DMC Global Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. Unless noted otherwise, dollar amounts below are in millions; the filing presents most financial figures in thousands.
Business context
DMC Global is a diversified holding company with three businesses: DynaEnergetics, which makes oil-and-gas well perforating products; NobelClad, which produces explosion-welded clad metal; and Arcadia, a U.S. architectural building-products supplier. On December 23, 2021, DMC acquired a controlling 60% interest in Arcadia. Arcadia recorded no sales in the brief period after acquisition, but its expenses and balance-sheet assets were consolidated. Thus, FY2021 revenue largely reflects DynaEnergetics and NobelClad, while year-end assets and liabilities include Arcadia.
Financial results and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $260.1 | $229.2 |
| Gross profit / margin | $59.5 / 22.9% | $56.9 / 24.8% |
| Operating loss | $(2.4) | $(1.0) |
| Net loss | $(1.0) | $(1.4) |
| Net loss attributable to DMC stockholders | $(0.2) | $(1.4) |
| Diluted loss per share | $(0.26) | $(0.10) |
| Adjusted EBITDA, non-GAAP | $20.2 | $19.1 |
| Cash flow from operations | $(12.8) | $30.4 |
Revenue rose 14%, led by a 20% increase at DynaEnergetics; NobelClad revenue increased 2%. Gross margin contracted, principally from lower DynaEnergetics selling prices and reduced international sales. DMC received $4.9 million of Employee Retention Credits in 2021, which supported gross profit and expenses. DynaEnergetics operating income increased to $8.2 million from $6.2 million, while NobelClad operating income increased to $9.8 million from $6.9 million.
Operating cash use reflected working-capital investment, including higher receivables, inventory, and prepaid items, as well as lower accrued income taxes. Year-end cash was $30.8 million; marketable securities were zero, versus $25.7 million in 2020. Total debt was $150.0 million gross ($147.4 million net of debt issuance costs); net debt, a non-GAAP measure, was $116.6 million, compared with net cash of $42.7 million a year earlier. Current assets were $239.2 million and current liabilities $105.8 million. The company reported a fully undrawn $50 million revolver and said available cash, operating cash flow, and credit facilities should fund foreseeable requirements, subject to business performance and credit availability.
Material changes and unusual items
- Arcadia acquisition: DMC paid $261.0 million cash, excluding $7.7 million of acquired cash, and issued 551,458 shares valued at $21.7 million for its 60% interest. The purchase-price allocation is preliminary and includes $141.3 million goodwill and $211.0 million of customer-relationship intangibles. The remaining 40% is redeemable; the minority owner may require a sale to DMC beginning after the third anniversary, at a price determined by the operating agreement.
- Financing and equity: DMC entered a five-year credit facility with a $150 million term loan and $50 million revolver. It also raised $123.5 million net through a public stock offering and $25.3 million net through its ATM program during 2021, with proceeds used in part for Arcadia.
- Nonrecurring and elevated costs: Acquisition expenses were $1.6 million. Arcadia’s acquisition-period shutdown expenses were $2.0 million. DynaEnergetics incurred increased patent-litigation costs; management expects these costs to continue through 2022.
- Legal matter: A settlement announced in January 2022 resolved an Arcadia product-liability case for $4.3 million, with approximately $1.0 million expected from insurers and $3.3 million funded by Arcadia; DMC obtained a $3.3 million purchase-price reduction for the matter. Two California wage-and-hour matters remain unresolved, and the filing says potential losses cannot be estimated.
Outlook, commentary, and principal risks
Management expected North American well-completion activity to continue improving as operators implemented 2022 budgets, with product pricing also expected to improve. DynaEnergetics implemented a 5% price increase in Q4 2021 and expected further increases in 2022 to offset labor and material costs and improve margins. Arcadia’s markets were forecast to grow, and DMC had begun initiatives to increase efficiency and manufacturing capacity. These are expectations, not quantified earnings or revenue guidance.
Management highlighted rising material and labor costs, supply-chain disruption, and labor availability as constraints across the businesses. Key risks include oil-and-gas spending and pricing cyclicality; construction-market and commodity exposure at Arcadia; NobelClad’s dependence on project timing and cyclical end markets; customer order cancellations or delays; integration and control-system challenges following the acquisition; debt covenants and floating-rate exposure; and the potential cash requirement from the Arcadia minority put option. The filing also cites COVID-19 impacts, foreign exchange, tariffs, cybersecurity, explosives and environmental compliance, and climate/energy-transition policy and sentiment. DMC had suspended its dividend in April 2020 and had not reinstated it.
The financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting for the company. However, DMC excluded Arcadia from management’s and the auditor’s ICFR assessment; Arcadia represented 60% of consolidated total assets and 87% of net assets at year-end. The auditor identified valuation of Arcadia’s customer-relationship intangible as a critical audit matter.
Most important facts for investors to verify
- How Arcadia performs on a full-year basis, and whether expected integration, capacity, and growth benefits materialize.
- Final acquisition purchase-price allocation and the assumptions behind the $211.0 million customer-relationship valuation and $141.3 million goodwill.
- Debt covenant headroom, variable-rate interest costs, debt reduction capacity, and the eventual funding terms for any Arcadia put-option exercise.
- Whether DynaEnergetics can convert activity growth and announced price increases into margin recovery despite cost inflation and international-market weakness.
- Resolution and financial consequences of Arcadia’s wage-and-hour matters and any remaining exposure related to the settled product-liability case.
- How much 2021 cash-flow weakness reflects temporary working-capital investment versus ongoing cash requirements; operating cash flow was negative $12.8 million.