option and Put Option enable the respective holder to exercise their rights based upon a predefined calculation as included within the Operating Agreement.
The Company initially accounted for the noncontrolling interest at its acquisition date fair value. We determined that both the Call Option and Put Option do not meet the definition of a derivative under ASC 815 Derivatives and Hedging as the Operating Agreement does not allow for contractual net settlement, the options cannot be settled outside the Operating Agreement through a market mechanism, and the underlying shares are deemed illiquid as they are not publicly traded and thus not considered readily convertible to cash. Additionally, the settlement price for both options is based upon a predefined calculation tied to adjusted earnings rather than a fixed price, and the formula is based upon a multiple of Arcadia’s average adjusted earnings for the preceding two fiscal years and its projected adjusted earnings for the then-current fiscal year. As such, we have concluded that the Call Option and Put Option are embedded within the noncontrolling interest and therefore do not represent freestanding instruments.
Given that the noncontrolling interest is subject to possible redemption (with redemption rights that are not entirely within the control of the Company), we have concluded that the noncontrolling interest should be accounted for in accordance with ASC 480 Distinguishing Liabilities from Equity ("ASC 480"). The Company has also concluded that the noncontrolling interest is probable of redemption, as the only criteria for the security to become redeemable is the passage of time. As such, the Company has classified the redeemable noncontrolling interest separate from the stockholders’ equity section in the Condensed Consolidated Balance Sheets.
At each balance sheet date subsequent to acquisition, the carrying value of the redeemable noncontrolling interest has been adjusted to its estimated redemption value as if redemption were to occur at the balance sheet date based upon the predefined calculation in the Operating Agreement described above. This immediate adjustment is charged or credited directly to retained earnings and therefore does not impact the Condensed Consolidated Statements of Operations or Comprehensive Income (Loss). As of September 30, 2022, the Company’s estimated redemption value of the redeemable noncontrolling interest decreased to $194,962 in comparison to our previous estimates at each balance sheet date subsequent to acquisition of $197,196 due to a change in our forecast of adjusted earnings for calendar year 2022. During the three months ended September
30, 2022, the Company recorded an adjustment of $2,256 to decrease the redeemable noncontrolling interest to its estimated redemption value. This adjustment was recorded after ascribing net income and cash distributions attributable to the redeemable noncontrolling interest in accordance with ASC 480.
Promissory Note
In order to equalize after-tax consideration to the redeemable noncontrolling interest holder relative to an alternative transaction structure, immediately following the closing of the acquisition, the Company loaned approximately $24,902 to the redeemable noncontrolling interest holder. The loan was evidenced by an unsecured promissory note, and the loan will be repaid out of proceeds from the sale of the redeemable noncontrolling interest holder’s interests in Arcadia, whether received upon exercise of the Put Option, the Call Option or upon sales to third parties permitted under the terms of the Operating Agreement. The loan must be repaid in full by December 2019,16, 2051 and has been recorded within “Other Assets”in the Condensed Consolidated Balance Sheets.
Unaudited Pro Forma Financial Accounting Standards Board issued aInformation
Pro forma financial information is presented for informational purposes and is not intended to represent or be indicative of the actual results of operations of the combined business that would have been reported had the acquisition of Arcadia been completed at an earlier date, nor is it representative of future operating results of the Company.
ASC 805 requires pro forma adjustments to reflect the effects of fair value adjustments, transaction costs, capital structure changes, the tax effects of such adjustments, and also requires nonrecurring adjustments to be prepared and presented. For the three and nine months ended September 30, 2021, operating results have been adjusted to reflect (a) fair value adjustments related to incremental intangible asset amortization, (b) interest expense with the higher principal and interest rates associated with the Company's new accounting pronouncement regarding accounting forterm loan debt incurred to finance, in part, the acquisition of Arcadia, (c) the effects of integration costs on the results of Arcadia's operations, and (d) the effects of the adjustments on income taxes.
The new standard removes certain exceptions tofollowing unaudited pro forma combined financial information presents combined results of the general principlesCompany and Arcadia. Arcadia’s operating results have been included in ASC 740 Income Taxes and also clarifies and amends existing guidance to provide for more consistent application. The new standard became effectivethe Company’s operating results for the Company in the first quarter of fiscal 2021three and did not have a material impact on our consolidated financial statements.nine months ended September 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2021 | | Nine months ended September 30, 2021 |
| As Reported | | Pro Forma | | As Reported | | Pro Forma |
| Net sales | $ | 67,175 | | | $ | 132,488 | | | $ | 188,271 | | | $ | 371,963 | |
| Net income attributable to DMC Global Inc. stockholders | $ | 403 | | | $ | 5,522 | | | $ | 2,559 | | | $ | 15,965 | |
3.4. 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 adjustwrite down 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 at September 30, 2021:2022:
| | | DynaEnergetics | | NobelClad | | DMC Global Inc. | | Arcadia | | DynaEnergetics | | NobelClad | | DMC Global Inc. |
| Raw materials | Raw materials | $ | 13,865 | | | $ | 8,923 | | | $ | 22,788 | | Raw materials | $ | 14,290 | | | $ | 16,646 | | | $ | 7,517 | | | $ | 38,453 | |
| Work-in-process | Work-in-process | 13,486 | | | 6,808 | | | 20,294 | | Work-in-process | 10,072 | | | 17,652 | | | 8,624 | | | 36,348 | |
| Finished goods | Finished goods | 18,251 | | | 634 | | | 18,885 | | Finished goods | 56,038 | | | 21,380 | | | 129 | | | 77,547 | |
| Supplies | Supplies | — | | | 205 | | | 205 | | Supplies | — | | | — | | | 225 | | | 225 | |
| Inventories | $ | 45,602 | | | $ | 16,570 | | | $ | 62,172 | | |
| Total inventories | | Total inventories | $ | 80,400 | | | $ | 55,678 | | | $ | 16,495 | | | $ | 152,573 | |
Inventories consisted of the following at December 31, 2020:
| | | | | | | | | | | | | | | | | |
| DynaEnergetics | | NobelClad | | DMC Global Inc. |
| Raw materials | $ | 13,250 | | | $ | 11,903 | | | $ | 25,153 | |
| Work-in-process | 7,062 | | | 6,682 | | | 13,744 | |
| Finished goods | 12,806 | | | 669 | | | 13,475 | |
| Supplies | — | | | 201 | | | 201 | |
| Inventories | $ | 33,118 | | | $ | 19,455 | | | $ | 52,573 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Arcadia | | DynaEnergetics | | NobelClad | | DMC Global Inc. |
| Raw materials | $ | 12,168 | | | $ | 15,209 | | | $ | 7,655 | | | $ | 35,032 | |
| Work-in-process | 3,987 | | | 13,672 | | | 10,257 | | | 27,916 | |
| Finished goods | 44,348 | | | 14,998 | | | 1,651 | | | 60,997 | |
| Supplies | — | | | — | | | 269 | | | 269 | |
| Total inventories | $ | 60,503 | | | $ | 43,879 | | | $ | 19,832 | | | $ | 124,214 | |
4.5. PURCHASED INTANGIBLE ASSETS
Our purchased intangible assets consisted of the following as of September 30, 2021:2022: | | | Gross | | Accumulated
Amortization | | Net | | Gross | | Accumulated
Amortization | | Net |
| Core technology | Core technology | $ | 16,052 | | | $ | (14,223) | | | $ | 1,829 | | Core technology | $ | 12,951 | | | $ | (12,693) | | | $ | 258 | |
| Customer relationships | Customer relationships | 36,110 | | | (36,110) | | | — | | Customer relationships | 242,642 | | | (42,016) | | | 200,626 | |
| Customer backlog | | Customer backlog | 22,000 | | | (22,000) | | | — | |
| Trademarks / Trade names | Trademarks / Trade names | 2,069 | | | (2,069) | | | — | | Trademarks / Trade names | 23,751 | | | (2,882) | | | 20,869 | |
| Total intangible assets | Total intangible assets | $ | 54,231 | | | $ | (52,402) | | | $ | 1,829 | | Total intangible assets | $ | 301,344 | | | $ | (79,591) | | | $ | 221,753 | |
Our purchased intangible assets consisted of the following as of December 31, 2020:2021: | | | Gross | | Accumulated
Amortization | | Net | | Gross | | Accumulated
Amortization | | Net |
| Core technology | Core technology | $ | 17,899 | | | $ | (14,234) | | | $ | 3,665 | | Core technology | $ | 15,647 | | | $ | (14,209) | | | $ | 1,438 | |
| Customer relationships | Customer relationships | 37,638 | | | (37,638) | | | — | | Customer relationships | 246,718 | | | (36,047) | | | 210,671 | |
| Customer backlog | | Customer backlog | 21,500 | | | — | | | 21,500 | |
| Trademarks / Trade names | Trademarks / Trade names | 2,194 | | | (2,194) | | | — | | Trademarks / Trade names | 24,037 | | | (2,070) | | | 21,967 | |
| Total intangible assets | Total intangible assets | $ | 57,731 | | | $ | (54,066) | | | $ | 3,665 | | Total intangible assets | $ | 307,902 | | | $ | (52,326) | | | $ | 255,576 | |
The change in the gross value of our purchased intangible assets at September 30, 2022 from December 31, 2020 to September 30, 2021 was primarily due to foreign currency translation and thetranslation. Additionally, there was an adjustment due to recognition of the tax benefit offrom tax deductible goodwill amortization relatedpreviously applied to the 2007 acquisition of our German subsidiaries. Prior to the impairment of thecertain goodwill related to the DynaEnergetics and NobelClad and DynaEnergetics reporting unitsunits. After the goodwill associated with each reporting unit was impaired at December 31, 2015 and September 30, 2017, and December 31, 2015, respectively, the tax benefit of tax amortization
reduced the goodwill balance. After we fully impaired the goodwill, which is only written off for U.S. GAAP purposes, the tax benefit of tax goodwill amortization reduces the gross value of the purchasedother intangible assets related to thisthe historical acquisition.
5.6. CONTRACT LIABILITIES
On occasion,At times, we require customers to make advance payments prior to the shipment of goodstheir orders 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: | | | September 30, 2021 | | December 31, 2020 | | September 30, 2022 | | December 31, 2021 |
| Arcadia | | Arcadia | $ | 26,123 | | | $ | 14,697 | |
| NobelClad | NobelClad | $ | 9,450 | | | $ | 4,450 | | NobelClad | 3,453 | | | 5,881 | |
| DynaEnergetics | DynaEnergetics | 309 | | | 478 | | DynaEnergetics | 454 | | | 474 | |
| Total | $ | 9,759 | | | $ | 4,928 | | |
| Total contract liabilities | | Total contract liabilities | $ | 30,030 | | | $ | 21,052 | |
We generally expect to recognize the revenue associated with contract liabilities over a time period no longer than one year, but unforeseen circumstances can cause delays in shipments associated with contract liabilities. Approximately 78% of the $4,928 recorded as contract liabilities at December 31, 2020 was recorded to net sales during the nine months ended September 30, 2021.
6.
7. LEASES
The Company leases real properties for use in manufacturing and as administrative and sales offices, and also leases automobiles and office equipment. 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. Right of use (ROU)Right-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 classification affecting the pattern of expense recognition.any. 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 present value of future lease payments. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term within the Condensed Consolidated Statement of Operations. Lease and non-lease components within the Company’s lease agreements are accounted for together. Variable lease payments are recognized in the period in which the obligation for those payments is incurred. The Company has no leases in which the Company is the lessor.
Nearly all of the Company’s leasing arrangements are classified as operating leases. ROU asset and lease liability balances were as follows for the periods presented:
| | | September 30, 2021 | | December 31, 2020 | | September 30, 2022 | | December 31, 2021 |
| ROU asset | ROU asset | $ | 11,198 | | | $ | 10,733 | | ROU asset | $ | 50,145 | | | $ | 52,219 | |
| | Current lease liability | Current lease liability | 1,648 | | | 1,741 | | Current lease liability | 6,994 | | | 6,126 | |
| Long-term lease liability | Long-term lease liability | 10,432 | | | 10,066 | | Long-term lease liability | 44,634 | | | 47,000 | |
| Total lease liability | Total lease liability | $ | 12,080 | | | $ | 11,807 | | Total lease liability | $ | 51,628 | | | $ | 53,126 | |
The ROU asset was includedis reported in “Other assets” while the current lease liability wasis reported in “Other current liabilities” and the long-term lease liability wasis reported in “Other long-term liabilities” in the Company’s Condensed Consolidated Balance Sheet.Sheets. Cash paid for operating lease liabilities are recorded as operating cash flows from operating activitiesoutflows in the Company’s Condensed Consolidated Statements of Cash Flows.
Arcadia leases certain office, manufacturing, distribution and warehouse facilities from entities affiliated with the redeemable noncontrolling interest holder and the president of Arcadia. There were eight related party leases in effect as of September 30, 2022, with expiration dates ranging from calendar years 2023 to 2031. As of September 30, 2022, the total ROU asset and related lease liability recognized for related party leases was $29,753 and $30,131, respectively.
For the three months ended September 30, 20212022 and 2020,2021, operating lease costs wereexpense was $2,872 and $1,064, and $1,055, respectively. For the nine months ended September 30, 20212022 and 2020,2021, operating lease costs wereexpense was $8,413 and $3,074, respectively. Related party lease expense for the three and $3,051, respectively. Operating lease costs werenine months ended September 30, 2022 was $1,156 and $3,469, respectively, which is included in the Company’s Condensed Consolidated Statements of Operations.overall operating lease expense. There was no related party lease expense recorded through September 30, 2021. Short term and variable lease costs were not material for the three and nine months ended September 30, 20212022 and 2020.2021.
Certain
8. DEBT
As of September 30, 2022 and December 31, 2021, outstanding borrowings consisted 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.following:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Syndicated credit agreement: | | | |
| U.S. Dollar revolving loan | $ | — | | | $ | — | |
| Term loan | 138,750 | | | 150,000 | |
| | | |
| | | |
| Commerzbank line of credit | — | | | — | |
| Outstanding borrowings | 138,750 | | | 150,000 | |
| Less: debt issuance costs | (2,341) | | | (2,575) | |
| Total debt | 136,409 | | | 147,425 | |
| Less: current portion of long-term debt | (15,000) | | | (15,000) | |
| Long-term debt | $ | 121,409 | | | $ | 132,425 | |
The following table summarizes the weighted average lease terms and discount rates for operating lease liabilities: | | | | | |
| September 30, 2021 |
Weighted average remaining lease term (in years) | 7.71 |
Weighted average discount rate | 5.4 | % |
The following table represents maturities of operating lease liabilities as of September 30, 2021: | | | | | |
Due within 1 year | $ | 1,648 | |
Due after 1 year through 2 years | 2,379 | |
Due after 2 years through 3 years | 2,160 | |
Due after 3 years through 4 years | 2,019 | |
Due after 4 years through 5 years | 1,642 | |
Due after 5 years | 5,067 | |
Total future minimum lease payments | 14,915 | |
Less imputed interest | (2,835) | |
Total | $ | 12,080 | |
7. DEBT
As of September 30, 2021 we had no outstanding borrowings under our credit facility. As of December 31, 2020, outstanding borrowings consisted of the following:
| | | | | | | |
| | | |
Syndicated credit agreement: | | | |
| | | |
| | | |
Capital expenditure facility | | | $ | 11,750 | |
| | | |
Outstanding borrowings | | | 11,750 | |
Less: debt issuance costs | | | (486) | |
Total debt | | | 11,264 | |
Less: current portion of long-term debt | | | (3,125) | |
Long-term debt | | | $ | 8,139 | |
Syndicated Credit Agreement
On March 8, 2018,December 23, 2021, we entered into a five-year $75,000$200,000 syndicated credit agreement (“credit facility”) which replaced in its entirety our prior syndicated credit facility entered into on February 23, 2015. The credit facilityincluded a $150,000 Term Loan, which is with a syndicate of three banks, with KeyBank, N.A. acting as administrative agent. The 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. The 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 agreement provided 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 was amortizable at 12.5%10% of principal per year with a balloon payment for the outstanding balance upon the credit facility maturity date in 2023. In February 2021, we repaid the remaining Capex Facility balance2026, and allows for revolving loans of $11,750.
up to $50,000. The credit facility has a $100,000an accordion feature to increase the commitments by $100,000 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 four banks, with KeyBank, N.A. acting as administrative agent. The credit facility is secured by the assets of DMC including accounts receivable, inventory, and fixed assets, including Arcadia and its subsidiary, as well as guarantees and share pledges by DMC and its subsidiaries.
