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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2024
OR
☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
Commission file number 001-14775
DMC GLOBAL INC.
(Exact name of Registrant as Specified in its Charter) | | | | | | | | |
Delaware | | 84-0608431 |
(State of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
11800 Ridge Parkway, Suite 300, Broomfield, Colorado 80021
(Address of principal executive offices, including zip code)
(303) 665-5700
(Registrant’s telephone number, including area code)
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol | | Name of exchange on which registered |
Common Stock, $0.05 Par Value | | BOOM | | The Nasdaq Global Select Market |
Stock Purchase Rights | | | | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | |
Large accelerated filer ☐ | | Accelerated filer ☒ |
| | |
Non-accelerated filer ☐ | | Smaller reporting company ☐ |
| | |
| | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 under the Act). Yes ☐ No ☒
The number of shares of Common Stock outstanding was 20,026,491 as of October 31, 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 fourth 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, 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 this Quarterly Report on Form 10-Q 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; the actions of activist stockholders; 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
Part I - FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
DMC GLOBAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share and Per Share Data)
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
| (unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 14,511 | | | $ | 31,040 | |
Marketable securities | — | | | 12,619 | |
Accounts receivable, net of allowance for doubtful accounts of $6,933 and $1,955, respectively | 110,996 | | | 106,205 | |
Inventories | 165,636 | | | 166,712 | |
Prepaid expenses and other | 16,734 | | | 10,236 | |
| | | |
| | | |
Total current assets | 307,877 | | | 326,812 | |
Property, plant and equipment | 233,978 | | | 223,683 | |
Less - accumulated depreciation | (104,304) | | | (94,416) | |
Property, plant and equipment, net | 129,674 | | | 129,267 | |
Goodwill | — | | | 141,725 | |
| | | |
Purchased intangible assets, net | 179,380 | | | 195,260 | |
Deferred tax assets | 1,750 | | | 6,738 | |
Other assets | 83,329 | | | 84,693 | |
Total assets | $ | 702,010 | | | $ | 884,495 | |
| | | |
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST, AND STOCKHOLDERS’ EQUITY | | |
Current liabilities: | | | |
Accounts payable | $ | 55,883 | | | $ | 40,202 | |
Accrued expenses | 12,568 | | | 10,830 | |
| | | |
| | | |
Accrued income taxes | 16,616 | | | 12,810 | |
Accrued employee compensation and benefits | 11,569 | | | 16,918 | |
Contract liabilities | 21,263 | | | 21,621 | |
Current portion of long-term debt | 2,500 | | | 15,000 | |
Other current liabilities | 9,650 | | | 9,080 | |
| | | |
Total current liabilities | 130,049 | | | 126,461 | |
Long-term debt | 71,715 | | | 100,851 | |
| | | |
Deferred tax liabilities | 1,702 | | | 1,956 | |
Other long-term liabilities | 54,940 | | | 57,172 | |
Total liabilities | 258,406 | | | 286,440 | |
Commitments and contingencies (Note 13) | | | |
Redeemable noncontrolling interest | 187,080 | | | 187,760 | |
Stockholders’ equity | | | |
Preferred stock, $0.05 par value; 4,000,000 shares authorized; no issued and outstanding shares | — | | | — | |
Common stock, $0.05 par value; 50,000,000 shares authorized; 20,797,744 and 20,467,495 shares issued, respectively | 1,040 | | | 1,023 | |
Additional paid-in capital | 307,331 | | | 313,833 | |
Retained earnings | — | | | 146,604 | |
Other cumulative comprehensive loss | (26,108) | | | (26,426) | |
Treasury stock, at cost, and company stock held for deferred compensation, at par; 761,407 and 689,700 shares, respectively | (25,739) | | | (24,739) | |
| | | |
| | | |
Total stockholders’ equity | 256,524 | | | 410,295 | |
Total liabilities, redeemable noncontrolling interest, and stockholders’ equity | $ | 702,010 | | | $ | 884,495 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Net sales | $ | 152,429 | | | $ | 172,147 | | | $ | 490,477 | | | $ | 545,152 | |
Cost of products sold | 122,324 | | | 119,550 | | | 371,607 | | | 378,454 | |
Gross profit | 30,105 | | | 52,597 | | | 118,870 | | | 166,698 | |
Costs and expenses: | | | | | | | |
General and administrative expenses | 14,349 | | | 16,259 | | | 45,952 | | | 60,285 | |
Selling and distribution expenses | 13,856 | | | 12,454 | | | 37,578 | | | 36,978 | |
