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, 2020.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements include the accounts of DMC Global Inc. (“DMC”, “we”, “us”, “our”, or the “Company”) and its controlled subsidiaries. Only subsidiaries in which controlling interests are maintained are consolidated. All significant intercompany accounts, profits, and transactions have been eliminated in consolidation.
Marketable Securities
We typically invest in highly rated securities with the primary objectives of preserving principal, providing access to liquidity to fund the ongoing operations and strategic needs of the Company and its subsidiaries, and achieving a yield that is commensurate with low risk and highly liquid securities.
Our investments in marketable debt securities are classified as either trading, available-for-sale or held-to-maturity based on the nature of the securities and their availability for use in current operations. The Company classifies its marketable debt securities in the Condensed Consolidated Balance Sheet as current or non-current based on related maturities and expectations of sales and redemptions in the subsequent twelve-month period. The Company may sell certain of its marketable debt securities prior to their stated maturities to manage liquidity, credit risk, or asset allocation.
As of September 30, 2021 and December 31, 2020, our investments had maturities ranging from three to twelve months, and all such investments have been classified and accounted for as trading securities.
The Company’s investments in marketable securities consisted of the following:
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|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
U.S. Treasury securities
|
$
|
76,591
|
|
|
$
|
25,736
|
|
|
Commercial paper (A-1 or P-1 rated)
|
68,341
|
|
|
—
|
|
|
Marketable securities
|
$
|
144,932
|
|
|
$
|
25,736
|
|
The Company’s U.S. Treasury securities have annual yields between 0.01% and 0.04% and the commercial paper securities have annual yields between 0.09% and 0.10%. The Company’s investments in marketable securities are measured at fair value with gains and losses recognized in the Condensed Consolidated Statement of Operations within “Other (expense) income, net." For the three and nine months ended September 30, 2021, the net gains on marketable securities were $2 and $12, respectively.
Accounts and Notes Receivable
The Company measures expected credit losses for its accounts receivable using a current expected credit loss model, which is based on historical experience, adjusted for current conditions and reasonable and supportable forecasts. The Company has disaggregated pools of accounts receivable balances by business, geography and/or customer risk profile and has used
history and other experience to establish an allowance for credit losses at the time the receivable is recognized. To measure expected credit losses, we have elected to pool trade receivables by segment and analyze DynaEnergetics and NobelClad accounts receivable balances as separate populations. Within each segment, receivables exhibit similar risk characteristics.
During the three and nine months ended September 30, 2021, our expected loss rate continued to reflect uncertainties in market conditions present in both of our businesses due to the ongoing COVID-19 pandemic. In addition, we reviewed receivables outstanding, including aged balances, and in circumstances where we are aware of a specific customer’s inability to meet its financial obligation to us, we recorded a specific allowance for credit losses (with the offsetting expense charged to “Selling and distribution expenses” in our Condensed Consolidated Statements of Operations) against the amounts due, reducing the net recognized receivable to the amount we estimate will be collected. During the three and nine months ended September 30, 2021, provisions of $4 and $100, respectively, were recorded.
The following table summarizes year-to-date activity in the allowance for credit losses on receivables from DynaEnergetics and NobelClad customers:
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|
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|
|
|
|
|
|
DynaEnergetics
|
|
NobelClad
|
|
DMC Global Inc.
|
|
Allowance for doubtful accounts, December 31, 2020
|
$
|
2,590
|
|
|
$
|
15
|
|
|
$
|
2,605
|
|
|
|
|
|
|
|
|
|
Current period provision for expected credit losses
|
100
|
|
|
—
|
|
|
100
|
|
|
|
|
|
|
|
|
|
Recoveries of amounts previously reserved
|
(10)
|
|
|
—
|
|
|
(10)
|
|
|
Impacts of foreign currency exchange rates and other
|
(2)
|
|
|
—
|
|
|
(2)
|
|
|
Allowance for doubtful accounts, September 30, 2021
|
$
|
2,678
|
|
|
$
|
15
|
|
|
$
|
2,693
|
|
During the third quarter of 2021, the Company entered into a note receivable with terms of repayment over five years, collateralized by certain fixed assets. The note, with an outstanding current balance of $622 as of September 30, 2021 recorded within “Prepaid expenses and other” and an outstanding long-term balance of $4,995 as of September 30, 2021 recorded within “Other Assets”, is considered an arrangement with a variable interest entity for which the Company is not the primary beneficiary and has concluded does not require consolidation.
Revenue Recognition
The Company’s revenues are primarily derived from consideration paid by customers for tangible goods. The Company analyzes its different goods by segment to determine the appropriate basis for revenue recognition. Revenue is not generated from sources other than contracts with customers and revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. There are no material upfront costs for operations that are incurred from contracts with customers.