Borrowings under the $150,000 Term Loan and $50,000 revolving loan limit can be in the form of one-, two-, three-,Adjusted Daily Simple Secured Overnight Financing Rate ("SOFR") loans or six-month LIBOR rateone month Adjusted Term SOFR loans. Additionally, USU.S. 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,rate, an adjusted Federal Funds rate or an adjusted LIBORSOFR rate). LIBORSOFR loans bear interest at the applicable LIBORSOFR 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%).
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 October 22, 2020, in connection with the commencement of our at-the-market offering, we entered into an amendment to the credit facility to waive the requirement that we repay outstanding balances under the credit facility from the proceeds of any equity offering.The waiver applies to at-the-market offerings up to $75 million.
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.
The leverage ratio is defined in the credit facility as the ratio of Consolidated Funded Indebtedness (as defined in the credit facility) on the last day of any trailing four quarter period to Consolidated Pro Forma EBITDA (as defined in the credit facility) for such period. The maximum leverage ratio permitted by our credit facility is 3.25 to 1.0 from the quarter ended September 30, 2022 through the quarter ended March 31, 2023, and 3.0 to 1.0 from the quarter ended June 30, 2023 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 (other than those made with respect to the preferred stock issued under the Operating Agreement), Consolidated Unfunded Capital Expenditures (as defined in the credit facility), and net cash income taxes to the sum of cash interest expense, any dividends on the preferred stock paid in cash, and scheduled principal payments on funded indebtedness. Under our credit facility, the minimum debt service coverage ratio permitted is 1.35 to 1.0.
As of September 30, 2021,2022, 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 of €7,000 for certain European operations. In July 2020, the German Bank Facility was amendedour NobelClad and DynaEnergetics operations in Europe. This line of credit is also used to increase the borrowing capacity from €4,000issue bank guarantees to €7,000. Of the €7,000 borrowing capacity, €4,000 was available ascustomers to secure advance payments made by them. As of September 30, 2022 and December 31, 2021, after considering outstanding letters of credit.
Given that we had no outstanding debt asborrowings under this line of September 30, 2021, our deferred debt issuance costscredit and bank guarantees of $318€2,559 and €2,997 were reported insecured by the “Other assets” line item in our Condensed Consolidated Balance Sheet. Our deferred debt issuance costs of $486 ascredit, respectively. The line of December 31, 2020 were reported incredit has open-ended terms and can be canceled by the “Long-term debt” line item in our Condensed Consolidated Balance Sheet. bank at any time.
Deferred debt issuance costs are being amortized over the remaining term of the credit facility which expires on March 8, 2023.
8. EQUITY OFFERINGS AND PROGRAM
Equity Offering
On May 3, 2021, the Company announced a registered public offering (“Offering”) of its stock under an automatic shelf registration statement on Form S-3ASR filed on May 3, 2021. The Company entered into an underwriting agreement with KeyBanc Capital Markets Inc. (“KeyBanc”), as representative of the underwriters (collectively, the “Underwriters”), pursuant to which the Company agreed to sell 2,500,000 shares of its $0.05 par value common stock to the Underwriters. In addition, the Underwriters were granted an option, exercisable within 30 days, to purchase up to an additional 375,000 shares of common stock to cover over-allotments, if any, on the same terms and conditions.
On May 7, 2021, DMC issued a total of 2,875,000 shares of its common stock, which included the exercise of the over-allotment option, at a market price of $45 per share resulting in gross proceeds of $129,375. Net proceeds from the offering were $123,461, after deducting underwriter fees and other expenses of $5,914. We intend to use the net proceeds from the offering for general corporate purposes, which may include acquisitions. Pending the use of the proceeds as described, we invested the proceeds of the offering in highly liquid marketable securities, including commercial paper and U.S. Treasury securities. Please see discussion of our marketable securities in Note 2.
At-the-Market Equity Program
On October 22, 2020, the Company commenced an at-the-market ("ATM") equity program under its shelf registration statement, which allows it to sell and issue up to $75 million in shares of its common stock from time to time. The Company entered into an Equity Distribution Agreement on October 22, 2020 with KeyBanc relating to the issuance and sale of shares of common stock pursuant to the program. KeyBanc is not required to sell any specific amount of securities but will act as our sales agent using commercially reasonable efforts consistent with its normal trading and sales practices, on mutually agreed terms between KeyBanc and us. There is no specific date on which the ATM equity program will end and there are no minimum purchase requirements. KeyBanc is entitled to compensation for shares sold pursuant to the program in an amount up to 1.5% of the gross proceeds of any shares of common stock sold under the Equity Distribution Agreement.
During the three months ended September 30, 2021, the Company did not sell any shares of common stock through its ATM equity program. During the nine months ended September 30, 2021, the Company sold 397,820 shares of common stock through its ATM equity program for gross proceeds of $25,647 at a weighted average price per share of $64.47. Net proceeds from such sales were $25,262, after deducting commissions paid to the sales agents of approximately $385. Since the inception of the program, the Company has sold 1,006,180 shares of common stock for gross proceeds of $51,779 at a weighted average price per share of $51.46. Total net proceeds from sales through the ATM program have been $51,002. We intend to use the net proceeds from the ATM equity program for general corporate purposes, which may include working capital, debt repayment and potential acquisitions or investments in businesses, products or technologies. Pending the use of the proceeds as described, a portion of the proceeds from the ATM program has been invested in highly liquid marketable securities, including commercial paper and U.S. Treasury securities, while the balance remains in cash. Please see discussion of our marketable securities in Note 2.
9. 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%33%), permanent differences between book and taxable income, income or loss attributable to the redeemable noncontrolling interest holder, and changes to valuation allowances on our deferred tax assets.
Arcadia is treated as a partnership for U.S. tax purposes. With the exception of certain state taxes, income or loss flows through to the shareholders and is taxed at the shareholder level. Tax impacts related to income or loss from Arcadia that are included in consolidated pretax results but are attributable to the redeemable noncontrolling interest holder are not included in the consolidated income tax provision.
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 Statementconsolidated 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 three and nine months ended September 30, 20212022 and September 30, 2020,2021, we did not record any adjustments to previously established valuation allowances, except for adjustments related to the changes in balances of the related deferred tax assets. 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.changes.
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 assessed 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. Nevertheless, ifIf 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 fourth quarter of 2019, our German operating entities commenced a tax audit for fiscal years 2015 through 2017. The audit concluded in the second quarter of 2021, and we recorded additional tax expense of $25 after receiving all material assessments from the German authorities.
10. BUSINESS SEGMENTS
Our business is organized into 2three segments: Arcadia, DynaEnergetics and NobelClad. In December 2021, DMC acquired a 60% controlling interest in Arcadia, a leading U.S. supplier of architectural building products, including storefronts and entrances, windows, curtain walls, doors and interior partitions for the commercial buildings market. Arcadia also supplies the luxury home market with highly engineered steel, aluminum and wood door and window systems. DynaEnergetics designs, manufactures and distributes products utilized by the global oil and gas industry principally for the perforation ofto perforate 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.
Segment information is as follows:
| | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Net sales | | | | | | | | |
| Net sales: | | Net sales: | | | | | | | |
| Arcadia | | Arcadia | $ | 80,697 | | | $ | — | | | $ | 225,127 | | | $ | — | |
| DynaEnergetics | DynaEnergetics | $ | 44,237 | | | $ | 34,201 | | | $ | 124,677 | | | $ | 111,065 | | DynaEnergetics | 70,372 | | | 44,237 | | | 186,776 | | | 124,677 | |
| NobelClad | NobelClad | 22,938 | | | 21,080 | | | 63,594 | | | 60,983 | | NobelClad | 23,396 | | | 22,938 | | | 67,109 | | | 63,594 | |
| Net sales | Net sales | $ | 67,175 | | | $ | 55,281 | | | $ | 188,271 | | | $ | 172,048 | | Net sales | $ | 174,465 | | | $ | 67,175 | | | $ | 479,012 | | | $ | 188,271 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Income (loss) before income taxes: | | | | | | | |
| Arcadia | $ | 3,742 | | | $ | — | | | $ | 3,521 | | | $ | — | |
| DynaEnergetics | 11,978 | | | 1,585 | | | 26,585 | | | 6,307 | |
| NobelClad | 2,505 | | | 3,620 | | | 5,690 | | | 8,595 | |
| Segment operating income | 18,225 | | | 5,205 | | | 35,796 | | | 14,902 | |
| | | | | | | |
| Unallocated corporate expenses | (2,939) | | | (2,499) | | | (10,490) | | | (6,903) | |
| Unallocated stock-based compensation* | (1,885) | | | (1,569) | | | (5,883) | | | (4,904) | |
| Other income (expense), net | 120 | | | (198) | | | (35) | | | 304 | |
| Interest expense, net | (1,771) | | | (14) | | | (4,058) | | | (230) | |
| Income before income taxes | $ | 11,750 | | | $ | 925 | | | $ | 15,330 | | | $ | 3,169 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Operating income | | | | | | | |
| DynaEnergetics | $ | 1,585 | | | $ | 2,171 | | | $ | 6,307 | | | $ | 3,886 | |
| NobelClad | 3,620 | | | 2,483 | | | 8,595 | | | 5,941 | |
| Segment operating income | 5,205 | | | 4,654 | | | 14,902 | | | 9,827 | |
| | | | | | | |
| Unallocated corporate expenses | (2,499) | | | (1,594) | | | (6,903) | | | (5,851) | |
| Stock-based compensation | (1,569) | | | (1,595) | | | (4,904) | | | (4,154) | |
| Other (expense) income, net | (198) | | | (148) | | | 304 | | | (118) | |
| Interest expense, net | (14) | | | (170) | | | (230) | | | (564) | |
| Income (loss) before income taxes | $ | 925 | | | $ | 1,147 | | | $ | 3,169 | | | $ | (860) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Depreciation and amortization: | | | | | | | |
| Arcadia | $ | 7,966 | | | $ | — | | | $ | 34,818 | | | $ | — | |
| DynaEnergetics | 1,957 | | | 2,012 | | | 5,908 | | | 6,095 | |
| NobelClad | 899 | | | 967 | | | 2,725 | | | 2,851 | |
| Segment depreciation and amortization | 10,822 | | | 2,979 | | | 43,451 | | | 8,946 | |
| Corporate and other | 104 | | | 102 | | | 281 | | | 277 | |
| Consolidated depreciation and amortization | $ | 10,926 | | | $ | 3,081 | | | $ | 43,732 | | | $ | 9,223 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Depreciation and amortization | | | | | | | |
| DynaEnergetics | $ | 2,012 | | | $ | 1,866 | | | $ | 6,095 | | | $ | 5,410 | |
| NobelClad | 967 | | | 879 | | | 2,851 | | | 2,594 | |
| Segment depreciation and amortization | 2,979 | | | 2,745 | | | 8,946 | | | 8,004 | |
| Corporate and other | 102 | | | 75 | | | 277 | | | 239 | |
| Consolidated depreciation and amortization | $ | 3,081 | | | $ | 2,820 | | | $ | 9,223 | | | $ | 8,243 | |
The disaggregation of revenue earned from contracts with customers based on the geographic location of the customer is as follows. For Arcadia, net sales have been presented consistent with United States regional definitions as provided by the American Institute of Architects.
Arcadia
| | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended | | | | |
| | September 30, 2022 | | September 30, 2022 | | | | |
| West | $ | 63,281 | | | $ | 176,288 | | | | | |
| South | 12,139 | | | 27,362 | | | | | |
| Northeast | 2,958 | | | 11,880 | | | | | |
| Midwest | 2,319 | | | 9,597 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total Arcadia | $ | 80,697 | | | $ | 225,127 | | | | | |
DynaEnergetics | | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| United States | United States | $ | 36,453 | | | $ | 23,324 | | | $ | 96,316 | | | $ | 80,931 | | United States | $ | 55,999 | | | $ | 36,543 | | | $ | 146,297 | | | $ | 96,316 | |
| Canada | Canada | 2,798 | | | 1,856 | | | 9,304 | | | 2,504 | | Canada | 4,341 | | | 2,798 | | | 14,453 | | | 9,304 | |
| Indonesia | | Indonesia | 1,051 | | | 240 | | | 1,903 | | | 933 | |
| Egypt | Egypt | 671 | | | 388 | | | 2,398 | | | 2,642 | | Egypt | 652 | | | 671 | | | 3,120 | | | 2,398 | |
| India | | India | 615 | | | 243 | | | 4,625 | | | 904 | |
| Oman | Oman | 665 | | | 1,148 | | | 2,117 | | | 1,842 | | Oman | 704 | | | 665 | | | 2,695 | | | 2,117 | |
| Rest of the world | 3,650 | | | 7,485 | | | 14,542 | | | 23,146 | | |
| | Rest of the world | | Rest of the world | 7,010 | | | 3,077 | | | 13,683 | | | 12,705 | |
| Total DynaEnergetics | Total DynaEnergetics | $ | 44,237 | | | $ | 34,201 | | | $ | 124,677 | | | $ | 111,065 | | Total DynaEnergetics | $ | 70,372 | | | $ | 44,237 | | | $ | 186,776 | | | $ | 124,677 | |
NobelClad
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| United States | $ | 9,120 | | | $ | 11,033 | | | $ | 29,055 | | | $ | 30,448 | |
| Canada | 3,161 | | | 1,254 | | | 6,952 | | | 3,985 | |
| Germany | 2,055 | | | 761 | | | 3,215 | | | 1,539 | |
| China | 1,100 | | | 892 | | | 3,467 | | | 3,775 | |
| Sweden | 1,096 | | | 494 | | | 2,179 | | | 676 | |
| United Arab Emirates | 1,003 | | | 929 | | | 2,705 | | | 2,030 | |
| Australia | 844 | | | 576 | | | 1,499 | | | 1,171 | |
| India | 742 | | | 299 | | | 3,007 | | | 1,371 | |
| South Korea | 672 | | | 328 | | | 1,510 | | | 1,426 | |
| Norway | 508 | | | 265 | | | 1,087 | | | 757 | |
| France | 472 | | | 509 | | | 1,625 | | | 1,929 | |
| Netherlands | 357 | | | 507 | | | 1,464 | | | 1,628 | |
| Italy | 143 | | | 831 | | | 840 | | | 1,268 | |
| Saudi Arabia | — | | | 242 | | | 1,995 | | | 310 | |
| Russia* | — | | | 1,519 | | | 191 | | | 3,586 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Rest of the world | 2,123 | | | 2,499 | | | 6,318 | | | 7,695 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total NobelClad | $ | 23,396 | | | $ | 22,938 | | | $ | 67,109 | | | $ | 63,594 | |
NobelClad
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| United States | $ | 11,033 | | | $ | 10,589 | | | $ | 30,448 | | | $ | 30,094 | |
| Russia | 1,519 | | | — | | | 3,586 | | | — | |
| Canada | 1,254 | | | 1,985 | | | 3,985 | | | 5,446 | |
| Singapore | 1,009 | | | 32 | | | 1,009 | | | 857 | |
| United Arab Emirates | 929 | | | 310 | | | 2,030 | | | 2,930 | |
| China | 892 | | | 1,448 | | | 3,775 | | | 1,543 | |
| Italy | 831 | | | 301 | | | 1,268 | | | 685 | |
| Germany | 761 | | | 982 | | | 1,539 | | | 2,770 | |
| Australia | 576 | | | 587 | | | 1,171 | | | 1,193 | |
| France | 509 | | | 300 | | | 1,929 | | | 2,392 | |
| Netherlands | 507 | | | 361 | | | 1,628 | | | 1,276 | |
| Sweden | 494 | | | 541 | | | 676 | | | 1,097 | |
| Rest of the world | 2,624 | | | 3,644 | | | 10,550 | | | 10,700 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total NobelClad | $ | 22,938 | | | $ | 21,080 | | | $ | 63,594 | | | $ | 60,983 | |
*Future sales to Russia have been indefinitely suspended due to the ongoing conflict in Ukraine.
