DMC GLOBAL INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form
10-Q
(Mark One)
For the quarterly period ended
June 30, 2024
OR
FOR THE TRANSITION PERIOD FROM TO .
Commission file number
001-14775
(Exact name of Registrant as Specified in its Charter)
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| (State of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices, including zip code)
(
303
)
665-5700
(Registrant’s telephone number, including area code)
| Title of each class | Trading Symbol | Name of exchange on which registered | ||||||||||||
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
☒
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
☒
No
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Non-accelerated filer ☐
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Smaller reporting company
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Emerging growth company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 under the Act). Yes
☐
No
☒
The number of shares of Common Stock outstanding was
20,038,774
as of July 30, 2024.
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 expected benefits from enhancements to our systems and processes at Arcadia Products, North American well completion activity in the third quarter of 2024, anticipated profit margin improvements resulting from changes in manufacturing processes and the introduction of new products in DynaEnergetics, continued demand and realization of large order opportunities at NobelClad, our backlog at NobelClad, the result and timing of the strategic review process for our businesses, our ability to access capital markets transactions in the future, 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, 2023 and other potential factors, including: 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; 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.
INDEX
| Page | ||||||||
3
Part I - FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
DMC GLOBAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share and Per Share Data)
| June 30, 2024 | December 31, 2023 | ||||||||||
| (unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ |
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$ |
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| Marketable securities |
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Accounts receivable, net of allowance for doubtful accounts of $
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| Inventories |
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| Prepaid expenses and other |
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| Total current assets |
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| Property, plant and equipment |
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| Less - accumulated depreciation |
(
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(
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| Property, plant and equipment, net |
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| Goodwill |
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| Purchased intangible assets, net |
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| Deferred tax assets |
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| Other assets |
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| Total assets | $ |
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$ |
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| LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST, AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ |
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$ |
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| Accrued expenses |
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| Accrued income taxes |
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| Accrued employee compensation and benefits |
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| Contract liabilities |
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| Current portion of long-term debt |
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| Other current liabilities |
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| Total current liabilities |
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| Long-term debt |
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| Deferred tax liabilities |
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| Other long-term liabilities |
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| Total liabilities |
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Commitments and contingencies (Note 12)
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| Redeemable noncontrolling interest |
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| Stockholders’ equity | |||||||||||
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Preferred stock, $
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Common stock, $
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| Additional paid-in capital |
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| Retained earnings |
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| Other cumulative comprehensive loss |
(
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(
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Treasury stock, at cost, and company stock held for deferred compensation, at par;
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(
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(
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| Total stockholders’ equity |
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| Total liabilities, redeemable noncontrolling interest, and stockholders’ equity | $ |
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$ |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net sales | $ |
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$ |
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$ |
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$ |
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| Cost of products sold |
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| Gross profit |
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| Costs and expenses: | |||||||||||||||||||||||
| General and administrative expenses |
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| Selling and distribution expenses |
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| Amortization of purchased intangible assets |
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| Strategic review expenses |
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| Restructuring expenses |
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| Total costs and expenses |
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| Operating income |
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| Other expense: | |||||||||||||||||||||||
| Other expense, net |
(
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(
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(
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(
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| Interest expense, net |
(
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(
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(
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(
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| Income before income taxes |
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| Income tax provision |
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| Net income | $ |
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$ |
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$ |
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$ |
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| Less: Net income attributable to redeemable noncontrolling interest |
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| Net income attributable to DMC Global Inc. stockholders | $ |
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$ |
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$ |
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$ |
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| Net income per share attributable to DMC Global Inc. stockholders: | |||||||||||||||||||||||
| Basic | $ |
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$ |
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$ |
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$ |
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| Diluted | $ |
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$ |
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$ |
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$ |
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| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic |
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| Diluted |
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Reconciliation to net income attributable to DMC Global Inc. stockholders after adjustment of redeemable noncontrolling interest for purposes of calculating earnings per share
| Three months ended June 30, |
Six months ended June 30,
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| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net income attributable to DMC Global Inc. stockholders | $ |
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$ |
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$ |
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$ |
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| Adjustment of redeemable noncontrolling interest |
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(
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(
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| Net income attributable to DMC Global Inc. stockholders after adjustment of redeemable noncontrolling interest | $ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
(unaudited)
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net income | $ |
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$ |
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$ |
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$ |
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| Change in cumulative foreign currency translation adjustment |
(
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(
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| Other comprehensive income | $ |
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$ |
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$ |
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$ |
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| Less: comprehensive income attributable to redeemable noncontrolling interest |
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| Comprehensive income attributable to DMC Global Inc. stockholders | $ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
6
DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
(Amounts in Thousands, Except Share Data)
(unaudited)
| Other | Treasury Stock, at cost, and | Total | Redeemable | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Additional | Cumulative | Company Stock Held for | DMC Global Inc. | Non- | |||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Retained | Comprehensive | Deferred Compensation, at par | Stockholders’ | Controlling | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Loss | Shares | Amount | Equity | Interest | |||||||||||||||||||||||||||||||||||||||||||||
| Balances, December 31, 2023 |
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$ |
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$ |
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$ |
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$ |
(
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(
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$ |
(
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$ |
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$ |
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| Net income (loss) | — | — | — |
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— | — | — |
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(
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| Change in cumulative foreign currency translation adjustment | — | — | — | — |
(
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— | — |
(
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— | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued in connection with stock compensation plans |
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(
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— | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — |
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— | — | — | — |
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| Distribution to redeemable noncontrolling interest holder | — | — | — | — | — | — | — | — |
(
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| Adjustment of redeemable noncontrolling interest | — | — | — |
(
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— | — | — |
(
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| Treasury stock activity | — | — | — | — | — |
(
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(
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(
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— | ||||||||||||||||||||||||||||||||||||||||||||
| Balances, March 31, 2024 |
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$ |
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$ |
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$ |
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$ |
(
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(
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$ |
(
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$ |
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$ |
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| Net income | — | — | — |
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— | — | — |
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| Change in cumulative foreign currency translation adjustment | — | — | — | — |
(
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— | — |
(
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— | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued in connection with stock compensation plans |
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— | — | — | — |
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— | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — |
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— | — | — | — |
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| Distribution to redeemable noncontrolling interest holder | — | — | — | — | — | — | — | — |
(
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| Adjustment of redeemable noncontrolling interest | — | — | — |
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— | — | — |
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(
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| Treasury stock activity | — | — | — | — | — |
(
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(
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(
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— | ||||||||||||||||||||||||||||||||||||||||||||
| Balances, June 30, 2024 |
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$ |
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$ |
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$ |
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$ |
(
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(
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$ |
(
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$ |
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$ |
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7
DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
(Amounts in Thousands, Except Share Data)
(unaudited)
| Other | Treasury Stock, at cost, and | Total | Redeemable | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Additional | Cumulative | Company Stock Held for | DMC Global Inc. | Non- | |||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Retained | Comprehensive | Deferred Compensation, at par | Stockholders’ | Controlling | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Loss | Shares | Amount | Equity | Interest | |||||||||||||||||||||||||||||||||||||||||||||
| Balances, December 31, 2022 |
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$ |
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$ |
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$ |
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$ |
(
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(
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$ |
(
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$ |
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$ |
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| Net income | — | — | — |
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— | — | — |
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| Change in cumulative foreign currency translation adjustment | — | — | — | — |
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— | — |
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— | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued in connection with stock compensation plans |
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(
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— | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — |
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— | — | — | — |
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| Distribution to redeemable noncontrolling interest holder | — | — | — | — | — | — | — | — |
(
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| Adjustment of redeemable noncontrolling interest | — | — | — |
(
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— | — | — |
(
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| Treasury stock activity | — | — | — | — | — |
(
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(
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(
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— | ||||||||||||||||||||||||||||||||||||||||||||
| Balances, March 31, 2023 |
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$ |
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$ |
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$ |
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$ |
(
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(
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$ |
(
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$ |
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$ |
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| Net income | — | — | — |
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— | — | — |
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| Change in cumulative foreign currency translation adjustment | — | — | — | — |
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— | — |
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— | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued in connection with stock compensation plans |
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— | — | — | — |
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— | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — |
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— | — | — | — |
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| Distribution to redeemable noncontrolling interest holder | — | — | — | — | — | — | — | — |
(
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| Adjustment of redeemable noncontrolling interest | — | — | — |
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— | — | — |
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(
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| Treasury stock activity | — | — | — | — | — |
(
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(
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(
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— | ||||||||||||||||||||||||||||||||||||||||||||
| Balances, June 30, 2023 |
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$ |
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$ |
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$ |
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$ |
(
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(
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$ |
(
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$ |
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$ |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
8
DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(unaudited)
| Six months ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows provided by operating activities: | |||||||||||
| Net income | $ |
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$ |
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| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation |
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| Amortization of purchased intangible assets |
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| Amortization of deferred debt issuance costs |
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| Stock-based compensation |
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| Deferred income taxes |
(
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| Other |
(
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(
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| Change in: | |||||||||||
| Accounts receivable, net |
(
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(
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| Inventories |
(
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(
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| Prepaid expenses and other |
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| Accounts payable |
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| Contract liabilities |
(
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| Accrued expenses and other liabilities |
(
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| Net cash provided by operating activities |
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| Cash flows provided by (used in) investing activities: | |||||||||||
| Investment in marketable securities |
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(
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| Proceeds from maturities of marketable securities |
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| Proceeds from sales of marketable securities |
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| Acquisition of property, plant and equipment |
(
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(
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| Proceeds on sale of property, plant and equipment |
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| Net cash provided by (used in) investing activities |
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(
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| Cash flows used in financing activities: | |||||||||||
| Repayments on term loan |
(
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(
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| Borrowings on term loan |
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| Borrowings on revolving loans |
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| Repayments on revolving loans |
(
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| Payment of debt issuance costs |
(
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| Distributions to redeemable noncontrolling interest holder |
(
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(
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| Net proceeds from issuance of common stock to employees and directors |
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| Treasury stock purchases |
(
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(
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| Net cash used in financing activities |
(
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(
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| Effects of exchange rates on cash |
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| Net decrease in cash and cash equivalents |
(
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(
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| Cash and cash equivalents, beginning of the period |
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| Cash and cash equivalents, end of the period | $ |
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$ |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
9
DMC GLOBAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
1.
BASIS OF PRESENTATION
The information included in the Condensed Consolidated Financial Statements is unaudited but includes all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the interim periods presented. 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, 2023.
2.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of DMC Global Inc. (“DMC”, “we”, “us”, “our”, or the “Company”) and its controlled subsidiaries. All intercompany accounts, profits, and transactions have been eliminated in consolidation.
Accounts 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 business segment and analyze each segment’s accounts receivable balances as separate populations. Within each segment, receivables exhibit similar risk characteristics.