Our rights to payments for goods transferred to customers arise when control is transferred at a point in time and not on any other criteria. Payment terms and conditions vary by contract, although terms generally include a requirement of payment within 30 to 60 days. In instances when we require customers to make advance payments prior to the shipment of their orders, we record a contract liability. We have determined that our contract liabilities do not include a significant financing component given the short duration between order initiation and order fulfillment within each of our segments. Please refer to Note 5 “Contract Liabilities” for further information on contract liabilities and Note 10 “Business Segments” for disaggregated revenue disclosures.
Income Taxes
We recognize deferred tax assets and liabilities for the expected future income tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. The deferred income tax impact of tax credits is recognized as an immediate adjustment to income tax expense. We recognize deferred tax assets for the expected future effects of all deductible temporary differences to the extent we believe these assets will more likely than not be realized. We record a valuation allowance when, based on current circumstances, it is more likely than not that all or a portion of the deferred tax assets will not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, recent financial operations and their associated valuation allowances, if any.
We recognize the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position that it will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that is more likely than not to be realized upon ultimate resolution. We recognize interest and penalties related to uncertain tax positions in operating expense.
Earnings Per Share
In periods with net income, the Company computes earnings per share (“EPS”) using a two-class method, which is an earnings allocation formula that determines EPS for (i) each class of common stock (the Company has a single class of common stock), and (ii) participating securities according to dividends declared and participation rights in undistributed earnings. Restricted stock awards are considered participating securities in periods of net income as they receive non-forfeitable rights to dividends similar to common stock. Restricted stock awards do not participate in net losses.
Basic EPS is calculated by dividing net income available to common stockholders of the Company by the weighted average number of shares of common stock outstanding during the period. Diluted EPS adjusts basic EPS for the effects of restricted stock awards, performance share units and other potentially dilutive financial instruments (dilutive securities), only in the periods in which such effect is dilutive. The effect of the dilutive securities is reflected in diluted EPS by application of the more dilutive of (1) the treasury stock method or (2) the two-class method. For the periods presented, diluted EPS using the treasury stock method was less dilutive than the two-class method; as such, only the two-class method has been included below.
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Three months ended September 30,
|
|
Nine months ended September 30,
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|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Net income (loss), as reported
|
$
|
403
|
|
|
$
|
1,008
|
|
|
2,559
|
|
|
(485)
|
|
|
|
|
|
|
|
|
|
|
|
Less: Undistributed net income available to participating securities
|
(3)
|
|
|
(17)
|
|
|
(25)
|
|
|
—
|
|
|
Numerator for basic net income (loss) per share:
|
400
|
|
|
991
|
|
|
2,534
|
|
|
(485)
|
|
|
Add: Undistributed net income allocated to participating securities
|
3
|
|
|
17
|
|
|
25
|
|
|
—
|
|
|
Less: Undistributed net income reallocated to participating securities
|
(3)
|
|
|
(17)
|
|
|
(25)
|
|
|
—
|
|
|
Numerator for diluted net income (loss) per share:
|
400
|
|
|
991
|
|
|
2,534
|
|
|
(485)
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic net income (loss) per share
|
18,728,278
|
|
|
14,820,881
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|
|
17,239,306
|
|
|
14,759,062
|
|
|
Effect of dilutive securities (1)
|
10,807
|
|
|
—
|
|
|
11,219
|
|
|
—
|
|
|
Weighted average shares outstanding for diluted net income (loss) per share
|
18,739,085
|
|
|
14,820,881
|
|
|
17,250,525
|
|
|
14,759,062
|
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.02
|
|
|
$
|
0.07
|
|
|
$
|
0.15
|
|
|
$
|
(0.03)
|
|
|
Diluted
|
$
|
0.02
|
|
|
$
|
0.07
|
|
|
$
|
0.15
|
|
|
$
|
(0.03)
|
|
(1) For the three and nine months ended September 30, 2020, 30,967 and 19,394 respectively, shares have been excluded as their effect would have been anti-dilutive.
Deferred compensation
The Company maintains a Non-Qualified Deferred Compensation Plan (the “Plan”) as part of its overall compensation package for certain employees. Participants are eligible to defer a portion of their annual salary, their annual incentive bonus, and their equity awards through the Plan on a tax-deferred basis. Deferrals into the Plan are not matched or subsidized by the Company, nor are they eligible for above-market or preferential earnings.
The Plan provides for deferred compensation obligations to be settled either by delivery of a fixed number of shares of DMC’s common stock or in cash, in accordance with participant contributions and elections. For deferred equity awards, subsequent to equity award vesting and after a period prescribed by the Plan, participants can elect to diversify contributions of equity awards into other investment options available to Plan participants. Once diversified, contributions of equity awards will be settled by delivery of cash.
The Company has established a grantor trust commonly known as a “rabbi trust” and contributed certain assets to satisfy the future obligations to participants in the Plan. These assets are subject to potential claims of the Company’s general creditors. The assets held in the trust include unvested restricted stock awards (“RSAs”), vested company stock awards, company-owned life insurance (“COLI”) on certain employees, and money market and mutual funds. Unvested RSAs and common stock held by the trust are reflected in the 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 Consolidated Statements of Stockholders’ Equity within “Common stock” at the par value of the common stock or unvested RSAs. These accounts are not adjusted for subsequent changes in the fair value of the common stock.
