Clad Metal End UseEnd-Use Markets
Oil and Gas: Oil and gas end use markets include both oil and gas production and petroleum refining. Oil and gas production covers a broad scope of operations related to recovering oil and/or gas for subsequent processing in refineries. Clad metal is used in separators, glycol contractors, pipe lines,pipelines, heat exchangers and other related equipment. IncreasedClad equipment is also advantageous for oil and gas production from deep, hot, and more corrosive fields has also increased the demand for clad equipment.fields. The primary clad metals for the oil and gas production market are stainless steel and nickel alloys clad to steel, with some use of reactive metals such as titanium.
Petroleum refining processes frequently are corrosive and operate at high temperatures and pressures. Clad metal is extensively used in a broad range of equipment including desulfurization hydrotreaters, coke drums, distillation columns, separators and heat exchangers. Reliance upon low-quality, high sulfurhigh-sulfur crude drives additional demand for new corrosion resistant equipment. Worldwide trends in regulatory controlRegulatory controls of sulfur emissions in gas, diesel and jet fuel are also increasingimpact the need for clad equipment. Like the upstream oil and gas sector, the clad metals are primarily stainless steel and nickel alloys.
Chemical and Petrochemical: Many common products, ranging from plastics to prescription drugs to electronic materials, are produced by chemical processes. Because the production of these items often involves corrosive agents and is conducted under high pressures or temperatures, corrosion resistant equipment is needed. One of the larger applications for clad equipment is in the manufacture of purified terephthalic acid (PTA), a precursor product for polyester, which is used in products as diverse as carpets and plastic bottles. The chemical market requires extensive use of stainless steel and nickel alloys, but also uses titanium, zirconium and tantalum.
Alternative Energy: Some alternative energy technologies involve conditions that necessitate clad metals. Solar panels predominantly incorporate high purity polysilicon. Processes for manufacturing high purity silicon utilize a broad range of highly corrosion-resistant clad alloys. Many geothermal fields are corrosive, requiring high alloy clad separators to handle the hot steam. SomeIn addition, some ethanol technologies and concentrating solar power technologies may require corrosion resistant metals at thicknesses where clad is an attractive alternative.
Hydrometallurgy: The processes for production of nickel, gold, and copper involve acids, high pressures, and high temperatures;temperatures, and titanium-clad plates are used extensively for construction of associated leaching and peripheral equipment.equipment such as autoclaves.
Aluminum Production: Aluminum Primary aluminum is reduced from its oxide in large electric smelters called potlines. The electric current is carried via aluminum conductors. The electricity must be transmitted into steel components for the high temperature smelting operations. Aluminum cannot be welded to steel conventionally. Explosion-welded aluminum-steel transition joints provide an energy efficient and highly durable solution for making these connections. Modern potlines use a large number of transition joints, which are typically replaced after approximately five years in service. Although primary aluminum production is the major electrochemical application for NobelClad products, there are a number of other electrochemical applications including production of zinc, magnesium, chlorine and chlorate. We are seeing an increase for equipment related to processing biomass feedstocks and biofuel end products, mostly stainless and nickel alloy clad.
Shipbuilding: The combined problems of corrosion and top-side weight drive demand for our aluminum-steel transition joints, which serve as the juncture between a ship's upper and lower structures. Top-side weight is often a significant problem with tall ships, including cruise ships, naval vessels, ferries and yachts. Use of aluminum in the upper structure and steel in the lower structure provides stability. Since aluminum cannot be welded directly to steel using conventional welding processes, and since bolted joints between aluminum and steel corrode quickly in seawater, explosion-welded transition joints are a common solution. NobelClad's transition joints have been used in the construction of many well-known ships, including the Queen Elizabeth II and modern U.S. Navy aircraft carriers.
Power Generation: Fossil fuel and nuclear power generation plants require extensive use of heat exchangers, many of which require corrosion resistant alloys to handle low quality cooling water. Our clad plates are used extensively for heat exchanger tubesheets. Thetube sheets, and the largest clad tubesheetstube sheets are used in the final low-pressure condensers. For most coastal and brackish water-cooled plants, titanium is the metal of choice, and titanium-clad tubesheetstube sheets are the low-cost solution for power plant condensers.
Industrial Refrigeration: Heat exchangers are a core component of refrigeration systems. When the cooling fluid is seawater, brackish, or even slightly polluted, corrosion-resistant metals are necessary. Metal selection can range from stainless
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steel to copper alloy to titanium. Explosion-welded clad metal is often the low-cost solution for making the tubesheets.tube sheets. Applications range from refrigeration chillers on fishing boats to massive air conditioning units for skyscrapers, airports, and deep underground mines.
New Applications/Industry Development
NobelClad continues its efforts in applications and materials innovations, with the goal of expanding NobelClad’s end-use markets and customer base. Examples of these efforts include the development of a new application of clad in the production of engineered wood, development of improved electrical transition joints for smelting applications, high-pressure refractory metals chemical processing pipe systems and cryogenic joints to LNG and air separation units. NobelClad is also engaged in research efforts related to using clad products in concentrating solar power production facilities.
Operations
NobelClad’s metal products are primarily produced for custom projects and conform to requirements set forth in customers’ purchase orders. Upon receipt of an order, NobelClad obtains the component materials from a variety of sources based on quality, availability and cost and then produces the order in one of its three manufacturing plants. Final products are processed to meet contract specific requirements for product configuration and quality/inspection level.
Products
NobelClad manufacturing technology is used in a variety of product applications.
DetaClad™: Our explosion clad plates and cylinders, available in 260 compatible and non-compatible metal combinations, are the basis of the world’s pressure vessels, towers and crystallizers used in many industries.
Tube Sheets: Our clad tube sheets are made from corrosion-resistant alloys, making them ideal for applications ranging from refrigeration chillers on fishing boats to air conditioners for use in food and pharmaceutical manufacturing.
Vessel Heads & Cylinders: NobelClad delivers high-quality clad heads of all sizes for reactors, heat exchangers and process vessels. We adapt our head forming process to specific clad metal combinations.
Structural Transition Joints: NobelClad’s structural transition joints permanently join metals without mechanical fasteners. Shipbuilders turn to us to connect superstructures and bulkheads to steel hulls, framing and deck components.
Electrical Transition Joints: NobelClad’s electrical transition joints offer strong, low electrical resistance solutions for aluminum and zinc smelting, when anode clad and cathode applications must operate at elevated temperatures.
Cylindra™ Cryogenic Transition Joints: Compared with bolted connection systems, Cylindra offers an easier, more reliable way to connect stainless steel to aluminum pipes for producing LNG and industrial gases in Air Separation Units (ASU).
DetaPipe™ Spools, Elbows and Branches: NobelClad offers reactive metal pipe spools and elbows for piping systems in demanding high-pressure and high-temperature processes. This new technology allows for end users to benefit from the corrosion resistance performance and process safety that metals like zirconium, titanium and tantalum provide.
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Suppliers and Raw Materials
NobelClad's operations involve a range of alloys, steels and other materials, such as stainless steel, copper alloys, nickel alloys, titanium, zirconium, tantalum, aluminum and other metals. NobelClad sources its raw materials from a number of different producers and suppliers. It holds a limited metal inventory and purchases its raw materials based on contract specifications. Under most contracts, any raw material price increases are passed on to NobelClad’s customers. NobelClad closely monitors the quality of its supplies and inspects the type, dimensions, markings, and certification of all incoming metals to ensure that the materials will satisfy applicable construction codes. NobelClad also manufactures a majority of its own explosives from standard raw materials, thus achievingand we believe that this allows us to achieve higher quality and lower cost.
Competition
bonded during the hot rolling operation in which the metal slab is converted to plate. Being a high temperature process that yields the formation of detrimental intermetallics, hot rollbond is limited to joining similar metals, such as stainless steel and nickel alloys to steel. Rollbond’s niche is production of large quantities of light to medium gauge clad plates. Rollbond products are generally suitable for most pressure vessel applications but have lower bond shear strength and may have inferior corrosion resistance.
The weld overlay process which is used by the many vessel fabricators that are often also NobelClad customers, is a slow and labor-intensive process that requires a large amount of floor space for the equipment.customers. In weld overlay cladding, the clad metal layer is deposited on the base metal using arc-welding type processes. Weld overlay is a cost-effective technology for complicated shapes, for field service jobs, and for production of some very heavy-wall pressure vessel reactors. During overlay welding, the cladding metal and base metal are melted together at their interface. The resulting dilution of the cladding metal chemistry may compromise corrosion performance and limit use in certain applications. Weld metal shrinkage during cooling potentially causes distortion when the base layer is thin. As with rollbond, weld overlay is limited to metallurgically similar metals, primarily stainless steels and nickel alloys joined to steel. Weld overlay is typically performed in conventional metal fabrication shops.
Explosion-Welded Metal Cladding. CompetitionWorldwide competition in the explosion-welded clad metal business is fragmented.fragmented, and we believe that NobelClad holds a strong market position in the clad metal industry. ItWithin North America, NobelClad is one of the leading producerlargest producers of explosion-welded clad products in North America, and hasproducts. In Europe, its manufacturing capacity gives NobelClad a strong position in Europe against smaller competitors. NobelClad’sIn Asia, NobelClad has mixed competition in Asia ranging from competitors with competitive technology and strong brand names and competitive technology to other producers whichthat are technically limited and offer minimal exports outside of their domestic markets. To remain competitive, NobelClad intends to continue developing and providing technologically advanced manufacturing services, maintaining quality levels, offering flexible delivery schedules, delivering finished products on a reliable basis and competing favorably on the basis of price.
Customer Profile
Marketing, Sales, Distribution
NobelClad conducts its selling efforts by marketing its services to potential customers' senior management, direct sales personnel, program managers, and independent sales representatives. Prospective customers in specific industries are identified through networking in the industry, cooperative relationships with suppliers, public relations, customer references, inquiries from technical articles and seminars, website inquiries, webinars, and trade shows. NobelClad’s sales office in the United States covers the Americasboth North and East Asia.South America. Its sales offices in Europe cover the full European continent, Africa, the Middle East, India, Southeast Asia, and Russia.India. NobelClad also has a sales officesoffice in South Korea and China to address thesethe Asian markets and uses contract agents to cover various other countries. Contract agents typically work under multi-year agreements which are subject to sales performance targets as well as compliance with NobelClad quality, and customer service and compliance expectations. Members of the global sales team may be called to work on projects located outside their usual territory. By maintaining relationships with its existing customers, developing new relationshiprelationships with prospective customers, and educating all its customers as to the technical benefits of NobelClad’s products, NobelClad endeavors to assist in setting standard specifications, both by our customers and the American Society of Mechanical Engineers and ASTM International, to ensure that the highest quality and reliability are achieved.
NobelClad’s products are generally shipped from its manufacturing locations in the United States Germany and France.Germany. Any shipping costs or duties for which NobelClad is responsible typically will be included in the price paid by the customer. Regardless of where the sale is booked, NobelClad will produce it, capacity permitting, at the location closest to the delivery place. In the event that there is a short-term capacity issue at one facility, NobelClad can produce the order at anyits other
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production sites,site, prioritizing timing. The varioustwo production sites allow NobelClad to meet customer production needs in a timely manner. After completion of the plan to consolidate NobelClad's European production facilities, which is expected to be completed by the end of 2018, NobelClad plans to focus its European manufacturing efforts in Germany, while maintaining its sales and administrative office in France.
Research and Development
We prepare a formal research and development plan annually. It is implemented at our cladding sites and is supervised by a technical committee that reviews progress quarterly and meets once a year to establish the plan for the following 12twelve months. The research and development projects concern process support, new products, new applications, and special customer-paid projects.
Corporate History and Recent Developments
The genesis of the Company wasoriginated as an unincorporated business called “Explosive Fabricators,” which was formed in Colorado in 1965. The business was incorporated in Colorado in 1971 under the name “E. F. Industries, Inc.,” which was later changed to “Explosive Fabricators, Inc.” The Company became publicly traded in 1976. In 1994, it changed its name to “Dynamic Materials Corporation.” The Company reincorporated in Delaware in 1997.
In 2001, the Company acquired substantially all of the stock of NobelClad Europe SA, a French company (“NobelClad France”Europe”). Early in its history, NobelClad France was, which had also been a licensee of the DetacladDetaClad technology. The acquisition of NobelClad FranceEurope expanded the Company’s explosive metalworking operations to Europe.
In 2007, the Company acquired the German company DynaEnergetics GmbH and Co. KG (“DynaEnergetics”) and certain affiliates. DynaEnergetics was comprised of two primary businesses: explosive metalworking and oilfieldenergy products. This acquisition expanded the Company’s explosive metalworking operations in Europe and added a complementary oilfieldenergy products business.
In 2013, the Company branded its explosive metalworking operations under the single name NobelClad. The NobelClad segment is comprised of the Company’s U.S. clad operations as well as the explosion metalworking assets and operations purchased in the NobelClad FranceEurope and DynaEnergetics acquisitions. In 2014, the Company re-branded the oilfieldenergy products segment as DynaEnergetics, which is comprised entirely of DynaEnergetics (other than its explosion metalworking operations), its subsidiaries and sister companies.DynaEnergetics.
In 2014, the Company sold AMK. Also in 2014, the Company acquired a modern manufacturing and office complex in Liebenscheid, Germany. The facility enhances NobelClad's manufacturing capabilities and serves as a state-of-the-art production and administrative resource for NobelClad's European operations.operations and also serves as a production resource for DynaEnergetics.
In 2016, the Company changed its name to DMC Global Inc., to reflect that we are a diversified portfolio of technical product and process businesses serving niche markets around the world.
