(EDGAR Online via COMTEX) -- ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our historical consolidated financial statements and notes, as well as the selected historical consolidated financial data that is included in our Annual Report filed on Form 10-K for the year ended December 31, 2020.
Unless stated otherwise, all currency amounts are presented in thousands of U.S. dollars (000s).
DMC Global Inc. ("DMC") operates two technical product and process business segments serving the energy, industrial and infrastructure markets. These segments, DynaEnergetics and NobelClad, operate globally through an international network of manufacturing, distribution and sales facilities.
DynaEnergetics designs, manufactures and distributes products utilized by the global oil and gas industry principally for the perforation of oil and gas wells. These products are sold to oilfield service companies in the U.S., Europe, Canada, Africa, the Middle East, and Asia. DynaEnergetics also sells directly to end-users. The market for perforating products, which are used during the well completion process, generally corresponds with oil and gas exploration and production activity. Exploration activity over the last several years has led to increasingly complex well completion operations, which in turn has increased the demand for high quality and technically advanced perforating products.
Cost of products sold for DynaEnergetics includes the cost of metals, explosives and other raw materials used to manufacture shaped charges, detonating products and perforating guns as well as employee compensation and benefits, freight in, depreciation of manufacturing facilities and equipment, manufacturing supplies and other manufacturing overhead expenses.
NobelClad produces explosion-welded clad metal plates for use in the construction of corrosion resistant industrial processing equipment and specialized transition joints. While a significant portion of the demand for our clad metal products is driven by maintenance and retrofit projects at existing chemical processing, petrochemical processing, oil refining, and aluminum smelting facilities, new plant construction and large plant expansion projects also account for a significant portion of total demand. These industries tend to be cyclical in nature and timing of new order inflow remains difficult to predict. We use backlog as a primary means to measure the immediate outlook for our NobelClad business. We define "backlog" at any given point in time as all firm, unfulfilled purchase orders and commitments at that time. Most firm purchase orders and commitments are realized, and we expect to fill most backlog orders within the following 12 months. NobelClad's backlog increased to $42,867 at September 30, 2021 from $39,884 at December 31, 2020.
Cost of products sold for NobelClad includes the cost of metals and alloys used to manufacture clad metal plates, the cost of explosives, employee compensation and benefits, freight in, outside processing costs, depreciation of manufacturing facilities and equipment, manufacturing supplies and other manufacturing overhead expenses.
In the first quarter of 2021, under provisions of legislation enacted in December 2020 the Company became eligible for the Employee Retention Credit ("ERC") under the Coronavirus Aid, Relief, and Economic Security Act, as amended ("CARES Act"). As a result of the new legislation, the Company was able to claim a refundable tax credit equal to 70% of the qualified wages they paid to employees during the first and second quarters of 2021, limited to $10 per employee per quarter. Thus, the maximum ERC amount available to the Company was $7 per employee during the first three quarters of 2021.
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Factors Affecting Results
Consolidated sales of $67,175 increased 3% versus the second quarter of 2021 and 22% versus the third quarter of 2020. DynaEnergetics reported a 19% sequential increase in unit sales of its fully integrated and factory-assembled DS perforating systems in North America. The increase was partially offset by supply chain bottlenecks that impacted certain international orders at both DynaEnergetics and NobelClad. The year-over-year increase in consolidated sales primarily was due to a recovery in energy demand, North American drilling and well completions activity and sales at DynaEnergetics, which has been severely impacted by the COVID-19 pandemic.
DynaEnergetics sales of $44,237 in the third quarter of 2021 increased 5% compared with the second quarter of 2021 due to a recovery in energy demand and prices, which led to higher North American drilling and well completions, and increased sales of DynaEnergetics' DS perforating systems. The increase in North America was offset by a slowdown in international sales volume driven by supply chain disruptions and travel restrictions. Sales increased 29% compared with the third quarter of 2020, which was severely impacted by the COVID-19 pandemic.
NobelClad's sales of $22,938 in the third quarter of 2021 decreased 1% compared to the second quarter of 2021 primarily due to shipping and supply chain bottlenecks and increased 9% compared with the third quarter of 2020 reflecting increased shipments of projects out of backlog.
Consolidated gross profit was 25% in the third quarter of 2021 versus 26% in the second quarter of 2021 and 25% in the third quarter of 2020. Gross profit was flat versus last year as the third quarter of 2021 and reflects receipt of $1,800 ERC under the CARES Act, while the third quarter of 2020 benefited from higher-margin international sales at DynaEnergetics that were $4.6 million greater than this year's third quarter.
Consolidated selling, general and administrative expenses were $15,314 in the third quarter of 2021 compared with $11,616 in the third quarter of 2020. The increase primarily was due to higher litigation expenses related to patent enforcement actions against companies that we believe infringe on DynaEnergetics' patents, restoration of variable compensation, and resumption of business-related travel. These increases were partially offset by receipt of $769 ERC under the CARES Act.
Restructuring expenses and asset impairments of $143 in the third quarter of 2020 primarily related to costs associated with the sale of the Tyumen, Siberia manufacturing facility.
Cash and marketable securities of $181,952 increased $128,029 from $53,923 at December 31, 2020. The increase primarily relates to proceeds from our registered public equity offering in May 2021 and under our at-the-market equity offering program ("ATM equity program").
Supply chain disruptions and travel restrictions challenged the international operations of both DMC businesses during the third quarter of 2021. As a result, consolidated sales were below our expectations. DynaEnergetics' international sales were down $2.8 million sequentially versus the $7.4 million reported in second quarter; and at NobelClad, disruptions in global metals supplies slowed activity at its U.S. and European manufacturing facilities.
