DMC Global Inc. (BOOM) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our historical Consolidated Financial Statements and notes included elsewhere in this annual report. A discussion regarding our financial condition and results of operations as well as our liquidity and capital resources for fiscal 2022 compared to fiscal 2021 can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which is available on the SEC’s website at www.sec.gov and our Investor Relations website at www.dmcglobal.com/investors.
Unless stated otherwise, all dollar figures in this report are presented in thousands (000s). N/M indicates that the change in dollars or percentage was not meaningful.
Overview
General
DMC Global Inc. (“DMC”, "we", "us", "our", or the "Company") owns and operates Arcadia Products, DynaEnergetics and NobelClad, three innovative, asset-light manufacturing businesses that provide differentiated products and engineered solutions to niche segments of the construction, energy, industrial processing and transportation markets. Each of our businesses provides a unique suite of highly engineered products and differentiated solutions, and each has established a leadership position in its respective market. Our businesses seek to capitalize on their product and service differentiation to expand profit margins, increase cash flow and enhance shareholder value. Based in Broomfield, Colorado, DMC trades on Nasdaq under the symbol “BOOM.”
Arcadia Products
On December 23, 2021, DMC completed the acquisition of 60% of the membership interests in Arcadia Products, LLC, a Colorado limited liability company resulting from the conversion of Arcadia, Inc. (collectively, “Arcadia Products”). Arcadia Products designs, engineers, fabricates, and finishes aluminum framing systems, windows, curtain walls, storefronts, entrance systems, and interior partitions to the commercial construction market. Additionally, Arcadia Products supplies customized windows and doors to the ultra-high-end residential real estate market.
Cost of products sold for Arcadia Products includes the cost of aluminum, paint, and other raw materials used in manufacturing as well as employee compensation and benefits, manufacturing facility lease expense, depreciation of manufacturing equipment, supplies and other manufacturing overhead expenses.
DynaEnergetics
DynaEnergetics designs, manufactures, markets and sells perforating systems and associated hardware for the global oil and gas industry. These products are primarily sold to oilfield service companies in the U.S., Europe, Canada, Africa, the Middle East, and Asia. The market for perforating products, which are used during the well completion process, generally corresponds with oil and gas exploration and production activity. Well completion operations are increasingly complex, which in turn has increased the demand for intrinsically-safe, reliable and technically advanced perforating systems.
Cost of products sold for DynaEnergetics includes the cost of metals, explosives and other raw materials used to manufacture shaped charges, detonating products and perforating guns as well as employee compensation and benefits, depreciation of manufacturing facilities and equipment, supplies and other manufacturing overhead expenses.
NobelClad
NobelClad produces explosion-welded clad metal plates for use in the construction of corrosion resistant industrial processing equipment and specialized transition joints for commuter rail cars, ships, and liquified natural gas (LNG) processing equipment. While most demand for our products is driven by maintenance and retrofit projects at existing plants and facilities, new projects for petrochemical processing, oil refining, and aluminum smelting facilities also account for a significant portion of total demand. These industries tend to be cyclical in nature and the timing of new order inflow remains difficult to predict. We use backlog, defined as all unfilled firm purchase orders and commitments at a point in time, to measure the immediate outlook for our NobelClad business. Most firm purchase orders and commitments are realized and shipped within twelve months. NobelClad's backlog increased to $59,357 at December 31, 2023 from $55,451 at December 31, 2022.
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Cost of products sold for NobelClad includes the cost of metals, explosive powders and other raw materials used to manufacture clad metal plates and transition joints as well as employee compensation and benefits, outside processing costs, depreciation of manufacturing facilities and equipment, manufacturing facility lease expense, supplies and other manufacturing overhead expenses.
Factors Affecting Results
•Consolidated net sales were $719,188 in 2023 versus $654,086 in 2022, an increase of 10%. The improved performance primarily was driven by an increase in unit sales of DynaEnergetics’ DS perforating systems and increased activity in NobelClad's core energy and petrochemical end markets.
•Arcadia Products reported sales of $298,909 in 2023, which were consistent with sales of $299,527 in 2022.
•DynaEnergetics' sales of $315,026 in 2023 increased 19% compared with 2022 due primarily to an increase in unit sales of DS perforating systems. International sales increased 28%, while North American sales increased 18%.
•NobelClad’s sales of $105,253 in 2023 increased 17% compared with 2022 reflecting healthy activity in core energy and petrochemical end markets.
•Consolidated gross profit of 29.5% in 2023 increased from 28.4% in 2022. The percentage improvement compared to prior year was attributable to favorable project and regional mix, as well as better absorption of fixed manufacturing overhead expenses at NobelClad. Also contributing to the percentage improvement was margin recovery at Arcadia as decreases in base aluminum metal prices exceeded declines in customer pricing.
•Consolidated selling, general, and administrative ("SG&A") expenses were $124,442 in 2023 compared with $118,349 in 2022. The year-over-year increase was primarily attributable to $4,343 of CEO transition expenses, as well as higher compensation and outside services costs.
•Cash and marketable securities of $43,659 at December 31, 2023 increased $18,515 from $25,144 at December 31, 2022 due primarily to higher free cash flow.
•Net debt, a non-GAAP measure, of $72,192 (comprised of $115,851 of total debt less $43,659 in cash, cash equivalents and marketable securities) at December 31, 2023 decreased $35,462 from $107,654 at December 31, 2022. The decrease was driven by $17,500 in Term Loan payments in 2023 and $12,471 of investments in marketable securities.