During the three months ended September 30, 2021, one customer in our DynaEnergetics segment accounted for approximately 11% of consolidated net sales. During the three months ended September 30, 2020, one customer in our DynaEnergetics segment accounted for approximately 11% of consolidated net sales. During theand nine months ended September 30, 2022 and 2021, no single customer accounted for greater than 10% of consolidated net sales. During the nine months ended September 30, 2020, one customer in our DynaEnergetics segment accounted for approximately 12% of consolidated net sales. As of September 30, 2021,2022, one customer in our DynaEnergetics segmentcustomer accounted for approximately 12%greater than 10% of consolidated accounts receivable. As of December 31, 20202021, no single customer accounted for greater than 10% of consolidated accounts receivable.
11. 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 the Canadian dollar, and, to a lesser extent, other currencies, arising from inter-companyintercompany 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 income (expense) income,, net” within our Condensed Consolidated Statements of Operations.
We execute derivatives with a specialized foreign exchange brokerage firm as well as other large financial institutions. 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 September 30, 20212022 and December 31, 2020,2021, the net notional amountsamount of the forward currency contracts the Company held were $11,746$8,591 and $2,092,$13,032, respectively. At September 30, 20212022 and December 31, 2020,2021, the fair values of outstanding foreign currency forward contracts were $0.
The following table presents the location and amount of net losses(losses) from hedging activities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| Derivative | Statements of Operations Location | 2021 | | 2020 | | 2021 | | 2020 |
| Foreign currency contracts | Other (expense) income, net | $ | (253) | | | $ | (1,045) | | | $ | (187) | | | $ | (917) | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| Derivative | Statements of Operations Location | 2022 | | 2021 | | 2022 | | 2021 |
| Foreign currency contracts | Other income (expense), net | $ | (637) | | | $ | (253) | | | $ | (789) | | | $ | (187) | |
| | | | | | | | |
12. 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.
Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent 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.results except as set forth below:
13. RESTRUCTURING EXPENSES AND ASSET IMPAIRMENTSWage and Hour Matters
DuringFelipe v. Arcadia, Inc. and One Stop Employment Services, Inc. (“One Stop”). This complaint was filed on October 22, 2021 in Los Angeles Superior Court and purports to allege a class action on behalf of all non-exempt California employees who worked on behalf of One Stop or Arcadia at any time during the first quarterfour years preceding the date of 2021, NobelClad recorded an accrual for additional severance liabilities of $116the complaint. One Stop is a staffing agency which wereprovides temporary workers, including to Arcadia. The complaint states claims under California’s labor laws and under its general Unfair Business Practices Act, California Business & Professions Code section 17200. The plaintiff has subsequently dismissed the class action claims without prejudice, acknowledging that Arcadia’s arbitration agreement likely bars such class claims. The plaintiff also filed a separate action under California’s Private Attorneys General Act (“PAGA”) alleging essentially the same wage and hour violations. This action included other Arcadia employees. In Viking River Cruises, Inc. versus Moriana, the U.S. Supreme Court concluded that arbitration agreements may bar representative PAGA claims. However, Viking River left open certain state law issues, which the California Supreme Court has agreed to with local labor authorities for employees terminated as part of closing manufacturing operations in France in 2018.address. Currently, Felipe’s PAGA representative claims are stayed, and will likely remain stayed until a California Supreme Court ruling. The plaintiff has announced the intent to commence arbitration on individual claims, but no claims have yet been filed.
During the third quarterMayorga v. Arcadia, Inc. This complaint was filed on November 15, 2021 in Los Angeles Superior Court. It purported to allege a class action on behalf of 2020, DynaEnergetics sold its Tyumen, Siberia production facility to a third-party for $448, which was equal to the carrying valueall of the assets held for sale.Company’s non-exempt California employees who worked at the Company within four years before the date the complaint was filed. It asserts claims substantially similar to those asserted in the Felipe case but does not include One Stop as a defendant. The plaintiff amended his complaint to delete class action claims and any individual non-PAGA claims. Accordingly, plaintiff’s complaint is now limited to PAGA collective action claims. As in Felipe, those PAGA representative claims are currently stayed and will likely remain stayed until the California Supreme Court addresses the state law issues left open by the U.S. Supreme Court’s decision in Viking River Cruises, Inc. versus Moriana. The plaintiff has however commenced arbitration on a solely individual basis of his wage and hour claims. The arbitral body has appointed an arbitrator to adjudicate those claims and a hearing has been set in June 2023. The remaining Mayorga PAGA representative claims have now been combined with the Felipe case.
DuringArcadia intends to vigorously defend against the second quarter of 2020 the COVID-19 pandemic-related collapse in oilFelipe and gas demand led to a downturn in well completions and the corresponding demand for DynaEnergetics’ products. As a result, DynaEnergetics recorded asset impairment charges of $1,181 on certain 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 respective workforces during the quarter. Finally, DynaEnergetics continued activities to prepare its Tyumen, Siberia facility for sale.
During the first quarter of 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 dueactions. Due to the COVID-19 pandemic. The workforce reduction impacted full-time, part-timenature of these matters and temporary direct-labor rolesinherent uncertainties, it is not possible to provide an evaluation of the likelihood of an unfavorable outcome or an estimate of the amount or range of potential loss, if any. Further, under the Equity Purchase Agreement, certain amounts have been placed in manufacturing and assembly at DynaEnergetics as well as general and administrative positions at DynaEnergetics, NobelClad, and at DMC’s corporate office.
Total restructuring and impairment charges incurred forescrow pending resolution of these programs are as follows and are reported in the “Restructuring expenses and asset impairments” line item in our Condensed Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2021 |
| Severance | | | | | | | | Other Exit Costs | | Total |
| | | | | | | | | | | |
| NobelClad | $ | 116 | | | | | | | | | $ | 11 | | | $ | 127 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total | $ | 116 | | | | | | | | | $ | 11 | | | $ | 127 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2020 |
| Severance | | | | Contract Termination Costs | | | | Other Exit Costs | | Total |
| DynaEnergetics | $ | 109 | | | | | $ | 8 | | | | | $ | 16 | | | $ | 133 | |
| NobelClad | — | | | | | — | | | | | 10 | | | 10 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total | $ | 109 | | | | | $ | 8 | | | | | $ | 26 | | | $ | 143 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2020 |
| Severance | | Asset Impairment | | Contract Termination Costs | | Equipment Moving Costs | | Other Exit Costs | | Total |
| DynaEnergetics | $ | 936 | | | $ | 1,181 | | | $ | 19 | | | $ | 126 | | | $ | 660 | | | $ | 2,922 | |
| NobelClad | 244 | | | — | | | — | | | — | | | 20 | | | 264 | |
| Corporate | 119 | | | — | | | — | | | — | | | — | | | 119 | |
| | | | | | | | | | | |
| Total | $ | 1,299 | | | $ | 1,181 | | | $ | 19 | | | $ | 126 | | | $ | 680 | | | $ | 3,305 | |
During the nine months ended September 30, 2021, the changes to the restructuring liability associated with these programs is summarized below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | Net expense | | Payments and Other Adjustments | | Currency Adjustments | | September 30, 2021 |
| Severance | $ | 958 | | | $ | 116 | | | $ | (56) | | | $ | (57) | | | $ | 961 | |
| | | | | | | | | |
| | | | | | | | | |
| Other exit costs | — | | | 11 | | | (11) | | | — | | | — | |
| Total | $ | 958 | | | $ | 127 | | | $ | (67) | | | $ | (57) | | | $ | 961 | |
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 statementsConsolidated 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, 2020.2021.
Unless stated otherwise, all currency amountsdollar figures are presented in thousands of U.S. dollars (000s).
Overview
General
DMC Global Inc. (“DMC”) operates two technical productis a diversified holding company. Our innovative businesses provide differentiated products and process business segments serving the energy,services to niche industrial and infrastructurecommercial markets around the world. DMC’s objective is to identify well-run businesses and strong management teams and support them with long-term capital and strategic, legal, technology and operating resources. DMC’s culture is to foster local innovation versus centralized control. We help our portfolio companies grow core businesses, launch new initiatives, upgrade technologies and systems to support their long-term strategy, and make acquisitions that improve their competitive positions and expand their markets. These segments,Today, DMC’s portfolio consists of Arcadia, DynaEnergetics, and NobelClad, operate globally through an international networkwhich collectively address the building products, energy, industrial processing and transportation markets. Based in Broomfield, Colorado, DMC trades on Nasdaq under the symbol “BOOM.”
Arcadia
On December 23, 2021, DMC completed the acquisition of manufacturing, distribution and sales facilities.
Our diversified segments each provide a suite of unique technical products to niche sectors60% of the global energy, industrialmembership interests in Arcadia Products, LLC, a Colorado limited liability company resulting from the conversion of Arcadia, Inc. (collectively, “Arcadia”). Arcadia is a leading U.S. supplier of architectural building products, which include exterior and infrastructure markets,interior framing systems, windows, curtain walls, doors, and each has established a strong or leading position ininterior partitions for the markets in which it participates. With an underlying focus on generating free cash flow, our objective iscommercial buildings market; and highly engineered windows and doors for the high-end residential real estate market.
Cost of products sold for Arcadia includes the cost of aluminum, paint, and other raw materials used to sustainmanufacture windows, curtain walls, doors, and grow the market shareinterior partitions as well as employee compensation and benefits, manufacturing facility lease expense, depreciation expense of our businesses through increased market penetration, development of new applications,property, plant and researchequipment related to manufacturing, supplies 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.other manufacturing overhead expenses.
DynaEnergetics
DynaEnergetics designs, manufactures and distributes products utilized by the global oil and gas industry principally for the perforation ofto perforate oil and gas wells. These products are sold to oilfield service companies in the U.S., Europe, Canada, Africa, the Middle East, 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 toWell completion operations are increasingly complex, well completion operations, which in turn has increased the demand for high qualityintrinsically-safe, reliable and technically advanced perforating products.systems.
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.
NobelClad
NobelClad produces 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 $42,867$48,019 at September 30, 20212022 from $39,884$41,181 at December 31, 2020.2021.
Cost of products sold for NobelClad includes the cost of metals, explosive powders and alloysother raw materials used to manufacture clad metal plates the cost of explosives,as well as employee compensation and benefits, freight in, outside processing costs, depreciation of manufacturing facilities and equipment, manufacturing facility lease expense, supplies and other manufacturing overhead expenses.
Employee Retention Credit
In the first quarter of 2021, under provisions of legislation enacted in December 2020 the Company became eligible for the Employee Retention Credit (“ERC”) under the Coronavirus Aid, Relief, and Economic Security Act, as amended (“CARES Act”). As a result of the new legislation, the Company was able to claim a refundable tax credit equal to 70% of the qualified wages theyit paid to employees duringfor portions of calendar year 2021. The ERC favorably impacted the firstfinancial statement results of the Company for the three and second quartersnine months ended September 30, 2021, as described further in the “Consolidated Results of Operations” section below. The ERC had no impact on the financial statement results of the Company for the three and nine months ended September 30, 2022.
Factors Affecting Results
•Consolidated sales were $174,465 in the third quarter of 2022. Excluding Arcadia, third quarter sales were $93,768, an increase of 40% versus the third quarter of 2021. The improved performance primarily was driven by higher energy prices and a growing reliance on North American oil and gas, which has led to increased drilling and well completion activity in North America and increased sales at DynaEnergetics.
•Arcadia reported sales of $80,697 in the third quarter of 2022, representing a sequential increase of 6%. The increase was largely attributable to higher customer pricing in response to higher base aluminum metal prices experienced throughout a significant portion of 2022, as well as increases in other input costs.
•DynaEnergetics sales of $70,372 in the third quarter of 2022 increased 59% compared with the third quarter of 2021 limiteddue to $10 per employee per quarter. Thus,improved oil and gas demand, which led to higher North American drilling and well completions, and increased demand and improved pricing for DynaEnergetics’ DS perforating systems. DynaEnergetics’ international sales also improved, increasing 117% compared with the maximum ERC amount availablethird quarter of 2021.
•NobelClad sales of $23,396 in the third quarter of 2022 increased 2% compared with the third quarter of 2021 reflecting increased shipments out of backlog. The increase in NobelClad 2022 sales was partially offset by the weakening of the Euro compared to the CompanyUnited States Dollar.
•Consolidated gross profit was $7 per employee during29% in the first three quartersthird quarter of 2022 versus 25% in the third quarter of 2021. The improvement compared to the prior year primarily was due to the acquisition of Arcadia, which had a higher gross profit percentage than DMC’s other business units. The impact of higher sales volume, primarily increases in unit sales of DS perforating systems at DynaEnergetics, on fixed manufacturing overhead expenses also contributed to the improved performance. These favorable impacts were partially offset by higher material and other input costs at each business segment. Additionally, the 2021 third quarter gross profit was favorably impacted by the receipt of $1,800 ERC under the CARES Act.
•Consolidated selling, general and administrative (SG&A) expenses were $30,544 in the third quarter of 2022 compared with $15,314 in the third quarter of 2021. Arcadia’s incremental selling, general and administrative expenses were $12,917 in the third quarter of 2022. The year-over-year increase also was attributable to higher salaries, benefits, and other-payroll related costs including variable incentive compensation and stock-based compensation expense. Additionally, SG&A in the third quarter of 2021 included receipt of $769 of ERC under the CARES Act.
•Cash of $18,486 at September 30, 2022 decreased $12,324 from $30,810 at December 31, 2021. The decrease in cash primarily related to principal and interest payments on the Company’s credit facility and funding working capital at DynaEnergetics and Arcadia. Both businesses increased their investments in inventory due to rising raw material prices, longer-lead times and continued sales volume growth.
Outlook
We remain in a period of volatile raw material and other input costs as well as continued supply chain disruptions and challenges. Each of our businesses have been and may continue to be impacted by high raw material prices, the availability of labor, increased wages, and supply chain disruptions such as longer lead times related to the procurement of raw materials.
Factors Affecting Results
•Consolidated sales of $67,175In North America, well completion activity increased 3% versus the second quarter of 2021 and 22% versus the third quarter of 2020. DynaEnergetics reported a 19% sequential increase in unit sales of its fully integrated and factory-assembled DS perforating systems in North America. The increase was partially offset by supply chain bottlenecks that impacted certain international orders at both DynaEnergetics and NobelClad. The year-over-year increase in consolidated sales primarily was due to a recovery in energy demand, North American drilling and well completions activity and sales at DynaEnergetics, which has been severely impacted by the COVID-19 pandemic.
•DynaEnergetics sales of $44,237 in the third quarter of 2021 increased 5% compared2022 which positively impacted DynaEnergetics’ end customers’ activity levels. These conditions, along with the second quarterattainment of 2021 due to a recovery in energy demand and prices, whichhigher market share, have led to higher North American drilling and well completions, and increased sales of DynaEnergetics’ DS perforating systems. The increase in North America was offset by a slowdown in international sales volume driven by supply chain disruptions and travel restrictions. Sales increased 29% compared with the third quarter of 2020, which was severely impacted by the COVID-19 pandemic.