The balances related to the deferred compensation plan were as follows:
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|
|
Consolidated Balance Sheet location
|
|
September 30, 2021
|
|
December 31, 2020
|
|
Deferred compensation assets
|
|
Other assets
|
|
$
|
13,261
|
|
|
$
|
7,596
|
|
|
Deferred compensation obligations
|
|
Other long-term liabilities
|
|
$
|
15,695
|
|
|
$
|
11,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We are required to use an established hierarchy for fair value measurements based upon the inputs to the valuation and the degree to which they are observable or not observable in the market. The three levels in the hierarchy are as follows:
•Level 1 — Inputs to the valuation based upon quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date.
•Level 2 — Inputs to the valuation include quoted prices in either markets that are not active, or in active markets for similar assets or liabilities, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data.
•Level 3 — Inputs to the valuation that are unobservable inputs for the asset or liability.
The highest priority is assigned to Level 1 inputs and the lowest priority to Level 3 inputs.
The carrying value of accounts receivable and payable, accrued expenses, revolving loans under our credit facility and borrowings under our capital expenditure facility, when outstanding, approximate their fair value.
Our U.S. Treasury marketable securities are valued using quoted prices in active markets that are accessible as of the measurement date. Our revolving loans and borrowings under our capital expenditure facility, when outstanding, reset each month at market interest rates. Money market funds and mutual funds of $8,629 as of September 30, 2021 and $4,244 as of December 31, 2020 held to satisfy future deferred compensation obligations are valued based upon the market values of underlying securities. We classify these assets as Level 1 in the fair value hierarchy.
Our commercial paper marketable securities are valued using quoted market prices in non-active markets. Our foreign currency forward contracts are also valued using quoted market prices in non-active markets or are determined using a yield curve model based on current market rates. As a result, we classify commercial paper marketable securities and foreign currency forward contracts as Level 2 in the fair value hierarchy.
We did not hold any Level 3 assets or liabilities as of September 30, 2021 or December 31, 2020.
Recent Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board issued a new accounting pronouncement regarding accounting for income taxes. The new standard removes certain exceptions to the general principles in ASC 740 Income Taxes and also clarifies and amends existing guidance to provide for more consistent application. The new standard became effective for the Company in the first quarter of fiscal 2021 and did not have a material impact on our 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 material, labor, freight, subcontract costs, and manufacturing overhead. As necessary, we adjust inventory to its net realizable value by recording provisions for excess, slow moving and obsolete inventory. We regularly review inventory quantities on hand and values, and compare them to estimates of future product demand, market conditions, production requirements and technological developments.
Inventories consisted of the following at September 30, 2021:
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|
|
|
|
|
|
|
|
|
|
|
|
|
DynaEnergetics
|
|
NobelClad
|
|
DMC Global Inc.
|
|
Raw materials
|
$
|
13,865
|
|
|
$
|
8,923
|
|
|
$
|
22,788
|
|
|
Work-in-process
|
13,486
|
|
|
6,808
|
|
|
20,294
|
|
|
Finished goods
|
18,251
|
|
|
634
|
|
|
18,885
|
|
|
Supplies
|
—
|
|
|
205
|
|
|
205
|
|
|
Inventories
|
$
|
45,602
|
|
|
$
|
16,570
|
|
|
$
|
62,172
|
|
Inventories consisted of the following at December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DynaEnergetics
|
|
NobelClad
|
|
DMC Global Inc.
|
|
Raw materials
|
$
|
13,250
|
|
|
$
|
11,903
|
|
|
$
|
25,153
|
|
|
Work-in-process
|
7,062
|
|
|
6,682
|
|
|
13,744
|
|
|
Finished goods
|
12,806
|
|
|
669
|
|
|
13,475
|
|
|
Supplies
|
—
|
|
|
201
|
|
|
201
|
|
|
Inventories
|
$
|
33,118
|
|
|
$
|
19,455
|
|
|
$
|
52,573
|
|
4. PURCHASED INTANGIBLE ASSETS
Our purchased intangible assets consisted of the following as of September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Core technology
|
$
|
16,052
|
|
|
$
|
(14,223)
|
|
|
$
|
1,829
|
|
|
Customer relationships
|
36,110
|
|
|
(36,110)
|
|
|
—
|
|
|
Trademarks / Trade names
|
2,069
|
|
|
(2,069)
|
|
|
—
|
|
|
Total intangible assets
|
$
|
54,231
|
|
|
$
|
(52,402)
|
|
|
$
|
1,829
|
|
Our purchased intangible assets consisted of the following as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Core technology
|
$
|
17,899
|
|
|
$
|
(14,234)
|
|
|
$
|
3,665
|
|
|
Customer relationships
|
37,638
|
|
|
(37,638)
|
|
|
—
|
|
|
Trademarks / Trade names
|
2,194
|
|
|
(2,194)
|
|
|
—
|
|
|
Total intangible assets
|
$
|
57,731
|
|
|
$
|
(54,066)
|
|
|
$
|
3,665
|
|
The change in the gross value of our purchased intangible assets from December 31, 2020 to September 30, 2021 was due to foreign currency translation and the recognition of the tax benefit of tax deductible goodwill amortization related to the 2007 acquisition of our German subsidiaries. Prior to the impairment of the goodwill related to the NobelClad and DynaEnergetics reporting units at September 30, 2017 and December 31, 2015, respectively, the tax benefit of tax amortization
reduced the goodwill balance. After we fully impaired the goodwill, which is only written off for U.S. GAAP purposes, the tax benefit of tax goodwill amortization reduces the gross value of the purchased intangible assets related to this acquisition.
