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
Unless stated otherwise, all currency amounts are presented in thousands of
Overview General
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
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
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
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
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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