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, 2019.
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.
Accounts Receivable
In June 2016, the Financial Accounting Standards Board (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's financial instruments within the scope of this guidance primarily include accounts receivable.
On January 1, 2020, we adopted the new standard under the modified retrospective approach, such that comparative information has not been restated and continues to be reported under accounting standards in effect for those periods. The Company recognized the cumulative effect of the new accounting standard as an adjustment to the January 1, 2020 balance of Retained Earnings in the Condensed Consolidated Balance Sheet, and the adoption of the new accounting standard did not have a material impact on the Company’s financial position and results of operations given limited historical write-off activity within each of the Company’s segments.
In accordance with the new standard, the Company has disaggregated pools of accounts receivable balances by business, geography and/or customer risk profile, and has used history and other experience to establish an allowance for credit losses at the time the receivable is recognized, rather than the historical approach of establishing reserves when accounts receivable balances age or demonstrate they will not be collected. To measure expected credit losses, we have elected to pool trade receivables by segment and analyze DynaEnergetics and NobelClad accounts receivable balances as separate populations. Within each segment, receivables exhibit similar risk characteristics.
During the six months ended June 30, 2020, we increased our expected loss rate due to the COVID-19 pandemic-related
collapse in oil and gas demand and resulting downturn in well completions. In addition, we continued to review receivables outstanding, including aged balances, and in circumstances where we are aware of a specific customer’s inability to meet its financial obligation to us, we recorded a specific allowance for credit losses (with the offsetting expense charged to “Selling and distribution expenses” in our Condensed Consolidated Statements of Operations) against the amounts due, reducing the net recognized receivable to the amount we estimate will be collected. In total, provisions of $3,264 were recorded during the six months ended June 30, 2020. The following table summarizes activity in the allowance for credit losses on receivables from DynaEnergetics and NobelClad customers:
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|
|
|
|
|
|
|
|
DynaEnergetics
|
|
NobelClad
|
|
DMC Global Inc.
|
|
Allowance for doubtful accounts, December 31, 2019
|
$
|
945
|
|
|
$
|
22
|
|
|
$
|
967
|
|
|
Adjustment for cumulative effect from change in accounting principle
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
50
|
|
|
Current period provision for expected credit losses
|
2,952
|
|
|
312
|
|
|
3,264
|
|
|
Write-offs charged against the allowance
|
(1,054)
|
|
|
(178)
|
|
|
(1,232)
|
|
|
Recoveries of amounts previously reserved
|
(67)
|
|
|
(134)
|
|
|
(201)
|
|
|
Impacts of foreign currency exchange rates and other
|
34
|
|
|
—
|
|
|
34
|
|
|
Allowance for doubtful accounts, June 30, 2020
|
$
|
2,860
|
|
|
$
|
22
|
|
|
$
|
2,882
|
|
Revenue Recognition
The Company’s revenues are primarily derived from consideration paid by customers for tangible goods. The Company analyzes its different goods by segment to determine the appropriate basis for revenue recognition. Revenue is not generated from sources other than contracts with customers and revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. There are no material upfront costs for operations that are incurred from contracts with customers.
Our rights to payments for goods transferred to customers arise when control is transferred at a point in time and not on any other criteria. Payment terms and conditions vary by contract, although terms generally include a requirement of payment within 30 to 60 days. In instances when we require customers to make advance payments prior to the shipment of their orders, we record a contract liability. We have determined that our contract liabilities do not include a significant financing component given the short duration between order initiation and order fulfillment within each of our segments. Please refer to Note 5 “Contract Liabilities” for further information on contract liabilities and Note 9 “Business Segments” for disaggregated revenue disclosures.
Income Taxes
We recognize deferred tax assets and liabilities for the expected future income tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. The deferred income tax impact of tax credits is recognized as an immediate adjustment to income tax expense. We recognize deferred tax assets for the expected future effects of all deductible temporary differences to the extent we believe these assets will more likely than not be realized. We record a valuation allowance when, based on current circumstances, it is more likely than not that all or a portion of the deferred tax assets will not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, recent financial operations and their associated valuation allowances, if any.
We recognize the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position that it will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that is more likely than not to be realized upon ultimate resolution. We recognize interest and penalties related to uncertain tax positions in operating expense.
Earnings Per Share
The Company computes earnings per share (“EPS”) using a two-class method, which is an earnings allocation formula that determines EPS for (i) each class of common stock (the Company has a single class of common stock), and (ii) participating securities according to dividends declared and participation rights in undistributed earnings. Restricted stock awards are considered participating securities in periods with net income as they receive non-forfeitable rights to dividends similar to common stock. Restricted stock awards do not participate in net losses.