•The Company’s leverage ratio, calculated in accordance with its credit facility, was 1.25 to 1.0 as of December 31, 2023 in comparison to the maximum ratio permitted of 3.0 to 1.0. The Company’s adjusted leverage ratio, calculated using net debt as of December 31, 2023, was 0.78 to 1.0.
Outlook
DMC’s Arcadia Products business serves the commercial building products market primarily in the western and southwestern United States, and the ultra-high-end residential market across the United States. We expect Arcadia Products to be the primary driver of DMC’s future financial and operational growth, reflecting its large addressable market and differentiated business model. Arcadia Products is investing in new digital technologies and manufacturing capacity to facilitate its expansion. Phase one of a new enterprise resource planning (ERP) system went live in the third quarter of 2023 and is enhancing operating efficiencies and the internal control environment. Additional aluminum painting capacity was added in the second half of 2023, and the business expects further expansions in painting and anodizing capacity in 2024.
At DynaEnergetics, U.S. well completion activity in the fourth quarter declined by approximately 8% versus the third quarter, according to the U.S. Energy Information Administration. We believe North American well completion activity will remain soft during the first quarter of 2024 based on a decline in the number of active drilling rigs and well fracking crews. DynaEnergetics introduced various premium products in 2023 and is in the process of implementing more efficient manufacturing processes that collectively are expected to partially offset persistent pricing pressure in North America’s well completions sector.
NobelClad is experiencing strong demand for its Cylindra™ cryogenic transition joints used in the LNG industry, while repair and maintenance work from downstream energy and petrochemical industries is also contributing to healthy production
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activity. Our backlog was $59,357 as of December 31, 2023 in comparison to $55,451 as of December 31, 2022. We expect to ship most orders in our backlog within twelve months.
On January 29, 2024, DMC announced its Board of Directors had initiated a review of strategic alternatives for its DynaEnergetics and NobelClad businesses. The process formalizes DMC’s ongoing efforts during the past several months to consider opportunities that unlock shareholder value. The Board has retained a financial advisor and may retain other advisors to assist in evaluating the Company’s current strategy, operations, and capital structure. The Board will consider various strategic, business, and financial alternatives for both businesses. These could include, among other things, a sale, a merger, or other business combination of a portion of DMC’s business-unit assets, and/or a strategic investment. The Board has not set a timetable to complete the strategic review process, and there can be no assurance that the review process will result in any transactions.
Use of Non-GAAP Financial Measures
In addition to disclosing financial results that are determined in accordance with generally accepted accounting principles in the United States (GAAP), the Company also discloses certain non-GAAP financial measures that we use in operational and financial decision making. Non-GAAP financial measures include the following:
•EBITDA: defined as net income (loss) plus net interest, taxes, depreciation and amortization.
•Adjusted EBITDA: excludes from EBITDA stock-based compensation, restructuring expenses and asset impairment charges (if applicable) and, when appropriate, nonrecurring items that management does not utilize in assessing DMC’s operating performance (as further described in the tables below).
•Adjusted EBITDA attributable to DMC Global Inc. stockholders: excludes the Adjusted EBITDA attributable to the 40% redeemable noncontrolling interest in Arcadia Products.
•Adjusted EBITDA for DMC business segments: defined as operating income (loss) plus depreciation, amortization, allocated stock-based compensation (if applicable), restructuring expenses and asset impairment charges (if applicable) and, when appropriate, nonrecurring items that management does not utilize in assessing DMC's operating performance.
•Adjusted net income (loss): defined as net income (loss) attributable to DMC Global Inc. stockholders prior to the adjustment of redeemable noncontrolling interest plus restructuring expenses and asset impairment charges (if applicable) and, when appropriate, nonrecurring items that management does not utilize in assessing DMC's operating performance.
•Adjusted diluted earnings per share: defined as diluted earnings per share attributable to DMC Global Inc. stockholders (exclusive of adjustment of redeemable noncontrolling interest) plus restructuring expenses and asset impairment charges (if applicable) and, when appropriate, nonrecurring items that management does not utilize in assessing DMC’s operating performance.
•Net debt: defined as total debt less total cash, cash equivalents and marketable securities.
•Free-cash flow: defined as cash flows provided by (used in) operating activities less net acquisitions of property, plant and equipment.
Management believes providing these additional financial measures is useful to investors in understanding the Company’s operating performance, including the effects of restructuring, impairment, and other nonrecurring charges, as well as its liquidity. Management typically monitors the business utilizing the above non-GAAP measures, in addition to GAAP results, to understand and compare operating results across accounting periods, and certain management incentive awards are based, in part, on these measures. The presence of non-GAAP financial measures in this report is not intended to suggest that such measures be considered in isolation or as a substitute for, or as superior to, DMC’s GAAP information, and investors are cautioned that the non-GAAP financial measures are limited in their usefulness. Given that not all companies use identical calculations, DMC’s presentation of non-GAAP financial measures may not be comparable to similarly titled measures of other companies.
