(Address of principal executive offices, including zip code)
(i303)
i665-5700
(Registrant’s telephone number, including area code)
Title of each class
Trading Symbol
Name
of exchange on which registered
iCommon Stock, $0.05 Par Value
iBOOM
iThe
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. iYes☒
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). iYes☒ 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.
iLarge
accelerated filer☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company i☐
Emerging
growth company i☐
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 i☒
The number of shares of Common Stock outstanding was i19,529,644
as of 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 the 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 at-the-market
offerings or the capital markets in the future, the ability of DynaEnergetics to realize the anticipated benefits of its patent strategy and expected continuing litigation costs, expected material and labor cost trends, 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, 2021 and such things as the following: geopolitical and economic
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 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 Arcadia 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; global economic conditions; and wars, terrorism and 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.
Less:
Net income attributable to redeemable noncontrolling interest
i1,496
i—
ii1,411/
i—
Net
income attributable to DMC Global Inc. stockholders
$
i6,717
$
i403
$
i8,981
$
i2,559
Net
income per share attributable to DMC Global Inc. stockholders:
Basic
$
i0.46
$
i0.02
$
i0.20
$
i0.15
Diluted
$
i0.46
$
i0.02
$
i0.20
$
i0.15
Weighted
average shares outstanding:
Basic
i19,381,489
i18,728,278
i19,352,638
i17,239,306
Diluted
i19,381,794
i18,739,085
i19,357,333
i17,250,525
Reconciliation
to net income attributable to DMC Global Inc. stockholders after adjustment of redeemable noncontrolling interest for purposes of calculating earnings per share
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
1. iBASIS
OF PRESENTATION
The information included in the Condensed Consolidated Financial Statements is unaudited but includes all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the interim periods presented. 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 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, 2021.
2. iSIGNIFICANT
ACCOUNTING POLICIES
i
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of DMC Global Inc. (“DMC”, “we”, “us”, “our”, or the “Company”) and its controlled subsidiaries. Only subsidiaries in which controlling interests are
maintained are consolidated. All significant intercompany accounts, profits, and transactions have been eliminated in consolidation.
i
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 each 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, 2022, our expected loss rate reflects uncertainties in market conditions that could impact our businesses, including COVID-19 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, 2022, provisions of $i568
and $i696, respectively, were recorded.
i
The following table summarizes
year-to-date activity in the allowance for credit losses on receivables from customers in each of our business segments:
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 i30 to i90
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. Refer to Note 6 "Contract Liabilities" for further information on contract liabilities and Note 10 "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.
i
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.
i
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 as common stock. Restricted stock awards do not participate in net losses.
Basic EPS is calculated by dividing net income
(loss) attributable to the Company’s stockholders after adjustment of redeemable noncontrolling interest by the weighted average number of common shares 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. iFor
the applicable periods presented, diluted EPS using the two-class method was more dilutive than the treasury stock method; as such, only the two-class method has been included below.
Net income attributable to DMC Global Inc. stockholders, as reported
$
i6,717
$
i403
i8,981
i2,559
Adjustment
of redeemable noncontrolling interest
i2,256
i—
(i4,996)
i—
Less:
Undistributed net income available to participating securities
(i136)
(i3)
(i61)
(i25)
Numerator
for basic net income per share:
i8,837
i400
i3,924
i2,534
Add:
Undistributed net income allocated to participating securities
i136
i3
i61
i25
Less:
Undistributed net income reallocated to participating securities
(i136)
(i3)
(i61)
(i25)
Numerator
for diluted net income per share:
i8,837
i400
i3,924
i2,534
Denominator:
Weighted
average shares outstanding for basic net income per share
i19,381,489
i18,728,278
i19,352,638
i17,239,306
Effect
of dilutive securities (1)
i305
i10,807
i4,695
i11,219
Weighted
average shares outstanding for diluted net income per share
i19,381,794
i18,739,085
i19,357,333
i17,250,525
Net
income per share attributable to DMC Global Inc. stockholders
Basic
$
i0.46
$
i0.02
$
i0.20
$
i0.15
Diluted
$
i0.46
$
i0.02
$
i0.20
$
i0.15
(1)
For the three and nine months ended September 30, 2022, i128,145 and i69,846
shares, respectively, have been excluded as their effect would have been anti-dilutive.
i
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. If diversified, these contributions 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 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.
