Company Quick10K Filing
Quick10K
Dynamic Materials
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$69.06 15 $1,030
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-25 Earnings, Exhibits
8-K 2019-05-10 Shareholder Vote, Other Events
8-K 2019-04-25 Earnings, Exhibits
8-K 2019-04-03 Earnings, Exhibits
8-K 2019-02-27 Officers, Exhibits
8-K 2019-02-21 Earnings, Exhibits
8-K 2018-10-25 Earnings, Exhibits
8-K 2018-08-22 Amend Bylaw, Exhibits
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-06-01 Shareholder Vote, Other Events
8-K 2018-02-27 Officers, Exhibits
MD Mednax 2,580
CATS Catasys 275
JNCE Jounce Therapeutics 184
KTCC Key Tronic 60
GETH Green Envirotech Holdings 0
HGBL Heritage Global 0
AGUSA AG Acquisition Group 0
ALPP Alpine 4 Technologies 0
SYEV Seychelle Environmental Technologies 0
INLL Intellisense Solutions 0
BOOM 2019-06-30
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 boom-exx311_q2x06302019.htm
EX-31.2 boom-exx312_q2x06302019.htm
EX-32.1 boom-exx321_q2x06302019.htm
EX-32.2 boom-exx322_q2x06302019.htm

Dynamic Materials Earnings 2019-06-30

BOOM 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a0630201910q.htm DMC GLOBAL SECOND QUARTER 2019 10-Q Document
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
Form 10-Q
 (Mark One)
 
x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019
 
OR
 
o         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)
 
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  x  No  o
 
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  x  No  o
 
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 o
 
Accelerated filer x
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
 
Emerging growth company o

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 o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 under the Act).  Yes  o  No x
 
The number of shares of Common Stock outstanding was 14,646,065 as of July 25, 2019.
 

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 projections, guidance and other statements regarding the expected impacts of new accounting standards and the timing of our implementation thereof, our business strategy, the level of demand for our perforating products and factors affecting this demand and our backlog. 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, 2018 and such things as the following: changes in global economic conditions; 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; 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; and general economic conditions, both domestic and foreign, impacting our business and the business of the end-market users we serve. 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.




INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


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)
 
June 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
14,881

 
$
13,375

Accounts receivable, net of allowance for doubtful accounts of $428 and $513, respectively
76,800

 
59,709

Inventories
59,980

 
51,074

Prepaid expenses and other
6,650

 
8,058

Total current assets
158,311

 
132,216

Property, plant and equipment
169,178

 
160,725

Less - accumulated depreciation
(63,946
)
 
(65,585
)
Property, plant and equipment, net
105,232

 
95,140

Purchased intangible assets, net
7,375

 
8,589

Deferred tax assets
3,656

 
4,001

Other assets
10,610

 
472

Total assets
$
285,184

 
$
240,418

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
36,179

 
$
24,243

Accrued expenses
10,048

 
8,967

Accrued anti-dumping penalties

 
8,000

Dividend payable
299

 
295

Accrued income taxes
9,419

 
9,545

Accrued employee compensation and benefits
7,170

 
9,250

Contract liabilities
2,076

 
1,140

Current portion of long-term debt
3,125

 
3,125

Other current liabilities
2,016

 

Total current liabilities
70,332

 
64,565

Long-term debt
32,744

 
38,230

Deferred tax liabilities
458

 
379

Other long-term liabilities
18,149

 
2,958

Total liabilities
121,683

 
106,132

Commitments and contingencies (Note 11)

 

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; 14,647,091 and 14,905,776 shares outstanding, respectively
756

 
749

Additional paid-in capital
82,853

 
80,077

Retained earnings
121,107

 
89,291

Other cumulative comprehensive loss
(33,895
)
 
(35,014
)
Treasury stock, at cost, and company stock held for deferred compensation, at par; 460,823 and 82,186 shares, respectively
(7,320
)
 
(817
)
Total stockholders’ equity
163,501

 
134,286

Total liabilities and stockholders’ equity
$
285,184

 
$
240,418

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

3

DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Share and Per Share Data)
(unaudited)


 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Net sales
$
110,954

 
$
80,915

 
$
211,089

 
$
148,228

Cost of products sold
68,881

 
54,140

 
132,611

 
98,700

Gross profit
42,073

 
26,775

 
78,478

 
49,528

Costs and expenses:
 

 
 

 
 

 
 

General and administrative expenses
9,460

 
9,743

 
18,628

 
17,920

Selling and distribution expenses
7,239

 
5,795

 
13,548

 
11,007

Amortization of purchased intangible assets
397

 
791

 
795

 
1,596

Restructuring expenses, net
324

 
217

 
402

 
361

Anti-dumping duty penalties

 

 

 
3,103

Total costs and expenses
17,420

 
16,546

 
33,373

 
33,987

Operating income
24,653

 
10,229

 
45,105

 
15,541

Other income (expense):
 

 
 

 
 

 
 

Other income (expense), net
343

 
(327
)
 