Amortization of purchased intangible assets | 5,278 | | | 5,667 | | | 15,877 | | | 17,001 | |
Goodwill impairment | 141,725 | | | — | | | 141,725 | | | — | |
Strategic review expenses | 1,763 | | | — | | | 5,952 | | | — | |
| | | | | | | |
Restructuring expenses and asset impairments | 2,069 | | | 515 | | | 2,348 | | | 515 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total costs and expenses | 179,040 | | | 34,895 | | | 249,432 | | | 114,779 | |
Operating (loss) income | (148,935) | | | 17,702 | | | (130,562) | | | 51,919 | |
Other expense: | | | | | | | |
Other (expense) income, net | (520) | | | 302 | | | (1,213) | | | (337) | |
Interest expense, net | (2,113) | | | (2,392) | | | (6,746) | | | (7,205) | |
(Loss) income before income taxes | (151,568) | | | 15,612 | | | (138,521) | | | 44,377 | |
Income tax provision | 7,848 | | | 4,087 | | | 12,283 | | | 13,187 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net (loss) income | $ | (159,416) | | | $ | 11,525 | | | $ | (150,804) | | | $ | 31,190 | |
Less: Net (loss) income attributable to redeemable noncontrolling interest | (58,093) | | | 2,642 | | | (56,056) | | | 7,695 | |
Net (loss) income attributable to DMC Global Inc. stockholders | $ | (101,323) | | | $ | 8,883 | | | $ | (94,748) | | | $ | 23,495 | |
| | | | | | | |
Net (loss) income per share attributable to DMC Global Inc. stockholders: | | | | |
Basic | $ | (8.27) | | | $ | 0.38 | | | $ | (8.04) | | | $ | 1.07 | |
Diluted | $ | (8.27) | | | $ | 0.38 | | | $ | (8.04) | | | $ | 1.07 | |
Weighted average shares outstanding: | | | | | | | |
Basic | 19,706,587 | | | 19,543,251 | | | 19,648,253 | | | 19,492,212 | |
Diluted | 19,706,587 | | | 19,596,575 | | | 19,648,253 | | | 19,540,978 | |
| | | | | | | |
| | | | | | | |
Reconciliation to net (loss) income attributable to DMC Global Inc. stockholders after adjustment of redeemable noncontrolling interest for purposes of calculating earnings per share
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Net (loss) income attributable to DMC Global Inc. stockholders | $ | (101,323) | | | $ | 8,883 | | | $ | (94,748) | | | $ | 23,495 | |
Adjustment of redeemable noncontrolling interest | (61,687) | | | (1,263) | | | (63,201) | | | (2,289) | |
Net (loss) income attributable to DMC Global Inc. stockholders after adjustment of redeemable noncontrolling interest | $ | (163,010) | | | $ | 7,620 | | | $ | (157,949) | | | $ | 21,206 | |
| | | | | | | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Amounts in Thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Net (loss) income | $ | (159,416) | | | $ | 11,525 | | | $ | (150,804) | | | $ | 31,190 | |
| | | | | | | |
Change in cumulative foreign currency translation adjustment | 1,946 | | | (2,303) | | | 318 | | | (1,088) | |
Other comprehensive (loss) income | $ | (157,470) | | | $ | 9,222 | | | $ | (150,486) | | | $ | 30,102 | |
| | | | | | | |
Less: comprehensive (loss) income attributable to redeemable noncontrolling interest | (58,093) | | | 2,642 | | | (56,056) | | | 7,695 | |
| | | | | | | |
Comprehensive (loss) income attributable to DMC Global Inc. stockholders | $ | (99,377) | | | $ | 6,580 | | | $ | (94,430) | | | $ | 22,407 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
(Amounts in Thousands, Except Share Data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Other | | Treasury Stock, 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 | 20,467,495 | | | $ | 1,023 | | | $ | 313,833 | | | $ | 146,604 | | | $ | (26,426) | | | (689,700) | | | $ | (24,739) | | | $ | 410,295 | | | $ | 187,760 | |
Net income (loss) | — | | | — | | | — | | | 2,563 | | | — | | | — | | | — | | | 2,563 | | | (244) | |
Change in cumulative foreign currency translation adjustment | — | | | — | | | — | | | — | | | (1,113) | | | — | | | — | | | (1,113) | | | — | |
Shares issued in connection with stock compensation plans | 236,509 | | | 12 | | | (12) | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation | — | | | — | | | 1,412 | | | — | | | — | | | — | | | — | | | 1,412 | | | 137 | |
Distribution to redeemable noncontrolling interest holder | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,880) | |
Adjustment of redeemable noncontrolling interest | — | | | — | | | — | | | (2,307) | | | — | | | — | | | — | | | (2,307) | | | 2,307 | |
Treasury stock activity | — | | | — | | | — | | | — | | | — | | | (32,030) | | | (936) | | | (936) | | | — | |
Balances, March 31, 2024 | 20,704,004 | | | $ | 1,035 | | | $ | 315,233 | | | $ | 146,860 | | | $ | (27,539) | | | (721,730) | | | $ | (25,675) | | | $ | 409,914 | | | $ | 187,080 | |
Net income | — | | | — | | | — | | | 4,012 | | | — | | | — | | | — | | | 4,012 | | | 2,281 | |