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, when outstanding, approximate their fair value.
Our foreign currency forward contracts are valued using quoted market prices or are determined using a yield curve model based on current market rates. As a result, we classify these instruments as Level 2 in the fair value hierarchy. Money market funds and mutual funds of $i8,379
as of September 30, 2022 and $i9,083 as of December 31, 2021 held to satisfy future deferred compensation obligations are valued based upon the market values of underlying securities and are classified as Level 2 in the fair value hierarchy.
We did not hold any Level 3 assets or liabilities as of September 30, 2022 or December
31, 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.
i
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. iBUSINESS 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 i60%
controlling interest in Arcadia Products, LLC, a Colorado limited liability company resulting from the conversion of Arcadia, Inc. (collectively, “Arcadia”) for closing consideration of $i261,000 in cash (excluding $i7,654
in acquired cash) and i551,458 shares of its common stock, par value $i0.05 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.
(1)
Cash sources of funding included $i150,000 in new term loan debt and $i118,654
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, $i640 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 $i2,674
in additional consideration to compensate for certain tax impacts of the transaction, as provided in the Equity Purchase Agreement.
(2) Equity consideration included i551,458 shares of DMC common stock.
(3) Property, plant and equipment consists of the following:
Land
$
i1,500
Buildings
and improvements
i6,451
Manufacturing equipment and tooling
i12,634
Furniture,
fixtures, and computer equipment
i211
Other
i1,297
Total
property, plant and equipment
$
i22,093
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 $i85,308.
(5)
Intangible assets consist of $i210,500 of customer relationships, $i22,000 of trade name, and $i22,000
of customer backlog. During the quarter ended September 30, 2022, the Company reclassified $i500 from customer relationships to customer backlog due to changes in purchase price allocation estimates.
(6) Redeemable
noncontrolling interest represents i40% 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 $i194,962 in comparison to our previous estimates at each balance sheet date subsequent to acquisition of $i197,196
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 $i2,256
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 $i24,902
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 16, 2051 and has been recorded within “Other Assets”in the Condensed Consolidated Balance Sheets.
Unaudited Pro Forma Financial Information
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 term
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.
i
The following unaudited pro forma combined financial information presents combined results of the Company and Arcadia. Arcadia’s operating results have been included in the
Company’s operating results for the three and nine months ended September 30, 2022.
Net
income attributable to DMC Global Inc. stockholders
$
i403
$
i5,522
$
i2,559
$
i15,965
/
4. iINVENTORIES
iInventories
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 write 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.
Our purchased intangible assets consisted of the following as of September 30, 2022:
Gross
Accumulated Amortization
Net
Core
technology
$
i12,951
$
(i12,693)
$
i258
Customer
relationships
i242,642
(i42,016)
i200,626
Customer
backlog
i22,000
(i22,000)
i—
Trademarks
/ Trade names
i23,751
(i2,882)
i20,869
Total
intangible assets
$
i301,344
$
(i79,591)
$
i221,753
Our
purchased intangible assets consisted of the following as of December 31, 2021:
Gross
Accumulated Amortization
Net
Core technology
$
i15,647
$
(i14,209)
$
i1,438
Customer
relationships
i246,718
(i36,047)
i210,671
Customer
backlog
i21,500
i—
i21,500
Trademarks
/ Trade names
i24,037
(i2,070)
i21,967
Total
intangible assets
$
i307,902
$
(i52,326)
$
i255,576
/
The
change in the gross value of our purchased intangible assets at September 30, 2022 from December 31, 2021 was primarily due to foreign currency translation. Additionally, there was an adjustment due to recognition of tax benefit from tax amortization previously applied to certain goodwill related to the DynaEnergetics and NobelClad reporting units. After the goodwill associated with each reporting unit was impaired at December 31, 2015 and September 30, 2017, respectively, the tax amortization reduces other intangible assets related to the historical acquisition.
At times, we require customers to make advance payments prior to the shipment of their orders in order to help finance our inventory investment on large orders or to keep customers’ credit limits at acceptable levels. iContract liabilities were as follows:
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.