322

 
(704
)
Interest expense, net
(409
)
 
(136
)
 
(782
)
 
(601
)
Income before income taxes
24,587

 
9,766

 
44,645

 
14,236

Income tax provision
7,343

 
3,394

 
12,231

 
3,944

Net income
$
17,244

 
$
6,372

 
$
32,414

 
$
10,292

 
 
 
 
 
 
 
 
Net income per share
 

 
 

 
 

 
 

Basic
$
1.17

 
$
0.43

 
$
2.20

 
$
0.69

Diluted
$
1.15

 
$
0.43

 
$
2.17

 
$
0.69

Weighted-average shares outstanding:
 

 
 

 
 

 
 

Basic
14,647,019

 
14,534,016

 
14,624,718

 
14,491,569

Diluted
14,899,987

 
14,534,016

 
14,849,816

 
14,491,569

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.02

 
$
0.02

 
$
0.04

 
$
0.04

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

4

DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
(unaudited)


 
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
17,244

 
$
6,372

 
$
32,414

 
$
10,292

 
 
 
 
 
 
 
 
Change in cumulative foreign currency translation adjustment
1,538

 
(4,356
)
 
1,119

 
(2,751
)
 
 
 
 
 
 
 
 
Total comprehensive income
$
18,782

 
$
2,016

 
$
33,533

 
$
7,541

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

5

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, March 31, 2019
15,089,080

 
$
755

 
$
81,122

 
$
104,162

 
$
(35,433
)
 
(103,384
)
 
$
(1,695
)
 
$
148,911

Net income

 

 

 
17,244

 

 

 

 
17,244

Change in cumulative foreign currency translation adjustment

 

 

 

 
1,538

 

 

 
1,538

Shares issued in connection with stock compensation plans
18,834

 
1

 
357

 

 

 

 

 
358

Stock-based compensation

 

 
1,360

 

 

 

 

 
1,360

Dividends declared

 

 

 
(299
)
 

 

 

 
(299
)
Treasury stock activity and transfers of stock to rabbi trust

 

 
14

 

 

 
(357,439
)
 
(5,625
)
 
(5,611
)
Balances, June 30, 2019
15,107,914

 
$
756

 
$
82,853

 
$
121,107

 
$
(33,895
)
 
(460,823
)
 
$
(7,320
)
 
$
163,501

 
 
 
 
 
 
 
 
 
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, 2018
14,987,962

 
$
749

 
$
80,077

 
$
89,291

 
$
(35,014
)
 
(82,186
)
 
$
(817
)
 
$
134,286

Net income

 

 

 
32,414

 

 

 

 
32,414

Change in cumulative foreign currency translation adjustment

 

 

 

 
1,119

 

 

 
1,119

Shares issued in connection with stock compensation plans
119,952

 
7

 
351

 

 

 
7,502

 

 
358

Stock-based compensation

 

 
2,411

 

 

 

 

 
2,411

Dividends declared

 

 

 
(598
)
 

 

 

 
(598
)
Treasury stock activity and transfers of stock to rabbi trust

 

 
14

 

 

 
(386,139
)
 
(6,503
)
 
(6,489
)
Balances, June 30, 2019
15,107,914

 
$
756

 
$
82,853

 
$
121,107

 
$
(33,895
)
 
(460,823
)
 
$
(7,320
)
 
$
163,501



6

DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts in Thousands, Except Share Data)
(unaudited)

 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Cumulative
 
 
 
 
 
 
 
Common Stock
 
Paid-In
 
Retained
 
Comprehensive
 
Treasury Stock
 
 
 
Shares
 
Amount
 
Capital
 
Earnings
 
Loss
 
Shares
 
Amount
 
Total
Balances, March 31, 2018
14,948,294

 
$
747

 
$
76,895

 
$
63,634

 
$
(29,214
)
 
(72,104
)
 
$
(705
)
 
$
111,357

Net income

 

 

 
6,372

 

 

 

 
6,372

Change in cumulative foreign currency translation adjustment

 

 

 

 
(4,356
)
 

 

 
(4,356
)
Shares issued in connection with stock compensation plans
24,885

 
2

 
230

 

 

 

 

 
232

Stock-based compensation

 

 
964

 

 

 

 

 
964

Dividends declared

 

 

 
(300
)
 

 

 

 
(300
)
Treasury stock activity

 

 

 

 

 
(1,348
)
 
(40
)
 
(40
)
Balances, June 30, 2018
14,973,179

 
$
749

 
$
78,089

 
$
69,706

 
$
(33,570
)
 
(73,452
)
 
$
(745
)
 
$
114,229

 
 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Cumulative
 
 
 
 
 
 
 
Common Stock
 
Paid-In
 
Retained
 
Comprehensive
 
Treasury Stock
 
 
 
Shares
 
Amount
 
Capital
 
Earnings
 
Loss
 
Shares
 
Amount
 
Total
Balances, December 31, 2017
14,821,801

 
$
741

 
$
76,146

 
$
60,074

 
$
(30,819
)
 