The following table summarizes year-to-date activity in the allowance for credit losses on receivables from customers in each of our business segments:
| Arcadia Products | DynaEnergetics | NobelClad | DMC Global Inc. | ||||||||||||||||||||
|
Allowance for doubtful accounts, December 31, 2023
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Current period provision for expected credit losses |
|
|
|
|
|||||||||||||||||||
| Write-offs charged against the allowance |
|
|
|
|
|||||||||||||||||||
| Recoveries of amounts previously reserved |
|
(
|
|
(
|
|||||||||||||||||||
| Impacts of foreign currency exchange rates and other |
|
(
|
(
|
(
|
|||||||||||||||||||
|
Allowance for doubtful accounts, June 30, 2024
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
10
Redeemable noncontrolling interest
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 Products”). The limited liability company operating agreement for Arcadia Products (the “Operating Agreement”) contains a right for the Company to purchase the remaining interest in Arcadia Products 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 Products has the right to sell its remaining interest in Arcadia Products 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 neither the Call Option nor the Put Option meet the definition of a derivative 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 Products’ average adjusted earnings over a three-year period, subject to a floor value as defined in the Operating Agreement which is based primarily upon a contractually stated equity value. 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 noncontrolling interest is also probable of redemption, as the only criteria for the security to become redeemable is the passage of time. As such, the redeemable noncontrolling interest is classified in temporary equity, separate from the stockholders’ equity section, in the Condensed Consolidated Balance Sheets.
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 $
24,902
to the redeemable noncontrolling interest holder. The loan was evidenced by an unsecured promissory note, and the loan will be repaid out of proceeds from the sale of the redeemable noncontrolling interest holder’s interests in Arcadia
Products
, 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 at the earlier of the exercise of the Put or Call Option, or by December 16, 2051, and has been recorded within “Other assets”
in the Condensed Consolidated Balance Sheets.
Revenue Recognition
The Company’s revenues are primarily derived from consideration paid by customers for tangible goods. The Company analyzes its different products 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.
11
See additional revenue recognition policy disclosures specific to each of our business segments within our Annual Report filed on Form 10-K for the year ended December 31, 2023.
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 bases 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 are 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 performance and existing 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 the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the Condensed Consolidated Financial Statements from such a position are measured as the largest benefit that is more likely than not to be realized upon ultimate resolution. We recognize interest and penalties related to uncertain tax positions in operating expense.
Earnings Per Share
In periods with net income, the Company computes earnings per share (“EPS”) using a two-class method, which is an earnings allocation formula that determines EPS for (i) each class of common stock (the Company has a single class of common stock), and (ii) participating securities according to dividends declared and participation rights in undistributed earnings. Restricted stock awards are considered participating securities in periods of net income as they receive non-forfeitable rights to dividends as common stock. Restricted stock awards do not participate in net losses.
12
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net income attributable to DMC Global Inc. stockholders, as reported | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Adjustment of redeemable noncontrolling interest |
|
|
(
|
(
|
|||||||||||||||||||
| Less: Undistributed net income available to participating securities |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Numerator for basic net income per share: |
|
|
|
|
|||||||||||||||||||
| Add: Undistributed net income allocated to participating securities |
|
|
|
|
|||||||||||||||||||
| Less: Undistributed net income reallocated to participating securities |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Numerator for diluted net income per share: | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average shares outstanding for basic net income per share |
|
|
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|
|||||||||||||||||||
|
Effect of dilutive securities
(1)
|
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|
|
|||||||||||||||||||
| Weighted average shares outstanding for diluted net income per share |
|
|
|
|
|||||||||||||||||||
| Net income per share attributable to DMC Global Inc. stockholders | |||||||||||||||||||||||
| Basic | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Diluted | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
(1)
For the three and six months ended June 30, 2024,
13,539
and
10,843
shares, respectively, have been excluded as their effect would have been anti-dilutive. For the three and six months ended June 30, 2023,
18,337
and
12,883
shares, respectively, have been excluded as their effect would have been anti-dilutive.
Deferred Compensation Plan
The Company maintains a Non-Qualified Deferred Compensation Plan (the “Plan”) as part of its overall compensation package for certain employees. Participants are eligible to defer a portion of their annual salary, their annual incentive bonus, and their equity awards through the Plan on a tax-deferred basis. Deferrals into the Plan are not matched or subsidized by the Company, nor are they eligible for above-market or preferential earnings.
The Plan provides for deferred compensation obligations to be settled either by delivery of a fixed number of shares of DMC’s common stock or in cash, in accordance with participant contributions and elections. For deferred equity awards, subsequent to equity award vesting and after a period prescribed by the Plan, participants can elect to diversify contributions of equity awards into other investment options available to Plan participants. Once diversified, such contributions will be settled by delivery of cash. Effective January 1, 2024, diversification of deferred equity awards is no longer permitted by the Plan.
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 current and former 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” at the par value of the common stock or unvested RSAs. These accounts are not adjusted for subsequent changes in the fair value of the common stock. COLI is accounted for at the cash surrender value while money market and mutual funds held by the trust are accounted for at fair value.
Deferred compensation obligations that will be settled in cash are accounted for on an accrual basis in accordance with the terms of the Plan. These obligations are adjusted based on changes in value of the underlying investment options chosen by Plan participants. Deferred compensation obligations that will be settled by delivery of a fixed number of previously vested shares of the Company’s common stock are reflected in the Condensed Consolidated Statements of Stockholders’ Equity and Redeemable Noncontrolling Interest within “Common stock” at the par value of the common stock or unvested RSAs. These accounts are not adjusted for subsequent changes in the fair value of the common stock.
13
The balances related to the deferred compensation plan were as follows for the periods presented. The amounts included within “Prepaid expenses and other” and “Other current liabilities” pertain to scheduled distributions per the terms of the Plan that will occur within twelve months of June 30, 2024.
| Balance Sheet location | June 30, 2024 | December 31, 2023 | ||||||||||||||||||
| Deferred compensation assets | Prepaid expenses and other | $ |
|
$ |
|
|||||||||||||||
| Deferred compensation assets | Other assets |
|
|
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| Deferred compensation obligations | Other current liabilities |
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|
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| Deferred compensation obligations | Other long-term liabilities |
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|
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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 cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their fair value. The carrying value of our revolving loans and term loan under our credit facility, when outstanding, also approximate their fair value because of the variable interest rate associated with these instruments, which reset each month at market interest rates. All of these account balances are considered Level 1 assets and liabilities.
We did not hold any Level 3 assets or liabilities as of June 30, 2024 or December 31, 2023.
Recent Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2023-07 (“ASU 2023-07”), Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which amends reportable segment disclosure requirements to enhance disclosure of significant segment information on an annual and interim basis. The guidance is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024 with early adoption permitted. ASU 2023-07 is to be applied retrospectively, and we are currently evaluating the impact on our financial statements and disclosures.
In December 2023, the FASB issued Accounting Standards Update 2023-09 (“ASU 2023-09”), Income Taxes (Topic 740): Improvement to Income Tax Disclosures, which amends income tax disclosure requirements for the effective tax rate reconciliation to include incremental income tax information and expanded disclosures of income taxes paid. The guidance is effective for fiscal years beginning after December 15, 2024 and is applied prospectively. Early adoption and retrospective application of the amendments are permitted. We are currently evaluating the impact of ASU 2023-09 on our financial statements and disclosures.
14
3.
INVENTORIES
Inventories consisted of the following at June 30, 2024:
|
Arcadia Products
|
DynaEnergetics | NobelClad | DMC Global Inc. | ||||||||||||||||||||
| Raw materials | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Work-in-process |
|
|
|
|
|||||||||||||||||||
| Finished goods |
|
|
|
|
|||||||||||||||||||
| Supplies |
|
|
|
|
|||||||||||||||||||
| Total inventories | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
Inventories consisted of the following at December 31, 2023:
|
Arcadia Products
|
DynaEnergetics | NobelClad | DMC Global Inc. | ||||||||||||||||||||
| Raw materials | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Work-in-process |
|
|
|
|
|||||||||||||||||||
| Finished goods |
|
|
|
|
|||||||||||||||||||
| Supplies |
|
|
|
|
|||||||||||||||||||
| Total inventories | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
4.
PURCHASED INTANGIBLE ASSETS
Our purchased intangible assets consisted of the following at June 30, 2024:
| Gross |
Accumulated
Amortization |
Net | |||||||||||||||
| Core technology | $ |
|
$ |
(
|
$ |
|
|||||||||||
| Customer relationships |
|
(
|
|
||||||||||||||
| Trademarks / Trade names |
|
(
|
|
||||||||||||||
| Total intangible assets | $ |
|
$ |
(
|
$ |
|
|||||||||||
Our purchased intangible assets consisted of the following at December 31, 2023:
| Gross |
Accumulated
Amortization |
Net | |||||||||||||||
| Core technology | $ |
|
$ |
(
|
$ |
|
|||||||||||
| Customer backlog |
|
(
|
|
||||||||||||||
| Customer relationships |
|
(
|
|
||||||||||||||
| Trademarks / Trade names |
|
(
|
|
||||||||||||||
| Total intangible assets | $ |
|
$ |
(
|
$ |
|
|||||||||||
The change in the gross value of our unamortized purchased intangible assets at June 30, 2024 from December 31, 2023 was due to foreign currency translation.
15
5.
CONTRACT LIABILITIES
| June 30, 2024 | December 31, 2023 | ||||||||||
|
Arcadia Products
|
$ |
|
$ |
|
|||||||
| NobelClad |
|
|
|||||||||
| DynaEnergetics |
|
|
|||||||||
| Total contract liabilities | $ |
|
$ |
|
|||||||
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, primarily supply chain delays and disruptions.
6.
LEASES
The Company leases real properties for use in manufacturing and as administrative and sales offices, and 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 implicit 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 Statements 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 is incurred. The Company has no leases in which the Company is the lessor.
Nearly all of the Company’s leasing arrangements are classified as operating leases. ROU asset and lease liability balances were as follows for the periods presented:
| June 30, 2024 | December 31, 2023 | ||||||||||
| ROU asset | $ |
|
$ |
|
|||||||
| Current lease liability |
|
|
|||||||||
| Long-term lease liability |
|
|
|||||||||
| Total lease liability | $ |
|
$ |
|
|||||||
The ROU asset is reported in “
” while the current lease liability is reported in “
” and the long-term lease liability is reported in “
” in the Company’s Condensed Consolidated Balance Sheets. Cash paid for operating lease liabilities is recorded as operating cash outflows in the Company’s Condensed Consolidated Statements of Cash Flows.
Arcadia Products leases certain office, manufacturing, distribution and warehouse facilities from entities affiliated with the redeemable noncontrolling interest holder and former president of Arcadia Products. There were
eight
such leases in effect as of June 30, 2024, with expiration dates ranging from calendar years 2025 to 2031. As of June 30, 2024, the total ROU asset and related lease liability recognized for these leases was $
23,613
and $
24,589
, respectively.
For the three months ended June 30, 2024 and 2023, operating lease expense was $
3,377
and $
3,115
, respectively. For the six months ended June 30, 2024 and 2023, operating lease expense was $
6,725
and $
6,155
, respectively. Related party lease expense for the three and six months ended June 30, 2024 and 2023 was $
1,156
and $
2,312
, respectively, in each period and is included in total operating lease expense. Short term and variable lease costs were not significant for any period presented.
16
7.
DEBT
Outstanding borrowings consisted of the following at:
| June 30, 2024 | December 31, 2023 | ||||||||||
| Syndicated credit agreement: | |||||||||||
| U.S. Dollar revolving loan | $ |
|
$ |
|
|||||||
| Term loan |
|
|
|||||||||
| Commerzbank line of credit |
|
|
|||||||||
| Outstanding borrowings |
|
|
|||||||||
| Less: debt issuance costs |
(
|
(
|
|||||||||
| Total debt |
|
|
|||||||||
| Less: current portion of long-term debt |
(
|
(
|
|||||||||
| Long-term debt | $ |
|
$ |
|
|||||||
Syndicated Credit Agreement
On
February 6, 2024
, the Company and certain domestic subsidiaries entered into an amendment (the “First Amendment”) to its existing credit agreement with a syndicate of banks, led by KeyBank National Association (the “credit facility”). The First Amendment provides for certain changes to the credit facility, including an increase in the maximum commitment amount from
$
200,000
to
$
300,000
.
