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, 2018
.
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 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.
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.
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.
For the
three months ended March 31, 2019
and
2018
, we recorded
$60
and
$49
of bad debt expense, respectively.
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 similar to common stock.
Basic EPS is then calculated by dividing net income 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 March 31,
|
|
2019
|
|
2018
|
Net income as reported
|
$
|
15,170
|
|
|
$
|
3,920
|
|
Less: Distributed net income available to participating securities
|
(6
|
)
|
|
(8
|
)
|
Less: Undistributed net income available to participating securities
|
(312
|
)
|
|
(94
|
)
|
Numerator for basic net income per share:
|
14,852
|
|
|
3,818
|
|
Add: Undistributed net income allocated to participating securities
|
312
|
|
|
94
|
|
Less: Undistributed net income reallocated to participating securities
|
(311
|
)
|
|
(94
|
)
|
Numerator for diluted net income per share:
|
14,853
|
|
|
3,818
|
|
Denominator:
|
|
|
|
Weighted average shares outstanding for basic net income per share
|
14,606,052
|
|
|
14,449,915
|
|
Effect of dilutive securities
|
65,637
|
|
|
—
|
|
Weighted average shares outstanding for diluted net income per share
|
14,671,689
|
|
|
14,449,915
|
|
Net income per share:
|
|
|
|
Basic
|
$
|
1.02
|
|
|
$
|
0.26
|
|
Diluted
|
$
|
1.01
|
|
|
$
|
0.26
|
|
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, accounts receivable and payable, accrued expenses, revolving loans under our credit facility and borrowings under our capital expenditure facility approximate their fair value, and these are
considered Level 1 assets and liabilities. 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.
We did not hold any Level 3 assets or liabilities as of
March 31, 2019
or
December 31, 2018
.
Recently Adopted Accounting Standards
On January 1, 2019, the Company adopted a new accounting standard, as amended, that requires the Company to record assets and liabilities on the balance sheet for lease-related rights and obligations and disclose key information about its leasing arrangements. The Company elected the modified retrospective approach upon adoption, and elected the package of practical expedients available under the new standard. This new standard establishes a right-of-use (“ROU”) model that requires the Company to recognize ROU assets and lease liabilities on the balance sheet for all leases with a term longer than 12 months at commencement of the lease.
Leases will be classified as financing or operating, with classification affecting the pattern of expense recognition in the Statement of Operations. Refer to Note 6 “Leases” for further information.
Recent Accounting Pronouncements
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 consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
Raw materials
|
$
|
26,669
|
|
|
$
|
26,544
|
|
Work-in-process
|
6,934
|
|
|
7,157
|
|
Finished goods
|
16,888
|
|
|
16,904
|
|
Supplies
|
360
|
|
|
469
|
|
|
$
|
50,851
|
|
|
$
|
51,074
|
|
4. PURCHASED INTANGIBLE ASSETS
Our purchased intangible assets consisted of the following as of
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Core technology
|
$
|
18,564
|
|
|
$
|
(10,903
|
)
|
|
$
|
7,661
|
|
Customer relationships
|
36,544
|
|
|
(36,323
|
)
|
|
221
|
|
Trademarks / Trade names
|
1,992
|
|
|
(1,992
|
)
|
|
—
|
|
Total intangible assets
|
$
|
57,100
|
|
|
$
|
(49,218
|
)
|
|
$
|
7,882
|
|
Our purchased intangible assets consisted of the following as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Core technology
|
$
|
18,916
|
|
|
$
|
(10,866
|
)
|
|
$
|
8,050
|
|
Customer relationships
|
37,122
|
|
|
(36,583
|
)
|
|
539
|
|
Trademarks / Trade names
|
2,031
|
|
|
(2,031
|
)
|
|
—
|
|
Total intangible assets
|
$
|
58,069
|
|
|
$
|
(49,480
|
)
|
|
$
|
8,589
|
|
The change in the gross value of our purchased intangible assets from
December 31, 2018
to
March 31, 2019
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:
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
NobelClad
|
2,077
|
|
|
922
|
|
DynaEnergetics
|
413
|
|
|
218
|
|
|
|
|
|
Total
|
$
|
2,490
|
|
|
$
|
1,140
|
|
We expect to recognize the revenue associated with contract liabilities over a time period no longer than one year. Of the
$1,140
recorded as contract liabilities at
December 31, 2018
,
$275
was recorded to net sales during the
three
months ended
March 31, 2019
.