Change in cumulative foreign currency translation adjustment | — | | | — | | | — | | | — | | | (515) | | | — | | | — | | | (515) | | | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Shares issued in connection with stock compensation plans | 85,643 | | | 5 | | | 127 | | | — | | | — | | | — | | | — | | | 132 | | | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 1,670 | | | — | | | — | | | — | | | — | | | 1,670 | | | 112 | |
| | | | | | | | | | | | | | | | | |
Distribution to redeemable noncontrolling interest holder | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,600) | |
Adjustment of redeemable noncontrolling interest | — | | | — | | | — | | | 793 | | | — | | | — | | | — | | | 793 | | | (793) | |
Treasury stock activity | — | | | — | | | — | | | — | | | — | | | (26,536) | | | (17) | | | (17) | | | — | |
| | | | | | | | | | | | | | | | | |
Balances, June 30, 2024 | 20,789,647 | | | $ | 1,040 | | | $ | 317,030 | | | $ | 151,665 | | | $ | (28,054) | | | (748,266) | | | $ | (25,692) | | | $ | 415,989 | | | $ | 187,080 | |
Net loss | — | | | — | | | — | | | (101,323) | | | — | | | — | | | — | | | (101,323) | | | (58,093) | |
Change in cumulative foreign currency translation adjustment | — | | | — | | | — | | | — | | | 1,946 | | | — | | | — | | | 1,946 | | | — | |
Shares issued in connection with stock compensation plans | 8,097 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation | — | | | — | | | 1,646 | | | — | | | — | | | — | | | — | | | 1,646 | | | 126 | |
Distribution to redeemable noncontrolling interest holder | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,720) | |
Adjustment of redeemable noncontrolling interest | — | | | — | | | (11,345) | | | (50,342) | | | — | | | — | | | — | | | (61,687) | | | 61,687 | |
Treasury stock activity | — | | | — | | | — | | | — | | | — | | | (13,141) | | | (47) | | | (47) | | | — | |
Balances, September 30, 2024 | 20,797,744 | | | $ | 1,040 | | | $ | 307,331 | | | $ | — | | | $ | (26,108) | | | (761,407) | | | $ | (25,739) | | | $ | 256,524 | | | $ | 187,080 | |
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 | 20,140,654 | | | $ | 1,007 | | | $ | 303,893 | | | $ | 125,215 | | | $ | (28,758) | | | (605,723) | | | $ | (20,710) | | | $ | 380,647 | | | $ | 187,522 | |
Net income | — | | | — | | | — | | | 909 | | | — | | | — | | | — | | | 909 | | | 1,230 | |
Change in cumulative foreign currency translation adjustment | — | | | — | | | — | | | — | | | 769 | | | — | | | — | | | 769 | | | — | |
Shares issued in connection with stock compensation plans | 258,807 | | | 13 | | | (13) | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation | — | | | — | | | 4,795 | | | — | | | — | | | — | | | — | | | 4,795 | | | 232 | |
Distribution to redeemable noncontrolling interest holder | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,600) | |
Adjustment of redeemable noncontrolling interest | — | | | — | | | — | | | (1,138) | | | — | | | — | | | — | | | (1,138) | | | 1,138 | |
Treasury stock activity | — | | | — | | | — | | | — | | | — | | | (77,184) | | | (3,705) | | | (3,705) | | | — | |
| | | | | | | | | | | | | | | | | |
Balances, March 31, 2023 | 20,399,461 | | | $ | 1,020 | | | $ | 308,675 | | | $ | 124,986 | | | $ | (27,989) | | | (682,907) | | | $ | (24,415) | | | $ | 382,277 | | | $ | 187,522 | |
Net income | — | | | — | | | — | | | 13,703 | | | — | | | — | | | — | | | 13,703 | | | 3,823 | |
Change in cumulative foreign currency translation adjustment | — | | | — | | | — | | | — | | | 446 | | | — | | | — | | | 446 | | | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Shares issued in connection with stock compensation plans | 50,582 | | | 2 | | | 210 | | | — | | | — | | | — | | | — | | | 212 | | | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 1,570 | | | — | | | — | | | — | | | — | | | 1,570 | | | 129 | |
Distribution to redeemable noncontrolling interest holder | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,840) | |
Adjustment of redeemable noncontrolling interest | — | | | — | | | — | | | 112 | | | — | | | — | | | — | | | 112 | | | (112) | |
Treasury stock activity | — | | | — | | | — | | | — | | | — | | | (2,635) | | | (14) | | | (14) | | | — | |
Balances, June 30, 2023 | 20,450,043 | | | $ | 1,022 | | | $ | 310,455 | | | $ | 138,801 | | | $ | (27,543) | | | (685,542) | | | $ | (24,429) | | | $ | 398,306 | | | $ | 187,522 | |
Net income | — | | | — | | | — | | | 8,883 | | | — | | | — | | | — | | | 8,883 | | | 2,642 | |
Change in cumulative foreign currency translation adjustment | — | | | — | | | — | | | — | | | (2,303) | | | — | | | — | | | (2,303) | | | — | |