5. CONTRACT LIABILITIES
On occasion, we require customers to make advance payments prior to the shipment of goods in order to help finance our inventory investment on large orders or to keep customers’ credit limits at acceptable levels. Contract liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
NobelClad
|
$
|
9,450
|
|
|
$
|
4,450
|
|
|
DynaEnergetics
|
309
|
|
|
478
|
|
|
Total
|
$
|
9,759
|
|
|
$
|
4,928
|
|
We generally expect to recognize the revenue associated with contract liabilities over a time period no longer than one year, but unforeseen circumstances can cause delays in shipments associated with contract liabilities. Approximately 78% of the $4,928 recorded as contract liabilities at December 31, 2020 was recorded to net sales during the nine months ended September 30, 2021.
6. LEASES
The Company leases real properties for use in manufacturing and as administrative and sales offices, and also leases automobiles and office equipment. The Company determines if a contract contains a lease arrangement at the inception of the contract. For leases in which the Company is the lessee, leases are classified as either finance or operating. Right of use (ROU) assets are initially measured at the present value of lease payments over the lease term plus initial direct costs, if any, with the classification affecting the pattern of expense recognition. If a lease does not provide a discount rate and the rate cannot be readily determined, an incremental borrowing rate is used to determine the future lease payments. Lease and non-lease components within the Company’s lease agreements are accounted for together.
Nearly all of the Company’s leasing arrangements are classified as operating leases. ROU asset and lease liability balances were as follows for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
ROU asset
|
$
|
11,198
|
|
|
$
|
10,733
|
|
|
|
|
|
|
|
Current lease liability
|
1,648
|
|
|
1,741
|
|
|
Long-term lease liability
|
10,432
|
|
|
10,066
|
|
|
Total lease liability
|
$
|
12,080
|
|
|
$
|
11,807
|
|
The ROU asset was included in “Other assets” while the current lease liability was reported in “Other current liabilities” and the long-term lease liability was reported in “Other long-term liabilities” in the Company’s Condensed Consolidated Balance Sheet. Cash paid for operating lease liabilities are recorded as cash flows from operating activities in the Company’s Condensed Consolidated Statements of Cash Flows. For the three months ended September 30, 2021 and 2020, operating lease costs were $1,064 and $1,055, respectively. For the nine months ended September 30, 2021 and 2020, operating lease costs were $3,074 and $3,051, respectively. Operating lease costs were included in the Company’s Condensed Consolidated Statements of Operations. Short term and variable lease costs were not material for the three and nine months ended September 30, 2021 and 2020.
Certain of the Company’s leases contain renewal options and options to extend the leases for up to five years, and a majority of these options are reflected in the calculation of the ROU asset and lease liability due to the likelihood of renewal.
The following table summarizes the weighted average lease terms and discount rates for operating lease liabilities:
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
Weighted average remaining lease term (in years)
|
7.71
|
|
Weighted average discount rate
|
5.4
|
%
|
The following table represents maturities of operating lease liabilities as of September 30, 2021:
|
|
|
|
|
|
|
|
Due within 1 year
|
$
|
1,648
|
|
|
Due after 1 year through 2 years
|
2,379
|
|
|
Due after 2 years through 3 years
|
2,160
|
|
|
Due after 3 years through 4 years
|
2,019
|
|
|
Due after 4 years through 5 years
|
1,642
|
|
|
Due after 5 years
|
5,067
|
|
|
Total future minimum lease payments
|
14,915
|
|
|
Less imputed interest
|
(2,835)
|
|
|
Total
|
$
|
12,080
|
|
7. DEBT
As of September 30, 2021 we had no outstanding borrowings under our credit facility. As of December 31, 2020, outstanding borrowings consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syndicated credit agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditure facility
|
|
|
$
|
11,750
|
|
|
|
|
|
|
|
Outstanding borrowings
|
|
|
11,750
|
|
|
Less: debt issuance costs
|
|
|
(486)
|
|
|
Total debt
|
|
|
11,264
|
|
|
Less: current portion of long-term debt
|
|
|
(3,125)
|
|
|
Long-term debt
|
|
|
$
|
8,139
|
|
Syndicated Credit Agreement
On March 8, 2018, we entered into a five-year $75,000 syndicated credit agreement (“credit facility”) which replaced in its entirety our prior syndicated credit facility entered into on February 23, 2015. The credit facility is with a syndicate of three banks, with KeyBank, N.A. acting as administrative agent. The facility is secured by the assets of DMC including accounts receivable, inventory, and fixed assets, as well as guarantees and share pledges by DMC and its subsidiaries. The credit facility allows for revolving loans of up to $50,000 with a $20,000 US dollar equivalent sublimit for alternative currency loans. In addition, the agreement provided for a $25,000 Capital Expenditure Facility (“Capex Facility”) which was used to assist in financing our DynaEnergetics manufacturing expansion project in Blum, Texas. At the end of year one, the Capex Facility converted to a term loan which was amortizable at 12.5% of principal per year with a balloon payment for the outstanding balance upon the credit facility maturity date in 2023. In February 2021, we repaid the remaining Capex Facility balance of $11,750.