Basic EPS is calculated by dividing net income available to common stockholders of the Company by the weighted average number of shares of common stock outstanding during the period. Diluted EPS adjusts basic EPS for the effects of restricted stock awards, performance share units and other potentially dilutive financial instruments (dilutive securities), only in the periods in which such effect is dilutive. The effect of the dilutive securities is reflected in diluted EPS by application of the more dilutive of (1) the treasury stock method or (2) the two-class method assuming nonvested shares are not converted into
shares of common stock. For the periods presented, diluted EPS using the treasury stock method was less dilutive than the two-class method; as such, only the two-class method has been included below.
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Three months ended June 30,
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|
Six months ended June 30,
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|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net (loss) income as reported
|
$
|
(5,648)
|
|
|
$
|
17,244
|
|
|
(1,493)
|
|
|
32,414
|
|
|
Less: Distributed net income available to participating securities
|
—
|
|
|
(2)
|
|
|
—
|
|
|
(5)
|
|
|
Less: Undistributed net income available to participating securities
|
—
|
|
|
(136)
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|
|
—
|
|
|
(256)
|
|
|
Numerator for basic net (loss) income per share:
|
(5,648)
|
|
|
17,106
|
|
|
(1,493)
|
|
|
32,153
|
|
|
Add: Undistributed net income allocated to participating securities
|
—
|
|
|
136
|
|
|
—
|
|
|
256
|
|
|
Less: Undistributed net income reallocated to participating securities
|
—
|
|
|
(134)
|
|
|
—
|
|
|
(252)
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|
|
Numerator for diluted net (loss) income per share:
|
(5,648)
|
|
|
17,108
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|
|
(1,493)
|
|
|
32,157
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|
Denominator:
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|
Weighted average shares outstanding for basic net (loss) income per share
|
14,832,242
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|
|
14,647,019
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|
|
14,745,661
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|
|
14,624,718
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|
|
Effect of dilutive securities (1)
|
—
|
|
|
252,968
|
|
|
—
|
|
|
225,098
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|
|
Weighted average shares outstanding for diluted net (loss) income per share
|
14,832,242
|
|
|
14,899,987
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|
|
14,745,661
|
|
|
14,849,816
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|
|
Net (loss) income per share:
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|
|
|
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Basic
|
$
|
(0.38)
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|
|
$
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1.17
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|
|
$
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(0.10)
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|
|
$
|
2.20
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Diluted
|
$
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(0.38)
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|
|
$
|
1.15
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|
|
$
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(0.10)
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|
|
$
|
2.17
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|
(1) For the three and six months ended June 30, 2020, 30,967 and 35,742, respectively, shares have been excluded as their effect would have been anti-dilutive.
Deferred compensation
The Company maintains a Non-Qualified Deferred Compensation Plan (the “Plan”) as part of its overall compensation package for certain employees. Participants are eligible to defer a portion of their annual salary, their annual incentive bonus, and their equity awards through the Plan on a tax-deferred basis. Deferrals into the Plan are not matched or subsidized by the Company, nor are they eligible for above-market or preferential earnings.
The Plan provides for deferred compensation obligations to be settled either by delivery of a fixed number of shares of DMC’s common stock or in cash, in accordance with participant contributions and elections. For deferred equity awards, subsequent to equity award vesting and after a period prescribed by the Plan, participants can elect to diversify contributions of equity awards into other investment options available to Plan participants. Once diversified, contributions of equity awards will be settled by delivery of cash.
The Company has established a grantor trust commonly known as a “rabbi trust” and contributed certain assets to satisfy the future obligations to participants in the Plan. These assets are subject to potential claims of the Company’s general creditors. The assets held in the trust include unvested RSAs, vested company stock awards, company-owned life insurance (“COLI”) on certain employees, and money market and mutual funds. Unvested RSAs and common stock held by the trust are reflected in the Consolidated Balance Sheets within “Treasury stock, at cost, and company stock held for deferred compensation, at par” at the par value of the common stock or unvested RSAs. These accounts are not adjusted for subsequent changes in the fair value of the common stock. COLI is accounted for at the cash surrender value while money market and mutual funds held by the trust are accounted for at fair value. The balances of $6,104 as of June 30, 2020 and $4,461 as of December 31, 2019 were reflected in the Consolidated Balance Sheets within “Other assets.”
Deferred compensation obligations that will be settled in cash are accounted for on an accrual basis in accordance with the terms of the Plan. The balances of $6,110 as of June 30, 2020 and $6,143 as of December 31, 2019 were reflected in the Consolidated Balance Sheets within “Other long-term liabilities.” These obligations are adjusted based on changes in value of the underlying investment options chosen by Plan participants. Deferred compensation that will be settled by delivery of a fixed
number of previously vested shares of the Company’s common stock are reflected in the Consolidated Statements of Stockholders’ Equity within “Common stock” at the par value of the common stock or unvested RSAs. These accounts are not adjusted for subsequent changes in the fair value of the common stock.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We are required to use an established hierarchy for fair value measurements based upon the inputs to the valuation and the degree to which they are observable or not observable in the market. The three levels in the hierarchy are as follows:
•Level 1 — Inputs to the valuation based upon quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date.