(39,783
)
 
$
(362
)
 
$
105,780

Net income

 

 

 
10,292

 

 

 

 
10,292

Change in cumulative foreign currency translation adjustment

 

 

 

 
(2,751
)
 

 

 
(2,751
)
Shares issued in connection with stock compensation plans
151,378

 
8

 
224

 

 

 

 

 
232

Adjustment for cumulative effect from change in accounting principle (ASU 2016-16)

 

 

 
(65
)
 

 

 

 
(65
)
Stock-based compensation

 

 
1,719

 

 

 

 

 
1,719

Dividends declared

 

 

 
(595
)
 

 

 

 
(595
)
Treasury stock activity

 

 

 

 

 
(33,669
)
 
(383
)
 
(383
)
Balances, June 30, 2018
14,973,179

 
$
749

 
$
78,089

 
$
69,706

 
$
(33,570
)
 
(73,452
)
 
$
(745
)
 
$
114,229

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

7

DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(unaudited)


 
Six months ended June 30,
 
2019
 
2018
Cash flows provided by (used in) operating activities:
 

 
 

Net income
$
32,414

 
$
10,292

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 

 
 

Depreciation
3,955

 
3,171

Amortization of purchased intangible assets
795

 
1,596

Amortization of deferred debt issuance costs
83

 
224

Stock-based compensation
2,666

 
1,792

Deferred income taxes
424

 
33

Loss on disposal of property, plant and equipment
317

 
26

Restructuring expenses
402

 
361

Transition tax liability

 
(268
)
Change in:
 

 
 

Accounts receivable, net
(16,123
)
 
(14,198
)
Inventories
(8,636
)
 
(18,790
)
Prepaid expenses and other
3,850

 
(513
)
Accounts payable
12,657

 
8,813

Contract liabilities
936

 
(3,509
)
Accrued anti-dumping duties and penalties
(8,000
)
 
2,958

Accrued expenses and other liabilities
(2,438
)
 
6,433

Net cash provided by (used in) operating activities
23,302

 
(1,579
)
 
 
 
 
Cash flows used in investing activities:
 

 
 

Acquisition of property, plant and equipment
(16,283
)
 
(16,201
)
Proceeds on sale of property, plant and equipment
1,258

 

Net cash used in investing activities
(15,025
)
 
(16,201
)
 
 
 
 
Cash flows provided by (used in) financing activities:
 

 
 

(Repayments) borrowings on bank lines of credit, net
(3,999
)
 
4,822

(Repayments) borrowings on capital expenditure facility
(1,562
)
 
11,803

Payment of dividends
(598
)
 
(593
)
Payment of debt issuance costs

 
(131
)
Net proceeds from issuance of common stock to employees and directors
358

 
230

Treasury stock purchases
(956
)
 
(383
)
Net cash provided by (used in) financing activities
(6,757
)
 
15,748

 
 
 
 
Effects of exchanges rates on cash
(14
)
 
(322
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
1,506

 
(2,354
)
Cash and cash equivalents, beginning of the period
13,375

 
8,983

Cash and cash equivalents, end of the period
$
14,881

 
$
6,629


Supplemental disclosure of cash flow information:
 
 
 
Non-cash lease liabilities arising from obtaining right-of-use assets (Note 6)
8,821

 



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

8


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, 2018.

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.

Revenue Recognition

On January 1, 2018, the Company adopted a new accounting standard, as amended, regarding revenue from contracts with customers using the modified retrospective approach, which was applied to all contracts with customers. Under the new standard, an entity is required to recognize revenue to depict the transfer of promised goods to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods.

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 9 “Business Segments” for disaggregated revenue disclosures.

For the three months ended June 30, 2019 and 2018, we recorded $114 and $53 of bad debt expense, respectively. For the six months ended June 30, 2019 and 2018, we recorded $174 and $102 of bad debt expense, respectively.

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 bases 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

9


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

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 as they receive non-forfeitable rights to dividends similar to common stock.

Basic EPS is then 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.

 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income as reported
$
17,244

 
$
6,372

 
32,414

 
10,292

Less: Distributed net income available to participating securities
(2
)
 
(7
)
 
(5
)
 
(14
)
Less: Undistributed net income available to participating securities
(136
)
 
(141
)
 
(256
)
 
(225
)
Numerator for basic net income per share:
17,106

 
6,224

 
32,153

 
10,053

Add: Undistributed net income allocated to participating securities
136

 
141

 
256

 
225

Less: Undistributed net income reallocated to participating securities
(134
)
 
(141
)
 
(252
)
 
(225
)
Numerator for diluted net income per share:
17,108

 
6,224

 
32,157


10,053

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding for basic net income per share
14,647,019

 
14,534,016

 
14,624,718

 
14,491,569

Effect of dilutive securities
252,968

 

 
225,098

 

Weighted average shares outstanding for diluted net income per share
14,899,987

 
14,534,016

 
14,849,816


14,491,569

Net income per share:
 
 
 
 
 
 
 
Basic
$
1.17

 
$
0.43

 
$
2.20

 
$
0.69

Diluted
$
1.15

 
$
0.43

 
$
2.17

 
$
0.69


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.