•NobelClad’s sales of $22,938 in the third quarter of 2021 decreased 1% compared to the second quarter of 2021 primarily due to shipping and supply chain bottlenecks and increased 9% compared with the third quarter of 2020 reflecting increased shipments of projects out of backlog.
•Consolidated gross profit was 25% in the third quarter of 2021 versus 26% in the second quarter of 2021 and 25% in the third quarter of 2020. Gross profit was flat versus last year as the third quarter of 2021 and reflects receipt of $1,800 ERC under the CARES Act, while the third quarter of 2020 benefited from higher-margin international sales at DynaEnergetics that were $4.6 million greater than this year’s third quarter.
•Consolidated selling, general and administrative expenses were $15,314 in the third quarter of 2021 compared with $11,616 in the third quarter of 2020. The increase primarily was due to higher litigation expenses related to patent enforcement actions against companies that we believe infringe on DynaEnergetics’ patents, restoration of variable compensation, and resumption of business-related travel. Thesecontinued increases were partially offset by receipt of $769 ERC under the CARES Act.
•Restructuring expenses and asset impairments of $143 in the third quarter of 2020 primarily related to costs associated with the sale of the Tyumen, Siberia manufacturing facility.
•Cash and marketable securities of $181,952 increased $128,029 from $53,923 at December 31, 2020. The increase primarily relates to proceeds from our registered public equity offering in May 2021 and under our at-the-market equity offering program (“ATM equity program”).
Outlook
Supply chain disruptions and travel restrictions challenged the international operations of both DMC businesses during the third quarter of 2021. As a result, consolidated sales were below our expectations. DynaEnergetics’ international sales were down $2.8 million sequentially versus the $7.4 million reported in second quarter; and at NobelClad, disruptions in global metals supplies slowed activity at its U.S. and European manufacturing facilities.
We remain in a period of rising material and labor costs at both DynaEnergetics and NobelClad; both of which could also be impacted by supply-chain disruptions and availability of direct labor. NobelClad was awarded an $8,800 order during the second quarter of 2021 for titanium clad plates that will be used to fabricate specialized equipment for a large purified terephthalic acid (PTA) plant. The plant was engineered in Europe, will be built in Southwest Asia and will include titanium-clad equipment fabricated in China. The clad plates, which will be used to fabricate pressure vessels and heat exchangers, are being manufactured at NobelClad’s production facility in Mt. Braddock, Pennsylvania. This large order should help offset the pandemic-related downturn in NobelClad’s base repair and maintenance business. However, receipt of the raw materials required to produce the order has been delayed due to supply chain bottlenecks, and while NobelClad still expects to receive the materials and fulfil the order during the fourth quarter, there remains a risk that some, or all, of the shipment will occur after year end.
In North America, rising crude prices led to higher well completion activity in the third quarter of 2021, which drove a strong increase in unit sales of DynaEnergetics’ fully integrated and factory-assembled DS perforating systems. However, pricing for products and services remained weak. Additionally, rising material and labor costs combined with availability of
direct labor are negatively impacting the recovery in DynaEnergetics. As market conditions continue to improveWe believe well completion activity and operators implement their 2022 budgets, we believecustomer pricing will beginremain resilient. DynaEnergetics has instituted price increases over the past twelve months to improve as well. We expectoffset higher labor and material costs. DynaEnergetics will be among the first to benefit from strengthening prices, as it offers a highly differentiated product line. Factory-assembledline, and its factory-assembled DS perforating systems are delivered just in time to the wellsite, eliminating customer assembly operations and requiring fewer people on location.
In the fourth quarter of 2021, DynaEnergetics announced a 5% price increase that will go into effect November 22, 2021. The increase was implemented to offset higher labor and material costs, as well as the anticipated wind down of the CARES Act. DynaEnergetics expects to implement additional increases during 2022 as it seeks to return margins to levels that reflect the inherent value of its products.
We believe many of the pre-wired carriers in the market incorporate features that violate DynaEnergetics patents, and we are takingcontinuing to take aggressive legal action against the companies that make these products. DynaEnergetics has made significant investments in technologies and products that have improved the safety, efficiency and performance of its customers’ well completions, and have enhanced the effectiveness and profitability of the industry as a whole. Our patent strategy is designed to protect these investments and provide transparency so others can innovate without violating our intellectual property. These lawsuits have increased our general and administrative expenses, in the first nine months of 2021, and we expect these costs to be ongoing throughout the remainder of 2021 and into 2022.
InArcadia serves the third quarter of 2021, NobelClad introduced DetaPipe™, a high-performance clad-pipe solution forcommercial building market in the chemicalwestern and metal-processing markets. This product offering issouthwestern United States, and the high-end residential market across the United States. Both commercial and residential operations have built substantial order backlogs and are benefiting from relatively strong markets, which collectively are expected to provide customers with a better-performing, cost-effective alternativelead to solid zirconium or titanium piperesilient financial performance. In addition, we expect the building products industry to remain strong, particularly in their high-pressure, high temperature processing environments.
In March 2021, provisions of legislation modifiedArcadia’s core geographic regions and extendedend markets. We are beginning the ERC underprocess to design and install new finishing capacity to increase manufacturing throughput. We expect the CARES Act through December 31, 2021 for eligible companies. Under this extension, we were able to claim the refundable tax credit for the quarter ended September 30, 2021, but at this time there is no guarantee that wefinishing capacity will be able to claimoperational next year. The design and implementation of a new enterprise resource planning system is also underway and will improve operating efficiencies and enhance the creditbuying experience for the quarter ended December 31, 2021. This could negatively impact our gross profit marginArcadia’s commercial and operating income in the fourth quarter of 2021.
From time to time, we also may continue to use our ATM equity program, which commenced in October 2020, to raise additional capital efficiently and responsibly. We did not sell shares under our ATM equity program during the second or third quarters of 2021. During the first quarter of 2021, we sold 397,820 shares of common stock at a weighted average price per share of $64.47 through our ATM equity program and received net proceeds of $25,262. In addition to sales under our ATM equity program, during the second quarter of 2021 we issued a total of 2,875,000 shares of our common stock through a registered public offering at a market price of $45 per share and received net proceeds of $123,461.residential customers.
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 or loss plus or minus net interest, taxes, depreciation and amortization. Adjusted EBITDA excludes from EBITDA stock-based compensation, restructuring expenses and asset 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). Adjusted EBITDA attributable to DMC Global Inc. excludes the adjusted EBITDA attributable to the 40% redeemable noncontrolling interest in Arcadia. For our business segments, Adjusted EBITDA is defined as operating income (loss) plus depreciation, amortization, allocated stock-based compensation, restructuring expenses and asset impairment charges and, when appropriate, other items that management does not utilize in assessing operating performance. 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.
Adjusted operating income (loss) is defined as operating income (loss) plus restructuring and impairment charges and, when appropriate, other items that management does not utilize in assessing DMC’s operating performance.
Adjusted net income (loss) is defined as net income (loss) attributable to DMC Global Inc. stockholders plus restructuring expenses and asset impairment charges and, when appropriate, other items that management does not utilize in assessing DMC’s operating performance. Adjusted diluted earnings per share is defined as diluted earnings per share attributable to DMC Global Inc. stockholders (exclusive of adjustment of redeemable noncontrolling interest) plus restructuring expenses and asset impairment charges and, when appropriate, other items that management does not utilize in assessing DMC’s operating performance.
Adjusted operating income (loss), adjusted net income (loss), and adjusted diluted earnings per share are presented because management believes these measures are useful to understand the effects of restructuring, impairment, and impairmentother non-recurring charges on DMC’s operating income (loss), net income (loss) and diluted earnings per share, respectively.
Net cashdebt is a non-GAAP measure we use to supplement information in our Condensed Consolidated Financial Statements. We define net cashdebt as total cash, cash equivalents and marketable securitiesdebt less total debt.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 suggest that such measures be considered in isolation or as a substitute for, or as superior to, DMC’s GAAP information, and investors are cautioned that the non-GAAP financial measures are limited in their usefulness. BecauseGiven not all companies use identical calculations, DMC’s presentation of non-GAAP financial measures may not be comparable to similarly titled measures of other companies.
Consolidated Results of Operations
Three months ended September 30, 20212022 compared with three months ended September 30, 20202021
| | | Three months ended September 30, | | | Three months ended September 30, | | |
| | 2021 | | 2020 | | $ change | | % change | | 2022 | | 2021 | | $ change | | % change | |
| Net sales | Net sales | $ | 67,175 | | | 55,281 | | | $ | 11,894 | | | 22 | % | Net sales | $ | 174,465 | | | $ | 67,175 | | | $ | 107,290 | | | 160 | % | |
| Gross profit | Gross profit | 16,662 | | | 13,593 | | | 3,069 | | | 23 | % | Gross profit | 51,338 | | | 16,662 | | | 34,676 | | | 208 | % | |
| Gross profit percentage | Gross profit percentage | 24.8 | % | | 24.6 | % | | Gross profit percentage | 29.4 | % | | 24.8 | % | | |
| COSTS AND EXPENSES: | COSTS AND EXPENSES: | | COSTS AND EXPENSES: | | |
| General and administrative expenses | General and administrative expenses | 9,721 | | | 6,911 | | | 2,810 | | | 41 | % | General and administrative expenses | 19,796 | | | 9,721 | | | 10,075 | | | 104 | % | |
| % of net sales | % of net sales | 14.5 | % | | 12.5 | % | | % of net sales | 11.3 | % | | 14.5 | % | | |
| Selling and distribution expenses | Selling and distribution expenses | 5,593 | | | 4,705 | | | 888 | | | 19 | % | Selling and distribution expenses | 10,748 | | | 5,593 | | | 5,155 | | | 92 | % | |
| % of net sales | % of net sales | 8.3 | % | | 8.5 | % | | % of net sales | 6.2 | % | | 8.3 | % | | |
| Amortization of purchased intangible assets | Amortization of purchased intangible assets | 211 | | | 369 | | | (158) | | | (43 | %) | Amortization of purchased intangible assets | 7,385 | | | 211 | | | 7,174 | | | 3,400 | % | |
| % of net sales | % of net sales | 0.3 | % | | 0.7 | % | | % of net sales | 4.2 | % | | 0.3 | % | | |
| | Restructuring expenses and asset impairments | — | | | 143 | | | (143) | | | (100 | %) | |
| Restructuring expenses | | Restructuring expenses | 8 | | | — | | | 8 | | | — | % | |
| | Operating income | Operating income | 1,137 | | | 1,465 | | | (328) | | | (22 | %) | Operating income | 13,401 | | | 1,137 | | | 12,264 | | | 1,079 | % | |
| Other expense, net | (198) | | | (148) | | | (50) | | | (34 | %) | |
| Other income (expense), net | | Other income (expense), net | 120 | | | (198) | | | 318 | | | 161 | % | |
| Interest expense, net | Interest expense, net | (14) | | | (170) | | | 156 | | | 92 | % | Interest expense, net | (1,771) | | | (14) | | | (1,757) | | | 12,550 | % | |
| Income before income taxes | Income before income taxes | 925 | | | 1,147 | | | (222) | | | (19 | %) | Income before income taxes | 11,750 | | | 925 | | | 10,825 | | | 1,170 | % | |
| Income tax provision | Income tax provision | 522 | | | 139 | | | 383 | | | 276 | % | Income tax provision | 3,537 | | | 522 | | | 3,015 | | | 578 | % | |
| Net income | Net income | 403 | | | 1,008 | | | (605) | | | (60 | %) | Net income | 8,213 | | | 403 | | | 7,810 | | | 1,938 | % | |
| Adjusted EBITDA | $ | 5,787 | | | $ | 6,023 | | | $ | (236) | | | (4 | %) | |
| Net income attributable to redeemable noncontrolling interest | | Net income attributable to redeemable noncontrolling interest | 1,496 | | | — | | | 1,496 | | | — | % | |
| Net income attributable to DMC Global Inc. | | Net income attributable to DMC Global Inc. | 6,717 | | | 403 | | | 6,314 | | | 1,567 | % | |
| Adjusted EBITDA attributable to DMC Global Inc. | | Adjusted EBITDA attributable to DMC Global Inc. | $ | 21,751 | | | $ | 5,787 | | | $ | 15,964 | | | 276 | % | |
Net sales increased $11,894were $174,465. Excluding Arcadia, net sales were $93,768 for the three months ended September 30, 2022, or an increase of 40% compared with the third quarter of 2020. The increasesame period in 2021 primarily was due to the recovery in energy demand and prices, which led to increased drilling and well completion activity in North America and increaseda corresponding increase in unit sales of DynaEnergetics’ DS perforating systems. The third quarter of 2020 was negatively impacted by the drop in demand for oil and gas drilling and completion activity and low energy prices due to the COVID-19 pandemic.
Gross profit percentage increasedwas 29.4%. Excluding Arcadia, gross profit percentage was 29.3% versus 24.8% in the same period in 2021. The improvement compared to 24.8% compared with the third quarter of 2020prior year primarily was due to the impact of higher sales volume on fixed manufacturing overhead expensesexpense, primarily due to increases in unit sales of DS perforating systems at DynaEnergetics. These favorable impacts were partially offset by higher material and improved project mixother input costs at NobelClad.each business segment. Additionally, the 2021 third quarter gross profit percentage was also favorably impacted by the receipt of $1,800 ERC under the CARES Act. These favorable items were offset by a decline in high-margin international sales and higher material costs at DynaEnergetics.
General and administrative expenses increased $2,810$10,075 for the three months ended September 30, 2022 compared with the third quartersame period in 2021. The Arcadia acquisition contributed $8,782 to the increase. The remainder of 2020the increase primarily was due to higher salaries, benefits, and other-payroll related costs including variable incentive compensation by $1,125 and the expiration of the 2021 ERC under the CARES Act by $349.
Selling and distribution expenses increased $5,155 for the three months ended September 30, 2022 compared with the same period in 2021. Arcadia contributed $4,135 to the increase. The remainder of the increase primarily was due to higher salaries, benefits, and other-payroll related costs including variable incentive compensation by $194, expiration of the 2021 ERC under the CARES Act by $420, higher lease expense by $173, and higher business-related travel by $76.
Operating income was $13,401 for the three months ended September 30, 2022 compared to $1,137 in the same period last year. Excluding Arcadia, operating income was $9,659 due to the improved performance of DynaEnergetics.
Other income, net of$120for the three months ended September 30, 2022 primarily related to net unrealized and realized foreign currency exchange gains. Currency gains and losses can arise when subsidiaries enter into inter-company and third-party
transactions that are denominated in currencies other than their functional currency, including foreign currency forward contracts used to offset foreign exchange rate fluctuations on certain foreign currency denominated asset and liability positions.
Interest expense, net of$1,771for the three months ended September 30, 2022 increased compared with the same period in 2021 due to the principal balance outstanding on the credit facility entered into in December 2021 in conjunction with the acquisition of Arcadia, as well as increasing interest rates during the quarter.
Income tax provision of $3,537 was recorded on income before income taxes of $11,750. Our most significant operations are in the United States, which has a 21% statutory income tax rate, and Germany, which has a 33% statutory income tax rate. The mix of income or loss before income taxes between these jurisdictions is one of the primary drivers of the difference between our 21% statutory tax rate and our effective tax rate. The effective rate was impacted unfavorably by geographic mix of pretax income, state taxes, and certain compensation expenses that are not tax deductible in the U.S. The operating results of Arcadia that are attributable to the redeemable noncontrolling interest holder are not taxed at DMC, which resulted in a favorable impact to the effective tax rate. We recorded an income tax provision of $522 on loss before income taxes of $925 for the three months ended September 30, 2021. The effective rate was impacted favorably by discrete stock-based compensation windfall benefits of $39. The rate was also impacted unfavorably by geographic mix of pretax income, state taxes, and certain compensation expenses that are not tax deductible in the U.S.