The credit facility has a $100,000 accordion feature to increase the commitments under the revolving loan class and/or by adding a term loan subject to approval by applicable lenders.
Borrowings under the $50,000 revolving loan can be in the form of one-, two-, three-, or six-month LIBOR rate loans. Additionally, US dollar borrowings on the revolving loan can be in the form of Base Rate loans (Base Rate borrowings are based on the greater of the administrative agent’s Prime rates, an adjusted Federal Funds rate or an adjusted LIBOR rate). LIBOR loans bear interest at the applicable LIBOR rate plus an applicable margin (varying from 1.50% to 3.00%). Base Rate loans bear interest at the defined Base rate plus an applicable margin (varying from 0.50% to 2.00%).
Borrowings under the $20,000 alternate currency sublimit can be in euros, Canadian dollars, pounds sterling, and in any other currency acceptable to the administrative agent. Alternative currency borrowings denominated in euros, pounds sterling, and any other currency that is dealt with on the London Interbank Deposit Market shall be comprised of LIBOR loans and bear interest at the LIBOR rate plus an applicable margin (varying from 1.50% to 3.00%).
On October 22, 2020, in connection with the commencement of our at-the-market offering, we entered into an amendment to the credit facility to waive the requirement that we repay outstanding balances under the credit facility from the proceeds of any equity offering. The waiver applies to at-the-market offerings up to $75 million.
The credit facility, as amended, includes various covenants and restrictions, certain of which relate to the payment of dividends or other distributions to stockholders; redemption of capital stock; incurrence of additional indebtedness; mortgaging, pledging or disposition of major assets; and maintenance of specified ratios. As of September 30, 2021, we were in compliance with all financial covenants and other provisions of our debt agreements.
We also maintain a line of credit with a German bank for certain European operations. In July 2020, the German Bank Facility was amended to increase the borrowing capacity from €4,000 to €7,000. Of the €7,000 borrowing capacity, €4,000 was available as of September 30, 2021 after considering outstanding letters of credit.
Given that we had no outstanding debt as of September 30, 2021, our deferred debt issuance costs of $318 were reported in the “Other assets” line item in our Condensed Consolidated Balance Sheet. Our deferred debt issuance costs of $486 as of December 31, 2020 were reported in the “Long-term debt” line item in our Condensed Consolidated Balance Sheet. Deferred debt issuance costs are being amortized over the remaining term of the credit facility which expires on March 8, 2023.
8. EQUITY OFFERINGS AND PROGRAM
Equity Offering
On May 3, 2021, the Company announced a registered public offering (“Offering”) of its stock under an automatic shelf registration statement on Form S-3ASR filed on May 3, 2021. The Company entered into an underwriting agreement with KeyBanc Capital Markets Inc. (“KeyBanc”), as representative of the underwriters (collectively, the “Underwriters”), pursuant to which the Company agreed to sell 2,500,000 shares of its $0.05 par value common stock to the Underwriters. In addition, the Underwriters were granted an option, exercisable within 30 days, to purchase up to an additional 375,000 shares of common stock to cover over-allotments, if any, on the same terms and conditions.
On May 7, 2021, DMC issued a total of 2,875,000 shares of its common stock, which included the exercise of the over-allotment option, at a market price of $45 per share resulting in gross proceeds of $129,375. Net proceeds from the offering were $123,461, after deducting underwriter fees and other expenses of $5,914. We intend to use the net proceeds from the offering for general corporate purposes, which may include acquisitions. Pending the use of the proceeds as described, we invested the proceeds of the offering in highly liquid marketable securities, including commercial paper and U.S. Treasury securities. Please see discussion of our marketable securities in Note 2.
At-the-Market Equity Program
On October 22, 2020, the Company commenced an at-the-market ("ATM") equity program under its shelf registration statement, which allows it to sell and issue up to $75 million in shares of its common stock from time to time. The Company entered into an Equity Distribution Agreement on October 22, 2020 with KeyBanc relating to the issuance and sale of shares of common stock pursuant to the program. KeyBanc is not required to sell any specific amount of securities but will act as our sales agent using commercially reasonable efforts consistent with its normal trading and sales practices, on mutually agreed terms between KeyBanc and us. There is no specific date on which the ATM equity program will end and there are no minimum purchase requirements. KeyBanc is entitled to compensation for shares sold pursuant to the program in an amount up to 1.5% of the gross proceeds of any shares of common stock sold under the Equity Distribution Agreement.