During the second quarter, the Company established a grantor trust commonly known as a “rabbi trust” and set aside certain assets related to the Plan to satisfy the future obligations to participants in the Plan. These assets are subject to the

10


Company’s general creditors. The assets held in the trust include unvested restricted stock awards (RSAs), vested company stock awards, and company-owned life insurance (“COLI”) on certain employees. Unvested RSAs and common stock held by the trust are reflected in the Condensed Consolidated Balance Sheet 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 held by the trust is accounted for at fair value and is reflected in the Condensed Consolidated Balance Sheet within “Prepaid expenses and other,” and subsequent increases or in the fair values of the assets are recorded as compensation expense or benefit, respectively, within “General and administrative expenses” in the Condensed Consolidated Statements of Operations.

Deferred compensation obligations that will be settled in cash are accounted for on an accrual basis in accordance with the terms of the Plan and are reflected in the Condensed Consolidated Balance Sheet within “Other long-term liabilities.” Deferred compensation obligations that will be settled by delivery of a fixed number of shares of the Company’s common stock are reflected in the Condensed 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.

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 revolving loans and borrowings under our capital expenditure facility reset each month at market rates. 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. The cash surrender value of COLI held to satisfy the future deferred compensation obligations is valued based upon the market values of underlying securities, and therefore we classify these assets as Level 2 in the fair value hierarchy.

We did not hold any Level 3 assets or liabilities as of June 30, 2019 or December 31, 2018.

Recently Adopted Accounting Standards

On January 1, 2019, the Company adopted a new accounting standard, as amended, that requires the Company to record assets and liabilities on the balance sheet for lease-related rights and obligations and disclose key information about its leasing arrangements. The Company elected the modified retrospective approach upon adoption and elected the package of practical expedients available under the new standard. This new standard establishes a right-of-use (“ROU”) model that requires the Company to recognize ROU assets and lease liabilities on the balance sheet for all leases with a term longer than 12 months at commencement of the lease.

Leases are classified as financing or operating, with classification affecting the pattern of expense recognition in the Statement of Operations. Refer to Note 6 “Leases” for further information.

Recent Accounting Pronouncements
 

11


In June 2016, the FASB issued a new accounting pronouncement regarding credit losses for financial instruments. The new standard requires entities to measure expected credit losses for certain financial assets held at the reporting date using a current expected credit loss model, which is based on historical experience, adjusted for current conditions and reasonable and supportable forecasts. The Company is required to adopt the new standard on January 1, 2020. Management is currently evaluating the potential impact that the adoption of this standard will have on the Company's financial position, results of operations, and related disclosures.

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:
 
June 30,
2019
 
December 31,
2018
Raw materials
$
31,773

 
$
26,544

Work-in-process
8,757

 
7,157

Finished goods
19,107

 
16,904

Supplies
343

 
469

 
$
59,980

 
$
51,074


4.      PURCHASED INTANGIBLE ASSETS
 
Our purchased intangible assets consisted of the following as of June 30, 2019:
 
Gross
 
Accumulated
Amortization
 
Net
Core technology
$
18,803

 
$
(11,428
)
 
$
7,375

Customer relationships
36,725

 
(36,725
)
 

Trademarks / Trade names
2,017

 
(2,017
)
 

Total intangible assets
$
57,545

 
$
(50,170
)
 
$
7,375

 
Our purchased intangible assets consisted of the following as of December 31, 2018:
 
Gross
 
Accumulated
Amortization
 
Net
Core technology
$
18,916

 
$
(10,866
)
 
$
8,050

Customer relationships
37,122

 
(36,583
)
 
539

Trademarks / Trade names
2,031

 
(2,031
)
 

Total intangible assets
$
58,069

 
$
(49,480
)
 
$
8,589

 
The change in the gross value of our purchased intangible assets from December 31, 2018 to June 30, 2019 was due to foreign currency translation and an adjustment due to the recognition of tax benefit of tax amortization previously applied to certain goodwill related to the NobelClad and DynaEnergetics reporting units. After the goodwill was written off at September 30, 2017 and December 31, 2015, respectively, the tax amortization reduces other noncurrent intangible assets related to the historical 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:

12


 
June 30, 2019
 
December 31, 2018
NobelClad
1,714

 
922

DynaEnergetics
362

 
218

 
 
 
 
Total
$
2,076


$
1,140


We expect to recognize the revenue associated with contract liabilities over a time period no longer than one year. Of the $1,140 recorded as contract liabilities at December 31, 2018, $560 was recorded to net sales during the six months ended June 30, 2019.

