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, 2019.

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



Overview

General

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

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

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

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

NobelClad

NobelClad is a global leader in the production of explosion-welded clad metal plates for use in the construction of corrosion resistant industrial processing equipment and specialized transition joints. While a significant portion of the demand for our clad metal products is driven by maintenance and retrofit projects at existing chemical processing, petrochemical processing, oil refining, and aluminum smelting facilities, new plant construction and large plant expansion projects also account for a significant portion of total demand. These industries tend to be cyclical in nature and timing of new order inflow remains difficult to predict. We use backlog as a primary means to measure the immediate outlook for our NobelClad business. We define "backlog" at any given point in time as all firm, unfulfilled purchase orders and commitments at that time. Most firm purchase orders and commitments are realized, and we expect to fill most backlog orders within the following 12 months. NobelClad's backlog increased to $42,871 at June 30, 2020 from $31,660 at December 31, 2019.

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




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Factors Affecting Results

•Consolidated sales of $43,203 decreased 41% versus the first quarter of 2020 and declined 61% versus the second quarter of 2019. As global crude oil prices and energy demand plunged due to the COVID-19 pandemic, there was a concurrent drop in unconventional drilling and completion activity, which negatively affected sales at DynaEnergetics. Second quarter 2020 well completions in the United States fell by nearly 70% according to the American Petroleum Institute. •DynaEnergetics sales of $23,643 in the second quarter of 2020 decreased 73% compared with the second quarter of 2019 and decreased 56% compared with the first quarter of 2020 as the COVID-19 pandemic drove a sharp decline in oil and gas demand and well completion activity in the U.S. •NobelClad's sales of $19,560 in the second quarter of 2020 decreased 12% compared with the second quarter of 2019 and 4% compared to the first quarter of 2020 due to the timing of shipment of projects out of backlog. •Consolidated gross profit of 15.3% in the second quarter of 2020 decreased from 37.9% in the second quarter of 2019. The decline primarily was attributable to the 73% year-over-year sales decline at DynaEnergetics, which was also impacted by lower selling prices and an increase in inventory reserves. The magnitude of DynaEnergetics' sales decrease led to significant under-absorption of fixed overhead and research and development expenses. In addition, low utilization of DynaEnergetics' manufacturing facilities resulted in an excess-capacity charge of $2,044. U.S. GAAP stipulates that fixed overhead expenses are capitalized as inventory on the balance sheet when incurred, and then expensed to the income statement when the related inventory is sold. However, in periods when manufacturing activity drops significantly below normal levels, a portion of fixed overhead expenses is required to be recognized in the income statement in the period incurred, rather than carried as inventory on the balance sheet. The second quarter of 2020 also included a lower proportion of sales in DynaEnergetics relative to NobelClad compared with the prior year. •Consolidated selling, general and administrative expenses were $12,195 in the second quarter of 2020 compared with $16,699 in the second quarter of 2019. The decrease primarily was due to lower outside service expenses, variable bonus, payroll and payroll-related costs, and travel expenses, partially offset by an increase in the provision for expected credit losses. •Restructuring expenses, net and asset impairments of $2,046 in the second quarter of 2020 primarily related to asset impairments and costs related to the anticipated sale of the Tyumen, Siberia manufacturing facility. •Net cash of $4,528 decreased $1,553 from $6,081 at December 31, 2019. Net cash is a non-GAAP measure calculated as total cash and cash equivalents ($17,248 at June 30, 2020) less total debt ($12,720 at June 30, 2020).

Outlook

In response to the COVID-19 pandemic, we took substantial steps worldwide to keep our employees safe. This included remote-working arrangements during the second quarter, redesigning our office and manufacturing layouts and workspaces, travel restrictions, adopting new processes for interactions with our suppliers and customers and making additional investments in employee safety equipment and processes. These efforts will continue as the pandemic continues and as we navigate the continually evolving regulatory environment at each of our locations.

In light of the unprecedented downturn in global economic activity and the pandemic-related impact on oil and gas demand, DMC implemented several cost-containment actions in the second quarter to reduce our activity-based cost structure, limit spending and protect our balance sheet. These actions included reducing our workforce by 32%, implementing reduced work weeks at DynaEnergetics, cutting selling, general and administrative expenses by 25%, reducing our capital expenditures budget by 50% and suspending the quarterly dividend. The decline in crude oil prices and oil and gas demand accelerated early in the second quarter of 2020. To further preserve liquidity, we entered into an amendment to our credit facility on June 25, 2020 to, among other provisions, maintain our $50,000 revolving credit facility and to waive the debt service coverage ratio for the quarters ending September 30, 2020, December 31, 2020, and March 31, 2021. We also filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission, which became effective on May 28, 2020, on which we registered up to $150 million of certain of our securities for potential sale from time to time and on terms that we may determine in the future. We believe these actions position us well to preserve liquidity over the next three quarters.

At DynaEnergetics, we expect a modest pick-up in third quarter demand from the low levels in the second quarter; however, the timing and extent to which the global oil and gas market recovers remains uncertain due in part to COVID-19. We have continued to invest in technology, product and market development initiatives to ensure we maintain our competitive advantages and future growth. During the second quarter of 2020, we introduced a series of products that are designed for new well-perforating applications and collectively increase its addressable market by more than 20%. The DS EchoTM perforating system positions DynaEnergetics in the emerging re-frac market, while DS MicroSetTM and DS LiberatorTM address plug setting and tool-string disengagement applications.



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NobelClad achieved a modest sequential improvement in its order backlog in the second quarter, and it is beginning to see effects of the global COVID-19 pandemic on booking activity. Customers in the downstream energy industry have delayed various repair and maintenance projects and the award of a large prospective petrochemical order. 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 cash and net debt are non-GAAP measures we use to supplement information in our Condensed Consolidated Financial Statements. We define net cash as total cash and cash equivalents less total debt and net debt as total debt less cash and cash equivalents. In addition to conventional measures prepared in accordance with GAAP, the Company uses this information to evaluate its performance, and we believe that certain investors may do the same.

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


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