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Consolidated Results of Operations
| 2023 | 2022 | $ change | % change | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net sales | $ | 719,188 | $ | 654,086 | $ | 65,102 | 10 | % | ||||||
| Gross profit | 212,052 | 185,447 | 26,605 | 14 | % | |||||||||
| Gross profit percentage | 29.5 | % | 28.4 | % | ||||||||||
| COSTS AND EXPENSES: | ||||||||||||||
| General and administrative expenses | 75,341 | 76,119 | (778) | (1) | % | |||||||||
| % of net sales | 10.5 | % | 11.6 | % | ||||||||||
| Selling and distribution expenses | 49,101 | 42,230 | 6,871 | 16 | % | |||||||||
| % of net sales | 6.8 | % | 6.5 | % | ||||||||||
| Amortization of purchased intangible assets | 22,667 | 36,926 | (14,259) | (39) | % | |||||||||
| % of net sales | 3.2 | % | 5.6 | % | ||||||||||
| Restructuring expenses, net and asset impairments | 3,766 | 182 | 3,584 | 1,969 | % | |||||||||
| Operating income | 61,177 | 29,990 | 31,187 | 104 | % | |||||||||
| Other expense, net | (1,782) | (594) | (1,188) | 200 | % | |||||||||
| Interest expense, net | (9,516) | (6,187) | (3,329) | 54 | % | |||||||||
| Income before income taxes | 49,879 | 23,209 | 26,670 | 115 | % | |||||||||
| Income tax provision | 15,120 | 9,376 | 5,744 | 61 | % | |||||||||
| Net income | 34,759 | 13,833 | 20,926 | 151 | % | |||||||||
| Less: Net income attributable to redeemable noncontrolling interest | 8,500 | 1,586 | 6,914 | 436 | % | |||||||||
| Net income attributable to DMC Global Inc. | 26,259 | 12,247 | 14,012 | 114 | % | |||||||||
| Adjusted EBITDA attributable to DMC Global Inc. | $ | 96,063 | $ | 74,199 | $ | 21,864 | 29 | % |
Net sales were $719,188 for the twelve months ended December 31, 2023, an increase of 10% compared with 2022, primarily due to an increase in unit sales of DynaEnergetics’ DS perforating systems and increased activity in NobelClad's core energy and petrochemical end markets.
Gross profit percentage was 29.5% versus 28.4% in 2022. The improvement compared to the prior year was attributable to the favorable project and regional mix at NobelClad and margin recovery at Arcadia Products.
General and administrative expenses decreased $778 for the twelve months ended December 31, 2023 compared with 2022. The decrease was driven by various cost savings initiatives, including headcount reductions and decreased business travel, partially offset by $4,343 of CEO transition expenses.
Selling and distribution expenses increased $6,871 for the twelve months ended December 31, 2023 compared with 2022. The higher expense was primarily due to increases in compensation costs of $3,543, marketing and certain other outside services costs of $1,562, bad debt expense of $1,133, and freight and supplies costs of $621.
Amortization of purchased intangible assets decreased $14,259 for the year ended December 31, 2023 compared with 2022 as the Arcadia Products customer backlog purchased intangible asset was fully amortized in 2022.
Restructuring expenses, net and asset impairments increased $3,584 for the year ended December 31, 2023 compared with 2022 due to $2,471 of asset impairments primarily associated with the abandonment of a software asset at DynaEnergetics and $1,295 of cost reduction initiatives, including employee severance, primarily at DynaEnergetics.
Operating income of $61,177 increased $31,187 for the year ended December 31, 2023 compared with 2022. The increase in operating income was primarily the result of increased gross profit.
Other expense, net of $1,782 in 2023 primarily related to net realized foreign currency exchange losses. Currency gains and losses can arise when subsidiaries enter into inter-company and third-party transactions that are denominated in currencies other than their functional currency, including foreign currency forward contracts used to offset foreign exchange rate fluctuations on certain foreign currency denominated asset and liability positions.
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Interest expense, net of $9,516 in 2023 increased 54% compared with 2022 due to an increase in floating interest rates related to the Term Loan.
Income tax provision of $15,120 was recorded on income before taxes of $49,879. Our most significant operations are in the United States, which has a 21% statutory income tax rate, and Germany, which has a 32% combined statutory income tax rate. The mix of income or loss before income taxes between these jurisdictions is one of the primary drivers of the difference between our 21% statutory tax rate and our effective tax rate. The effective rate was impacted unfavorably by the geographic mix of pretax income, state taxes, and certain compensation expenses that are not tax deductible in the U.S. The operating results of Arcadia that are attributable to the redeemable noncontrolling interest holder are not taxed at DMC, which resulted in a partially offsetting favorable impact to the effective tax rate. We recorded an income tax provision of $9,376 on income before income taxes of $23,209 in 2022. The prior year rate was impacted by the same factors previously discussed.
Net income attributable to DMC Global Inc. in 2023 was $26,259, or $1.08 per diluted share, after adjustment to the redeemable noncontrolling interest, compared with net income of $12,247, or $0.72 per diluted share, in 2022.