•Level 2 — Inputs to the valuation include quoted prices in either markets that are not active, or in active markets for similar assets or liabilities, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data.
•Level 3 — Inputs to the valuation that are unobservable inputs for the asset or liability.
The highest priority is assigned to Level 1 inputs and the lowest priority to Level 3 inputs.
The carrying value of accounts receivable and payable, accrued expenses, revolving loans under our credit facility and borrowings under our capital expenditure facility approximate their fair value. Our revolving loans and borrowings under our capital expenditure facility reset each month at market interest rates.
Our foreign currency forward contracts are valued using quoted market prices or are determined using a yield curve model based on current market rates. As a result, we classify these investments as Level 2 in the fair value hierarchy. Money market funds and mutual funds of $4,097 as of June 30, 2020 and $2,420 as of December 31, 2019 were held to satisfy future deferred compensation obligations are valued based upon the market values of underlying securities, and therefore we classify these assets as Level 2 in the fair value hierarchy.
We did not hold any Level 3 assets or liabilities as of June 30, 2020 or December 31, 2019.
Recently Adopted Accounting Standards
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 adopted the new standard on January 1, 2020. The Company's financial instruments within the scope of this guidance primarily include trade receivables. Please refer to “Accounts Receivable” for further information.
Recent Accounting Pronouncements
In December 2019, the FASB issued a new accounting pronouncement regarding accounting for income taxes. The new standard removes certain exceptions to the general principles in ASC 740 Income Taxes and also clarifies and amends existing guidance to provide for more consistent application. The new standard will become effective for the Company in the first quarter of fiscal 2021 and early adoption is permitted. We are evaluating the impact that the adoption of this update will have on our consolidated financial statements.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Significant cost elements included in inventory are material, labor, freight, subcontract costs, and manufacturing overhead. As necessary, we adjust inventory to its net realizable value by recording provisions for excess, slow moving and obsolete inventory. We regularly review inventory quantities on hand and values, and compare them to estimates of future product demand, market conditions, production requirements and technological developments.
Inventories consisted of the following:
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|
June 30, 2020
|
|
December 31, 2019
|
|
Raw materials
|
$
|
26,180
|
|
|
$
|
26,173
|
|
|
Work-in-process
|
16,170
|
|
|
12,194
|
|
|
Finished goods
|
17,153
|
|
|
15,045
|
|
|
Supplies
|
257
|
|
|
316
|
|
|
|
$
|
59,760
|
|
|
$
|
53,728
|
|
4. PURCHASED INTANGIBLE ASSETS
Our purchased intangible assets consisted of the following as of June 30, 2020:
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|
|
|
|
|
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Core technology
|
$
|
17,374
|
|
|
$
|
(12,590)
|
|
|
$
|
4,784
|
|
|
Customer relationships
|
35,131
|
|
|
(35,131)
|
|
|
—
|
|
|
Trademarks / Trade names
|
1,994
|
|
|
(1,994)
|
|
|
—
|
|
|
Total intangible assets
|
$
|
54,499
|
|
|
$
|
(49,715)
|
|
|
$
|
4,784
|
|
Our purchased intangible assets consisted of the following as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Core technology
|
$
|
17,717
|
|
|
$
|
(11,837)
|
|
|
$
|
5,880
|
|
|
Customer relationships
|
35,091
|
|
|
(35,091)
|
|
|
—
|
|
|
Trademarks / Trade names
|
1,988
|
|
|
(1,988)
|
|
|
—
|
|
|
Total intangible assets
|
$
|
54,796
|
|
|
$
|
(48,916)
|
|
|
$
|
5,880
|
|
The change in the gross value of our purchased intangible assets from December 31, 2019 to June 30, 2020 was due to foreign currency translation and an adjustment due to the recognition of tax benefit of tax amortization previously applied to certain goodwill related to the NobelClad and DynaEnergetics reporting units. After the goodwill was written off at September 30, 2017 and December 31, 2015, respectively, the tax amortization reduces other noncurrent intangible assets related to the historical acquisition.
5. CONTRACT LIABILITIES
On occasion, we require customers to make advance payments prior to the shipment of goods in order to help finance our inventory investment on large orders or to keep customers’ credit limits at acceptable levels. Contract liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
NobelClad
|
$
|
4,639
|
|
|
$
|
1,427
|
|
|
DynaEnergetics
|
587
|
|
|
1,309
|
|
|
|
|
|
|
|
Total
|
$
|
5,226
|
|
|
$
|
2,736
|
|
We expect to recognize the revenue associated with contract liabilities over a time period no longer than one year. Of the $2,736 recorded as contract liabilities at December 31, 2019, $1,988 was recorded to net sales during the six months ended June 30, 2020.