In 2019, DynaEnergetics completed a series of capacity expansion initiatives at its manufacturing facilities in North America and Germany. Capitalizing on its more efficient manufacturing footprint, DynaEnergetics ceased its operations in Tyumen, Siberia, and during the third quarter of 2020, DynaEnergetics sold the land and buildings in Tyumen, Siberia to a third-party. Additionally in 2019, the Company internally restructured its European entities and simplified its legal structure. The new structure took effect on January 1, 2020, and reduces the number of legal entities, minimizes complexity and enables the Company to reduce its annual compliance and administration costs and manage global tax reform more effectively.
In 2021, the Company completed the acquisition of 60% of the membership interests in Arcadia. This acquisition diversified the markets and industries in which we operate and dramatically expanded our addressable markets.
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Human Capital
DMC empowers its people and organizations by institutionalizing entrepreneurship and celebrating ingenuity. We seek to foster local innovation versus centralized control, and stand behind our businesses in ways that truly add value. Our culture is based on four core values:
•Integrity - We stand by our word and own our decisions. We are fair in how we treat customers, peers, partners and the communities we work in. We treat our company like it’s our own.
•Courage - We are entrepreneurs, with the courage to act when we see something that needs doing. We believe in pursuing the right path forward, even if it’s the most difficult one.
•Teamwork - We believe being a part of one team, one community. We count on each other to do our part. We stand by one another when things are tough, learning from our failures and celebrating together when we get the job done.
•Humility - We believe that inspiration can come from anywhere and remain open to new ideas. We are proud of our work and how it helps our customers, but are never boastful.
DMC aligns to provide all employees with a supportive work environment and the opportunity to improve their skills and advance their careers. Our culture is reflected in our inclusive and thriving workplace. We believe every employee deserves an environment in which they are treated with dignity and respect, and their voices are heard. We support diversity within our workforce, and respect and embrace the different backgrounds, experiences, cultures and perspectives our employees bring to DMC.
As of December 31, 2017,2022, we had 5361,700 permanent and part-time employees (293(1,474 U.S. and 243226 non-U.S.), the majority of whom are engaged in manufacturing operations, with the remainder primarily in sales, marketing and administrative functions. MostNone of our manufacturing employees are not unionized.In addition, we use a number of temporary workers at any given time, depending on the workload.workload at our businesses. We currently believe that employee relations are good.
Compensation and Benefits. Our compensation and benefits teams strive to develop and implement policies and programs that are fair to employees, support our business goals, maintain competitiveness, and promote shared fiscal responsibility among the Company and our employees. We offer employees benefits that vary by country and are designed to meet or exceed the requirements of local laws and to be competitive in the marketplace. Examples of benefits offered in the U.S. include traditional and Roth 401(k) plans with matching employer contributions; health benefits; life and disability insurance; additional voluntary insurance; paid counseling assistance; paid time off and parental leave; and a tuition reimbursement program. We also sponsor an employee stock purchase plan to encourage employees to acquire an ownership stake in DMC.
Health and Safety. The health and safety of our employees is fundamental to our success. Our occupational health and safety ("OH&S") management system is focused on maintaining a strong safety culture, stringent risk management and effective leadership. DMC’s occupational health and safety management system covers all employees regardless of employment type, and is aligned with standards requirements of ISO 45001:2018. During the COVID-19 pandemic, the health and safety of our employees remained our top priority. We continue to monitor and adjust our policies and practices to remain aligned with federal, state, local and international regulations and guidelines.
Diversity and Inclusion. We believe that we will be most successful with a diverse employee population and encourage hiring and promotion practices that focus on the best talent and the most effective performers. Because we operate a global business across multiple business segments, products and service areas, we believe it is especially important that we attract employees with diverse backgrounds and the capability to address customer needs across the numerous cultures in the countries in which we operate. Our commitment to diversity and inclusion starts at the top with a highly skilled and diverse Board of Directors. We adopted a formal diversity and inclusion policy in May 2021.
Employee Development. DMC strives to identify top talent within the Company, and to provide opportunities for employees to progress to higher levels within the organization. We seek to maximize each employee’s developmental potential through a combination of training and experience.
Ethics. Our directors and all employees, including senior management, are required to conduct themselves in accordance with the highest professional and ethical standards, informed by a robust Code of Ethics and Business Conduct (the “Code”). We are committed to ensuring a fair and inclusive work environment in which employees are treated with dignity and respect. We have strict policies to protect against unlawful discrimination and harassment, and a Compliance Hotline that provides an alternative and anonymous method of reporting suspected violations of the Code, DMC’s corporate policies or applicable laws. We are in the process of bringing Arcadia employees into DMC’s corporate policies and programs.
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Government Regulations
DMC is subject to numerous environmental, legal and other governmental and regulatory requirements related to its operations worldwide. For additional details, see “Item 1(a). Risk Factors—Legal and Regulatory Risks”, which is incorporated by reference in this Item 1.
Insurance
Our operations expose us to potential liabilities for property damage and personal injury or death as a result of the failure of a component that has been designed, manufactured, serviced, processed, or distributed by us. We maintain liability insurance that we believe adequately protects us from potential product losses and liability claims.
Intellectual Property
We hold a variety of intellectual property through our DynaEnergetics businessbusinesses including but not limited to patents, patent applications, registered and unregistered trademarks, trade secrets, proprietary information and know-how. We have followed a policy of seeking patent and trademark protection in countries and regions throughout the world for products and methods that appear to have commercial significance. DynaEnergetics seeks and holds numerous patents covering various products and processes, including but not limited to perforating guns and their various components, shaped charges, packaging of explosive materials, detonating cord, and electronics.
No single patent or trademark is considered to be critical to any of Arcadia's, DynaEnergetics' business.
, or NobelClad's businesses.
We are careful in protecting our proprietary know-how and manufacturing expertise in bothArcadia, DynaEnergetics, and NobelClad, and DynaEnergetics, and we haveeach business unit has implemented measures and procedures designed to ensure that the information remains confidential.
Foreign and Domestic Operations and Export Sales
All of our sales are shipped from our manufacturing facilities and distribution centers located in the United States, Germany, France, Canada, and Russia.Canada. The following chart represents our net sales based on the geographic location to where we shipped the product, regardless of the country of the actual end user. NobelClad products are usually shipped to the fabricator before being passed on to the end user.
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| (Dollars in Thousands) | ||||||||||||
| For the years ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| United States | $ | 116,083 | $ | 78,999 | $ | 81,634 | ||||||
| Canada | 23,377 | 16,021 | 13,000 | |||||||||
| United Arab Emirates | 1,768 | 7,449 | 7,891 | |||||||||
| France | 3,032 | 3,744 | 6,624 | |||||||||
| South Korea | 1,173 | 1,690 | 5,709 | |||||||||
| Germany | 5,397 | 5,979 | 5,182 | |||||||||
| Russia | 4,504 | 3,731 | 4,937 | |||||||||
| India | 2,927 | 5,066 | 4,566 | |||||||||
| Egypt | 2,721 | 1,942 | 4,080 | |||||||||
| Spain | 1,126 | 1,500 | 3,858 | |||||||||
| Iraq | 77 | 13 | 3,758 | |||||||||
| China | 3,673 | 7,012 | 2,426 | |||||||||
| Italy | 1,582 | 2,577 | 2,327 | |||||||||
| Hong Kong | 255 | 699 | 2,207 | |||||||||
| Sweden | 2,009 | 2,124 | 1,699 | |||||||||
| Rest of the world | 23,099 | 20,029 | 17,020 | |||||||||
| Total | $ | 192,803 | $ | 158,575 | $ | 166,918 | ||||||
| (Dollars in Thousands) | |||||||||||||||||
| For the years ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| United States | $ | 549,370 | $ | 173,336 | $ | 149,214 | |||||||||||
| Canada | 26,766 | 16,929 | 10,428 | ||||||||||||||
| India | 8,249 | 3,062 | 7,236 | ||||||||||||||
| Egypt | 5,780 | 3,519 | 3,453 | ||||||||||||||
| Germany | 5,151 | 3,270 | 5,704 | ||||||||||||||
| United Arab Emirates | 5,107 | 3,843 | 4,848 | ||||||||||||||
| Turkey | 4,602 | 3,153 | 2,887 | ||||||||||||||
| China | 3,902 | 10,365 | 5,390 | ||||||||||||||
| Sweden | 3,746 | 1,208 | 1,569 | ||||||||||||||
| South Korea | 3,242 | 2,144 | 1,972 | ||||||||||||||
| Oman | 3,188 | 3,115 | 2,551 | ||||||||||||||
| Netherlands | 3,041 | 2,200 | 1,850 | ||||||||||||||
| Saudi Arabia | 2,416 | 553 | 535 | ||||||||||||||
| France | 2,101 | 2,522 | 2,904 | ||||||||||||||
| Indonesia | 2,085 | 1,131 | 1,832 | ||||||||||||||
| South Africa | 1,970 | 886 | 235 | ||||||||||||||
| Norway | 1,854 | 2,211 | 2,583 | ||||||||||||||
| Italy | 1,816 | 1,467 | 1,220 | ||||||||||||||
| Australia | 1,816 | 1,567 | 2,667 | ||||||||||||||
| Kuwait | 1,801 | 1,559 | 1,716 | ||||||||||||||
| Hong Kong | 1,158 | 1,731 | 435 | ||||||||||||||
| Romania | 851 | 913 | 465 | ||||||||||||||
| Russia* | 183 | 4,057 | 24 | ||||||||||||||
| Rest of the world | 13,891 | 15,374 | 17,443 | ||||||||||||||
| Net sales | $ | 654,086 | $ | 260,115 | $ | 229,161 | |||||||||||
*Future sales to Russia have been suspended indefinitely due to the ongoing conflict in Ukraine.
Company Information
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We therefore file periodic reports, proxy statements and other information with the Securities Exchange Commission (the “SEC”). Such reports may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330. In addition, theThe SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.
Our Internet address is www.dmcglobal.com. Information contained on our website does not constitute part of this Annual Report on Form 10-K. Our annual report on SEC Form 10-K, quarterly reports on Forms 10-Q, current reports on Forms 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our website as soon as reasonably practicable after we electronically file such material is electronically filed with, or furnish itfurnished to, the SEC. We also regularly post information about our Company on our website under the "Investors" tab.
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ITEM 1A.Risk Factors
Please carefully consider the following discussion of material factors, events, and uncertainties that make our business and an investment in our securities subject to risk. The events and consequences discussed in these risk factors could, in circumstances we may or may not be able to accurately predict, recognize, or control, have a material adverse effect on our business, growth, reputation, prospects, financial condition, operating results (including components of our financial results), cash flows, liquidity, and stock price. These risk factors do not identify all risks that we face; our operations could also be affected by factors, events, or uncertainties that are not presently known to us or that we currently do not consider to present significant risks to our operations.
Summary of Material Risk Factors
The following is a summary of the material risk factors that could adversely affect our business, financial condition, and results of operations. This summary should be read together with the more detailed descriptions of risks relating to our Company below.
Risk Factors Related to Arcadia
•North American and global economic and industry-related business conditions materially affect our NobelClad Segmentsales and results of operations.
•An inability to successfully develop new products or improve existing products could negatively impact our ability to attract new customers and/or retain existing customers.
•If we are unable to manage our supply chain effectively, including availability and price of materials used in our products, our results of operations will be negatively affected.
•Product quality issues and product liability claims could adversely affect our operating results.
Risk Factors Related to DynaEnergetics
•Demand for DynaEnergetics’ products is substantially dependent on the levels of capital expenditures by the oil and gas industry. Decreases or expected decreases in oil and gas prices and reduced expenditures in the oil and gas industry could have a material adverse impact on our financial condition, results of operations and cash flows.
•Failure to adjust our manufacturing and supply chain to accurately meet customer demands could have a material adverse effect on our results of operations.
•Failure to manage periods of growth or contraction may seriously harm our business.
•We may not be able to continue to compete successfully against other companies in our industry.
•If we are not able to design, develop, and produce commercially competitive products in a timely manner in response to changes in the market, customer requirements, competitive pressures, and technology trends, our business and consolidated results of operations and the value of our intellectual property could be materially and adversely affected.
•Demand for DynaEnergetics products could be reduced by existing and future legislation, regulations and public sentiment.
Risk Factors Related to NobelClad
•NobelClad’s business is dependent on sales to a limited number of customers in cyclical markets and our results are affected by the price of metals.
•Our backlog figures may not accurately predict future sales.
•There is a limited availability of sites suitable for cladding operations.
•There is no assurance that we will continue to compete successfully against other manufacturers of competitive products.
•Customers have the right to change orders until products are completed.
•We do not maintain a reserve fund for warranty or defective products claims. Our explosion-welded clad products compete with explosion-welded clad products madecosts could substantially increase if we experience a large claim or a significant number of warranty claims.
Risk Factors Related to our Businesses Generally
•Our operations are subject to political and economic instability and risk of government actions that could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition.
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•Our business, financial condition and results of operations could be adversely affected by other manufacturersdisruptions in the clad metal business located throughout the world and with clad products manufactured using other technologies. Our combined North Americanglobal and European operations typically supply explosion-welded cladeconomies caused by the ongoing military action between Russia and Ukraine.
•Our operating results fluctuate from quarter to quarter.
•We are exposed to potentially volatile fluctuations of the worldwide market. There is one other well-known explosion-welded clad supplier worldwide -U.S. dollar (our reporting currency) against the currencies of many of our operating subsidiaries.