Adjusted EBITDA in 2023 increased compared with 2022 due to the factors discussed above. See "Use of Non-GAAP Financial Measures" above for explanation of the use of Adjusted EBITDA, a non-GAAP measure. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
| 2023 | 2022 | |||||
|---|---|---|---|---|---|---|
| Net income | $ | 34,759 | $ | 13,833 | ||
| Interest expense, net | 9,516 | 6,187 | ||||
| Income tax provision | 15,120 | 9,376 | ||||
| Depreciation | 13,840 | 14,281 | ||||
| Amortization of purchased intangible assets | 22,667 | 36,926 | ||||
| EBITDA | 95,902 | 80,603 | ||||
| Stock-based compensation | 10,115 | 10,058 | ||||
| CEO transition expenses | 4,343 | — | ||||
| Restructuring expenses, net and asset impairments | 3,766 | 182 | ||||
| Nonrecurring retirement expenses | — | 1,100 | ||||
| Amortization of acquisition-related inventory valuation step-up | — | 430 | ||||
| Other expense, net | 1,782 | 594 | ||||
| Adjusted EBITDA | 115,908 | 92,967 | ||||
| Adjusted EBITDA attributable to redeemable noncontrolling interest | (19,845) | (18,768) | ||||
| Adjusted EBITDA attributable to DMC Global Inc. stockholders | $ | 96,063 | $ | 74,199 |
Adjusted Net Income and Adjusted Diluted Earnings Per Share increased compared with 2022 due to the factors discussed above. See "Use of Non-GAAP Financial Measures" above for explanation of the use of non-GAAP measures. The following is a reconciliation of the most directly comparable GAAP measures to Adjusted Net Income and Adjusted Diluted Earnings Per Share.
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| Twelve months ended December 31, 2023 | ||||||
|---|---|---|---|---|---|---|
| Amount | Per Share(1) | |||||
| Net income attributable to DMC Global Inc. (2) | $ | 26,259 | $ | 1.35 | ||
| CEO transition expenses and accelerated stock-based compensation, net of tax (3) | 6,284 | 0.32 | ||||
| Restructuring expenses and asset impairments, net of tax | 2,773 | 0.14 | ||||
| As adjusted | $ | 35,316 | $ | 1.81 |
(1) Calculated using diluted weighted average shares outstanding of 19,518,382
(2) Net income attributable to DMC Global Inc. prior to the adjustment of redeemable noncontrolling interest
(3) Includes CEO transition expenses of $4,343 and accelerated stock-based compensation of $3,040 related to the vesting of the former CEO’s outstanding equity awards, net of tax.
| Twelve months ended December 31, 2022 | ||||||
|---|---|---|---|---|---|---|
| Amount | Per Share(1) | |||||
| Net income attributable to DMC Global Inc. (2) | $ | 12,247 | $ | 0.63 | ||
| Nonrecurring retirement expenses, net of tax | 905 | 0.05 | ||||
| Amortization of acquisition-related inventory valuation step-up, net of tax | 199 | 0.01 | ||||
| NobelClad restructuring expenses and asset impairments, net of tax | 124 | 0.01 | ||||
| As adjusted | $ | 13,475 | $ | 0.70 |
(1) Calculated using diluted weighted average shares outstanding of 19,369,165
(2) Net income attributable to DMC Global Inc. prior to the adjustment of redeemable noncontrolling interest
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Business Segment Financial Information
We primarily evaluate performance and allocate resources based on segment revenues, operating income and Adjusted EBITDA as well as projected future performance. Segment operating income is defined as revenues less expenses identifiable to the segment. DMC operating income and Adjusted EBITDA include unallocated corporate expenses and unallocated stock-based compensation expense. Stock-based compensation is not allocated to wholly owned segments, DynaEnergetics and NobelClad. Stock-based compensation is allocated to the Arcadia Products segment as 60% of such expense is attributable to the Company, whereas the remaining 40% is attributable to the redeemable noncontrolling interest holder. Segment operating income will reconcile to consolidated income before income taxes by deducting unallocated corporate expenses, unallocated stock-based compensation, other (expense) income, net, and interest expense, net.
Net sales, segment operating income, and Adjusted EBITDA for each segment were as follows for years ended December 31:
| 2023 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Arcadia Products | DynaEnergetics | NobelClad | DMC Global Inc. | |||||||||||
| Net Sales | $ | 298,909 | $ | 315,026 | $ | 105,253 | $ | 719,188 | ||||||
| % of Consolidated | 41.6 | % | 43.8 | % | 14.6 | % | ||||||||
| Operating income | 21,407 | 46,353 | 19,427 | 61,177 | ||||||||||
| Adjusted EBITDA attributable to DMC Global Inc. | 29,767 | 56,270 | 22,760 | 96,063 |
| 2022 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Arcadia Products | DynaEnergetics | NobelClad | DMC Global Inc. | ||||||||||
| Net Sales | 299,527 | $ | 264,327 | $ | 90,232 | $ | 654,086 | ||||||
| % of Consolidated | 45.8 | % | 40.4 | % | 13.8 | % | |||||||
| Operating income | 3,962 | 39,055 | 7,989 | 29,990 | |||||||||
| Adjusted EBITDA attributable to DMC Global Inc. | 28,152 | 46,932 | 11,901 | 74,199 |
Arcadia Products
| 2023 | 2022 | $ change | % change | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net sales | $ | 298,909 | $ | 299,527 | $ | (618) | — | % | ||||||
| Gross profit | 92,252 | 88,334 | 3,918 | 4 | % | |||||||||
| Gross profit percentage | 30.9 | % | 29.5 | % | ||||||||||
| COSTS AND EXPENSES: | ||||||||||||||
| General and administrative expenses | 30,488 | 31,872 | (1,384) | (4) | % | |||||||||
| Selling and distribution expenses | 17,749 | 16,184 | 1,565 | 10 | % | |||||||||
| Amortization of purchased intangible assets | 22,608 | 36,316 | (13,708) | (38) | % | |||||||||
| Operating income | 21,407 | 3,962 | 17,445 | 440 | % | |||||||||
| Adjusted EBITDA | 49,612 | 46,920 | 2,692 | 6 | % | |||||||||
| Less: adjusted EBITDA attributable to redeemable noncontrolling interest | (19,845) | (18,768) | (1,077) | 6 | % | |||||||||
| Adjusted EBITDA attributable to DMC Global Inc. | $ | 29,767 | $ | 28,152 | $ | 1,615 | 6 | % |
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Net sales of $298,909 in 2023 were comparable to net sales of $299,527 in 2022.