Shares issued in connection with stock compensation plans | 7,214 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 1,697 | | | — | | | — | | | — | | | — | | | 1,697 | | | 135 | |
Distribution to redeemable noncontrolling interest holder | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4,040) | |
Adjustment of redeemable noncontrolling interest | — | | | — | | | — | | | (1,263) | | | — | | | — | | | — | | | (1,263) | | | 1,263 | |
Treasury stock activity | — | | | — | | | — | | | — | | | — | | | (7,996) | | | (154) | | | (154) | | | — | |
Balances, September 30, 2023 | 20,457,257 | | | $ | 1,022 | | | $ | 312,152 | | | $ | 146,421 | | | $ | (29,846) | | | (693,538) | | | $ | (24,583) | | | $ | 405,166 | | | $ | 187,522 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(unaudited)
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2024 | | 2023 |
Cash flows provided by operating activities: | | | |
Net (loss) income | $ | (150,804) | | | $ | 31,190 | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | |
| | | |
Depreciation | 10,294 | | | 10,294 | |
Amortization of purchased intangible assets | 15,877 | | | 17,001 | |
Amortization of deferred debt issuance costs | 624 | | | 412 | |
| | | |
Stock-based compensation | 5,103 | | | 8,558 | |
| | | |
Bad debt expense | 4,979 | | | 141 | |
Deferred income taxes | 4,734 | | | 2,218 | |
Asset impairments | 1,044 | | | 515 | |
Goodwill impairment | 141,725 | | | — | |
Other | (76) | | | (2,040) | |
| | | |
Change in: | | | |
Accounts receivable, net | (9,458) | | | (11,557) | |
Inventories | 1,357 | | | (29,460) | |
Prepaid expenses and other | 2,351 | | | 14,185 | |
Accounts payable | 15,388 | | | (1,485) | |
Contract liabilities | (399) | | | (3,450) | |
| | | |
Accrued expenses and other liabilities | (7,954) | | | 6,226 | |
Net cash provided by operating activities | 34,785 | | | 42,748 | |
Cash flows provided by (used in) investing activities: | | | |
| | | |
Investment in marketable securities | — | | | (7,516) | |
| | | |
| | | |
Proceeds from maturities of marketable securities | 3,000 | | | — | |
Proceeds from sales of marketable securities | 9,619 | | | — | |
Acquisition of property, plant and equipment | (11,600) | | | (7,455) | |
Proceeds from property, plant and equipment reimbursements | 406 | | | — | |
| | | |
Proceeds on sale of property, plant and equipment | 100 | | | — | |
| | | |
Net cash provided by (used in) investing activities | 1,525 | | | (14,971) | |
Cash flows used in financing activities: | | | |
| | | |
Repayments on term loan | (118,750) | | | (13,750) | |
Borrowings on term loan | 50,000 | | | — | |
Borrowings on revolving loans | 77,650 | | | — | |
Repayments on revolving loans | (50,400) | | | — | |
| | | |
Payment of debt issuance costs | (2,735) | | | — | |
Distributions to redeemable noncontrolling interest holder | (8,321) | | | (10,345) | |
| | | |
| | | |
Net proceeds from issuance of common stock to employees and directors | 132 | | | 212 | |
Treasury stock purchases | (1,000) | | | (2,328) | |
| | | |
Net cash used in financing activities | (53,424) | | | (26,211) | |
| | | |
Effects of exchange rates on cash | 585 | | | 1,350 | |
| | | |
Net (decrease) increase in cash and cash equivalents | (16,529) | | | 2,916 | |
Cash and cash equivalents, beginning of the period | 31,040 | | | 25,144 | |
Cash and cash equivalents, end of the period | $ | 14,511 | | | $ | 28,060 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DMC GLOBAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
1. BASIS OF PRESENTATION
The information included in the Condensed Consolidated Financial 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.
During the three and nine months ended September 30, 2024, our expected loss rate reflects uncertainties in market conditions present in our businesses, including supply chain disruptions, industry consolidation, rising interest rates, as well as global geopolitical and economic instability. In addition, we reviewed receivables outstanding, including aged balances, and in circumstances where we are aware of a specific customer’s inability to meet its financial obligation to us, we recorded a specific allowance for credit losses against the amounts due, reducing the net receivable recognized to the amount we estimate will be collected. The offsetting expense is charged to “Selling and distribution expenses” in our Condensed Consolidated Statements of Operations. During the three and nine months ended September 30, 2024, net provisions of $3,943 and $4,979, respectively, were recorded. During the three and nine months ended September 30, 2023, net provisions of $317 and $141, respectively, were recorded.
