UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

Form 10-Q

 (Mark One)

 

☒      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

 

OR

 

☐         TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934

FOR THE TRANSITION PERIOD FROM                   TO                   .

 

Commission file number 001-14775

 DMC GLOBAL INC.

(Exact name of Registrant as Specified in its Charter)

Delaware						84-0608431
(State of Incorporation or Organization)						(I.R.S. Employer Identification No.)

11800 Ridge Parkway, Suite 300, Broomfield, Colorado 80021

(Address of principal executive offices, including zip code)

 

(303) 665-5700

(Registrant’s telephone number, including area code)

 

Title of each class

Trading Symbol

Name of exchange on which registered

Common Stock, $0.05 Par Value

BOOM

The Nasdaq Global Select Market

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒  No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  ☒  No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer ☐						Accelerated filer ☒
Non-accelerated filer ☐						Smaller reporting company ☐
						Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 under the Act).  Yes  ☐  No ☒

 

The number of shares of Common Stock outstanding was 15,833,470 as of April 22, 2021.

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CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. We intend the forward-looking statements throughout this quarterly report on Form 10-Q to be covered by the safe harbor provisions for forward-looking statements. Statements contained in this report which are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from projected results. These statements can sometimes be identified by our use of forward-looking words such as “may,” “believe,” “plan,” “anticipate,” “estimate,” “expect,” “intend,” and other phrases of similar meaning. Such statements include expectations regarding improvements to DynaEnergetics’ end markets, our ability to access the capital markets and the availability of proceeds from our at-the-market offering to support our liquidity position and our expected future liquidity position. The forward-looking information is based on information available as of the date of this quarterly report and on numerous assumptions and developments that are not within our control. Although we believe that our expectations as expressed in these forward-looking statements are reasonable, we cannot assure you that our expectations will turn out to be correct. Factors that could cause actual results to differ materially include, but are not limited to, those factors referenced in our Annual Report on Form 10-K for the year ended December 31, 2020 and such things as the following: impacts of COVID-19 and any related preventative or protective actions taken by governmental authorities and resulting economic impacts, including recessions or depressions; supply chain delays and disruptions; transportation disruptions; the ability to obtain new contracts at attractive prices; the size and timing of customer orders and shipments; product pricing and margins; our ability to realize sales from our backlog; fluctuations in customer demand; fluctuations in foreign currencies; competitive factors; the timely completion of contracts; the timing and size of expenditures; the timely receipt of government approvals and permits; the price and availability of metal and other raw material; fluctuations in tariffs or quotas; changes in laws and regulations, both domestic and foreign, impacting our business and the business of the end-market users we serve; the adequacy of local labor supplies at our facilities; current or future limits on manufacturing capacity at our various operations; our ability to successfully integrate acquired businesses; the impact of pending or future litigation or regulatory matters; the availability and cost of funds; our ability to access our borrowing capacity under our credit facility or access the capital markets; and global economic conditions and political and economic developments. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

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INDEX

 

						Page
PART I - FINANCIAL INFORMATION
Item 1			Condensed Consolidated Financial Statements			4
			Condensed Consolidated Balance Sheets as of March 31, 2021 (unaudited) and December 31, 2020			4
			Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020 (unaudited)			5
			Condensed Consolidated Statements of Comprehensive (Loss) Income for the three months ended March 31, 2021 and 2020 (unaudited)			6
			Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2021 and 2020 (unaudited)			7
			Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (unaudited)			8
			Notes to Condensed Consolidated Financial Statements (unaudited)			9
Item 2			Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3			Quantitative and Qualitative Disclosure about Market Risk			32
Item 4			Controls and Procedures			32
PART II - OTHER INFORMATION
Item 1			Legal Proceedings			33
Item 1A			Risk Factors			33
Item 2			Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 3			Defaults Upon Senior Securities			33
Item 4			Mine Safety Disclosures			33
Item 5			Other Information			33
Item 6			Exhibits			33
			Signatures			34

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Part I - FINANCIAL INFORMATION

ITEM 1.  Condensed Consolidated Financial Statements

DMC GLOBAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except Share and Per Share Data)

			March 31, 2021						December 31, 2020
			(unaudited)
ASSETS
Current assets:
Cash and cash equivalents			$	45,837					$	28,187
Marketable securities			20,943						25,736
Accounts receivable, net of allowance for doubtful accounts of $2,631 and $2,605, respectively			35,609						31,366
Inventories			57,944						52,573
Prepaid expenses and other			7,855						5,448
Total current assets			168,188						143,310
Property, plant and equipment			178,752						180,278
Less - accumulated depreciation			(71,952)						(70,867)
Property, plant and equipment, net			106,800						109,411
Purchased intangible assets, net			2,927						3,665
Deferred tax assets			5,873						4,582
Other assets			21,029						18,677
Total assets			$	304,817					$	279,645
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable			$	27,336					$	17,574
Accrued expenses			7,727						5,301
Accrued income taxes			7,975						7,279
Accrued employee compensation and benefits			6,625						7,160
Contract liabilities			7,205						4,928
Current portion of long-term debt			—						3,125
Other current liabilities			1,505						1,741
Total current liabilities			58,373						47,108
Long-term debt			—						8,139
Deferred tax liabilities			1,211						2,254
Other long-term liabilities			26,803						25,230
Total liabilities			86,387						82,731
Commitments and contingencies (Note 12)
Stockholders’ equity
Preferred stock, $0.05 par value; 4,000,000 shares authorized; no issued and outstanding shares			—						—
Common stock, $0.05 par value; 25,000,000 shares authorized; 15,833,470 and 15,389,285 shares outstanding, respectively			820						796
Additional paid-in capital			144,094						117,387
Retained earnings			116,089						115,657
Other cumulative comprehensive loss			(24,929)						(22,962)
Treasury stock, at cost, and company stock held for deferred compensation, at par; 566,343 and 528,274 shares, respectively			(17,644)						(13,964)
Total stockholders’ equity			218,430						196,914
Total liabilities and stockholders’ equity			$	304,817					$	279,645

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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DMC GLOBAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in Thousands, Except Share and Per Share Data)

(unaudited)

			Three months ended March 31,
			2021						2020
Net sales			$	55,658					$	73,564
Cost of products sold			42,745						49,094
Gross profit			12,913						24,470
Costs and expenses:
General and administrative expenses			7,929						8,126
Selling and distribution expenses			5,243						8,527
Amortization of purchased intangible assets			324						354
Restructuring expenses			127						1,116
Total costs and expenses			13,623						18,123
Operating (loss) income			(710)						6,347
Other income (expense):
Other income, net			394						115
Interest expense, net			(135)						(238)
(Loss) income before income taxes			(451)						6,224
Income tax (benefit) provision			(883)						2,069
Net income			$	432					$	4,155
Net income per share
Basic			$	0.03					$	0.28
Diluted			$	0.03					$	0.28
Weighted average shares outstanding:
Basic			15,453,103						14,697,164
Diluted			15,463,923						14,717,836
Dividends declared per common share			$	—					$	0.125

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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DMC GLOBAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Amounts in Thousands)

(unaudited)

 

			Three months ended March 31,
			2021						2020
Net income			$	432					$	4,155
Change in cumulative foreign currency translation adjustment			(1,967)						(840)
Total comprehensive (loss) income			$	(1,535)					$	3,315

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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DMC GLOBAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in Thousands, Except Share Data)

(unaudited)

																											Other						Treasury Stock and
															Additional												Cumulative						Company Stock Held for
			Common Stock												Paid-In						Retained						Comprehensive						Deferred Compensation
			Shares						Amount						Capital						Earnings						Loss						Shares						Amount												Total
Balances, December 31, 2020			15,917,559						$	796					$	117,387					$	115,657					$	(22,962)					(528,274)						$	(13,964)											$	196,914
Net income			—						—						—						432						—						—						—												432
Change in cumulative foreign currency translation adjustment			—						—						—						—						(1,967)						—						—												(1,967)
Shares issued in connection with at-the-market offering program			397,820						20						25,242						—						—						—						—												25,262
Shares issued in connection with stock compensation plans			84,434						4						(4)						—						—						—						—												—
Stock-based compensation			—						—						1,469						—						—						—						—												1,469
Treasury stock activity			—						—						—						—						—						(38,069)						(3,680)												(3,680)
Balances, March 31, 2021			16,399,813						$	820					$	144,094					$	116,089					$	(24,929)					(566,343)						$	(17,644)											$	218,430

																											Other						Treasury Stock and
															Additional												Cumulative						Company Stock Held for
			Common Stock												Paid-In						Retained						Comprehensive						Deferred Compensation
			Shares						Amount						Capital						Earnings						Loss						Shares						Amount												Total
Balances, December 31, 2019			15,117,207						$	756					$	85,639					$	119,002					$	(25,803)					(464,532)						$	(7,453)											$	172,141
Net income			—						—						—						4,155						—						—						—												4,155
Change in cumulative foreign currency translation adjustment			—						—						—						—						(840)						—						—												(840)
Shares issued in connection with stock compensation plans			143,628						7						(7)						—						—						—						—												—
Adjustment for cumulative effect from change in accounting principle (ASU 2016-13)			—						—						—						(50)						—						—						—												(50)
Stock-based compensation			—						—						1,200						—						—						—						—												1,200
Dividends declared			—						—						—						(1,883)						—						—						—												(1,883)
Treasury stock activity			—						—						—						—						—						(45,061)						(1,034)												(1,034)
Balances, March 31, 2020			15,260,835						$	763					$	86,832					$	121,224					$	(26,643)					(509,593)						$	(8,487)											$	173,689