The credit facility allows for revolving loans of up to
$
200,000
, a
$
50,000
term loan facility, and a
$
50,000
delayed draw term loan facility that can be accessed by the Company at its discretion until February 6, 2026. The
$
50,000
term loan facility is amortizable at
$
625
per quarter beginning on June 30, 2024 through March 31, 2026. Quarterly term loan amortization increases to
$
938
on June 30, 2026 through March 31, 2028, and increases to
$
1,250
from June 30, 2028 through December 31, 2028. A balloon payment for the outstanding term loan balance is due upon the credit facility maturity date of February 6, 2029. The credit facility retains a
$
100,000
accordion feature to increase the commitments under the revolving loan and/or by adding one or more term loans subject to approval by the applicable lenders. The credit facility is secured by certain assets of DMC including accounts receivable, inventory, and fixed assets, including Arcadia
Products
and its subsidiary, as well as guarantees and share pledges by DMC and its subsidiaries. The revolving loan can also be used to issue bank guarantees to customers to secure their advanced payments.
As of June 30, 2024 and December 31, 2023, bank guarantees of $
443
, respectively, were secured.
Borrowings under the
$
200,000
revolving loan limit and
$
50,000
Term Loan 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
2.25
% to
3.25
%). Base Rate loans bear interest at the defined Base Rate plus an applicable margin (varying from
1.25
% to
2.25
%).
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 EBITDA (as defined in the credit facility) for such period.
The maximum leverage ratio permitted by our credit facility is
3.0
to 1.0.
The debt service coverage ratio is defined in the credit facility as the ratio of Consolidated EBITDA less the sum of capital distributions paid in cash (other than those made with respect to preferred stock issued under the Operating Agreement), Consolidated Unfunded Capital Expenditures (as defined in the credit facility), and net cash income taxes divided by 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
1.25
to 1.0.
As of June 30, 2024, we were in compliance with all financial covenants and other provisions of our debt agreements.
17
We also maintain a line of credit with a German bank with a borrowing capacity of €
7,000
for our NobelClad and DynaEnergetics operations in Europe. This line of credit is also used to issue bank guarantees to customers to secure their advanced payments. As of June 30, 2024 and December 31, 2023, we had
no
outstanding borrowings under this line of credit and bank guarantees of €
1,512
and €
1,696
, respectively, were secured. The line of credit has open-ended terms and can be canceled by the bank at any time.
8.
STOCKHOLDERS PROTECTION RIGHTS AGREEMENT
On June 5, 2024, the Company’s board of directors (the “Board”) adopted the Stockholder Protection Rights Agreement (the “Rights Agreement”) and declared a dividend of one right (“Right”) for each share of the Company’s common stock outstanding at the close of business on June 17, 2024. One Right will also be issued together with each share of common stock issued by the Company after that date, but before the Separation Time (as defined in the Rights Agreement). Each Right initially represents the right to purchase one one-thousandth (
0.001
) of a share of Series B Participating Preferred Stock for $
75.00
, subject to adjustment and upon such terms and subject to the conditions set forth in the Rights Agreement. Rights will generally become exercisable only if any person (or any persons acting as a group) acquires
10
% or more, or
20
% in the case of certain passive investors, of the Company’s outstanding common stock. If Rights become exercisable, all holders of Rights (other than the person, entity or group triggering the Rights Agreement, whose rights will become void and will not be exercisable) will have the right to purchase from the Company for $
75.00
, subject to certain potential adjustments, shares of the Company’s common stock having a market value of twice that amount.
The Rights Agreement expires on June 4, 2025, unless earlier terminated or the Rights are redeemed or exchanged by the Board. There is currently no impact on the Company’s Condensed Consolidated Financial Statements.
9.
INCOME TAXES
The effective tax rate for each of the periods reported differs from the U.S. statutory rate primarily due to variation in contribution to consolidated pre-tax income from each jurisdiction for the respective periods, differences between the U.S. and foreign tax rates (which range from
20
% to
33
%), permanent differences between book and taxable income, and income or loss attributable to the redeemable noncontrolling interest holder.
Arcadia Products 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 Products 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 six months ended June 30, 2024 and 2023, we did not record any adjustments to previously established valuation allowances, except for corresponding adjustments related to changes in deferred tax asset balances. These adjustments had no impact on the Condensed Consolidated Statements of Operations. 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.
18
In March 2024, we were notified of a forthcoming tax audit in Germany of our NobelClad subsidiary for the years 2019 through 2021. In July 2024, we were notified of a forthcoming tax audit in Germany of our DynaEnergetics subsidiary for the years 2019 through 2020. Our tax provisions reflect our best estimate of state, local, federal, and foreign taxes. While the audits are not unexpected, the outcome cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with our expectations, the Company could be required to adjust its provisions for income taxes in the period such resolution occurs.
10.
BUSINESS SEGMENTS
Our business is organized into
three
segments: Arcadia Products, DynaEnergetics and NobelClad. In December 2021, DMC acquired a
60
% controlling interest in Arcadia Products. Arcadia Products designs, engineers, fabricates, and finishes aluminum framing systems, windows, curtain walls, storefronts, entrance systems, and interior partitions to the commercial construction market. Additionally, Arcadia Products supplies customized windows and doors for the ultra-high-end residential construction market. DynaEnergetics designs, manufactures, markets, and sells perforating systems and associated hardware for the global oil and gas industry. NobelClad produces explosion-welded clad metal plates for use in the construction of corrosion resistant industrial processing equipment and specialized transition joints for commuter rail cars, ships, and liquified natural gas (LNG) processing equipment.
Our reportable segments are separately managed, strategic business units that offer different products and services, and each segment has separate financial information available that is evaluated regularly by the Chief Operating Decision Maker ("CODM") in allocating resources and assessing performance. Each segment’s products are marketed to different customer types and require different manufacturing processes and technologies.
Segment information is as follows:
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| Arcadia Products | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| DynaEnergetics |
|
|
|
|
|||||||||||||||||||
| NobelClad |
|
|
|
|
|||||||||||||||||||
| Net sales | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Income before income taxes: | |||||||||||||||||||||||
| Arcadia Products | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| DynaEnergetics |
|
|
|
|
|||||||||||||||||||
| NobelClad |
|
|
|
|
|||||||||||||||||||
| Segment operating income |
|
|
|
|
|||||||||||||||||||
| Unallocated corporate expenses |
(
|
(
|
(
|
(
|
|||||||||||||||||||
|
Unallocated stock-based compensation
*
|
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Other expense, net |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Interest expense, net |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Income before income taxes | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
19
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Depreciation and amortization: | |||||||||||||||||||||||
| Arcadia Products | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| DynaEnergetics |
|
|
|
|
|||||||||||||||||||
| NobelClad |
|
|
|
|
|||||||||||||||||||
| Segment depreciation and amortization |
|
|
|
|
|||||||||||||||||||
| Corporate and other |
|
|
|
|
|||||||||||||||||||
| Consolidated depreciation and amortization | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
* Stock-based compensation is not allocated to wholly owned segments DynaEnergetics and NobelClad. Stock-based compensation is allocated to the Arcadia Products segment as
60
% of such expense is attributable to the Company, whereas the remaining
40
% is attributable to the redeemable noncontrolling interest holder.
The disaggregation of revenue earned from contracts with customers is based on the geographic location of the customer. For Arcadia Products, net sales have been presented consistent with United States regional definitions as provided by the American Institute of Architects. For DynaEnergetics and NobelClad, all net sales are from products shipped from our manufacturing facilities and distribution centers located in the United States, Germany, and Canada.
Arcadia Products
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| West | $ |
|
$ |
|
$ |
|
|
||||||||||||||||
| South |
|
|
|
|
|||||||||||||||||||
| Northeast |
|
|
|
|
|||||||||||||||||||
| Midwest |
|
|
|
|
|||||||||||||||||||
| Total Arcadia Products | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
DynaEnergetics
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| United States | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Canada |
|
|
|
|
|||||||||||||||||||
| India |
|
|
|
|
|||||||||||||||||||
| Oman |
|
|
|
|
|||||||||||||||||||
| Kuwait |
|
|
|
|
|||||||||||||||||||
| Indonesia |
|
|
|
|
|||||||||||||||||||
|
Rest of the world
(1)
|
|
|
|
|
|||||||||||||||||||
| Total DynaEnergetics | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
(1)
Rest of the world does not include any individual country comprising sales greater than 5% of total DynaEnergetics revenue for the periods presented.
20
NobelClad
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| United States | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Canada |
|
|
|
|
|||||||||||||||||||
| Netherlands |
|
|
|
|
|||||||||||||||||||
| France |
|
|
|
|
|||||||||||||||||||
| Germany |
|
|
|
|
|||||||||||||||||||
| Australia |
|
|
|
|
|||||||||||||||||||
| United Arab Emirates |
|
|
|
|
|||||||||||||||||||
| South Africa |
|
|
|
|
|||||||||||||||||||
| Saudi Arabia |
|
|
|
|
|||||||||||||||||||
| South Korea |
|
|
|
|
|||||||||||||||||||
| Italy |
|
|
|
|
|||||||||||||||||||
| Belgium |
|
|
|
|
|||||||||||||||||||
| China |
|
|
|
|
|||||||||||||||||||
| Brazil |
|
|
|
|
|||||||||||||||||||
|
Rest of the world
(1)
|
|
|
|
|
|||||||||||||||||||
| Total NobelClad | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
(1)
Rest of the world does not include any individual country comprising sales greater than 5% of total NobelClad revenue for the periods presented.
During the three and six months ended June 30, 2024, one DynaEnergetics customer accounted for approximately
22
% and
23
%, respectively, of consolidated net sales. During the three and six months ended June 30, 2023, the same DynaEnergetics customer accounted for approximately
10
% of consolidated net sales. Additionally, the same DynaEnergetics customer accounted for approximately
29
% and
32
% of consolidated accounts receivable as of June 30, 2024 and December 31, 2023, respectively.
11.
DERIVATIVE INSTRUMENTS
We are exposed to foreign currency exchange risk resulting from fluctuations in exchange rates, primarily the U.S. dollar to the 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 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.
As of June 30, 2024 and December 31, 2023, the net notional amounts of the forward contracts the Company held were $
21,009
and $
32,310
, respectively. At June 30, 2024 and December 31, 2023, the fair value of outstanding forward contracts was $
0
.
The following table reflects the location and amount of net (losses) gains from hedging activities for the periods presented. These hedging net (losses) gains offset foreign currency gains and losses recorded in the normal course of business, which are not shown below.
21
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||
| Derivative | Statements of Operations Location | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||
| Foreign currency contracts | $ |
(
|
$ |
|
$ |
(
|
$ |
|
||||||||||||||||||
12.
COMMITMENTS AND CONTINGENCIES
Contingent Liabilities
The Company records an accrual for contingent liabilities when a loss is both probable and reasonably estimable. If some amount within a range of loss appears to be a better estimate than any other amount within the range, that amount is accrued. When no amount within a range of loss appears to be a better estimate than any other amount, the lowest amount in the range is accrued.