Net income attributable to DMC Global Inc. for the three months ended September 30, 2022 was $6,717, or $0.46 per diluted share after the adjustment related to the redeemable noncontrolling interest, compared to net income of $403, or $0.02 per diluted share, for the same period in 2021.
Adjusted EBITDA for the three months ended September 30, 2022 increased compared with the same period in 2021 primarily due to the acquisition of Arcadia and improved performance of DynaEnergetics. 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 September 30, |
| | 2022 | | 2021 |
| Net income | $ | 8,213 | | | $ | 403 | |
| Interest expense, net | 1,771 | | | 14 | |
| Income tax provision | 3,537 | | | 522 | |
| Depreciation | 3,541 | | | 2,870 | |
| Amortization of purchased intangible assets | 7,385 | | | 211 | |
| EBITDA | 24,447 | | | 4,020 | |
| | | |
| Restructuring expenses | 8 | | | — | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Stock-based compensation | 2,242 | | | 1,569 | |
| Other (income) expense, net | (120) | | | 198 | |
| Adjusted EBITDA attributable to redeemable noncontrolling interest | (4,826) | | | — | |
| Adjusted EBITDA attributable to DMC Global Inc. | $ | 21,751 | | | $ | 5,787 | |
Adjusted Net Income and Adjusted Diluted Earnings per Share for the three months ended September 30, 2022 increased compared with the same period in 2021 primarily due to the factors discussed above. See "Overview" above for the explanation of the use of non-GAAP measures. The following is a reconciliation of the most directly comparable GAAP measures to Adjusted Net Income and Adjusted Diluted Earnings Per Share.
| | | | | | | | | | | | | | | | | |
| | | | | | | Three months ended September 30, 2022 |
| | | | | | | Amount | | Per Share (1) |
| Net income attributable to DMC Global Inc. | | | | | | | $ | 6,717 | | | $ | 0.35 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| NobelClad restructuring expenses, net of tax | | | | | | | 5 | | | — | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| As adjusted | | | | | | | $ | 6,722 | | | $ | 0.35 | |
(1) Calculated using diluted weighted average shares outstanding of 19,381,794
| | | | | | | | | | | | | | | | | |
| | | | | | | Three months ended September 30, 2021 |
| | | | | | | Amount | | Per Share (1) |
| Net income attributable to DMC Global Inc. | | | | | | | $ | 403 | | | $ | 0.02 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| As adjusted | | | | | | | $ | 403 | | | $ | 0.02 | |
(1) Calculated using diluted weighted average shares outstanding of 18,739,085
Nine months ended September 30, 2022 compared with nine months ended September 30, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, | | | | | | |
| 2022 | | 2021 | | $ change | | % change | | | | |
| Net sales | $ | 479,012 | | | $ | 188,271 | | | $ | 290,741 | | | 154 | % | | | | |
| Gross profit | 140,343 | | | 46,546 | | | 93,797 | | | 202 | % | | | | |
| Gross profit percentage | 29.3 | % | | 24.7 | % | | | | | | | | |
| COSTS AND EXPENSES: | | | | | | | | | | | |
| General and administrative expenses | 56,330 | | | 26,121 | | | 30,209 | | | 116 | % | | | | |
| % of net sales | 11.8 | % | | 13.9 | % | | | | | | | | |
| Selling and distribution expenses | 31,383 | | | 16,380 | | | 15,003 | | | 92 | % | | | | |
| % of net sales | 6.6 | % | | 8.7 | % | | | | | | | | |
| Amortization of purchased intangible assets | 33,154 | | | 823 | | | 32,331 | | | 3,928 | % | | | | |
| % of net sales | 6.9 | % | | 0.4 | % | | | | | | | | |
| | | | | | | | | | | |
| Restructuring expenses | 53 | | | 127 | | | (74) | | | (58 | %) | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Operating income | 19,423 | | | 3,095 | | | 16,328 | | | 528 | % | | | | |
| Other (expense) income, net | (35) | | | 304 | | | (339) | | | (112 | %) | | | | |
| Interest expense, net | (4,058) | | | (230) | | | (3,828) | | | 1,664 | % | | | | |
| Income before income taxes | 15,330 | | | 3,169 | | | 12,161 | | | 384 | % | | | | |
| Income tax provision | 4,938 | | | 610 | | | 4,328 | | | 710 | % | | | | |
| Net income | 10,392 | | | 2,559 | | | 7,833 | | | 306 | % | | | | |
| Net income attributable to redeemable noncontrolling interest | 1,411 | | | — | | | 1,411 | | | — | % | | | | |
| Net income attributable to DMC Global Inc. | 8,981 | | | 2,559 | | | 6,422 | | | 251 | % | | | | |
| Adjusted EBITDA attributable to DMC Global Inc. | $ | 54,618 | | | $ | 17,349 | | | $ | 37,269 | | | 215 | % | | | | |
Net sales were $479,012. Excluding Arcadia, net sales were $253,885 for the nine months ended September 30, 2022, an increase of 35% compared with the same period in 2021 primarily due to increased drilling and well completion activity in North America and a corresponding increase in unit sales of DynaEnergetics’ DS perforating systems.
Gross profit percentage was 29.3%. Excluding Arcadia, gross profit percentage was 27.6% versus 24.7% in the same period in 2021. The improvement compared to prior year primarily was due to higher sales volume on fixed manufacturing overhead expenses, primarily due to increases in unit sales of DS perforating systems at DynaEnergetics. These increases were partially offset by a less favorable project mix at NobelClad and higher material costs at DynaEnergetics. Additionally, 2021 gross profit was favorably impacted by the receipt of $4,134 ERC under the CARES Act.
General and administrative expenses increased $30,209 for the nine months ended September 30, 2022 compared with the same period in 2021. The Arcadia acquisition contributed $22,337 to the increase. The remainder of the increase was due to higher outside services costs by $2,251,$1,725, which was primarily related to patent infringement litigation in which DynaEnergetics is the plaintiff, an increase from resumption ofhigher headcount and salaries, benefits, and other-payroll related costs including variable incentive compensation by $2,644, higher business-related travel by $344, an increase from$1,668, and the restorationexpiration of variable compensation by $326, and salaries by $158 due to headcount additions and merit increases. These increases were partially offset by receipt of $349the 2021 ERC under the CARES Act.Act by $1,028.
Selling and distribution expenses increased $888$15,003 for the nine months ended September 30, 2022 compared with the third quartersame period in 2021.The Arcadia acquisition contributed $11,832 to the increase. The remainder of 2020 primarily due to increases in salaries by $548 due to headcount additions and merit increases, depreciation expense by $354, increasesthe increase was from the resumption of business-related travel by $168, higher outside service costs by $176, and increases from the restoration of variable compensation by $156. These increases were partially offset by receipt of $420 ERC under the CARES Act.
Restructuring expenses and asset impairments in the third quarter of2020 primarily related to costs associated with the saleexpiration of the Tyumen, Siberia manufacturing facility.
Operating income of $1,137 in the third quarter of 2021 decreased compared to the same period last year primarily due to a decrease in earnings at DynaEnergetics partially offset by higher earnings at NobelClad. Operating income was also favorably impacted by receipt of $2,569 ERC under the CARES Act in the third quarter of 2021.
$399, higher depreciation expense by $136, higher outside service costs by $165, and higher salaries, benefits, and other-payroll related costs including variable incentive compensation by $319.
Operating income was $19,423 for the nine months ended September 30, 2022 compared to $3,095 in the same period last year. The improved performance was attributable to DynaEnergetics and the acquisition of Arcadia. Operating income for the nine months ended September 30, 2021 was also favorably impacted by receipt of $6,398 ERC under the CARES Act.
Other expense, net of $19835 infor the third quarter of 2021nine months ended September 30, 2022 primarily related to net unrealized and realized foreign currency exchange losses. Currency gains and losses can arise when subsidiaries enter into inter-company and third-party transactions that are denominated in currencies other than their functional currency, including foreign currency forward contracts used to offset foreign exchange rate fluctuations on certain foreign currency denominated asset and liability positions.
Interest expense, net of $14decreased4,058 for the nine months ended September 30, 2022 increased compared with the third quarter of 2020 primarily same period in 2021due to the repaymentprincipal balance outstanding on the credit facility entered into in fullDecember 2021 in conjunction with the acquisition of our outstanding debt inArcadia, as well as increasing interest rates during the first quarter of 2021. Interest expense, net was also favorably impacted by interest on our investments in marketable securities.year-to-date period.
Income tax provision of $522$4,938 was recorded on income before income taxes of $925.$15,330. Our most significant operations are in the United States, which has a 21% statutory income tax rate, and Germany, which has a 33% statutory income tax rate. The mix of income or loss before income taxes between these jurisdictions is one of the primary drivers of the difference between our 21% statutory tax rate and our effective tax rate. The rate was also impacted unfavorably by geographic mix of pretax income, state taxes, and certain compensation expenses that are not tax deductible in the U.S. We recorded an income tax benefit of $139 on income before income taxes of $1,147 for the third quarter of 2020. The effective rate was impacted unfavorably by geographic mix of pretax income, state taxes, and certain compensation expenses that are not tax deductible in the U.S. The operating results of Arcadia that are attributable to the redeemable noncontrolling interest holder are not taxed at DMC, which resulted in a favorable impact to the effective tax rate. The effective rate was impacted unfavorably by discrete stock-based compensation shortfalls of $454. We recorded an income tax provision of $610 on income before income taxes of $3,169 for the nine months ended September 30, 2021. The effective rate was impacted favorably by discrete stock-based compensation windfall benefits of $832. The rate was also impacted favorablyunfavorably by discrete itemsgeographic mix of $247.pretax income, state taxes, and certain compensation expenses that are not tax deductible in the U.S.
Net income attributable to DMC Global Inc. for the threenine months ended September 30, 20212022 was $403,$8,981, or $0.02$0.20 per diluted share after the adjustment related to the redeemable noncontrolling interest, compared to net income of $1,008,$2,559, or $0.07$0.15 per diluted share, for the same period in 2020.2021.
Adjusted EBITDA decreasedfor the nine months ended September 30, 2022 increased compared with the third quarter of 2020same period in 2021 primarily due to the factors discussed above.acquisition of Arcadia and improved performance of DynaEnergetics. 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 September 30, |
| | 2021 | | 2020 |
| Net income | $ | 403 | | | $ | 1,008 | |
| Interest expense, net | 14 | | | 170 | |
| Income tax provision | 522 | | | 139 | |
| Depreciation | 2,870 | | | 2,451 | |
| Amortization of purchased intangible assets | 211 | | | 369 | |
| EBITDA | 4,020 | | | 4,137 | |
| | | |
| Restructuring expenses and asset impairments | — | | | 143 | |
| | | |
| | | |
| | | |
| Stock-based compensation | 1,569 | | | 1,595 | |
| Other expense, net | 198 | | | 148 | |
| Adjusted EBITDA | $ | 5,787 | | | $ | 6,023 | |
| | | | | | | | | | | | |
| Nine months ended September 30, | |
| | 2022 | | 2021 | |
| Net income | $ | 10,392 | | | $ | 2,559 | | |
| Interest expense, net | 4,058 | | | 230 | | |
| Income tax provision | 4,938 | | | 610 | | |
| Depreciation | 10,578 | | | 8,400 | | |
| Amortization of purchased intangible assets | 33,154 | | | 823 | | |
| EBITDA | 63,120 | | | 12,622 | | |
| | | | |
| Restructuring expenses | 53 | | | 127 | | |
| | | | |
| | | | |
| Amortization of acquisition-related inventory valuation step-up | 430 | | | — | | |
| | | | |
| | | | |
| Stock-based compensation | 6,891 | | | 4,904 | | |
| Other expense (income), net | 35 | | | (304) | | |
| Adjusted EBITDA attributable to redeemable noncontrolling interest | (15,911) | | | — | | |
| Adjusted EBITDA attributable to DMC Global Inc. | $ | 54,618 | | | $ | 17,349 | | |
Adjusted Net Income and Adjusted Diluted Earnings per Share decreasedincreased for the nine months ended September 30, 2022 compared with the third quarter of 2020same period in 2021 primarily due to the factors discussed above. See "Overview" above for the explanation of the use of non-GAAP measures. The following is a reconciliation of the most directly comparable GAAP measures to Adjusted Net Income and Adjusted Diluted Earnings Per Share.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2021 |
| Pre-Tax | | Tax (Benefit) | | Net | | Diluted weighted average shares outstanding | | Diluted EPS |
| Net income, as reported | $ | 925 | | | $ | 522 | | | $ | 403 | | | 18,739,085 | | | $ | 0.02 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Adjusted net income | $ | 925 | | | $ | 522 | | | $ | 403 | | | 18,739,085 | | | $ | 0.02 | |
| | | | | | | | | | | | |
| | Nine months ended September 30, 2022 |
| | Amount | | Per Share (1) |
| Net income attributable to DMC Global Inc. | | $ | 8,981 | | | $ | 0.47 | |
| | | | |
| Amortization of acquisition-related inventory valuation step-up, net of tax | | 199 | | | 0.01 | |
| | | | |
| NobelClad restructuring expenses, net of tax | | 36 | | | — | |
| | | | |
| | | | |
| | | | |
| | | | |
| As adjusted | | $ | 9,216 | | | $ | 0.48 | |
(1) Calculated using diluted weighted average shares outstanding of 19,357,333
| | | | | | | | | | | | |
| | Nine months ended September 30, 2021 |
| | Amount | | Per Share (1) |
| Net income attributable to DMC Global Inc. | | $ | 2,559 | | | 0.15 | |
| | | | |
| | | | |
| NobelClad restructuring expenses, net of tax | | 127 | | | 0.01 | |
| | | | |
| | | | |
| | | | |
| | | | |
| As adjusted | | $ | 2,686 | | | $ | 0.16 | |
(1) Calculated using diluted weighted average shares outstanding of 17,250,525
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2020 |
| Pre-Tax | | Tax (Benefit) Provision | | Net | | Diluted weighted average shares outstanding | | Diluted EPS |
| Net income, as reported | $ | 1,147 | | | $ | 139 | | | $ | 1,008 | | | 14,820,881 | | | $ | 0.07 | |
| Restructuring expenses and asset impairments: | | | | | | | | | |
| DynaEnergetics | 133 | | | (39) | | | 172 | | | 14,820,881 | | | 0.01 | |
| NobelClad | 10 | | | 3 | | | 7 | | | 14,820,881 | | | — | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Adjusted net income | $ | 1,290 | | | $ | 103 | | | $ | 1,187 | | | 14,820,881 | | | $ | 0.08 | |
Nine months ended September 30, 2021 compared with nine months ended September 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, | | | | |
| 2021 | | 2020 | | $ change | | % change |
| Net sales | $ | 188,271 | | | $ | 172,048 | | | $ | 16,223 | | | 9 | % |
| Gross profit | 46,546 | | | 44,667 | | | 1,879 | | | 4 | % |
| Gross profit percentage | 24.7 | % | | 26.0 | % | | | | |
| COSTS AND EXPENSES: | | | | | | | |
| General and administrative expenses | 26,121 | | | 21,744 | | | 4,377 | | | 20 | % |
| % of net sales | 13.9 | % | | 12.6 | % | | | | |
| Selling and distribution expenses | 16,380 | | | 18,720 | | | (2,340) | | | (13 | %) |
| % of net sales | 8.7 | % | | 10.9 | % | | | | |
| Amortization of purchased intangible assets | 823 | | | 1,076 | | | (253) | | | (24 | %) |
| % of net sales | 0.4 | % | | 0.6 | % | | | | |
| | | | | | | |
| Restructuring expenses | 127 | | | 3,305 | | | (3,178) | | | (96 | %) |
| | | | | | | |
| | | | | | | |
| Operating income (loss) | 3,095 | | | (178) | | | 3,273 | | | 1,839 | % |
| Other income (expense), net | 304 | | | (118) | | | 422 | | | 358 | % |
| Interest expense, net | (230) | | | (564) | | | 334 | | | 59 | % |
| Income (loss) before income taxes | 3,169 | | | (860) | | | 4,029 | | | 468 | % |
| Income tax provision (benefit) | 610 | | | (375) | | | 985 | | | 263 | % |
| Net income (loss) | 2,559 | | | (485) | | | 3,044 | | | 628 | % |
| Adjusted EBITDA | $ | 17,349 | | | $ | 15,524 | | | $ | 1,825 | | | 12 | % |
Net sales increased $16,223 compared with the same period of 2020 primarily due to the recovery in energy demand, which led to higher energy prices, increased drilling and well completion activity in North America and increased sales of DynaEnergetics’ DS perforating systems. The first nine months of 2020 was severely impacted by the drop in demand for oil and gas and related drilling and well completion activity due to the COVID-19 pandemic.