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”) assets are initially measured at the present value of lease payments over the lease term plus initial direct costs, if 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.
i
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:
The
ROU asset is reported in “Other assets” while the current lease liability is reported in “Other current liabilities” and the long-term lease liability is reported in “Other long-term liabilities” in the Company’s Condensed Consolidated Balance Sheets. Cash paid for operating lease liabilities are recorded as operating cash outflows 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 ieight 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 $i29,753
and $i30,131, respectively.
For the three months ended September 30, 2022 and 2021, operating lease expense was $i2,872
and $i1,064, respectively. For the nine months ended September 30, 2022 and 2021, operating lease expense was $i8,413
and $i3,074, respectively. Related party lease expense for the three and nine months ended September 30, 2022 was $i1,156
and $i3,469, respectively, which is included in overall operating lease expense. There was ino
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, 2022 and 2021.
On December 23, 2021, we entered into a ifive-year $i200,000
syndicated credit agreement (“credit facility”) which included a $i150,000 Term Loan, which is amortizable at i10%
of principal per year with a balloon payment for the outstanding balance upon the credit facility maturity date in 2026, and allows for revolving loans of up to $i50,000. The credit facility has an accordion feature to increase the commitments by $i100,000
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 ifour 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 $i150,000 Term Loan and $i50,000 revolving loan limit can be in the form of Adjusted
Daily Simple Secured Overnight Financing Rate ("SOFR") loans or one month Adjusted Term SOFR loans. Additionally, U.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 rate, an adjusted Federal Funds rate or an adjusted SOFR rate). SOFR loans bear interest at the applicable SOFR rate plus an applicable margin (varying from i1.50% to i3.00%).
Base Rate loans bear interest at the defined Base rate plus an applicable margin (varying from i0.50% to i2.00%).
The
credit facility 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 i3.25
to 1.0 from the quarter ended September 30, 2022 through the quarter ended March 31, 2023, and i3.0 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 i1.35 to 1.0.
As of September
30, 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 €i7,000 for our NobelClad and DynaEnergetics operations in Europe. This line of credit is also used to issue bank guarantees to customers to secure advance payments made by them. As of September 30, 2022 and December
31, 2021, we had iino/ outstanding borrowings under this line of credit and bank guarantees of €i2,559
and €i2,997 were secured by the line of credit, respectively. The line of credit has open-ended terms and can be canceled by the bank at any time.
Deferred debt issuance costs are being amortized over the remaining term of the credit facility which expires on December 23, 2026.
9. iINCOME
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 i20% to i33%),
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 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, 2022 and September 30, 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 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. If any such earnings were ultimately distributed to the U.S. in the form of dividends or otherwise,
or if the shares of our international subsidiaries were sold or transferred, we could be subject to additional U.S. federal and state income taxes. Due to the multiple avenues in which earnings can be repatriated, and because a large portion of these earnings are not liquid, it is not practical to estimate the amount of additional taxes that might be payable on these amounts of undistributed foreign income.
10. iBUSINESS
SEGMENTS
Our business is organized into ithree segments: Arcadia, DynaEnergetics and NobelClad. In December 2021, DMC acquired a i60%
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 to perforate oil and gas wells. NobelClad is a 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.
*
Stock-based compensation is not allocated to wholly owned segments DynaEnergetics and NobelClad. Stock-based compensation is allocated to the Arcadia segment as i60% of such expense is attributable to the Company, whereas the remaining ii40/%
is attributable to the redeemable noncontrolling interest holder.
i
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.
*Future
sales to Russia have been indefinitely suspended due to the ongoing conflict in Ukraine.
During the three and nine months ended September 30, 2022 and 2021, no single customer accounted for greater than 10% of consolidated net sales. As of September 30, 2022, one DynaEnergetics customer accounted for greater than i10% of consolidated accounts receivable. As of December
31, 2021, no single customer accounted for greater than 10% of consolidated accounts receivable.
11. iDERIVATIVE 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 intercompany 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), 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.
iThe
following table presents the location and amount of net (losses) from hedging activities, which offset foreign currency gains and losses recorded in the normal course of business that are not presented below.
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 except as set forth below:
Wage and Hour Matters
Felipe 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 four years preceding the date of the complaint. One Stop is a staffing agency which provides 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 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.
Mayorga 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 all of the 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.