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 | $ | 60 | | | $ | 1,838 | | | $ | 57 | | | $ | 1,955 | |
| | | | | | | |
Current period provision for expected credit losses | 428 | | | 4,636 | | | — | | | 5,064 | |
Write-offs charged against the allowance | — | | | — | | | — | | | — | |
Recoveries of amounts previously reserved | — | | | (45) | | | (40) | | | (85) | |
Impacts of foreign currency exchange rates and other | — | | | — | | | (1) | | | (1) | |
Allowance for doubtful accounts, September 30, 2024 | $ | 488 | | | $ | 6,429 | | | $ | 16 | | | $ | 6,933 | |
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 December 23, 2024 (“Call Option”). Similarly, the Operating Agreement permits the minority interest holder of Arcadia Products the right to sell its remaining interest in Arcadia Products to the Company on or after December 23, 2024 (“Put Option”). The purchase price for any interests sold pursuant to the Call Option or Put Option would be based upon a predefined calculation as included within the Operating Agreement. In connection with an exercise of the Call Option, the Operating Agreement would require payment of the purchase price in cash. However, in connection with the exercise of the Put Option, the Operating Agreement permits the Company the option to pay the purchase price in cash or in a combination of cash and preferred stock that would be authorized at that time.
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.
At each balance sheet date subsequent to acquisition, two separate calculations must be performed to determine the value of the redeemable noncontrolling interest. First, the redeemable noncontrolling interest must be accounted for in accordance with ASC 810 Consolidation (“ASC 810”) whereby income (loss) and cash distributions attributable to the redeemable noncontrolling interest holder are ascribed. After this occurs, applicable provisions of ASC 480 must be considered to determine whether any further adjustment is necessary to increase the carrying value of the redeemable noncontrolling interest. An adjustment would only be necessary if the estimated settlement amount of the redeemable noncontrolling interest, per the terms of the Operating Agreement, exceeds the carrying value calculated in accordance with ASC 810. If such adjustment is required, the impact is immediately recorded to retained earnings and additional paid-in capital, upon absence of retained earnings, and therefore does not impact the Condensed Consolidated Statements of Operations or Comprehensive Income (Loss). As of September 30, 2024 and December 31, 2023, the redeemable noncontrolling interest was $187,080 and $187,760, respectively. The September 30, 2024 redeemable noncontrolling interest value is equal to the floor value per the Operating Agreement.
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.
Our rights to payments for goods transferred to customers within our DynaEnergetics and NobelClad business segments arise when control is transferred at a point in time and not on any other criteria. Our rights to payments for goods transferred to customers within our Arcadia Products business segment also predominantly arise when control is transferred at a point in time; however, at times, control of certain customized, project-based products passes to the customer over time. Payment terms and conditions vary by contract, although terms generally include a requirement of payment within 30 to 90 days across all of our segments. In instances when we require customers to make advanced payments prior to the shipment of their orders, we record a contract liability. We have determined that our contract liabilities do not include a significant financing component given the short duration between order initiation and order fulfillment within each of our segments. Refer to Note 11 "Business Segments" for disaggregated revenue disclosures.
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.
Basic EPS is calculated by dividing net income (loss) attributable to the Company’s stockholders after adjustment of redeemable noncontrolling interest by the weighted-average number of common shares outstanding during the period. Net income (loss) available to common shareholders of the Company includes any adjustment to the redeemable noncontrolling interest as of the end of the period presented. Refer to the "Redeemable noncontrolling interest" section above for further discussion of the calculation of the adjustment of the redeemable noncontrolling interest. Diluted EPS adjusts basic EPS for the effects of restricted stock awards, restricted stock units, performance share units and other potentially dilutive financial instruments (dilutive securities), only in the periods in which such effect is dilutive. The effect of the dilutive securities is reflected in diluted EPS by application of the more dilutive of (1) the treasury stock method or (2) the two-class method. For the three and nine months ended September 30, 2023, diluted EPS using the two-class method was more dilutive than the treasury stock method; as such, only the two-class method has been included below.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Net (loss) income attributable to DMC Global Inc. stockholders, as reported | $ | (101,323) | | | $ | 8,883 | | | $ | (94,748) | | | $ | 23,495 | |
Adjustment of redeemable noncontrolling interest | (61,687) | | | (1,263) | | | (63,201) | | | (2,289) | |
| | | | | | | |
Less: Undistributed net income available to participating securities | — | | | (118) | | | — | | | (329) | |
Numerator for basic net (loss) income per share: | (163,010) | | | 7,502 | | | (157,949) | | | 20,877 | |
Add: Undistributed net income allocated to participating securities | — | | | 118 | | | — | | | 329 | |
Less: Undistributed net income reallocated to participating securities | — | | | (117) | | | — | | | (328) | |
Numerator for diluted net (loss) income per share: | $ | (163,010) | | | $ | 7,503 | | | $ | (157,949) | | | $ | 20,878 | |
Denominator: | | | | | | | |
Weighted average shares outstanding for basic net (loss) income per share | 19,706,587 | | | 19,543,251 | | | 19,648,253 | | | 19,492,212 | |
Effect of dilutive securities (1) | — | | | 53,324 | | | — | | | 48,766 | |
Weighted average shares outstanding for diluted net (loss) income per share | 19,706,587 | | | 19,596,575 | | | 19,648,253 | | | 19,540,978 | |
Net (loss) income per share | | | | | | |
Basic | $ | (8.27) | | | $ | 0.38 | | | $ | (8.04) | | | $ | 1.07 | |
Diluted | $ | (8.27) | | | $ | 0.38 | | | $ | (8.04) | | | $ | 1.07 | |
(1) Given we were in a net loss position after the adjustment of redeemable noncontrolling interest for the three and nine months ended September 30, 2024, all potentially dilutive shares were anti-dilutive and were therefore excluded from the determination of diluted EPS. For the three and nine months ended September 30, 2023, 3,239 and 9,447 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.