•Disruptions or delays involving our suppliers or increases in prices for the components, raw materials and parts that we obtain from our suppliers could have a divisionmaterial adverse effect on our business and consolidated results of Asahi-Kasei Corporationoperations.
•The terms of Japan. There are alsoour indebtedness contain a number of smaller companies worldwiderestrictive covenants, the breach of any of which could result in acceleration of payment of our credit facilities.
•If our customers delay paying or fail to pay a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.
•New or existing tariffs and other trade measures could adversely affect our results of operations, financial position and cash flows.
•Failure to attract and retain key personnel and source sufficient labor could adversely affect our current operating results.
•A failure in our information technology systems or those of third parties, including those caused by security breaches, cyber-attacks or data protection failures, could disrupt our business, result in significant legal costs and other losses and damage our reputation.
•Failure to establish and maintain adequate internal controls over financial reporting could result in the inability to report our financial results in a timely and reliable manner, which could harm our business and impact the value of our securities.
Legal and Regulatory Risks
•Our operations require us to comply with explosion-welded clad manufacturing capability, including several companies in China that appear to be growing significantly in their domestic markets. Explosion-welded clad products also compete with those manufactured by rollbondnumerous laws and weld overlay cladding processes. The technical and commercial nichesregulations, violations of each cladding process are well understood within the industry and vary from one world market location to another. We focuswhich could have a material adverse effect on reliability, product quality, on-time delivery performance, and low-cost manufacturing to minimize the potentialour consolidated results of future competitive threats. However, there is no guarantee we will be able to maintain our competitive position.operations, financial condition or cash flows.
•The use of explosives subjectsin our DynaEnergetics and NobelClad manufacturing processes and products subject us to additional regulation,environmental, health and safety laws and any accidents or injuries could subject us to significant liabilities.
•Demand for our products could be reduced by existing and future legislation, regulations and public sentiment.
•We are subject to extensive environmental, health and safety laws and failure to comply with such laws and regulations could result in restrictions or prohibitions on our facilities, substantial civil or criminal liabilities and could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition.
•Failure to comply with applicable federal, state and local employment and labor laws and regulations could have a material, adverse impact on our business.
•The regulatory environment governing information, data security and privacy is increasingly demanding and evolving and a data security breach could result in litigation, enforcement actions and related penalties and fines.
•Legal, regulatory or market measures to address climate change, including proposals to restrict emissions of GHGs and other sustainability initiatives, could have an adverse impact on the Company’s business and results of operations.
•Changes in or interpretation of tax law could impact the determination of our income tax liabilities for a tax year.
•We are subject to litigation and may be subject to additional litigation in the future.
Intellectual Property Risks
•Our operations involve the detonation of large amounts of explosives. The use of explosives is an inherently dangerous activity. As a result, we are required to use specific safety precautions under U.S. Occupational Safety and Health Administration guidelines and guidelines of similar entities in Germany and France. These include precautions which must be tak
•We may incur substantial costs defending against third parties alleging that we infringe their proprietary rights.
Risks Related to soundAcquisitions
•We have incurred debt to finance the acquisition of 60% of Arcadia and ground vibration or falling debriswill incur additional substantial financial obligations in connection with the acquisition of the remaining 40% of Arcadia.
•After the Arcadia acquisition, DMC is the majority shareholder of Arcadia, and our interest in Arcadia is subject to the risks normally associated with the detonationconduct of explosives. There isbusinesses with a risk that an accident or death could occur in oneminority shareholder.
•Fully integrating Arcadia’s business following the acquisition may be more difficult, costly and time-consuming than expected, which may adversely affect our results of operations and the value of our facilities. common stock.
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•To the extent that we seek to further expand our business through acquisitions, we may experience issues in executing acquisitions or integrating acquired operations.
Risk Factors Related to Our Common Stock
•The price and trading volume of our common stock may be volatile, which may make it difficult for you to resell the common stock when you want or at prices you find attractive.
•Holders of our common stock do not currently receive dividends and our dividend may not be reinstated in the future.
Risk Factors Related to Arcadia
North American and global economic and industry-related business conditions materially affect our sales and results of operations.
Our Arcadia businesses are significantly influenced by North American economic conditions and the cyclical nature of the North American commercial and residential construction industry. The construction industry is impacted by macroeconomic trends, such as intended, canavailability of credit, employment levels, consumer confidence, interest rates and commodity prices. In addition, changes in architectural design trends, demographic trends, and/or remote work trends could negatively impact demand for our products. To the extent changes in these factors negatively impact the overall commercial construction industry, our revenue and profits could be significantly reduced.
The markets in which Arcadia operates are highly competitive and many of our competitors are larger and better capitalized than we are. These competitors may be better able to withstand changes in conditions within the industries and markets in which we operate and may have significantly greater operating and financial flexibility than we have. Moreover, barriers to entry are low in certain product lines and new competitors may enter our industry, whether within the U.S. or internationally. An increase in competition, including in the form of aggressive pricing by new market entrants or offerings of alternative building materials, could cause us to lose customers and lead to damagedecreases in net sales and profitability if we are not able to the shooting siterespond adequately to such challenges. The actions of our existing competitors or manufacturing facility or to equipment used at the facility or injury or death to persons at the facility. Any accidentnew competitors could result in significant manufacturing delays, disruptionloss of operations customers and/or claims for damages resulting from deathmarket share. Changes in our competitors' products, prices or injuries, whichservices could result in decreasednegatively impact our market share, net sales and increased expenses. To date, we have not incurred any significant delays, disruptions and/or claims resulting from accidents at our facilities. If an accident occurred, we might be requiredmargins.
An inability to suspend our operations for a period of time while an investigation is undertakensuccessfully develop new products or repairs are made. Such a delay mightimprove existing products could negatively impact our ability to meetattract new customers and/or retain existing customers.
Our success depends on meeting consumer needs and anticipating changes in consumer preferences with successful new products and product improvements. We aim to introduce products and new or improved production processes proactively to offset obsolescence and decreases in sales of existing products. While we devote significant focus to the development of new products, we may not be successful in product development and our new products may not be commercially successful. In addition, it is possible that competitors may improve their products more rapidly or effectively, which could adversely affect our sales. Furthermore, market demand formay decline as a result of consumer preferences trending away from our products.categories or trending down within our brands or product categories, which could adversely impact our results of operations, cash flows and financial condition.
We obtain a significant portion of our key raw materials, such as aluminum extrusions, from a few key suppliers. While we structure many of our supply arrangements to moderate the customer. However, because a changeeffects of fluctuations in an orderthe market for raw aluminum and we endeavor to adjust our pricing to offset potential impacts, operating results could be negatively impacted by price movements in the market for raw aluminum. In recent years, we have seen increased volatility in the price of aluminum that we purchase from our key suppliers.
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Our suppliers are subject to fluctuations in general economic cycles. Global economic conditions and political and economic instability may delay completion ofimpact their ability to operate their businesses, including continuing impacts from the project, recognition of income forCOVID-19 pandemic and the projectongoing military action between Russia and Ukraine and related government actions. Our suppliers may also be delayed.impacted by the increasing costs or availability of raw materials, labor and transportation. Some of our suppliers may not be able to handle commodity cost volatility or changing volumes while still performing up to our specifications. These factors may cause suppliers to be unable to meet their commitments or to negatively change the terms of the supply arrangements.
The loss of, or substantial decrease in the availability of, products from our suppliers, or the loss of a key supplier, could adversely impact our financial condition and results of operations. If any of our key suppliers are unable to meet their commitments, or if those supply arrangements are terminated, we may not be able to obtain certain raw materials on commercially reasonable terms or at all, and may suffer a significant interruption in our ability to manufacture our products, including because it may be difficult to find substitute or alternate suppliers as the aluminum extrusions we use are customized.
We could also be required to maintain higher inventory levels as we address supply uncertainties. Such developments would result in higher costs and ultimately a decrease in our revenues and profitability. If our supply of raw materials is disrupted or our delivery times are extended, our results of operations and financial condition could be materially adversely affected.
Product quality issues and product liability claims could adversely affect our operating results.
We believe that future orders of our products will depend on our ability to maintain the performance, reliability, quality and timely delivery standards required by our customers. We have in the past been and currently are subject to product liability and warranty claims. If our products have performance, reliability or quality problems, or products are installed improperly, we may experience additional warranty expense; reduced or canceled orders; or delays in the collection of accounts receivable. Additionally, product liability and warranty claims could result in costly and time-consuming litigation that could require significant time and attention of management and involve significant monetary damages that could negatively impact our operating results. There is no assurance that the number and value of product liability and warranty claims will not increase as compared to historical claim rates, or that our warranty reserve at any particular time will be sufficient. No assurance can be given that coverage under insurance policies, if applicable, will be adequate to cover future product liability claims against us. If we are unable to recover on insurance claims, in whole or in part, or if we exhaust our available insurance coverage at some point in the future, then we might be forced to expend legal fees and settlement or judgment costs relating to product liability and warranty claims, which could negatively impact our profitability, results of operations, cash flows and financial condition.
Risk Factors Related to DynaEnergetics
Demand for DynaEnergetics’ products is substantially dependent on the levels of capital expenditures by the oil and gas industry. DecreasedDecreases or expected decreases in oil and gas prices and reduced expenditures in the oil and gas industry could have a significantmaterial adverse impact on our financial condition, results of operations and cash flows.
Demand for the majority of ourDynaEnergetics' products depends substantially on the level of expenditures by the oil and gas industry for the exploration, development and production of oil and natural gas reserves. These expenditures are generally dependent on the industry’s view of future oil and natural gas prices and are sensitive to the industry’s view of future economic growth and the resulting impact on demand for oil and natural gas. From 2014 through mid-2017,Higher oil and gas prices declined significantly, resultinghave resulted in lowerincreasing North American completion activity and increased expenditures by the oil and gas industry. This has resulted in increased cash flows for E&P companies; however, E&P companies are still seeking to control their cost of operations and this has continued to result in downward pressure on prices for our products. In addition, the oil and gas industry during this period. As a result, manyhas historically been cyclical, and to date in 2023, oil prices have declined significantly from their 2022 highs. When oil prices decline, we would expect an increased risk of our customers reduced or delayed their oil and gas exploration and production spending, reducing the demand for our products and exerting downward pressure on the prices that we charged and the revenues and profits we earned during this period. This resulted in DynaEnergetics’ revenues in 2016 being 36.2% less than in 2014 and in 2015 being 27.0% less than in 2014. Although we have seen increased oil and gas prices and increased exploration and production spending in 2017, resulting in increased revenues for DynaEnergetics, there is no assurance that such conditions will continue.
The prices for oil and natural gas have historically been volatile and can be affected by a variety of factors, including:
•changes in the supply of and demand for hydrocarbons, which isare affected by general economic, business and businessregulatory conditions;
•the ability or willingness of the Organization of Petroleum Exporting Countries (“OPEC”) and other oil producing companies to set and maintain production levels for oil;
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•oil and gas production levels byin the U.S. and in other non-OPEC countries;
•the level of excess production capacity;
•speculation as to the future price of oil and the speculative trading of oil and natural gas futures contracts;
•government initiatives to restrict oil and gas drilling or development or promote the use of renewable energy sources and public sentiment regarding the same;
•political and economic uncertainty, geopolitical unrest, and geopolitical unrest;acts of war;
•the level of worldwide oil and gas exploration and production activity;
•access to potential resources;
•changes in governmental policies, and subsidies;subsidies, or sanctions;
•the costs of exploring for, producing and delivering oil and gas;
•technological advances affecting energy consumption; and
•weather conditions.
Failure to adjust our manufacturing and supply chain to accurately meet customers demandcustomer demands could adversely affecthave a material adverse effect on our results of operations.
We make significant decisions, including determining the levels of business that we will seek and accept, production schedules, levels of reliance on contract manufacturing and outsourcing, internal fabrication utilization and other resource requirements, based on our estimates of customer requirements. Factors that can impact our ability to accurately estimate future customer requirements include the short-term nature of many customers’ commitments, our customers’ ability to reschedule, cancel and modify orders with little or no notice and without significant penalty, the accuracy of our customers’ forecasts, and seasonal or cyclical trends in customers' industries.
To ensure availability of our products, particularly for our largest customers, we typicallymay start manufacturing our relevant products based on our customers’ forecasts, which are not binding. As a result, we incur inventory and manufacturing costs in advance of anticipated sales that may never materialize or which may be substantially lower than expected. If actual demand for our products is lower than forecast, we may also experience higher inventory carrying and operating costs and product obsolescence. Because certain of our sales, research and development, and internal manufacturing overhead expenses are relatively fixed, a reduction in customer demand may also decrease our gross margin and operating income.
Conversely, customers often require rapid increases in production on short notice. We may be unable to secure sufficient materials or contract manufacturing capacity to meet such increases in demand. This could damage our customer relationships, reduce revenue growth and margins, subject us to additional liabilities, harm our reputation, and prevent us from taking advantage of opportunities.
Failure to manage periods of growth or contraction may seriously harm our business.
Our industry frequently sees periods of expansion and contraction which require companies to adjust to customers’ needs and market demands. We regularly contend with these issues and must carefully manage our business to meet customer and market requirements. If we fail to manage these growth and contraction decisions effectively, we may find ourselves with either excess or insufficient resources and our business and our profitability could suffer as a result.
Periods of contraction or reduced net sales, or other factors negatively affecting particular sites, create other challenges. We must determinemarkets, require us to assess whether facilities remain viable, whether staffing levels need to be reduced, and how to respond to changing levels
of customer demand. While maintaining excess capacity or higher levels of employment entails short-term costs, reductions in capacity or employment could impair our ability to respond to new opportunities and programs, market improvements or to maintain customer relationships. Our decisions to reduce costs and capacity can affect our short-term and long-term results and result in restructuring charges.