Gross profit percentage decreased to 24.7% compared with the nine months of 2020 primarily due to lower average selling prices and a decrease in international sales at DynaEnergetics. The decline was partially offset by excess capacity charges and inventory reserves that were recorded at DynaEnergetics in the second quarter of 2020, as well as favorable project mix in NobelClad, and receipt of $4,134 ERC under the CARES Act in the first nine months of 2021.
General and administrative expenses increased $4,377 compared with the nine months of 2020 primarily due to an increase in outside services costs by $3,721 mostly related to patent infringement litigation in which DynaEnergetics is the plaintiff, restoration of variable compensation by $1,050, and an increase in stock-based compensation expense by $890. The increases were partially offset by receipt of $1,028 ERC under the CARES Act.
Selling and distribution expenses decreased $2,340 compared with the same period of 2020 primarily due to reductions in provisions for expected credit losses by $3,227 and receipt of $1,236 ERC under the CARES Act. The decreases were partially offset by increases in depreciation expense by $900, salaries by $517 due to headcount additions and merit increases, increases from the restoration of variable compensation by $479, and higher outside service costs by $271.
Restructuring expenses and asset impairments of $127 in the nine months of 2021 primarily related to additional severance accruals for employee terminations associated with closing manufacturing operations in France in 2018. Expenses in 2020 primarily related to downsizing our direct labor workforce at DynaEnergetics in response to declining crude oil prices and corresponding demand for well perforating systems due to the COVID-19 pandemic.
Operating income of $3,095 in 2021 reflect higher earnings at DynaEnergetics and NobelClad during 2021, including receipt of $6,398 ERC under the CARES Act in the first nine months of 2021.
Other income, net of$304 in the nine months of 2021 primarily related to a gain on the sale of a fully depreciated fixed asset by DynaEnergetics partially offset with net unrealized and realized foreign currency exchange losses. Currency gains and losses can arise when subsidiaries enter into inter-company and third-party transactions that are denominated in currencies other than their functional currency, including foreign currency forward contracts used to offset foreign exchange rate fluctuations on certain foreign currency denominated asset and liability positions.
Interest expense, net of$230decreased compared with the nine months of 2020 primarily due to the repayment in full of our outstanding debt in the first quarter of 2021. Interest expense, net was also favorably impacted by interest on our investments in marketable securities.
Income tax provision of $610 was recorded on income before income taxes of $3,169. Our most significant operations are in the United States, which has a 21% statutory income tax rate, and Germany, which has a 33% statutory income tax rate. The mix of income or loss before income taxes between these jurisdictions is one of the main drivers of the difference between our 21% statutory tax rate and our effective tax rate. The effective income tax rate was impacted favorably by discrete stock-based compensation windfall benefits of $832. The rate was also impacted unfavorably by geographic mix of pretax income, state taxes, and certain compensation expenses that are not tax deductible in the U.S. We recorded an income tax benefit of $375 on loss before income taxes of $860 for the nine months of 2020. The effective rate was impacted unfavorably by geographic 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 of $549.
Net income for the nine months ended September 30, 2021 was $2,559, or $0.15 per diluted share, compared to net loss of $485, or $0.03 per diluted share, for the same period in 2020.
Adjusted EBITDA increased compared with the first nine months of 2020 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. | | | | | | | | | | | |
| Nine months ended September 30, |
| | 2021 | | 2020 |
| Net income (loss) | $ | 2,559 | | | $ | (485) | |
| Interest expense, net | 230 | | | 564 | |
| Income tax provision (benefit)) | 610 | | | (375) | |
| Depreciation | 8,400 | | | 7,167 | |
| Amortization of purchased intangible assets | 823 | | | 1,076 | |
| EBITDA | 12,622 | | | 7,947 | |
| | | |
| Restructuring expenses and asset impairments | 127 | | | 3,305 | |
| | | |
| | | |
| | | |
| Stock-based compensation | 4,904 | | | 4,154 | |
| Other (income) expense, net | (304) | | | 118 | |
| Adjusted EBITDA | $ | 17,349 | | | $ | 15,524 | |
Adjusted Net Income and Adjusted Diluted Earnings per Share increased compared with the first nine months of 2020 due to the factors discussed above. See "Overview" above for the explanation of the use of non-GAAP measures. The following is a reconciliation of the most directly comparable GAAP measures to Adjusted Net Income and Adjusted Diluted Earnings Per Share.
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| Nine months ended September 30, 2021 |
| Pre-Tax | | Tax Provision | | Net | | Diluted weighted average shares outstanding | | Diluted EPS |
| Net income, as reported | $ | 3,169 | | | $ | 610 | | | $ | 2,559 | | | 17,250,525 | | | $ | 0.15 | |
| Restructuring expenses and asset impairments: | | | | | | | | | |
| | | | | | | | | |
| NobelClad | 127 | | | — | | | 127 | | | 17,250,525 | | | 0.01 | |
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| Adjusted net income | 3,296 | | | 610 | | | 2,686 | | | 17,250,525 | | | 0.16 | |
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| Nine months ended September 30, 2020 |
| Pre-Tax | | Tax (Benefit) Provision | | Net | | Diluted weighted average shares outstanding | | Diluted EPS |
| Net loss, as reported | $ | (860) | | | $ | (375) | | | $ | (485) | | | 14,759,062 | | | $ | (0.03) | |
| Restructuring expenses and asset impairments: | | | | | | | | | |
| DynaEnergetics | 2,922 | | | 896 | | | 2,026 | | | 14,759,062 | | | 0.14 | |
| NobelClad | 264 | | | 77 | | | 187 | | | 14,759,062 | | | 0.01 | |
| Corporate | 119 | | | 25 | | | 94 | | | 14,759,062 | | | 0.01 | |
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| Adjusted net income | $ | 2,445 | | | $ | 623 | | | $ | 1,822 | | | 14,759,062 | | | $ | 0.13 | |
Business Segment Financial Information
We primarily evaluate performance and allocate resources based on segment revenues, operating income and adjusted EBITDA as well as projected future performance. Segment operating income is defined as revenues less expenses identifiable to the segment. Segment operating income will reconcile to consolidated income before income taxes by deducting unallocated corporate expenses, including stock-based compensation, net other expense, and net interest expense.
Arcadia
As more fully described in the 2021 Form 10-K, a 60% controlling interest in Arcadia was acquired in December 2021. A summary of results of operations for Arcadia for the three and nine months ended September 30, 2022 is as follows (in thousands):
Three and nine months ended September 30, 2022 | | | | | | | | | | | |
| Three months ended September 30, 2022 | | Nine months ended September 30, 2022 |
| Net sales | $ | 80,697 | | | $ | 225,127 | |
| Gross profit | 23,892 | | | 70,364 | |
| Gross profit percentage | 29.6 | % | | 31.3 | % |
| COSTS AND EXPENSES: | | | |
| General and administrative expenses | 8,782 | | | 22,337 | |
| Selling and distribution expenses | 4,135 | | | 11,832 | |
| Amortization of purchased intangible assets | 7,233 | | | 32,674 | |
| | | |
| | | |
| Operating income | 3,742 | | | 3,521 | |
| Adjusted EBITDA | 12,065 | | | 39,777 | |
| Less: adjusted EBITDA attributable to redeemable noncontrolling interest | (4,826) | | | (15,911) | |
| Adjusted EBITDA attributable to DMC Global Inc. | $ | 7,239 | | | $ | 23,866 | |
Arcadia’s profitability is dependent, in large part, on the spread between its input costs, for which the primary raw material is aluminum metal, and the subsequent value received from selling its products, which include exterior and interior framing systems, curtain walls, windows, doors, and interior partitions for the commercial buildings market; and highly engineered windows and doors for the high-end residential market.
During the three and nine months ended September 30, 2022, both net sales and cost of products sold increased in comparison to pre-acquisition periods, largely driven by higher customer pricing in response to higher base aluminum metal prices and increases in other input costs. During the nine months ended September 30, 2022, cost of products sold was also negatively impacted by the amortization of the inventory step-up recorded in purchase accounting. Gross profit dollars generated were consistent with pre-acquisition periods; however, the related gross profit percentage decreased as increased input costs outpaced the increase in net sales from higher average selling prices. General and administrative and selling and distribution expenses were higher in comparison to pre-acquisition periods. Higher general and administrative expenses were driven by public company related expenses such as internal and external audit fees, investments to support growth, employee headcount and compensation, non-recurring integration costs including outside services costs such as professional services, and depreciation expense related to the increase in fair value of property, plant and equipment recorded as of the date of acquisition. Higher sales and distribution expenses were driven primarily by increases in employee headcount and compensation. Amortization of purchased intangible assets related to identifiable intangible assets recorded as of the date of acquisition.
Adjusted EBITDA was primarily driven by the factors discussed above. See “Overview” above for the explanation of the use of non-GAAP measures. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
| | | | | | | | | | | |
| Three months ended September 30, 2022 | | Nine months ended September 30, 2022 |
| Operating income | $ | 3,742 | | | $ | 3,521 | |
| Adjustments: | | | |
| Amortization of acquisition-related inventory valuation step-up | — | | | 430 | |
| | | |
| Depreciation | 733 | | | 2,144 | |
| Amortization of purchased intangible assets | 7,233 | | | 32,674 | |
| Stock-based compensation | 357 | | | 1,008 | |
| Adjusted EBITDA | 12,065 | | | 39,777 | |
| Less: adjusted EBITDA attributable to redeemable noncontrolling interest | (4,826) | | | (15,911) | |
| Adjusted EBITDA attributable to DMC Global Inc. | $ | 7,239 | | | $ | 23,866 | |
DynaEnergetics
Three months ended September 30, 20212022 compared with three months ended September 30, 20202021 | | | Three months ended September 30, | | | Three months ended September 30, | |
| | 2021 | | 2020 | | $ change | | % change | | 2022 | | 2021 | | $ change | | % change |
| Net sales | Net sales | $ | 44,237 | | | $ | 34,201 | | | $ | 10,036 | | | 29 | % | Net sales | $ | 70,372 | | | $ | 44,237 | | | $ | 26,135 | | | 59 | % |
| Gross profit | Gross profit | 9,924 | | | 8,194 | | | 1,730 | | | 21 | % | Gross profit | 21,237 | | | 9,924 | | | 11,313 | | | 114 | % |
| Gross profit percentage | Gross profit percentage | 22.4 | % | | 24.0 | % | | Gross profit percentage | 30.2 | % | | 22.4 | % | |
| COSTS AND EXPENSES: | COSTS AND EXPENSES: | | COSTS AND EXPENSES: | |
| General and administrative expenses | General and administrative expenses | 4,990 | | | 3,176 | | | 1,814 | | | 57 | % | General and administrative expenses | 4,924 | | | 4,990 | | | (66) | | | (1 | %) |
| Selling and distribution expenses | Selling and distribution expenses | 3,260 | | | 2,445 | | | 815 | | | 33 | % | Selling and distribution expenses | 4,257 | | | 3,260 | | | 997 | | | 31 | % |
| Amortization of purchased intangible assets | Amortization of purchased intangible assets | 89 | | | 269 | | | (180) | | | (67 | %) | Amortization of purchased intangible assets | 78 | | | 89 | | | (11) | | | (12 | %) |
| Restructuring expenses and asset impairments | — | | | 133 | | | (133) | | | (100 | %) | |
| | | Operating income | Operating income | 1,585 | | | 2,171 | | | (586) | | | (27 | %) | Operating income | 11,978 | | | 1,585 | | | 10,393 | | | 656 | % |
| Adjusted EBITDA | Adjusted EBITDA | $ | 3,597 | | | $ | 4,170 | | | $ | (573) | | | (14 | %) | Adjusted EBITDA | $ | 13,935 | | | $ | 3,597 | | | $ | 10,338 | | | 287 | % |
Net sales were $10,036 higher thanincreased $26,135 for the third quarter of 2020 duethree months ended September 30, 2022 compared to the same period in 2021. Higher energy prices and a recovery in energy demand, whichgrowing reliance on North American oil and gas has led to increased drilling and well completion activity in North America and increased sales of DynaEnergetics’ DS perforating systems. The year-over-year increaseInternational sales also increased, which favorably impacted results in net sales from North American activity was partially offset by lower international sales.the third quarter of 2022.
Gross profit percentage decreasedincreased to 22.4%compared with30.2% for the third quarter of 2020three months ended September 30, 2022 primarily due to a declinethe impact of higher sales volume on fixed manufacturing overhead expenses, primarily due to increases in high-margin internationalunit sales and higher material costs. These items were partially offsetof DS perforating systems. The three months ended September 30, 2021 was favorably impacted by the receipt of $1,250 ERC under the CARES Act in the third quarter of 2021.
General and administrative expenses increased $1,814 compared with the third quarter of 2020 primarily due to an increase in outside services costs by $1,969 mostly related to patent infringement litigation in which DynaEnergetics is the plaintiff. The increase was partially offset by receipt of $100 ERC under the CARES Act.
Selling and distribution expenses increased $815$997 for thethree months ended September 30, 2022 compared withto the third quarter of 2020same period in 2021 primarily due to increases inhigher salaries, benefits, and other-payroll related costs by $359 due to headcount additions and merit increases, increases in depreciation expense by $335, higher outside service costs by $170, increases from the restoration ofincluding variable incentive compensation by $120, and an increase from resumption$296, the expiration of business-related travel by $96. The increases were partially offset by receipt of $279the 2021 ERC under the CARES Act.
Restructuring expensesAct by $279, and asset impairments in 2020 primarily related to costs associated with the sale of the Tyumen, Siberia manufacturing facility.higher lease expense by $196.
Operating income decreased $586increased $10,393 for the three months ended September 30, 2022 compared withto the third quarter of 2020 primarilysame period in 2021 due to the impact of lower high margin international sales, higher material costs, and higher selling, general and administrative expenses. The decline was partially offset by receipt of $1,629 ERC under the CARES Act.factors discussed above.