6. LEASES
The Company leases real properties for use in manufacturing and as administrative and sales offices, and leases automobiles and office equipment. The Company determines if a contract contains a lease arrangement at the inception of the contract. For leases in which the Company is the lessee, leases are classified as either finance or operating. Right of use (ROU) assets are initially measured at the present value of lease payments over the lease term plus initial direct costs, if any, with the
classification affecting the pattern of expense recognition. If a lease does not provide a discount rate and the rate cannot be readily determined, an incremental borrowing rate is used to determine the future lease payments. Lease and non-lease components within the Company’s lease agreements are accounted for together.
Nearly all of the Company’s leasing arrangements are classified as operating leases. ROU asset and lease liability balances were as follows for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
ROU asset
|
11,055
|
|
|
10,423
|
|
|
|
|
|
|
|
Current lease liability
|
1,846
|
|
|
1,716
|
|
|
Long-term lease liability
|
10,430
|
|
|
9,777
|
|
|
Total lease liability
|
$
|
12,276
|
|
|
$
|
11,493
|
|
The ROU asset was included in “Other assets” while the current lease liability was reported in “Other current liabilities” and the long-term lease liability was reported in “Other long-term liabilities” on the Company’s Condensed Consolidated Balance Sheet. Cash paid for operating lease liabilities are recorded as cash flows from operating activities in the Company’s Condensed Consolidated Statements of Cash Flows. For the three months ended June 30, 2020 and 2019, operating lease costs were $894 and $751, respectively. For the six months ended June 30, 2020 and 2019, operating lease costs were $1,996 and $1,436, respectively. Operating lease costs were included in the Company’s Condensed Consolidated Statements of Operations. Short term and variable lease costs were not material for the three and six months ended June 30, 2020 and 2019.
Certain of the Company’s leases contain renewal options and options to extend the leases for up to five years, and a majority of these options are reflected in the calculation of the ROU asset and lease liability due to the likelihood of renewal.
The following table summarizes the weighted average lease terms and discount rates for operating lease liabilities:
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
Weighted average remaining lease term (in years)
|
8.62
|
|
Weighted average discount rate
|
5.5
|
%
|
The following table represents maturities of operating lease liabilities as of June 30, 2020:
|
|
|
|
|
|
|
|
Due within 1 year
|
$
|
1,846
|
|
|
Due after 1 year through 2 years
|
1,924
|
|
|
Due after 2 years through 3 years
|
1,766
|
|
|
Due after 3 years through 4 years
|
1,609
|
|
|
Due after 4 years through 5 years
|
1,538
|
|
|
Due after 5 years
|
6,148
|
|
|
Total future minimum lease payments
|
14,831
|
|
|
Less imputed interest
|
(2,555)
|
|
|
Total
|
$
|
12,276
|
|
7. DEBT
Outstanding borrowings consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Syndicated credit agreement:
|
|
|
|
|
U.S. Dollar revolving loan
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Capital expenditure facility
|
13,313
|
|
|
14,875
|
|
|
|
|
|
|
|
Outstanding borrowings
|
13,313
|
|
|
14,875
|
|
|
Less: debt issuance costs
|
(593)
|
|
|
(603)
|
|
|
Total debt
|
12,720
|
|
|
14,272
|
|
|
Less: current portion of long-term debt
|
(3,125)
|
|
|
(3,125)
|
|
|
Long-term debt
|
$
|
9,595
|
|
|
$
|
11,147
|
|
Syndicated Credit Agreement
On March 8, 2018, we entered into a five-year $75,000 syndicated credit agreement (“credit facility”) which replaced in its entirety our prior syndicated credit facility entered into on February 23, 2015. The credit facility allows for revolving loans of up to $50,000 with a $20,000 US dollar equivalent sublimit for alternative currency loans. In addition, the agreement provided for a $25,000 Capital Expenditure Facility (“Capex Facility”) which was used to assist in financing our DynaEnergetics manufacturing expansion project in Blum, Texas. At the end of year one, the Capex Facility converted to a term loan which is amortizable at 12.5% of principal per year with a balloon payment for the outstanding balance upon the credit facility maturity date in 2023. The Capex Facility bears interest at a LIBOR-based variable rate which at June 30, 2020 was 2.49%. In 2019, we prepaid an additional $7,000 above the required amortization amount. The credit facility has a $100,000 accordion feature to increase the commitments under the revolving loan class and/or by adding a term loan subject to approval by applicable lenders. We entered into the credit facility with a syndicate of three banks, with KeyBank, N.A. acting as administrative agent. The syndicated credit facility is secured by the assets of DMC including accounts receivable, inventory, and fixed assets, as well as guarantees and share pledges by DMC and its subsidiaries.
