DMC Global Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts below are in millions of U.S. dollars unless otherwise noted. DMC operates Arcadia (architectural building products), DynaEnergetics (oil-and-gas perforating products) and NobelClad (explosion-welded clad metal plates). Arcadia was acquired in December 2021; its inclusion makes reported year-over-year growth comparisons substantially acquisition-driven.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $174.5 | $67.2 | $479.0 | $188.3 |
| Gross profit / margin | $51.3 / 29.4% | $16.7 / 24.8% | $140.3 / 29.3% | $46.5 / 24.7% |
| Operating income | $13.4 | $1.1 | $19.4 | $3.1 |
| Net income | $8.2 | $0.4 | $10.4 | $2.6 |
| Net income attributable to DMC shareholders | $6.7 | $0.4 | $9.0 | $2.6 |
| Diluted EPS attributable to DMC shareholders | $0.46 | $0.02 | $0.20 | $0.15 |
Q3 sales increased 160%; nine-month sales increased 154%. Excluding Arcadia, sales rose 40% in Q3 and 35% for the nine months. DynaEnergetics was the main driver of legacy-business growth, while NobelClad’s nine-month operating income declined. Consolidated margins improved, reflecting Arcadia’s contribution and increased DynaEnergetics volume, partly offset by higher input costs and weaker NobelClad project mix.
Cash flow and liquidity: Nine-month operating cash flow was $24.3, versus cash used of $1.9 in 2021. Investing cash outflow was $13.3, including $11.3 of capital expenditures; financing cash outflow was $22.8. Cash fell $12.3 from year-end to $18.5, primarily due to debt service and working-capital investment. Inventory rose to $152.6 from $124.2 and receivables to $94.2 from $71.9.
Debt: Total debt was $136.4, including $138.8 of term-loan borrowings before $2.3 of issuance costs; net debt was $117.9, versus $116.6 at year-end. The $50.0 revolving facility was undrawn and available. The company reported compliance with covenants: leverage ratio 2.10x against a 3.25x maximum, and trailing debt-service coverage ratio 2.17x against a 1.35x minimum. Interest expense rose with acquisition-related borrowing and higher interest rates.
Business developments and changes
- Arcadia contributed $80.7 of Q3 sales and $225.1 for the nine months. Its Q3 sales increased 6% sequentially, with pricing responding to higher aluminum and other input costs.
- DynaEnergetics Q3 sales increased 59% year over year to $70.4; nine-month sales increased 50% to $186.8. Management cited stronger North American drilling and completions, higher DS-system sales, improved international demand and better pricing.
- NobelClad Q3 sales rose 2% to $23.4, but operating income fell 31% to $2.5. Nine-month sales rose 6% to $67.1 while operating income fell 34% to $5.7. Its backlog was $48.0 at September 30, up from $41.2 at year-end.
- The 2021 comparison included Employee Retention Credits (ERC); none benefited 2022 results. Prior-year ERC receipts supported gross profit and reduced expenses, so reported comparisons reflect both the acquisition and the expiration of those credits.
Outlook, risks and unusual items
- Management gave no quantified earnings or revenue guidance. It expected resilient DynaEnergetics demand and customer pricing, and strong building-products markets in Arcadia’s core regions. Arcadia was planning additional finishing capacity expected to be operational in 2023 and implementing a new ERP system.
- Management cited volatile raw-material and input costs, labor availability and wage pressure, and ongoing supply-chain delays. DynaEnergetics had implemented price increases and expected patent-litigation costs to continue through 2022.
- Russia’s invasion of Ukraine presents risks to European energy, supply chains and logistics; DMC noted its German operations and suppliers depend in part on natural gas. NobelClad indefinitely suspended future sales to Russia.
- Arcadia’s 40% redeemable noncontrolling interest was valued at $195.0 at quarter-end. Its put/call rights become exercisable on or after December 23, 2024; the estimated redemption value is adjusted through retained earnings, not operating income. A $2.3 million Q3 decrease in that value affected the EPS reconciliation. The filing reports nine-month GAAP diluted EPS of $0.20, while adjusted diluted EPS was $0.48; the difference includes adjustments related to the redeemable interest and specified items.
- Two Arcadia California wage-and-hour matters include stayed representative claims and individual proceedings; the company said potential loss cannot be estimated. Certain amounts remain in escrow pending resolution.
- Cash dividends remain suspended indefinitely. Management said existing cash, operating cash flow and available borrowing capacity should fund foreseeable requirements, while warning that weaker orders, margins, backlog conversion or credit availability could impair liquidity.
Investor verification priorities
- Separate Arcadia’s acquired contribution from organic growth and assess segment-level margins, especially NobelClad’s declining profitability.
- Track working-capital conversion, inventory levels, operating cash flow and the use of the remaining $50.0 revolver.
- Verify the effect of interest-rate changes and term-loan amortization on interest expense, covenant headroom and net debt.
- Monitor Arcadia’s put/call valuation and the related EPS reconciliation, as well as the wage claims and DynaEnergetics patent-litigation costs.
- Assess whether input-cost inflation, supply disruptions and European energy risks affect pricing, production and management’s stated outlook.