Adjusted EBITDA decreasedfor the three months ended September 30, 2022 increased compared with the third quarter of 2020same period in 2021 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 September 30, |
| 2021 | | 2020 |
| Operating income | $ | 1,585 | | | $ | 2,171 | |
| Adjustments: | | | |
| Restructuring expenses and asset impairments | — | | | 133 | |
| | | |
| | | |
| Adjusted operating income | 1,585 | | | 2,304 | |
| Depreciation | 1,923 | | | 1,597 | |
| Amortization of purchased intangibles | 89 | | | 269 | |
| Adjusted EBITDA | $ | 3,597 | | | $ | 4,170 | |
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| Three months ended September 30, |
| 2022 | | 2021 |
| Operating income | $ | 11,978 | | | $ | 1,585 | |
| Adjustments: | | | |
| | | |
| | | |
| Depreciation | 1,879 | | | 1,923 | |
| Amortization of purchased intangible assets | 78 | | | 89 | |
| Adjusted EBITDA | $ | 13,935 | | | $ | 3,597 | |
Nine months ended September 30, 20212022 compared with nine months ended September 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, | | | | |
| 2021 | | 2020 | | $ change | | % change |
| Net sales | $ | 124,677 | | | $ | 111,065 | | | $ | 13,612 | | | 12 | % |
| Gross profit | 29,034 | | | 29,640 | | | (606) | | | (2) | % |
| Gross profit percentage | 23.3 | % | | 26.7 | % | | | | |
| COSTS AND EXPENSES: | | | | | | | |
| General and administrative expenses | 12,574 | | | 10,164 | | | 2,410 | | | 24 | % |
| Selling and distribution expenses | 9,702 | | | 11,880 | | | (2,178) | | | (18) | % |
| Amortization of purchased intangible assets | 451 | | | 788 | | | (337) | | | (43) | % |
| Restructuring expenses and asset impairments | — | | | 2,922 | | | (2,922) | | | (100) | % |
| | | | | | | |
| Operating income | 6,307 | | | 3,886 | | | 2,421 | | | 62 | % |
| Adjusted EBITDA | $ | 12,402 | | | $ | 12,218 | | | $ | 184 | | | 2 | % |
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| Nine months ended September 30, | | | | |
| 2022 | | 2021 | | $ change | | % change |
| Net sales | $ | 186,776 | | | $ | 124,677 | | | $ | 62,099 | | | 50 | % |
| Gross profit | 53,805 | | | 29,034 | | | 24,771 | | | 85 | % |
| Gross profit percentage | 28.8 | % | | 23.3 | % | | | | |
| COSTS AND EXPENSES: | | | | | | | |
| General and administrative expenses | 14,657 | | | 12,574 | | | 2,083 | | | 17 | % |
| Selling and distribution expenses | 12,318 | | | 9,702 | | | 2,616 | | | 27 | % |
| Amortization of purchased intangible assets | 245 | | | 451 | | | (206) | | | (46 | %) |
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| | | | | | | |
| Operating income | 26,585 | | | 6,307 | | | 20,278 | | | 322 | % |
| Adjusted EBITDA | $ | 32,493 | | | $ | 12,402 | | | $ | 20,091 | | | 162 | % |
Net sales were $13,612 higher than inincreased $62,099 for the nine months ended September 30, 2022 compared to the same period of 2020in 2021 due to a recovery in energy demand and a growing reliance on North American oil and gas, which led to increased energy prices, drilling and well completion activity in North America and increased sales of DynaEnergetics’ DS perforating systems. The year-over-year increaseInternational sales also increased, which favorably impacted results in net sales was partially offset by lower international sales. The first nine months of 2020 was severely impacted by the drop in energy demand and related drilling and completion activity due to the COVID-19 pandemic.2022.
Gross profit percentagedecreased to 23.3% increased to 28.8% for the nine months ended September 30, 2022 compared with 2020to the same period in 2021 primarily due to lower average selling pricesthe impact of higher sales volume on fixed manufacturing overhead expenses, primarily increases in unit sales of DS perforating systems. The nine months ended September 30, 2021 which also contributed to lower fixed cost absorption, as well as a decline in high-margin international sales. The decline was partially offsetfavorably impacted by the receipt of $2,696 ERC under the CARES Act.
General and administrative expenses increased $2,410$2,083 for the nine months ended September 30, 2022 compared with 2020 primarilyto the same period in 2021 due to an increase in outside services costs by $3,525 mostly$831, primarily related to patent infringement litigation in which DynaEnergetics is the plaintiff. The increase was partially offsetplaintiff, higher salaries, benefits, and other-payroll related costs including variable incentive compensation by receipt$541, and the expiration of $333the 2021 ERC under the CARES Act.Act by $333.
Selling and distribution expensesdecreased $2,178increased $2,616 for the nine months ended September 30, 2022 compared with 2020to the same period in 2021 primarily due to reductions in provisions for expected credit losses by $2,915 and receiptthe expiration of $800the 2021 ERC under the CARES Act. These decreases were partially offsetAct by $800, increases in lease expense by $425, increases in salaries, benefits, and other-payroll related costs including variable incentive compensation by $506, higher business-related travel by $239, and increases in depreciation expense by $901, increases in salaries by $491 due to headcount additions and merit increases, and increases from the restoration of variable compensation by $411.
Restructuring expenses and asset impairments in 2020 primarily related to downsizing our direct labor workforce in response to declining crude oil prices and corresponding demand for well perforating systems. We also recorded asset impairments and incurred costs associated with the sale of the Tyumen, Siberia manufacturing facility.$116.
Operating income increased $2,421$20,278 for the nine months ended September 30, 2022 compared with 2020 as increased sales volume, receipt of $3,829 ERC underto the CARES Act, and a reductionsame period in 2021 due to the provisions for expected credit losses more than offset lower average selling prices.factors discussed above.
Adjusted EBITDA increased for the nine months ended September 30, 2022 compared with 2020to the same period in 2021 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. | | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2020 |
| Operating income | $ | 6,307 | | | $ | 3,886 | |
| Adjustments: | | | |
| Restructuring expenses and asset impairments | — | | | 2,922 | |
| | | |
| | | |
| Adjusted operating income | 6,307 | | | 6,808 | |
| Depreciation | 5,644 | | | 4,622 | |
| Amortization of purchased intangibles | 451 | | | 788 | |
| Adjusted EBITDA | $ | 12,402 | | | $ | 12,218 | |
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2022 | | 2021 |
| Operating income | $ | 26,585 | | | $ | 6,307 | |
| Adjustments: | | | |
| | | |
| | | |
| Depreciation | 5,663 | | | 5,644 | |
| Amortization of purchased intangible assets | 245 | | | 451 | |
| Adjusted EBITDA | $ | 32,493 | | | $ | 12,402 | |
NobelClad
Three months ended September 30, 20212022 compared with three months ended September 30, 20202021 | | | Three months ended September 30, | | | Three months ended September 30, | |
| | 2021 | | 2020 | | $ change | | % change | | 2022 | | 2021 | | $ change | | % change |
| Net sales | Net sales | $ | 22,938 | | | $ | 21,080 | | | $ | 1,858 | | | 9 | % | Net sales | $ | 23,396 | | | $ | 22,938 | | | $ | 458 | | | 2 | % |
| Gross profit | Gross profit | 6,883 | | | 5,577 | | | 1,306 | | | 23 | % | Gross profit | 6,325 | | | 6,883 | | | (558) | | | (8 | %) |
| Gross profit percentage | Gross profit percentage | 30.0 | % | | 26.5 | % | | Gross profit percentage | 27.0 | % | | 30.0 | % | |
| COSTS AND EXPENSES: | COSTS AND EXPENSES: | | COSTS AND EXPENSES: | |
| General and administrative expenses | General and administrative expenses | 933 | | | 878 | | | 55 | | | 6 | % | General and administrative expenses | 1,475 | | | 933 | | | 542 | | | 58 | % |
| Selling and distribution expenses | Selling and distribution expenses | 2,208 | | | 2,106 | | | 102 | | | 5 | % | Selling and distribution expenses | 2,263 | | | 2,208 | | | 55 | | | 2 | % |
| Amortization of purchased intangible assets | Amortization of purchased intangible assets | 122 | | | 100 | | | 22 | | | 22 | % | Amortization of purchased intangible assets | 74 | | | 122 | | | (48) | | | (39 | %) |
| Restructuring expenses and asset impairments | — | | | 10 | | | (10) | | | (100 | %) | |
| Restructuring expenses | | Restructuring expenses | 8 | | | — | | | 8 | | | — | % |
| | Operating income | Operating income | 3,620 | | | 2,483 | | | 1,137 | | | 46 | % | Operating income | 2,505 | | | 3,620 | | | (1,115) | | | (31 | %) |
| Adjusted EBITDA | Adjusted EBITDA | $ | 4,587 | | | $ | 3,372 | | | $ | 1,215 | | | 36 | % | Adjusted EBITDA | $ | 3,412 | | | $ | 4,587 | | | $ | (1,175) | | | (26 | %) |
Net sales increased $1,858$458 for the three months ended September 30, 2022 compared withto the third quarter of 2020same period in 2021 primarily due to the timing of shipment of projectsshipments out of backlog. NobelClad net sales in 2022 were also negatively impacted by the weakening of the Euro compared to the United States Dollar.
Gross profit percentage of 30.0% increased compared withdecreased to 27.0% for the third quarter of 2020 primarily due to better project mix, higher sales volume on fixed overhead expenses andthree months ended September 30, 2022. The three months ended September 30, 2021 was favorably impacted by the receipt of $550 ERC under the CARES Act. Excluding the CARES Act and foreign currency impacts, the gross profit percentage was consistent period over period.
General and administrative expenses increased $55$542 for the three months ended September 30, 2022 compared withto the third quarter of 2020 primarilysame period in 2021 due to increases from the resumption of business travelhigher outside services costs by $36 and the restoration of variable compensation by $11.
Selling and distribution expenses increased $102 compared with the third quarter of 2020$472 primarily due to increases from the resumption of business travel by $72 and the restoration of variable compensation by $36.
Restructuring expenses and asset impairments of $10 in 2020 related to severance costs associated with the past closureimplementation of a manufacturing facility in France.new enterprise resource planning system.
Operating income increased $1,137decreased $1,115 for thethree months ended September 30, 2022 compared withto the third quarter of 2020 primarilysame period in 2021 due to improved project mix,a decrease in gross profit and higher general and administrative expenses. Operating income in 2021 was benefited by the favorable impact of higher sales volume on fixed overhead expenses, and receipt of $719 of ERC under the CARES Act. The increase was partially offset by higher general and administrative and selling and distribution expenses.
Adjusted EBITDA increasedfor the three months ended September 30, 2022 decreased compared with the third quarter of 2020same period in 2021 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 September 30, |
| 2021 | | 2020 |
| Operating income | $ | 3,620 | | | $ | 2,483 | |
| Adjustments: | | | |
| Restructuring expenses and asset impairments | — | | | 10 | |
| | | |
| Adjusted operating income | 3,620 | | | 2,493 | |
| Depreciation | 845 | | | 779 | |
| Amortization of purchased intangibles | 122 | | | 100 | |
| Adjusted EBITDA | $ | 4,587 | | | $ | 3,372 | |
Nine months ended September 30, 2021 compared with nine months ended September 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, | | | | |
| 2021 | | 2020 | | $ change | | % change |
| Net sales | $ | 63,594 | | | $ | 60,983 | | | $ | 2,611 | | | 4 | % |
| Gross profit | 17,960 | | | 15,530 | | | 2,430 | | | 16 | % |
| Gross profit percentage | 28.2 | % | | 25.5 | % | | | | |
| COSTS AND EXPENSES: | | | | | | | |
| General and administrative expenses | 2,636 | | | 2,649 | | | (13) | | | — | % |
| Selling and distribution expenses | 6,230 | | | 6,388 | | | (158) | | | (2) | % |
| Amortization of purchased intangible assets | 372 | | | 288 | | | 84 | | | 29 | % |
| Restructuring expenses and asset impairments | 127 | | | 264 | | | (137) | | | (52) | % |
| | | | | | | |
| Operating income | 8,595 | | | 5,941 | | | 2,654 | | | 45 | % |
| Adjusted EBITDA | $ | 11,573 | | | $ | 8,799 | | | $ | 2,774 | | | 32 | % |
Net sales were $2,611 higher compared with 2020 primarily due to the timing of shipment of projects out of backlog.
Gross profit percentage of 28.2% increased compared with of 2020 primarily due to improved project mix, the favorable impact of higher sales volume on fixed expenses, and receipt of $1,438 ERC under the CARES Act.
General and administrative expenses were essentially flat compared with 2020.
Selling and distribution expenses decreased $158 compared with of 2020 primarily due to a prior year provision for expected credit losses of $178 associated with a customer that declared bankruptcy during the first quarter of 2020.
| | | | | | | | | | | |
| Three months ended September 30, |
| 2022 | | 2021 |
| Operating income | $ | 2,505 | | | $ | 3,620 | |
| Adjustments: | | | |
| Restructuring expenses | 8 | | | — | |
| | | |
| Depreciation | 825 | | | 845 | |
| Amortization of purchased intangibles | 74 | | | 122 | |
| Adjusted EBITDA | $ | 3,412 | | | $ | 4,587 | |
Restructuring expenses and asset impairmentsNine months ended September 30, 2022 compared with nine months ended September 30, 2021 | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, | | | | |
| 2022 | | 2021 | | $ change | | % change |
| Net sales | $ | 67,109 | | | $ | 63,594 | | | $ | 3,515 | | | 6 | % |
| Gross profit | 16,532 | | | 17,960 | | | (1,428) | | | (8 | %) |
| Gross profit percentage | 24.6 | % | | 28.2 | % | | | | |
| COSTS AND EXPENSES: | | | | | | | |
| General and administrative expenses | 3,644 | | | 2,636 | | | 1,008 | | | 38 | % |
| Selling and distribution expenses | 6,910 | | | 6,230 | | | 680 | | | 11 | % |
| Amortization of purchased intangible assets | 235 | | | 372 | | | (137) | | | (37 | %) |
| Restructuring expenses | 53 | | | 127 | | | (74) | | | (58 | %) |
| | | | | | | |
| Operating income | 5,690 | | | 8,595 | | | (2,905) | | | (34 | %) |
| Adjusted EBITDA | $ | 8,468 | | | $ | 11,573 | | | $ | (3,105) | | | (27 | %) |
Net sales of $127increased $3,515 for the nine months ended September 30, 2022 compared to the same period in 2021 related tprimarily due to the timing of shipments out of backlog. The increase in net sales was partially offset by the weakening of the Euro compared to the United States Dollar.
Gross profit percentageo decreased to 24.6% for the nine months ended September 30, 2022. The nine months ended September 30, 2021 was favorably impacted by the receipt of $1,438 ERC under the CARES Act. Excluding the CARES Act and foreign currency impacts, the gross profit percentage decreased in 2022 due to a less favorable project mix.
General and administrative expenses additional severance liabilitiesincreased $1,008 for employees terminated as part of closing manufacturing operationsthe nine months ended September 30, 2022 compared to the same period in France in 2018. Expenses of $264 in 20202021 due to higher outside services costs by $847 primarily related to severance costs.the implementation of a new enterprise resource planning system.
Selling and distribution expenses increased $680 for the nine months ended September 30, 2022 compared to the same period in 2021 primarily due the expiration of the 2021 ERC under the CARES Act by $436 and the resumption of business travel by $193.
Operating income increased $2,654decreased $2,905 for the nine months ended September 30, 2022 compared with 2020 primarilyto the same period in 2021 due to improved project mix, the favorable impact oflower gross profit and higher sales volume on fixed expenses,general and receipt of $1,958 ERC under the CARES Act.administrative and selling and distribution expenses.
Adjusted EBITDA increasedfor the nine months ended September 30, 2022 decreased compared with 2020to the same period in 2021 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. | | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2020 |
| Operating income | 8,595 | | | 5,941 | |
| Adjustments: | | | |
| Restructuring expenses and asset impairments | 127 | | | 264 | |
| | | |
| Adjusted operating income | 8,722 | | | 6,205 | |
| Depreciation | 2,479 | | | 2,306 | |
| Amortization of purchased intangibles | 372 | | | 288 | |
| Adjusted EBITDA | 11,573 | | | 8,799 | |
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2022 | | 2021 |
| Operating income | $ | 5,690 | | | $ | 8,595 | |
| Adjustments: | | | |
| Restructuring expenses | 53 | | | 127 | |
| | | |
| Depreciation | 2,490 | | | 2,479 | |
| Amortization of purchased intangibles | 235 | | | 372 | |
| Adjusted EBITDA | $ | 8,468 | | | $ | 11,573 | |
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. The COVID-19 pandemic drove a sharp decline in DynaEnergetics' core oil and gas end markets and corresponding well-completion activity and demand for its perforating 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, significantly cutting selling, general and administrative expenses, reducing our capital expenditures budget by 50% and suspending the quarterly dividend. While the decline in crude oil prices and oil and gas demand accelerated early in the second quarter of 2020, sales volume has improved in the four consecutive quarters through the third quarter of 2021. Though NobelClad customers in the downstream energy industry have delayed various projects, NobelClad’s order backlog increased to $42,867Our net debt position was $117,923 at September 30, 2021 from $39,8842022 compared to $116,615 at December 31, 2020.