Gross profit percentage increased to 30.9% in 2023 primarily due to decreases in base aluminum metal costs which exceeded declines in customer pricing.
General and administrative expenses were lower by $1,384 in 2023 compared to 2022 due primarily to a decrease in stock-based compensation of $656 and a decrease in outside services costs of $538.
Selling and distribution expenses increased $1,565 in 2023 compared to 2022 due to higher compensation costs.
Amortization of purchased intangible assets decreased $13,708 in 2023 compared to 2022 as the customer backlog purchased intangible asset was fully amortized in 2022.
Operating income increased $17,445 in 2023 compared to 2022 due to the factors discussed above.
Adjusted EBITDA increased in 2023 due to the factors discussed above. See “Use of Non-GAAP Financial Measures” above for explanation of the use of Adjusted EBITDA, a non-GAAP measure. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
| 2023 | 2022 | |||||
|---|---|---|---|---|---|---|
| Operating income | $ | 21,407 | $ | 3,962 | ||
| Adjustments: | ||||||
| Depreciation | 3,695 | 2,906 | ||||
| Amortization of purchased intangible assets | 22,608 | 36,316 | ||||
| Stock-based compensation | 1,571 | 2,206 | ||||
| CEO transition expenses | 331 | — | ||||
| Amortization of acquisition-related inventory valuation step-up | — | 430 | ||||
| Nonrecurring retirement expenses | — | 1,100 | ||||
| Adjusted EBITDA | $ | 49,612 | $ | 46,920 | ||
| Less: adjusted EBITDA attributable to redeemable noncontrolling interest | (19,845) | (18,768) | ||||
| Adjusted EBITDA attributable to DMC Global Inc. | $ | 29,767 | $ | 28,152 |
DynaEnergetics
| 2023 | 2022 | $ change | % change | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net sales | $ | 315,026 | $ | 264,327 | $ | 50,699 | 19 | % | ||||||
| Gross profit | 86,701 | 75,569 | 11,132 | 15 | % | |||||||||
| Gross profit percentage | 27.5 | % | 28.6 | % | ||||||||||
| COSTS AND EXPENSES: | ||||||||||||||
| General and administrative expenses | 15,806 | 19,627 | (3,821) | (19 | %) | |||||||||
| Selling and distribution expenses | 21,472 | 16,588 | 4,884 | 29 | % | |||||||||
| Amortization of purchased intangible assets | 59 | 299 | (240) | (80) | % | |||||||||
| Restructuring expenses, net and asset impairments | 3,011 | — | 3,011 | 100 | % | |||||||||
| Operating income | 46,353 | 39,055 | 7,298 | 19 | % | |||||||||
| Adjusted EBITDA | $ | 56,270 | $ | 46,932 | $ | 9,338 | 20 | % |
Net sales increased $50,699 in 2023 compared to 2022 due to higher North American drilling and well completions, which led to increased demand for DS perforating systems. International sales also increased by 28%, which favorably impacted 2023 results.
Gross profit percentage decreased to 27.5% primarily due to an unfavorable customer mix.
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General and administrative expenses decreased by $3,821 compared with 2022 primarily due to lower patent infringement litigation costs of $3,019 and depreciation expense of $533.
Selling and distribution expenses increased by $4,884 compared with 2022 primarily due to increases in marketing costs of $1,609, bad debt expense of $1,371, compensation costs of $831, freight and other supplies expense of $790, and business-related travel of $112.
Restructuring expenses, net and asset impairments increased $3,011 for the year ended December 31, 2023 compared with 2022 due to $1,140 of cost reduction initiatives, primarily employee severance, and an asset impairment charge of $1,871 associated with the abandonment of a software asset.
Operating income increased by $7,298 compared with 2022 due primarily to increased gross profit.
Adjusted EBITDA increased in 2023 compared with 2022 primarily due to the factors discussed above. See "Use of Non-GAAP Financial Measures" above for explanation of the use of Adjusted EBITDA, a non-GAAP measure. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
| 2023 | 2022 | |||||
|---|---|---|---|---|---|---|
| Operating income | $ | 46,353 | $ | 39,055 | ||
| Adjustments: | ||||||
| Depreciation | 6,847 | 7,578 | ||||
| Amortization of purchased intangible assets | 59 | 299 | ||||
| Restructuring expenses, net and asset impairments | 3,011 | — | ||||
| Adjusted EBITDA | $ | 56,270 | $ | 46,932 |
NobelClad
| 2023 | 2022 | $ change | % change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net sales | $ | 105,253 | $ | 90,232 | $ | 15,021 | 17 | % | |||||||
| Gross profit | 33,529 | 22,050 | 11,479 | 52 | % | ||||||||||
| Gross profit percentage | 31.9 | % | 24.4 | % | |||||||||||
| COSTS AND EXPENSES: | |||||||||||||||
| General and administrative expenses | 4,092 | 4,587 | (495) | (11) | % | ||||||||||
| Selling and distribution expenses | 9,570 | 8,981 | 589 | 7 | % | ||||||||||
| Amortization of purchased intangible assets | — | 311 | (311) | (100) | % | ||||||||||
| Restructuring expenses, net and asset impairments | 440 | 182 | 258 | 142 | % | ||||||||||
| Operating income | 19,427 | 7,989 | 11,438 | 143 | % | ||||||||||
| Adjusted EBITDA | $ | 22,760 | $ | 11,901 | $ | 10,859 | 91 | % |
Net sales increased $15,021 in 2023 compared with 2022 due primarily to higher activity in core energy and petrochemical end markets, including increased pressure vessel plate shipments.