6.      LEASES

The Company leases real properties for use in manufacturing and as administrative and sales offices, and leases automobiles and office equipment. Until the end of 2018, leases of property, plant and equipment were classified as operating leases. Payments made under operating leases were charged to the Condensed Consolidated Statement of Operations on a straight-line basis. Upon adoption of the new lease standard, the Company recognized ROU assets and lease liabilities in relation to leases which had previously been classified as operating leases.

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. 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. The Company has no material leases in which the Company is the lessor.    

The significant majority of the Company’s leasing arrangements are classified as operating leases. As of June 30, 2019, the total ROU asset and lease liability for operating leases were $10,436 and $11,522, respectively. The ROU asset was included in “Other assets” while $2,016 of the lease liability was reported in “Other current liabilities” and $9,506 was reported in “Other long-term liabilities” on the Company’s Condensed Consolidated Balance Sheet. The Company’s financing leases were not material as of June 30, 2019. 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 and six months ended June 30, 2019, operating lease costs were $751 and $1,436 which were included in the Company’s Condensed Consolidated Statements of Income. Short term and variable lease costs were not material for the three and six months ended June 30, 2019.

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.

The following table summarizes the weighted average lease terms and discount rates for operating lease liabilities:
 
June 30, 2019
Weighted average remaining lease term (in years)
9.06

Weighted average discount rate
5.2
%

The following table represents maturities of operating lease liabilities as of June 30, 2019:
Due within 1 year
$
2,476

Due after 1 year through 2 years
1,826

Due after 2 years through 3 years
1,388

Due after 3 years through 4 years
1,293

Due after 4 years through 5 years
1,159

Due after 5 years
6,526

Total future minimum lease payments
14,668

Less imputed interest
(3,146
)
Total
$
11,522



13


7.      DEBT
 
Outstanding borrowings consisted of the following:
 
June 30,
2019
 
December 31,
2018
Syndicated credit agreement:
 

 
 

U.S. Dollar revolving loan
$
13,129

 
$
17,128

Capital expenditure facility
23,438

 
25,000

Outstanding borrowings
36,567

 
42,128

Less: debt issuance costs
(698
)
 
(773
)
Total debt
35,869

 
41,355

Less: current portion of long-term debt
(3,125
)
 
(3,125
)
Long-term debt
$
32,744

 
$
38,230


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 new 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 new agreement provides 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 is amortizable at 12.5% of principal per year with a balloon payment for the outstanding balance upon the credit facility maturity date in year five. The new 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 London Interbank Offered Rate (“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%). All revolver loan borrowings and repayments have been in the form of one-month or two-month loans and are reported on a net basis in our Condensed Consolidated Statements of Cash Flows.

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%).

The credit facility 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 June 30, 2019, 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 €4,000, of which €1,478 is available as of June 30, 2019 after considering outstanding letters of credit.

Included in lines of credit are deferred debt issuance costs of $698 and $773 as of June 30, 2019 and December 31, 2018, respectively. Deferred debt issuance costs are being amortized over the remaining term of the credit facility which expires on March 8, 2023.


14


8.     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. At March 31, 2019, the Company was no longer in a three-year cumulative loss position in the U.S. and we believe sufficient future taxable income will be generated to use existing deferred tax assets in that jurisdiction. Accordingly, during the three months ended March 31, 2019, we released valuation allowances of $368 in that jurisdiction and certain states. 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 reassessed 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. 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.

9.      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 June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Net sales
 
 
 
 
 
 
 
DynaEnergetics
$
88,628

 
$
58,899

 
$
168,464

 
$
108,020

NobelClad
22,326

 
22,016

 
42,625

 
40,208

Net sales
$
110,954

 
$
80,915

 
$
211,089

 
$
148,228



15


 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Operating income
 
 
 
 
 
 
 
DynaEnergetics
$
26,813

 
$
12,228

 
$
49,923

 
$
20,948

NobelClad
1,923

 
1,703

 
$
3,753

 
$
1,691

Segment operating income
28,736

 
13,931

 
53,676

 
22,639

 
 
 
 
 
 
 
 
Unallocated corporate expenses
(2,588
)
 
(2,618
)
 
(5,905
)
 
(5,306
)
Stock-based compensation
(1,495
)
 
(1,084
)
 
(2,666
)
 
(1,792
)
Other income (expense), net
343

 
(327
)
 
322

 
(704
)
Interest expense, net
(409
)
 
(136
)
 
(782
)
 
(601
)
Income before income taxes
$
24,587

 
$
9,766

 
$
44,645

 
$
14,236


 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Depreciation and amortization
 
 
 
 
 
 
 
DynaEnergetics
$
1,719

 
$
1,575

 
$
3,118

 
$
3,134

NobelClad
835

 
817

 
1,632

 
1,633

Segment depreciation and amortization
$
2,554

 
$
2,392

 
$
4,750

 
$
4,767


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

DynaEnergetics
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
United States
$
75,323