6. LEASES
The Company leases real properties for use in manufacturing and as administrative and sales offices, in addition to automobiles and office equipment. Until the end of 2018, leases of property, plant and equipment were classified as operating leases. Payments made under operating leases were charged to the Condensed Consolidated Statement of Operations on a straight line basis. Upon adoption of the new lease standard, the Company recognized ROU assets and lease liabilities in relation to leases which had previously been classified as operating leases.
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. 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. The Company has no material leases in which the Company is the lessor.
The significant majority of the Company’s leasing arrangements are classified as operating leases. As of March 31, 2019, the total ROU asset and lease liability for operating leases were
$8,165
and
$8,279
, respectively. The ROU asset was included in “Other assets” while
$2,122
of the lease liability was reported in “Other current liabilities” and
$6,157
was reported in “Other long-term liabilities” on the Company’s Condensed Consolidated Balance Sheet. The Company’s financing leases were not material as of March 31, 2019. 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 March 31, 2019, operating lease costs were
$685
which were included in the Company’s Condensed Consolidated Statements of Income. Short term and variable lease costs were not material for the three months ended March 31, 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:
|
|
|
|
|
|
|
March 31, 2019
|
Weighted average remaining lease term (in years)
|
6.48
|
|
Weighted average discount rate
|
5.3
|
%
|
The following table represents maturities of operating lease liabilities as of March 31, 2019:
|
|
|
|
|
|
Due within 1 year
|
2,485
|
|
Due after 1 year through 2 years
|
1,744
|
|
Due after 2 years through 3 years
|
1,278
|
|
Due after 3 years through 4 years
|
1,039
|
|
Due after 4 years through 5 years
|
753
|
|
Due after 5 years
|
2,379
|
|
Total future minimum lease payments
|
9,678
|
|
Less imputed interest
|
(1,399
|
)
|
Total
|
8,279
|
|
7. DEBT
Outstanding borrowings consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
Syndicated credit agreement:
|
|
|
|
|
|
U.S. Dollar revolving loan
|
$
|
19,879
|
|
|
$
|
17,128
|
|
Capital expenditure facility
|
24,219
|
|
|
25,000
|
|
Outstanding borrowings
|
44,098
|
|
|
42,128
|
|
Less: debt issuance costs
|
(734
|
)
|
|
(773
|
)
|
Total debt
|
43,364
|
|
|
41,355
|
|
Less: current portion of long-term debt
|
(3,125
|
)
|
|
(3,125
|
)
|
Long-term debt
|
$
|
40,239
|
|
|
$
|
38,230
|
|
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 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 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 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 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 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
March 31, 2019
, 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
€2,171
is available as of
March 31, 2019
after considering outstanding letters of credit.
Included in lines of credit are deferred debt issuance costs of
$734
and
$773
as of
March 31, 2019
and
December 31, 2018
, 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. 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, 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 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. 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.
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 March 31,
|
|
2019
|
|
2018
|
Net sales
|
|
|
|
DynaEnergetics
|
$
|
79,836
|
|
|
$
|
49,121
|
|
NobelClad
|
20,299
|
|
|
18,192
|
|
Net sales
|
$
|
100,135
|
|
|
$
|
67,313
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2019
|
|
2018
|
Operating income (loss)
|
|
|
|
DynaEnergetics
|
$
|
23,110
|
|
|
$
|
8,720
|
|
NobelClad
|
1,830
|
|
|
(12
|
)
|
Segment operating income
|
24,940
|
|
|
8,708
|
|
|
|
|
|
Unallocated corporate expenses
|
(3,317
|
)
|
|
(2,688
|
)
|
Stock-based compensation
|
(1,171
|
)
|
|
(708
|
)
|
Other expense, net
|
(21
|
)
|
|
(377
|
)
|
Interest expense, net
|
(373
|
)
|
|
(465
|
)
|
Income before income taxes
|
$
|
20,058
|
|
|
$
|
4,470
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2019
|
|
2018
|
Depreciation and amortization
|
|
|
|
DynaEnergetics
|
$
|
1,399
|
|
|
$
|
1,559
|
|
NobelClad
|
797
|
|
|
816
|
|
Segment depreciation and amortization
|
$
|
2,196
|
|
|
$
|
2,375
|
|
The disaggregation of revenue earned from contracts with customers based on the geographic location of the customer is as follows.
