DMC Global Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited results. Dollar amounts below are in millions unless stated otherwise. DMC operates Arcadia (architectural products), DynaEnergetics (oilfield perforating products) and NobelClad (explosion-welded clad metals).
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $188.7 | $165.8 | $373.0 | $304.5 |
| Gross profit | $61.9 | $52.1 | $114.1 | $89.0 |
| Gross margin | 32.8% | 31.4% | 30.6% | 29.2% |
| Operating income | $27.0 | $9.9 | $34.2 | $6.0 |
| Net income attributable to DMC shareholders | $13.7 | $5.6 | $14.6 | $2.3 |
| Diluted EPS attributable to DMC shareholders | $0.70 | $0.20 | $0.69 | $(0.26) |
| Adjusted EBITDA attributable to DMC shareholders (non-GAAP) | $31.8 | $22.4 | $51.9 | $32.9 |
Q2 revenue rose 14% year over year, while operating income increased to $27.0 million from $9.9 million. Higher DynaEnergetics volume, improved manufacturing absorption and favorable NobelClad project mix supported margins. First-half revenue grew 22%; operating income and DMC-attributable net income also increased substantially. Lower amortization, following full amortization of Arcadia’s acquired customer backlog asset in 2022, contributed to the reported operating-income improvement.
Segments and material changes
- DynaEnergetics: Q2 revenue increased 26% to $84.8 million; segment operating income rose to $17.7 million from $11.3 million. Higher DS perforating-system unit sales drove growth. First-half revenue increased 43% to $166.7 million.
- Arcadia: Q2 revenue increased 4% to $79.2 million, primarily from higher pricing; segment operating income was $9.6 million versus $2.2 million. For the first half, gross margin declined to 31.1% from 32.2% as higher aluminum and other input costs pressured results; adjusted EBITDA attributable to DMC declined 3%.
- NobelClad: Q2 revenue increased 13% to $24.8 million and segment operating income rose to $4.7 million from $2.5 million, aided by stronger end-market activity and favorable project mix. Backlog was $63.5 million at June 30, up from $55.5 million at year-end.
- Consolidated Q2 SG&A was $29.2 million, approximately flat year over year. First-half G&A rose 21%, including CEO transition costs and accelerated equity-award compensation; first-half interest expense increased 110% to $4.8 million, primarily because of higher floating rates.
Cash flow, debt and liquidity
- First-half operating cash flow was $18.5 million, versus $2.5 million in 2022. Working-capital use included increases in accounts receivable and inventory.
- First-half investing cash outflow was $7.5 million, including $5.1 million of capital expenditures and a $2.4 million investment in marketable securities. Financing cash outflow was $18.3 million, including $10.0 million of term-loan repayments, $6.3 million of distributions to Arcadia’s minority holder and $2.2 million of treasury-stock purchases.
- At June 30, cash and cash equivalents were $18.7 million and marketable securities were $2.4 million, totaling $21.1 million. Total debt, net of issuance costs, was $123.1 million; net debt was $101.9 million, down from $107.7 million at December 31, 2022.
- The $50 million revolving facility was undrawn. DMC reported compliance with debt covenants; its leverage ratio was 1.31 versus a 3.0 maximum, and debt-service coverage was 3.25 versus a 1.35 minimum. The term loan matures in 2026 and carries variable-rate interest.
Outlook, risks and unusual items
- The filing provides no quantified consolidated revenue or earnings guidance. Management expects Arcadia profitability to recover in the remainder of 2023, citing resilient markets, substantial order backlogs and anticipated efficiency benefits from phase one of its ERP system, which went live in July.
- Management expects North American well-completion activity to soften in the second half of 2023, but anticipates resilient DynaEnergetics demand and pricing. New premium products and manufacturing-process improvements are expected to support margins; management also expects lower patent-litigation expense for the rest of 2023.
- NobelClad reported increased demand for LNG transition joints and improving repair and maintenance activity. Management expects to ship most of its backlog within 12 months, subject to order execution and other conditions.
- Key risks include macroeconomic and geopolitical uncertainty, inflation and supply-chain disruption, customer demand and pricing, raw-material and energy costs, foreign-exchange exposure, higher floating interest rates, and the ability to convert backlog into shipments and cash. One DynaEnergetics customer represented about 10% of Q2 and first-half sales and 19% of receivables at June 30.
- The former CEO’s transition generated $3.5 million of first-half expenses, including severance, search and termination costs; accelerated vesting added $3.0 million of stock-based compensation. Arcadia recorded a $0.375 million reserve for a proposed wage-and-hour/PAGA settlement, with an offsetting indemnification receivable; the settlement remains subject to final documentation and court approval. Individual claims remain unresolved.
- Arcadia’s 40% redeemable noncontrolling interest was carried at $187.5 million. The operating agreement gives DMC and the minority holder call and put rights exercisable on or after the third anniversary of the acquisition, with settlement based on a formula tied to adjusted earnings.
- The quarterly dividend remains suspended. Management said existing cash, operating cash flow and available credit are expected to support foreseeable needs, but noted that future capital-market access is not assured and cash generation depends on sales, margins and working-capital execution.
Important facts for investors to verify
- Whether DynaEnergetics demand and pricing remain resilient if North American completion activity declines, and whether expected product and manufacturing changes improve margins.
- Arcadia’s operating recovery, input-cost trends and realized efficiency gains from the new ERP system.
- Backlog conversion at NobelClad and across the businesses, including shipment timing and working-capital requirements.
- Cash conversion and inventory levels, alongside variable-rate interest expense, scheduled debt repayments and covenant headroom.
- Resolution and indemnification of Arcadia wage-and-hour matters, and the timing and potential cost of the Arcadia put/call rights.
- The impact of CEO transition items and other adjustments when comparing GAAP results with management’s non-GAAP measures.