Arcadia
intends to vigorously defend against the Felipe and Mayorga actions. Due to the nature of these matters and inherent 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 escrow pending resolution of these matters.
ITEM
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our historical Consolidated Financial Statements and notes, as well as the selected historical consolidated financial data that is included in our Annual Report filed on Form 10-K for the year ended December 31, 2021.
Unless stated otherwise, all dollar figures are presented in thousands (000s).
Overview
General
DMC
Global Inc. (“DMC”) is a diversified holding company. Our innovative businesses provide differentiated products and services to niche industrial and commercial 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. Today, DMC’s portfolio consists of Arcadia, DynaEnergetics, and NobelClad, which 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 60% of the membership 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 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.
Cost of products sold for Arcadia includes the cost of aluminum, paint, and other raw materials used to manufacture windows, curtain walls, doors, and interior partitions as well as employee compensation and benefits, manufacturing facility lease expense, depreciation expense of property, plant and equipment related
to manufacturing, supplies and other manufacturing overhead expenses.
DynaEnergetics
DynaEnergetics designs, manufactures and distributes products utilized by the global oil and gas industry principally to 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. Well completion operations are increasingly complex, which in turn has increased the demand for intrinsically-safe, reliable and technically advanced perforating 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, 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 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 $48,019 at September 30, 2022 from $41,181 at December 31, 2021.
Cost
of products sold for NobelClad includes the cost of metals, explosive powders and other raw materials used to manufacture clad metal plates as well as employee compensation and benefits, outside processing costs, depreciation of manufacturing 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 it paid to employees for portions of calendar year 2021. The ERC favorably impacted the financial statement results of the Company for the three and nine 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 due to 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 third 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 United States Dollar.
•Consolidated gross profit was 29% in the third 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.
In North America, well completion activity increased in the third quarter of 2022 which positively impacted DynaEnergetics’ end customers’ activity levels. These conditions, along with the attainment of higher market share, have
led to continued increases in unit sales of DynaEnergetics’ fully integrated and factory-assembled DS perforating systems.
We believe well completion activity and customer pricing will remain resilient. DynaEnergetics has instituted price increases over the past twelve months to offset higher labor and material costs. DynaEnergetics offers a highly differentiated product line, 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.
We believe many of the pre-wired carriers in the market incorporate features that violate DynaEnergetics patents, and we are continuing 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, and we expect these costs to be ongoing throughout 2022.
Arcadia serves the commercial building market in the western and southwestern 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 lead to resilient financial performance. In addition, we expect the building products industry to remain strong, particularly
in Arcadia’s core geographic regions and end markets. We are beginning the process to design and install new finishing capacity to increase manufacturing throughput. We expect the finishing capacity will be operational next year. The design and implementation of a new enterprise resource planning system is also underway and will improve operating efficiencies and enhance the buying experience for Arcadia’s commercial and 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
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 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 other non-recurring charges on DMC’s net income (loss) and diluted earnings per share,
respectively.
Net debt is a non-GAAP measure we use to supplement information in our Condensed Consolidated Financial Statements. We define net debt as total debt less total 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. Given 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.
Net
income attributable to redeemable noncontrolling interest
1,496
—
1,496
—
%
Net income attributable to DMC Global Inc.
6,717
403
6,314
1,567
%
Adjusted
EBITDA attributable to DMC Global Inc.
$
21,751
$
5,787
$
15,964
276
%
Net sales were $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 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 29.4%. Excluding Arcadia, gross profit percentage was 29.3% versus 24.8% in the same period in 2021. The improvement compared to the prior year primarily was due to higher sales volume on fixed manufacturing overhead expense, primarily due to increases in unit sales of DS perforating systems at DynaEnergetics. 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.
General
and administrative expenses increased $10,075 for the three months ended September 30, 2022 compared with the same period in 2021. The Arcadia acquisition contributed $8,782 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 $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.
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.
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 $1,725, which was primarily related to patent infringement litigation in which DynaEnergetics is the plaintiff, higher headcount and salaries, benefits, and other-payroll related costs including variable incentive compensation by $2,644, higher business-related travel by $1,668, and the expiration of the 2021 ERC under the CARES Act by $1,028.
