DMC Global Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Dollar amounts below are in millions unless stated otherwise. DMC operates Arcadia (architectural building products), DynaEnergetics (oil-and-gas perforating products), and NobelClad (explosion-welded clad metal). Arcadia, acquired in December 2021, is consolidated at 60%; its 40% minority interest is redeemable.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $165.8 | $65.4 | $304.5 | $121.1 |
| Gross profit | $52.1 | $17.0 | $89.0 | $29.9 |
| Gross margin | 31.4% | 25.9% | 29.2% | 24.7% |
| Operating income | $9.9 | $2.7 | $6.0 | $2.0 |
| Net income | $6.5 | $1.7 | $2.2 | $2.2 |
| Net income attributable to DMC stockholders | $5.6 | $1.7 | $2.3 | $2.2 |
| Diluted EPS attributable to DMC stockholders | $0.20 | $0.10 | $(0.26) | $0.13 |
| Adjusted EBITDA attributable to DMC (non-GAAP) | $22.4 | $7.5 | $32.9 | $11.6 |
Although first-half net income attributable to DMC was positive, reported EPS was $(0.26): the EPS calculation reflects a $7.3 million adjustment for the redeemable noncontrolling interest’s redemption value. Q2 diluted EPS was $0.20. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results.
Segments and drivers
- Arcadia: Q2 sales were $76.5 million, up 12% sequentially; first-half sales were $144.4 million. Q2 gross margin was 34.3%. Higher customer pricing largely reflected increased aluminum and other input costs. Arcadia’s results were not in the prior-year comparison.
- DynaEnergetics: Q2 sales rose 60% to $67.5 million; first-half sales rose 45% to $116.4 million. Q2 gross margin improved to 29.6% from 25.3%, with greater North American drilling and completions, higher DS system sales and pricing, and improved fixed-cost absorption. Patent-enforcement legal costs increased expenses.
- NobelClad: Q2 sales fell 6% to $21.9 million, principally from shipment timing and currency effects; first-half sales rose 8% to $43.7 million. First-half gross margin declined to 23.4% from 27.2%, and operating income fell 36%. Backlog was $46.8 million at June 30, versus $41.2 million at year-end.
Excluding Arcadia, consolidated Q2 sales were $89.4 million, up 37%; first-half sales were $160.1 million, up 32%. Consolidated margin gains also reflect Arcadia’s higher margin mix. Higher input costs partially offset volume and pricing benefits. Prior-year comparisons included Employee Retention Credits: $1.5 million benefited Q2 2021 gross profit, and $2.3 million benefited first-half 2021 gross profit.
Cash flow, liquidity and debt
- Six-month operating cash flow was $2.5 million, versus cash used of $6.0 million in 2021. Receivables and inventories used cash; inventory investment reflected higher costs, longer lead times, and expected sales growth.
- Cash was $11.8 million at June 30, down from $30.8 million at December 31. Investing cash use was $5.7 million, including $6.3 million of capital expenditures. Financing cash use was $15.8 million, including $7.5 million of term-loan repayments and a $7.0 million distribution to Arcadia’s minority holder.
- Total debt, net of issuance costs, was $140.0 million, including $15.0 million current and $125.0 million long-term; gross borrowings were $142.5 million. Net debt was $128.2 million, up from $116.6 million at year-end. The $50 million revolving facility was undrawn and available.
- The company reported compliance with covenants. Its June 30 leverage ratio was 2.48x against a 3.25x maximum for the applicable period; trailing-twelve-month debt-service coverage was 1.88x against a 1.35x minimum. The term loan matures in 2026 and has scheduled amortization plus a balloon payment at maturity.
Management believes cash, operating cash flow, and available credit will fund foreseeable needs, but notes that this depends on sales, profitable margins, and continued access to borrowing. The quarterly dividend remains suspended indefinitely.
Outlook, risks and unusual items
- No specific consolidated revenue or earnings guidance was provided. Management expects DynaEnergetics’ end markets and customer pricing to be resilient, and plans additional price increases in the second half of 2022 to address costs and improve margins.
- Arcadia is targeting growth in its core western and southwestern U.S. markets. New finishing capacity is being designed and installed, with operations expected next year; an ERP system implementation is also underway.
- Inflation, aluminum and steel costs, wage pressures, labor availability, supply-chain delays, energy costs, and transportation disruptions may pressure operations and margins. Management cautions that actual results may differ from its forward-looking statements.
- Russia’s invasion of Ukraine may disrupt European supply chains and raise energy costs; German operations and customers depend in part on natural gas. The company has no operations in Russia or Ukraine, but supplies Ukraine and reversed $975,000 of prior sales in Q2 after a Ukrainian customer returned inventory; $420,000 of returned goods was available for immediate resale. NobelClad has indefinitely suspended future Russia sales.
- DynaEnergetics expects patent-litigation costs to continue through 2022. Arcadia faces California wage-and-hour matters; the company said potential loss could not be estimated. A separate Arcadia product-liability matter was settled for $4.3 million and paid in Q2; insurance covered approximately $1.0 million, and DMC obtained a purchase-price reduction for its share of the balance.
- Arcadia’s minority holder has put rights, and DMC has corresponding call rights, exercisable on or after the third acquisition anniversary under an earnings-based formula. The June 30 estimated redemption value was $197.2 million.
Important facts for investors to verify
- How much reported growth reflects Arcadia’s inclusion versus organic performance, and whether DynaEnergetics’ pricing and volumes can offset ongoing material and labor inflation.
- Whether working-capital investment converts to cash as inventory and receivables normalize; monitor cash, net debt, and use of the revolving facility.
- Whether Arcadia’s planned capacity and ERP projects proceed on schedule and support profitable growth.
- Developments in patent litigation, Arcadia wage-and-hour claims, and the Ukraine customer return, including any further financial impact.
- Arcadia’s future performance and the valuation implications of its redeemable 40% noncontrolling interest and related put/call rights.
- Compliance with debt covenants and the effect of floating-rate borrowing costs, European energy exposure, and currency movements.