Legal Proceedings
In the ordinary course of its business, the Company is involved in a number of lawsuits and claims, both actual and potential. In addition to the matters discussed below, various other lawsuits, claims, and proceedings have been or may be instituted or asserted against the Company, including those pertaining to environmental, safety and health, commercial, tax, product liability, intellectual property infringement and employment matters, and other actions and claims arising out of the normal course of business. Although it is difficult to accurately predict the outcome of any such proceedings, based on facts currently available, management believes that the disposition of these other matters that are pending or asserted will not have a material adverse effect, individually or in the aggregate, on the financial position of the Company.
Environmental Matter
On February 21, 2024, Los Angeles Waterkeeper (Waterkeeper) sent Arcadia Products a 60-day Notice of Intent (NOI) to file a citizen suit related to alleged stormwater-related violations of the Clean Water Act at
three
Arcadia Products facilities located in Vernon, California. The alleged violations include exceedances of discharge-related requirements and limitations, certain alleged stormwater pollution prevention plan inadequacies, and certain monitoring and reporting violations. The Company has engaged an engineering and consulting firm to assist the Company in investigating the allegations and in responding to the NOI. On April 26, 2024, Waterkeeper filed a complaint in the U.S. District Court for the Central District of California under the citizen suit provisions of the Clean Water Act. The Company is in settlement discussions with Waterkeeper. Those discussion could include certain improvements to the Company’s stormwater management infrastructure and practices at all
three
facilities. The Company also has been in contact with the Los Angeles Regional Water Quality Control Board (LARWQCB) to address certain alleged violations. The Company understands that certain violations may be subject to mandatory minimum penalties under the California Water Code. The Company cannot predict how the Waterkeeper lawsuit will be resolved, but has accrued $
450
for estimated reporting penalties based upon facts and circumstances currently known to the Company.
13.
STRATEGIC REVIEW EXPENSES
During the first quarter of 2024, the Company announced that its Board had initiated a review of strategic alternatives for the DynaEnergetics and NobelClad segments. In conjunction with the Board’s consideration of various strategic, business, and financial alternatives, the Company has, and will continue to incur, significant expenses. During the three months ended June 30, 2024, strategic review expenses incurred were $
2,020
and primarily included $
1,030
in professional service fees and $
863
in employee retention compensation, including $
106
of stock-based compensation.
During the six months ended June 30, 2024, strategic review expenses incurred were $
4,189
and primarily included $
2,170
in professional service fees and $
1,351
in employee retention compensation, including $
178
of stock-based compensation.
22
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 that are included in our Annual Report filed on Form 10-K for the year ended December 31, 2023.
Unless stated otherwise, all dollar figures are presented in thousands (000s).
Overview
General
DMC Global Inc. (“DMC”, "we", "us", "our", or the "Company") owns and operates Arcadia Products, DynaEnergetics and NobelClad, three innovative, asset-light manufacturing businesses that provide differentiated products and engineered solutions to niche segments of the construction, energy, industrial processing and transportation markets. Each of our businesses provides a unique suite of highly engineered products and differentiated solutions, and each has established a leadership position in its respective market. Our businesses seek to capitalize on their product and service differentiation to expand profit margins, increase cash flow and enhance shareholder value. Based in Broomfield, Colorado, DMC trades on Nasdaq under the symbol “BOOM.”
Arcadia Products
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 Products”). Arcadia Products designs, engineers, fabricates, and finishes aluminum framing systems, windows, curtain walls, storefronts, entrance systems, and interior partitions to the commercial construction market. Additionally, Arcadia Products supplies customized windows and doors to the ultra-high-end residential construction market.
Cost of products sold for Arcadia Products includes the cost of aluminum, paint, and other raw materials used in manufacturing as well as employee compensation and benefits, manufacturing facility lease expense, depreciation of manufacturing equipment, supplies and other manufacturing overhead expenses.
DynaEnergetics
DynaEnergetics designs, manufactures, markets and sells perforating systems and associated hardware for the global oil and gas industry. These products are primarily sold to oilfield service companies in the U.S., Europe, Canada, Africa, the Middle East, and Asia. 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, 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 for commuter rail cars, ships, and liquified natural gas (LNG) processing equipment. While most demand for our products is driven by maintenance and retrofit projects at existing plants and facilities, new projects for petrochemical processing, oil refining, and aluminum smelting facilities also account for a significant portion of total demand. These industries tend to be cyclical in nature and the timing of new order inflow remains difficult to predict. We use backlog, defined as all unfilled firm purchase orders and commitments at a point in time, to measure the immediate outlook for our NobelClad business. Most firm purchase orders and commitments are realized and shipped within twelve months. NobelClad's backlog was $63,902 at June 30, 2024 compared to $59,357 at December 31, 2023.
Cost of products sold for NobelClad includes the cost of metals, explosive powders and other raw materials used to manufacture clad metal plates and transition joints as well as employee compensation and benefits, outside processing costs, depreciation of manufacturing facilities and equipment, manufacturing facility lease expense, supplies and other manufacturing overhead expenses.
Factors Affecting Results
•
Consolidated sales were $171,179 in the second quarter of 2024 versus $188,664 in the second quarter of 2023, a decrease of 9%. The decline in sales performance was driven by lower sales at Arcadia Products and DynaEnergetics.
•
Arcadia Products reported sales of $69,748 in the second quarter of 2024, representing a decrease of 12% compared with the second quarter of 2023. The decrease was primarily due to
lower sales volumes in longer-cycle ultra-high-end residential and certain short-cycle commercial markets.
•
DynaEnergetics’ sales of $76,210 in the second quarter of 2024 decreased 10% compared with the second quarter of 2023 primarily due to a decrease in pricing of DS perforating systems as a result of industry consolidation in the United States.
•
NobelClad’s sales of $25,221 in the second quarter of 2024 increased 2% compared with the second quarter of 2023 reflecting continued healthy activity in core energy and petrochemical end markets.
•
Consolidated gross profit was 27.1% in the second quarter of 2024 versus 32.8% in the second quarter of 2023. The decline was primarily attributable to margin declines at DynaEnergetics as well as lower absorption of fixed manufacturing overhead costs as a result of the decrease in consolidated sales.
•
Consolidated selling, general and administrative (SG&A) expenses were $27,122 in the second quarter of 2024 compared with $29,226 in the second quarter of 2023. The year-over-year decrease is primarily attributable to a reduction in compensation costs as well as outside services costs.
•
Cash and cash equivalents of $14,567 at June 30, 2024 decreased $29,092 from cash and cash equivalents and marketable securities of $43,659 at December 31, 2023. The decrease was primarily attributable to debt repayments made in conjunction with the Company’s credit agreement amendment executed in February 2024.
•
The Company’s leverage ratio, calculated in accordance with its credit facility, was 1.10 to 1.0 as of June 30, 2024 in comparison to the maximum ratio permitted of 3.0 to 1.0. The Company’s adjusted leverage ratio, calculated using net debt as of June 30, 2024, was 0.92 to 1.0.
Outlook
We expect Arcadia Products to be the primary driver of DMC’s future financial and operational growth, reflecting the division’s large addressable market and differentiated business model. Arcadia Products is capitalizing on new digital technologies and industrial engineering initiatives to strengthen operations and increase manufacturing capacity. Phase one of a new enterprise resource planning (ERP) system went live in the third quarter of 2023 and has enhanced operating efficiencies and the internal control environment. Additional aluminum painting capacity was added in the second half of 2023, and the business expects industrial engineering programs, coupled with external sourcing, to further expand painting and anodizing capacity in 2024. Key growth initiatives for 2024 include utilizing new painting capacity to increase sales and ensuring each of Arcadia’s product offerings (commercial exteriors, commercial interiors, and ultra-high-end residential) are represented across all branch locations throughout the western and southwestern United States.
At DynaEnergetics, U.S. well completion activity in the first quarter declined by approximately 10% versus the fourth quarter, and was down sequentially another 4% in the second quarter, according to the U.S. Energy Information Administration. We believe North American well completion activity will remain soft during the third quarter of 2024 based on year-to-date declines in the number of active drilling rigs and well fracking crews. DynaEnergetics introduced various premium products in 2023 and is in the process of implementing lower-cost product designs and several operational excellence initiatives, including automated manufacturing and assembly processes, that collectively are expected to partially offset persistent pricing pressure in North America’s well completions sector.
NobelClad continues to experience strong demand for its Cylindra™ cryogenic transition joints for use in the processing of LNG, and recent enhancements to the Cylindra production process have reduced manufacturing lead times. Early in the second quarter, NobelClad was awarded its largest-ever clad-plate order, and currently is pursuing additional large order opportunities in the energy and petrochemical industries, some of which we believe could be awarded later in 2024. NobelClad’s order backlog was $63,902 as of June 30, 2024, up from $59,357 as of December 31, 2023. NobelClad expects to ship most orders in its backlog within twelve months.
On January 29, 2024, DMC announced its Board of Directors had initiated a review of strategic alternatives. The process formalized DMC’s ongoing efforts to unlock shareholder value. The Board has retained financial advisors to assist in evaluating the Company’s current strategy, operations, and capital structure, and will consider various strategic, business, and financial alternatives. These could include, among other things, a sale, a merger, or other business combination. The Board has not set a timetable to complete the strategic review process, and there can be no assurance that the review process will result in any transactions.
Use of Non-GAAP Financial Measures
In addition to disclosing financial results that are determined in accordance with generally accepted accounting principles in the United States (GAAP), the Company also discloses certain non-GAAP financial measures that we use in operational and financial decision making. Non-GAAP financial measures include the following:
•
EBITDA:
defined as net income (loss) plus net interest, taxes, depreciation and amortization.
•
Adjusted EBITDA
: excludes from EBITDA stock-based compensation, restructuring expenses and asset impairment charges (if applicable) and, when appropriate, nonrecurring 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 Products.
•
Adjusted EBITDA for DMC business segments:
defined as operating income (loss) plus depreciation, amortization, allocated stock-based compensation (if applicable), restructuring expenses and asset impairment charges (if applicable) and, when appropriate, nonrecurring items that management does not utilize in assessing DMC's operating performance.
•
Adjusted net income (loss):
defined as net income (loss) attributable to DMC Global Inc. stockholders prior to the adjustment of redeemable noncontrolling interest plus restructuring expenses and asset impairment charges (if applicable) and, when appropriate, nonrecurring items that management does not utilize in assessing DMC's operating performance.
•
Adjusted diluted earnings per share:
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 (if applicable) and, when appropriate, nonrecurring items that management does not utilize in assessing DMC’s operating performance.
•
Net debt:
defined as total debt less total cash, cash equivalents and marketable securities.
•
Free-cash flow:
defined as cash flows provided by (used in) operating activities less net acquisitions of property, plant and equipment.
Management believes providing these additional financial measures is useful to investors in understanding the Company’s operating performance, excluding the effects of restructuring, impairment, and other nonrecurring charges, as well as its liquidity. Management typically monitors the business utilizing the above non-GAAP measures, in addition to GAAP results, to understand and compare operating results across accounting periods, and certain management incentive awards are based, in part, on these measures. 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 that 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.