During the three months ended September 30, 2021, the Company did not sell any shares of common stock through its ATM equity program. During the nine months ended September 30, 2021, the Company sold 397,820 shares of common stock through its ATM equity program for gross proceeds of $25,647 at a weighted average price per share of $64.47. Net proceeds from such sales were $25,262, after deducting commissions paid to the sales agents of approximately $385. Since the inception of the program, the Company has sold 1,006,180 shares of common stock for gross proceeds of $51,779 at a weighted average price per share of $51.46. Total net proceeds from sales through the ATM program have been $51,002. We intend to use the net proceeds from the ATM equity program for general corporate purposes, which may include working capital, debt repayment and potential acquisitions or investments in businesses, products or technologies. Pending the use of the proceeds as described, a portion of the proceeds from the ATM program has been invested in highly liquid marketable securities, including commercial paper and U.S. Treasury securities, while the balance remains in cash. Please see discussion of our marketable securities in Note 2.
9. INCOME TAXES
The effective tax rate for each of the periods reported differs from the U.S. statutory rate primarily due to variation in contribution to consolidated pre-tax income from each jurisdiction for the respective periods, differences between the U.S. and foreign tax rates (which range from 20% to 34%), permanent differences between book and taxable income, and changes to valuation allowances on our deferred tax assets.
We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use existing deferred tax assets. Additionally, a three-year cumulative loss at a Consolidated Financial Statement level may be viewed as negative evidence impacting a jurisdiction that by itself is not in a three-year cumulative loss position. During the nine months ended September 30, 2021 and September 30, 2020, we did not record any adjustments to previously established valuation allowances, except for adjustments related to the changes in balances of the related deferred tax assets. The Company will continue to monitor the realizability of deferred tax assets and the need for valuation allowances and will record adjustments in the periods in which facts support such adjustments.
The Tax Cuts and Jobs Act (“TCJA”) provides that foreign earnings generally can be repatriated to the U.S. without federal tax consequence. We have assessed the assertion that cumulative earnings by our foreign subsidiaries are indefinitely reinvested. We continue to permanently reinvest the earnings of our international subsidiaries and therefore we do not provide for U.S. income taxes or withholding taxes that could result from the distribution of those earnings to the U.S. parent. Nevertheless, if any such earnings were ultimately distributed to the U.S. in the form of dividends or otherwise, or if the shares of our international subsidiaries were sold or transferred, we could be subject to additional U.S. federal and state income taxes. Due to the multiple avenues in which earnings can be repatriated, and because a large portion of these earnings are not liquid, it is not practical to estimate the amount of additional taxes that might be payable on these amounts of undistributed foreign income.
During the fourth quarter of 2019, our German operating entities commenced a tax audit for fiscal years 2015 through 2017. The audit concluded in the second quarter of 2021, and we recorded additional tax expense of $25 after receiving all material assessments from the German authorities.
10. BUSINESS SEGMENTS
Our business is organized into two segments: DynaEnergetics and NobelClad. DynaEnergetics designs, manufactures and distributes products utilized by the global oil and gas industry principally for the perforation of oil and gas wells. NobelClad is a global leader in the production of explosion-welded clad metal plates for use in the construction of corrosion resistant industrial processing equipment and specialized transition joints.
Our reportable segments are separately managed strategic business units that offer different products and services. Each segment’s products are marketed to different customer types and require different manufacturing processes and technologies.
Segment information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Net sales
|
|
|
|
|
|
|
|
|
DynaEnergetics
|
$
|
44,237
|
|
|
$
|
34,201
|
|
|
$
|
124,677
|
|
|
$
|
111,065
|
|
|
NobelClad
|
22,938
|
|
|
21,080
|
|
|
63,594
|
|
|
60,983
|
|
|
Net sales
|
$
|
67,175
|
|
|
$
|
55,281
|
|
|
$
|
188,271
|
|
|
$
|
172,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Operating income
|
|
|
|
|
|
|
|
|
DynaEnergetics
|
$
|
1,585
|
|
|
$
|
2,171
|
|
|
$
|
6,307
|
|
|
$
|
3,886
|
|
|
NobelClad
|
3,620
|
|
|
2,483
|
|
|
8,595
|
|
|
5,941
|
|
|
Segment operating income
|
5,205
|
|
|
4,654
|
|
|
14,902
|
|
|
9,827
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated corporate expenses
|
(2,499)
|
|
|
(1,594)
|
|
|
(6,903)
|
|
|
(5,851)
|
|
|
Stock-based compensation
|
(1,569)
|
|
|
(1,595)
|
|
|
(4,904)
|
|
|
(4,154)
|
|
|
Other (expense) income, net
|
(198)
|
|
|
(148)
|
|
|
304
|
|
|
(118)
|
|
|
Interest expense, net
|
(14)
|
|
|
(170)
|
|
|
(230)
|
|
|
(564)
|
|
|
Income (loss) before income taxes
|
$
|
925
|
|
|
$
|
1,147
|
|
|
$
|
3,169
|
|
|
$
|
(860)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
DynaEnergetics
|
$
|
2,012
|
|
|
$
|
1,866
|
|
|
$
|
6,095
|
|
|
$
|
5,410
|
|
|
NobelClad
|
967
|
|
|
879
|
|
|
2,851
|
|
|
2,594
|
|
|
Segment depreciation and amortization
|
2,979
|
|
|
2,745
|
|
|
8,946
|
|
|
8,004
|
|
|
Corporate and other
|
102
|
|
|
75
|
|
|
277
|
|
|
239
|
|
|
Consolidated depreciation and amortization
|
$
|
3,081
|
|
|
$
|
2,820
|
|
|
$
|
9,223
|
|
|
$
|
8,243
|
|
The disaggregation of revenue earned from contracts with customers based on the geographic location of the customer is as follows.