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We may not be able to continue to compete successfully against other companies in our industry.
The markets in which we operate are highly competitive. DynaEnergetics competes with a broad spectrum of companies that produce and market perforating services and products. Many of these companies are large national and multi-national companies, including the oil and natural gas industry’s largest oilfield service providers. These companies have longer operating histories, greater financial, technical, and other resources, and greater name recognition than we do. In addition, we compete with many smaller companies capable of competing effectively on a regional or local basis. Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements. To remain competitive, DynaEnergetics must continue to provide innovative products at competitive prices and maintain an excellent reputation for value, quality, on-time delivery, and safety. If we fail to compete successfully against our competition, we may be unable to maintain acceptable sales levels, prices and margins for our products, and serviceswhich could be reduced by existing and future legislation or regulations.
If we are not able to design, develop, and produce commercially competitive products in a timely manner in response to changes in the market, customer requirements, competitive pressures, and technology trends, our business and consolidated results of operations and the value of our intellectual property could be materially and adversely affected.
The market for our products is characterized by continual technological developments to provide better and more reliable performance.performance and enhanced product offerings. If we are not able to design, develop, and produce commercially competitive products in a timely manner in response to changes in the market, customer requirements, competitive pressures, and technology trends, our business and consolidated results of operations and the value of our intellectual property could be materially and adversely affected. Likewise, if our proprietary technologies, equipment, facilities, or work processes become obsolete, we may no longer be competitive, and our business and consolidated results of operations could be materially and adversely affected.
Regulatory agencies and environmental advocacy groups in the United States, the E.U., and other regions or countries have been focusing considerable attention on emissions of explosives subjects DynaEnergeticscarbon dioxide, methane and other greenhouse gases and their role in climate change. There is also increased focus, including by governments and our customers, investors and other stakeholders, on these and other sustainability and energy transition matters. Existing or future legislation and regulations related to various environmental, healthgreenhouse gas emissions and safety lawsclimate change, as well as initiatives by governments, non-governmental organizations, and any accidentscompanies to conserve energy or injuries could subject us to significant liabilities.
In addition, some international, national, state and safetylocal governments and agencies have also adopted laws and regulations covering all aspectsor are evaluating proposed legislation and regulations that are focused on directly limiting the extraction of the business including general operating licenses, transportation domestically and internationally, storage requirements, waste disposal, manufacturing regulations, employee training and certification requirements, and labor regulations. Violation of theseshale gas or oil using hydraulic fracturing. These laws and regulations could resultlimit oil and gas development, lead to operational delays and increased costs for our customers, and therefore reduce demand for DynaEnergetics' products. Such reductions in demand for our products may, in turn, adversely affect our financial condition, results of operations and cash flows.
Increased negative investor sentiment toward oil and gas and preference for assets outside of traditional energy sectors could lead to higher capital costs for our customers and reduced investment in fossil fuels, thereby reducing demand for our products. Such preferences could also impact our ability to obtain acceptable debt or equity financing on attractive terms or at all and could negatively impact our stock price over time. Our business, reputation and demand for our stock could be negatively affected if we do not (or are perceived to not) act responsibly with respect to sustainability matters.
Risk Factors Related to NobelClad
NobelClad’s business is dependent on sales to a limited number of customers in cyclical markets and our results are affected by the price of metals.
NobelClad revenues are affected both by the demand for NobelClad’s explosion-welded cladding services and the base price of metal used in explosion-welded cladding operations. The explosion-welded cladding market is dependent upon sales of products for use by customers in a limited number of heavy industries, including oil and gas, chemicals and petrochemicals, alternative energy, hydrometallurgy, aluminum production, shipbuilding, rail car manufacturing, power generation, and industrial refrigeration. These industries tend to be cyclical in nature and an economic slowdown in one or all of these
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industries-whether due to traditional cyclicality, general economic conditions or other factors-could impact capital expenditures within that industry. The COVID-19 pandemic, government actions taken in response, and resulting economic impacts, including inflationary conditions in many markets, have created uncertainty in our end markets, and we have seen continued delays in projects and capital expenditures. In addition, metals prices affect the demand for cladded products and our margins. Although higher metal prices increase demand for use of cladded materials over solid metals, lead to higher sales (in terms of dollars rather than square meters of cladding) and generally higher margins for NobelClad, metal pricing is volatile. We have recently experienced several years of a low-metals-price environment, which significantly reduced demand for clad product and overall sales. In the last two years, the price of metals has increased substantially. However, there can be no assurance that prices will remain at these levels and supply chain difficulties and other uncertainties have disrupted projects and normal sales cycles. If demand or metals prices decline or if supply chain issues or similar disruptions persist, our sales would be adversely affected, and this could have a material adverse effect on our business, financial condition, and results of operations.
We are dependent on a relatively small number of large projects and customers for a significant penalties or in interruptionportion of our net sales.
A significant portion of our net sales is derived from a relatively small number of projects and customers; therefore, the failure to complete existing contracts on a timely basis, to receive payment for such services in a timely manner, or to enter into future contracts at projected volumes and profitability levels could adversely affect our ability to meet cash requirements exclusively through operating activities. We attempt to minimize the risk of losing customers or specific contracts by continually improving commercial execution and product quality, delivering product on time and competing aggressively on the basis of price. We expect to continue to depend upon our principal customers for a significant portion of our sales, although our principal customers may not continue to purchase products and services from us at current levels, if at all. The loss of one or more major customers or a change in their buying patterns could have a material adverse effect on our business, activities. DynaEnergetics’ success depends on continued compliance with applicable lawsfinancial condition, and regulations. In addition, new environmental, healthresults of operations.
Our backlog figures may not accurately predict future sales.
We use backlog to predict our anticipated future sales. Our year-end backlog was $55.5 million, $41.2 million, and safety laws$39.9 million at the end of fiscal years 2022, 2021 and regulations could2020, respectively. We define “backlog” at any given point in time to consist of all firm, unfulfilled purchase orders and commitments at that time. We expect to fill most items in backlog within the following twelve months. However, since orders may be passedrescheduled or canceled and a significant portion of our net sales is derived from a small number of customers, backlog is not necessarily indicative of future sales levels. Moreover, we cannot be sure of when during the future twelve-month period we will be able to recognize revenue corresponding to our backlog nor can we be certain that could create costly compliance issues. While DynaEnergetics endeavorsrevenues corresponding to our backlog will not fall into periods beyond the twelve-month horizon.
There is a limited availability of sites suitable for cladding operations.
Our cladding process involves the detonation of large amounts of explosives. As a result, the sites where we perform cladding must meet certain criteria, including adequate distance from densely populated areas, specific geological characteristics, and the ability to comply with all applicable lawslocal noise and vibration abatement regulations compliance within conducting the process. Our shooting sites in Pennsylvania and in Germany are located in mines. Our Pennsylvania shooting site is subleased under an arrangement pursuant to which we provide certain contractual services to the sub-landlord, and this sublease expires in 2029. In addition, we could experience difficulty in obtaining or renewing permits because of resistance from residents in the vicinity of existing or proposed sites. The failure to obtain required governmental approvals or permits could limit our ability to expand our cladding business in the future, laws and regulations may not be economically feasiblethe failure to maintain such permits or even possible. Even with compliance with applicable healthsatisfy other conditions to use the sites would have a material adverse effect on our business, financial condition and safety laws, itresults of operations.
There is possible that accidents may occur, potentially resulting in injury to our employees, equipment and facilities. Any accident could result in significant manufacturing delays, disruption of operations or claims for damages resulting from death or injuries, which could result in decreased sales and increased expenses.
Our explosion-welded clad products compete on a worldwide basis with explosion-welded clad products made by other manufacturers in the clad metal business and with products manufactured using other technologies. We see competition from one large well-known clad supplier and from a growing number of smaller companies with explosion welded clad manufacturing capability in China and India. Explosion-welded clad products also compete with products manufactured by roll bond and weld overlay cladding processes. The technical and commercial niches of each cladding process are well understood within the industry and vary from one market location to another and at different metal prices. We focus on reliability, product quality, on-time delivery performance, and low-cost manufacturing to minimize the potential of future competitive threats. However, there is no guarantee we will be able to maintain our competitive position.
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Customers have the right to change orders until products are completed.
Customers have some rights to change orders after they have been placed. If orders are changed, the extra expenses associated with the change usually will be passed on to the customer. However, because a change in an order may delay completion of the project, recognition of income for the project may also be delayed. Additionally, any errors or changes as to specifications or significant changes in pricing or availability of materials may cause cost overruns and delays in completion of projects. If we fail to meet delivery schedules, we may be required to pay damages or may risk loss of an order, which could have a material adverse effect on our business, financial condition and results of operations.
We do not maintain a reserve fund for warranty or defective products claims. Our costs could substantially increase if we experience a large claim or a significant number of warranty claims.
Our product warranties against technical defects of our clad products vary depending on our purchase orders with customers. The warranties require us to repair or replace defective products and may require the payment of a certain percentage of the purchase price as liquidated damages for our failure to meet the specified product specifications and delivery requirements. In addition, our clad products are often used as part of larger projects or are used in potentially hazardous applications that can cause injury or loss of life and damage to property or equipment. In the event of an actual or alleged product defect, we may be named as a defendant in product liability or other lawsuits asserting potentially large claims. We cannot guarantee that insurance will be available or adequate to cover any or all liabilities incurred. We have not established any reserve funds for potential warranty claims since historically we have experienced few warranty claims for our products and the costs associated with our warranty claims have been low. If we experience an increase in warranty claims or if our repair and replacement costs associated with warranty claims increase significantly, it could have a material adverse effect on our financial condition and results of operations.
Risk Factors Related to our Businesses Generally
Our operations are subject to political and economic instability and risk of government actions thatcould have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition.
We are exposed to risks inherent in doing business in each of the countries in which we operate. Our operations are subject to various risks unique to each country that could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition. With respect to any particular country, these risks may include:
•political, social and economic instability;
•civil unrest, acts of terrorism, force majeure, war, other armed conflict;
•public health crises and catastrophic events, such as the COVID-19 pandemic;
•inflation;
•currency fluctuations, devaluations, conversion, or repatriation restrictions;
•expropriation and nationalization of our assets;
•confiscatory taxation or other adverse tax policies;
•theft of, or lack of sufficient legal protection for, proprietary technology and other intellectual property;
•limitations on extraction of shale gas or oil using hydraulic fracturing;
•limitations on or disruptions to our markets or operations, restrictions on payments, or limitations on the movement of funds;
•increased tariffs;
•trade and economic sanctions or other restrictions;
•unexpected changes in legal and regulatory requirements, including changes in interpretation or enforcement of existing laws;
•deprivation of contract rights; and
•the inability to obtain or retain licenses required for operation.
Our business, financial condition and results of operations could be adversely affected by disruptions in the global and European economies caused by the ongoing military action between Russia and Ukraine.
In February of 2022, Russian military forces invaded Ukraine, resulting in conflict and disruption in the region. The length, impact and outcome of the ongoing military conflict in Ukraine is highly unpredictable. This conflict has led and may continue to lead to significant market and other disruptions, including significant volatility in commodity prices and supply of energy resources, instability in financial markets, higher inflation, supply chain interruptions, increased costs for transportation
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and raw materials, political and social instability, as well as an increase in cyberattacks and espionage. Furthermore, governments in the United States, the European Union, the United Kingdom, Canada and others have imposed financial and economic sanctions on certain industry segments and various parties in Russia. We continue to monitor the conflict including the potential impact of financial and economic sanctions on the global economy and particularly the economies of Europe. Increased trade barriers, sanctions and other restrictions on global or regional trade could adversely affect our business, financial condition and results of operations. Further escalation of geopolitical tensions related to this military conflict and/or its expansion could result in loss of property, expropriation, cyberattacks, supply disruptions, plant closures and an inability to obtain key supplies and materials, as well as adversely affect both our and our customers' supply chains and logistics, particularly in Europe.
In many cases, both our German operations and those of European customers and suppliers depend on the availability of natural gas for use in their manufacturing operations. A significant proportion of Germany's natural gas supply has historically originated from Russia. Material disruptions of natural gas supply to Europe and in particular Germany, whether from sanctions, counter-measures by Russia, other restrictions, damage to infrastructure and logistics or otherwise from the destabilizing effects of military conflict could materially and adversely impact European and global natural gas and oil markets. We expect that shortages in supply and increases in costs of natural gas or other energy will adversely impact our ability to operate our German manufacturing facilities as efficiently and cost-effectively as previously, which could adversely affect our business, results of operations and financial condition.
Our operating results fluctuate from quarter to quarter.
We have experienced, and expect to continue to experience, fluctuations in annual and quarterly operating results caused by various factors at both NobelClad and DynaEnergetics.our businesses. At NobelClad, quarterly sales and operating results depend on the volume and timing of the orders in our backlog as well as bookings during the quarter. At DynaEnergetics, the level of demand from our customers is impacted by oil and gas prices as well as a variety of other factors and can vary significantly from quarter to quarter. Significant portionsAt Arcadia, operating results can fluctuate due to price movements in the market for raw aluminum. Portions of our operating expenses are fixed, and planned expenditures are based primarily on sales forecasts and product development programs. If sales do not meet our expectations in any given period, the adverse impact on operating results may be magnified by our inability to adjust operating expenses sufficiently or quickly enough to compensate for such a shortfall. Results of operations in any period should not be considered indicative of the results for any future period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Fluctuations in operating results may also result in fluctuations in the price of our common stock.