23
Consolidated Results of Operations
Three months ended June 30, 2024 compared with three months ended June 30, 2023
| Three months ended June 30, | |||||||||||||||||||||||
| 2024 | 2023 | $ change | % change | ||||||||||||||||||||
| Net sales | $ | 171,179 | $ | 188,664 | $ | (17,485) | (9 | %) | |||||||||||||||
| Gross profit | 46,413 | 61,890 | (15,477) | (25 | %) | ||||||||||||||||||
| Gross profit percentage | 27.1 | % | 32.8 | % | |||||||||||||||||||
| COSTS AND EXPENSES: | |||||||||||||||||||||||
| General and administrative expenses | 15,623 | 17,526 | (1,903) | (11 | %) | ||||||||||||||||||
| % of net sales | 9.1 | % | 9.3 | % | |||||||||||||||||||
| Selling and distribution expenses | 11,499 | 11,700 | (201) | (2 | %) | ||||||||||||||||||
| % of net sales | 6.7 | % | 6.2 | % | |||||||||||||||||||
| Amortization of purchased intangible assets | 5,307 | 5,667 | (360) | (6 | %) | ||||||||||||||||||
| % of net sales | 3.1 | % | 3.0 | % | |||||||||||||||||||
| Strategic review expenses | 2,020 | — | 2,020 | 100 | % | ||||||||||||||||||
| Restructuring expenses | 279 | — | 279 | 100 | % | ||||||||||||||||||
| Operating income | 11,685 | 26,997 | (15,312) | (57 | %) | ||||||||||||||||||
| Other expense, net | (284) | (439) | 155 | (35 | %) | ||||||||||||||||||
| Interest expense, net | (2,316) | (2,432) | 116 | (5 | %) | ||||||||||||||||||
| Income before income taxes | 9,085 | 24,126 | (15,041) | (62 | %) | ||||||||||||||||||
| Income tax provision | 2,792 | 6,600 | (3,808) | (58 | %) | ||||||||||||||||||
| Net income | 6,293 | 17,526 | (11,233) | (64 | %) | ||||||||||||||||||
| Less: Net income attributable to redeemable noncontrolling interest | 2,281 | 3,823 | (1,542) | (40 | %) | ||||||||||||||||||
| Net income attributable to DMC Global Inc. | 4,012 | 13,703 | (9,691) | (71 | %) | ||||||||||||||||||
| Adjusted EBITDA attributable to DMC Global Inc. | $ | 19,420 | $ | 31,776 | $ | (12,356) | (39 | %) | |||||||||||||||
Net sales
were $171,179 for the three months ended June 30, 2024, or a decrease of 9% compared with the same period in 2023, due to lower sales at Arcadia Products and DynaEnergetics. The decrease at Arcadia Products was primarily due to
lower sales volumes in longer-cycle ultra-high-end residential and certain short-cycle commercial markets.
DynaEnergetics’ lower sales were primarily due to a decrease in pricing of DS perforating systems as a result of industry consolidation in the United States.
Gross profit percentage
was 27.1% versus 32.8% in the same period in 2023. The decline compared to prior year was primarily attributable to margin declines at DynaEnergetics as well as lower absorption of fixed manufacturing overhead costs as a result of the decrease in consolidated sales.
General and administrative expenses
decreased $1,903 for the three months ended June 30, 2024 compared with the same period in prior year primarily due to lower compensation costs of $1,139, and lower outside services costs related to patent ligation at DynaEnergetics and ERP implementation costs at Arcadia of $1,032.
Amortization of purchased intangible assets
decreased $360 for the three months ended June 30, 2024 compared to the same period in 2023 as the Arcadia Products customer relationship purchased intangible asset is amortized using an accelerated amortization method.
Strategic review expenses
of $2,020 for the three months ended June 30, 2024 relate to a review of strategic alternatives for the DynaEnergetics and NobelClad business segments. In connection with this process, strategic review expenses primarily included $1,030 in professional service fees and $863 in employee retention compensation, including $106 of stock-based compensation.
24
Operating income
of $11,685 for the three months ended June 30, 2024 decreased compared to $26,997 in the same period in 2023. The reduction in operating income was the result of decreased financial performance at Arcadia Products and DynaEnergetics.
Other expense, net
of
$284
for the three months ended June 30, 2024 primarily related to net realized and unrealized 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.
Income tax provision
of $2,792 was recorded on income before income taxes of $9,085 for the three months ended June 30, 2024. Our most significant operations are in the United States, which has a 21% statutory income tax rate, and Germany, which has a 32% combined 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 the 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 Products that are attributable to the redeemable noncontrolling interest holder are not taxed at DMC, which resulted in a partially offsetting favorable impact to the effective tax rate. We recorded an income tax provision of $6,600 on income before income taxes of $24,126 for the three months ended June 30, 2023. The prior year rate was impacted by the same factors previously discussed.
Net income attributable to DMC Global Inc.
for the three months ended June 30, 2024 was $4,012, compared to $13,703 for the same period in 2023.
Adjusted EBITDA
decreased for the three months ended June 30, 2024 compared with the same period in 2023 primarily due to the factors discussed above. See “Use of Non-GAAP Financial Measures” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
| Three months ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Net income | $ | 6,293 | $ | 17,526 | |||||||
| Interest expense, net | 2,316 | 2,432 | |||||||||
| Income tax provision | 2,792 | 6,600 | |||||||||
| Depreciation | 3,431 | 3,434 | |||||||||
| Amortization of purchased intangible assets | 5,307 | 5,667 | |||||||||
| EBITDA | 20,139 | 35,659 | |||||||||
| Stock-based compensation | 1,676 | 1,699 | |||||||||
| Strategic review expenses | 2,020 | — | |||||||||
| Restructuring expenses | 279 | — | |||||||||
| CEO transition expenses | — | 573 | |||||||||
| Other expense, net | 284 | 439 | |||||||||
| Adjusted EBITDA | 24,398 | 38,370 | |||||||||
| Less: adjusted EBITDA attributable to redeemable noncontrolling interest | (4,978) | (6,594) | |||||||||
| Adjusted EBITDA attributable to DMC Global Inc. | $ | 19,420 | $ | 31,776 | |||||||
25
Adjusted Net Income and Adjusted Diluted Earnings per Share
decreased for the three months ended June 30, 2024 compared with the same period in 2023 primarily due to the factors discussed above. See "Use of Non-GAAP Financial Measures" above for the explanation of the use of non-GAAP measures. The following is a reconciliation of the most directly comparable GAAP measures to Adjusted Net Income and Adjusted Diluted Earnings Per Share.
| Three months ended June 30, 2024 | |||||||||||
| Amount |
Per Share
(1)
|
||||||||||
|
Net income attributable to DMC Global Inc.
(2)
|
$ | 4,012 | $ | 0.20 | |||||||
| Strategic review expenses, net of tax | 1,538 | 0.08 | |||||||||
| Restructuring expenses, net of tax | 125 | 0.01 | |||||||||
| As adjusted | $ | 5,675 | $ | 0.29 | |||||||
(1)
Calculated using diluted weighted average shares outstanding of 19,671,169
(2)
Net income attributable to DMC Global Inc. prior to the adjustment of redeemable noncontrolling interest
| Three months ended June 30, 2023 | |||||||||||
| Amount |
Per Share
(1)
|
||||||||||
|
Net income attributable to DMC Global Inc.
(2)
|
$ | 13,703 | $ | 0.70 | |||||||
| CEO transition expenses and accelerated stock-based compensation, net of tax | 428 | 0.02 | |||||||||
| As adjusted | $ | 14,131 | $ | 0.72 | |||||||
(1)
Calculated using diluted weighted average shares outstanding of 19,504,963
(2)
Net income attributable to DMC Global Inc. prior to the adjustment of redeemable noncontrolling interest
26
Six months ended June 30, 2024 compared with six months ended June 30, 2023
| Six months ended June 30, | |||||||||||||||||||||||
| 2024 | 2023 | $ change | % change | ||||||||||||||||||||
| Net sales | $ | 338,048 | $ | 373,005 | $ | (34,957) | (9 | %) | |||||||||||||||
| Gross profit | 88,765 | 114,101 | (25,336) | (22 | %) | ||||||||||||||||||
| Gross profit percentage | 26.3 | % | 30.6 | % | |||||||||||||||||||
| COSTS AND EXPENSES: | |||||||||||||||||||||||
| General and administrative expenses | 31,603 | 44,026 | (12,423) | (28 | %) | ||||||||||||||||||
| % of net sales | 9.3 | % | 11.8 | % | |||||||||||||||||||
| Selling and distribution expenses | 23,722 | 24,524 | (802) | (3 | %) | ||||||||||||||||||
| % of net sales | 7.0 | % | 6.6 | % | |||||||||||||||||||
| Amortization of purchased intangible assets | 10,599 | 11,334 | (735) | (6 | %) | ||||||||||||||||||
| % of net sales | 3.1 | % | 3.0 | % | |||||||||||||||||||
| Strategic review expenses | 4,189 | — | 4,189 | 100 | % | ||||||||||||||||||
| Restructuring expenses | 279 | — | 279 | 100 | % | ||||||||||||||||||
| Operating income | 18,373 | 34,217 | (15,844) | (46 | %) | ||||||||||||||||||
| Other expense, net | (693) | (639) | (54) | 8 | % | ||||||||||||||||||
| Interest expense, net | (4,633) | (4,813) | 180 | (4 | %) | ||||||||||||||||||
| Income before income taxes | 13,047 | 28,765 | (15,718) | (55 | %) | ||||||||||||||||||
| Income tax provision | 4,435 | 9,100 | (4,665) | (51 | %) | ||||||||||||||||||
| Net income | 8,612 | 19,665 | (11,053) | (56 | %) | ||||||||||||||||||
| Net income attributable to redeemable noncontrolling interest | 2,037 | 5,053 | (3,016) | (60 | %) | ||||||||||||||||||
| Net income attributable to DMC Global Inc. | 6,575 | 14,612 | (8,037) | (55 | %) | ||||||||||||||||||
| Adjusted EBITDA attributable to DMC Global Inc. | $ | 36,103 | $ | 51,867 | $ | (15,764) | (30 | %) | |||||||||||||||
Net sales
were $338,048 for the six months ended June 30, 2024, a decrease of 9% compared with the same period in 2023, primarily due to lower Arcadia sales volumes in longer-cycle ultra-high-end residential and certain short-cycle commercial markets, and a decrease in pricing of DynaEnergetics’ DS perforating systems as a result of industry consolidation in the United States.
Gross profit percentage
was 26.3% versus 30.6% in 2023. The decline compared to the prior year was primarily attributable
to lower customer pricing as well as lower absorption of fixed manufacturing overhead costs as a result of the decrease in net sales at DynaEnergetics
.
General and administrative expenses
decreased $12,423 for the six months ended June 30, 2024 compared with the same period in 2023. 2023 included
nonrecurring CEO transition expenses and related accelerated stock-based compensation of $6,578, and
patent infringement litigation costs at DynaEnergetics of $3,610. The remaining year-over-year decrease is primarily attributable to a reduction in internal leadership and sales meeting expense of $1,176 and ERP implementation costs of $480.
Selling and distribution expenses
decreased $802 for the six months ended June 30, 2024 compared with the same period in 2023. The lower expense was primarily due to decreases in compensation costs of $1,152 and marketing and other outside services costs of $647. These reductions were partially offset by an increase in bad debt expense of $1,214 primarily at DynaEnergetics.