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 September 30, 2024.
| | | | | | | | | | | | | | | | | | | | |
| | Balance Sheet location | | September 30, 2024 | | December 31, 2023 |
Deferred compensation assets | | Prepaid expenses and other | | $ | 1,608 | | | $ | 1,428 | |
Deferred compensation assets | | Other assets | | 7,524 | | | 8,449 | |
Deferred compensation obligations | | Other current liabilities | | 1,608 | | | 1,428 | |
Deferred compensation obligations | | Other long-term liabilities | | 11,223 | | | 12,078 | |
| | | | | | |
| | | | | | |
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We are required to use an established hierarchy for fair value measurements based upon the inputs to the valuation and the degree to which they are observable or not observable in the market. The three levels in the hierarchy are as follows:
•Level 1 — Inputs to the valuation based upon quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date.
•Level 2 — Inputs to the valuation include quoted prices in either markets that are not active, or in active markets for similar assets or liabilities, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data.
•Level 3 — Inputs to the valuation that are unobservable inputs for the asset or liability.
The highest priority is assigned to Level 1 inputs and the lowest priority to Level 3 inputs.
The carrying value of 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.
Our foreign currency forward contracts are valued using quoted market prices or are determined using a yield curve model based on current market rates. As a result, we classify these instruments as Level 2 in the fair value hierarchy. Money market funds and mutual funds of $966 as of September 30, 2024 and $3,257 as of December 31, 2023 held to satisfy future deferred compensation obligations are valued based upon the market values of underlying securities and are classified as Level 2 assets in the fair value hierarchy.
We did not hold any Level 3 assets or liabilities as of September 30, 2024 or December 31, 2023. Refer to Note 5 “Goodwill” for further information on the valuation approach utilized in assessing the Arcadia Products reporting unit for impairment, which included significant inputs not observable in the market and thus represent Level 3 measurements.
Asset impairments
Finite-lived assets are tested for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. We compare the expected undiscounted future operating cash flows associated with applicable assets or asset groupings to their respective carrying values to determine if they are fully recoverable when indicators of impairment are present. If the expected future operating cash flows of an asset or asset grouping are not sufficient to recover the related carrying value, we estimate the fair value of the asset or asset grouping. Impairment is recognized when the carrying amount of the asset or asset grouping is not recoverable and when carrying value exceeds the estimated fair value. Long-lived assets to be disposed of, if any, are reported at the lower of carrying amount or fair value less cost to sell.
During the three and nine months ended September 30, 2024, we recorded asset impairments of $1,044 related to the abandonment of a planned manufacturing expansion at DynaEnergetics. During the three and nine months ended September 30, 2023, we recorded asset impairments of $515, primarily attributable to a manufacturing asset at NobelClad that was removed from production.
Restructuring expenses
Restructuring expenses are incurred from time to time to improve operational efficiency across our businesses. During the three and nine months ended September 30, 2024, we recorded total restructuring expenses of $1,025 and $1,304, respectively. These expenses relate to employee severance associated with headcount reductions at DynaEnergetics and Arcadia Products.
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.
We have considered all other recent accounting pronouncements issued, but not yet effective, and we do not expect any to have a material effect on the Company’s Condensed Consolidated Financial Statements.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Significant cost elements included in inventory are raw materials, labor, freight, subcontract costs, and manufacturing overhead. As necessary, we write down inventory to its net realizable value by recording provisions for excess, slow moving and obsolete inventory. To determine provision amounts, we regularly review inventory quantities on hand and values, and compare them to estimates of future product demand, market conditions, production requirements and technological developments.