We are exposed to potentially volatile fluctuations of the U.S. dollar (our reporting currency) against the currencies of many of our operating subsidiaries.
Many of our operating subsidiaries conduct business in Euroseuros, Canadian dollars, or other foreign currencies such as the Russian Ruble.currencies. Sales made in currencies other than U.S. dollars accounted for 28%6%, 28%16%, and 23%17% of total sales for the years ended 2017, 20162022, 2021 and 2015,2020, respectively. Any increase (decrease) in the value of the U.S. dollar against any foreign currency that is the functional currency of any of our operating subsidiaries will cause us to experience foreign currency translation (gains) losses with respect to amounts already invested in such foreign currencies. In addition, our company and our operating subsidiaries are exposed to foreign currency risk to the extent that we or they enter into transactions denominated in currencies other than our or their respective functional currencies. For example, DynaEnergetics KG’sEurope's functional currency is Euros,euros, but its sales often occur in U.S. dollars. Changes in exchange rates with respect to these items will result in unrealized (based upon period-end exchange rates) or realized foreign currency transaction gains and losses upon settlement of the transactions. In addition, we are exposed to foreign exchange rate fluctuations related to our operating subsidiaries’ assets and liabilities and to the financial results of foreign subsidiaries and affiliates when their respective financial statements are translated into U.S. dollars for inclusion in our Consolidated Financial Statements. Cumulative translation adjustments are recorded in accumulated other cumulative comprehensive income (loss)loss as a separate component of equity. Our primary exposure to foreign currency risk is the Euroeuro, due to the percentage of our U.S. dollar revenue that is derived from countries where the Euroeuro is the functional currency and the Russian Ruble due to our operations in Tyumen, Siberia. During the third quarter of 2017, we began usingcurrency. We use foreign currency forward contracts, generally with maturities of one month, to offset foreign exchange rate fluctuations on certain foreign currency denominated asset and liability account balances. These hedge transactions relate to our operating entities with significant economic exposure to transactions denominated in currencies other than their functional currency. Our primary economic exposures include the U.S. dollar to the Euro,euro, the U.S. dollar to the Canadian dollar, and the Euroeuro to the U.S. Dollar and the Euro to the Russian Ruble.dollar. Since the underlying balance sheet account balances being hedged can fluctuate significantly throughout our monthly hedge periods, our hedging program cannot fully protectedprotect against foreign currency fluctuations.
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Disruptions or delays involving our suppliers or increases in prices for the components, raw materials and parts that we obtain from our suppliers could have a material adverse effect on our business and consolidated results of operations.
Our operations are dependent upon the continued ability of our suppliers to deliver the components, raw materials and parts that we need to manufacture our products. In some instances, we purchase components, raw materials and parts that are ultimately derived from a single source and may be at an increased risk for supply disruptions. Any number of factors, including labor disruptions, acts of war or terrorism, military activity, trade sanctions, catastrophic weather events, the occurrence of a pandemic or other widespread illness (such as COVID-19), contractual or other disputes, unfavorable economic or industry conditions, transportation disruptions, delivery delays or other performance problems or financial difficulties or solvency problems, could disrupt our suppliers’ operations and performance, which could, in turn, lead to uncertainty in our supply chain or cause supply disruptions for us and disrupt our operations. Although we have been able to manage supply chain impacts through the COVID-19 pandemic, we have experienced longer lead times for certain materials and have in other cases had heightened difficulty in sourcing materials. Lockdown orders or a prolonged period of travel, commercial and other similar restrictions could cause additional global supply disruptions. If we experience further supply disruptions, we may not be able to develop alternate sourcing quickly. Any disruption of our production schedule caused by an unexpected shortage of components, raw materials or parts even for a relatively short period of time could cause us to alter production schedules or suspend production entirely, which would adversely affect our business and results of operations.
The terms of our indebtedness contain a number of restrictive covenants, the breach of any of which could result in acceleration of payment of our credit facilities.
As of December 31, 2017,2022, we had an outstanding balance of approximately $18.3$135.0 million on our syndicated credit agreement. This agreement includes various covenants and restrictions and certain of these relate to the incurrence of additional indebtedness and the mortgaging, pledging or disposing of major assets. We are also required to maintain certain financial ratios on a quarterly basis. A breach of any of these covenants could impair our ability to borrow and could result in acceleration of our obligations to repay our debt if we are unable to obtain a waiver or amendment from our lenders. As of December 31, 2017,2022, we were in compliance with all financial covenants and other provisions of the credit agreement, as amended, and our other loan agreements. Any failure to remain in compliance with any material provision or covenant of our credit agreement could result in a default, which would, absent a waiver or amendment, require immediate repayment of outstanding indebtedness under our credit facilities.
We are dependent on a relatively small number of large projects and customers for a significant portion of our net sales.
If our customers delay paying or fail to pay a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.
We depend on a limited number of significant customers. For the year ended December 31, 2017, one customer represented approximately 10% of consolidated revenue,customers in our DynaEnergetics and NobelClad businesses, and the loss of one or more significant customers or the failure of a customer to pay outstanding amounts due could have a material adverse effect on our business and our consolidated results of operations.
In most cases, we bill our customers for our services in arrears and are, therefore, subject to the risk that our customers delayingwill delay payment of or failingfail to pay our invoices. In weak economic environments, we may experience increased delays and failures due to, among other reasons, a reduction in our customers’ cash flow from operations and in their access to the credit markets.markets and rising interest rates. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.
New or existing tariffs and other trade measures could adversely affect our results of operations, financial position and cash flows.
New or existing tariffs and other trade measures could adversely affect our results of operations, financial position and cash flows, either directly or indirectly through various adverse impacts on our significant customers. In 2018, the U.S. announced tariffs of 25 percent on steel and 10 percent on aluminum imported from countries where we typically source metals. These tariffs were met with retaliatory tariffs from certain countries and increased, broader tariffs were levied by the U.S. on targeted countries, including China. Certain of these tariffs have been modified; however, impacts and uncertainties are continuing. The tariffs impacted the cost of the importation of steel, which we utilize in our steel plate and steel pipe, key materials in our NobelClad and DynaEnergetics businesses. Though in many cases we have been able to source metals from domestic suppliers, some materials are only available from sources subject to tariffs. The cost of domestic steel and aluminum has also increased, along with the price of delivery, and the availability of certain materials has been limited. These increased costs have increased the price of our products to our customers and, in some instances, affected our ability to be competitive. For our NobelClad business, this impacts our ability to compete on international projects and negatively impacts U.S. fabricators, which are the primary consumers of NobelClad products. Although some of these tariffs have been subsequently
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reduced or eliminated, as occurred in connection with the United States Mexico Canada Agreement (USMCA), many tariffs continue to exist and new tariffs have been and may be imposed at any time. The prolonged duration of tariffs, the imposition of additional tariffs and the risk of potential broader global trade conflicts could have a material adverse effect on our business, financial condition or results of operations.
Failure to attract and retain key personnel and source sufficient labor could adversely affect our current operations.operating results.
Our continued success depends to a large extent upon the efforts and abilities of key managerial and technical employees.employees, and our ability to secure sufficient manufacturing labor. In recent months, our management team has undergone significant changes, including the announced retirement of Michael Kuta, our Chief Financial Officer, and the departure of our President and Chief Executive Officer, followed by the appointment of Michael Kuta and David Aldous as interim co-Presidents and Chief Executive Officers and the appointment of Eric Walter as Chief Financial Officer. Our current and future success is dependent on recruitment of a new Chief Executive Officer and the retention of key personnel, including other executive officers and directors. The loss or unavailability of services of certain of theseany key personnel could have a materialan adverse effect on the Company’s leadership, ability to execute our business, results of operations, and financial condition. There can be no assurance that we will be able to attract and retain such individuals on acceptable terms, if at all; and the failure to do so could have a material adverse effect on our business,strategy, financial condition and results of operations.
A failure in our information technology systems or those of third parties, including those caused by security breaches, cyber-attacks or data protection failures, could disrupt our business, result in significant legal costs and other losses and damage our reputation and causes losses.reputation.
We are dependent upon information technology systems in the conduct of our operations. Our information technology systems are subject to disruption, damage or failure from a variety of sources, including, without limitation, computer viruses, security breaches, cyber-attacks, natural disasters and defects in design. Cybersecurity incidents in particular are evolving and
include, but are not limited to, malicious software, attempts to gain unauthorized access to data and banking information and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and the corruption of data. The risk of cybersecurity incidents may increase with the political and economic instability or warfare (including the ongoing hostilities between Russia and Ukraine). Various measures have been implemented to manage our risks related to information technology systems and network disruptions. However, given the unpredictability of the timing, nature and scope of information technology disruptions, we could potentially be subject to production downtimes, operational delays, the compromising of confidential or otherwise protected information, destruction or corruption of data, security breaches, theft, other manipulation or improper use of our systems and networks or financial losses from remedial actions, any of which could have a material adverse effect on our cash flows, competitive position, financial condition or results of operations. In addition, a data breach could result in negative publicity which could damage our reputation and have an adverse effect on our results of operations and our stock price.
We outsource certain technology and business process functions to third parties and may increasingly do so in the future. If we do not effectively develop, implement and monitor our outsourcing strategy, if third party providers do not perform as anticipated or if we experience technological or other problems with a transition, we may not realize productivity improvements or cost efficiencies and may experience operational difficulties, increased costs and loss of business. Our outsourcing of certain technology and business processes functions to third parties may expose us to enhanced risks related to data security, which could result in monetary and reputational damages. In addition, our ability to receive services from third party providers may be impacted by cultural differences, political instability, and unanticipated regulatory requirements or policies. As a result, our ability to conduct our business may be adversely affected.
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We depend on our ability to produce accurate and timely financial statements in order to run our business. If we fail to do so, our business could be negatively affected and our independent registered public accounting firm may be unable to attest to the fair presentation of our Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles (“GAAP”) and the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. If we cannot provide reliable financial reports and effectively prevent fraud, our reputation and operating results could be harmed. Even effective internal controls have inherent limitations including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. In addition, projections of any evaluation of effectiveness of internal control over financial reporting in future periods are subject to the risk that the control may become inadequate because of changes in conditions or a deterioration in the degree of compliance with the policies or procedures.
If we fail to maintain adequate internal controls, including any failure to implement new or improved controls as may be required by acquisitions or other changes in our business, or if we experience difficulties in their execution, we could fail to meet our reporting obligations, and there could be a material adverse effect on our business and financial results. In the event that our current internal control practices deteriorate, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of our stock may be adversely affected.
Legal and Regulatory Risks
Our operations require us to comply with numerous laws and regulations, violations of which could have a material adverse effect on our consolidated results of operations, financial condition or cash flows.
Our operations are subject to international, regional, national, and local laws and regulations in every place where we operate, relating to matters such as environmental protection, health and safety, labor and employment, import/export controls, currency exchange, bribery and corruption, data privacy and cybersecurity, intellectual property, immigration, and taxation. These laws and regulations are complex, frequently change, and have tended to become more stringent over time. In the event the scope of these laws and regulations expands in the future, the incremental cost of compliance could adversely affect our consolidated financial condition, consolidated results of operations, or consolidated cash flows.
Our international operations are subject to anti-corruption and anti-bribery laws and regulations, such as the FCPA, the U.K. Bribery Act and other similar laws. We are also subject to trade control regulations and trade sanctions laws that restrict the movement of certain goods to, and certain operations in, various countries or with certain persons. These trade regulations and laws can include restrictions on selling or importing goods, services or technology in or from affected regions, travel bans and asset freezes impacting connected individuals and political, military, business and financial organizations and can change very quickly, such as has occurred in connection with Russia’s invasion of Ukraine. Our ability to transfer people, products and data among certain countries is subject to maintaining required licenses and complying with these laws and regulations.
The internal controls, policies and procedures, and employee training and compliance programs we have implemented to deter prohibited practices may not be effective in preventing employees, contractors or agents from violating or circumventing such internal policies or from material violations of applicable laws and regulations. Any determination that we have violated or are responsible for violations of anti-bribery, trade control, trade sanctions or anti-corruption laws could have a material adverse effect on our financial condition. Violations of international and U.S. laws and regulations or the loss of any required licenses may result in fines and penalties, criminal sanctions, administrative remedies or restrictions on business conduct, and could have a material adverse effect on our business, operations and financial condition. In addition, any major violations could have a significant effect on our reputation and consequently on our ability to win future business and maintain existing customer and supplier relationships.
The use of explosives in our DynaEnergetics and NobelClad manufacturing processes and products subject us to additional environmental, health and safety laws and any accidents or injuries could subject us to significant liabilities.
DynaEnergetics uses explosive materials in its manufacturing processes and products. NobelClad’s manufacturing process involves the detonation of large quantities of explosives. The use of explosives is an inherently dangerous activity. These activities subject us to extensive environmental and health and safety laws and regulations including guidelines and regulations for the purchase, manufacture, handling, transport, storage and use of explosives issued by the U.S. Bureau of
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Alcohol, Tobacco and Firearms; the Federal Motor Carrier Safety regulations set forth by the U.S. Department of Transportation; the Safety Library Publications of the Institute of Makers of Explosive; and similar guidelines of their European counterparts. In Germany, the transport, storage and use of explosives is governed by a permit issued under the Explosives Act (Sprengstoffgesetz).