Strategic review expenses
of $4,189 for the six months ended June 30, 2024 relate to a review of strategic alternatives for the DynaEnergetics and NobelClad business segments. In connection with this process, strategic review expenses primarily included $2,170 in professional service fees and $1,351 in employee retention compensation, including $178 of stock-based compensation.
Amortization of purchased intangible assets
decreased $735 for the six months ended June 30, 2024 compared to the same period in 2023 as the Arcadia Products customer relationship purchased intangible asset is amortized using an accelerated amortization method.
27
Operating income
was $18,373 for the six months ended June 30, 2024 compared to $34,217 in the same period last year. The decrease in operating income was the result of decreased financial performance at Arcadia Products and DynaEnergetics.
Other expense, net
of
$693
for
the
six months ended June 30, 2024 primarily related to net 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.
Income tax provision
of $4,435 was recorded on income before income taxes of $13,047 for the six months ended June 30, 2024. Our most significant operations are in the United States, which has a 21% statutory income tax rate, and Germany, which has a 32% combined 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 the 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 Products that are attributable to the redeemable noncontrolling interest holder are not taxed at DMC, which resulted in a partially offsetting favorable impact to the effective tax rate. We recorded an income tax provision of $9,100 on income before income taxes of $28,765 for the six months ended June 30, 2023. The prior year rate was impacted by the same factors previously discussed.
Net income attributable to DMC Global Inc.
for the six months ended June 30, 2024 was $6,575, compared to $14,612 for the same period in 2023.
Adjusted EBITDA
decreased for the six months ended June 30, 2024 decreased compared with the same period in 2023 primarily due to the factors discussed above. See “Use of Non-GAAP Financial Measures” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
| Six months ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Net income | $ | 8,612 | $ | 19,665 | |||||||
| Interest expense, net | 4,633 | 4,813 | |||||||||
| Income tax provision | 4,435 | 9,100 | |||||||||
| Depreciation | 6,850 | 6,834 | |||||||||
| Amortization of purchased intangible assets | 10,599 | 11,334 | |||||||||
| EBITDA | 35,129 | 51,746 | |||||||||
| Stock-based compensation | 3,153 | 6,726 | |||||||||
| Strategic review expenses | 4,189 | — | |||||||||
| Restructuring expenses | 279 | — | |||||||||
| CEO transition expenses | — | 3,538 | |||||||||
| Other expense, net | 693 | 639 | |||||||||
| Adjusted EBITDA | 43,443 | 62,649 | |||||||||
| Less: adjusted EBITDA attributable to redeemable noncontrolling interest | (7,340) | (10,782) | |||||||||
| Adjusted EBITDA attributable to DMC Global Inc. | $ | 36,103 | $ | 51,867 | |||||||
Adjusted Net Income and Adjusted Diluted Earnings per Share
decreased for the six months ended June 30, 2024 compared with the same period in 2023 primarily due to the factors discussed above. See "Use of Non-GAAP Financial Measures" 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.
28
| Six months ended June 30, 2024 | |||||||||||
| Amount |
Per Share
(1)
|
||||||||||
|
Net income attributable to DMC Global Inc.
(2)
|
$ | 6,575 | $ | 0.33 | |||||||
| Strategic review expenses, net of tax | 3,142 | 0.16 | |||||||||
| Restructuring expenses, net of tax | 125 | 0.01 | |||||||||
| As adjusted | $ | 9,842 | $ | 0.50 | |||||||
(1)
Calculated using diluted weighted average shares outstanding of 19,647,005
(2)
Net income attributable to DMC Global Inc. prior to the adjustment of redeemable noncontrolling interest.
| Six months ended June 30, 2023 | |||||||||||
| Amount |
Per Share
(1)
|
||||||||||
|
Net income attributable to DMC Global Inc.
(2)
|
$ | 14,612 | 0.75 | ||||||||
|
CEO transition expenses and accelerated stock-based compensation, net of tax
(3)
|
5,663 | 0.29 | |||||||||
| As adjusted | $ | 20,275 | $ | 1.04 | |||||||
(1)
Calculated using diluted weighted average shares outstanding of 19,485,863
(2)
Net income attributable to DMC Global Inc. prior to the adjustment of redeemable noncontrolling interest.
(3)
Includes CEO transition expenses of $3,538 and accelerated stock-based compensation of $3,040 related to the vesting of the former CEO’s outstanding equity awards, net of tax.
29
Business Segment Financial Information
We primarily evaluate performance and allocate resources based on segment revenues, operating income and Adjusted EBITDA as well as projected future performance. Segment operating income is defined as revenues less expenses identifiable to the segment. DMC consolidated operating income and Adjusted EBITDA include unallocated corporate expenses and unallocated stock-based compensation expense. Stock-based compensation is not allocated to wholly owned segments, DynaEnergetics and NobelClad. Stock-based compensation is allocated to the Arcadia Products segment as 60% of such expense is attributable to the Company, whereas the remaining 40% is attributable to the redeemable noncontrolling interest holder. Segment operating income will reconcile to consolidated income before income taxes by deducting unallocated corporate expenses, unallocated stock-based compensation, other (expense) income, net, and interest expense, net.
Arcadia Products
Three months ended June 30, 2024 compared with three months ended June 30, 2023
| Three months ended June 30, | |||||||||||||||||||||||
| 2024 | 2023 | $ change | % change | ||||||||||||||||||||
| Net sales | $ | 69,748 | $ | 79,158 | $ | (9,410) | (12 | %) | |||||||||||||||
| Gross profit | 23,157 | 27,459 | (4,302) | (16 | %) | ||||||||||||||||||
| Gross profit percentage | 33.2 | % | 34.7 | % | |||||||||||||||||||
| COSTS AND EXPENSES: | |||||||||||||||||||||||
| General and administrative expenses | 7,765 | 8,206 | (441) | (5 | %) | ||||||||||||||||||
| Selling and distribution expenses | 4,116 | 4,021 | 95 | 2 | % | ||||||||||||||||||
| Amortization of purchased intangible assets | 5,278 | 5,652 | (374) | (7 | %) | ||||||||||||||||||
| Restructuring expenses | 279 | — | 279 | 100 | % | ||||||||||||||||||
| Operating income | 5,719 | 9,580 | (3,861) | (40 | %) | ||||||||||||||||||
| Adjusted EBITDA | 12,445 | 16,486 | (4,041) | (25 | %) | ||||||||||||||||||
| Less: adjusted EBITDA attributable to redeemable noncontrolling interest | (4,978) | (6,594) | (1,616) | (25 | %) | ||||||||||||||||||
| Adjusted EBITDA attributable to DMC Global Inc. | $ | 7,467 | $ | 9,892 | (2,425) | (25 | %) | ||||||||||||||||
Net sales
decreased $9,410 for the three months ended June 30, 2024 compared to the same period in 2023 primarily due to
lower sales volumes in longer-cycle ultra-high-end residential and certain short-cycle commercial markets.
Gross profit percentage
decreased to 33.2% for the three months ended June 30, 2024 compared to the same period in 2023 primarily due to
lower absorption of fixed manufacturing overhead costs as a result
of the decrease in consolidated sales, partially offset by direct labor reductions and recently enacted operational efficiencies.
General and administrative expenses
decreased $441 for
three months ended June 30, 2024 compared to the same period in 2023 primarily due to lower ERP system implementation costs.
Amortization of purchased intangible assets
decreased $374 for the three months ended June 30, 2024 compared to the same period in 2023 as the customer relationship purchased intangible asset is amortized using an accelerated amortization method.
Restructuring expenses
of $279 for the three months ended June 30, 2024 relates to employee severance associated with headcount reductions.
Operating income
decreased $3,861 for the
three months ended June 30, 2024 compared to the same period in 2023 due to the decline in gross profit.
Adjusted EBITDA
decreased for the three months ended June 30, 2024 compared with the same period in 2023 due to the factors discussed above. See “Use of Non-GAAP Financial Measures” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
30
| Three months ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Operating income | $ | 5,719 | $ | 9,580 | |||||||
| Adjustments: | |||||||||||
| Depreciation | 888 | 889 | |||||||||
| Amortization of purchased intangible assets | 5,278 | 5,652 | |||||||||
| Stock-based compensation | 281 | 323 | |||||||||
| Restructuring expenses | 279 | — | |||||||||
| CEO transition expenses | — | 42 | |||||||||
| Adjusted EBITDA | 12,445 | 16,486 | |||||||||
| Less: adjusted EBITDA attributable to redeemable noncontrolling interest | (4,978) | (6,594) | |||||||||
| Adjusted EBITDA attributable to DMC Global Inc. | $ | 7,467 | $ | 9,892 | |||||||
Six months ended June 30, 2024 compared with six months ended June 30, 2023
| Six months ended June 30, | |||||||||||||||||||||||
| 2024 | 2023 | $ change | % change | ||||||||||||||||||||
| Net sales | $ | 131,673 | $ | 159,496 | $ | (27,823) | (17 | %) | |||||||||||||||
| Gross profit | 39,970 | 49,553 | (9,583) | (19 | %) | ||||||||||||||||||
| Gross profit percentage | 30.4 | % | 31.1 | % | |||||||||||||||||||
| COSTS AND EXPENSES: | |||||||||||||||||||||||
| General and administrative expenses | 15,421 | 16,063 | (642) | (4 | %) | ||||||||||||||||||
| Selling and distribution expenses | 8,584 | 9,473 | (889) | (9 | %) | ||||||||||||||||||
| Amortization of purchased intangible assets | 10,555 | 11,304 | (749) | (7 | %) | ||||||||||||||||||
| Restructuring expenses | 279 | — | 279 | 100 | % | ||||||||||||||||||
| Operating income | 5,131 | 12,713 | (7,582) | (60 | %) | ||||||||||||||||||
| Adjusted EBITDA | 18,351 | 26,956 | (8,605) | (32 | %) | ||||||||||||||||||
| Less: adjusted EBITDA attributable to redeemable noncontrolling interest | (7,340) | (10,782) | (3,442) | (32 | %) | ||||||||||||||||||
| Adjusted EBITDA attributable to DMC Global Inc. | $ | 11,011 | $ | 16,174 | (5,163) | (32 | %) | ||||||||||||||||
Net sales
decreased $27,823 for the six months ended June 30, 2024 compared to the same period in 2023 primarily due to lower sales volumes in longer-cycle ultra-high-end residential and certain short-cycle commercial markets.
Gross profit percentage
decreased to 30.4% for the six months ended June 30, 2024 primarily due to
lower absorption of fixed manufacturing overhead costs as a result of the de
crease in consolidated sales, partially offset by direct labor reductions and recently enacted operational efficiencies.
General and administrative expenses
were lower by $642 for the
six months ended June 30, 2024 compared to the same period in 2023 due to decreases in outside services costs primarily attributable to the implementation of a new ERP system.
Selling and distribution expenses
decreased $889 for the
six months ended June 30, 2024 compared to the same period in 2023 due to lower compensation costs of $404, as well as a reduction in certain outside services costs and business related travel.
Amortization of purchased intangible assets
decreased $749 for the six months ended June 30, 2024 compared to the same period in 2023 as the customer backlog purchased intangible asset was fully amortized in 2023.
31
Restructuring expenses
of $279 for the six months ended June 30, 2024 relates to employee severance associated with headcount reductions.