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

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DMC GLOBAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(unaudited)

			Three months ended March 31,
			2021						2020
Cash flows provided by operating activities:
Net income			$	432					$	4,155
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			2,698						2,352
Amortization of purchased intangible assets			324						354
Amortization of deferred debt issuance costs			56						40
Stock-based compensation			1,608						1,118
Deferred income taxes			(2,334)						(160)
(Gain) loss on disposal of property, plant and equipment			(288)						13
Restructuring expenses			127						1,116
Change in:
Accounts receivable, net			(4,629)						10,277
Inventories			(6,184)						(8,187)
Prepaid expenses and other			(4,480)						383
Accounts payable			9,963						(2,752)
Contract liabilities			2,432						955
Accrued expenses and other liabilities			2,451						(4,744)
Net cash provided by operating activities			2,176						4,920
Cash flows provided by (used in) investing activities:
Proceeds from maturities of marketable securities			4,799						—
Acquisition of property, plant and equipment			(1,365)						(5,121)
Proceeds on sale of property, plant and equipment			281						—
Net cash provided by (used in) investing activities			3,715						(5,121)
Cash flows provided by (used in) financing activities:
Repayments on capital expenditure facility			(11,750)						(781)
Payment of dividends			—						(1,866)
Net proceeds from issuance of common stock through at-the-market offering program			25,262						—
Treasury stock purchases			(2,435)						(1,034)
Net cash provided by (used in) financing activities			11,077						(3,681)
Effects of exchanges rates on cash			682						(20)
Net increase (decrease) in cash and cash equivalents			17,650						(3,902)
Cash and cash equivalents, beginning of the period			28,187						20,353
Cash and cash equivalents, end of the period			$	45,837					$	16,451

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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DMC GLOBAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except Share and Per Share Data)

(unaudited)

 

1.      BASIS OF PRESENTATION

 

The information included in the condensed consolidated financial statements is unaudited but includes all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the financial statements that are included in our Annual Report filed on Form 10-K for the year ended December 31, 2020.

2.      SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of DMC Global Inc. (“DMC”, “we”, “us”, “our”, or the “Company”) and its controlled subsidiaries. Only subsidiaries in which controlling interests are maintained are consolidated. All significant intercompany accounts, profits, and transactions have been eliminated in consolidation.

Marketable Securities

We typically invest in highly rated securities, with the primary objectives of preserving principal, providing access to liquidity to fund the ongoing operations and strategic needs of the Company and its subsidiaries, and achieving a yield that is commensurate with low risk and highly liquid securities. The Company’s investment policy generally limits the amount of credit exposure to any one issuer.

Our investments in marketable debt securities are classified as either trading, available-for-sale or held-to-maturity based on the nature of the securities and their availability for use in current operations. The Company classifies its marketable debt securities on the Condensed Consolidated Balance Sheet as current or non-current based on maturities and our expectations of sales and redemptions in the following year.

As of March 31, 2021 and December 31, 2020, our investments were comprised solely of U.S. Treasury securities with maturities ranging from three to twelve months, and these investments have been classified and accounted for as trading securities. The Company’s investments in U.S. Treasury securities are measured at fair value with gains and losses recognized in the Condensed Consolidated Statement of Operations within “Other income, net."

Accounts Receivable

The Company measures expected credit losses for its accounts receivable using a current expected credit loss model, which is based on historical experience, adjusted for current conditions and reasonable and supportable forecasts. The Company has disaggregated pools of accounts receivable balances by business, geography and/or customer risk profile and has used history and other experience to establish an allowance for credit losses at the time the receivable is recognized. To measure expected credit losses, we have elected to pool trade receivables by segment and analyze DynaEnergetics and NobelClad accounts receivable balances as separate populations. Within each segment, receivables exhibit similar risk characteristics.

During the three months ended March 31, 2021, our expected loss rate continued to reflect uncertainties in market conditions present in both of our businesses due to the ongoing COVID-19 pandemic. In addition, we reviewed receivables outstanding, including aged balances, and in circumstances where we are aware of a specific customer’s inability to meet its financial obligation to us, we recorded a specific allowance for credit losses (with the offsetting expense charged to “Selling and distribution expenses” in our Condensed Consolidated Statements of Operations) against the amounts due, reducing the net recognized receivable to the amount we estimate will be collected. In total, provisions of $38 were recorded during the three months ended March 31, 2021.

The following table summarizes activity in the allowance for credit losses on receivables from DynaEnergetics and NobelClad customers:

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			DynaEnergetics						NobelClad						DMC Global Inc.
Allowance for doubtful accounts, December 31, 2020			$	2,590					$	15					$	2,605
Current period provision for expected credit losses			38						—						38
Recoveries of amounts previously reserved			(10)						—						(10)
Impacts of foreign currency exchange rates and other			(2)						—						(2)
Allowance for doubtful accounts, March 31, 2021			$	2,616					$	15					$	2,631

Revenue Recognition

The Company’s revenues are primarily derived from consideration paid by customers for tangible goods. The Company analyzes its different goods by segment to determine the appropriate basis for revenue recognition. Revenue is not generated from sources other than contracts with customers and revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. There are no material upfront costs for operations that are incurred from contracts with customers.

Our rights to payments for goods transferred to customers arise when control is transferred at a point in time and not on any other criteria. Payment terms and conditions vary by contract, although terms generally include a requirement of payment within 30 to 60 days. In instances when we require customers to make advance payments prior to the shipment of their orders, we record a contract liability. We have determined that our contract liabilities do not include a significant financing component given the short duration between order initiation and order fulfillment within each of our segments. Please refer to Note 5 “Contract Liabilities” for further information on contract liabilities and Note 10 “Business Segments” for disaggregated revenue disclosures.

Income Taxes

We recognize deferred tax assets and liabilities for the expected future income tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. The deferred income tax impact of tax credits is recognized as an immediate adjustment to income tax expense. We recognize deferred tax assets for the expected future effects of all deductible temporary differences to the extent we believe these assets will more likely than not be realized. We record a valuation allowance when, based on current circumstances, it is more likely than not that all or a portion of the deferred tax assets will not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, recent financial operations and their associated valuation allowances, if any.

We recognize the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position that it will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that is more likely than not to be realized upon ultimate resolution. We recognize interest and penalties related to uncertain tax positions in operating expense.

Earnings Per Share

In periods with net income, the Company computes earnings per share (“EPS”) using a two-class method, which is an earnings allocation formula that determines EPS for (i) each class of common stock (the Company has a single class of common stock), and (ii) participating securities according to dividends declared and participation rights in undistributed earnings. Restricted stock awards are considered participating securities in periods with net income as they receive non-forfeitable rights to dividends similar to common stock. Restricted stock awards do not participate in net losses.

Basic EPS is calculated by dividing net income available to common stockholders of the Company by the weighted average number of shares of common stock outstanding during the period. Diluted EPS adjusts basic EPS for the effects of restricted stock awards, performance share units and other potentially dilutive financial instruments (dilutive securities), only in the periods in which such effect is dilutive. The effect of the dilutive securities is reflected in diluted EPS by application of the more dilutive of (1) the treasury stock method or (2) the two-class method assuming nonvested shares are not converted into shares of common stock. For the periods presented, diluted EPS using the treasury stock method was less dilutive than the two-class method; as such, only the two-class method has been included below.

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			Three months ended March 31,
			2021						2020
Net income, as reported			$	432					$	4,155
Less: Distributed net income available to participating securities			—						(30)
Less: Undistributed net income available to participating securities			(5)						(37)
Numerator for basic net income per share:			427						4,088
Add: Undistributed net income allocated to participating securities			5						37
Less: Undistributed net income reallocated to participating securities			(5)						(37)
Numerator for diluted net income per share:			427						4,088
Denominator:
Weighted average shares outstanding for basic net income per share			15,453,103						14,697,164
Effect of dilutive securities			10,820						20,672
Weighted average shares outstanding for diluted net income per share			15,463,923						14,717,836
Net income per share
Basic			$	0.03					$	0.28
Diluted			$	0.03					$	0.28

Deferred compensation

The Company maintains a Non-Qualified Deferred Compensation Plan (the “Plan”) as part of its overall compensation package for certain employees. Participants are eligible to defer a portion of their annual salary, their annual incentive bonus, and their equity awards through the Plan on a tax-deferred basis. Deferrals into the Plan are not matched or subsidized by the Company, nor are they eligible for above-market or preferential earnings.

The Plan provides for deferred compensation obligations to be settled either by delivery of a fixed number of shares of DMC’s common stock or in cash, in accordance with participant contributions and elections. For deferred equity awards, subsequent to equity award vesting and after a period prescribed by the Plan, participants can elect to diversify contributions of equity awards into other investment options available to Plan participants. Once diversified, contributions of equity awards will be settled by delivery of cash.

The Company has established a grantor trust commonly known as a “rabbi trust” and contributed certain assets to satisfy the future obligations to participants in the Plan. These assets are subject to potential claims of the Company’s general creditors. The assets held in the trust include unvested restricted stock awards (“RSAs”), vested company stock awards, company-owned life insurance (“COLI”) on certain employees, and money market and mutual funds. Unvested RSAs and common stock held by the trust are reflected in the Consolidated Balance Sheets within “Treasury stock, at cost, and company stock held for deferred compensation, at par” at the par value of the common stock or unvested RSAs. These accounts are not adjusted for subsequent changes in the fair value of the common stock. COLI is accounted for at the cash surrender value while money market and mutual funds held by the trust are accounted for at fair value.