 
$
44,164

 
143,281

 
80,294

Canada
2,919

 
8,556

 
6,376

 
14,341

United Arab Emirates
1,594

 
365

 
4,098

 
888

France
1

 
21

 
41

 
73

Ukraine
1,678

 
1,109

 
3,410

 
1,513

Germany
25

 
53

 
80

 
81

Russia
570

 
1,144

 
1,055

 
2,426

India
47

 
195

 
77

 
829

Egypt
872

 
534

 
1,734

 
1,076

Indonesia
941

 
164

 
1,180

 
184

Iraq
690

 
245

 
886

 
319

China

 

 
29

 
56

Italy

 
21

 
18

 
31

Hong Kong
61

 
302

 
61

 
302

Rest of the world
3,907

 
2,026

 
6,138

 
5,607

Total DynaEnergetics
$
88,628

 
$
58,899

 
$
168,464

 
$
108,020



16


NobelClad
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
United States
$
12,304

 
$
6,775

 
21,947

 
12,481

Canada
1,335

 
1,631

 
3,359

 
3,424

United Arab Emirates
289

 
259

 
1,273

 
390

France
896

 
1,744

 
1,653

 
2,695

South Korea
413

 
828

 
881

 
1,831

Germany
828

 
640

 
1,831

 
2,253

India
155

 
33

 
279

 
803

Spain
285

 
464

 
346

 
632

Italy
142

 
872

 
664

 
1,077

Australia
397

 

 
845

 

China

 
4,386

 

 
7,844

Netherlands
378

 
821

 
1,012

 
1,312

Norway
1,538

 
44

 
2,160

 
287

Sweden
836

 
440

 
1,137

 
578

South Africa
273

 
30

 
1,006

 
193

Rest of the world
2,257

 
3,049

 
4,232

 
4,408

Total NobelClad
$
22,326

 
$
22,016

 
$
42,625

 
$
40,208


During the three months ended June 30, 2019 and 2018, one customer in our DynaEnergetics segment accounted for greater than 10% of consolidated net sales. During the six months ended June 30, 2019, one customer in DynaEnergetics was responsible for more than 10% of consolidated net sales. During the six months ended June 30, 2018, no customer was responsible for more than 10% of consolidated net sales.
 
10.      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, the euro to the Russian ruble, 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 (expense), 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 June 30, 2019 and 2018, the notional amounts of the forward currency contracts the Company held were $5,819 and $10,824, respectively. At June 30, 2019 and 2018, the fair values of outstanding foreign currency forward contracts were $0.

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

 
 
Three months ended June 30,
 
Six months ended June 30,
Derivative
Statements of Operations Location
2019
 
2018
 
2019
 
2018
Foreign currency contracts
Other income (expense), net
$
(53
)
 
$
(509
)
 
$
69

 
$
(301
)

17



11.   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.

Anti-dumping and Countervailing Duties

In June 2015, U.S. Customs and Border Protection (“U.S. Customs”) sent us a Notice of Action that proposed to classify certain of our imports as subject to anti-dumping duties pursuant to a 2010 anti-dumping duty (“AD”) order on Oil Country Tubular Goods (“OCTG”) from China. A companion countervailing duty (“CVD”) order on the same product is in effect as well. The Notice of Action covered one entry of certain raw material steel mechanical tubing made in China and imported into the U.S. from Canada by our DynaEnergetics segment during 2015 for use in manufacturing perforating guns.

In July 2015, we sent a response to U.S. Customs outlining the reasons our mechanical tubing imports do not fall within the scope of the AD order on OCTG from China and should not be subject to anti-dumping duties. U.S. Customs proposed to take similar action with respect to other entries of this product and requested an approximately $1,100 cash deposit or bond for AD/CVD.

In August 2015, we posted the bond of approximately $1,100 to U.S. Customs. Subsequently, U.S. Customs declined to conclude on the Company’s assertion that the mechanical tubing the Company has been importing is not within the scope of the AD order on OCTG from China. As a result, on September 25, 2015 the Company filed a request for a scope ruling with the U.S. Department of Commerce (“Commerce Department”).

On February 15, 2016, the Company received the Commerce Department’s scope ruling, which determined certain imports, primarily used for gun carrier tubing, are included in the scope of the AD/CVD orders on OCTG from China and thus are subject to AD/CVD. On March 11, 2016, the Company filed an appeal with the U.S. Court of International Trade (“CIT”) related to the Commerce Department’s scope ruling. On February 7, 2017, the CIT remanded the scope ruling to the Commerce Department to reconsider its determination. The Commerce Department filed its remand determination with the CIT on June 7, 2017 continuing to find that the Company’s imports at issue are within the scope of the AD/CVD orders on OCTG from China. On March 16, 2018, the CIT issued its decision on the appeal and sustained the Commerce Department’s scope ruling. The Company did not appeal this ruling.

On December 27, 2016, we received notice from U.S. Customs that it may pursue penalties against us related to the AD/CVD issue and demanding tender of alleged loss of AD/CVD in an amount of $3,049, which had previously been accrued for in our financial statements. We filed a response to the notice on February 6, 2017. On February 16, 2017, we received notice that U.S. Customs was seeking penalties in the amount of $14,783. U.S. Customs also reasserted its demand for tender of alleged loss of AD/CVD in the amount of $3,049. We tendered $3,049 in AD amounts on March 6, 2017 into a suspense account pending ultimate resolution of the AD/CVD case. We submitted a petition for relief and mitigation of penalties on May 17, 2017.