Selling and distribution expenses increased $15,003 for the nine months ended September 30, 2022 compared with the same period in 2021.The
Arcadia acquisition contributed $11,832 to the increase. The remainder of the increase was from the expiration of the 2021 ERC under the CARES Act by $1,236, higher business-related travel by $431, increased lease expense by
$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$35for the nine 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$4,058 for the nine months ended September 30, 2022 increased compared with the same period in 2021due 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 year-to-date period.
Income
tax provision of $4,938 was recorded on income before income taxes of $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 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 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 nine months ended September 30, 2022 was $8,981, or $0.20 per diluted share after the adjustment related to the redeemable noncontrolling interest, compared to net income of $2,559, or $0.15 per diluted share, for the same period in 2021.
Adjusted EBITDA for the nine 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.
Adjusted
Net Income and Adjusted Diluted Earnings per Share increased for the nine months ended September 30, 2022 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.
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):
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.
Net
sales increased $26,135 for the three months ended September 30, 2022 compared to the same period in 2021. Higher energy prices and a growing 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. International sales also increased, which favorably impacted results in the third quarter of 2022.
Gross profit percentage increased to 30.2% for the three months ended September 30, 2022 primarily due to the impact of higher sales volume on fixed manufacturing overhead expenses, primarily due to increases in unit sales of DS perforating systems. The three months ended September 30,
2021 was favorably impacted by the receipt of $1,250 ERC under the CARES Act.
Selling and distribution expensesincreased $997 for thethree months ended September 30, 2022 compared to the same period in 2021 primarily due to higher salaries, benefits, and other-payroll related costs including variable incentive compensation by $296, the expiration of the 2021 ERC under the CARES Act by $279, and higher lease expense by $196.
Operating income increased $10,393 for thethree months ended September 30, 2022 compared to the same period in 2021
due to the factors discussed above.
Adjusted EBITDAfor the three months ended September 30, 2022 increased compared with 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.
Net
sales increased $62,099 for the nine months ended September 30, 2022 compared to the same period in 2021 due to a recovery in energy demand and a growing reliance on North American oil and gas, which led to increased drilling and well completion activity in North America and increased sales of DynaEnergetics’ DS perforating systems. International sales also increased, which favorably impacted results in 2022.
Gross profit percentageincreased to 28.8% for the nine months ended September 30, 2022 compared to the same period in 2021 primarily due to the 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 was favorably impacted by the receipt of $2,696 ERC under the CARES Act.
General and administrative expenses increased $2,083 for the nine months ended September 30, 2022 compared to the same period in 2021 due to an increase in outside services costs by $831, primarily related to patent infringement litigation in which DynaEnergetics is the plaintiff, higher salaries, benefits, and other-payroll related costs including variable incentive compensation by $541, and the expiration of the 2021 ERC under the CARES Act by $333.
Selling and distribution expensesincreased $2,616 for the nine months ended September 30, 2022 compared to the
same period in 2021 primarily due to the expiration of the 2021 ERC under the CARES Act 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 $116.
Operating income increased $20,278for the nine months ended September 30, 2022 compared to the same period in 2021 due to the factors discussed above.
Adjusted EBITDAincreased for the nine months ended September 30, 2022 compared to 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.
Net sales increased $458 for the three months ended September 30, 2022 compared to the same period in 2021 primarily due to the timing of shipments 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 decreased to 27.0% for the three 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 $542 for the three months ended September 30, 2022 compared to the same period in 2021 due to higher outside services costs by $472 primarily related to the implementation of a new enterprise resource planning system.
Operating
income decreased $1,115 for thethree months ended September 30, 2022 compared to the same period in 2021 due to a decrease in gross profit and higher general and administrative expenses. Operating income in 2021 was benefited by the receipt of $719 of ERC under the CARES Act.
Adjusted EBITDA for the three months ended September 30, 2022 decreased compared with 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.
Net sales increased $3,515 for the nine months ended September 30, 2022 compared to the same period in 2021 primarily 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 percentage 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 increased $1,008 for the nine months ended September 30, 2022 compared to the same period in 2021 due to higher outside services costs by $847 primarily related to 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 decreased $2,905 for the nine months ended September 30, 2022 compared to the same period in 2021 due to lower gross profit and higher general and administrative and selling and distribution expenses.
