DMC Global Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts below are in millions of dollars unless otherwise noted. DMC operates Arcadia (architectural building products), DynaEnergetics (oil-and-gas well perforating products), and NobelClad (explosion-welded clad metal products).
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $172.1 | $174.5 | $545.2 | $479.0 |
| Gross profit / margin | $52.6 / 30.6% | $51.3 / 29.4% | $166.7 / 30.6% | $140.3 / 29.3% |
| Operating income | $17.7 | $13.4 | $51.9 | $19.4 |
| Net income | $11.5 | $8.2 | $31.2 | $10.4 |
| Net income attributable to DMC shareholders | $8.9 | $6.7 | $23.5 | $9.0 |
| Diluted EPS attributable to DMC shareholders | $0.38 | $0.46 | $1.07 | $0.20 |
| Adjusted EBITDA attributable to DMC shareholders | $24.6 | $21.8 | $76.5 | $54.6 |
Q3 sales declined 1% year over year, while gross margin improved 1.2 percentage points. For the nine-month period, sales increased 14%, operating income rose 167%, and DMC-attributable net income increased 162%. Interest expense rose 35% in Q3 and 78% year to date, primarily due to higher floating rates. Adjusted EBITDA is a non-GAAP measure defined by the company.
Segments and material changes
- Arcadia: Q3 sales fell 11% to $71.5 million, largely from lower aluminum-linked pricing, softer commercial-interior demand, and temporary disruption during ERP implementation. Gross margin improved to 33.3% from 29.6%; segment operating income increased to $6.5 million from $3.7 million. Nine-month sales grew 3% to $231.0 million.
- DynaEnergetics: Q3 sales rose 4% to $73.0 million, but gross margin declined to 26.8% from 30.2%, amid lower fixed-cost absorption and unfavorable customer mix. Operating income fell 9% to $10.9 million. Nine-month sales increased 28% to $239.7 million, supported by higher DS perforating-system sales.
- NobelClad: Q3 sales increased 18% to $27.7 million, and operating income more than doubled to $5.2 million, with stronger energy and petrochemical activity and favorable mix. Nine-month sales rose 11% to $74.5 million.
For Q3, the improved consolidated gross margin reflected Arcadia margin recovery and favorable NobelClad mix and overhead absorption. Nine-month operating income also benefited from lower amortization after Arcadia’s acquired customer-backlog intangible asset was fully amortized in 2022.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $42.7 million, up from $24.3 million. Working capital remained a use of cash, particularly inventory ($29.5 million) and receivables ($11.4 million).
- Investing cash outflow was $15.0 million, including $7.5 million of capital expenditures and $7.5 million invested in marketable securities. Financing cash outflow was $26.2 million, including $13.8 million of term-loan repayments, $10.3 million of distributions to Arcadia’s redeemable noncontrolling-interest holder, and $2.3 million of treasury-stock purchases.
- At September 30, cash and cash equivalents were $28.1 million and marketable securities were $7.5 million. Total debt, net of issuance costs, was $119.5 million; reported net debt was $83.9 million, down from $107.7 million at year-end 2022. The $50 million revolver was undrawn.
- The credit-facility leverage ratio was 1.26x against a maximum of 3.0x; debt-service coverage was 3.30x against a minimum of 1.35x. DMC reported compliance with its debt covenants.
- Current assets were $336.8 million and current liabilities were $137.6 million. The quarterly dividend remains suspended indefinitely.
Outlook, risks, and unusual items
- Management expects North American well-completion activity to remain soft in Q4 2023, weighing on DynaEnergetics. It anticipates longer-term margin benefits from manufacturing-process changes and new premium products; patent-litigation costs were lower in Q2 and Q3 and were expected to stay lower for the remainder of 2023.
- Arcadia’s ERP phase one went live in July. Management said performance improved through Q3 and expected further improvement in Q4, partly offset by seasonality and annual maintenance. ERP implementation caused a brief operational slowdown and changes to internal-control processes; management expects the system to strengthen controls.
- NobelClad backlog was $60.8 million at September 30, up from $55.5 million at December 31, 2022. Management expected most backlog orders to ship within 12 months; shipment timing and conversion remain subject to demand and execution.
- Management cited working-capital discipline, targeted cost reductions, Arcadia integration, DynaEnergetics profitability, and NobelClad product commercialization as priorities. It stated current cash, securities, operating cash flow, and credit availability should fund foreseeable needs, while noting risks to orders, margins, backlog conversion, and borrowing or capital-market access. No specific consolidated earnings or revenue guidance is provided.
- CEO transition expenses totaled $4.3 million year to date, including severance, search and transition costs; accelerated vesting of former CEO equity awards added $3.0 million of stock-based compensation. NobelClad recorded a $0.4 million manufacturing-asset impairment in Q3.
- Arcadia’s 40% noncontrolling interest is classified as redeemable temporary equity, carried at $187.5 million. The agreement provides put and call rights beginning on or after the third anniversary of the December 2021 acquisition, with settlement based on a prescribed earnings formula.
- Arcadia wage-and-hour/PAGA matters have a settlement in principle: Arcadia’s proposed contribution is $0.375 million toward a $0.6 million total settlement. Court approval and final documentation remain conditions; the company recorded an offsetting indemnification receivable, with no reported income-statement impact for the nine months.
- A single DynaEnergetics customer represented approximately 15% of consolidated Q3 sales and 20% of receivables at September 30, 2023. Broader risks include cyclical customer demand, commodity and input costs, supply-chain disruption, foreign exchange, litigation, and floating-rate debt costs.
Investor verification priorities
- Track Arcadia’s ERP stabilization, demand, pricing and margin recovery, and whether Q4 improvement materializes.
- Monitor North American completion activity, DynaEnergetics margins and customer concentration, and progress from new products and manufacturing changes.
- Assess NobelClad backlog conversion, shipment timing, and the sustainability of recent growth and margin improvement.
- Review cash conversion and inventory levels, floating-rate interest costs, debt amortization, covenant headroom, and the implications of Arcadia’s put/call rights.
- Confirm resolution and final terms of the Arcadia settlement, and distinguish GAAP results from management’s non-GAAP adjusted measures and CEO-transition add-backs.