Deferred compensation obligations that will be settled in cash are accounted for on an accrual basis in accordance with the terms of the Plan. These obligations are adjusted based on changes in value of the underlying investment options chosen by Plan participants. Deferred compensation obligations that will be settled by delivery of a fixed number of previously vested shares of the Company’s common stock are reflected in the Consolidated Statements of Stockholders’ Equity within “Common stock” at the par value of the common stock or unvested RSAs. These accounts are not adjusted for subsequent changes in the fair value of the common stock.

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The balances related to the deferred compensation plan were as follows:

						Consolidated Balance Sheet location			March 31, 2021						December 31, 2020
Deferred compensation assets						Other assets			$	9,447					$	7,596
Deferred compensation obligations						Other long-term liabilities			$	13,500					$	11,894

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We are required to use an established hierarchy for fair value measurements based upon the inputs to the valuation and the degree to which they are observable or not observable in the market. The three levels in the hierarchy are as follows:                   

•Level 1 — Inputs to the valuation based upon quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date.

•Level 2 — Inputs to the valuation include quoted prices in either markets that are not active, or in active markets for similar assets or liabilities, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data.

•Level 3 — Inputs to the valuation that are unobservable inputs for the asset or liability. 

The highest priority is assigned to Level 1 inputs and the lowest priority to Level 3 inputs.

The carrying value of accounts receivable and payable, accrued expenses, revolving loans under our credit facility and borrowings under our capital expenditure facility approximate their fair value. Our U.S. Treasury marketable securities are valued using quoted prices in active markets that are accessible as of the measurement date. Our revolving loans and borrowings under our capital expenditure facility, when outstanding, reset each month at market interest rates. Money market funds and mutual funds of $5,955 as of March 31, 2021 and $4,244 as of December 31, 2020 were held to satisfy future deferred compensation obligations are valued based upon the market values of underlying securities, and therefore we classify these assets as Level 1 in the fair value hierarchy.

Our foreign currency forward contracts are valued using quoted market prices or are determined using a yield curve model based on current market rates. As a result, we classify these investments as Level 2 in the fair value hierarchy.

We did not hold any Level 3 assets or liabilities as of March 31, 2021 or December 31, 2020.

Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board issued a new accounting pronouncement regarding accounting for income taxes. The new standard removes certain exceptions to the general principles in ASC 740 Income Taxes and also clarifies and amends existing guidance to provide for more consistent application. The new standard became effective for the Company in the first quarter of fiscal 2021 and did not have a material impact on our consolidated financial statements.

3.      INVENTORIES

 

Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Significant cost elements included in inventory are material, labor, freight, subcontract costs, and manufacturing overhead. As necessary, we adjust inventory to its net realizable value by recording provisions for excess, slow moving and obsolete inventory. We regularly review inventory quantities on hand and values, and compare them to estimates of future product demand, market conditions, production requirements and technological developments.

Inventories consisted of the following at March 31, 2021:

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			DynaEnergetics						NobelClad						DMC Global Inc.
Raw materials			$	14,616					$	11,403					$	26,019
Work-in-process			7,997						8,763						16,760
Finished goods			14,532						401						14,933
Supplies			—						232						232
Inventories			$	37,145					$	20,799					$	57,944

Inventories consisted of the following at December 31, 2020:

			DynaEnergetics						NobelClad						DMC Global Inc.
Raw materials			$	13,250					$	11,903					$	25,153
Work-in-process			7,062						6,682						13,744
Finished goods			12,806						669						13,475
Supplies			—						201						201
Inventories			$	33,118					$	19,455					$	52,573

4.      PURCHASED INTANGIBLE ASSETS

 

Our purchased intangible assets consisted of the following as of March 31, 2021:

			Gross						Accumulated Amortization						Net
Core technology			$	16,881					$	(13,954)					$	2,927
Customer relationships			36,516						(36,516)						—
Trademarks / Trade names			2,102						(2,102)						—
Total intangible assets			$	55,499					$	(52,572)					$	2,927

 

Our purchased intangible assets consisted of the following as of December 31, 2020:

			Gross						Accumulated Amortization						Net
Core technology			$	17,899					$	(14,234)					$	3,665
Customer relationships			37,638						(37,638)						—
Trademarks / Trade names			2,194						(2,194)						—
Total intangible assets			$	57,731					$	(54,066)					$	3,665

 

The change in the gross value of our purchased intangible assets from December 31, 2020 to March 31, 2021 was due to foreign currency translation and the recognition of the tax benefit of tax deductible goodwill amortization related to the 2007 acquisition of our German subsidiaries. Prior to the impairment of the goodwill related to the NobelClad and DynaEnergetics reporting units at September 30, 2017 and December 31, 2015, respectively, the tax benefit of tax amortization reduced the goodwill balance. After we fully impaired the goodwill, which is only written off for U.S. GAAP purposes, the tax benefit of tax goodwill amortization reduces the gross value of the purchased intangible assets related to this acquisition.

5.      CONTRACT LIABILITIES

 

On occasion, we require customers to make advance payments prior to the shipment of goods in order to help finance our inventory investment on large orders or to keep customers’ credit limits at acceptable levels. Contract liabilities were as follows:

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			March 31, 2021						December 31, 2020
NobelClad			$	6,845					$	4,450
DynaEnergetics			360						478
Total			$	7,205					$	4,928

We generally expect to recognize the revenue associated with contract liabilities over a time period no longer than one year, but unforeseen circumstances can cause delays in shipments associated with contract liabilities. Approximately 25% of the $4,928 recorded as contract liabilities at December 31, 2020 was recorded to net sales during the three months ended March 31, 2021.

6.      LEASES

The Company leases real properties for use in manufacturing and as administrative and sales offices, and leases automobiles and office equipment. The Company determines if a contract contains a lease arrangement at the inception of the contract. For leases in which the Company is the lessee, leases are classified as either finance or operating. Right of use (ROU) assets are initially measured at the present value of lease payments over the lease term plus initial direct costs, if any, with the classification affecting the pattern of expense recognition. If a lease does not provide a discount rate and the rate cannot be readily determined, an incremental borrowing rate is used to determine the future lease payments. Lease and non-lease components within the Company’s lease agreements are accounted for together.

Nearly all of the Company’s leasing arrangements are classified as operating leases. ROU asset and lease liability balances were as follows for the periods presented:

			March 31, 2021						December 31, 2020
ROU asset			10,589						10,733
Current lease liability			1,505						1,741
Long-term lease liability			10,137						10,066
Total lease liability			$	11,642					$	11,807

The ROU asset was included in “Other assets” while the current lease liability was reported in “Other current liabilities” and the long-term lease liability was reported in “Other long-term liabilities” on the Company’s Condensed Consolidated Balance Sheet. Cash paid for operating lease liabilities are recorded as cash flows from operating activities in the Company’s Condensed Consolidated Statements of Cash Flows. For the three months ended March 31, 2021 and 2020, operating lease costs were $971 and $1,102, respectively, which were included in the Company’s Condensed Consolidated Statements of Operations. Short term and variable lease costs were not material for the three months ended March 31, 2021 and 2020.

Certain of the Company’s leases contain renewal options and options to extend the leases for up to five years, and a majority of these options are reflected in the calculation of the ROU asset and lease liability due to the likelihood of renewal.

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The following table summarizes the weighted average lease terms and discount rates for operating lease liabilities:

			March 31, 2021
Weighted average remaining lease term (in years)			8.03
Weighted average discount rate			5.1		%

The following table represents maturities of operating lease liabilities as of March 31, 2021:

Due within 1 year			$	1,505
Due after 1 year through 2 years			2,077
Due after 2 years through 3 years			1,967
Due after 3 years through 4 years			1,792
Due after 4 years through 5 years			1,733
Due after 5 years			5,727
Total future minimum lease payments			14,801
Less imputed interest			(3,159)
Total			$	11,642

7.      DEBT

 

As of March 31, 2021 we had no outstanding borrowings under our credit facility. As of December 31, 2020, outstanding borrowings consisted of the following:

Syndicated credit agreement:
Capital expenditure facility									$	11,750
Outstanding borrowings									11,750
Less: debt issuance costs									(486)
Total debt									11,264
Less: current portion of long-term debt									(3,125)
Long-term debt									$	8,139

Syndicated Credit Agreement

On March 8, 2018, we entered into a five-year $75,000 syndicated credit agreement (“credit facility”) which replaced in its entirety our prior syndicated credit facility entered into on February 23, 2015. The credit facility allows for revolving loans of up to $50,000 with a $20,000 US dollar equivalent sublimit for alternative currency loans. In addition, the agreement provided for a $25,000 Capital Expenditure Facility (“Capex Facility”) which was used to assist in financing our DynaEnergetics manufacturing expansion project in Blum, Texas. At the end of year one, the Capex Facility converted to a term loan which was amortizable at 12.5% of principal per year with a balloon payment for the outstanding balance upon the credit facility maturity date in 2023. In February 2021, we repaid the remaining Capex Facility balance of $11,750.

The credit facility has a $100,000 accordion feature to increase the commitments under the revolving loan class and/or by adding a term loan subject to approval by applicable lenders. We entered into the credit facility with a syndicate of three banks, with KeyBank, N.A. acting as administrative agent. The syndicated credit facility is secured by the assets of DMC including accounts receivable, inventory, and fixed assets, as well as guarantees and share pledges by DMC and its subsidiaries.

Borrowings under the $50,000 revolving loan can be in the form of one-, two-, three-, or six-month LIBOR rate loans. Additionally, US dollar borrowings on the revolving loan can be in the form of Base Rate loans (Base Rate borrowings are based on the greater of the administrative agent’s Prime rates, an adjusted Federal Funds rate or an adjusted LIBOR rate). LIBOR loans bear interest at the applicable LIBOR rate plus an applicable margin (varying from 1.50% to 3.00%). Base Rate loans bear interest at the defined Base rate plus an applicable margin (varying from 0.50% to 2.00%).

