DMC Global Inc. — Q1 2023 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2023, compared with Q1 2022. DMC operates Arcadia (architectural building products), DynaEnergetics (oil-and-gas perforating products), and NobelClad (explosion-welded clad metals). Dollar amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $184.3 | $138.7 |
| Gross profit / margin | $52.2 / 28.3% | $36.9 / 26.6% |
| Operating income (loss) | $7.2 | $(3.9) |
| Net income (loss) | $2.1 | $(4.3) |
| Net income (loss) attributable to DMC | $0.9 | $(3.3) |
| Adjusted EBITDA attributable to DMC* | $20.1 | $10.5 |
| Operating cash flow | $7.1 | $(4.6) |
| Capital expenditures | $2.2 | $1.5 |
Sales rose 33% year over year; gross profit increased 41%. Operating performance improved mainly on higher DynaEnergetics volume and improved Arcadia results. Interest expense increased to $2.4 million from $1.0 million, principally because of higher rates on variable-rate debt. The tax provision was $2.5 million on $4.6 million of pretax income.
Segment sales: Arcadia $80.3 million (+18%); DynaEnergetics $82.0 million (+68%); NobelClad $22.0 million (+1%). Segment operating income was $3.1 million, $13.2 million, and $2.6 million, respectively. Arcadia’s gross margin declined to 27.5% from 29.8% amid higher aluminum and other input costs; DynaEnergetics’ rose to 29.8% from 25.8% on volume leverage; NobelClad’s rose to 26.2% from 19.1%, primarily from project mix.
Balance sheet and liquidity
- Cash was $19.6 million at March 31, down $5.5 million from year-end. Current assets were $325.6 million and current liabilities $162.0 million.
- Total debt carrying value was $126.7 million, including $15.0 million current; term-loan principal outstanding was $128.8 million. Net debt was $107.0 million, versus $107.7 million at year-end.
- The $50 million revolving facility was undrawn and available. The company reported compliance with debt covenants; actual leverage and debt-service coverage ratios were 1.47x and 2.99x, respectively, against limits of 3.25x maximum and 1.35x minimum.
- Q1 operating cash flow benefited from earnings but included substantial working-capital movements, including higher receivables and inventory. Financing cash use included $6.3 million of term-loan repayments, $2.6 million distributed to Arcadia’s redeemable noncontrolling-interest holder, and $2.2 million of treasury-stock purchases.
Material changes, outlook and risks
- DynaEnergetics benefited from stronger North American drilling and completion activity and higher international sales. Management reported record unit sales of its DS perforating systems and expects activity and customer pricing to remain resilient through 2023; further price increases may depend on market conditions. Process changes and planned premium products are intended to improve margins.
- Arcadia reported higher sales, partly from customer pricing, but faced input-cost pressure. Management expects sequential Q2 improvement, plans additional finishing capacity during 2023, and said phase one of its new ERP implementation was nearing completion.
- NobelClad backlog increased to $60.0 million from $55.5 million at year-end. Management expects most backlog orders to ship within 12 months; demand was improving for LNG transition joints and energy/petrochemical repair work.
- Management cited macroeconomic uncertainty, inflation, supply-chain disruption, material and labor costs, customer demand, production capacity, and access to financing as risks. The company said its available cash, operating cash flow and credit facilities should fund foreseeable operating and capital needs, but future capital-market access is not assured.
- Leadership changed during the quarter: interim co-CEOs were appointed, a new CFO and Arcadia president were named, and a search for a permanent CEO was underway, with completion expected before year-end. The former CEO’s separation and accelerated equity vesting contributed significant Q1 expenses. DynaEnergetics patent litigation increased costs; management expected those costs to be substantially lower for the rest of 2023.
- Two Arcadia California wage-and-hour matters remained pending, with representative claims stayed and individual claims proceeding to arbitration. The company said it could not estimate the likelihood or amount of potential loss; certain amounts are held in escrow. No other legal matters were identified as expected to have a material adverse effect.
- The quarterly dividend remains suspended. No significant changes to previously disclosed risk factors were reported.
*Adjusted EBITDA is a non-GAAP measure; DMC’s calculation excludes specified items and the Arcadia noncontrolling-interest share. The filing reports GAAP EPS of $(0.01) for Q1 2023 despite $0.9 million of income attributable to DMC, because the EPS calculation includes a $1.1 million redeemable-interest adjustment, resulting in a loss numerator of $0.2 million.
Important facts for investors to verify
- Whether demand, pricing and margin trends at DynaEnergetics and Arcadia persist, and whether planned capacity, ERP and product initiatives deliver expected benefits.
- Working-capital requirements and cash conversion, particularly the increases in receivables and inventory, alongside scheduled debt repayment and variable-rate interest costs.
- Progress on the CEO search and execution of management’s stated cash-flow and cost priorities.
- Developments in the Arcadia wage-and-hour matters and DynaEnergetics patent litigation, including any resulting financial exposure.
- The terms and potential settlement implications of Arcadia’s redeemable noncontrolling interest and its put/call options beginning after the third acquisition anniversary.