Inventories consisted of the following at September 30, 2024:
| | | | | | | | | | | | | | | | | | | | | | | |
| Arcadia Products | | DynaEnergetics | | NobelClad | | DMC Global Inc. |
Raw materials | $ | 10,564 | | | $ | 24,925 | | | $ | 8,793 | | | $ | 44,282 | |
Work-in-process | 6,111 | | | 18,234 | | | 15,924 | | | 40,269 | |
Finished goods | 54,985 | | | 25,808 | | | — | | | 80,793 | |
Supplies | — | | | — | | | 292 | | | 292 | |
Total inventories | $ | 71,660 | | | $ | 68,967 | | | $ | 25,009 | | | $ | 165,636 | |
Inventories consisted of the following at December 31, 2023: | | | | | | | | | | | | | | | | | | | | | | | |
| Arcadia Products | | DynaEnergetics | | NobelClad | | DMC Global Inc. |
Raw materials | $ | 9,257 | | | $ | 26,107 | | | $ | 7,089 | | | $ | 42,453 | |
Work-in-process | 7,565 | | | 23,196 | | | 12,509 | | | 43,270 | |
Finished goods | 56,463 | | | 23,644 | | | 633 | | | 80,740 | |
Supplies | — | | | — | | | 249 | | | 249 | |
Total inventories | $ | 73,285 | | | $ | 72,947 | | | $ | 20,480 | | | $ | 166,712 | |
4. PURCHASED INTANGIBLE ASSETS
Our purchased intangible assets consisted of the following at September 30, 2024: | | | | | | | | | | | | | | | | | |
| Gross | | Accumulated Amortization | | Net |
Core technology | $ | 276 | | | $ | (276) | | | $ | — | |
| | | | | |
Customer relationships | 211,113 | | | (49,663) | | | 161,450 | |
| | | | | |
Trademarks / Trade names | 22,000 | | | (4,070) | | | 17,930 | |
Total intangible assets | $ | 233,389 | | | $ | (54,009) | | | $ | 179,380 | |
Our purchased intangible assets consisted of the following at December 31, 2023: | | | | | | | | | | | | | | | | | |
| Gross | | Accumulated Amortization | | Net |
Core technology | $ | 283 | | | $ | (269) | | | $ | 14 | |
Customer backlog | 22,000 | | | (22,000) | | | — | |
Customer relationships | 211,128 | | | (34,913) | | | 176,215 | |
| | | | | |
Trademarks / Trade names | 22,000 | | | (2,969) | | | 19,031 | |
Total intangible assets | $ | 255,411 | | | $ | (60,151) | | | $ | 195,260 | |
The change in the gross value of our unamortized purchased intangible assets at September 30, 2024 from December 31, 2023 was due to foreign currency translation.
5. GOODWILL
Goodwill represents the amount by which the purchase price exceeds the fair value of identifiable tangible and intangible assets and liabilities acquired in a business combination. Goodwill is not subject to amortization and is tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value might not be fully recoverable. A qualitative assessment is allowed to determine if goodwill is potentially impaired. The qualitative assessment determines whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If it is more likely than not that the fair value of the reporting unit is less than the carrying amount, then a quantitative impairment test is performed. The quantitative goodwill impairment test is used to identify both the existence of impairment and the amount of impairment loss. The test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded for the difference.
In connection with the preparation of its quarterly financial statements during the third quarter of 2024, the Company assessed changes in circumstances that occurred during the quarter to determine whether it was more likely than not that the fair value of its Arcadia Products reporting unit was below its carrying amount. While there was no single determinative event or factor, potential triggering events during the third quarter of 2024, including recent financial performance not in accordance with expectations and downward revisions to the near-term forecast, led the Company to conclude that when considering the events and factors in totality, it was more likely than not that the fair value of the Arcadia Products reporting unit was below its carrying value at September 30, 2024. As such, a quantitative goodwill impairment test was performed. The Company utilized the market approach to estimate the fair value of the Arcadia Products reporting unit, but also considered the income approach to validate the results. The market approach includes observable inputs of fair value, including but not limited to non-binding offers received from third-parties and comparative market multiples. The income approach estimates the fair value by discounting the reporting unit’s estimated future cash flows using an estimated discount rate, or expected return, that a marketplace participant would have required as of the valuation date. For both approaches, the inputs used in the determination of fair value are generally Level 3 inputs.
Based on the results of our quantitative goodwill impairment test, we recorded a $141,725 impairment charge to goodwill during the three and nine months ended September 30, 2024, which is included in “Goodwill impairment” in our Condensed Consolidated Statements of Operations.
6. CONTRACT LIABILITIES
At times, we require customers to make advanced payments prior to the shipment of their orders to help finance our inventory investment on large orders or keep customers’ credit limits at acceptable levels. Contract liabilities were as follows for the periods presented: | | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
Arcadia Products | $ | 9,763 | | | $ | 13,815 | |
NobelClad | 9,999 | | | 6,662 | |
DynaEnergetics | 1,501 | | | 1,144 | |
Total contract liabilities | $ | 21,263 | | | $ | 21,621 | |
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.