Adjusted EBITDA for the nine months ended September 30, 2022 decreased compared to 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.
We have historically financed our operations from a combination of internally generated cash flow, revolving credit borrowings,
and various long-term debt arrangements. Our net debt position was $117,923 at September 30, 2022 compared to $116,615 at December 31, 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 a fully undrawn and available $50,000 revolving credit facility at September 30, 2022.
We believe that cash and cash equivalents on hand, cash flow from operations, funds available under our current credit facilities and any future replacement thereof will be sufficient to fund the working capital, debt service, and other capital
expenditure requirements of our current business operations for the foreseeable future. We may also execute capital markets transactions, including at-the-market offering programs, to raise additional funds if we believe market conditions are 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 financial
market conditions, including the related impact on credit availability and capital markets.
Debt facilities
On December 23, 2021, in connection with the Arcadia acquisition, we entered into a five-year $200,000 syndicated credit agreement (“credit facility”) which included a $150,000 Term Loan, which is amortizable at 10% of principal per year with a balloon payment for the outstanding balance upon the credit facility maturity date in 2026, and allows for revolving loans of up to $50,000. The credit facility has an 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 Adjusted Daily Simple Secured Overnight Financing Rate ("SOFR") loans or one month Adjusted Term SOFR loans. Additionally, U.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 rate, an adjusted Federal Funds rate or an adjusted SOFR rate). SOFR loans bear interest at the applicable SOFR 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%).
The credit facility includes various covenants and 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
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. Consolidated Pro Forma EBITDA equals Adjusted EBITDA as calculated within the Consolidated 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 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 actual leverage ratio as of September
30, 2022, calculated in accordance with the credit facility, as amended, was 2.10 to 1.0.
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. The actual debt service coverage ratio for the trailing twelve months ended September 30, 2022 was 2.17 to 1.0.
As
of September 30, 2022, U.S. dollar revolving loans of $0 and borrowings of $138,750 on the Term Loan were outstanding under our credit facility and our available revolver borrowing capacity was $50,000.
We also maintain a line of credit with a German bank for our NobelClad and DynaEnergetics operations in Europe. This line of credit provides a borrowing capacity of €7,000.
Cash flows provided by (used in) operating activities
Net cash provided by operating activities was $24,335 for the nine months ended September 30, 2022 compared with net cash used in operating activities of $1,906 in the same period last year. The increase primarily was due to higher 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 inventory levels due to increased input costs and lead times for several key raw materials at DynaEnergetics and Arcadia, and an expected
increase in sales volume at DynaEnergetics.
Cash flows used in investing activities
Net cash used 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 were $124,514 and primarily related to investment in marketable securities of $123,984 made with the proceeds from our May 2021 equity offering.
Cash flows (used in) provided by financing activities
Net
cash flows used in financing activities for the nine months ended September 30, 2022 of $22,814 included a distribution to the redeemable noncontrolling interest holder of $10,293, quarterly payments on our term loan of $11,250, and 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.
Redeemable noncontrolling interest
The Operating Agreement contains a right for the
Company 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, 2022, the estimated value of 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 its projected adjusted earnings for the then-current fiscal year.
On April 23, 2020, DMC announced that its Board of Directors suspended the quarterly dividend indefinitely due to the uncertain economic 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, 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, 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.
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, 2021, except as provided below.
Our business, financial condition and results of operations could be adversely affected by disruptions in the global and European economies caused by Russia’s invasion of
Ukraine.
The global economy continues to be 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 negatively impact global demand, cause supply chain disruptions and increase costs for transportation, energy and other raw materials. Furthermore, governments in the 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 continue to monitor the conflict including the potential impact of financial and economic sanctions on the global economy and particularly the economies of Europe. Increased trade barriers, sanctions and other restrictions on global or regional trade could adversely 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 2022, we retained shares of common stock in satisfaction of withholding tax obligations. These shares are held as treasury shares by the Company.
(1)
Share purchases in 2022 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.
(2) As of September 30, 2022, the maximum number of shares that may yet be purchased would not exceed the employees’ portion of taxes withheld on unvested shares (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 (151,468) into other investment options available to participants in the Plan.
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, 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.
101The following materials from the Quarterly Report on Form 10-Q of DMC Global Inc. for the quarter ended September 30, 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.
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.