Despite our use of specialized facilities to store and handle dangerous materials and our employee training programs, the storage and handling of explosive materials could result in explosive incidents that temporarily shut down or otherwise disrupt our or our customers’ operations or cause restrictions, delays or cancellations in the delivery of our services. It is possible that such an explosion could result in death or significant injuries to employees and other persons. Material property damage to us, our customers and third parties arising from an explosion or resulting fire could also occur. Any explosion could expose us to adverse publicity and liability for damages or cause production restrictions, delays or cancellations, any of which could have a material adverse effect on our operating results, financial condition and cash flows. Moreover, failure to comply with applicable requirements or the occurrence of an explosive incident may also result in the loss of our license to store and handle explosives, which would have a material adverse effect on our business, results of operations and financial conditions.
Demand for our products could be reduced by existing and future legislation, regulations and public sentiment.
Regulatory agencies and environmental advocacy groups in the United States, the E.U., and other regions or countries have been focusing considerable attention on the emissions of carbon dioxide, methane and other greenhouse gases and their role in climate change. There is also increased focus, including by governments and our customers, investors and other stakeholders, on these and other sustainability and energy transition matters. Existing or future legislation and regulations related to greenhouse gas emissions and climate change, as well as initiatives by governments, non-governmental organizations, and companies to conserve energy or promote the use of alternative energy sources, and negative attitudes toward or perceptions of fossil fuel products and their relationship to the environment, may significantly curtail demand for and production of oil and gas in areas of the world where our customers operate, and thus reduce future demand for some of our products.
In addition, some international, national, state and local governments and agencies have also adopted laws and regulations or are evaluating proposed legislation and regulations that are focused on directly limiting the extraction of shale gas or oil using hydraulic fracturing. These laws and regulations could limit oil and gas development, lead to operational delays and increased costs for our customers, and therefore reduce demand for our products. Such reductions in demand for our products may, in turn, adversely affect our financial condition, results of operations and cash flows.
Increased negative investor sentiment toward oil and gas and preference for assets outside of traditional energy sectors could lead to higher capital costs for our customers and reduced investment in fossil fuels, thereby reducing demand for our products. Such preferences could also impact our ability to obtain acceptable debt or equity financing on attractive terms or at all and could negatively impact our stock price over time. Our business, reputation and demand for our stock could be negatively affected if we do not (or are perceived to not) act responsibly with respect to sustainability matters.
We are subject to extensive environmental, health and safety laws and failure to comply with such laws and regulations could result in restrictions or prohibitions on our facilities, substantial civil or criminal liabilities and could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition.
We are subject to extensive environmental, health and safety regulation in the United States and the other countries where our manufacturing facilities are located. Among other things, these laws regulate the emissions or discharge of materials into the environment; govern the use, storage, treatment, disposal and management of hazardous substances and wastes; protect the health and safety of our employees; regulate the materials used in our products or manufacturing processes; and impose liability for the costs of investigating and remediating (as well as other damages resulting from) present and past releases of hazardous substances. Representative laws and regulations which we may be subject to the in the U.S. include: noise abatement and air emissions regulations, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Resource Conservation and Recovery Act (“RCRA”) and comparable state laws, and various regulations and laws enforced by the U.S Department of Labor, the U.S. Department of Commerce, and the U.S. Environmental Protection Agency and their state equivalents. Violations of these laws or of any conditions contained in environmental permits can result in substantial fines or penalties, injunctive relief, requirements to install pollution controls or other equipment, and civil sanctions. We could be held liable for costs to investigate, remediate or otherwise address contamination at any real property we have ever owned, operated or used as a disposal site, or at other sites where we or predecessors may have released hazardous materials. We could incur fines, penalties or sanctions or be subject to third-party claims, including indemnification claims, for property damage, personal injury or otherwise as a result of violations of (or liabilities under) environmental, health and safety laws, or in connection with releases of hazardous or other materials.
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Changes in or new interpretations of existing laws, regulations or enforcement policies, the discovery of previously unknown contamination, or the imposition of other environmental liabilities or obligations in the future including additional investigation, remediation or other obligations with respect to our products or business activities may lead to additional compliance costs or require us to change our manufacturing processes, which could have a material adverse effect on our business, financial condition or results of operations.
In Germany, we and all our activities are subject to various safety and environmental regulations of the federal state which are enforced by the local authorities, including the Federal Act on Emission Control (Bundes-Immissionsschutzgesetz). The Federal Act on Emission Control permits are held by companies jointly owned by DynaEnergetics and the other companies that are located at the Troisdorf manufacturing site and are for an indefinite period of time. The Dillenburg, Germany facility is operated based on a specific permit granted by the local mountain authority and must be renewed every three years. Any failure to comply with current and future environmental and safety regulations could subject us to significant liabilities. Any actual or alleged violations of environmental, health or safety laws could result in restrictions or prohibitions on our facilities or substantial civil or criminal sanctions. In addition, under certain environmental laws, we could be held responsible for all of the costs relating to any contamination at our facilities and at third party waste disposal sites, even when such contamination was caused by a predecessor and even when the actions resulting in the contamination were lawful at the time. We could also be held liable for any and all consequences arising out of human exposure to hazardous substances or other environmental damage.
Failure to comply with applicable federal, state and local employment and labor laws and regulations could have a material, adverse impact on our business.
Various federal, state and local employment and labor laws and regulations govern our relationships with our employees, and similar laws and regulations apply to our operations outside of the U.S. These laws and regulations relate to matters such as employment discrimination, wage and hour laws, requirements to provide and document meal and rest periods or other benefits, family leave mandates, requirements regarding working conditions and accommodations to certain employees, citizenship or work authorization and related requirements, insurance and workers’ compensation rules, healthcare laws and anti-discrimination and anti-harassment laws. We incur substantial costs to comply with these laws and regulations and non-compliance could expose us to significant liabilities. For example, Arcadia is currently defending a lawsuit in California alleging violations of wage and hour regulations with respect to certain temporary and permanent employees. We are incurring legal costs to defend this action and may in the future be required to defend similar actions, and we could incur losses from these and similar cases, and the amount of such losses or costs could be material.
Several jurisdictions also have implemented sick pay and paid time off legislation, which requires employers to provide paid time off to employees, and “just cause” termination legislation, which restricts companies’ ability to terminate employees or reduce employees’ hours unless they can prove “just cause” or a “bona fide economic reason” for the termination or reduction in hours. All of these regulations impose additional obligations on us and our failure to comply with any of these regulations could subject us to penalties and other legal liabilities, which could adversely affect our business and results of operations.
The regulatory environment governing information, data security and privacy is increasingly demanding and evolving and a data security breach could result in litigation, enforcement actions and related penalties and fines.
The regulatory environment surrounding information security and privacy is increasingly demanding. We are subject to numerous U.S. federal and state laws and non-U.S. laws and regulations governing the protection of personal and confidential information of our customers and employees. The regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future.
Several U.S. states have passed comprehensive privacy laws that will go into effect in 2023. Of note among them is the California Consumer Privacy Rights Act (CPRA), which amends and expands the California Consumer Privacy (CCPA). The CPRA, which went into effect on January 1, 2023, along with the CCPA, governs the transmission, security and privacy of California residents’ personal information. The CPRA has a twelve month look-back period for enforcement purposes. Among many new requirements, the CPRA creates a category for sensitive data including health and other personal information that requires additional safeguards and disclosures. In addition, the CPRA expands consumers’ rights and has enhanced enforcement mechanisms such as the creation of a California Privacy Protection Agency that will investigate and enforce the CPRA and its promulgating regulations. The states of Virginia, Colorado, Connecticut and Utah have also recently enacted omnibus data privacy laws. In addition, many other proposals exist in states across the U.S. that could increase our potential liability and increase our compliance costs. Aspects of these state privacy statutes remain unclear, resulting in further legal uncertainty and potentially requiring us to modify our data practices and policies and to incur substantial additional compliance costs.
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Moreover, a comprehensive federal data privacy bill, the American Data Privacy and Protection Act, has been proposed and, if passed, will further change the privacy and data security compliance landscape. In addition, the SEC recently proposed a cybersecurity rule that may go into effect as early as the first half of 2023. The new cybersecurity rule will require, among other things, comprehensive disclosure regarding oversight of cybersecurity risks and increased monitoring and reporting of data security incidents.
Internationally, the European Data Protection Board recently released new guidelines on enforcement and fines related to the General Data Protection Regulation (GDPR). The new guidelines suggest a tougher stance on enforcement and stiffer fines for companies that violate the GDPR. This is in addition to the continued complexities involving the transfer of personal data from Europe to the U.S. following the Schrems II decision. The U.S. and the European Commission have been in discussions for a new Trans-Atlantic data privacy framework, Privacy Shield 2.0, which is anticipated to go into effect in early 2023, which will require additional compliance efforts from our company. In March 2022, the U.S. and EU announced a new regulatory regime intended to replace the invalidated regulations; however, this new EU-US Data Privacy Framework has not yet been implemented beyond an executive order signed by President Biden on October 7, 2022 on Enhancing Safeguards for United States Signals Intelligence Activities.
As international data privacy and protection laws continue to evolve, and as new regulations, interpretive guidance and enforcement information become available, we may incur incremental costs to modify our business practices to comply with these requirements. In addition, our internal control policies and procedures may not always protect us from reckless, intentional or criminal acts committed by our employees or agents.
Violations of these laws, or allegations of such violations, could subject us to criminal or civil, monetary or and non-monetary penalties, disrupt our operations, involve significant management distraction, subject us to class action lawsuits and result in a material adverse effect on our business, financial condition and results of operations.
Legal, regulatory or market measures to address climate change, including proposals to restrict emissions of GHGs and other sustainability initiatives, could have an adverse impact on the Company’s business and results of operations.
Various legislative, regulatory, and inter-governmental proposals to restrict emissions of GHGs, such as carbon dioxide (“CO2”), are under consideration by governmental legislative bodies and regulators in the jurisdictions where we operate. Such regulatory and global initiatives may require us to modify our operating procedures, incur capital expenditures, change fuel sources, or take other actions that may adversely affect our financial results.Increasing regulations to reduce GHG emissions, as proposed throughout many of our operating regions, would be expected to increase energy costs, reduce energy availability and increase price volatility for energy.
The heightened stakeholder focus on Environmental, Social, and Governance, or “ESG,” issues related to our businesses requires the continuous monitoring of various and evolving laws, regulations, standards and expectations and the associated reporting requirements. Specifically, certain stakeholders are beginning to require that we provide information on our plans relating to certain climate-related matters such as greenhouse gas emissions, and we expect this trend to continue and be amplified by the potential adoption of the proposed SEC regulations relating to climate change disclosure. A failure to adequately or timely meet stakeholder expectations and reporting requirements may result in noncompliance with any imposed regulations, the loss of business, reputational impacts, diluted market valuation, an inability to attract and retain customers, and an inability to attract and retain top talent. In addition, our adoption and the reporting of certain standards or mandated compliance to certain requirements could necessitate additional investments that could impact our profitability.
Further, we have established and publicly disclosed other ESG targets and goals and other sustainability commitments that are subject to a variety of assumptions, risks and uncertainties. If we are unable to meet these targets, goals or commitments on our projected timelines or at all, or if they are not perceived to be sufficiently robust, our reputation as well as our relationships with investors, customers and other stakeholders could be harmed, which could in turn adversely impact our business and results of operations. In addition, not all of our competitors may seek to establish climate or other ESG targets and goals, or at a comparable level to ours, which could result in our competitors achieving competitive advantages through lower supply chain or operating costs.
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Changes in or interpretation of tax law could impact the determination of our income tax liabilities for a tax year.
We are subject to income taxes in the U.S. and certain foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the course of our business, there are many transactions and calculations where the ultimate tax determination is subjective or uncertain. We earn a significant amount of our operating income outside the U.S and have significant intercompany transactions between our affiliates. A change in the mix of earnings and losses in countries with differing statutory tax rates, changes in our business or structure, or disputes about intercompany transfer pricing arrangements may result in higher effective tax rates for the Company.
Our future effective tax rates could be adversely affected by changes in tax laws or their interpretation, both domestically and internationally. For example, regulations related to the 2017 United States Tax Cuts and Jobs Act (“TCJA”) are still being developed, some with retroactive application. As regulations and guidance evolve with respect to tax law, our results may differ from previous estimates and may materially affect our financial condition or results of operations. The OECD/G20 Base Erosion and Profit Shifting Project (or BEPS Project) is developing an international framework to combat tax avoidance by multinational enterprises and countries where the Company is subject to taxes are independently evaluating their corporate tax policy. Tax legislation and enforcement could adversely impact the Company’s tax provision and the value of deferred tax assets and liabilities.
We are under audit by tax authorities in different jurisdictions from time to time. Although we believe that our provision for income taxes and our tax estimates are reasonable, tax authorities may disagree with certain positions we have taken. In addition, economic and political pressures to increase tax revenue in various jurisdictions may make resolving tax disputes favorably more difficult. The final resolution of any audits or litigation may differ from the amounts recorded in our consolidated financial statements and may materially affect our consolidated financial statements in the period or periods in which that determination is made.
We are subject to litigation and may be subject to additional litigation in the future.
We are currently, and may in the future become, subject to litigation, arbitration or other legal proceedings with other parties. Managing or defending such legal proceedings may result in substantial legal fees, expenses and costs and diversion of management resources. If material litigation is brought against us in the future, an adverse decision could have a material adverse effect on our financial position or prospects. For a more detailed discussion of pending litigation, refer to Note 13 to our Consolidated Financial Statements.
In the event of a dispute arising in connection with our foreign operations, we may be subject to the exclusive jurisdiction of foreign courts or arbitral panels, or may not be successful in subjecting foreign persons to the jurisdiction of courts or arbitral panels in the United States. Our inability to enforce our rights and the enforcement of rights on a prejudicial basis by foreign courts or arbitral panels could have an adverse effect on our results of operations and financial position.