On March 27, 2018, we received notice from U.S. Customs Headquarters that it intended to move forward with its pursuit of penalties. The Company engaged in discussions with U.S. Customs Headquarters regarding the scope of penalties asserted and the arguments set forth in the Company’s petition for relief and mitigation of penalties. Based on these discussions and the Company’s assessment of the probable ultimate penalty rate, the Company accrued $3,103 in the first quarter of 2018.

On October 11, 2018, we received a decision from U.S. Customs Headquarters in which a mitigated amount of $8,000 in penalties was asserted. In its financial statements for the quarter ended September 30, 2018, the Company accrued an additional $4,897 of penalties. On December 7, 2018, we submitted a supplemental petition requesting a waiver of the penalty under the Small Business Regulatory Enforcement Act in lieu of tendering the penalty amount. On April 12, 2019, we received notice that our waiver request was denied and tendered the $8,000 during the second quarter of 2019.


18


12.    RESTRUCTURING

During the fourth quarter of 2017, NobelClad announced plans to consolidate its European production facilities by closing manufacturing operations in France. During the third quarter of 2018, final approval of the proposed measures was granted by the local workers council, in accordance with applicable French law. NobelClad completed the closure of the Rivesaltes production facility in the fourth quarter of 2018 but is maintaining its sales and administrative office in France. During the second quarter of 2019, NobelClad sold its production facility and related assets and recognized a gain of $519. NobelClad also recorded an additional accrual of $712 for known and probable severance liabilities related to employees terminated as part of closing the manufacturing operations in France. The additional severance accrual was recorded based, in part, on a successful appeal of the severance benefits by some terminated employees during the second quarter of 2019.

Total restructuring and impairment charges incurred for these programs are as follows and are reported in the “Restructuring expenses, net” line item in our Condensed Consolidated Statements of Operations:
 
Three months ended June 30, 2019
 
Severance
 
Gain on asset disposal
 
Contract Termination Costs
 
Equipment Moving Costs
 
Other Exit Costs
 
Total
NobelClad
$
712

 
$
(519
)
 
$
4

 
$
82

 
$
45

 
$
324

 
Six months ended June 30, 2019
 
Severance
 
Gain on asset disposal
 
Contract Termination Costs
 
Equipment Moving Costs
 
Other Exit Costs
 
Total
NobelClad
$
712

 
$
(636
)
 
$
43

 
$
227

 
$
56

 
$
402

 
Three months ended June 30, 2018
 
Severance
 
Other Exit Costs
 
Total
NobelClad
$
182

 
$
35

 
$
217

 
Six months ended June 30, 2018
 
Severance
 
Other Exit Costs
 
Total
NobelClad
$
235

 
$
126

 
$
361

During the six months ended June 30, 2019, the changes to the restructuring liability associated with these programs is summarized below:
 
December 31, 2018
 
Net expense (1)
 
Payments and Other Adjustments
 
June 30, 2019
Severance
$
1,105

 
$
712

 
$
(677
)
 
$
1,140

Contract termination costs

 
43

 
(43
)
 

Equipment moving costs
8

 
227

 
(234
)
 
1

Other exit costs
42

 
56

 
(96
)
 
2

Total
$
1,155

 
$
1,038

 
$
(1,050
)
 
$
1,143

(1) Excluding gain on asset disposal


19


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, 2018.
 
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, South America, Africa, the Middle East, Russia, 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.

DynaEnergetics continues to introduce new products and technologies into the marketplace. Recently, DynaEnergetics introduced two new models to its DynaStage® (DS) product family during the second quarter. DS TrinityTM 3.5 is currently in field trials, and is a smaller-diameter version of the DS Trinity 4.0, which was introduced in the first quarter of 2019.

NobelClad

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. 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 $38,841 at June 30, 2019 from $29,879 at December 31, 2018.

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.


20


Factors Affecting Results

DynaEnergetics sales of $88,628 in the second quarter of 2019 increased 11% sequentially versus the first quarter of 2019 and 50% compared with the second quarter of 2018 due to higher well-completions in the U.S. unconventional oil and gas market and adding several new customers for its intrinsically safe initiating systems (IS2™) and its family of DS Factory-Assembled, Performance-Assured™ perforating systems.
NobelClad’s sales of $22,326 in the second quarter of 2019 increased 10% versus the first quarter of 2019 due to higher project volume and increased 1% compared with the second quarter of 2018
Consolidated gross profit of 37.9% in the second quarter of 2019 increased from 33.1% in the second quarter of 2018. The improvement primarily was due to a higher proportion of DynaEnergetics sales relative to NobelClad sales, favorable product mix and productivity improvements in DynaEnergetics, improved project mix in NobelClad and the favorable impact of higher volume on fixed manufacturing overhead expenses.
Consolidated selling, general and administrative expenses were $16,699 in the second quarter of 2019 compared with $15,538 in the second quarter of 2018. The increase primarily was due to headcount additions and merit increases, as well as higher stock-based compensation, and increased variable incentive compensation.
Net debt of $20,988 decreased $6,992 from $27,980 at December 31, 2018. Net debt is a non-GAAP measure calculated as total debt ($35,869 at June 30, 2019) less cash and cash equivalents ($14,881 at June 30, 2019)

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 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.