Gross profit percentage increased to 31.9% in 2023 due to a more favorable project and regional mix, as well as the impact of higher sales on fixed manufacturing overhead expenses.
General and administrative expenses decreased by $495 compared with 2022 due to lower outside services costs driven by a decrease in ERP system implementation costs.
Selling and distribution expenses increased by $589 compared with 2022 due primarily to higher compensation costs of $787, partially offset by a decrease in depreciation of $105 and bad debt expense of $61.
Restructuring expenses, net and asset impairments increased by $258 compared with 2022 due to the impairment of a manufacturing asset that was removed from production.
Operating income increased $11,438 compared to 2022 primarily due to an increase in gross profit.
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Adjusted EBITDA increased due to the factors discussed above. See "Use of Non-GAAP Financial Measures" above for explanation of the use of Adjusted EBITDA, a non-GAAP measure. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
| 2023 | 2022 | |||||
|---|---|---|---|---|---|---|
| Operating income | $ | 19,427 | $ | 7,989 | ||
| Adjustments: | ||||||
| Depreciation | 2,893 | 3,419 | ||||
| Amortization of purchased intangible assets | — | 311 | ||||
| Restructuring expenses, net and asset impairments | 440 | 182 | ||||
| Adjusted EBITDA | $ | 22,760 | $ | 11,901 |
Liquidity and Capital Resources
We have historically financed our operations from a combination of internally generated cash flow, revolving credit borrowings, and various long-term debt arrangements. Our net debt position was $72,192 at December 31, 2023 compared to $107,654 at December 31, 2022. The decrease was driven by $17,500 in Term Loan payments in 2023 and $12,471 of investments in marketable securities. We have a fully undrawn $50,000 revolving credit facility at December 31, 2023.
On October 22, 2020, we commenced an at-the-market equity ("ATM") program under a shelf registration statement filed in May 2020 under which we have sold a total of 1,006,180 shares of common stock for net proceeds of $51,002 since inception. There was no ATM activity for the years ended December 31, 2023 and 2022.
In May 2021, the Company completed a registered public offering of its stock under an automatic shelf registration statement on Form S-3ASR filed on May 3, 2021, issuing 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 used proceeds from the ATM program and the registered public offering as part of the consideration used to acquire our 60% controlling interest in Arcadia Products.
In 2023, the Company completed a shelf registration statement on Form S-3, which became effective on March 31, 2023, for the potential offering of securities not to exceed $200,000. We have not issued shares under this registration statement as of December 31, 2023. We may in the future seek to reengage under an at-the-market offering program or otherwise access the capital markets, but there can be no assurance that any future capital will be available on acceptable terms or at all.
We believe that cash and cash equivalents and marketable securities on hand, cash flow from operations, funds available under our credit facilities and any future replacement thereof will be sufficient to fund the working capital, required minimum debt service payments, and other capital expenditure requirements of our current business operations for the foreseeable future. We may also execute capital markets transactions, including at-the-market offering programs, to raise additional funds if we believe market conditions are favorable, but there can be no assurance that any future capital will be available on acceptable terms or at all. Nevertheless, our ability to generate sufficient cash flows from operations will depend upon our success in executing our strategies. If we are unable to (i) realize sales from our backlog; (ii) secure new customer orders; (iii) continue selling products at profitable margins; and (iv) continue to implement cost-effective internal processes, our ability to meet cash requirements through operating activities could be impacted. Furthermore, any restriction on the availability of borrowings under our credit facilities could negatively affect our ability to meet future cash requirements. We will continue to monitor financial market conditions, including the related impact on credit availability and capital markets.
Debt facilities
On December 23, 2021, in connection with the Arcadia Products acquisition, we entered into a five-year $200,000 syndicated credit agreement (“credit facility”) which included a $150,000 Term Loan (the "Term Loan"), which is amortizable at 10% of principal per year with a balloon payment for the outstanding balance upon the credit facility maturity date in 2026, and allows for revolving loans of up to $50,000. The credit facility is secured by the 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.
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Borrowings under the $150,000 Term Loan and $50,000 revolving loan limit can be in the form of Adjusted Daily Simple Secured Overnight Financing Rate ("SOFR") loans or one month Adjusted Term SOFR loans. Additionally, U.S. dollar borrowings on the revolving loan can be in the form of Base Rate loans (Base Rate borrowings are based on the greater of the administrative agent’s prime rate, an adjusted Federal Funds rate or an adjusted SOFR rate). SOFR loans bear interest at the applicable SOFR rate plus an applicable margin (varying from 1.50% to 3.00%). Base Rate loans bear interest at the defined Base rate plus an applicable margin (varying from 0.50% to 2.00%).