Operating income
decreased $7,582 for the
six months ended June 30, 2024 compared to the same period in 2023 due to the decline in gross profit.
Adjusted EBITDA
decreased
for the six months ended June 30, 2024 compared with the same period in 2023 due to the factors discussed above. See “Use of Non-GAAP Financial Measures” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
| Six months ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Operating income | $ | 5,131 | $ | 12,713 | |||||||
| Adjustments: | |||||||||||
| Depreciation | 1,763 | 1,706 | |||||||||
| Amortization of purchased intangible assets | 10,555 | 11,304 | |||||||||
| Stock-based compensation | 623 | 902 | |||||||||
| Restructuring expenses | 279 | — | |||||||||
| CEO transition expenses | — | 331 | |||||||||
| Adjusted EBITDA | 18,351 | 26,956 | |||||||||
| Less: adjusted EBITDA attributable to redeemable noncontrolling interest | (7,340) | (10,782) | |||||||||
| Adjusted EBITDA attributable to DMC Global Inc. | $ | 11,011 | $ | 16,174 | |||||||
DynaEnergetics
Three months ended June 30, 2024 compared with three months ended June 30, 2023
| Three months ended June 30, | |||||||||||||||||||||||
| 2024 | 2023 | $ change | % change | ||||||||||||||||||||
| Net sales | $ | 76,210 | $ | 84,754 | $ | (8,544) | (10 | %) | |||||||||||||||
| Gross profit | 15,133 | 26,552 | (11,419) | (43 | %) | ||||||||||||||||||
| Gross profit percentage | 19.9 | % | 31.3 | % | |||||||||||||||||||
| COSTS AND EXPENSES: | |||||||||||||||||||||||
| General and administrative expenses | 3,011 | 3,577 | (566) | (16 | %) | ||||||||||||||||||
| Selling and distribution expenses | 5,041 | 5,227 | (186) | (4 | %) | ||||||||||||||||||
| Amortization of purchased intangible assets | 29 | 15 | 14 | 93 | % | ||||||||||||||||||
| Operating income | 7,052 | 17,733 | (10,681) | (60 | %) | ||||||||||||||||||
| Adjusted EBITDA | $ | 8,752 | $ | 19,461 | $ | (10,709) | (55 | %) | |||||||||||||||
Net sales
decreased $8,544 for the three months ended June 30, 2024 compared to the same period in 2023 primarily due to a decrease in pricing of DS perforating systems as a result of industry consolidation in the United States.
Gross profit percentage
decreased to 19.9% for the three months ended June 30, 2024
due to lower customer pricing as well as lower absorption of fixed manufacturing overhead costs as a result of the decrease in net sales.
General and administrative expenses
were lower by $566 for the three months ended June 30, 2024 compared to the same period in 2023 driven by a decrease in patent infringement litigation costs of $337. The remaining decrease is primarily attributable to a reduction in compensation costs of $185.
Selling and distribution expenses
were lower by $186 for the
three months ended June 30, 2024 compared to the same period in 2023 primarily due to a decrease in marketing consulting costs of $450 and variable compensation costs of $287, partially offset by an increase in bad debt expense of $583.
32
Operating income
decreased $10,681 for the
three months ended June 30, 2024 compared to the same period in 2023 due to the decline in gross profit.
Adjusted EBITDA
decreased for the three months ended June 30, 2024 compared with the same period in 2023 due to the factors discussed above. See “Use of Non-GAAP Financial Measures” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
| Three months ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Operating income | $ | 7,052 | $ | 17,733 | |||||||
| Adjustments: | |||||||||||
| Depreciation | 1,671 | 1,713 | |||||||||
| Amortization of purchased intangible assets | 29 | 15 | |||||||||
| Adjusted EBITDA | $ | 8,752 | $ | 19,461 | |||||||
Six months ended June 30, 2024 compared with six months ended June 30, 2023
| Six months ended June 30, | |||||||||||||||||||||||
| 2024 | 2023 | $ change | % change | ||||||||||||||||||||
| Net sales | $ | 154,332 | $ | 166,722 | $ | (12,390) | (7 | %) | |||||||||||||||
| Gross profit | 32,104 | 50,989 | (18,885) | (37 | %) | ||||||||||||||||||
| Gross profit percentage | 20.8 | % | 30.6 | % | |||||||||||||||||||
| COSTS AND EXPENSES: | |||||||||||||||||||||||
| General and administrative expenses | 5,903 | 9,774 | (3,871) | (40 | %) | ||||||||||||||||||
| Selling and distribution expenses | 10,263 | 10,284 | (21) | — | % | ||||||||||||||||||
| Amortization of purchased intangible assets | 44 | 30 | 14 | 47 | % | ||||||||||||||||||
| Operating income | 15,894 | 30,901 | (15,007) | (49 | %) | ||||||||||||||||||
| Adjusted EBITDA | $ | 19,291 | $ | 34,416 | $ | (15,125) | (44 | %) | |||||||||||||||
Net sales
decreased $12,390 for the six months ended June 30, 2024 compared to the same period in 2023 due to a decrease in pricing of DS perforating systems as a result of industry consolidation in the United States.
Gross profit percentage
decreased to 20.8% for the six months ended June 30, 2024 compared to 30.6% in the same period in 2023
due to lower customer pricing as well as lower absorption of fixed manufacturing overhead costs as a result of the decrease in net sales.
General and administrative expenses
decreased $3,871 for the six months ended June 30, 2024 compared to the same period in 2023 primarily due to lower patent infringement litigation costs of $3,201 and compensation costs of $777.
Operating income
decreased $15,007
for the six months ended June 30, 2024 compared to the same period in 2023 due to the decline in gross profit.
Adjusted EBITDA
decreased for the six months ended June 30, 2024 compared to the same period in 2023 due to the factors discussed above. See “Use of Non-GAAP Financial Measures” 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.
33
| Six months ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Operating income | $ | 15,894 | $ | 30,901 | |||||||
| Adjustments: | |||||||||||
| Depreciation | 3,353 | 3,485 | |||||||||
| Amortization of purchased intangible assets | 44 | 30 | |||||||||
| Adjusted EBITDA | $ | 19,291 | $ | 34,416 | |||||||
NobelClad
Three months ended June 30, 2024 compared with three months ended June 30, 2023
| Three months ended June 30, | |||||||||||||||||||||||
| 2024 | 2023 | $ change | % change | ||||||||||||||||||||
| Net sales | $ | 25,221 | $ | 24,752 | $ | 469 | 2 | % | |||||||||||||||
| Gross profit | 8,222 | 8,021 | 201 | 3 | % | ||||||||||||||||||
| Gross profit percentage | 32.6 | % | 32.4 | % | |||||||||||||||||||
| COSTS AND EXPENSES: | |||||||||||||||||||||||
| General and administrative expenses | 1,023 | 949 | 74 | 8 | % | ||||||||||||||||||
| Selling and distribution expenses | 2,267 | 2,365 | (98) | (4 | %) | ||||||||||||||||||
| Operating income | 4,932 | 4,707 | 225 | 5 | % | ||||||||||||||||||
| Adjusted EBITDA | $ | 5,722 | $ | 5,407 | $ | 315 | 6 | % | |||||||||||||||
Net sales
increased $469 for the three months ended June 30, 2024 compared to the same period in 2023 primarily due to higher activity in core energy and petrochemical end markets, including increased Cylindra™ cryogenic transition joints and pressure vessel plate shipments.
General and administrative expenses
were higher by $74 for the three months ended June 30, 2024 compared to the same period in 2023 du
e to increases in outside services costs of $30 and business travel of $23.
Selling and distribution expenses
were lower by $98 for the three months ended June 30, 2024 compared to the same period in 2023 du
e primarily to decreases in compensation costs of $37 and business travel of $38.
Operating income
increased $225 for the
three months ended June 30, 2024 compared to the same period in 2023 due to an increase in gross profit.
Adjusted EBITDA
increased for the three months ended June 30, 2024 compared with the same period in 2023 due to the factors discussed above. See “Use of Non-GAAP Financial Measures” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
| Three months ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Operating income | $ | 4,932 | $ | 4,707 | |||||||
| Adjustments: | |||||||||||
| Depreciation | 790 | 700 | |||||||||
| Adjusted EBITDA | $ | 5,722 | $ | 5,407 | |||||||
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Six months ended June 30, 2024 compared with six months ended June 30, 2023
| Six months ended June 30, | |||||||||||||||||||||||
| 2024 | 2023 | $ change | % change | ||||||||||||||||||||
| Net sales | $ | 52,043 | $ | 46,787 | $ | 5,256 | 11 | % | |||||||||||||||
| Gross profit | 16,866 | 13,804 | 3,062 | 22 | % | ||||||||||||||||||
| Gross profit percentage | 32.4 | % | 29.5 | % | |||||||||||||||||||
| COSTS AND EXPENSES: | |||||||||||||||||||||||
| General and administrative expenses | 2,096 | 1,872 | 224 | 12 | % | ||||||||||||||||||
| Selling and distribution expenses | 4,738 | 4,604 | 134 | 3 | % | ||||||||||||||||||
| Operating income | 10,032 | 7,328 | 2,704 | 37 | % | ||||||||||||||||||
| Adjusted EBITDA | $ | 11,602 | $ | 8,768 | $ | 2,834 | 32 | % | |||||||||||||||
Net sales
increased $5,256 for the six months ended June 30, 2024 compared to the same period in 2023 due primarily to higher activity in core energy and petrochemical end markets, including increased Cylindra™ cryogenic transition joints and pressure vessel plate shipments.
Gross profit percentage
increased to 32.4% for the six months ended June 30, 2024 due to a more favorable project and regional mix, as well as the impact of higher sales on fixed manufacturing overhead expenses.
General and administrative expenses
increased $224 for the six months ended June 30, 2024 compared to the same period in 2023
primarily due to higher compensation costs of $118 and outside services costs of $74.
Selling and distribution expenses
increased $134 for the six months ended June 30, 2024 compared to the same period in 2023
primarily due to higher outside services costs of $62 and compensation costs of $30.
Operating income
increased $2,704 for the six months ended June 30, 2024 compared to the same period in 2023 due to higher gross profit.
Adjusted EBITDA
increased for the six months ended June 30, 2024 compared to the same period in 2023 due to the factors discussed above. See “Use of Non-GAAP Financial Measures” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
| Six months ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Operating income | $ | 10,032 | $ | 7,328 | |||||||
| Adjustments: | |||||||||||
| Depreciation | 1,570 | 1,440 | |||||||||
| Adjusted EBITDA | $ | 11,602 | $ | 8,768 | |||||||
Liquidity and Capital Resources
We have historically financed our operations from a combination of internally generated cash flow, revolving credit borrowings, and various long-term debt arrangements. Our net debt position was $69,545 at June 30, 2024 compared to $72,192 at December 31, 2023. The decrease in net debt during 2024 was due primarily to a reduction in outstanding debt attributable to repayments made on the revolving loan subsequent to the credit agreement amendment executed in February 2024, along with a required principal payment on the term loan in the second quarter.
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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, required minimum debt service payments, 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
February 6, 2024
, the Company and certain domestic subsidiaries entered into an amendment (the “First Amendment”) to its existing credit agreement with a syndicate of banks, led by KeyBank National Association (the “credit facility”). The First Amendment provides for certain changes to the credit facility, including an increase in the maximum commitment amount from
$200,000
to
$300,000.