Borrowings under the $20,000 alternate currency sublimit can be in euros, Canadian dollars, pounds sterling, and in any other currency acceptable to the administrative agent. Alternative currency borrowings denominated in euros, pounds sterling, and any other currency that is dealt with on the London Interbank Deposit Market shall be comprised of LIBOR loans and bear interest at the LIBOR rate plus an applicable margin (varying from 1.50% to 3.00%).

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On June 25, 2020, we entered into an amendment ("Amendment") to the credit facility. The Amendment waives the debt service coverage ratio covenant for the quarters ending September 30, 2020, December 31, 2020, and March 31, 2021. The debt service coverage ratio minimum of 1.35 to 1 will resume beginning with the quarter ending June 30, 2021 and thereafter. The debt service coverage ratio is defined in the credit facility as the ratio of Consolidated Pro Forma EBITDA less the sum of capital distributions paid in cash, cash income taxes and Consolidated Unfunded Capital Expenditures (as defined in the credit facility) to Debt Service Charges (as defined in the credit facility).

Additionally, the Amendment added a Minimum Liquidity covenant requiring the total of cash and cash equivalents held by U.S. subsidiaries and available borrowing capacity under the credit facility to exceed $10,000 for the quarters ending September 30, 2020, December 31, 2020, and March 31, 2021. The Minimum Liquidity covenant is not required after March 31, 2021.

During the period from the Amendment through August 31, 2020, borrowings outstanding under the credit facility bore interest at LIBOR plus a margin of 1.75% or at a Base Rate (as defined in the credit facility) plus a margin of 0.75%. For the period from September 1, 2020 through the date of receipt of the covenant compliance certificate for the quarter ending March 31, 2021, borrowings outstanding under the credit facility will bear interest at LIBOR plus a margin of 1.75% to 3.00% or at a Base Rate plus a margin of 0.75% to 2.00%. In each case, the margin is based on the Company's Leverage Ratio of Consolidated Funded Indebtedness (as defined in the credit facility) on the last day of such period to Consolidated Pro Forma EBITDA for such period. Additionally, the Amendment sets the minimum LIBOR at 0.75%.

On October 22, 2020, in connection with the commencement of our at-the-market offering, we entered into an amendment to the credit facility to waive the requirement that we repay outstanding balances under the credit facility from the proceeds of any equity offering. The waiver applies to at-the-market offerings up to $75 million.

The credit facility, as amended, includes various covenants and restrictions, certain of which relate to the payment of dividends or other distributions to stockholders; redemption of capital stock; incurrence of additional indebtedness; mortgaging, pledging or disposition of major assets; and maintenance of specified ratios. As of March 31, 2021, we were in compliance with all financial covenants and other provisions of our debt agreements.

We also maintain a line of credit with a German bank for certain European operations. In July 2020, the German Bank Facility was amended to increase the borrowing capacity from €4,000 to €7,000. Of the €7,000 borrowing capacity, €3,781 was available as of March 31, 2021 after considering outstanding letters of credit.

Given that we had no outstanding debt as of March 31, 2021, our deferred debt issuance costs of $430 were reported in the “Other assets” line item on our Condensed Consolidated Balance Sheet. Our deferred debt issuance costs of $486 as of December 31, 2020 were reported in the “Long term debt” line item on our Condensed Consolidated Balance Sheet. Deferred debt issuance costs are being amortized over the remaining term of the credit facility which expires on March 8, 2023.

8.     EQUITY PROGRAM

On October 22, 2020, the Company commenced an at-the-market ("ATM") equity program under its shelf registration statement, which allows it to sell and issue up to $75 million in shares of its common stock from time to time. The Company entered into an Equity Distribution Agreement on October 22, 2020 with KeyBanc Capital Markets Inc. ("KeyBanc") relating to the issuance and sale of shares of common stock pursuant to the program. KeyBanc is not required to sell any specific amount of securities but will act as our sales agent using commercially reasonable efforts consistent with its normal trading and sales practices, on mutually agreed terms between KeyBanc and us. There is no specific date on which the ATM equity program will end and there are no minimum purchase requirements. KeyBanc will be entitled to compensation for shares sold pursuant to the program in an amount up to 1.5% of the gross proceeds of any shares of common stock sold under the Equity Distribution Agreement.

During the quarter ended March 31, 2021, the Company sold 397,820 shares of common stock through its ATM equity program for gross proceeds of $25,647 at a weighted average price per share of $64.47. Net proceeds from such sales were $25,262, after deducting commissions paid to the sales agents of approximately $385. Since the inception of the program, the Company has sold 1,006,180 shares of common stock through its ATM equity program for gross proceeds of $51,779 at a weighted average price per share of $51.46.

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9.     INCOME TAXES

The effective tax rate for each of the periods reported differs from the U.S. statutory rate primarily due to variation in contribution to consolidated pre-tax income from each jurisdiction for the respective periods, differences between the U.S. and foreign tax rates (which range from 20% to 34%), permanent differences between book and taxable income, and changes to valuation allowances on our deferred tax assets.

We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use existing deferred tax assets. Additionally, a three-year cumulative loss at a Consolidated Financial Statement level may be viewed as negative evidence impacting a jurisdiction that by itself is not in a three-year cumulative loss position. During the three months ended March 31, 2021 and March 31, 2020, we did not record any adjustments to valuation allowances. The Company will continue to monitor the realizability of deferred tax assets and the need for valuation allowances and will record adjustments in the periods in which facts support such adjustments.

The Tax Cuts and Jobs Act (“TCJA”) provides that foreign earnings generally can be repatriated to the U.S. without federal tax consequence. We have assessed the assertion that cumulative earnings by our foreign subsidiaries are indefinitely reinvested. We continue to permanently reinvest the earnings of our international subsidiaries and therefore we do not provide for U.S. income taxes or withholding taxes that could result from the distribution of those earnings to the U.S. parent. Nevertheless, if any such earnings were ultimately distributed to the U.S. in the form of dividends or otherwise, or if the shares of our international subsidiaries were sold or transferred, we could be subject to additional U.S. federal and state income taxes. Due to the multiple avenues in which earnings can be repatriated, and because a large portion of these earnings are not liquid, it is not practical to estimate the amount of additional taxes that might be payable on these amounts of undistributed foreign income.

During the fourth quarter of 2019, our German operating entities commenced a tax audit for fiscal years 2015 through 2017. We expect this audit to be completed in the second quarter of 2021. If any issues addressed in the audit are resolved in a manner not consistent with our expectations, the Company could be required to adjust its provision for income taxes in future periods.

10.      BUSINESS SEGMENTS

 

Our business is organized into two segments: DynaEnergetics and NobelClad. DynaEnergetics designs, manufactures and distributes products utilized by the global oil and gas industry principally for the perforation of oil and gas wells. NobelClad is a global leader in the production of explosion-welded clad metal plates for use in the construction of corrosion resistant industrial processing equipment and specialized transition joints.

Our reportable segments are separately managed strategic business units that offer different products and services. Each segment’s products are marketed to different customer types and require different manufacturing processes and technologies.

Segment information is as follows:

 

			Three months ended March 31,
			2021						2020
Net sales
DynaEnergetics			$	38,172					$	53,220
NobelClad			17,486						20,344
Net sales			$	55,658					$	73,564

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			Three months ended March 31,
			2021						2020
Operating income
DynaEnergetics			1,521						8,606
NobelClad			$	1,604					$	1,476
Segment operating income			3,125						10,082
Unallocated corporate expenses			(2,227)						(2,617)
Stock-based compensation			(1,608)						(1,118)
Other income, net			394						115
Interest expense, net			(135)						(238)
(Loss) income before income taxes			$	(451)					$	6,224

			Three months ended March 31,
			2021						2020
Depreciation and amortization
DynaEnergetics			2,000						1,772
NobelClad			$	939					$	834
Segment depreciation and amortization			2,939						2,606
Corporate and other			83						100
Consolidated depreciation and amortization			$	3,022					$	2,706

The disaggregation of revenue earned from contracts with customers based on the geographic location of the customer is as follows.

DynaEnergetics

			Three months ended March 31,
			2021						2020
United States			$	27,831					$	46,271
Canada			3,702						668
Hong Kong			1,190						136
Egypt			1,053						1,311
Oman			781						180
Indonesia			571						479
Pakistan			509						345
Ukraine			436						302
India			393						316
Romania			322						104
Germany			314						300
Rest of the world			1,070						2,808
Total DynaEnergetics			$	38,172					$	53,220

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NobelClad

			Three months ended March 31,
			2021						2020
United States			$	8,347					$	9,042
Canada			1,024						1,768
Russia			1,021						—
South Korea			886						990
France			669						1,491
United Arab Emirates			664						739
India			649						77
Netherlands			591						547
Australia			578						249
Italy			435						92
Spain			413						1,247
Germany			390						986
Norway			283						960
Taiwan			278						—
China			239						87
Rest of the world			1,019						2,069
Total NobelClad			$	17,486					$	20,344

During the three months ended March 31, 2021, one customer in our DynaEnergetics segment accounted for approximately 10% of consolidated net sales. During the three months ended March 31, 2020, one customer accounted for approximately 15% of consolidated net sales.