Borrowings under the $50,000 revolving loan can be in the form of one, two, three, or six month LIBOR rate loans. Additionally, US dollar borrowings on the revolving loan can be in the form of Base Rate loans (Base Rate borrowings are based on the greater of the administrative agent’s Prime rates, an adjusted Federal Funds rate or an adjusted LIBOR rate). LIBOR loans bear interest at the applicable LIBOR rate plus an applicable margin (varying from 1.50% to 3.00%). Base Rate loans bear interest at the defined Base rate plus an applicable margin (varying from 0.50% to 2.00%). All revolver loan borrowings and repayments have been in the form of one-month or two-month loans and are reported on a net basis in our Condensed Consolidated Statements of Cash Flows.
Borrowings under the $20,000 alternate currency sublimit can be in euros, Canadian dollars, pounds sterling, and in any other currency acceptable to the administrative agent. Alternative currency borrowings denominated in euros, pounds sterling, and any other currency that is dealt with on the London Interbank Deposit Market shall be comprised of LIBOR loans and bear interest at the LIBOR rate plus an applicable margin (varying from 1.50% to 3.00%).
On June 25, 2020, we entered into an amendment ("Amendment") to the credit facility. The Amendment waives the debt service coverage ratio covenant for the quarters ending September 30, 2020, December 31, 2020, and March 31, 2021. The debt service coverage ratio minimum of 1.35 to 1 was applicable for the quarter ending June 30, 2020 and will resume beginning with the quarter ending June 30, 2021 and thereafter. The debt service coverage ratio is defined in the credit facility as the ratio of Consolidated Pro Forma EBITDA less the sum of capital distributions paid in cash, cash income taxes and Consolidated Unfunded Capital Expenditures (as defined in the credit facility) to Debt Service Charges (as defined in the credit facility).
Additionally, the Amendment added a Minimum Liquidity covenant requiring the total of cash and cash equivalents held by U.S. subsidiaries and available borrowing capacity under the credit facility to exceed $10,000 for the quarters ending September 30, 2020, December 31, 2020, and March 31, 2021. The Minimum Liquidity covenant is not required after the quarter ending March 31, 2021.
During the period from the Amendment through August 31, 2020, borrowings outstanding under the credit facility will bear interest at LIBOR plus a margin of 1.75% or at a Base Rate (as defined in the credit facility) plus a margin of 0.75%. For the period from September 1, 2020 through the date of receipt of the covenant compliance certificate for the quarter ending March 31, 2021, borrowings outstanding under the credit facility will bear interest at LIBOR plus a margin of 1.75% to 3.00% or at a Base Rate plus a margin of 0.75% to 2.00%. In each case, the margin is based on the Company's Leverage Ratio of
Consolidated Funded Indebtedness (as defined in the credit facility) on the last day of such period to Consolidated Pro Forma EBITDA for such period. Additionally, the Amendment sets the minimum LIBOR at 0.75%.
The credit facility, as amended, includes various covenants and restrictions, certain of which relate to the payment of dividends or other distributions to stockholders; redemption of capital stock; incurrence of additional indebtedness; mortgaging, pledging or disposition of major assets; and maintenance of specified ratios. As of June 30, 2020, 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 €243 is available as of June 30, 2020 after considering outstanding letters of credit.
Included in long-term debt are deferred debt issuance costs of $593 and $603 as of June 30, 2020 and December 31, 2019, respectively. Deferred debt issuance costs are being amortized over the remaining term of the credit facility which expires on March 8, 2023.
8. INCOME TAXES
The effective tax rate for each of the periods reported differs from the U.S. statutory rate primarily due to variation in contribution to consolidated pre-tax income from each jurisdiction for the respective periods, differences between the U.S. and foreign tax rates (which range from 20% to 34%), permanent differences between book and taxable income, and changes to valuation allowances on our deferred tax assets.
We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use existing deferred tax assets. Additionally, a three-year cumulative loss at a Consolidated Financial Statement level may be viewed as negative evidence impacting a jurisdiction that by itself is not in a three-year cumulative loss position. During the six months ended June 30, 2020, we did not record any adjustments to valuation allowances. At March 31, 2019, the Company was no longer in a three-year cumulative loss position in the U.S. and we believe sufficient future taxable income will be generated to use existing deferred tax assets in that jurisdiction. Accordingly, during the three months ended March 31, 2019, we released valuation allowances of $368 in that jurisdiction and certain states. The Company will continue to monitor the realizability of deferred tax assets and the need for valuation allowances and will record adjustments in the periods in which facts support such adjustments.