7. 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:
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
ROU asset | $ | 43,924 | | | $ | 45,409 | |
| | | |
Current lease liability | 8,067 | | | 7,652 | |
Long-term lease liability | 38,509 | | | 39,744 | |
Total lease liability | $ | 46,576 | | | $ | 47,396 | |
| | | |
The ROU asset is reported in “Other assets” while the current lease liability is reported in “Other current liabilities” and the long-term lease liability is reported in “Other long-term liabilities” in the Company’s Condensed Consolidated Balance Sheets. Cash paid for operating lease liabilities 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. There were eight such leases in effect as of September 30, 2024, with expiration dates ranging from calendar years 2025 to 2031. As of September 30, 2024, the total ROU asset and related lease liability recognized for these leases was $22,705 and $23,470, respectively.
For the three months ended September 30, 2024 and 2023, operating lease expense was $3,291 and $3,349, respectively. For the nine months ended September 30, 2024 and 2023, operating lease expense was $10,016 and $9,504, respectively. Related party lease expense for the three and nine months ended September 30, 2024 and 2023 was $1,156 and $3,469, 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.
8. DEBT
Outstanding borrowings consisted of the following at:
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
Syndicated credit agreement: | | | |
U.S. Dollar revolving loan | $ | 27,250 | | | $ | — | |
Term loan | 48,750 | | | 117,500 | |
| | | |
| | | |
Commerzbank line of credit | — | | | — | |
Outstanding borrowings | 76,000 | | | 117,500 | |
Less: debt issuance costs | (1,785) | | | (1,649) | |
Total debt | 74,215 | | | 115,851 | |
Less: current portion of long-term debt | (2,500) | | | (15,000) | |
Long-term debt | $ | 71,715 | | | $ | 100,851 | |
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 September 30, 2024 and December 31, 2023, bank guarantees of $3,040 and $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 September 30, 2024, we were in compliance with all financial covenants and other provisions of our debt agreements.
We also maintain a line of credit with a German bank 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 September 30, 2024 and December 31, 2023, we had no outstanding borrowings under this line of credit and bank guarantees of €2,162 and €1,696, respectively, were secured. The line of credit has open-ended terms and can be canceled by the bank at any time.
9. 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 if any person (or any persons acting as a group) acquires “Beneficial Ownership” (as defined in the Rights Agreement) of 10%, or 20% in the case of certain passive investors, or more 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.
The Company’s Certificate of Incorporation authorizes the issuance of preferred stock. However, as of September 30, 2024, no preferred stock has been issued.
10. 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 nine months ended September 30, 2024, we were in a three-year cumulative loss position at the consolidated financial statement level, driven by losses in the U.S. primarily related to the impairment of Arcadia Products’ goodwill in the third quarter of 2024. Accordingly, during the three months ended September 30, 2024, we evaluated the impact on all jurisdictions and have recorded a valuation allowance against the corresponding net deferred tax assets in the U.S. as of September 30, 2024. 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 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.
In 2024, we have been notified of forthcoming tax audits in Germany of both our NobelClad and DynaEnergetics subsidiaries for the years 2019 through 2021. 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.
11. 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 September 30, | | Nine months ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Net sales: | | | | | | | |
Arcadia Products | $ | 57,818 | | | $ | 71,455 | | | $ | 189,491 | | | $ | 230,951 | |
DynaEnergetics | 69,679 | | | 72,998 | | | 224,011 | | | 239,720 | |
NobelClad | 24,932 | | | 27,694 | | | 76,975 | | | 74,481 | |
Net sales | $ | 152,429 | | | $ | 172,147 | | | $ | 490,477 | | | $ | 545,152 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
(Loss) income before income taxes: | | | | | | | |
Arcadia Products | $ | (145,122) | | | $ | 6,476 | | | $ | (139,991) | | | $ | 19,189 | |
DynaEnergetics | (3,049) | | | 10,871 | | | 12,845 | | | 41,772 | |
NobelClad | 4,969 | | | 5,232 | | | 15,001 | | | 12,560 | |
Segment operating (loss) income | (143,202) | | | 22,579 | | | (112,145) | | | 73,521 | |
| | | | | | | |
Unallocated corporate expenses (1) | (4,377) | | | (3,382) | | | (14,531) | | | (14,283) | |
Unallocated stock-based compensation (2) | (1,356) | | | (1,495) | | | (3,886) | | | (7,319) | |
Other (expense) income, net | (520) | | | 302 | | | (1,213) | | | (337) | |
Interest expense, net | (2,113) | | | (2,392) | | | (6,746) | | | (7,205) | |
(Loss) income before income taxes | $ | (151,568) | | | $ | 15,612 | | | $ | |