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2019
|
|
2018
|
United States
|
$
|
67,959
|
|
|
$
|
36,130
|
|
Canada
|
3,458
|
|
|
5,785
|
|
United Arab Emirates
|
2,503
|
|
|
523
|
|
Russia
|
485
|
|
|
1,282
|
|
Egypt
|
862
|
|
|
542
|
|
Rest of the world
|
4,569
|
|
|
4,859
|
|
Total DynaEnergetics
|
$
|
79,836
|
|
|
$
|
49,121
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2019
|
|
2018
|
United States
|
$
|
9,643
|
|
|
$
|
5,706
|
|
Canada
|
2,024
|
|
|
1,794
|
|
United Arab Emirates
|
985
|
|
|
131
|
|
France
|
757
|
|
|
951
|
|
South Korea
|
468
|
|
|
1,003
|
|
Germany
|
1,003
|
|
|
1,613
|
|
India
|
125
|
|
|
770
|
|
China
|
—
|
|
|
3,458
|
|
Italy
|
522
|
|
|
205
|
|
Belgium
|
886
|
|
|
384
|
|
Australia
|
448
|
|
|
—
|
|
Netherlands
|
634
|
|
|
491
|
|
Norway
|
622
|
|
|
243
|
|
Portugal
|
208
|
|
|
—
|
|
South Africa
|
733
|
|
|
164
|
|
Rest of the world
|
1,241
|
|
|
1,279
|
|
Total NobelClad
|
$
|
20,299
|
|
|
$
|
18,192
|
|
During the
three months ended March 31, 2019
,
one
customer in our DynaEnergetics segment accounted for greater than 10% of consolidated net sales. During the
three months ended
March 31, 2018
,
no
customer was responsible for more 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, 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 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
March 31, 2019
and
2018
, the notional amounts of the forward currency contracts the Company held were
$11,638
and
$6,236
, respectively. At
March 31, 2019
and
2018
, the fair values of outstanding foreign currency forward contracts were
$0
and
$11
, respectively, and were recorded in accrued expenses
The following table presents the location and amount of net gains (losses) from hedging activities:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
Derivative
|
Statements of Operations Location
|
2019
|
|
2018
|
Foreign currency contracts
|
Other expense, net
|
$
|
122
|
|
|
$
|
208
|
|
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.
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. In its financial statements for the quarter ended September 30, 2018, the Company accrued an additional
$4,897
of penalties. On December 7, 2018, we submitted a supplemental petition requesting a waiver of the penalty under the Small Business Regulatory Enforcement Act in lieu of tendering the penalty amount. On April 12, 2019, we received notice that our waiver request was denied and expect to tender the
$8,000
in the second quarter of 2019.
12. RESTRUCTURING
During the fourth quarter of 2017, NobelClad announced plans to consolidate its European production facilities by closing
manufacturing operations in France
. During the third quarter of 2018, final approval of the proposed measures was
granted by the local workers council, in accordance with applicable French law. NobelClad completed the closure of the Rivesaltes production facility in the fourth quarter of 2018, but will maintain its sales and administrative office in France. NobelClad has entered into a sales agreement with a buyer for the production facility, and the sale is expected to close 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” line item in our Condensed Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2019
|
|
Gain on asset disposal
|
|
Contract Termination Costs
|
|
Equipment Moving Costs
|
|
Other Exit Costs
|
|
Total
|
NobelClad
|
$
|
(116
|
)
|
|
$
|
39
|
|
|
$
|
144
|
|
|
$
|
11
|
|
|
$
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2018
|
|
Severance
|
|
Other Exit Costs
|
|
Total
|
NobelClad
|
$
|
53
|
|
|
$
|
91
|
|
|
$
|
144
|
|
During the
three months ended March 31, 2019
, the changes to the restructuring liability associated with these programs is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Net expense (1)
|
|
Payments and Other Adjustments
|
|
Currency Adjustments
|
|
March 31, 2019
|
Severance
|
$
|
1,105
|
|
|
$
|
—
|
|
|
$
|
(653
|
)
|
|
$
|
(9
|
)
|
|
$
|
443
|
|
Contract termination costs
|
—
|
|
|
39
|
|
|
(39
|
)
|
|
—
|
|
|
—
|
|
Equipment moving costs
|
8
|
|
|
144
|
|
|
(118
|
)
|
|
—
|
|
|
34
|
|
Other exit costs
|
42
|
|
|
11
|
|
|
(12
|
)
|
|
—
|
|
|
41
|
|
Total
|
$
|
1,155
|
|
|
$
|
194
|
|
|
$
|
(822
|
)
|
|
$
|
(9
|
)
|
|
$
|
518
|
|
(1) Excluding gain on asset disposal
13. SUBSEQUENT EVENTS
Anti-dumping and Countervailing Duties Penalties
Subsequent to March 31, 2019, the Company received a written response from U.S. Customs related to our supplemental petition requesting a waiver of the assessed penalties under the Small Business Regulatory Enforcement Act. After reviewing our petition, U.S. Customs denied our waiver request. Please refer to Note 11 “Commitments and Contingencies” for further discussion of the anti-dumping and countervailing duties.