The Tax Cuts and Jobs Act (“TCJA”) provides that foreign earnings generally can be repatriated to the U.S. without federal tax consequence. We have reassessed the assertion that cumulative earnings by our foreign subsidiaries are indefinitely reinvested. We continue to permanently reinvest the earnings of our international subsidiaries and therefore we do not provide for U.S. income taxes or withholding taxes that could result from the distribution of those earnings to the U.S. parent. If any such earnings were ultimately distributed to the U.S. in the form of dividends or otherwise, or if the shares of our international subsidiaries were sold or transferred, we could be subject to additional U.S. federal and state income taxes. Due to the multiple avenues in which earnings can be repatriated, and because a large portion of these earnings are not liquid, it is not practical to estimate the amount of additional taxes that might be payable on these amounts of undistributed foreign income.
During the first quarter of 2020, we filed for a quick refund of our 2019 U.S. tax overpayment of $2,700 followed by a tax return filing in the second quarter. We expect to receive the payment during the third quarter of 2020. During the fourth quarter of 2019, our German operating entities commenced a tax audit for fiscal years 2015 through 2017. If any issues addressed in the audit are resolved in a manner not consistent with our expectations, the Company could be required to adjust its provision for income taxes in future periods.
9. BUSINESS SEGMENTS
Our business is organized into two segments: DynaEnergetics and NobelClad. DynaEnergetics designs, manufactures and distributes products utilized by the global oil and gas industry principally for the perforation of oil and gas wells. NobelClad is a global leader in the production of explosion-welded clad metal plates for use in the construction of corrosion resistant industrial processing equipment and specialized transition joints.
Our reportable segments are separately managed strategic business units that offer different products and services. Each segment’s products are marketed to different customer types and require different manufacturing processes and technologies.
Segment information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net sales
|
|
|
|
|
|
|
|
|
DynaEnergetics
|
$
|
23,643
|
|
|
$
|
88,628
|
|
|
$
|
76,863
|
|
|
$
|
168,464
|
|
|
NobelClad
|
19,560
|
|
|
22,326
|
|
|
39,903
|
|
|
42,625
|
|
|
Net sales
|
$
|
43,203
|
|
|
$
|
110,954
|
|
|
$
|
116,766
|
|
|
$
|
211,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Operating (loss) income
|
|
|
|
|
|
|
|
|
DynaEnergetics
|
$
|
(6,895)
|
|
|
$
|
26,813
|
|
|
$
|
1,711
|
|
|
$
|
49,923
|
|
|
NobelClad
|
1,985
|
|
|
1,923
|
|
|
$
|
3,459
|
|
|
$
|
3,753
|
|
|
Segment operating (loss) income
|
(4,910)
|
|
|
28,736
|
|
|
5,170
|
|
|
53,676
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated corporate expenses
|
(1,639)
|
|
|
(2,588)
|
|
|
(4,256)
|
|
|
(5,905)
|
|
|
Stock-based compensation
|
(1,441)
|
|
|
(1,495)
|
|
|
(2,559)
|
|
|
(2,666)
|
|
|
Other (expense) income, net
|
(85)
|
|
|
343
|
|
|
32
|
|
|
322
|
|
|
Interest expense, net
|
(156)
|
|
|
(409)
|
|
|
(394)
|
|
|
(782)
|
|
|
(Loss) income before income taxes
|
$
|
(8,231)
|
|
|
$
|
24,587
|
|
|
$
|
(2,007)
|
|
|
$
|
44,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
DynaEnergetics
|
$
|
1,772
|
|
|
$
|
1,719
|
|
|
$
|
3,544
|
|
|
$
|
3,118
|
|
|
NobelClad
|
881
|
|
|
835
|
|
|
1,715
|
|
|
1,632
|
|
|
Segment depreciation and amortization
|
2,653
|
|
|
2,554
|
|
|
5,259
|
|
|
4,750
|
|
|
Corporate and other (1)
|
64
|
|
|
—
|
|
|
164
|
|
|
—
|
|
|
Consolidated depreciation and amortization
|
$
|
2,717
|
|
|
$
|
2,554
|
|
|
$
|
5,423
|
|
|
$
|
4,750
|
|
(1) Prior to Q4 2019, the Company fully allocated corporate and other depreciation to the segments.
The disaggregation of revenue earned from contracts with customers based on the geographic location of the customer is as follows.