The credit facility allows for revolving loans of up to
$200,000
, a
$50,000
term loan facility, and a
$50,000
delayed draw term loan facility that can be accessed by the Company at its discretion until February 6, 2026. The
$50,000
term loan facility is amortizable at
$625
per quarter beginning on June 30, 2024 through March 31, 2026. Quarterly term loan amortization increases to
$938
on June 30, 2026 through March 31, 2028, and increases to
$1,250
from June 30, 2028 through December 31, 2028. A balloon payment for the outstanding term loan balance is due upon the credit facility maturity date of February 6, 2029. The credit facility retains a
$100,000
accordion feature to increase the commitments under the revolving loan and/or by adding one or more term loans subject to approval by the applicable lenders. The credit facility is secured by certain assets of DMC including accounts receivable, inventory, and fixed assets, including Arcadia Products and its subsidiary, as well as guarantees and share pledges by DMC and its subsidiaries.
Borrowings under the
$200,000
revolving loan limit and
$50,000
Term Loan 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 2.25% to 3.25%). Base Rate loans bear interest at the defined Base Rate plus an applicable margin (varying from 1.25% to 2.25%).
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 EBITDA (as defined in the credit facility) for such period.
The maximum leverage ratio permitted by our credit facility is 3.0 to 1.0. The actual leverage ratio as of June 30, 2024, calculated in accordance with the amended credit facility, was 1.10 to 1.0.
The debt service coverage ratio is defined in the credit facility as the ratio of Consolidated EBITDA less the sum of capital distributions paid in cash (other than those made with respect to preferred stock issued under the Operating Agreement), Consolidated Unfunded Capital Expenditures (as defined in the credit facility), and net cash income taxes divided by 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
1.25 to 1.0. The actual debt service coverage ratio for the trailing twelve months ended June 30, 2024 was 3.26 to 1.0.
We also maintain a line of credit with a German bank for certain European operations. This line of credit provides a borrowing capacity of €7,000 on which no amounts were outstanding as of June 30, 2024.
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Redeemable noncontrolling interest
The Operating Agreement for Arcadia Products contains a right for the Company to purchase the remaining interest in Arcadia Products 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 Products has the right to sell its remaining interest in Arcadia Products 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, subject to a floor value also as defined within the Operating Agreement which is based primarily upon a contractually stated equity value.
As of
June 30, 2024
, the settlement amount of the redeemable noncontrolling inte
rest is $187,080 and is equal to the floor value as defined within the Operating Agreement. Upon settlement, consideration paid will be net of the $24,902 promissory note outstanding due from the redeemable noncontrolling interest holder. Refer to Note 2 within Item 1 for further information related to the valuation of the redeemable noncontrolling interest and promissory note outstanding.
Other contractual obligations and commitments
Our debt balance, net of deferred debt issuance costs, decreased to $84,112 at June 30, 2024 from $115,851 at December 31, 2023 for the reasons discussed above. Our other contractual obligations and commitments have not materially changed since December 31, 2023.
Cash flows provided by operating activities
Net cash provided by operating activities was $15,783 for the six months ended June 30, 2024 compared to $18,544 in the same period last year driven primarily by lower net income in 2024 as compared to 2023.
Cash flows provided by (used in) investing activities
Net cash provided by investing activities for the six months ended June 30, 2024 of $7,204 was attributable to proceeds from the sales and maturities of marketable securities of $12,619, partially offset by the acquisition of property, plant and equipment of $5,515. Net cash used in investing activities for the six months ended June 30, 2023 of $7,536 related to the acquisition of property, plant and equipment and investments in marketable securities.
Cash flows used in financing activities
Net cash flows used in financing activities for the six months ended June 30, 2024 of $39,727 included net credit facility repayments of $31,500. Additional cash flows used in financing activities included distributions to the redeemable noncontrolling interest holder of $4,672, payment of debt issuance costs of $2,735 and treasury stock purchases of $952.
Net cash flows used in financing activities for the six months ended June 30, 2023 of $18,270 primarily included a quarterly principal payment and prepayment on our term loan of $10,000, distributions to the redeemable noncontrolling interest holder of $6,311, and treasury stock purchases of $2,171.
Payment of Dividends
Any determination to pay cash dividends is at the discretion of the Board of Directors. On April 23, 2020, DMC announced that its Board of Directors suspended the quarterly dividend indefinitely. 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.
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Critical Accounting Estimates
Preparation of financial statements in conformity with generally accepted accounting principles in the United States requires that management make estimates, judgments and assumptions that affect the amounts reported for revenues, expenses, asset, liabilities, and other related disclosures. Our critical accounting estimates have not changed from those reported in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
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, 2023.
ITEM 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of the 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.
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Part II - OTHER INFORMATION
Item 1. Legal Proceedings
Please see Note 12 to the Condensed Consolidated Financial Statements.
Item 1A. Risk Factors
There have been no significant changes in the risk factors identified as being attendant to our business in our Annual Report on Form 10-K for the year ended December 31, 2023, except as provided below.
Our business could be negatively affected as a result of actions of activist stockholders or others.
We may be subject to actions or proposals from stockholders or others that may not align with our business strategies or the interests of our other stockholders. Responding to such actions can be costly and time-consuming, disrupt our business and operations, and divert the attention of our Board, management, and employees from the pursuit of our business strategies. Such activities could interfere with our ability to execute our strategic plan. Activist stockholders or others may create perceived uncertainties as to the future direction of our business or strategy which may be exploited by our competitors and may make it more difficult to attract and retain qualified personnel and potential customers, and may affect our relationships with current customers, vendors, investors, and other third parties. In addition, a proxy contest for the election of directors at our annual meeting would require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and our Board. Our stock price could also be subject to significant fluctuations or otherwise be adversely affected by the events, risks and uncertainties of any stockholder activism.
Our stockholder protection rights agreement includes terms and conditions that could discourage a takeover or other transaction that stockholders may consider favorable.
On June 5, 2024, the Company entered into the Rights Agreement, pursuant to which the Board declared a dividend of one Right for each share of our common stock outstanding at the close of business on June 17, 2024. One Right will also be issued together with each share of common stock issued by the Company after that date, but before the Separation Time (as defined in the Rights Agreement). Each Right initially represents the right to purchase one one-thousandth of a share of Series B Participating Preferred Stock for $75.00, subject to adjustment and upon such terms and subject to the conditions set forth in the Rights Agreement. Rights will generally become exercisable only if any person (or any persons acting as a group) acquires 10% or more, or 20% in the case of certain passive investors, of our outstanding common stock. If Rights become exercisable, all holders of Rights (other than the person, entity or group triggering the Rights Agreement, whose rights will become void and will not be exercisable) will have the right to purchase from the Company for $75.00, subject to certain potential adjustments, shares of our common stock having a market value of twice that amount. The Rights Agreement expires on June 4, 2025, unless earlier terminated or the Rights are redeemed or exchanged by the Board.
Additional information regarding the Rights Agreement is contained in the Current Report on Form 8-K filed with the SEC on June 6, 2024.
The Rights Agreement will cause substantial dilution to any person or group that acquires beneficial ownership of 10% or more, or 20% in the case of certain passive investors, of the Company’s outstanding common stock. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to discourage any person, entity or group from gaining a control or control-like position in the Company or engaging in other tactics, potentially disadvantaging the interests of the Company’s stockholders, without negotiating with the Board and without paying an appropriate control premium to all stockholders. The Rights Agreement is similar to plans adopted by other public companies, and it is intended to protect stockholders’ interests, including by providing the Board sufficient time to make informed judgments and take actions that are in the best interests of the Company and its stockholders. Nevertheless, the Rights Agreement may be considered to have certain anti-takeover effects, including potentially discouraging a third party from attempting to obtain a substantial position in our common stock or seeking to obtain control of the Company and discouraging a takeover attempt that stockholders may consider favorable or that could result in a premium over the market price of our common stock. Even in the absence of a takeover attempt, the Rights Agreement may adversely affect the prevailing market price of our common stock if it is viewed as discouraging takeover attempts in the future.
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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 or distributions of shares of common stock pursuant to our Amended and Restated Non-Qualified Deferred Compensation Plan (“deferred compensation plan”) during the second quarter of 2024, we retained shares of common stock in satisfaction of withholding tax obligations. We also retained shares of common stock as the result of participants’ diversification of equity awards held in the deferred compensation plan into other investment options. These shares are held as treasury shares by the Company.
|
Total number of shares purchased
(1) (2)
|
Average price paid per share
|
|||||||||||||
| April 1 to April 30, 2024 | 200 | $ | 17.53 | |||||||||||
| May 1 to May 31, 2024 | — | $ | — | |||||||||||
| June 1 to June 30, 2024 | 917 | $ | 13.98 | |||||||||||
| Total | 1,117 | $ | 14.62 | |||||||||||
(1)
Share purchases during the period were to offset tax withholding obligations that occurred upon (i) vesting of restricted common stock under the terms of the 2016 Equity Incentive Plan and (ii) distributions of shares of common stock pursuant to deferred compensation obligations.
(2)
As of June 30, 2024, the maximum number of shares that could be purchased would not exceed the employees’ portion of taxes to be withheld on unvested shares (723,179) and potential purchases upon participant elections to diversify equity awards held in the deferred compensation plan (80,901) into other investment options available to participants in the Plan.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Our Coolspring property is subject to regulation by the Federal Mine Safety and Health Administration (“MSHA”) under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”). Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (The “Dodd-Frank Act”), issuers that are operators, or that have a subsidiary that is an operator, of a coal or other mine in the United States are required to disclose in their periodic reports filed with the SEC information regarding specified health and safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities. During the quarter ended June 30, 2024, we had no such specified health and safety violations, orders or citations, related assessments or legal actions, mining-related fatalities, or similar events in relation to our United States operations requiring disclosure pursuant to Section 1503(a) of the Dodd-Frank Act.
Item 5. Other Information
During the quarter ended June 30, 2024, no director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Company
adopted
or
terminated
any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements (in each case, as defined in Item 408(a) of Regulation S-K).
40
Item 6. Exhibits
3.1
Certificate of Designation, Preferences and Rights of Series B Participating Preferred Stock of DMC Global Inc., dated June 5, 2024 (incorporated by reference to the exhibit of the same number in the Company’s Current Report on Form 8-K filed on June 6, 2024).
101
The following materials from the Quarterly Report on Form 10-Q of DMC Global Inc. for the quarter ended June 30, 2024, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statement of Stockholders’ Equity and Redeemable Noncontrolling Interest, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) 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.
** Certain schedules or similar attachments to this exhibit have been omitted in accordance with Item 601(a)(5) of Regulation S-K. The registrant hereby agrees to furnish supplementally to the Securities and Exchange Commission upon request a copy of any omitted schedule or attachment to this exhibit.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| DMC Global Inc. | |||||||||||
| (Registrant) | |||||||||||
| Date: | August 1, 2024 | /s/ Eric V. Walter | |||||||||
| Eric V. Walter, Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) | |||||||||||
| Date: | August 1, 2024 | /s/ Brett Seger | |||||||||
| Brett Seger, Chief Accounting Officer (Duly Authorized Officer and Principal Accounting Officer) | |||||||||||
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TABLE OF CONTENTS
Part I - Financial InformationItem 1. Condensed Consolidated Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosure About Market RiskItem 4. Controls and ProceduresPart II - Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits