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 September 30, 2018
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.) |
5405 Spine Road, Boulder, Colorado 80301
(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 14,898,543 as of October 25, 2018.
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, expectations regarding expanding market opportunities for DynaEnergetics’ perforating systems, the expected timing for the new manufacturing, assembly and administrative space in Blum, Texas to be fully operational, the estimated percent of DynaEnergetics’ total sales to be contributed by its Russia-based operations in 2018, the expected timing of the payments of AD/CVD penalties, our liquidity position and factors impacting such position, including expectations regarding legal costs, and the outcome of pending patent litigation. 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, 2017 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; the adequacy of local labor supplies at our facilities; current or future limits on manufacturing capacity at our various operations; our ability to complete our expansion plans on schedule and on budget; 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
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)
|
| | | | | | | |
| September 30, | | December 31, |
| 2018 | | 2017 |
| (unaudited) | | |
ASSETS | |
| | |
|
CURRENT ASSETS: | |
| | |
|
Cash and cash equivalents | $ | 11,098 |
| | $ | 8,983 |
|
Accounts receivable, net of allowance for doubtful accounts of $490 and $1,088, respectively | 65,618 |
| | 49,468 |
|
Inventories | 56,496 |
| | 35,742 |
|
Prepaid expenses and other | 6,664 |
| | 5,763 |
|
| | | |
Total current assets | 139,876 |
| | 99,956 |
|
| | | |
PROPERTY, PLANT AND EQUIPMENT | 144,697 |
| | 121,339 |
|
Less - accumulated depreciation | (64,915 | ) | | (61,467 | ) |
| | | |
Property, plant and equipment, net | 79,782 |
| | 59,872 |
|
| | | |
PURCHASED INTANGIBLE ASSETS, net | 9,515 |
| | 12,861 |
|
| | | |
DEFERRED TAX ASSETS | — |
| | 98 |
|
| | | |
OTHER ASSETS | 346 |
| | 296 |
|
| | | |
TOTAL ASSETS | $ | 229,519 |
| | $ | 173,083 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DMC GLOBAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share and Per Share Data)
|
| | | | | | | |
| September 30, | | December 31, |
| 2018 | | 2017 |
| (unaudited) | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | |
|
CURRENT LIABILITIES: | |
| | |
|
Accounts payable | $ | 25,068 |
| | $ | 19,826 |
|
Accrued expenses | 10,431 |
| | 6,884 |
|
Accrued anti-dumping duties and penalties | 8,000 |
| | 3,609 |
|
Dividend payable | 298 |
| | 295 |
|
Accrued income taxes | 9,299 |
| | 2,939 |
|
Accrued employee compensation and benefits | 7,720 |
| | 6,186 |
|
Contract liabilities | 4,310 |
| | 5,888 |
|
| | | |
Total current liabilities | 65,126 |
| | 45,627 |
|
| | | |
LINES OF CREDIT | 41,454 |
| | 17,984 |
|
| | | |
DEFERRED TAX LIABILITIES | 849 |
| | 573 |
|
| | | |
OTHER LONG-TERM LIABILITIES | 2,700 |
| | 3,119 |
|
| | | |
Total liabilities | 110,129 |
| | 67,303 |
|
| | | |
COMMITMENTS AND CONTINGENT LIABILITIES |
|
| |
|
|
| |
| | |
|
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; 14,896,043 and 14,782,018 shares outstanding, respectively | 749 |
| | 741 |
|
Additional paid-in capital | 78,944 |
| | 76,146 |
|
Retained earnings | 74,318 |
| | 60,074 |
|
Other cumulative comprehensive loss | (33,806 | ) | | (30,819 | ) |
Treasury stock, at cost; 82,136 and 39,783 shares, respectively | (815 | ) | | (362 | ) |
| | | |
Total stockholders’ equity | 119,390 |
| | 105,780 |
|
| | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 229,519 |
| | $ | 173,083 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
NET SALES | $ | 87,883 |
| | $ | 52,161 |
| | $ | 236,111 |
| | $ | 138,314 |
|
COST OF PRODUCTS SOLD | 58,155 |
| | 34,999 |
| | 156,855 |
| | 96,767 |
|
Gross profit | 29,728 |
| | 17,162 |
| | 79,256 |
| | 41,547 |
|
COSTS AND EXPENSES: | |
| | |
| | |
| | |
|
General and administrative expenses | 9,630 |
| | 6,535 |
| | 27,550 |
| | 19,821 |
|
Selling and distribution expenses | 5,420 |
| | 4,446 |
| | 16,427 |
| | 13,420 |
|
Amortization of purchased intangible assets | 769 |
| | 1,046 |
| | 2,365 |
| | 3,034 |
|
Restructuring expenses | 192 |
| | — |
| | 553 |
| | 458 |
|
Anti-dumping duty penalties | 4,897 |
| | — |
| | 8,000 |
| | — |
|
Goodwill impairment charge | — |
| | 17,584 |
| | — |
| | 17,584 |
|
Total costs and expenses | 20,908 |
| | 29,611 |
| | 54,895 |
| | 54,317 |
|
OPERATING INCOME (LOSS) | 8,820 |
| | (12,449 | ) | | 24,361 |
| | (12,770 | ) |
OTHER INCOME (EXPENSE): | |
| | |
| | |
| | |
|
Other expense, net | (335 | ) | | (436 | ) | | (1,039 | ) | | (965 | ) |
Interest expense | (495 | ) | | (367 | ) | | (1,098 | ) | | (1,203 | ) |
Interest income | — |
| | — |
| | 2 |
| | 2 |
|
INCOME (LOSS) BEFORE INCOME TAXES | 7,990 |
| | (13,252 | ) | | 22,226 |
| | (14,936 | ) |
INCOME TAX PROVISION | 3,080 |
| | 812 |
| | 7,024 |
| | 1,956 |
|
NET INCOME (LOSS) | $ | 4,910 |
| | $ | (14,064 | ) | | $ | 15,202 |
| | $ | (16,892 | ) |
| | | | | | | |
INCOME (LOSS) PER SHARE | |
| | |
| | |
| | |
|
Basic | $ | 0.33 |
| | $ | (0.98 | ) | | $ | 1.02 |
| | $ | (1.18 | ) |
Diluted | $ | 0.33 |
| | $ | (0.98 | ) | | $ | 1.02 |
| | $ | (1.18 | ) |
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: | |
| | |
| | |
| | |
|
Basic | 14,571,155 |
| | 14,368,225 |
| | 14,518,765 |
| | 14,333,452 |
|
Diluted | 14,571,155 |
| | 14,368,225 |
| | 14,518,765 |
| | 14,333,452 |
|
| | | | | | | |
DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.02 |
| | $ | 0.02 |
| | $ | 0.06 |
| | $ | 0.06 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in Thousands)
(unaudited)
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net income (loss) | $ | 4,910 |
| | $ | (14,064 | ) | | $ | 15,202 |
| | $ | (16,892 | ) |
| | | | | | | |
Change in cumulative foreign currency translation adjustment | (236 | ) | | 2,952 |
| | (2,987 | ) | | 9,730 |
|
| | | | | | | |
Total comprehensive income (loss) | $ | 4,674 |
| | $ | (11,112 | ) | | $ | 12,215 |
| | $ | (7,162 | ) |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENT 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, December 31, 2017 | 14,821,801 |
| | $ | 741 |
| | $ | 76,146 |
| | $ | 60,074 |
| | $ | (30,819 | ) | | (39,783 | ) | | $ | (362 | ) | | $ | 105,780 |
|
Net income | — |
| | — |
| | — |
| | 15,202 |
| | — |
| | — |
| | — |
| | 15,202 |
|
Change in cumulative foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | (2,987 | ) | | — |
| | — |
| | (2,987 | ) |
Shares issued in connection with stock compensation plans | 156,378 |
| | 8 |
| | 224 |
| | — |
| | — |
| | — |
| | — |
| | 232 |
|
Adjustment for cumulative effect from change in accounting principle (ASU 2016-16) | — |
| | — |
| | — |
| | (65 | ) | | — |
| | — |
| | — |
| | (65 | ) |
Stock-based compensation | — |
| | — |
| | 2,574 |
| | — |
| | — |
| | — |
| | — |
| | 2,574 |
|
Dividends declared | — |
| | — |
| | — |
| | (893 | ) | | — |
| | — |
| | — |
| | (893 | ) |
Treasury stock purchases | — |
| | — |
| | — |
| | — |
| | — |
| | (42,353 | ) | | (453 | ) | | (453 | ) |
Balances, September 30, 2018 | 14,978,179 |
| | $ | 749 |
| | $ | 78,944 |
| | $ | 74,318 |
| | $ | (33,806 | ) | | (82,136 | ) | | $ | (815 | ) | | $ | 119,390 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(unaudited)
|
| | | | | | | |
| Nine months ended September 30, |
| 2018 | | 2017 |
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: | |
| | |
|
Net income (loss) | $ | 15,202 |
| | $ | (16,892 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| | |
|
Depreciation (including capital lease amortization) | 4,799 |
| | 5,030 |
|
Amortization of purchased intangible assets | 2,365 |
| | 3,034 |
|
Amortization of deferred debt issuance costs | 268 |
| | 359 |
|
Stock-based compensation | 2,662 |
| | 2,125 |
|
Deferred income tax | 276 |
| | (408 | ) |
Loss (gain) on disposal of property, plant and equipment | 30 |
| | (46 | ) |
Restructuring expenses | 553 |
| | 458 |
|
Goodwill impairment charge | — |
| | 17,584 |
|
Transition tax liability | (679 | ) | | — |
|
Change in: | |
| | |
|
Accounts receivable, net | (16,885 | ) | | (10,747 | ) |
Inventories | (21,618 | ) | | (1,221 | ) |
Prepaid expenses and other | (576 | ) | | 20 |
|
Accounts payable | 4,657 |
| | 1,051 |
|
Contract liabilities | (1,559 | ) | | 97 |
|
Accrued anti-dumping duties and penalties | 4,391 |
| | (2,965 | ) |
Accrued expenses and other liabilities | 12,659 |
| | 3,039 |
|
Net cash provided by operating activities | 6,545 |
| | 518 |
|
| | | |
CASH FLOWS USED IN INVESTING ACTIVITIES: | |
| | |
|
Acquisition of property, plant and equipment | (26,574 | ) | | (3,299 | ) |
Proceeds on sale of property, plant and equipment | — |
| | 2 |
|
Net cash used in investing activities | (26,574 | ) | | (3,297 | ) |
| | | |
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: | |
| | |
|
Borrowings on bank lines of credit, net | 23,512 |
| | 6,000 |
|
Payment of dividends | (891 | ) | | (880 | ) |
Payment of debt issuance costs | (310 | ) | | (133 | ) |
Net proceeds from issuance of common stock to employees and directors | 232 |
| | 154 |
|
Treasury stock purchases | (453 | ) | | (336 | ) |
Net cash provided by financing activities | 22,090 |
| | 4,805 |
|
| | | |
EFFECTS OF EXCHANGE RATES ON CASH | 54 |
| | 416 |
|
| | | |
NET INCREASE IN CASH AND CASH EQUIVALENTS | 2,115 |
| | 2,442 |
|
CASH AND CASH EQUIVALENTS, beginning of the period | 8,983 |
| | 6,419 |
|
CASH AND CASH EQUIVALENTS, end of the period | $ | 11,098 |
| | $ | 8,861 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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, 2017.
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.
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 are 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; the tax position 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 of being realized upon ultimate resolution. We recognize interest and penalties related to uncertain tax positions in operating expense.
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.
There was no cumulative financial statement effect of initially applying the new revenue standard because an analysis of our contracts supported the recognition of revenue consistent with our historical approach. In accordance with the modified retrospective approach, the comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company does not expect the adoption of the new revenue standard to have a material impact to the Company’s revenues or net income on an ongoing basis.
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, as described below. 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. On occasion, NobelClad and DynaEnergetics may require customers to make advance payments prior to the shipment of goods. We record such payments as contract liabilities in our Consolidated Balance Sheet. Please refer to Note 5 “Contract Liabilities” for further information.
Our rights to payments for goods transferred to customers are conditional only on the passage of 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 where the timing of revenue recognition differs from the timing of invoicing, we have determined that our contracts do not include a significant financing component given the short duration between order initiation and order fulfillment within each of our segments. Refer to Note 8 “Business Segments” for additional disaggregated revenue disclosures.
For the three months ended September 30, 2018 and 2017, we recorded reversal of $32 and $65 of prior bad debt expense, respectively. For the nine months ended September 30, 2018 and 2017, we recorded reversal of $28 and $66 of prior bad debt expense, respectively.
NobelClad
Customers agree to terms and conditions at the time of initiating an order. The significant majority of transactions contain a single performance obligation - the delivery of a clad metal product. In instances where multiple products are included within an order, each product represents a separate performance obligation given that: (1) the customer can benefit from each product on a standalone basis and (2) each product is distinct within the context of the contract.
The transaction price is readily determinable and fixed at the time the transaction is entered into with the customer. NobelClad is entitled to each product’s transaction price upon the customer obtaining control of the item. Such control occurs as of a point in time, which is generally based upon relevant International Commercial Terms (“Incoterms”) as it relates to product ownership and legal title being transferred. Upon fulfillment of applicable Incoterms, NobelClad has performed its contractual requirements such that it has a present right to payment, and the customer from that point forward bears all risks and rewards of ownership. In addition, at this date, the customer has the ability to direct the use of, or restrict the access to, the asset. No payment discounts, rebates, refunds, or any other forms of variable consideration are included within its contracts. NobelClad also does not provide service-type warranties either via written agreement or customary business practice, nor does it allow customer returns.
For contracts that contain only one performance obligation, the total transaction price is allocated to the sole performance obligation. For less frequent contracts which contain multiple distinct performance obligations, judgment is required to determine the standalone selling price (“SSP”) for each performance obligation. NobelClad uses the expected cost plus margin approach in order to estimate SSP, whereby an entity forecasts its expected costs of satisfying a performance obligation and then adds an appropriate margin for that good. The required judgment described herein largely is mitigated given the short duration between order initiation and complete order fulfillment.
DynaEnergetics
Customers agree to terms and conditions at the time of initiating an order. Transactions contain standard products, which may include perforating system components, such as detonating cord, or systems and associated hardware, including factory-assembled DynaStage® perforating systems and DynaSelect® detonators. In instances where multiple products are included within an order, each product represents a separate performance obligation given that: (1) the customer can benefit from each product on a standalone basis and (2) each product is distinct within the context of the contract.
The transaction price is readily determinable and fixed at the time the transaction is entered into with the customer. DynaEnergetics is entitled to each product’s transaction price upon the customer obtaining control of the item. Such control occurs as of a point in time, which is generally based upon relevant Incoterms as it relates to product ownership and legal title being transferred. Upon fulfillment of applicable Incoterms, DynaEnergetics has performed its contractual requirements such that it has a present right to payment, and the customer from that point forward bears all risks and rewards of ownership. In addition, at this date, the customer has the ability to direct the use of, or restrict the access to, the asset. No payment discounts, rebates, refunds, or any other forms of variable consideration are included within contracts. DynaEnergetics also does not provide service-type warranties either via written agreement or customary business practice, nor does it allow customer returns without its prior approval.
For orders that contain only one performance obligation, the total transaction price is allocated to the sole performance obligation. For orders that contain multiple products being purchased by the customer, judgment is required to determine SSP for each distinct performance obligation. However, such judgment largely is mitigated given that products purchased are generally shipped at the same time. In instances where products purchased are not shipped at the same time, DynaEnergetics uses the contractually stated price to determine SSP as this price approximates the price of each good as sold separately.
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 as common stock.
Basic EPS is then calculated by dividing net income (loss) available to common shareholders of the Company by the weighted‑average number of common shares 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 common shares. 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 September 30, | | Nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net income (loss) as reported | 4,910 |
| | (14,064 | ) | | 15,202 |
| | (16,892 | ) |
Less: Distributed net income available to participating securities | (7 | ) | | — |
| | (20 | ) | | — |
|
Less: Undistributed net income available to participating securities | (104 | ) | | — |
| | (323 | ) | | — |
|
Numerator for basic net income per share: | 4,799 |
| | (14,064 | ) | | 14,859 |
| | (16,892 | ) |
Add: Undistributed net income allocated to participating securities | 104 |
| | — |
| | 323 |
| | — |
|
Less: Undistributed net income reallocated to participating securities | (104 | ) | | — |
| | (323 | ) | | — |
|
Numerator for diluted net income per share: | 4,799 |
| | (14,064 | ) | | 14,859 |
|
| (16,892 | ) |
Denominator: | | | | | | | |
Weighted average shares outstanding for basic net income per share | 14,571,155 |
| | 14,368,225 |
| | 14,518,765 |
| | 14,333,452 |
|
Effect of dilutive securities | — |
| | — |
| | — |
| | — |
|
Weighted average shares outstanding for diluted net income per share | 14,571,155 |
| | 14,368,225 |
| | 14,518,765 |
|
| 14,333,452 |
|
Net income (loss) per share: | | | | | | | |
Basic | $ | 0.33 |
| | $ | (0.98 | ) | | $ | 1.02 |
| | $ | (1.18 | ) |
Diluted | $ | 0.33 |
| | $ | (0.98 | ) | | $ | 1.02 |
| | $ | (1.18 | ) |
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 cash and cash equivalents, trade accounts receivable and payables, accrued expenses and lines of credit approximate their fair value.
Our foreign currency forward contracts are determined using a yield curve model based on quoted market prices. As a result, these investments have been classified as Level 2 in the fair value hierarchy.
We did not hold any Level 3 assets or liabilities as of September 30, 2018 or December 31, 2017.
Recently Adopted Accounting Standards
In October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-16 which removes the prohibition against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. This ASU is effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and the Company adopted this ASU in the first quarter of 2018. The adoption of this ASU resulted in a reduction to January 1, 2018 “Retained earnings” in the Condensed Consolidated Balance Sheet of $65 and eliminated a $65 prepaid income tax balance recorded in the Consolidated Balance Sheet as of December 31, 2017.
In March 2017, the FASB issued ASU 2017-07 to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost within an entity’s financial statements. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company adopted this ASU in the first quarter of 2018. The Company records its annual adjustment to its defined benefit pension obligation based upon actuarial calculations performed during the fourth quarter. The adoption of this ASU is not expected to have a material impact on the consolidated financial statements.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02 which amends the existing accounting standards for lease accounting. The standard requires a lessee to recognize, on the balance sheet, a liability to make lease payments and a right-of-use (“ROU”) asset representing a right to use the underlying asset for the lease term. Leases will be classified as financing or operating, with classification affecting the pattern of expense recognition in the statement of operations. The ASU is effective for the Company on January 1, 2019. The ASU allows for either the modified or full retrospective method of adoption.
In July 2018, the FASB issued ASU No. 2018-11 which allows entities to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in the consolidated financial statements. The ASU allows entities to continue to apply the legacy guidance in Topic 840, Leases, including its disclosure requirements, in the comparative periods presented in the year the new leases standard is adopted. Entities that elect this option would still adopt the new leases standard using a modified retrospective transition method, but would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented.
The Company is currently in the process of completing an analysis of our vendor contracts and anticipates that a significant majority of its leasing arrangements will be classified as operating. Additionally, management is implementing a new software system to facilitate the requirements of the new standard and will complete the implementation during the fourth quarter of this year. Management is currently evaluating the impact that this standard will have on our consolidated financial statements and which practical expedients to employ during adoption. The Company anticipates that the adoption of this standard will result in an increase in its assets and liabilities.
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 consist of the following:
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Raw materials | $ | 31,259 |
| | $ | 16,255 |
|
Work-in-process | 7,485 |
| | 6,120 |
|
Finished goods | 17,431 |
| | 13,049 |
|
Supplies | 321 |
| | 318 |
|
| | | |
| $ | 56,496 |
| | $ | 35,742 |
|
4. PURCHASED INTANGIBLE ASSETS
The following table presents details of our purchased intangible assets as of September 30, 2018:
|
| | | | | | | | | | | |
| Gross | | Accumulated Amortization | | Net |
Core technology | $ | 19,436 |
| | $ | (10,771 | ) | | $ | 8,665 |
|
Customer relationships | 37,564 |
| | (36,714 | ) | | 850 |
|
Trademarks / Trade names | 2,086 |
| | (2,086 | ) | | — |
|
| | | | | |
Total intangible assets | $ | 59,086 |
| | $ | (49,571 | ) | | $ | 9,515 |
|
The following table presents details of our purchased intangible assets, other than goodwill, as of December 31, 2017:
|
| | | | | | | | | | | |
| Gross | | Accumulated Amortization | | Net |
Core technology | $ | 20,027 |
| | $ | (10,333 | ) | | $ | 9,694 |
|
Customer relationships | 39,244 |
| | (36,077 | ) | | 3,167 |
|
Trademarks / Trade names | 2,149 |
| | (2,149 | ) | | — |
|
| | | | | |
Total intangible assets | $ | 61,420 |
| | $ | (48,559 | ) | | $ | 12,861 |
|
The change in the gross value of our purchased intangible assets from December 31, 2017 to September 30, 2018 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. As of September 30, 2018 and December 31, 2017, contract liabilities (previously known as customer advances) were as follows:
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
NobelClad | 3,854 |
| | 5,804 |
|
DynaEnergetics | 456 |
| | 84 |
|
| | | |
Total | $ | 4,310 |
|
| $ | 5,888 |
|
We expect to recognize the revenue associated with contract liabilities over a time period no longer than one year. Of the $5,888 recorded as contract liabilities at December 31, 2017, $4,566 was recorded to net sales during the nine months ended September 30, 2018.
6. DEBT
Lines of credit consisted of the following:
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Syndicated credit agreement: | |
| | |
|
U.S. Dollar revolving loan | $ | 23,279 |
| | $ | 18,250 |
|
Capital expenditure loan | 18,990 |
| | — |
|
Long-term lines of credit | 42,269 |
| | 18,250 |
|
Less: debt issuance costs | 815 |
| | 266 |
|
Lines of credit | $ | 41,454 |
| | $ | 17,984 |
|
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 is to be used to finance our DynaEnergetics manufacturing expansion project in Blum, Texas. The Capex facility allows for advances to fund capital expenditures of the Blum expansion project during year one of the credit facility. At the end of year one, the Capex Facility will convert to a term loan which will be 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 and $25,000 Capex Facility 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 rates 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 borrowing and repayments under the credit facility have been in the form of one 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 September 30, 2018, 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 €1,827 is available as of September 30, 2018 after considering outstanding letters of credit.
Included in lines of credit are deferred debt issuance costs of $815 and $266 as of September 30, 2018 and December 31, 2017, respectively. Upon entering into the credit facility, we wrote off $159 of previously deferred debt issuance costs and incurred $817 of additional costs. Debt issuance costs of $507 were paid directly by the administrative agent and increased outstanding amounts under U.S. dollar revolving loans, and debt issuance costs of $310 have been paid by the Company. Deferred debt issuance costs are being amortized over the remaining term of the credit facility which expires on March 8, 2023.
As of December 31, 2017, we had a $35,000 credit facility that allowed for revolving loans of $30,000 in U.S. dollars and $5,000 in alternative currencies as well as a $25,000 accordion feature to increase the commitments in any of the loan classes subject to approval by applicable lenders.
7. 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 September 30, 2018 and December 31, 2017, the Company was in a consolidated three-year cumulative loss position. Accordingly, we have evaluated the impact on all jurisdictions and have continued to record a valuation allowance against the corresponding net deferred tax assets as of September 30, 2018 and December 31, 2017. 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”) was enacted in December 2017. Among other things, the TCJA reduced the U.S. federal corporate tax rate from 35% to 21% beginning in 2018, required companies to pay a one-time transition tax on previously unremitted earnings of non-U.S. subsidiaries that were previously tax deferred, and created new taxes on certain foreign sourced earnings. The SEC staff issued Staff Accounting Bulletin (SAB) 118, which provided guidance on accounting for enactment effects of the TCJA. SAB 118 provided a measurement period of up to one year from the TCJA’s enactment date for companies to complete their accounting under ASC 740. In accordance with SAB 118, to the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA.
For various reasons that are discussed more fully below, including the issuance of additional technical and interpretive guidance, we have not completed accounting for the income tax effects of certain elements of the TCJA. However, we were able to make reasonable estimates of the TCJA’s effects and, as such, have recorded provisional amounts related to the transition tax and the remeasurement of deferred tax assets and liabilities.
The transition tax is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of the Company’s non-U.S. subsidiaries. To determine the amount of the transition tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. E&P is similar to retained earnings of the subsidiary, but requires other adjustments to conform to U.S. tax rules. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. We were able to make a reasonable estimate of the transition tax and recorded a provisional obligation and additional income tax expense of $946 in the fourth quarter of 2017, which was reduced to $678 in the first quarter of 2018 in response to additional guidance received from the Internal Revenue Service and to $343 in the third quarter of 2018 upon completion of certain E&P calculations. The Company expects to elect to pay this liability over eight years. A payment of $76 was made during the second quarter of 2018. As of September 30, 2018, we reflected $267 in other long term liabilities. However, the Company is continuing to gather additional information and will consider additional technical guidance to more precisely compute and account for the amount of the transition tax in the measurement period. This amount may change when we finalize the
calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation, finalize the calculation of non-U.S. income taxes paid on such earnings, and finalize our determination on the impact of the deemed repatriation of foreign earnings on 2017 taxable income.
In addition to the transition tax, the TCJA introduced a territorial tax system, which was effective beginning in 2018. The territorial tax system may impact the Company’s overall global capital and legal entity structure, working capital, and repatriation plan on a go-forward basis. In light of the territorial tax system, and other new international provisions within the TCJA that are effective beginning in 2018, the Company is currently analyzing its global capital and legal entity structure, working capital requirements, and repatriation plans. We have not completed our full analysis with respect to the impact of the TCJA on our indefinite reinvestment assertion, and we are not yet able to make reasonable estimates of its related effects. Therefore, no provisional adjustments relative to the territorial tax system and our indefinite reinvestment assertion were recorded. Further, it is impracticable for the Company to estimate any future tax costs for any unrecognized deferred tax liabilities associated with its indefinite reinvestment assertion as of December 31, 2017 or September 30, 2018, because the actual tax liability, if any, would be dependent on complex analysis and calculations considering various tax laws, exchange rates, circumstances existing when a repatriation, sale, or liquidation occurs, or other factors. If there are any changes to our indefinite reinvestment assertion as a result of finalizing our assessment of the TCJA, the Company will adjust its provisional estimates, record, and disclose any tax impacts in the appropriate period, pursuant to SAB 118.
We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21% under the TCJA. As our U.S. deferred tax assets are fully offset by a valuation allowance, there was no net additional tax impact related to deferred tax assets and liabilities recognized in the fourth quarter of 2017. We are still analyzing certain aspects of the TCJA, considering additional technical guidance, and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. This includes, but is not limited to, the impacts of changes to Code Section 162(m) on our deferred tax assets related to compensation, and the potential impacts of the global intangible low-taxed income (“GILTI”) provision within the TCJA on deferred tax assets and liabilities.
We have not completed our full analysis with respect to the GILTI provision within the TCJA, and we are not yet able to make reasonable estimates of its related effects. Therefore, no provisional adjustments relative to GILTI were recorded. Currently, we have not yet elected a policy as to whether we will recognize deferred taxes for basis differences expected to reverse as GILTI or whether we will account for GILTI as period costs if and when incurred. The Company is currently evaluating other elements of the TCJA for which the Company was not yet able to make reasonable estimates of the enactment impact and for which it would continue accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before the TCJA.
8. BUSINESS SEGMENTS
Our business is organized into two segments: NobelClad and DynaEnergetics. 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. DynaEnergetics designs, manufactures and distributes products utilized by the global oil and gas industry principally for the perforation of oil and gas wells.
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 September 30, | | Nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net sales: | | | | | | | |
NobelClad | $ | 21,633 |
| | $ | 16,841 |
| | $ | 61,841 |
| | $ | 54,145 |
|
DynaEnergetics | 66,250 |
| | 35,320 |
| | 174,270 |
| | 84,169 |
|
| | | | | | | |
Net sales | $ | 87,883 |
| | $ | 52,161 |
| | $ | 236,111 |
| | $ | 138,314 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Operating income (loss) | | | | | | | |
NobelClad | $ | 2,099 |
| | $ | (17,030 | ) | | $ | 3,791 |
| | $ | (14,313 | ) |
DynaEnergetics | 9,860 |
| | 6,867 |
| | 30,801 |
| | 8,908 |
|
| | | | | | | |
Segment operating income (loss) | 11,959 |
| | (10,163 | ) | | 34,592 |
| | (5,405 | ) |
| | | | | | | |
Unallocated corporate expenses | (2,269 | ) | | (1,543 | ) | | (7,569 | ) | | (5,240 | ) |
Stock-based compensation | (870 | ) | | (743 | ) | | (2,662 | ) | | (2,125 | ) |
Other expense, net | (335 | ) | | (436 | ) | | (1,039 | ) | | (965 | ) |
Interest expense | (495 | ) | | (367 | ) | | (1,098 | ) | | (1,203 | ) |
Interest income | — |
| | — |
| | 2 |
| | 2 |
|
| | | | | | | |
Income (loss) before income taxes | $ | 7,990 |
| | $ | (13,252 | ) | | $ | 22,226 |
| | $ | (14,936 | ) |
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Depreciation and amortization: | | | | | | | |
NobelClad | $ | 802 |
| | $ | 932 |
| | $ | 2,435 |
| | $ | 2,927 |
|
DynaEnergetics | 1,595 |
| | 1,757 |
| | 4,729 |
| | 5,137 |
|
| | | | | | | |
Segment depreciation and amortization | $ | 2,397 |
| | $ | 2,689 |
| | $ | 7,164 |
| | $ | 8,064 |
|
The disaggregation of revenue earned from contracts with customers based on the geographic location of the customer is as follows. Revenues that would have been reported under previous accounting guidance would not have been materially different from the amounts shown below.
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
United States | 9,815 |
| | 9,484 |
| | 22,296 |
| | 24,918 |
|
Canada | 1,415 |
| | 1,041 |
| | 4,839 |
| | 6,541 |
|
United Arab Emirates | 346 |
| | 418 |
| | 737 |
| | 1,100 |
|
France | 508 |
| | 655 |
| | 3,203 |
| | 1,996 |
|
South Korea | 143 |
| | 29 |
| | 1,974 |
| | 1,173 |
|
Germany | 1,459 |
| | 1,056 |
| | 3,712 |
| | 3,820 |
|
Oman | 424 |
| | 24 |
| | 635 |
| | 1,323 |
|
India | 1,284 |
| | 272 |
| | 2,086 |
| | 531 |
|
Spain | 268 |
| | 345 |
| | 900 |
| | 1,375 |
|
China | 1,217 |
| | 1 |
| | 9,061 |
| | 1,025 |
|
Italy | 471 |
| | 221 |
| | 1,547 |
| | 1,183 |
|
Hong Kong | 851 |
| | 638 |
| | 2,662 |
| | 1,400 |
|
Sweden | 1,394 |
| | 987 |
| | 1,972 |
| | 1,598 |
|
Rest of the world | 2,038 |
| | 1,670 |
| | 6,217 |
| | 6,162 |
|
| | | | | | | |
Total NobelClad | $ | 21,633 |
| | $ | 16,841 |
| | $ | 61,841 |
| | $ | 54,145 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
United States | 54,281 |
| | 24,740 |
| | 134,575 |
| | 58,002 |
|
Canada | 5,904 |
| | 4,583 |
| | 20,245 |
| | 11,425 |
|
United Arab Emirates | 146 |
| | 113 |
| | 1,034 |
| | 201 |
|
France | 3 |
| | 7 |
| | 76 |
| | 43 |
|
Oman | 74 |
| | 182 |
| | 800 |
| | 312 |
|
Germany | 41 |
| | 207 |
| | 122 |
| | 264 |
|
Russia | 646 |
| | 888 |
| | 3,072 |
| | 2,733 |
|
India | 678 |
| | 287 |
| | 1,507 |
| | 1,637 |
|
Egypt | 321 |
| | 901 |
| | 1,397 |
| | 1,784 |
|
Romania | 110 |
| | 498 |
| | 399 |
| | 1,021 |
|
Iraq | — |
| | 25 |
| | 318 |
| | 25 |
|
Rest of the world | 4,046 |
| | 2,889 |
| | 10,725 |
| | 6,722 |
|
| | | | | | | |
Total DynaEnergetics | $ | 66,250 |
| | $ | 35,320 |
| | $ | 174,270 |
| | $ | 84,169 |
|
During the three months ended September 30, 2018, two customers in our DynaEnergetics segment each individually accounted for greater than 10% of total net sales. During the nine months ended September 30, 2018 and the three and nine months ended September 30, 2017, no customer was responsible for more than 10% of total net sales.
9. 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 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 represents 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 September 30, 2018, the notional amounts of the forward contracts the Company held to purchase currencies were $9,042, and the notional amounts of forward contracts the Company held to sell currencies were $2,806. The fair values of outstanding foreign currency forward contracts were not material at September 30, 2018.
The following table presents the location and amount of net gains (losses) from hedging activities:
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
Derivative | Statements of Operations Location | 2018 | | 2017 | | 2018 | | 2017 |
Foreign currency contracts | Other income (expense), net | $ | 36 |
| | $ | (193 | ) | | $ | (265 | ) | | $ | (193 | ) |
10. 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. The Company expects to tender the amount in the fourth quarter of 2018. In its financial statements for the quarter ended September 30, 2018, the Company accrued an additional $4,897 of penalties. As of September 30, 2018, the total amount accrued related to AD/CVD penalties was $8,000.
During the quarter ended September 30, 2018, the Company paid the remaining accrued AD/CVD and interest of $3,461 to U.S. Customs.
Patent and Trademark Infringement
On July 1, 2016, GEODynamics, Inc., a US-based oil and gas perforating equipment manufacturer based in Fort Worth, Texas (“GEODynamics”) filed a patent infringement action against DynaEnergetics US, Inc. (“DynaEnergetics”) in the United States District Court for the Eastern District of Texas (“District Court”) alleging infringement of US Patent No. 8,544,563 (the “563 patent”), based on DynaEnergetics’ US sales of DPEX® shaped charges. As part of the defense of this action, on September 20, 2016, DynaEnergetics filed an Inter Parties Review (IPR) against the 563 patent at the U.S. Patent Trial and Appeal Board (“PTAB”), requesting invalidation of the 563 patent. On March 17, 2017, DynaEnergetics’ IPR request was instituted by the PTAB, and on March 1, 2018, PTAB issued its decision in favor of DynaEnergetics, invalidating all challenged claims of the 563 patent. In May 2018, GEODynamics filed its notice of appeal with respect to the PTAB decision but withdrew its notice of appeal in September 2018. DynaEnergetics is in the process of filing for dismissal of the District Court case.
On April 28, 2017, GEODynamics filed a patent infringement action against DynaEnergetics in District Court alleging infringement of U.S. Patent No. 8,220,394 (the “394 patent”), based on DynaEnergetics’ U.S. sales of its DPEX® and HaloFrac® shaped charges. The 394 patent case went to trial in early October 2018, and on October 10, 2018, the jury found in favor of DynaEnergetics on all counts.
On August 21, 2017, GEODynamics filed a patent infringement action against DynaEnergetics GmbH & Co. KG and DynaEnergetics Beteiligungs GmbH, both wholly owned subsidiaries of DMC (collectively, “DynaEnergetics EU”), in the Regional Court of Düsseldorf, Germany, alleging infringement of the German part DE 60 2004 033 297 of European patent EP 1 671 013 B1 granted on June 29, 2011, a patent related to the 394 patent (the “EP 013 patent”). This action is based on the manufacturing, sale and marketing of DPEX shaped charges in Germany. DynaEnergetics EU denies validity and infringement of the EP 013 patent and is vigorously defending against this lawsuit. DynaEnergetics EU filed its defense at the Regional Court of Düsseldorf and a nullity action against EP 013 at the German Federal Patent Court on February 14, 2018. A trial in the infringement proceedings is scheduled for March 2019, and a trial in the nullity action is not expected before late 2019.