DynaEnergetics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
United States
|
11,335
|
|
|
75,323
|
|
|
57,607
|
|
|
143,281
|
|
|
India
|
4,707
|
|
|
47
|
|
|
5,023
|
|
|
77
|
|
|
Egypt
|
943
|
|
|
872
|
|
|
2,254
|
|
|
1,734
|
|
|
Malaysia
|
531
|
|
|
123
|
|
|
912
|
|
|
123
|
|
|
Kuwait
|
520
|
|
|
746
|
|
|
1,029
|
|
|
746
|
|
|
Indonesia
|
467
|
|
|
941
|
|
|
946
|
|
|
1,180
|
|
|
Germany
|
87
|
|
|
25
|
|
|
387
|
|
|
80
|
|
|
United Arab Emirates
|
85
|
|
|
1,594
|
|
|
751
|
|
|
4,098
|
|
|
Pakistan
|
40
|
|
|
—
|
|
|
384
|
|
|
340
|
|
|
Canada
|
—
|
|
|
2,919
|
|
|
668
|
|
|
6,376
|
|
|
Iraq
|
2,188
|
|
|
690
|
|
|
2,189
|
|
|
886
|
|
|
Rest of the world
|
2,740
|
|
|
5,348
|
|
|
4,713
|
|
|
9,543
|
|
|
Total DynaEnergetics
|
$
|
23,643
|
|
|
$
|
88,628
|
|
|
$
|
76,863
|
|
|
$
|
168,464
|
|
NobelClad
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
United States
|
10,462
|
|
|
12,304
|
|
|
19,505
|
|
|
21,947
|
|
|
United Arab Emirates
|
1,881
|
|
|
289
|
|
|
2,620
|
|
|
1,273
|
|
|
Canada
|
1,693
|
|
|
1,335
|
|
|
3,461
|
|
|
3,359
|
|
|
Germany
|
802
|
|
|
828
|
|
|
1,788
|
|
|
1,831
|
|
|
Norway
|
680
|
|
|
1,538
|
|
|
1,640
|
|
|
2,160
|
|
|
Spain
|
626
|
|
|
285
|
|
|
1,873
|
|
|
346
|
|
|
France
|
602
|
|
|
896
|
|
|
2,092
|
|
|
1,653
|
|
|
Netherlands
|
369
|
|
|
378
|
|
|
915
|
|
|
1,012
|
|
|
Australia
|
357
|
|
|
397
|
|
|
606
|
|
|
845
|
|
|
Singapore
|
250
|
|
|
—
|
|
|
824
|
|
|
—
|
|
|
South Korea
|
222
|
|
|
413
|
|
|
1,212
|
|
|
881
|
|
|
Sweden
|
73
|
|
|
836
|
|
|
556
|
|
|
1,137
|
|
|
India
|
69
|
|
|
155
|
|
|
146
|
|
|
279
|
|
|
Belgium
|
46
|
|
|
598
|
|
|
410
|
|
|
1,483
|
|
|
Greece
|
20
|
|
|
9
|
|
|
188
|
|
|
26
|
|
|
Rest of the world
|
1,408
|
|
|
2,065
|
|
|
2,067
|
|
|
4,393
|
|
|
Total NobelClad
|
$
|
19,560
|
|
|
$
|
22,326
|
|
|
$
|
39,903
|
|
|
$
|
42,625
|
|
During the three months ended June 30, 2020, no customers accounted for greater than 10% of consolidated net sales. During the six months ended June 30, 2020 and the three and six months ended June 30, 2019, one customer in our DynaEnergetics segment accounted for greater than 10% of consolidated net sales.
10. DERIVATIVE INSTRUMENTS
We are exposed to foreign currency exchange risk resulting from fluctuations in exchange rates, primarily the U.S. dollar to euro, the U.S. dollar to Canadian dollar, 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) income, net” within our Condensed Consolidated Statements of Operations.
We execute derivatives with a specialized foreign exchange brokerage firm. The primary credit risk inherent in derivative agreements is the possibility that a loss may occur from the nonperformance of a counterparty to the agreements. We perform a review of the credit risk of our counterparties at the inception of the contract and on an ongoing basis. We anticipate that our counterparties will be able to fully satisfy their obligations under the agreements but will take action if doubt arises regarding the counterparties’ ability to perform.
As of June 30, 2020 and December 31, 2019, the notional amounts of the forward currency contracts the Company held were $19,163 and $22,860, respectively. At June 30, 2020 and December 31, 2019, the fair values of outstanding foreign currency forward contracts were $0.
The following table presents the location and amount of net gains (losses) from hedging activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
Derivative
|
Statements of Operations Location
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Foreign currency contracts
|
Other (expense) income, net
|
$
|
(706)
|
|
|
$
|
(53)
|
|
|
$
|
128
|
|
|
$
|
69
|
|
|
|
|
|
|
|
|
|
|
|
11. COMMITMENTS AND CONTINGENCIES
Contingent Liabilities
The Company records an accrual for contingent liabilities when a loss is both probable and reasonably estimable. If some amount within a range of loss appears to be a better estimate than any other amount within the range, that amount is accrued. When no amount within a range of loss appears to be a better estimate than any other amount, the lowest amount in the range is accrued.
Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
12. RESTRUCTURING AND ASSET IMPAIRMENTS
During the second quarter of 2020 the COVID-19 pandemic-related collapse in oil and gas demand led to a downturn in well completions and the corresponding demand for DynaEnergetics’ products. As a result, DynaEnergetics recorded asset impairment charges of $1,181 on certain manufacturing assets that will no longer be utilized in production at its Blum, Texas and Troisdorf, Germany facilities. Additionally, both DynaEnergetics and NobelClad further reduced the respective workforces during the quarter. Finally, DynaEnergetics continued activities to prepare its Tyumen, Siberia facility for sale. As of June 30, 2020, total DynaEnergetics Siberia’s assets classified as held for sale were $421. We expect the sale of the remaining assets will be finalized during the third quarter.
During the first quarter of 2020, DMC reduced its workforce by 264 positions to address a sharp decline in well completions in the Company’s core oil and gas end market principally due to the COVID-19 pandemic. The workforce reduction impacted full-time, part-time and temporary direct-labor roles in manufacturing and assembly at DynaEnergetics as well as general and administrative positions at DynaEnergetics, NobelClad, and at DMC’s corporate office.
During the fourth quarter of 2017, NobelClad announced plans to consolidate its European production facilities by closing manufacturing operations in France. During the second quarter of 2019, NobelClad sold its production facility and related assets and other machinery and equipment to third-parties for a gain of $519. Additionally, it moved certain machinery and equipment to its manufacturing facility in Germany. During the second quarter of 2019, NobelClad also recorded an additional accrual of $712 for known and probable severance liabilities related to employees terminated as part of closing the manufacturing operations in France. The additional severance accrual was recorded based, in part, on a successful appeal of the severance benefits by some terminated employees during the second quarter of 2019.
Total restructuring and impairment charges incurred for these programs are as follows and are reported in the “Restructuring expenses, net and asset impairments” line item in our Condensed Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
Asset impairment
|
|
|
|
Equipment Moving Costs
|
|
Other Exit Costs
|
|
Total
|
|
NobelClad
|
$
|
191
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
195
|
|
|
DynaEnergetics
|
121
|
|
|
1,181
|
|
|
|
|
126
|
|
|
423
|
|
|
1,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
312
|
|
|
$
|
1,181
|
|
|
|
|
$
|
126
|
|
|
$
|
427
|
|
|
$
|
2,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
Gain on asset disposal
|
|
Contract Termination Costs
|
|
|
Equipment Moving Costs
|
|
Other Exit Costs
|
|
Total
|
|
NobelClad
|
$
|
712
|
|
|
$
|
(519)
|
|
|
$
|
4
|
|
|
|
$
|
82
|
|
|
$
|
45
|
|
|
$
|
324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
Asset impairment
|
|
Contract Termination Costs
|
|
Equipment Moving Costs
|
|
Other Exit Costs
|
|
Total
|
|
NobelClad
|
$
|
244
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
254
|
|
|
DynaEnergetics
|
828
|
|
|
1,181
|
|
|
11
|
|
|
126
|
|
|
643
|
|
|
2,789
|
|
|
Corporate
|
119
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
1,191
|
|
|
$
|
1,181
|
|
|
$
|
11
|
|
|
$
|
126
|
|
|
$
|
653
|
|
|
$
|
3,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
Gain on asset disposal
|
|
Contract Termination Costs
|
|
Equipment Moving Costs
|
|
Other Exit Costs
|
|
Total
|
|
NobelClad
|
$
|
712
|
|
|
$
|
(636)
|
|
|
$
|
43
|
|
|
$
|
227
|
|
|
$
|
56
|
|
|
$
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the six months ended June 30, 2020, the changes to the restructuring liability associated with these programs is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Net expense (1)
|
|
Payments and Other Adjustments
|
|
Currency Adjustments
|
|
June 30, 2020
|
|
Severance
|
$
|
2,404
|
|
|
$
|
1,191
|
|
|
$
|
(1,302)
|
|
|
$
|
(168)
|
|
|
$
|
2,125
|
|
|
Contract termination costs
|
—
|
|
|
11
|
|
|
—
|
|
|
(1)
|
|
|
10
|
|
|
Equipment moving costs
|
—
|
|
|
126
|
|
|
(126)
|
|
|
—
|
|
|
—
|
|
|
Other exit costs
|
271
|
|
|
653
|
|
|
(989)
|
|
|
141
|
|
|
76
|
|
|
Total
|
$
|
2,675
|
|
|
$
|
1,981
|
|
|
$
|
(2,417)
|
|
|
$
|
(28)
|
|
|
$
|
2,211
|
|
(1) Excludes asset impairment expenses