The credit facility includes various covenants and restrictions, certain of which relate to the payment of dividends or other distributions to stockholders; redemption of capital stock; incurrence of additional indebtedness; mortgaging, pledging or disposition of major assets; and maintenance of specified ratios. As of December 31, 2023, we were in compliance with all financial covenants and other provisions of our debt agreements.
The leverage ratio is defined in the credit facility as the ratio of Consolidated Funded Indebtedness (as defined in the credit facility) on the last day of any trailing four quarter period to Consolidated Pro Forma EBITDA (as defined in the credit facility) for such period. Consolidated Pro Forma EBITDA equals Adjusted EBITDA as calculated within the Consolidated Results of Operations section plus certain predefined add-backs. The maximum leverage ratio permitted by our credit facility is 3.00 to 1.0 from the quarter ended December 31, 2023 and thereafter. The actual leverage ratio as of December 31, 2023, calculated in accordance with the credit facility, as amended, was 1.25 to 1.0.
The debt service coverage ratio is defined in the credit facility as the ratio of Consolidated Pro Forma EBITDA less the sum of capital distributions paid in cash (other than those made with respect to preferred stock issued under the Operating Agreement), Consolidated Unfunded Capital Expenditures (as defined in the credit facility), and net cash income taxes to the sum of cash interest expense, any dividends on the preferred stock paid in cash, and scheduled principal payments on funded indebtedness. Under our credit facility, the minimum debt service coverage ratio permitted is 1.35 to 1.0. The actual debt service coverage ratio for the trailing twelve months ended December 31, 2023 was 3.05 to 1.0.
As of December 31, 2023, borrowings of $117,500 on the Term Loan under our credit facility were outstanding. No amounts were outstanding on the $50,000 revolver as of December 31, 2023.
We also maintain a line of credit with a German bank for certain European operations. This line of credit provides a borrowing capacity of €7,000 on which no amounts were outstanding as of December 31, 2023.
Refer to Note 14 within Item 8 — Financial Statements and Supplementary Data for discussion of the credit facility amendment executed subsequent to December 31, 2023. The credit facility amendment was executed, in part, with the intention to provide the Company with the financial flexibility to purchase the remaining interest in Arcadia Products.
Redeemable noncontrolling interest
The Operating Agreement for Arcadia Products contains a right for the Company to purchase the remaining interest in Arcadia Products from the minority interest holder on or after the third anniversary of the acquisition closing date (“Call Option”). Similarly, the minority interest holder of Arcadia Products has the right to sell its remaining interest in Arcadia Products to the Company on or after the third anniversary of the acquisition closing date (“Put Option”). Both the Call Option and Put Option enable the respective holder to exercise their rights based upon a predefined calculation as included within the Operating Agreement.
As of December 31, 2023, the redeemable noncontrolling interest is $187,760 in comparison to our previous estimate at December 31, 2022 of $187,522. Upon settlement, consideration paid will be net of the $24,902 promissory note outstanding due from the redeemable noncontrolling interest holder. Refer to Note 2 within Item 8 — Financial Statements and Supplementary Data for further information related to the valuation of the redeemable noncontrolling interest and promissory note outstanding.
Other contractual obligations and commitments
The table below presents principal cash flows by expected maturity dates for our debt obligations and other contractual obligations and commitments as of December 31, 2023:
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| Payment Due by Period | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As of December 31, 2023 | |||||||||||||||||||
| Less than | More than | ||||||||||||||||||
| Other Contractual Obligations | 1 Year | 1-3 Years | 3-5 Years | 5 Years | Total | ||||||||||||||
| Credit facility(1) | $ | 15,000 | $ | 102,500 | $ | — | $ | 117,500 | |||||||||||
| Operating lease obligations(2) | 9,575 | 17,945 | 13,608 | 14,367 | 55,495 | ||||||||||||||
| Purchase obligations(3) | 92,827 | — | — | — | 92,827 | ||||||||||||||
| Total(4) | $ | 117,402 | $ | 120,445 | $ | 13,608 | $ | 14,367 | $ | 265,822 |
(1) Represents outstanding borrowings under our credit facility but excludes future interest expense on outstanding credit facility borrowings. For more information about our debt obligations, refer to Note 6 "Debt" within Item 8 — Financial Statements and Supplementary Data.
(2) The operating lease obligations presented reflect future minimum lease payments due under non-cancelable portions of our leases as of December 31, 2023. Our operating lease obligations are described in Note 5 "Leases" within Item 8 — Financial Statements and Supplementary Data.
(3) Amounts represent firm commitments to purchase goods or services to be utilized in the normal course of business. These amounts are not reflected in the Consolidated Balance Sheets.
(4) The above table does not include amounts potentially payable upon exercise of the Put Option or Call Option associated with the redeemable noncontrolling interest.
Cash flows from operating activities
Net cash provided by operating activities was $65,927 in 2023 compared to $44,936 in 2022. The increase primarily was due to higher net income. Specifically, the NobelClad and DynaEnergetics business segments experienced increases in operating income of $11,438 and $7,298, respectively. The improved financial performance was driven by higher activity levels in each segment's core end markets. Additionally, working capital impacts on operating cash flows improved in 2023 as compared to 2022.
Cash flows from investing activities
Net cash used in investing activities in 2023 of $28,101 primarily related to the acquisition of property, plant and equipment of $15,974 and investments in marketable securities of $12,471.