On September 27, 2017, DynaEnergetics GmbH & Co. KG filed a revocation action in the Patents Court, Shorter Trials Scheme in the UK against GEODynamics, asserting that the EP 013 patent, as maintained in the UK, is invalid. GEODynamics filed its defense and a counterclaim alleging infringement of the EP 013 patent in November 2017 based on sales and marketing of DPEX® shaped charges in the UK. GEODynamics discontinued its counterclaim for infringement on May 9, 2018 and has been ordered to pay costs related thereto at the close of the proceedings. Trial is currently expected to begin in late October 2018.
We do not believe that the EP 013 patent or infringement claims based on the patent are valid, and we do not believe it is probable that we will incur a material loss on the EP 013 matter. However, if it is determined that the patent is valid and that DynaEnergetics EU has infringed it, it is reasonably possible that our financial statements could be materially affected. We are not able to provide a reasonable estimate of the range of loss, and we have not accrued for any such losses. Such an evaluation includes, among other things, a determination of the total number of infringing products manufactured in Germany, the scope of potential damages and the relevant period for which damages would apply, if any.
Operating Leases
During the third quarter of 2018, we signed a lease for new office space for our corporate headquarters and for NobelClad’s U.S. administrative offices. We expect to move into the new offices during the first quarter of 2019. The annual minimum commitment payments under the office lease for the next five years as of September 30, 2018 are presented below:
|
| | | |
| Office Lease Commitments |
Year ended December 31 - | |
|
2018 | $ | — |
|
2019 | 236 |
|
2020 | 286 |
|
2021 | 296 |
|
2022 | 305 |
|
Thereafter | 2,267 |
|
| |
Total minimum payments | $ | 3,390 |
|
11. RESTRUCTURING
During the fourth quarter of 2017, NobelClad announced plans to consolidate its European production facilities by closing manufacturing operations in France, which it expects to complete by the end of 2018. Final approval of the proposed measures has been granted by the local workers council, in accordance with applicable French law. NobelClad plans to exit the Rivesaltes production facility, but will maintain its sales and administrative office in France. For the remainder of 2018, we expect to incur approximately $550 of restructuring expenses related to severance, equipment moving, legal fees, and contract termination costs.
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 September 30, 2018 |
| Severance | | Equipment Moving Costs | | Other Exit Costs | | Total |
NobelClad | $ | 65 |
| | $ | 119 |
| | $ | 8 |
| | $ | 192 |
|
|
| | | | | | | | | | | | | | | |
| Nine months ended September 30, 2018 |
| Severance | | Equipment Moving Costs | | Other Exit Costs | | Total |
NobelClad | $ | 300 |
| | $ | 119 |
| | $ | 134 |
| | $ | 553 |
|
|
| | | | | | | | | | | | | | | |
| Nine months ended September 30, 2017 |
| Severance | | Asset Impairment | | Other Exit Costs | | Total |
DynaEnergetics | $ | 20 |
| | $ | 143 |
| | $ | 295 |
| | $ | 458 |
|
During the nine months ended September 30, 2018, the changes to the restructuring liability associated with these programs is summarized below:
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | Expense | | Payments and Other Adjustments | | Currency Adjustments | | September 30, 2018 |
Severance | $ | 2,568 |
| | $ | 300 |
| | $ | (248 | ) | | $ | (73 | ) | | $ | 2,547 |
|
Equipment moving costs | — |
| | 119 |
| | (93 | ) | | — |
| | 26 |
|
Other exit costs | 10 |
| | 134 |
| | (144 | ) | | — |
| | — |
|
| | | | | | | | | |
Total | $ | 2,578 |
| | $ | 553 |
| | $ | (485 | ) | | $ | (73 | ) | | $ | 2,573 |
|
11. SUBSEQUENT EVENTS
Patent and Trademark Infringement
Trial on the 394 patent infringement matter resulted in a verdict on October 10, 2018 in favor of DynaEnergetics on all counts. Please refer to Note 10 “Commitments and Contingencies” for further discussion of the alleged patent infringement case.
Anti-dumping and Countervailing Duties
Subsequent to September 30, 2018, the Company received a written response from U.S. Customs related to penalties previously assessed. After reviewing the Company’s previously filed petition for relief and mitigation of penalties, U.S. Customs asserted a mitigated penalty of $8,000. Based upon this decision and the Company’s decision not to appeal further, the Company has accrued an additional $4,897 during the third quarter as a recognized subsequent event. Please refer to Note 10 “Commitments and Contingencies” for further discussion of the anti-dumping and countervailing duties.
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, 2017.
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, NobelClad and DynaEnergetics, 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 free-cash flow generation, 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.
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 decreased to $36,293 at September 30, 2018 from $37,529 at December 31, 2017.
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, outside processing costs, depreciation of manufacturing facilities and equipment, manufacturing supplies and other manufacturing overhead expenses.
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, depreciation of manufacturing facilities and equipment, manufacturing supplies and other manufacturing overhead expenses.
Factors Affecting Results
During the three and nine months ended September 30, 2018, the following factors most affected our financial performance:
| |
• | DynaEnergetics sales of $66,250 in the third quarter of 2018 increased 12% sequentially versus the second quarter of 2018 and 88% compared with the third quarter of 2017 primarily due to strong demand from a growing number of operators and service companies for DynaEnergetics’ advanced perforating systems. |
| |
• | NobelClad’s sales of $21,633 in the third quarter of 2018 increased 28% versus the third quarter of 2017 due to higher project volume. |
| |
• | Consolidated gross profit of 34% in the third quarter of 2018 increased from 33% in the third quarter of 2017. The improvement primarily was due to a higher proportion of DynaEnergetics sales relative to NobelClad sales, higher average selling prices in DynaEnergetics and the favorable impact of higher volume on fixed manufacturing overhead expenses. |
| |
• | Consolidated selling, general and administrative expenses were $15,050 in the third quarter of 2018 compared with $10,981 in the third quarter of 2017. The increase primarily was due to patent infringement legal defense costs, headcount additions and merit increases, as well as stock-based compensation and variable sales commissions, distribution expenses and incentive compensation. |
| |
• | Subsequent to the close of the third quarter, DynaEnergetics was notified by the U.S. Customs Department of its decision to assess an $8,000 penalty associated with a 2015 anti-dumping and countervailing duties case. The Company previously had disclosed a potential penalty range of $3,100 to $12,400. DynaEnergetics, which has elected not to continue its appeals in the case, recorded an accrual for potential penalties of $3,103 in the first quarter of 2018 and an additional $4,897 in the third quarter of 2018. The Company plans to tender the $8,000 in the fourth quarter of 2018. |
| |
• | Net debt of $30,356 increased $21,355 from $9,001 at December 31, 2017. The increase in net debt from December 31, 2017 primarily was attributable to borrowing to fund working capital and for the construction of DynaEnergetics’ 74,000 square foot manufacturing, assembly and administrative space on its manufacturing facility in Blum, Texas. Net debt is a non-GAAP measure calculated as amounts borrowed under lines of credit less cash and cash equivalents. |
Business Outlook
| |
• | In the fourth quarter of 2018, DynaEnergetics commenced production and assembly operations at its new 74,000 square foot manufacturing, assembly and administrative space at its existing site in Blum, Texas. The facility is expected to be fully operational during the fourth quarter. |
| |
• | In the fourth quarter of 2018, NobelClad expects to complete the consolidation of its European manufacturing facilities. NobelClad will close its manufacturing facility in Rivesaltes, France. All manufacturing and shooting operations in Europe will occur at its existing site in Liebenscheid, Germany. |
| |
• | Management is exploring strategic alternatives for its Russia-based perforating manufacturing and sales operations, which are expected to contribute approximately 2% to the Company’s sales in 2018. |
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 lines of credit 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.