11.      DERIVATIVE INSTRUMENTS

We are exposed to foreign currency exchange risk resulting from fluctuations in exchange rates, primarily the U.S. dollar to euro, the U.S. dollar to Canadian dollar, and, to a lesser extent, other currencies, arising from inter-company and third-party transactions entered into by our subsidiaries that are denominated in currencies other than their functional currency. Changes in exchange rates with respect to these transactions result in unrealized gains or losses if such transactions are unsettled at the end of the reporting period or realized gains or losses at settlement of the transaction. We use foreign currency forward contracts to offset foreign exchange rate fluctuations on foreign currency denominated asset and liability positions. None of these contracts are designated as accounting hedges, and all changes in the fair value of the forward contracts are recognized in “Other income, net” within our Condensed Consolidated Statements of Operations.

We execute derivatives with a specialized foreign exchange brokerage firm. The primary credit risk inherent in derivative agreements is the possibility that a loss may occur from the nonperformance of a counterparty to the agreements. We perform a review of the credit risk of our counterparties at the inception of the contract and on an ongoing basis. We anticipate that our counterparties will be able to fully satisfy their obligations under the agreements but will take action if doubt arises regarding the counterparties’ ability to perform.

As of March 31, 2021 and December 31, 2020, the notional amounts of the forward currency contracts the Company held were $2,909 and $2,092, respectively. At March 31, 2021 and December 31, 2020, the fair values of outstanding foreign currency forward contracts were $0.

The following table presents the location and amount of net gains from hedging activities:

						Three months ended March 31,
Derivative			Statements of Operations Location			2021						2020
Foreign currency contracts			Other income, net			$	55					$	834

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12.    COMMITMENTS AND CONTINGENCIES

Contingent Liabilities

The Company records an accrual for contingent liabilities when a loss is both probable and reasonably estimable. If some amount within a range of loss appears to be a better estimate than any other amount within the range, that amount is accrued. When no amount within a range of loss appears to be a better estimate than any other amount, the lowest amount in the range is accrued.

Legal Proceedings

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

13.     RESTRUCTURING EXPENSES

During the first quarter of 2021, NobelClad recorded an accrual for additional severance liabilities of $116 which were agreed to with local labor authorities for employees terminated as part of closing manufacturing operations in France in 2018.

During the first quarter of 2020, DMC reduced its workforce by 264 positions to address a sharp decline in well completions in the Company’s core oil and gas end market principally due to the COVID-19 pandemic. The workforce reduction impacted full-time, part-time and temporary direct-labor roles in manufacturing and assembly at DynaEnergetics as well as general and administrative positions at DynaEnergetics, NobelClad, and at DMC’s corporate office.

Total restructuring and impairment charges incurred for these programs are as follows and are reported in the “Restructuring expenses” line item in our Condensed Consolidated Statements of Operations:

			Three months ended March 31, 2021
			Severance																								Other Exit Costs						Total
NobelClad			$	116																							$	11					$	127
Total			$	116																							$	11					$	127

			Three months ended March 31, 2020
			Severance												Contract Termination Costs												Other Exit Costs						Total
DynaEnergetics			$	707											$	11											$	220					$	938
NobelClad			54												—												5						59
Corporate			119												—												—						$	119
Total			$	880											$	11											$	225					$	1,116

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During the three months ended March 31, 2021, the changes to the restructuring liability associated with these programs is summarized below:

			December 31, 2020						Net expense						Payments and Other Adjustments						Currency Adjustments						March 31, 2021
Severance			$	958					$	116					$	(18)					$	(42)					$	1,014
Other exit costs			—						11						(8)						—						3
Total			$	958					$	127					$	(26)					$	(42)					$	1,017

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ITEM 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with our historical consolidated financial statements and notes, as well as the selected historical consolidated financial data that is included in our Annual Report filed on Form 10-K for the year ended December 31, 2020.

 

Unless stated otherwise, all currency amounts are presented in thousands of U.S. dollars (000s).

 

Overview

 

General

DMC Global Inc. (“DMC”) operates two technical product and process business segments serving the energy, industrial and infrastructure markets. These segments, DynaEnergetics and NobelClad, operate globally through an international network of manufacturing, distribution and sales facilities.

 Our diversified segments each provide a suite of unique technical products to niche sectors of the global energy, industrial and infrastructure markets, and each has established a strong or leading position in the markets in which it participates. With an underlying focus on generating free cash flow, our objective is to sustain and grow the market share of our businesses through increased market penetration, development of new applications, and research and development of new and adjacent products that can be sold across our global network of sales and distribution facilities. We routinely explore acquisitions of related businesses that could strengthen or add to our existing product portfolios, or expand our geographic footprint and market presence. We also seek acquisition opportunities outside our current markets that would complement our existing businesses and enable us to build a stronger and more diverse company.

DynaEnergetics

DynaEnergetics designs, manufactures and distributes products utilized by the global oil and gas industry principally for the perforation of oil and gas wells. These products are sold to oilfield service companies in the U.S., Europe, Canada, Africa, the Middle East, and Asia. DynaEnergetics also sells directly to end-users. The market for perforating products, which are used during the well completion process, generally corresponds with oil and gas exploration and production activity. Exploration activity over the last several years has led to increasingly complex well completion operations, which in turn has increased the demand for high quality and technically advanced perforating products.

Cost of products sold for DynaEnergetics includes the cost of metals, explosives and other raw materials used to manufacture shaped charges, detonating products and perforating guns as well as employee compensation and benefits, freight in, depreciation of manufacturing facilities and equipment, manufacturing supplies and other manufacturing overhead expenses.

NobelClad

NobelClad produces explosion-welded clad metal plates for use in the construction of corrosion resistant industrial processing equipment and specialized transition joints. While a significant portion of the demand for our clad metal products is driven by maintenance and retrofit projects at existing chemical processing, petrochemical processing, oil refining, and aluminum smelting facilities, new plant construction and large plant expansion projects also account for a significant portion of total demand. These industries tend to be cyclical in nature and timing of new order inflow remains difficult to predict. We use backlog as a primary means to measure the immediate outlook for our NobelClad business. We define “backlog” at any given point in time as all firm, unfulfilled purchase orders and commitments at that time. Most firm purchase orders and commitments are realized, and we expect to fill most backlog orders within the following 12 months. NobelClad’s backlog increased to $43,191 at March 31, 2021 from $39,884 at December 31, 2020.

Cost of products sold for NobelClad includes the cost of metals and alloys used to manufacture clad metal plates, the cost of explosives, employee compensation and benefits, freight in, outside processing costs, depreciation of manufacturing facilities and equipment, manufacturing supplies and other manufacturing overhead expenses.

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Factors Affecting Results

•Consolidated sales of $55,658 decreased 3% versus the fourth quarter of 2020 primarily related to the impact of the February 2021 winter storm in Texas, which led to a two-week shutdown for certain customers and approximately $5,100 of sales at DynaEnergetics that were pushed out of the first quarter. NobelClad also experienced shipping delays on approximately $1,700 of sales caused by timing of final customer inspection and approval of clad plates prior to shipment and the impact of widespread logistical bottlenecks in Europe in March 2021. Consolidated sales decreased 24% versus the first quarter of 2020 as the COVID-19 pandemic drove down energy demand, which negatively impacted North American unconventional drilling and completion activity and sales at DynaEnergetics. The winter storm in Texas and shipping delays at NobelClad also unfavorably impacted the year-over-year comparisons.

•DynaEnergetics sales of $38,172 in the first quarter of 2021 increased 8% compared with the fourth quarter of 2020 primarily due to a sequential increase in international sales, partially offset by the impact of the February 2021 winter storm in Texas. The 28% decline in sales compared with the first quarter of 2020 primarily was attributable to lower energy demand due to the COVID-19 pandemic, which negatively impacted unconventional drilling and completion activity in North America.

•NobelClad’s sales of $17,486 in the first quarter of 2021 decreased 20% compared to the fourth quarter of 2020 and decreased 14% compared with the first quarter of 2020. The decline relates to shipment delays on several orders.

•Consolidated gross profit of 23% in the first quarter of 2021 decreased from 33% in the first quarter of 2020. The decline occurred at DynaEnergetics due to lower average selling prices and under-absorption of fixed overhead and research and development expenses from a 28% year-over-year sales decline. Additionally, DynaEnergetics incurred one-time costs associated with a one-week production shutdown during the February 2021 winter storm in Texas.

•Consolidated selling, general and administrative expenses were $13,172 in the first quarter of 2021 compared with $16,653 in the first quarter of 2020. The decrease primarily was due to reductions in provisions for expected credit losses, reduced headcount, lower variable bonus expenses, and reduced travel expenses. Consolidated selling, general and administrative expenses in the first quarter of 2021 included approximately $1,000 of patent litigation expenses related to actions we have taken against companies that we believe have infringed on DynaEnergetics’ patents.

•Restructuring expenses of $127 in the first quarter of 2021 related to severance and legal expense for NobelClad relating to closing manufacturing operations in France in 2018. Restructuring expenses of $1,116 in the first quarter of 2020 primarily related to downsizing our direct labor workforce in response to the COVID-19 impact on demand at DynaEnergetics.

•Net cash of $66,780 (comprised of $66,780 in cash and marketable securities net of $0 of total debt) increased $24,121 from $42,659 (comprised of $53,923 in cash and marketable securities net of $11,264 of total debt) at December 31, 2020, primarily due to sales under our ongoing at-the-market equity offering program (“ATM equity program”).