Net cash used in investing activities in 2022 was $20,926 and primarily related to the acquisition of property, plant and equipment of $18,584 and consideration adjustments related to the acquisition of Arcadia Products of $2,404.
Cash flows from financing activities
Net cash used in financing activities in 2023 totaled $33,182, which included payments on our Term Loan of $17,500, distributions to the redeemable noncontrolling interest holder of $13,515, and treasury stock purchases of $2,481.
Net cash used in financing activities in 2022 totaled $28,510, which included payments on our Term Loan of $15,000, distributions to the redeemable noncontrolling interest holder of $12,300, and treasury stock purchases of $1,231.
Payment of dividends
Any determination to pay cash dividends is at the discretion of the Board of Directors. On April 23, 2020, DMC announced that its Board of Directors suspended the quarterly dividend indefinitely. Future dividends may be affected by, among other items, our views on potential future capital requirements, future business prospects, debt covenant compliance considerations, changes in income tax laws, and any other factors that our Board of Directors deems relevant.
Critical Accounting Estimates
Our Consolidated Financial Statements contain information that is pertinent to management’s discussion and analysis of results of operations and financial condition. Preparation of financial statements in conformity with generally accepted
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accounting principles in the United States requires that management make estimates, judgments and assumptions that affect the amounts reported for revenues, expenses, assets, liabilities, and other related disclosures.
Our critical accounting estimates, described below, are important to the portrayal of our results of operations and financial condition. Management’s judgments and estimates in these areas are based on information available and at times requires management to make difficult, subjective, and complex judgments. Actual results may or may not differ from these estimates.
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. If assumptions about future demand change and/or actual market conditions are less favorable than those projected by the Company, additional write-downs of inventories may be required.
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 acquired in a business combination and determined to have an indefinite useful life is not amortized, but instead is tested for impairment at least annually during the fourth quarter or whenever events or changes in circumstances indicate that the carrying value might not be fully recoverable. For goodwill, impairment is assessed at the reporting unit level. A reporting unit is defined as an operating segment or a component of an operating segment to the extent discrete financial information is available that is reviewed by segment management. The Company's reporting units are each of the three operating segments disclosed in Note 10 within Item 8 — Financial Statements and Supplementary Data.
To test goodwill for impairment, we first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. For the qualitative assessment, we consider macroeconomic and market conditions, cost factors, financial performance and other relevant entity-specific events. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying value during the qualitative assessment, then we quantitatively estimate the fair value of the reporting unit and compare the estimated fair value to its carrying value. Based on the results of the quantitative assessment, if the carrying value exceeds the fair value of the reporting unit, an impairment loss is recognized for the difference.
The assumptions used in a quantitative assessment require significant judgment, which include assumptions about future economic conditions and company-specific conditions and plans. In the Company's quantitative assessment, we estimate the fair value of a reporting unit by using the income approach, specifically a discounted cash flow analysis. A number of assumptions and estimates are required in performing the discounted cash flow analysis, including forecasts of revenues, gross profits, capital expenditures, discount rates, working capital changes, and terminal growth rates. Actual results may differ from those assumed in the forecasts.
As of December 31, 2023, the carrying value of goodwill was $141,725 and relates entirely to the Arcadia Products operating segment and reporting unit. As of the date of the 2023 annual impairment test, we performed a quantitative assessment and concluded that the fair value of the Arcadia Products reporting unit exceeded its carrying value by approximately 10%. Discount rates are one of the more significant assumptions used in the income approach. If the Company increased the discount rate used by approximately 100 basis points, the fair value of Arcadia Products would still exceed its carrying value. A sustained decline in general economic conditions, activity levels in end markets or equity valuations could impact the judgments and assumptions used to estimate the fair value of Arcadia Products, and the Company could be required to record an impairment charge in the future. If the Company was required to recognize an impairment charge in the future, the Consolidated Balance Sheets and Consolidated Statements of Operations and Comprehensive Income (Loss) could be materially impacted; however, the non-cash charge would not impact the Company's consolidated cash flows, current liquidity, and capital resources.
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Asset impairments
Finite-lived assets, including purchased intangible assets, property, plant and equipment, and right-of-use 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.
The net carrying value of our purchased intangible assets as of December 31, 2023 was $195,260 and includes $195,215 of purchased intangible assets related to Arcadia Products. The net carrying values of our property, plant and equipment and right-of-use assets as of December 31, 2023 were $129,267 and $45,409, respectively. During the year ended December 31, 2023, we recorded impairment charges on our property, plant and equipment of $2,471. The impairment charges included $1,871 related to the abandonment of a software asset at DynaEnergetics and $440 attributable to a manufacturing asset in NobelClad that was removed from production.
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. Deferred tax assets are recognized 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. As of December 31, 2023, we have a valuation allowance of $6,167 recorded against deferred tax assets primarily in our foreign jurisdictions.
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 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. As of December 31, 2023, we have an uncertain tax position liability of $5,017 recorded in our Consolidated Balance Sheet related to tax positions taken in prior periods.
Off Balance Sheet Arrangements
At December 31, 2023, we had no off-balance sheet arrangements, as defined by SEC rules, that have or are reasonably likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Recent Accounting Pronouncements
Refer to Note 2 "Significant Accounting Policies" within Part II, Item 8 — Financial Statements and Supplementary Data in this annual report for a discussion, as applicable, of recent accounting pronouncements and their anticipated effect on our business.