DMC Global Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unless noted, financial amounts below are in millions of U.S. dollars. DMC operates Arcadia (architectural building products), DynaEnergetics (oilfield perforating products) and NobelClad (explosion-welded clad metal). Arcadia was acquired in December 2021; its results are included in Q1 2022 but not the prior-year quarter, limiting year-over-year comparability.
Key financial results
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Net sales | $138.7 | $55.7 | Up 149%; Q1 2022 includes $68.0 from Arcadia. Excluding Arcadia, sales were $70.7, up 27% year over year. |
| Gross profit / margin | $36.9 / 26.6% | $12.9 / 23.2% | Margin improvement reflects Arcadia’s higher gross margin and higher DynaEnergetics volume; partially offset by NobelClad mix and DynaEnergetics material costs and lower-margin international sales. |
| Operating loss | $(3.9) | $(0.7) | Higher amortization following the Arcadia acquisition contributed materially. |
| Net income (loss) | $(4.3) consolidated; $(3.3) attributable to DMC | $0.4 | Reported diluted EPS was $(0.47), versus $0.03. The 2022 EPS calculation includes a $5.7 adjustment for redeemable noncontrolling interest; the filing’s EPS reconciliation shows a $(9.0) numerator after that adjustment. |
| Adjusted EBITDA attributable to DMC | $10.5 | $4.0 | Increase primarily reflects Arcadia; this is a non-GAAP measure. |
| Operating cash flow | $(4.6) | $2.2 | Use of cash primarily reflected working-capital investment, especially inventory. |
| Cash and cash equivalents | $15.4 | $30.8 at Dec. 31, 2021 | Declined $15.4 during the quarter. |
| Debt and net debt | $143.7 debt; $128.3 net debt | $147.4 debt; $116.6 net debt at Dec. 31, 2021 | Net debt increased to fund working capital. Term-loan borrowings were $146.3 before debt issuance costs. |
Current assets were $255.8 and current liabilities $121.2 at March 31, 2022. The $50.0 revolving credit facility was undrawn and available. DMC reported compliance with debt covenants; its credit-agreement leverage ratio was 2.9x and debt service coverage ratio was 1.6x, compared with limits of no more than 3.5x and no less than 1.35x, respectively.
Segment performance and changes
- Arcadia: Sales were $68.0, gross margin 29.8%, operating loss $2.4 and Adjusted EBITDA $11.4 (of which $6.9 was attributable to DMC). Acquisition-related intangible amortization and integration costs affected reported results.
- DynaEnergetics: Sales rose 28% to $48.9; operating income increased to $3.3 from $1.5. Gross margin improved to 25.8% from 22.1%, principally on higher volume, while patent litigation costs increased.
- NobelClad: Sales rose 25% to $21.9, mainly due to shipment timing from backlog. Gross margin fell to 19.1% from 26.4% on less favorable project mix; operating income declined to $0.7 from $1.6. Backlog was $44.4 at quarter-end, up from $41.2 at year-end.
Consolidated operating results also reflect much higher purchased-intangible amortization ($13.0 versus $0.3 a year earlier) and higher net interest expense ($1.0 versus $0.1), principally due to acquisition financing. Q1 2021 results benefited from Employee Retention Credits; no such credit affected Q1 2022.
Outlook, risks and unusual items
- Management provided no quantified consolidated earnings or revenue guidance. It expects building-products markets to grow in Arcadia’s core regions and plans new paint and anodizing lines, expected to be operational by next year, alongside an ERP implementation.
- Management expects improving well-completion activity and customer pricing to support DynaEnergetics. A 5% price increase announced in Q4 2021 was followed by another increase effective April 1, 2022; further increases were planned for the second half of 2022. The filing cautions that supply constraints, including sand shortages, affected customer activity earlier in the quarter.
- Inflation, rising raw-material and labor costs, supply-chain and transportation disruption, labor availability, and customer order and shipment timing may pressure margins and cash needs. DMC said businesses were building inventory to address higher prices and longer lead times.
- DynaEnergetics patent-enforcement litigation increased costs; management expected those costs to continue through 2022. Arcadia wage-and-hour/PAGA matters remain unresolved, and the company said loss likelihood or range could not be estimated. Arcadia’s $4.3 settlement of a product-liability case was court-approved in April; about $1.0 was expected from insurance, with the remaining $3.3 funded by Arcadia, subject to a purchase-price reduction for DMC’s share.
- DMC was monitoring $1.2 of receivables from a DynaEnergetics customer operating in Western Ukraine. NobelClad indefinitely suspended future sales to Russia due to the conflict. Broader geopolitical, foreign-exchange, demand and financing risks remain.
- Arcadia’s 40% minority interest is redeemable, with put and call options exercisable on or after the acquisition’s third anniversary. Its reported redemption value was $197.2 million at March 31, 2022. Arcadia also had related-party leases with entities affiliated with the minority holder and Arcadia’s president.
Important facts for investors to verify
- How much of reported growth and Adjusted EBITDA reflects Arcadia versus organic performance, and how Arcadia’s margins evolve as input costs and pricing change.
- Whether working-capital needs, inventory levels and operating cash flow improve; cash fell to $15.4 million while net debt rose to $128.3 million.
- Headroom under the credit agreement as leverage limits tighten, including the availability and conditions of the undrawn $50.0 million revolver.
- Arcadia purchase-accounting estimates, the $197.2 million redeemable-interest valuation and future put/call option economics.
- Developments in patent and wage-and-hour litigation, the Western Ukraine receivable, and the settlement payment and insurance recovery.
- Execution and timing of Arcadia’s planned capacity additions and ERP implementation, and whether announced DynaEnergetics price increases offset cost inflation.