Consolidated Results of Operations
Three months ended September 30, 2018 compared with three months ended September 30, 2017
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | |
| | 2018 | | 2017 | | $ change | | % change |
Net sales | | $ | 87,883 |
| | $ | 52,161 |
| | $ | 35,722 |
| | 68 | % |
Gross profit | | 29,728 |
| | 17,162 |
| | 12,566 |
| | 73 | % |
Gross profit percentage | | 33.8 | % | | 32.9 | % | | | | |
COSTS AND EXPENSES: | | | | | | | | |
General and administrative expenses | | 9,630 |
| | 6,535 |
| | 3,095 |
| | 47 | % |
% of net sales | | 11.0 | % | | 12.5 | % | | | | |
Selling and distribution expenses | | 5,420 |
| | 4,446 |
| | 974 |
| | 22 | % |
% of net sales | | 6.2 | % | | 8.5 | % | | | | |
Amortization of purchased intangible assets | | 769 |
| | 1,046 |
| | (277 | ) | | (26 | )% |
% of net sales | | 0.9 | % | | 2.0 | % | | | | |
Restructuring expenses | | 192 |
| | — |
| | 192 |
| | 100 | % |
Anti-dumping duty penalties | | 4,897 |
| | — |
| | 4,897 |
| | 100 | % |
Goodwill impairment charge | | — |
| | 17,584 |
| | (17,584 | ) | | (100 | )% |
Operating income (loss) | | 8,820 |
| | (12,449 | ) | | 21,269 |
| | 171 | % |
Other expense, net | | (335 | ) | | (436 | ) | | 101 |
| | 23 | % |
Interest expense, net | | (495 | ) | | (367 | ) | | (128 | ) | | (35 | )% |
Income before income taxes | | 7,990 |
| | (13,252 | ) | | 21,242 |
| | 160 | % |
Income tax provision | | 3,080 |
| | 812 |
| | 2,268 |
| | 279 | % |
Net income (loss) | | 4,910 |
| | (14,064 | ) | | 18,974 |
| | 135 | % |
Adjusted EBITDA | | $ | 17,176 |
| | $ | 8,567 |
| | $ | 8,609 |
| | 100 | % |
Net sales increased compared with 2017 primarily due to increased market activity levels in North America’s unconventional onshore oil and gas well completions sector and strong demand for DynaEnergetics’ advanced perforating systems.
Gross profit percentage increased compared with 2017 primarily due to a higher proportion of net sales in DynaEnergetics relative to NobelClad and improved pricing and product mix in DynaEnergetics.
General and administrative expenses increased compared with 2017 primarily due to patent infringement legal defense costs, increased salaries and wages due to merit increases and higher variable incentive compensation and stock-based compensation expense.
Selling and distribution increased compared with 2017 primarily due to higher salaries and wages from headcount additions and merit raises as well as variable sales commissions, distribution costs and incentive compensation expense.
Amortization of purchased intangibles decreased compared with 2017 primarily due to fully amortizing certain trademarks in DynaEnergetics as of December 31, 2017.
Restructuring expenses in 2018 primarily related to equipment moving expenses and severance costs associated with the planned closure of NobelClad’s manufacturing operations in France.
Anti-dumping duty penalties represent an accrual for a mitigated amount of penalties related to the anti-dumping and countervailing duties (“AD/CVD”) matter that was formally asserted by U.S. Customs Headquarters and recorded by the DynaEnergetics segment.
Goodwill impairment charge relates to fully impairing NobelClad's goodwill balance in the third quarter of 2017.
Operating income in 2018 compared with an operating loss in 2017 due to improved earnings in our DynaEnergetics and NobelClad segments as well as the non-recurring goodwill impairment charge in 2017 partially offset by the accrual for AD/CVD penalties in 2018.
Other expense, net in 2018 primarily relates to realized and unrealized currency losses compared to realized and unrealized losses in 2017. 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. During the third quarter of 2017, we began using 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 expense, net” within our Condensed Consolidated Statements of Operations.
Interest expense, net increased compared with 2017 primarily due to a larger average outstanding debt balance, including borrowings to finance the construction of a new manufacturing, assembly and administrative space at DynaEnergetics’ existing site in Blum, Texas.
Income tax provision of $3,080 on pretax income of $7,990. The effective rate was unfavorably impacted by the $4,897 accrual of non-deductible anti-dumping duty penalties but was favorably impacted by discrete items, including a $52 benefit for vesting of restricted stock, and a $336 adjustment to reduce the provisional Tax Cuts and Jobs Act transition tax amount originally recorded in the fourth quarter of 2017 due to the completion of certain earnings and profits (E&P) calculations. We recorded an income tax provision of $812 on pretax loss of $13,252 for the third quarter of 2017. The tax expense in the third quarter of 2017 related to jurisdictions in which we generated pretax income, while tax benefits in jurisdictions in which we generated pretax losses were offset by valuation allowances.
Net income for the three months ended September 30, 2018 was $4,910, or $0.33 per diluted share, compared with net loss of $14,064, or $0.98 per diluted share, for the same period in 2017.