DynaEnergetics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
United States
|
$
|
36,453
|
|
|
$
|
23,324
|
|
|
$
|
96,316
|
|
|
$
|
80,931
|
|
|
Canada
|
2,798
|
|
|
1,856
|
|
|
9,304
|
|
|
2,504
|
|
|
Egypt
|
671
|
|
|
388
|
|
|
2,398
|
|
|
2,642
|
|
|
Oman
|
665
|
|
|
1,148
|
|
|
2,117
|
|
|
1,842
|
|
|
Rest of the world
|
3,650
|
|
|
7,485
|
|
|
14,542
|
|
|
23,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total DynaEnergetics
|
$
|
44,237
|
|
|
$
|
34,201
|
|
|
$
|
124,677
|
|
|
$
|
111,065
|
|
NobelClad
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
United States
|
$
|
11,033
|
|
|
$
|
10,589
|
|
|
$
|
30,448
|
|
|
$
|
30,094
|
|
|
Russia
|
1,519
|
|
|
—
|
|
|
3,586
|
|
|
—
|
|
|
Canada
|
1,254
|
|
|
1,985
|
|
|
3,985
|
|
|
5,446
|
|
|
Singapore
|
1,009
|
|
|
32
|
|
|
1,009
|
|
|
857
|
|
|
United Arab Emirates
|
929
|
|
|
310
|
|
|
2,030
|
|
|
2,930
|
|
|
China
|
892
|
|
|
1,448
|
|
|
3,775
|
|
|
1,543
|
|
|
Italy
|
831
|
|
|
301
|
|
|
1,268
|
|
|
685
|
|
|
Germany
|
761
|
|
|
982
|
|
|
1,539
|
|
|
2,770
|
|
|
Australia
|
576
|
|
|
587
|
|
|
1,171
|
|
|
1,193
|
|
|
France
|
509
|
|
|
300
|
|
|
1,929
|
|
|
2,392
|
|
|
Netherlands
|
507
|
|
|
361
|
|
|
1,628
|
|
|
1,276
|
|
|
Sweden
|
494
|
|
|
541
|
|
|
676
|
|
|
1,097
|
|
|
Rest of the world
|
2,624
|
|
|
3,644
|
|
|
10,550
|
|
|
10,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NobelClad
|
$
|
22,938
|
|
|
$
|
21,080
|
|
|
$
|
63,594
|
|
|
$
|
60,983
|
|
During the three months ended September 30, 2021, one customer in our DynaEnergetics segment accounted for approximately 11% of consolidated net sales. During the three months ended September 30, 2020, one customer in our DynaEnergetics segment accounted for approximately 11% of consolidated net sales. During the nine months ended September 30, 2021 no single customer accounted for greater than 10% of consolidated net sales. During the nine months ended September 30, 2020, one customer in our DynaEnergetics segment accounted for approximately 12% of consolidated net sales. As of September 30, 2021, one customer in our DynaEnergetics segment accounted for approximately 12% of consolidated accounts receivable. As of December 31, 2020 no single customer accounted for greater than 10% of consolidated accounts receivable.
11. DERIVATIVE INSTRUMENTS
We are exposed to foreign currency exchange risk resulting from fluctuations in exchange rates, primarily the U.S. dollar to euro, the U.S. dollar to Canadian dollar, and, to a lesser extent, other currencies, arising from inter-company and third-party transactions entered into by our subsidiaries that are denominated in currencies other than their functional currency. Changes in exchange rates with respect to these transactions result in unrealized gains or losses if such transactions are unsettled at the end of the reporting period or realized gains or losses at settlement of the transaction. We use foreign currency forward contracts to offset foreign exchange rate fluctuations on foreign currency denominated asset and liability positions. None of these contracts are designated as accounting hedges, and all changes in the fair value of the forward contracts are recognized in “Other (expense) income, net” within our Condensed Consolidated Statements of Operations.