2021. Net debt increased during 2022 to fund a build-up of working capital, which included higher inventory levels due to increased prices and lead times for several key raw materials at DynaEnergetics and Arcadia, and an increase in sales volume at DynaEnergetics in 2022. We have also taken action to allow flexibility in accessing the capital markets. On October 22, 2020, we commenced an at-the-market equity program under a shelf registration statement filed in May 2020, which allows us to sell and issue up to $75 million in shares of our common stock from time to time, and since the inception of the program during the fourth quarter of 2020 we have sold 1,006,180 shares of common stock for net proceeds of $51,002. In connection with the commencement of the at-the-market equity program, we also amended our credit facility to waive the requirement to repay outstanding amounts under the credit facility with proceeds from the program. Our ability to access remaining capital may be limited by market conditions at the time of any future potential sale. While we were able to sell shares during the fourth quarter of 2020 and first quarter of 2021, there can be no assurance that any future capital will be available on acceptable terms or at all.
Additionally, on May 3, 2021, the Company announced a registered public offering of its stock under an automatic shelf registration statement on Form S-3ASR filed on May 3, 2021. The Company entered into an underwriting agreement with KeyBanc Capital Markets Inc. (“KeyBanc”), as representative of the underwriters (collectively, the “Underwriters”), pursuant to which the Company agreed to sell 2,500,000 shares of its $0.05 par value common stock to the Underwriters. In addition, the Underwriters were granted an option, exercisable within 30 days, to purchase up to an additional 375,000 shares of common stock to cover over-allotments, if any, on the same terms and conditions. On May 7, 2021 DMC issued a total of 2,875,000 shares of its common stock, which included the exercise of the over-allotment option, at a market price of $45 for gross proceeds of $129,375. Net proceeds from the offering were $123,461, after deducting underwriter fees and other expenses of $5,914. We intend to use the net proceeds from the offering for general corporate purposes, which may include acquisitions. Pending use of the proceeds as described, we invested the proceeds of the offering in highly liquid marketable securities, including commercial paper and U.S. Treasury securities. Please see discussion of our marketable securities in Note 2 to the Condensed Consolidated Financial Statements.
These measures enabled us to improve our net cash position from $42,659 at December 31, 2020 to $181,952 at September 30, 2021, maintain our fully undrawn and available $50,000 revolving credit facility and repay our capital expenditure term loan in full.at September 30, 2022.
We believe that cash and cash equivalents and marketable securities on hand, cash flow from operations, funds available under our current credit facilities and any future replacement thereof and potential proceeds from our at-the-market offering, will be sufficient to fund the working capital, debt service, if applicable, and other capital expenditure requirements of our current business operations for the foreseeable future. We may also execute capital markets transactions, including at-the-market offering programs, to raise additional funds if we believe market conditions are favorable.favorable, but there can be no assurance that any future capital will be available on acceptable terms or at all. 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 haverelated impact on credit availability and capital markets. We also continue to pursue potential acquisitions; the completion of any acquisition may significantly increase our capital requirements.
Debt facilities
As of September 30,On December 23, 2021, we had no outstanding borrowings under our credit facility. On March 8, 2018,in connection with the Arcadia acquisition, we entered into a five-year $75,000 credit facility which replaced in its entirety our prior$200,000 syndicated credit facility entered into on February 23, 2015. The agreement (“credit facility allows for revolving loans of up to $50,000 withfacility”) which included a $20,000 US dollar equivalent sublimit for alternative currency loans. In addition, the agreement provides for a $25,000 Capex Facility$150,000 Term Loan, 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 wasis amortizable at 12.5%10% of principal per year with a balloon payment for the outstanding balance upon the credit facility maturity date in 2023. In February 2021, we repaid the outstanding Capex Facility balance2026, and allows for revolving loans of $11,750.
up to $50,000. The credit facility has a $100,000an accordion feature to increase the commitments by $100,000 under the revolving loan class and/or to addby adding a term loan subject to approval by applicable lenders. We entered into the credit facility with a syndicate of threefour 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, including Arcadia and its subsidiary, as well as guarantees and share pledges by DMC and its subsidiaries.
Borrowings under the $150,000 Term Loan and $50,000 revolving loan limit can be in the form of one-, two-, three-,Adjusted Daily Simple Secured Overnight Financing Rate ("SOFR") loans or six-month LIBORone month Adjusted Term SOFR loans. Additionally, USU.S. 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,rate, an adjusted Federal Funds rate or an adjusted LIBORSOFR rate). LIBORSOFR loans bear interest at the applicable LIBORSOFR 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%).
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%).
As of September 30, 2021 our available borrowing capacity was $50,000. Future borrowings are subject to compliance with financial covenants that could significantly limit such availability.
As of September 30, 2021, there were two significant financial covenants under ourThe credit facility a debt-to-EBITDA leverage ratio (“leverage ratio”)includes various covenants and a minimum liquidity ratio. restrictions, certain of which relate to the payment of dividends or other distributions to stockholders; redemption of capital stock; incurring additional indebtedness; mortgaging, pledging or disposition of major assets; and maintenance of specified ratios.
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)credit facility) on the last day of suchany trailing four quarter period to Consolidated Pro Forma EBITDA (as defined in the credit facility) for such period. ForConsolidated Pro Forma EBITDA equals Adjusted EBITDA as calculated within the September 30, 2021 reportingConsolidated Results of Operations section plus certain predefined add-backs, which include up to $5,000 for one-time integration expenses incurred in the twelve-month period following the closing date of the Arcadia acquisition. The maximum leverage ratio permitted by our syndicated credit facility was 3.00is 3.25 to 1.0.1.0 from the quarter ended September 30, 2022 through the quarter ended March 31, 2023, and 3.0 to 1.0 from the quarter ended June 30, 2023 and thereafter. The actual leverage ratio as of September 30, 2021,2022, calculated in accordance with the credit facility, as amended, was 0.02.10 to 1.0.
The debt service coverage ratio asis defined in the credit facility means, for any period,as the ratio of Consolidated Pro Forma EBITDA less the sum of capital distributions paid in cash dividends, cash income taxes and(other than those made with respect to the preferred stock issued under the Operating Agreement), Consolidated Unfunded Capital Expenditures (as defined in the agreement)credit facility), and net cash income taxes to Debt Service Charges (as definedthe sum of cash interest expense, any dividends on the preferred stock paid in cash, and scheduled principal payments on funded indebtedness. Under our credit facility, the agreement). The minimum debt service coverage ratio permitted by our credit facility for the September 30, 2021 reporting period is 1.35 to 1.0. The actual debt service coverage ratio for the trailing twelve months ended September 30, 20212022 was 6.02.17 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, and mortgaging and pledging or disposition of major assets. As of September 30, 2021, we2022, U.S. dollar revolving loans of $0 and borrowings of $138,750 on the Term Loan were in compliance with all financial covenantsoutstanding under our credit facility and other provisions of our debt agreements.available revolver borrowing capacity was $50,000.
We also maintain a line of credit with a German bank for certain European operations.our NobelClad and DynaEnergetics operations in Europe. This line of credit provides a borrowing capacity of €7,000.
Other contractual obligations and commitments
Our long-term debt balance decreased to $0$136,409 at September 30, 20212022 from $8,139$147,425 at December 31, 2020.2021. Our other contractual obligations and commitments have not materially changed since December 31, 2020.2021.
Cash flows provided by (used in) provided by operating activities
Net cash used inprovided by operating activities was $1,906$24,335 for the nine months ended September 30, 20212022 compared with net cash provided byused in operating activities of $21,354$1,906 in the same period last year. The decreaseincrease primarily was due to an increasedhigher net income and higher non-cash reconciling adjustments related to amortization of purchased intangible assets from the Arcadia acquisition. These increases were partially offset by use of cash for working capital, which included higher accounts receivable, higher inventory levels due to mitigate global supply chain bottlenecksincreased input costs and lead times for several key raw materials at DynaEnergetics and Arcadia, and an expected increase in anticipation of increased sales activity in future periods, and higher prepaid expenses and other assets related in part to payments to fund our Non-Qualified Deferred Compensation Plan and other prepaid service contracts. The increases in working capital were partially offset by higher accounts payable and accrued expenses resulting from increased purchasing activity.volume at DynaEnergetics.
Cash flows used in investing activities
Net cash flowsused in investing activities for the nine months ended September 30, 2022 of $13,311 related to the acquisition of property, plant and equipment and consideration adjustments related to the Arcadia acquisition. Net cash used in investing activities for the nine months ended September 30, 2021 ofwere $124,514 and primarily related to investment in marketable securities of $123,984 usingmade with the proceeds from our May 2021 equity offering, and acquisitions of property, plant and equipment partially offsetoffering.
Cash flows (used in) provided by proceeds from maturities of marketable securities of $4,799 from U.S. treasuries that were converted to cash upon maturity. financing activities
Net cash flows used in investingfinancing activities for the nine months ended September 30, 2020 were $9,662 and related2022 of $22,814 included a distribution to the acquisitionsredeemable noncontrolling interest holder of property, plant$10,293, quarterly payments on our term loan of $11,250, and equipment at DynaEnergetics.
Cash flows provided by (used in) financing activities
treasury stock purchases of $1,092. Net cash flows provided by financing activities for the nine months ended September 30, 2021 of $134,750 included net proceeds from our equity offering of $123,461 and our ATM equity program of $25,262 partially offset by repayment in full of the Capex Facility of $11,750 and treasury stock purchases of $2,476. Net cash flows used in financing activities
Redeemable noncontrolling interest
The Operating Agreement contains a right for the nine months endedCompany to purchase the remaining interest in Arcadia from the minority interest holder on or after December 23, 2024. Similarly, the minority interest holder of Arcadia has the right to sell its remaining interest in Arcadia to the Company on or after December 23, 2024. As of September 30, 20202022, the estimated value of $7,038 was due to dividend payments, treasury stock purchases,the redeemable noncontrolling interest is $194,962, which is based upon a multiple of Arcadia’s average adjusted earnings for the preceding two fiscal years and repayments onits projected adjusted earnings for the Capex Facility.then-current fiscal year.
Payment of Dividends
We paid a quarterly cash dividendOn April 23, 2020, DMC announced that its Board of $0.125 per share in the first quarter of 2020. In April 2020, weDirectors suspended the quarterly dividend indefinitely due to the 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
Our critical accounting policies have not changed from those reported in our Annual Report on Form 10-K for the year ended December 31, 2020.2021.
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, 2020.2021.
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
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.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
Please see Note 12 to the Condensed Consolidated Financial Statements.
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, 2020,2021, except as provided below.
The proposed new regulation concerning mandatory COVID-19 vaccination of employees could have a material adverse impact on ourOur business, financial condition and results of operations.operations could be adversely affected by disruptions in the global and European economies caused by Russia’s invasion of Ukraine.
On September 9, 2021, President Biden announced a proposed new rule requiring all employers with at least 100 employeesThe global economy continues to ensure that their employees are fully vaccinated or require unvaccinated workersbe negatively impacted by increasing tension and uncertainty resulting from Russia's invasion of Ukraine. The adverse and uncertain economic conditions resulting therefrom have and may continue to get a negative test at least once a week. The Department of Labor's Occupational Safetynegatively impact global demand, cause supply chain disruptions and Health Administration (“OSHA”) is drafting an emergency regulation to carry out this mandate, which is expected to take effectincrease costs for transportation, energy and other raw materials. Furthermore, governments in the coming weeks.United States, the European Union, the United Kingdom, Canada and others have imposed financial and economic sanctions on certain industry segments and various parties in Russia. We currently have no details ascontinue to monitor the requirementsconflict including the potential impact of financial and economic sanctions on the regulations,global economy and it is not possible to predict with certaintyparticularly the impacts the new regulation would haveeconomies of Europe. Increased trade barriers, sanctions and other restrictions on us. As a company with more than 100 employees, we would be required to mandate COVID-19 vaccination of our workforceglobal or require our unvaccinated employees to be tested on a weekly basis. This may result in increased costs, labor disruptions or employee attrition, whichregional trade could be material as a substantial number of our employees are based in areas of the country where vaccination rates are below the national average. If we lose employees, it will be difficult in the current competitive labor market to find replacement employees, and this could have an adverse effect on future revenues and costs, which could be material. In addition, additional uncertainty could be caused by competing and potentially conflicting laws and regulations, such as the recent executive order issued by the governor of Texas prohibiting vaccine mandates. Accordingly, the proposed new OSHA regulation when implemented could have a material adverse effect onadversely affect our business, financial condition and results of operations. Although we have no operations located in Russia or Ukraine, we do supply regularly into Ukraine and the destabilizing effects of Russia’s invasion of Ukraine could have other adverse effects on our business. Further escalation of geopolitical tensions related to this military conflict and/or its expansion could result in loss of property, expropriation, cyberattacks, supply disruptions, plant closures and an inability to obtain key supplies and materials, as well as adversely affect both our and our customers' supply chains and logistics, particularly in Europe.
In many cases, both our German operations and those of European customers and suppliers depend on the availability of natural gas for use in their manufacturing operations. A significant proportion of Germany's natural gas supply originates from Russia. Material disruptions of natural gas supply to Europe and in particular Germany, whether from sanctions, counter-measures by Russia, other restrictions, damage to infrastructure and logistics or otherwise from the destabilizing effects of military conflict could materially and adversely impact European and global natural gas and oil markets. We expect that shortages in supply and increases in costs of natural gas or other energy will adversely impact our ability to operate our German manufacturing facilities as efficiently and cost-effectively as previously, which could adversely affect our business, results of operations and financial condition.
In addition, the effects of such military conflict could heighten and increase many of the other risks described in Part I, Item 1A. "Risk Factors" in our Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In connection with the vesting of Company restricted common stock under our equity incentive plans during the third quarter of 2021,2022, 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 |
| July 1 to July 31, 2021 | | 64 | | | $ | 56.21 | |
| August 1 to August 31, 2021 | | 43,661 | | | $ | 41.31 | |
| September 1 to September 30, 2021 | | 320 | | | $ | 39.38 | |
| Total | | 44,045 | | | $ | 41.32 | |
| | | | | | | | | | | | | | |
| | Total number of shares purchased (1) (2) | | Average price paid per share |
| July 1 to July 31, 2022 | | 64 | | | $ | 18.03 | |
| August 1 to August 31, 2022 | | — | | | $ | — | |
| September 1 to September 30, 2022 | | — | | | $ | — | |
| Total | | 64 | | | $ | 18.03 | |
(1) Share purchases in 2021 included 1772022 represent shares withheld to offset tax withholding obligations that occurred upon the vesting of restricted common stock under the terms of the 2016 Equity Incentive Plan and 43,368 share purchases related to the participant elections to diversify contributions of equity awards into other investment options available to participants in the Company’s Amended and Restated Non-Qualified Deferred Compensation Plan.
(2) As of September 30, 2021,2022, the maximum number of shares that may yet be purchased would not exceed the employees’ portion of taxes withheld on unvested shares (295,261)(495,932) and potential purchases upon participant elections to diversify equity awards held in the Company’s Amended and Restated Non-Qualified Deferred Compensation Plan (142,565)(151,468) into other investment options available to participants in the Plan.
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 September 30, 2021,2022, 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
101 The following materials from the Quarterly Report on Form 10-Q of DMC Global Inc. for the quarter ended September 30, 2021,2022, 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.*
* 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 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.
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: | October 21, 2021November 3, 2022 | | /s/ Michael Kuta |
| | | Michael Kuta, Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) |