Outlook

The early momentum in North America’s unconventional oil and gas sector in the first quarter of 2021 was disrupted by the February winter storm in Texas, our largest regional market. DynaEnergetics’ U.S. manufacturing and assembly operations experienced a one-week production shutdown and approximately $5,100 of sales related to customer shutdowns were pushed out of the first quarter. Unconventional well completion activity began to accelerate at the end of the first quarter indicating that DynaEnergetics’ end markets are improving. However, a sustained recovery for our business is predicated on stable oil prices, a successful global COVID-19 vaccine rollout, and achieving higher prices for our perforating systems. Additionally, in 2021 we expect to incur increased expenses related to litigation necessary to protect and enforce our intellectual property and patents.

NobelClad experienced shipping delays in the first quarter of 2021 related to the timing of customer inspection and approval of clad plates prior to shipment and the impact of widespread logistical bottlenecks in Europe in March 2021. NobelClad ended the first quarter of 2021 with a $43,191 backlog, and the business has made progress on a variety of application and product-development initiatives.

From time to time, we also may continue to use our ATM equity program, which was commenced in October 2020, to raise additional capital efficiently and responsibly. During the first quarter of 2021, we sold 397,820 shares of common stock at a weighted average price per share of $64.47 through our ATM equity program, and received net proceeds of $25,262.

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Use of Non-GAAP Financial Measures

Adjusted EBITDA is a non-GAAP (generally accepted accounting principles) measure that we believe provides an important indicator of our ongoing operating performance and that we use in operational and financial decision-making. We define EBITDA as net income or loss plus or minus net interest, taxes, depreciation and amortization. Adjusted EBITDA excludes from EBITDA stock-based compensation, restructuring and impairment charges and, when appropriate, other items that management does not utilize in assessing DMC’s operating performance (as further described in the tables below). As a result, internal management reports used during monthly operating reviews feature Adjusted EBITDA and certain management incentive awards are based, in part, on the amount of Adjusted EBITDA achieved during the year.

Adjusted operating income is defined as operating income plus restructuring and impairment charges and, when appropriate, other items that management does not utilize in assessing DMC’s operating performance.

Adjusted net income is defined as net income plus restructuring and impairment charges and, when appropriate, other items that management does not utilize in assessing DMC’s operating performance. Adjusted diluted earnings per share is defined as diluted earnings per share plus restructuring and impairment charges and, when appropriate, other items that management does not utilize in assessing DMC’s operating performance.

Adjusted operating income, adjusted net income, and adjusted diluted earnings per share are presented because management believes these measures are useful to understand the effects of restructuring and impairment charges on DMC’s operating income, net income and diluted earnings per share, respectively.

Net cash is a non-GAAP measure we use to supplement information in our Consolidated Financial Statements. We define net cash as total cash, cash equivalents and marketable securities less total debt. In addition to conventional measures prepared in accordance with GAAP, the Company uses this information to evaluate its performance, and we believe that certain investors may do the same.

The presence of non-GAAP financial measures in this report is not intended to suggest that such measures be considered in isolation or as a substitute for, or as superior to, DMC’s GAAP information, and investors are cautioned that the non-GAAP financial measures are limited in their usefulness. Because not all companies use identical calculations, DMC’s presentation of non-GAAP financial measures may not be comparable to similarly titled measures of other companies.

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Consolidated Results of Operations

Three months ended March 31, 2021 compared with three months ended March 31, 2020

			Three months ended March 31,
			2021						2020						$ change						% change
Net sales			$	55,658					$	73,564					$	(17,906)					(24)		%
Gross profit			12,913						24,470						(11,557)						(47)		%
Gross profit percentage			23.2		%				33.3		%
COSTS AND EXPENSES:
General and administrative expenses			7,929						8,126						(197)						(2)		%
% of net sales			14.2		%				11.0		%
Selling and distribution expenses			5,243						8,527						(3,284)						(39)		%
% of net sales			9.4		%				11.6		%
Amortization of purchased intangible assets			324						354						(30)						(8)		%
% of net sales			0.6		%				0.5		%
Restructuring expenses			127						1,116						(989)						(89)		%
Operating (loss) income			(710)						6,347						(7,057)						(111)		%
Other income, net			394						115						279						243		%
Interest expense, net			(135)						(238)						103						43		%
(Loss) income before income taxes			(451)						6,224						(6,675)						(107)		%
Income tax (benefit) provision			(883)						2,069						(2,952)						(143)		%
Net income			432						4,155						(3,723)						(90)		%
Adjusted EBITDA			$	4,047					$	11,287					$	(7,240)					(64)		%

Net sales decreased $17,906 compared with the first quarter of 2020 due to the impact of lower energy demand caused by the COVID-19 pandemic, which negatively impacted unconventional drilling and completion activity in North America. The first quarter of 2021 also was adversely impacted by sales at DynaEnergetics that were pushed out of the first quarter due to the February 2021 winter storm in Texas, DynaEnergetics’ largest regional market. NobelClad also experienced shipping delays caused by timing of final customer inspection and approval of clad plates prior to shipment and the impact of widespread logistical bottlenecks in Europe in March 2021.

Gross profit percentage decreased to 23.2% compared with the first quarter 2020 primarily due to the impact of lower volume on fixed manufacturing overhead expenses and lower average selling prices. Additionally, DynaEnergetics incurred one-time costs associated with the one-week production shutdown and sales pushed out of the first quarter related to the February 2021 winter storm in Texas. These items were partially offset by the benefit of the Employee Retention Credit (“ERC”) under the Coronavirus Aid, Relief, and Economic Security Act, as amended (“CARES Act”).

General and administrative expenses decreased $197 compared with the first quarter of 2020 primarily due to headcount reductions and lower payroll-related costs by $193 and a $335 CARES Act benefit, partially offset by increases in other benefits costs.

Selling and distribution expenses decreased $3,284 compared with the first quarter of 2020 primarily due to reductions in provisions for expected credit losses by $2,261, reductions in salaries, benefits, other-payroll related costs, and variable bonus expenses by $466, including a $395 CARES Act benefit, reductions in travel expenses by $273, and lower shipping and freight costs by $141 related to lower sales volume.

Restructuring expenses of $127 in 2021 primarily related to additional severance liabilities which were agreed to with local labor authorities for employees terminated as part of closing manufacturing operations in France in 2018. Expenses in 2020 primarily related to downsizing our direct labor workforce at DynaEnergetics in response to declining crude oil prices and corresponding demand for well perforating systems due to the COVID-19 pandemic.

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Operating loss of $710 primarily was due to lower earnings at DynaEnergetics in the first quarter of 2021.

Other income, net of $394 in 2021 primarily related to gain on the sale of a fully depreciated fixed asset by DynaEnergetics combined with net unrealized and realized foreign currency exchange gains. Currency gains and losses can arise when subsidiaries enter into inter-company and third-party transactions that are denominated in currencies other than their functional currency, including foreign currency forward contracts used to offset foreign exchange rate fluctuations on certain foreign currency denominated asset and liability positions.

Interest expense, net of $135 decreased compared with the first quarter of 2020 primarily due to a lower average outstanding debt balance in 2021.

Income tax benefit of $883 was recorded on a pretax loss of $451. Our most significant operations are in the United States, which has a 21% statutory tax rate and Germany, which has a 33% statutory tax rate. The mix of pretax income between these jurisdictions is one of the main drivers of the difference between our 21% statutory tax rate and our effective tax rate. The effective rate was impacted favorably by discrete stock-based compensation windfall benefits of $720. The rate was also impacted unfavorably by geographic mix of pretax income, state taxes, and certain compensation expenses that are not tax deductible in the U.S. We recorded an income tax provision of $2,069 on pretax income of $6,224 for the first quarter of 2020. The effective rate was impacted unfavorably by geographic mix of pretax income, state taxes, and certain compensation expenses that are not tax deductible in the U.S. The effective rate was also impacted favorably by discrete items of $371.

Net income for the three months ended March 31, 2021 was $432, or $0.03 per diluted share, compared to net income of $4,155, or $0.28 per diluted share, for the same period in 2020.

Adjusted EBITDA decreased compared with the first quarter of 2020 primarily due to the factors discussed above. See “Overview” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.

			Three months ended March 31,
			2021						2020
Net income			$	432					$	4,155
Interest expense, net			135						238
Income tax (benefit) provision			(883)						2,069
Depreciation			2,698						2,352
Amortization of purchased intangible assets			324						354
EBITDA			2,706						9,168
Restructuring expenses			127						1,116
Stock-based compensation			1,608						1,118
Other income, net			(394)						(115)
Adjusted EBITDA			$	4,047					$	11,287

Adjusted Net Income and Adjusted Diluted Earnings per Share decreased compared with the first quarter of 2020 due to the factors discussed above. See "Overview" above for the explanation of the use of non-GAAP measures. The following is a reconciliation of the most directly comparable GAAP measures to Adjusted Net Income and Adjusted Diluted Earnings Per Share.

			Three months ended March 31, 2021
			Pre-Tax						Tax (Benefit)						Net						Diluted weighted average shares outstanding						Diluted EPS
Net income, as reported			$	(451)					$	(883)					$	432					15,463,923						$	0.03
Restructuring programs:
NobelClad			127						—						127						15,463,923						0.01
Adjusted net income			$	(324)					$	(883)					$	559					15,463,923						$	0.04

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			Three months ended March 31, 2020
			Pre-Tax						Tax Provision						Net						Diluted weighted average shares outstanding						Diluted EPS
Net income, as reported			$	6,224					$	2,069					$	4,155					14,717,836						$	0.28
Restructuring programs:
DynaEnergetics			938						—						938						14,717,836						0.06
NobelClad			59						—						59						14,717,836						—
Corporate			119						—						119						14,717,836						0.01
Adjusted net income			$	7,340					$	2,069					$	5,271					14,717,836						$	0.35

Business Segment Financial Information

We primarily evaluate performance and allocate resources based on segment revenues, operating income and adjusted EBITDA as well as projected future performance. Segment operating income is defined as revenues less expenses identifiable to the segment. Segment operating income will reconcile to consolidated income before income taxes by deducting unallocated corporate expenses, including stock-based compensation, net other expense, and net interest expense.