We execute derivatives with a specialized foreign exchange brokerage firm as well as other large financial institutions. The primary credit risk inherent in derivative agreements is the possibility that a loss may occur from the nonperformance of a counterparty to the agreements. We perform a review of the credit risk of our counterparties at the inception of the contract and on an ongoing basis. We anticipate that our counterparties will be able to fully satisfy their obligations under the agreements but will take action if doubt arises regarding the counterparties’ ability to perform.
As of September 30, 2021 and December 31, 2020, the notional amounts of the forward currency contracts the Company held were $11,746 and $2,092, respectively. At September 30, 2021 and December 31, 2020, the fair values of outstanding foreign currency forward contracts were $0.
The following table presents the location and amount of net losses from hedging activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
Derivative
|
Statements of Operations Location
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Foreign currency contracts
|
Other (expense) income, net
|
$
|
(253)
|
|
|
$
|
(1,045)
|
|
|
$
|
(187)
|
|
|
$
|
(917)
|
|
|
|
|
|
|
|
|
|
|
|
12. COMMITMENTS AND CONTINGENCIES
Contingent Liabilities
The Company records an accrual for contingent liabilities when a loss is both probable and reasonably estimable. If some amount within a range of loss appears to be a better estimate than any other amount within the range, that amount is accrued. When no amount within a range of loss appears to be a better estimate than any other amount, the lowest amount in the range is accrued.
Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
13. RESTRUCTURING EXPENSES AND ASSET IMPAIRMENTS
During the first quarter of 2021, NobelClad recorded an accrual for additional severance liabilities of $116 which were agreed to with local labor authorities for employees terminated as part of closing manufacturing operations in France in 2018.
During the third quarter of 2020, DynaEnergetics sold its Tyumen, Siberia production facility to a third-party for $448, which was equal to the carrying value of the assets held for sale.
During the second quarter of 2020 the COVID-19 pandemic-related collapse in oil and gas demand led to a downturn in well completions and the corresponding demand for DynaEnergetics’ products. As a result, DynaEnergetics recorded asset impairment charges of $1,181 on certain manufacturing assets that will no longer be utilized in production at its Blum, Texas and Troisdorf, Germany facilities. Additionally, both DynaEnergetics and NobelClad further reduced the respective workforces during the quarter. Finally, DynaEnergetics continued activities to prepare its Tyumen, Siberia facility for sale.
During the first quarter of 2020, DMC reduced its workforce by 264 positions to address a sharp decline in well completions in the Company’s core oil and gas end market principally due to the COVID-19 pandemic. The workforce reduction impacted full-time, part-time and temporary direct-labor roles in manufacturing and assembly at DynaEnergetics as well as general and administrative positions at DynaEnergetics, NobelClad, and at DMC’s corporate office.
Total restructuring and impairment charges incurred for these programs are as follows and are reported in the “Restructuring expenses and asset impairments” line item in our Condensed Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2021
|
|
|
Severance
|
|
|
|
|
|
|
|
Other Exit Costs
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NobelClad
|
$
|
116
|
|
|
|
|
|
|
|
|
$
|
11
|
|
|
$
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
116
|
|
|
|
|
|
|
|
|
$
|
11
|
|
|
$
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2020
|
|
|
Severance
|
|
|
|
Contract Termination Costs
|
|
|
|
Other Exit Costs
|
|
Total
|
|
DynaEnergetics
|
$
|
109
|
|
|
|
|
$
|
8
|
|
|
|
|
$
|
16
|
|
|
$
|
133
|
|
|
NobelClad
|
—
|
|
|
|
|
—
|
|
|
|
|
10
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
109
|
|
|
|
|
$
|
8
|
|
|
|
|
$
|
26
|
|
|
$
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2020
|
|
|
Severance
|
|
Asset Impairment
|
|
Contract Termination Costs
|
|
Equipment Moving Costs
|
|
Other Exit Costs
|
|
Total
|
|
DynaEnergetics
|
$
|
936
|
|
|
$
|
1,181
|
|
|
$
|
19
|
|
|
$
|
126
|
|
|
$
|
660
|
|
|
$
|
2,922
|
|
|
NobelClad
|
244
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20
|
|
|
264
|
|
|
Corporate
|
119
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
1,299
|
|
|
$
|
1,181
|
|
|
$
|
19
|
|
|
$
|
126
|
|
|
$
|
680
|
|
|
$
|
3,305
|
|
During the nine months ended September 30, 2021, the changes to the restructuring liability associated with these programs is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Net expense
|
|
Payments and Other Adjustments
|
|
Currency Adjustments
|
|
September 30, 2021
|
|
Severance
|
$
|
958
|
|
|
$
|
116
|
|
|
$
|
(56)
|
|
|
$
|
(57)
|
|
|
$
|
961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other exit costs
|
—
|
|
|
11
|
|
|
(11)
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
958
|
|
|
$
|
127
|
|
|
$
|
(67)
|
|
|
$
|
(57)
|
|
|
$
|
961
|
|
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