Adjusted EBITDA increased compared with 2017 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 September 30, |
| | 2018 | | 2017 |
Net income (loss) | | $ | 4,910 |
| | $ | (14,064 | ) |
Interest expense | | 495 |
| | 367 |
|
Interest income | | — |
| | — |
|
Provision for income taxes | | 3,080 |
| | 812 |
|
Depreciation | | 1,628 |
| | 1,643 |
|
Amortization of purchased intangible assets | | 769 |
| | 1,046 |
|
EBITDA | | 10,882 |
| | (10,196 | ) |
Restructuring expenses | | 192 |
| | — |
|
Anti-dumping duty penalties | | 4,897 |
| | — |
|
Goodwill impairment charge | | — |
| | 17,584 |
|
Stock-based compensation | | 870 |
| | 743 |
|
Other expense, net | | 335 |
| | 436 |
|
Adjusted EBITDA | | $ | 17,176 |
| | $ | 8,567 |
|
Nine months ended September 30, 2018 compared with nine months ended September 30, 2017
|
| | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | | | |
| | 2018 | | 2017 | | $ change | | % change |
Net sales | | $ | 236,111 |
| | $ | 138,314 |
| | $ | 97,797 |
| | 71 | % |
Gross profit | | 79,256 |
| | 41,547 |
| | 37,709 |
| | 91 | % |
Gross profit percentage | | 33.6 | % | | 30.0 | % | | | | |
COSTS AND EXPENSES: | | | | | | | | |
General and administrative expenses | | 27,550 |
| | 19,821 |
| | 7,729 |
| | 39 | % |
% of net sales | | 11.7 | % | | 14.3 | % | | | | |
Selling and distribution expenses | | 16,427 |
| | 13,420 |
| | 3,007 |
| | 22 | % |
% of net sales | | 7.0 | % | | 9.7 | % | | | | |
Amortization of purchased intangible assets | | 2,365 |
| | 3,034 |
| | (669 | ) | | (22 | )% |
% of net sales | | 1.0 | % | | 2.2 | % | | | | |
Restructuring expenses | | 553 |
| | 458 |
| | 95 |
| | 21 | % |
Anti-dumping duty penalties | | 8,000 |
| | — |
| | 8,000 |
| | 100 | % |
Goodwill impairment charge | | — |
| | 17,584 |
| | (17,584 | ) | | (100 | )% |
Operating income (loss) | | 24,361 |
| | (12,770 | ) | | 37,131 |
| | 291 | % |
Other expense, net | | (1,039 | ) | | (965 | ) | | (74 | ) | | (8 | )% |
Interest expense, net | | (1,096 | ) | | (1,201 | ) | | 105 |
| | 9 | % |
Income (loss) before income taxes | | 22,226 |
| | (14,936 | ) | | 37,162 |
| | 249 | % |
Income tax provision | | 7,024 |
| | 1,956 |
| | 5,068 |
| | 259 | % |
Net income (loss) | | 15,202 |
| | (16,892 | ) | | 32,094 |
| | 190 | % |
Adjusted EBITDA | | $ | 42,740 |
| | $ | 15,461 |
| | $ | 27,279 |
| | 176 | % |
Net sales increased compared with 2017 primarily due to a 107% increase in DynaEnergetics’ net sales due to increased activity levels in North America’s unconventional onshore oil and gas well completions sector and growth in customer demand for its advanced perforating systems.
Gross profit percentage increased compared with 2017 primarily due to a higher proportion of net sales in DynaEnergetics relative to NobelClad, improved pricing and product mix in DynaEnergetics, as well as better project mix in NobelClad.
General and administrative expenses increased compared with 2017 primarily due to patent infringement legal defense costs and other outside service expenses, increased salaries and wages from merit raises and higher variable incentive compensation and stock-based compensation expense.
Selling and distribution increased compared with 2017 primarily due to headcount additions and merit increases as well as variable sales commissions, distribution costs and incentive compensation expense.
Amortization of purchased intangibles decreased compared with 2017 primarily due to fully amortizing certain trademarks in DynaEnergetics as of December 31, 2017.
Restructuring expenses in 2018 primarily related to equipment moving expenses, legal fees and severance costs associated with the planned closure of NobelClad’s manufacturing operations in France, while the expenses in 2017 related to the closure of DynaEnergetics operations in Kazakhstan.
Anti-dumping duty penalties represent an accrual for a mitigated amount of penalties related to the AD/CVD matter that was formally asserted by U.S. Customs Headquarters and recorded by the DynaEnergetics segment.
Goodwill impairment charge relates to fully impairing NobelClad's goodwill balance in the third quarter of 2017.
Operating income in 2018 compared to operating loss in 2017 primarily due to improved earnings in our DynaEnergetics segment as well as the non-recurring goodwill impairment charge in 2017.
Other expense, net in 2018 primarily relates to realized and unrealized foreign currency losses compared to realized and unrealized losses in 2017. 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. During the third quarter of 2017, we began using 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 expense, net” within our Condensed Consolidated Statements of Operations.
Interest expense, net decreased compared with 2017. We wrote off $159 of deferred debt issuance costs in the first quarter of 2018 versus $261 in the first quarter of 2017. Additionally, during 2018 we capitalized interest of approximately $217 on DynaEnergetics’ new manufacturing, assembly and administrative facility in Blum, Texas. These two items were partially offset by interest incurred on a larger average outstanding debt balance in 2018.
Income tax provision of $7,024 on pretax income of $22,226. The effective rate was unfavorably impacted by the accrual of non-deductible anti-dumping duty penalties but was favorably impacted by discrete items, including a $338 benefit for vesting of restricted stock, and a $603 adjustment to reduce the provisional Tax Cuts and Jobs Act transition tax amount originally recorded in the fourth quarter of 2017 due to new guidance issued by the Internal Revenue Service regarding the application of loss carryovers to the tax calculation and the completion of certain E&P calculations. We recorded an income tax provision of $1,956 on a pretax loss of $14,936 for the nine months ended September 30, 2017. The tax expense in 2017 related to jurisdictions in which we generated pretax income, while tax benefits in jurisdictions in which we generated pretax losses were offset by valuation allowances.
Net income for the nine months ended September 30, 2018 was $15,202, or $1.02 per diluted share, compared with a net loss of $16,892, or $1.18 per diluted share, for the same period in 2017.
Adjusted EBITDA increased compared with 2017 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.
|
| | | | | | | | |
| | Nine months ended September 30, |
| | 2018 | | 2017 |
Net income (loss) | | $ | 15,202 |
| | $ | (16,892 | ) |
Interest expense | | 1,098 |
| | 1,203 |
|
Interest income | | (2 | ) | | (2 | ) |
Provision for income taxes | | 7,024 |
| | 1,956 |
|
Depreciation | | 4,799 |
| | 5,030 |
|
Amortization of purchased intangible assets | | 2,365 |
| | 3,034 |
|
EBITDA | | 30,486 |
| | (5,671 | ) |
Restructuring expenses | | 553 |
| | 458 |
|
Anti-dumping duty penalties | | 8,000 |
| | — |
|
Goodwill impairment charge | | — |
| | 17,584 |
|
Stock-based compensation | | 2,662 |
| | 2,125 |
|
Other expense, net | | 1,039 |
| | 965 |
|
Adjusted EBITDA | | $ | 42,740 |
| | $ | 15,461 |
|
Business Segment Financial Information
We primarily evaluate performance and allocate resources based on segment revenues, operating income (loss) and adjusted EBITDA as well as projected future performance. Segment operating income (loss) is defined as revenues less expenses identifiable to the segment. Segment operating income (loss) will reconcile to consolidated income (loss) before income taxes by deducting
unallocated corporate expenses, including stock-based compensation, net other expense, net interest expense, and income tax provision.
NobelClad
Three months ended September 30, 2018 compared with three months ended September 30, 2017
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | |
| | 2018 | | 2017 | | $ change | | % change |
Net sales | | $ | 21,633 |
| | $ | 16,841 |
| | $ | 4,792 |
| | 28 | % |
Gross profit | | 5,302 |
| | 3,560 |
| | 1,742 |
| | 49 | % |
Gross profit percentage | | 24.5 | % | | 21.1 | % | | | | |
COSTS AND EXPENSES: | | | | | | | | |
General and administrative expenses | | 1,090 |
| | 1,210 |
| | (120 | ) | | (10 | )% |
Selling and distribution expenses | | 1,822 |
| | 1,696 |
| | 126 |
| | 7 | % |
Amortization of purchased intangible assets | | 99 |
| | 100 |
| | (1 | ) | | (1 | )% |
Restructuring expenses | | 192 |
| | — |
| | 192 |
| | 100 | % |
Goodwill impairment charge | | — |
| | 17,584 |
| | (17,584 | ) | | (100 | )% |
Operating income (loss) | | 2,099 |
| | (17,030 | ) | | 19,129 |
| | 112 | % |
Adjusted EBITDA | | $ | |