Net debt is a non-GAAP measure we use to supplement information in our Condensed Consolidated Financial Statements. We define net debt as total debt less cash and cash equivalents. 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 be considered in isolation or as a substitute for, or 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 other similarly titled measures of other companies.


21


Consolidated Results of Operations

Three months ended June 30, 2019 compared with three months ended June 30, 2018

 
Three months ended June 30,
 
 
 
 
 
2019
 
2018
 
$ change
 
% change
Net sales
$
110,954

 
$
80,915

 
$
30,039

 
37
 %
Gross profit
42,073

 
26,775

 
15,298

 
57
 %
Gross profit percentage
37.9
%
 
33.1
%
 
 
 
 
COSTS AND EXPENSES:
 
 
 
 
 
 
 
General and administrative expenses
9,460

 
9,743

 
(283
)
 
(3
)%
% of net sales
8.5
%
 
12.0
%
 
 
 
 
Selling and distribution expenses
7,239

 
5,795

 
1,444

 
25
 %
% of net sales
6.5
%
 
7.2
%
 
 
 
 
Amortization of purchased intangible assets
397

 
791

 
(394
)
 
(50
)%
% of net sales
0.4
%
 
1.0
%
 
 
 
 
Restructuring expenses, net
324

 
217

 
107

 
49
 %
Operating income
24,653

 
10,229

 
14,424

 
141
 %
Other income (expense), net
343

 
(327
)
 
670

 
205
 %
Interest expense, net
(409
)
 
(136
)
 
(273
)
 
(201
)%
Income before income taxes
24,587

 
9,766

 
14,821

 
152
 %
Income tax provision
7,343

 
3,394

 
3,949

 
116
 %
Net income
17,244

 
6,372

 
10,872

 
171
 %
Adjusted EBITDA
$
29,026

 
$
13,922

 
$
15,104

 
108
 %

Net sales increased compared with 2018 primarily due to higher well completions in the U.S. unconventional onshore oil and gas sector and growth in customer demand for DynaEnergetics’ advanced perforating systems.

Gross profit percentage increased compared with 2018 primarily due to a higher proportion of DynaEnergetics sales relative to NobelClad sales, favorable product mix and manufacturing efficiencies in DynaEnergetics, improved project mix in NobelClad and the favorable impact of higher volume on fixed manufacturing overhead expenses.

General and administrative expenses decreased compared with 2018 primarily due to lower outside service costs for patent infringement defense partially offset by increased salaries and wages from merit increases, variable incentive compensation and stock-based compensation expense.

Selling and distribution expenses increased compared with 2018 primarily due to increased outside services, higher incentive compensation expense, salaries and wages from headcount additions as well as merit increases, and stock-based compensation expense.

Amortization of purchased intangible assets decreased compared with 2018 primarily due to fully amortizing certain trademarks in DynaEnergetics as of December 31, 2018.

Restructuring expenses, net in 2019 were primarily related to severance liabilities, equipment moving expenses and contract termination costs, partially offset by a gain on assets sold in connection with the closure of NobelClad’s manufacturing operations in France.

Operating income increased primarily due to improved earnings in our DynaEnergetics and NobelClad segments in 2019.

Other income (expense), net in 2019 primarily relates to gain on machinery & equipment sold by DynaEnergetics partially combined with net unrealized and realized currency gains compared to net unrealized and realized currency losses in

22


2018. Our subsidiaries frequently enter into inter-company and third-party transactions that are denominated in currencies other than their functional currency. Changes in exchange rates with respect to these transactions will result in unrealized gains or losses if unsettled at the end of the reporting period or realized gains or losses at settlement of the transaction. We use foreign currency forward contracts, generally with maturities up to one month, to offset foreign exchange rate fluctuations on certain 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 immediately in “Other income (expense), net” within our Condensed Consolidated Statements of Operations.
 
Interest expense, net increased compared with 2018 primarily due to reduced capitalization of interest on DynaEnergetics’ construction of a new manufacturing, assembly and administrative space combined with interest incurred on a higher average outstanding debt balance in 2019.

Income tax provision of $7,343 was recorded on pretax income of $24,587. The effective rate was impacted by a favorable discrete item recorded in the quarter of $782. We recorded an income tax provision of $3,394 on pretax income of $9,766 for the second quarter of 2018. The effective rate for the second quarter of 2018 was favorably impacted by discrete items recorded in the quarter, including a $164 benefit for vesting of restricted stock.