DynaEnergetics

Three months ended March 31, 2021 compared with three months ended March 31, 2020

			Three months ended March 31,
			2021						2020						$ change						% change
Net sales			$	38,172					$	53,220					$	(15,048)					(28)		%
Gross profit			8,434						19,476						(11,042)						(57)		%
Gross profit percentage			22.1		%				36.6		%
COSTS AND EXPENSES:
General and administrative expenses			3,574						3,832						(258)						(7)		%
Selling and distribution expenses			3,140						5,840						(2,700)						(46)		%
Amortization of purchased intangible assets			199						260						(61)						(23)		%
Restructuring expenses			—						938						(938)						(100)		%
Operating income			1,521						8,606						(7,085)						(82)		%
Adjusted EBITDA			$	3,521					$	11,316					$	(7,795)					(69)		%

Net sales were $15,048 lower than in the first quarter of 2020 due to sharply lower demand for well perforating systems at DynaEnergetics as the COVID-19 pandemic-related collapse in oil and gas demand led to a downturn in well completions in the U.S. Sales in the first quarter of 2021 were adversely impacted by sales that were pushed out of the first quarter due to the February 2021 winter storm in Texas, DynaEnergetics’ largest regional market.

Gross profit percentage decreased to 22.1% compared with the first quarter of 2020 primarily due to significant slowdown in market activity leading to lower fixed cost absorption and lower average selling prices. First quarter 2021 gross profit percentage was also adversely affected by one-time costs associated with a one-week production shutdown and sales that were pushed out of the first quarter due to the February 2021 winter storm in Texas.

General and administrative expenses decreased $258 compared with the first quarter of 2020 primarily due to reductions in salaries and wages, variable bonus and other payroll-related costs by $398, partially offset by an increase in outside service costs by $173.

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Selling and distribution expenses decreased $2,700 compared with the first quarter of 2020 primarily due to reductions in provisions for expected credit losses by $1,949, salaries and wages, variable bonus and other payroll-related costs by $358, travel expenses by $186, and shipping and freight costs by $139 on decreased sales volumes.

Restructuring expenses in 2020 primarily related to downsizing our direct labor workforce at DynaEnergetics in response to declining crude oil prices and corresponding demand for well perforating systems due to the COVID-19 pandemic.

Operating income decreased $7,085 compared with the first quarter of 2020 primarily due to the impact of lower volume on fixed manufacturing overhead costs, and lower average selling prices, partially offset by reduced general and administrative and selling and distribution spending.

Adjusted EBITDA decreased compared with the first quarter of 2020 due to the factors discussed above. See “Overview” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.

			Three months ended March 31,
			2021						2020
Operating income			$	1,521					$	8,606
Adjustments:
Restructuring expenses			—						938
Adjusted operating income			1,521						9,544
Depreciation			1,801						1,512
Amortization of purchased intangibles			199						260
Adjusted EBITDA			$	3,521					$	11,316

NobelClad

Three months ended March 31, 2021 compared with three months ended March 31, 2020

			Three months ended March 31,
			2021						2020						$ change						% change
Net sales			$	17,486					$	20,344					$	(2,858)					(14)		%
Gross profit			4,617						5,154						(537)						(10)		%
Gross profit percentage			26.4		%				25.3		%
COSTS AND EXPENSES:
General and administrative expenses			813						974						(161)						(17)		%
Selling and distribution expenses			1,948						2,551						(603)						(24)		%
Amortization of purchased intangible assets			125						94						31						33		%
Restructuring expenses			127						59						68						115		%
Operating income			1,604						1,476						128						9		%
Adjusted EBITDA			$	2,670					$	2,369					$	301					13		%

Net sales of $17,486 decreased compared with the first quarter of 2020 primarily due to the timing of shipment of projects out of backlog, including shipment delays related to timing of final customer inspection and approval of clad plates prior to shipping and the impact of widespread logistical bottlenecks in Europe in March 2021.

Gross profit percentage of 26.4% increased compared with the first quarter of 2020 primarily due to a more favorable project mix.

General and administrative expenses decreased $161 compared with the first quarter of 2020 primarily due to reductions in salaries and wages, variable bonus and other payroll-related costs by $74 and outside service costs by $63.

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Selling and distribution expenses decreased $603 compared with the first quarter of 2020 primarily due to reductions in provisions for expected credit losses by $312, salaries and wages, variable bonus and other payroll-related costs by $108, travel expenses by $86, and outside service costs by $54.

Restructuring expenses of $127 in 2021 related to additional severance liabilities which were agreed to with local labor authorities for employees terminated as part of closing manufacturing operations in France in 2018.

Operating income increased $128 compared with the first quarter of 2020 primarily due to lower general and administrative and selling expenses and a more favorable project mix, partially offset by the impact of lower net sales.

Adjusted EBITDA increased compared with the first quarter of 2020 primarily due to the factors discussed above. See “Overview” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.

			Three months ended March 31,
			2021						2020
Operating income			1,604						1,476
Adjustments:
Restructuring expenses			127						59
Adjusted operating income			1,731						1,535
Depreciation			814						740
Amortization of purchased intangibles			125						94
Adjusted EBITDA			2,670						2,369

Liquidity and Capital Resources

 

We have historically financed our operations from a combination of internally generated cash flow, revolving credit borrowings, and various long-term debt arrangements. The COVID-19 pandemic drove a sharp decline in DynaEnergetics' core oil and gas end markets and corresponding well-completion activity and demand for its perforating systems late in the first quarter of 2020. In April 2020, DMC announced several cost-containment actions to reduce our activity-based cost structure, limit spending and protect our balance sheet. These actions included reducing our workforce by 32%, implementing reduced work weeks at DynaEnergetics, significantly cutting selling, general and administrative expenses, reducing our capital expenditures budget by 50% and suspending the quarterly dividend. To further preserve liquidity, we entered into an amendment to our credit facility on June 25, 2020 to, among other things, maintain our $50,000 borrowing capacity under our revolving credit facility and to waive the debt service coverage ratio requirement for the quarters ending September 30, 2020, December 31, 2020, and March 31, 2021. While the decline in crude oil prices and oil and gas demand accelerated early in the second quarter of 2020, sales volume has improved in the three consecutive quarters through the first quarter of 2021. Though NobelClad customers in the downstream energy industry have delayed various projects, NobelClad’s order backlog increased to $43,191 at March 31, 2021 from $39,884 at December 31, 2020.

We have also taken action to allow flexibility in accessing the capital markets. We filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission, which became effective on May 28, 2020, pursuant to which we registered for sale up to $150 million of certain of our securities from time to time and on terms that we may determine in the future. On October 22, 2020, we commenced an at-the-market equity program under the shelf registration statement, which allows us to sell and issue up to $75 million in shares of our common stock from time to time, and since the inception of the program during the fourth quarter of 2020 we sold 1,006,180 shares of common stock for net proceeds of $51,002. In connection with the commencement of the at-the-market equity program, we also amended our credit facility to waive the requirement to repay outstanding amounts under the credit facility with proceeds from the program. Our ability to access this capital may be limited by market conditions at the time of any future potential sale. While we were able to sell shares during the fourth quarter of 2020 and first quarter of 2021, there can be no assurance that any future capital will be available on acceptable terms or at all.

These measures enabled us to improve our net cash position from $42,659 at December 31, 2020 to $66,780 at March 31, 2021, maintain our fully undrawn and available $50,000 revolving credit facility, repay our capital expenditure term loan in full, and provide covenant relief for three quarters.

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With due consideration of the COVID-19 global pandemic and the resulting severe disruption of our end markets, we believe that cash flow from operations, funds available under our current credit facilities and any future replacement thereof, and potential proceeds from our at-the-market offering, will be sufficient to fund the working capital, debt service, and other capital expenditure requirements of our current business operations for the foreseeable future. We may also execute capital markets transactions to raise additional funds if we believe market conditions are favorable. Nevertheless, our ability to generate sufficient cash flows from operations will depend upon our success in executing our strategies. If we are unable to (i) realize sales from our backlog; (ii) secure new customer orders; (iii) continue selling products at profitable margins; and (iv) continue to implement cost-effective internal processes, our ability to meet cash requirements through operating activities could be impacted. Furthermore, any restriction on the availability of borrowings under our credit facilities could negatively affect our ability to meet future cash requirements. We will continue to monitor the continuing unprecedented financial and market conditions, including the impacts COVID-19 will have on credit availability and capital markets. We also continue to pursue potential acquisitions; the completion of any acquisition may significantly increase our capital requirements.

Debt facilities

 

As of March 31, 2021 we had no outstanding borrowings under our credit facility. On March 8, 2018, we entered into a five-year $75,000 credit facility which replaced in its entirety our prior syndicated credit facility entered into on February 23, 2015. The credit facility allows for revolving loans of up to $50,000 with a $20,000 US dollar equivalent sublimit for alternative currency loans. In addition, the agreement provides for a $25,000 Capex Facility which was used to assist in financing our DynaEnergetics manufacturing expansion project in Blum, Texas. At the end of year one, the Capex Facility converted to a term loan which was amortizable at 12.5% of principal per year with a balloon payment for the outstanding balance upon the credit facility maturity date in 2023. In February 2021, we repaid the outstanding Capex Facility balance of $11,750.