We remain in a period of rising material and labor costs at both DynaEnergetics and NobelClad; both of which could also be impacted by supply-chain disruptions and availability of direct labor. NobelClad was awarded an $8,800 order during the second quarter of 2021 for titanium clad plates that will be used to fabricate specialized equipment for a large purified terephthalic acid (PTA) plant. The plant was engineered in Europe, will be built in Southwest Asia and will include titanium-clad equipment fabricated in China. The clad plates, which will be used to fabricate pressure vessels and heat exchangers, are being manufactured at NobelClad's production facility in Mt. Braddock, Pennsylvania. This large order should help offset the pandemic-related downturn in NobelClad's base repair and maintenance business. However, receipt of the raw materials required to produce the order has been delayed due to supply chain bottlenecks, and while NobelClad still expects to receive the materials and fulfil the order during the fourth quarter, there remains a risk that some, or all, of the shipment will occur after year end.
In North America, rising crude prices led to higher well completion activity in the third quarter of 2021, which drove a strong increase in unit sales of DynaEnergetics' fully integrated and factory-assembled DS perforating systems. However, pricing for products and services remained weak. Additionally, rising material and labor costs combined with availability of Table of Contents
direct labor are negatively impacting the recovery in DynaEnergetics. As market conditions continue to improve and operators implement their 2022 budgets, we believe pricing will begin to improve as well. We expect DynaEnergetics will be among the first to benefit from strengthening prices, as it offers a highly differentiated product line. Factory-assembled DS systems are delivered just in time to the wellsite, eliminating assembly operations and requiring fewer people on location.
In the fourth quarter of 2021, DynaEnergetics announced a 5% price increase that will go into effect November 22, 2021. The increase was implemented to offset higher labor and material costs, as well as the anticipated wind down of the CARES Act. DynaEnergetics expects to implement additional increases during 2022 as it seeks to return margins to levels that reflect the inherent value of its products.
We believe many of the pre-wired carriers in the market incorporate features that violate DynaEnergetics patents, and we are taking aggressive legal action against the companies that make these products. DynaEnergetics has made significant investments in technologies and products that have improved the safety, efficiency and performance of its customers' well completions, and have enhanced the effectiveness and profitability of the industry as a whole. Our patent strategy is designed to protect these investments and provide transparency so others can innovate without violating our intellectual property. These lawsuits have increased our general and administrative expenses in the first nine months of 2021, and we expect these costs to be ongoing throughout the remainder of 2021 and into 2022.
In the third quarter of 2021, NobelClad introduced DetaPipe(TM), a high-performance clad-pipe solution for the chemical and metal-processing markets. This product offering is expected to provide customers with a better-performing, cost-effective alternative to solid zirconium or titanium pipe in their high-pressure, high temperature processing environments.
In March 2021, provisions of legislation modified and extended the ERC under the CARES Act through December 31, 2021 for eligible companies. Under this extension, we were able to claim the refundable tax credit for the quarter ended September 30, 2021, but at this time there is no guarantee that we will be able to claim the credit for the quarter ended December 31, 2021. This could negatively impact our gross profit margin and operating income in the fourth quarter of 2021.
From time to time, we also may continue to use our ATM equity program, which commenced in October 2020, to raise additional capital efficiently and responsibly. We did not sell shares under our ATM equity program during the second or third quarters of 2021. During the first quarter of 2021, we sold 397,820 shares of common stock at a weighted average price per share of $64.47 through our ATM equity program and received net proceeds of $25,262. In addition to sales under our ATM equity program, during the second quarter of 2021 we issued a total of 2,875,000 shares of our common stock through a registered public offering at a market price of $45 per share and received net proceeds of $123,461.
Adjusted EBITDA is a non-GAAP (generally accepted accounting principles) measure that we believe provides an important indicator of our ongoing operating performance and that we use in operational and financial decision-making. We define EBITDA as net income or loss plus or minus net interest, taxes, depreciation and amortization. Adjusted EBITDA excludes from EBITDA stock-based compensation, restructuring and impairment charges and, when appropriate, other items that management does not utilize in assessing DMC's operating performance (as further described in the tables below). As a result, internal management reports used during monthly operating reviews feature Adjusted EBITDA and certain management incentive awards are based, in part, on the amount of Adjusted EBITDA achieved during the year.
Adjusted operating income (loss) is defined as operating income (loss) plus restructuring and impairment charges and, when appropriate, other items that management does not utilize in assessing DMC's operating performance.
Adjusted net income (loss) is defined as net income (loss) plus restructuring and impairment charges and, when appropriate, other items that management does not utilize in assessing DMC's operating performance. Adjusted diluted earnings per share is defined as diluted earnings per share plus restructuring and impairment charges and, when appropriate, other items that management does not utilize in assessing DMC's operating performance.
Adjusted operating income (loss), adjusted net income (loss), and adjusted diluted earnings per share are presented because management believes these measures are useful to understand the effects of restructuring and impairment charges on DMC's operating income (loss), net income (loss) and diluted earnings per share, respectively.
Net cash is a non-GAAP measure we use to supplement information in our Consolidated Financial Statements. We define net cash as total cash, cash equivalents and marketable securities less total debt. In addition to conventional measures
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prepared in accordance with GAAP, the Company uses this information to evaluate its performance, and we believe that certain investors may do the same.
The presence of non-GAAP financial measures in this report is not intended to suggest that such measures be considered in isolation or as a substitute for, or as superior to, DMC's GAAP information, and investors are cautioned that the non-GAAP financial measures are limited in their usefulness. Because not all companies use identical calculations, DMC's presentation of non-GAAP financial measures may not be comparable to similarly titled measures of other companies.
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Oct 21, 2021
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