Intellectual Property Risks
Our failure to protect our proprietary information and any successful intellectual property challenges against us could materially and adversely affect our competitive position.
The protection of our intellectual property rights is essential to maintaining our competitive position and recognizing the value of our investments in technology and intellectual property in our existing and future products. We rely on trade secret protection for certain aspects of our technology, in part through confidentiality and other written agreements with our employees, consultants and third parties. Through these and other written agreements, we attempt to control access to and distribution of our intellectual property documentation and other proprietary technology information. Despite our efforts to protect our proprietary rights, former employees, consultants or third parties may, in an unauthorized manner, attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights or technology or otherwise develop a product with the same functionality as our technology. Policing unauthorized use of our intellectual property rights is difficult, and nearly impossible on a worldwide basis. Therefore, we cannot be certain that the steps we have taken or will take in the future will prevent misappropriation of our technology or intellectual property rights.
We also actively pursue patent protection for our proprietary technology and intellectual property where appropriate for protecting our competitive position. The process of seeking patent protection can be long and expensive and we cannot be certain that any currently pending or future applications will actually result in issued patents, or that, even if patents are issued, they will be respected by third parties. In addition, our competitors may be able to develop technology independently that is
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similar to ours without infringing on our patents or gaining access to our trade secrets, and this could have a similar effect on our competitive position.
Intellectual property litigation and threats of litigation are becoming more common in the oilfield services industry. We are currently involved and may in the future be involved in litigation, in the United States or abroad, to enforce our patents or other intellectual property rights or to protect our trade secrets and know-how. These actions can require multiple years to come to resolution or settlement, and even if we ultimately prevail, we may be unable to realize adequate protection of our competitive position. In addition, these actions commonly result in actions by the affected third parties to establish the invalidity of our patents. While we intend to prosecute these actions vigorously, there is no guarantee of success, and such effort takes significant financial and management resources from the Company. In the event that one or more of our patents are challenged, a court or the United States Patent and Trademark Office (USPTO) may invalidate the patent(s) or determine that the patent(s) is not enforceable, which could harm our competitive position. If our patents are invalidated, or if the scope of the claims in any of these patents is limited by a court or USPTO decision, we could be prevented from pursuing certain litigation matters or licensing the invalidated or limited portion of such patents. Such adverse decisions could negatively impact our future revenue. Patent litigation, if necessary or when instituted against us, could result in substantial costs and divert our management’s attention and resources.
We may incur substantial costs defending against third parties alleging that we infringe their proprietary rights.
We are currently involved and may in the future be involved in litigation relating to alleged infringement by us of others’ patents or other intellectual property rights. We have an active "freedom to operate" review process for our technology, but there is no assurance that future infringement claims will not be asserted. Infringement claims generally result in significant legal and other costs and may distract management from running our core businesses even if we are ultimately successful. In the event of any adverse ruling in any intellectual property litigation, we could be required to pay substantial damages, cease the manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license from the third-party claiming infringement with royalty payment obligations by us. We also have certain indemnification obligations to customers with respect to the infringement of third-party intellectual property rights by our products, which may increase our costs. Any of these occurrences could significantly harm our competitive position, results of operations, financial position and cash flows.
Risks Related to Acquisitions
We have incurred debt to finance the acquisition of 60% of Arcadia and will incur additional substantial financial obligations in connection with the acquisition of the remaining 40% of Arcadia.
We financed a portion of the purchase price of the Arcadia acquisition with proceeds from our credit facility. Our ability to service the indebtedness under the credit facility and to maintain compliance with the covenants included in the credit facility will depend on our success in achieving the intended benefits of the acquisition, which is subject to numerous risks and uncertainties as discussed above. We will have to devote a substantial portion of our cash flow to meet required payments of principal and interest on this indebtedness, and if we are unable to generate sufficient cash flow to do so, or if we otherwise fail to comply with the terms of the credit facility, we could be in default under the agreement.
In addition, as early as three years after the closing of the Arcadia acquisition, we may be required to pay the Option Purchase Price for some or all of Munera’s interests in Arcadia if Munera exercises the Put Option. Even if we elect to pay 80% of the Option Purchase Price in preferred stock, we will need to fund the remaining portion in cash. We do not currently have sufficient funds to pay the cash portion of the Option Purchase Price, and we may not be able to obtain such funds on terms acceptable to us or at all. Our ability to finance the Option Purchase Price will depend on numerous factors, including the performance of our businesses and general market and economic conditions. If we fail to pay the Option Purchase Price when required under the Operating Agreement, we will be in default under the agreement. The Option Purchase Price is likely to be substantial relative to the current size of our business. In addition, the Option Purchase Price is subject to a defined “floor” value in the Operating Agreement, which is based primarily upon a contractually stated equity value. The floor value will apply even if Arcadia’s performance fails to meet our expectations. This may make it more difficult for us to finance the payment of the Option Purchase Price. In addition, debt or preferred equity financing, if obtained, may involve agreements that include liens or restrictions on our assets and covenants limiting or restricting our ability to take specific actions, such as paying dividends or making distributions, incurring additional debt, acquiring or disposing of assets or increasing expenses. Debt financing would also be required to be repaid regardless of our operating results. Obtaining financing through issuances of common stock would impose fewer restrictions on our future operations but would be dilutive to the interests of existing stockholders.
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After the Arcadia acquisition, DMC is the majority shareholder of Arcadia, and our interest in Arcadia is subject to the risks normally associated with the conduct of businesses with a minority shareholder.
Pursuant to the Equity Purchase Agreement pursuant to which we acquired a 60% ownership stake in Arcadia, Munera continues to hold 40% of the outstanding equity interests of Arcadia. Our Operating Agreement governs our relationship with Munera, and we believe the Operating Agreement provides us with effective and sufficient control of Arcadia to allow the business to be operated consistent with our goals and values and with sufficient opportunity for profitable growth. Nevertheless, conducting a business with minority owners may lead to certain risks and uncertainties, which could have an adverse impact on our ability to profitably grow the Arcadia business, which could have a material adverse impact on our future cash flows, earnings, results of operations and financial condition. These include:
•our ability to effectively control certain strategic, operational and financial decisions;
•the potential for disagreement over the direction of the company and costs and expenses involved; and
•the risk of having economic or business interests or goals that are inconsistent with, or opposed to, those of Munera.
There can be no assurance that the acquisition will be beneficial to us, whether due to the above-described risks, unfavorable economic conditions, integration challenges or other factors.
Fully integrating Arcadia’s business following the acquisition may be more difficult, costly and time-consuming than expected, which may adversely affect our results of operations and the value of our common stock.
While the Company’s management has made significant progress in integrating Arcadia’s business into DMC, integration efforts will be substantial and continuing. The integration process is complex, costly and time-consuming, and the Company’s management may face significant, ongoing challenges in implementing such integration, many of which may be beyond the control of management, including, without limitation:
•difficulties in achieving anticipated expansion and growth prospects;
•the possibility of faulty assumptions underlying expectations regarding the integration process;
•unanticipated issues in integrating accounting, information technology, communications programs, financial procedures and operations, and other systems, procedures and policies;
•cybersecurity issues as we integrate Arcadia into our programs and systems;
•failure to implement effective internal and disclosure controls;
•difficulties in managing a larger corporation, addressing differences in business culture and retaining key personnel;
•impacts on employee, supplier and customer relationships;
•failure to address any pre-existing liabilities or claims involving the acquired business;
•unanticipated changes in applicable laws and regulations;
•coordinating geographically separate organizations; and
•unforeseen expenses or delays associated with integration efforts.
Some of these factors are outside the control of the Company, and any one of them could result in increased costs and diversion of management’s time and energy, as well as decreases in revenue or increases in cost, which could materially impact the business, financial conditions and results of operations of the Company.
The acquisition of Arcadia is expected to materially complicate the timely achievement of effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act, which could have a material adverse effect on our business and stock price.
Prior to the acquisition, Arcadia operated as a closely-held, private company, which had no previous public reporting obligations and therefore, did not historically institute and evaluate its internal controls and procedures in compliance with Section 404. Implementing changes to our internal controls have been required following the acquisition and may take significant additional time to complete, and may require further significant effort and involvement of directors, officers and employees, as well as substantial costs in order to modify existing accounting systems. Further, we may encounter difficulties assimilating or integrating the internal controls, disclosure controls and information technology infrastructure of the Company and Arcadia. Our efforts to assimilate and integrate our internal controls with Arcadia’s may not be effective, and any failure to maintain effective controls could result in material weaknesses or significant deficiencies in our internal controls. Our failure to implement and maintain effective internal control over financial reporting could result in a material misstatement of our financial statements or otherwise cause us to fail to meet our financial reporting obligations. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our business, financial condition, operating results and our stock price, and could result in stockholder litigation.
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To the extent that we seek to further expand our business through acquisitions, we may experience issues in executing acquisitions or integrating acquired operations.
From time to time, we examine opportunities to make selective acquisitions in order to increase shareholder return by increasing our total available markets, expanding our existing operations and, potentially, generating synergies. The success of any acquisition depends on a number of factors, including, but not limited to:
•identifying suitable candidates for acquisition and negotiating acceptable terms;
•obtaining approval from regulatory authorities and potentially DMC’s shareholders;
•maintaining our financial and strategic focus and avoiding distraction of management during the process of integrating the acquired business;
•implementing our standards, controls, procedures and policies at the acquired business and addressing any pre-existing liabilities or claims involving the acquired business;
•our ability to realize the expected tax treatment or tax benefits from the transaction; and
•to the extent the acquired operations are in a country in which we have not operated historically, understanding the regulations and challenges of operating in that new jurisdiction.
For example, our due diligence process may not reveal all liabilities associated with a potential acquisition, and this could result in us incurring unanticipated losses after the acquisition is completed. There can be no assurance that we will be able to conclude any acquisitions successfully or that any acquisition will achieve the anticipated synergies or other positive results. Any material problems that we encounter in connection with such an acquisition could have a material adverse effect on our business, results of operations and financial position.
Risk Factors Related to Our Common Stock
The price and trading volume of our common stock may be volatile, which may make it difficult for you to resell the common stock when you want or at prices you find attractive.
The market price and trading volume of our common stock may be subject to significant fluctuations due to general stock market conditions and/or a change in sentiment in the market regarding our operations, business prospects or liquidity. Among the factors that could affect the price of our common stock are:
•changes in the architectural building products, oil and gas, industrial, or infrastructure markets;
•operating and financial performance that vary from the expectations of management, securities analysts andor investors;
•developments in our business or in our business sectors generally;
•regulatory changes affecting our industry generally or our business and operations;
•the operating and stock price performance of companies that investors consider to be comparable to us;
•announcements of strategic developments, acquisitions and other material events by us or our competitors;
•our ability to integrate and operate the companies and the businesses that we acquire;
•rumors and market speculation regarding our industries, business or trading activity;
•significant amounts of short selling, the perception that short sales could occur and other speculative trading activity;
•activism by any large stockholder or group of stockholders;
•changes in global financial markets and global economies and general market conditions, such as interest orincluding volatility in foreign exchange rates, tariffs and stock, commodity, credit or asset valuations, and government actions or volatility.shutdowns.
The stock markets in general have experienced extreme volatility that has at times been unrelated to the operating performance of particular companies. These broad marketcompanies, and these fluctuations may adversely affect the trading price of our common stock.
Holders of our common stock do not currently receive dividends and our dividend may not receive dividends.be reinstated in the future.
Our Board of Directors suspended our dividend in April 2020 in order to preserve liquidity in light of the sharp reduction in demand for DynaEnergetics products and other impacts of the COVID-19 pandemic. Holders of our common stock are entitled to receive only such dividends as our Board of Directors may declaredeclares out of funds legally available for such payments. We are incorporated in Delaware and governed by the Delaware General Corporation Law. Delaware law allows a corporation to pay dividends only out of surplus, as determined under Delaware law or, if there is no surplus, out of net profits for the fiscal year in which the dividend was declared and for the preceding fiscal year. Under Delaware law, however,In addition, dividends may not be permitted pursuant to the terms of debt or other agreements to which we cannot pay dividends out of net profits if, after we pay the dividend, our capital would be impaired. Our ability to pay dividends will be subject to our future earnings, capital requirements and financial condition, as well as our compliance with covenants and financial ratios related to existing or future indebtedness.are subject. Although we have historically declared cash dividends on our
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common stock, we are not required to do so and ourthere can be no assurance as to whether the Board of Directors may modify the dividend policy or reduce, defer or eliminate our common stockwill reinstate a dividend in the future.
ITEM 1B.Unresolved Staff Comments
None.