The facility has a $100,000 accordion feature to increase the commitments under the revolving loan class and/or to add a term loan subject to approval by applicable lenders. We entered into the credit facility with a syndicate of three banks, with KeyBank, N.A. acting as administrative agent. The syndicated credit facility is secured by the assets of DMC including accounts receivable, inventory, and fixed assets, as well as guarantees and share pledges by DMC and its subsidiaries.

Borrowings under the $50,000 revolving loan can be in the form of one-, two-, three-, or six-month LIBOR loans. Additionally, US dollar borrowings on the revolving loan can be in the form of Base Rate loans (Base Rate borrowings are based on the greater of the administrative agent’s Prime rates, an adjusted Federal Funds rate or an adjusted LIBOR rate). LIBOR loans bear interest at the applicable LIBOR rate plus an applicable margin (varying from 1.50% to 3.00%). Base Rate loans bear interest at the defined Base rate plus an applicable margin (varying from 0.50% to 2.00%).

Borrowings under the $20,000 Alternate Currency sublimit can be in euros, Canadian dollars, pounds sterling, and in any other currency acceptable to the administrative agent. Alternative currency borrowings denominated in euros, pounds sterling, and any other currency that is dealt with on the London Interbank Deposit Market shall be comprised of LIBOR loans and bear interest at the LIBOR rate plus an applicable margin (varying from 1.50% to 3.00%).

On June 25, 2020, we entered into an amendment ("Amendment") to the credit facility. The Amendment waives the debt service coverage ratio covenant for the quarters ending September 30, 2020, December 31, 2020, and March 31, 2021. The debt service coverage ratio minimum of 1.35 to 1 was applicable for the quarter ending June 30, 2020 and will resume beginning with the quarter ending June 30, 2021 and thereafter.

Additionally, the Amendment adds a Minimum Liquidity covenant requiring the total of cash and cash equivalents held by U.S. subsidiaries and available borrowing capacity under the credit facility to exceed $10,000 for the quarters ending September 30, 2020, December 31, 2020, and March 31, 2021. The Minimum Liquidity covenant is not applicable after the quarter ending March 31, 2021.

During the period from the date of the Amendment through August 31, 2020, borrowings outstanding under the credit facility bore interest at LIBOR plus a margin of 1.75% or at a Base Rate (as defined in the credit facility) plus a margin of 0.75%. For the period from September 1, 2020 through the date of receipt of the covenant compliance certificate for the quarter ending March 31, 2021, borrowings outstanding under the credit facility will bear interest at a LIBOR plus a margin of 1.75% to 3.00% or at a Base Rate plus a margin of 0.75% to 2.00%. In each case, the margin is based on the Company's Leverage Ratio of Consolidated Funded Indebtedness (as defined in the credit facility) on the last day of such period to Consolidated Pro Forma EBITDA for such period. Additionally, the Amendment sets the minimum LIBOR at 0.75%.

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As of March 31, 2021 our available borrowing capacity was $50,000. Future borrowings are subject to compliance with financial covenants that could significantly limit such availability.

 

As of March 31, 2021, there were two significant financial covenants under our credit facility, a debt-to-EBITDA leverage ratio (“leverage ratio”) and a minimum liquidity ratio. The leverage ratio is defined in the credit facility for any trailing four quarter period as the ratio of Consolidated Funded Indebtedness (as defined in the agreement) on the last day of such period to Consolidated Pro Forma EBITDA for such period. For the March 31, 2021 reporting period, the maximum leverage ratio permitted by our syndicated credit facility was 3.00 to 1.0. The actual leverage ratio as of March 31, 2021, calculated in accordance with the credit facility, as amended, was 0.0 to 1.0.

The Minimum Liquidity covenant requires the total of cash and cash equivalents held by U.S. subsidiaries and available borrowing capacity under the credit facility to exceed $10,000. The liquidity as of March 31, 2021, calculated in accordance with the credit facility, as amended, was $83,565.

Our credit facility, as amended, also includes various other covenants and restrictions, certain of which relate to the payment of dividends or other distributions to stockholders, redemption of capital stock, incurrence of additional indebtedness, and mortgaging and pledging or disposition of major assets. As of March 31, 2021, we were in compliance with all financial covenants and other provisions of our debt agreements.

We also maintain a line of credit with a German bank for certain European operations. This line of credit provides a borrowing capacity of €7,000.

Other contractual obligations and commitments

 

Our long-term debt balance decreased to $0 at March 31, 2021 from $8,139 at December 31, 2020. Our other contractual obligations and commitments have not materially changed since December 31, 2020.

Cash flows provided by operating activities

 

Net cash provided by operating activities was $2,176 for the three months ended March 31, 2021 compared with $4,920 in the same period last year with the decrease primarily due to the decline in net income. Cash used in net working capital in 2021 included higher accounts receivable, higher inventory build in anticipation of increased sales activity in the second quarter due in part to shipping delays at NobelClad and the impact of the winter storm on sales at DynaEnergetics in the first quarter, as well as higher prepaid expenses and other assets driven by timing of annual insurance payments and recurring prepaid service contracts, partially offset by higher accounts payable and accrued expenses resulting from increased purchasing activity.

Cash flows provided by (used in) investing activities

 

Net cash flows provided by investing activities for the three months ended March 31, 2021 of $3,715 primarily related to proceeds from maturities of marketable securities of $4,799 from U.S. treasuries that were converted to cash upon maturity, partially offset by acquisitions of property, plant and equipment. Net cash flows used in investing activities for the three months ended March 31, 2020 totaled $5,121 and related to the acquisitions of property, plant and equipment at DynaEnergetics.

Cash flows provided by (used in) financing activities

 

Net cash flows provided by financing activities for the three months ended March 31, 2021 of $11,077 included proceeds from our ATM equity program of $25,262 partially offset by repayment in full of the Capex Facility of $11,750 and treasury stock purchases of $2,435. Net cash flows used in financing activities for the three months ended March 31, 2020 of $3,681 was due to dividend payments, treasury stock purchases, and repayments on the Capex Facility.

 

Payment of Dividends

 

We paid a quarterly cash dividend of $0.125 per share in the first quarter of 2020. In April 2020, we suspended the quarterly dividend indefinitely due to the uncertain economic outlook caused by the COVID-19 pandemic. Future dividends may be affected by, among other items, our views on potential future capital requirements, future business prospects, debt covenant compliance considerations, changes in income tax laws, and any other factors that our Board of Directors deems relevant. Any determination to pay cash dividends will be at the discretion of the Board of Directors.

 

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Critical Accounting Policies

 

Except as described below, our critical accounting policies have not changed from those reported in our Annual Report on Form 10-K for the year ended December 31, 2020.

ITEM 3.  Quantitative and Qualitative Disclosure about Market Risk

 

There were no material changes in market risk for changes in foreign currency exchange rates and interest rates from the information provided in Item 7A – Quantitative and Qualitative Disclosures About Market Risk in the company's Annual Report on Form 10-K for the year ended December 31, 2020.

ITEM 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report, and they have concluded that these controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There were no changes that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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Part II - OTHER INFORMATION

Item 1. Legal Proceedings

 

Please see Note 12 to the Condensed Consolidated Financial Statements.

Item 1A. Risk Factors

 

There have been no significant changes in the risk factors identified as being attendant to our business in our Annual Report on Form 10-K for the year ended December 31, 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In connection with the vesting of Company restricted common stock under our equity incentive plans during the first quarter of 2021, we retained shares of common stock in satisfaction of withholding tax obligations. These shares are held as treasury shares by the Company.

						Total number of shares purchased (1) (2)						Average price paid per share
January 1 to January 31, 2021						—						$	—
February 1 to February 28, 2021						38,001						$	65.75
March 1 to March 31, 2021						18,100						$	65.37
Total						56,101						$	65.63

(1) Share purchases in 2021 included 37,723 shares withheld to offset tax withholding obligations that occurred upon the vesting of restricted common stock under the terms of the 2016 Equity Incentive Plan and 18,378 share purchases related to the participant elections to diversify contributions of equity awards into other investment options available to participants in the Company’s Amended and Restated Non-Qualified Deferred Compensation Plan.

(2) As of March 31, 2021, the maximum number of shares that may yet be purchased would not exceed the employees’ portion of taxes withheld on unvested shares (312,426) and potential purchases upon participant elections to diversify equity awards held in the Company’s Amended and Restated Non-Qualified Deferred Compensation Plan (182,202) into other investment options available to participants in the Plan.

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Our Coolspring property is subject to regulation by the Federal Mine Safety and Health Administration (“MSHA”) under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”). Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (The “Dodd-Frank Act”), issuers that are operators, or that have a subsidiary that is an operator, of a coal or other mine in the United States are required to disclose in their periodic reports filed with the SEC information regarding specified health and safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities. During the quarter ended March 31, 2021, we had no such specified health and safety violations, orders or citations, related assessments or legal actions, mining-related fatalities, or similar events in relation to our United States operations requiring disclosure pursuant to Section 1503(a) of the Dodd-Frank Act.

 

Item 5. Other Information

 

None.

Item 6. Exhibits

 

10.8 Employment Agreement dated May 26, 2020, from the Company to Ian Grieves.

31.1 Certification of the President and Chief Executive Officer pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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Table of Contents

 

31.2 Certification of the Chief Financial Officer pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101 The following materials from the Quarterly Report on Form 10-Q of DMC Global Inc. for the quarter ended March 31, 2021, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statement of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.*

*    Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

									DMC Global Inc.
									(Registrant)
Date:			April 22, 2021						/s/ Michael Kuta
									Michael Kuta, Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)

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