ITEM 2.Properties
Corporate Headquarters
Our corporate headquarters currently are located in Boulder,Broomfield, Colorado. The termoffice is also used for NobelClad’s U.S. administrative offices.
| Location | Property Type | Property Size | Owned/Leased | Expiration Date of Lease (if applicable) | ||||||||||||||||||||||
| Broomfield, Colorado | Corporate and Sales Office | 18,284 sq. ft. | Leased | September 30, 2029, with renewal option for 60 months | ||||||||||||||||||||||
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Arcadia
Arcadia owns a manufacturing site and sales office in Vernon, California and leases other manufacturing and distribution centers throughout the United States. The table below summarizes Arcadia's material properties, including their location, type, size, whether owned or leased and expiration terms, if applicable.
| Location | Property Type | Property Size | Owned/Leased | Expiration Date of Lease (if applicable) | ||||||||||||||||||||||
| Vernon, California | Corporate office, metal shop building, warehouse | 26,500 sq. ft. | Owned | |||||||||||||||||||||||
| Land for office, paint shop, anodizing line | 0.8 acre | Owned | ||||||||||||||||||||||||
| Land for office, paint shop, anodizing line | 2.24 acres | Leased | May 31, 2046 | |||||||||||||||||||||||
| Vernon, California | Land for parking | 39,545 sq. ft. | Leased | March 31, 2027 | ||||||||||||||||||||||
Vernon, California(1) | Office, paint shop | 112,000 sq. ft. | Leased | December 22, 2026, with renewal option for 60 months | ||||||||||||||||||||||
Vernon, California(1) | Office, warehouse | 110,677 sq. ft. | Leased | December 22, 2026, with renewal option for 60 months | ||||||||||||||||||||||
Hayward, California(1) | Distribution, light assembly | 45,624 sq. ft. | Leased | December 22, 2024, with renewal option for 36 months | ||||||||||||||||||||||
West Sacramento, California(1) | Distribution, light assembly | 16,000 sq. ft. | Leased | December 22, 2024, with renewal option for 36 months | ||||||||||||||||||||||
Stamford, Connecticut(1) | Office, warehouse | 39,418 sq. ft. | Leased | December 22, 2023, with renewal option for 24 months | ||||||||||||||||||||||
Phoenix, Arizona(1) | Office, warehouse | 51,986 sq. ft. | Leased | December 22, 2026, with renewal option for 24 months | ||||||||||||||||||||||
Las Vegas, Nevada(1) | Office, warehouse | 88,915 sq. ft. | Leased | December 22, 2026, with renewal option for 24 months | ||||||||||||||||||||||
Tucson, Arizona(1) | Office, paint shop, warehouse | 106,507 sq. ft. | Leased | December 22, 2026, with renewal option for 60 months | ||||||||||||||||||||||
| Waipahu, Hawaii | Distribution, light assembly | Building: 12,746 sq. ft. Land: 21,872 sq. ft. | Leased | May 31, 2023 | ||||||||||||||||||||||
| South Gate, California | Office, manufacturing | 45,700 sq. ft. | Leased | December 31, 2027 | ||||||||||||||||||||||
| South Gate, California | Office, manufacturing | 25,000 sq. ft. | Leased | April 30, 2027 | ||||||||||||||||||||||
| Houston, Texas | Office, warehouse | 43,412 sq. ft. | Leased | November 30, 2028, with renewal option for 60 months | ||||||||||||||||||||||
| Dallas, Texas | Office, warehouse | 86,731 sq. ft. | Leased | November 30, 2025, with renewal option for 60 months | ||||||||||||||||||||||
| Kent, Washington | Distribution, light assembly | 25,000 sq. ft. | Leased | March 31, 2024 | ||||||||||||||||||||||
(1) These leases are with entities affiliated with the holder of the redeemable noncontrolling interest and the former president of Arcadia. During the year-ended December 31, 2022, DMC recorded $4,625 in lease for the office space is through November 30, 2022.expense related to these properties.
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DynaEnergetics
DynaEnergetics leases a manufacturing site and sales office in Troisdorf, Germany. The leases for these properties expire on December 31, 2025, and we are negotiating future renewal options. In the U.S., DynaEnergetics owns manufacturing and assembly sites in Texas and leases storage bunkers and office and warehouse space in various cities throughout Texas. DynaEnergetics also leases office and warehouse space and bunkers for storage of its explosives in Alberta, Canada.
The table below summarizes DynaEnergetics' material properties, including their location, type, size, whether owned or leased and expiration terms, if applicable.
| Location | Property Type | Property Size | Owned/Leased | Expiration Date of Lease (if applicable) | ||||||||||||||||||||||
| Troisdorf, Germany | Manufacturing and administration office | Manufacturing: 263,201 sq. ft. Office: 2,033 sq. ft. | Leased | December 31, 2025 | ||||||||||||||||||||||
| Troisdorf, Germany | Office | 9,203 sq. ft. | Leased | December 31, 2025 | ||||||||||||||||||||||
| Liebenscheid, Germany | Manufacturing and office | 5,511 sq. ft. | Owned | |||||||||||||||||||||||
| Liebenscheid, Germany | Land | 77,672 sq. ft. | Owned | |||||||||||||||||||||||
| Houston, Texas | Office | 11,370 sq. ft. | Leased | November 30, 2026 | ||||||||||||||||||||||
| Blum, Texas | Office, warehouse, and manufacturing | 83,000 sq. ft. | Owned | |||||||||||||||||||||||
Blum, Texas(a) | Warehouse | 10,000 sq. ft. | Owned | |||||||||||||||||||||||
| Blum, Texas | Land for office, warehouse, and manufacturing | 284 acres | Owned | |||||||||||||||||||||||
| Midland, Texas | Land | 13.3 acres | Leased | April 1, 2029 | ||||||||||||||||||||||
| Victoria, Texas | Office and warehouse | 4,448 sq. ft. | Leased | June 30, 2023 | ||||||||||||||||||||||
| Whitney, Texas | Office, warehouse, and manufacturing | 36,000 sq. ft. | Owned | |||||||||||||||||||||||
| Alberta, Canada | Office and warehouse | 7,650 sq. ft. | Leased | August 31, 2025 | ||||||||||||||||||||||
(a) The Blum, Texas warehouse is separate from the main Blum manufacturing campus.
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NobelClad
NobelClad owns a manufacturing site in Liebenscheid, Germany as well as a mine used as a shooting site in Dillenburg, Germany. We leasepurchased the buildings and land around the Dillenburg mine to ensure access toin 2022. NobelClad leases the shooting site. The leases associated with the Dillenburg shooting site expire August 31, 2021. NobelClad owns the land and the buildingsbuilding housing its operations in Rivesaltes, France.
The tablestable below summarize oursummarizes NobelClad's material properties, by segment, including their location, type, size, whether owned or leased and expiration terms, if applicable.
| Location | Property Type | Property Size | Owned/Leased | Expiration Date of Lease (if applicable) | ||||||||||||||||||||||
| Mt. Braddock, Pennsylvania | Clad plate manufacturing and administration office | Land: 14 acres Buildings: 101,300 sq. ft. | Owned | |||||||||||||||||||||||
| Dunbar, Pennsylvania | Clad plate shooting site | Land: 322 acres Buildings: 15,960 sq. ft. | Leased | December 15, | ||||||||||||||||||||||
| Cool Spring, Pennsylvania | Clad plate shooting site | 1,200,000 sq. ft. | Leased | |||||||||||||||||||||||
| Canonsburg, Pennsylvania | Manufacturing | 16,000 sq. ft | Leased | |||||||||||||||||||||
Tautavel, France(a) | ||||||||||||||||||||||||
| Perpignan, France | Administration and sales office | 3,671 sq. ft | Leased | September 30, 2029, with renewal options for additional three-year periods. | ||||||||||||||||||||||
| Burbach-Würgendorf, Germany | Storage | 224 sq. meters | Leased | December 31, 2050 | ||||||||||||||||||||||
| Dillenburg, Germany | Clad plate shooting site | Land: 18.9 acres Buildings: 46,285 sq. ft. | Owned | |||||||||||||||||||||||
| Liebenscheid, Germany | Manufacturing | Land: 10.47 acres Buildings: 125,394 sq. ft. | Owned | |||||||||||||||||||||||
(a) The Mt. Braddock, Pennsylvania location is also used as a manufacturing and distribution center for our DynaEnergetics business segment.
ITEM 3. Legal Proceedings
ITEM 4. Mine Safety Disclosures
Our Coolspring property is subject to regulation by the Federal Mine Safety and Health Administration ("MSHA") under the Federal Mine Safety and Health Act of 1977 (the "Mine Act"). Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (The(the "Dodd-Frank Act"), issuers that are operators, or that have a subsidiary that is an operator, of a coal or other mine in the United States are required to disclose in their periodic reports filed with the SEC information regarding specified health and safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities. During the year ended December 31, 2017,2022, we had no such specified health and safety violations, orders or citations, related assessments or legal actions, mining-related fatalities, or similar events in relation to our United States operations requiring disclosure pursuant to Section 1503(a) of the Dodd-Frank Act.
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PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is publicly traded on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “BOOM.” The following table sets forth quarterly high and low sales prices for the common stock during our last two fiscal years, as reported by Nasdaq.
| 2017 | High | Low | ||||||
| First Quarter | $ | 17.00 | $ | 11.75 | ||||
| Second Quarter | $ | 15.55 | $ | 11.60 | ||||
| Third Quarter | $ | 18.45 | $ | 12.43 | ||||
| Fourth Quarter | $ | 26.15 | $ | 16.30 | ||||
| 2016 | High | Low | ||||||
| First Quarter | $ | 7.23 | $ | 4.84 | ||||
| Second Quarter | $ | 11.62 | $ | 5.98 | ||||
| Third Quarter | $ | 12.38 | $ | 9.20 | ||||
| Fourth Quarter | $ | 17.19 | $ | 9.80 | ||||
As of March 7, 2018,February 20, 2023, there were 252228 holders of record of our common stock (does not include beneficial holders of shares held in “street name”).
Equity Compensation Plan
Refer to “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding securities authorized for issuance under our equity compensation plans, which is incorporated in this Item by this reference.
Issuer Purchases of Equity Securities
During the quarter ended December 31, 2022, we purchased shares of common stock as follows. These shares are held as treasury shares by the Company.
Total number of shares purchased (1) (2) | Average price paid per share | |||||||||||||
| October 1 to October 31, 2022 | 213 | $ | 15.98 | |||||||||||
| November 1 to November 30, 2022 | 701 | $ | 19.04 | |||||||||||
| December 1 to December 31, 2022 | 6,987 | $ | 17.35 | |||||||||||
| Total | 7,901 | $ | 17.46 | |||||||||||
(1) Share purchases during the period were to offset tax withholding obligations that occurred upon the vesting of restricted common stock under the terms of the 2016 Equity Incentive Plan.
(2) As of December 31, 2022, the maximum number of shares that could be purchased would not exceed the employees’ portion of taxes to be withheld on unvested shares (470,624) and potential purchases upon participant elections to diversify equity awards held in the Company’s Amended and Restated Non-Qualified Deferred Compensation Plan (151,468) into other investment options available to participants in the Plan.
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Stock Performance Graph
The following graph compares the performance of our common stock with the Nasdaq Non-Financial Stocks Index and the Nasdaq Composite (U.S.) Index. The comparison of total return (change in year-end stock price plus reinvested dividends) for each of the years assumes that $100 was invested on December 31, 2012,2017, in each of the Company, the Nasdaq Non-Financial Stocks Index and the Nasdaq Composite (U.S.) Index with investment weighted on the basis of market capitalization. The comparisons in the graph below are based upon historical data and are not indicative of, or intended to forecast, future performance of our common stock.
| Total Return Analysis | December 31, 2017 | December 31, 2018 | December 31, 2019 | December 31, 2020 | December 31, 2021 | December 31, 2022 | ||||||||||||||
| DMC Global Inc. | $100.00 | $140.20 | $179.40 | $172.65 | $158.12 | $77.60 | ||||||||||||||
| Nasdaq Non-Financial Stocks | $100.00 | $100.04 | $139.51 | $207.70 | $264.82 | $179.07 | ||||||||||||||
| Nasdaq Composite (U.S.) | $100.00 | $94.56 | $124.03 | $150.41 | $189.36 | $152.00 | ||||||||||||||
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| Total Return Analysis | 12/31/12 | 12/31/13 | 12/30/14 | 12/31/15 | 12/31/16 | 12/31/17 |
| DMC Global Inc. | $100 | $156.40 | $115.252 | $50.2878 | $114.029 | $180.216 |
| Nasdaq Non-Financial Stocks | $100 | $136.92 | $163.48 | $179.42 | $192.48 | $255.98 |
| Nasdaq Composite (U.S.) | $100 | $133.48 | $150.12 | $150.84 | $170.46 | $206.91 |
ITEM 6.Selected Financial Data
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| (Dollars in Thousands, Except Per Share Data) | ||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| Statement of Operations | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
| Net sales | $ | 192,803 | $ | 158,575 | $ | 166,918 | $ | 202,561 | $ | 202,060 | ||||||||||
| Gross profit | 59,391 | 38,680 | 35,624 | 61,419 | 58,134 | |||||||||||||||
| Costs and expenses | 49,784 | 42,752 | 43,776 | 47,973 | 47,156 | |||||||||||||||
| Restructuring expenses | 4,283 | 1,202 | 4,063 | 6,781 | — | |||||||||||||||
| Goodwill impairment | 17,584 | — | 11,464 | — | — | |||||||||||||||
| Income (loss) from operations | (12,260 | ) | (5,274 | ) | (23,679 | ) | 6,665 | 10,978 | ||||||||||||
| Other expense, net | (3,024 | ) | (434 | ) | (2,410 | ) | (826 | ) | (1,169 | ) | ||||||||||
| Income (loss) before income taxes, discontinued operations and non-controlling interest | (15,284 | ) | (5,708 | ) | (26,089 | ) | 5,839 | 9,809 | ||||||||||||
| Income tax provision (benefit) | 3,569 | 797 | (2,118 | ) | 3,913 | 3,736 | ||||||||||||||
| Income (loss) from continuing operations | (18,853 | ) | (6,505 | ) | (23,971 | ) | 1,926 | 6,073 | ||||||||||||
| Income from discontinued operations | — | — | — | 641 | 478 | |||||||||||||||
| Net income attributable to non-controlling interest | — | — | — | — | 92 | |||||||||||||||
| Net income (loss) attributable to DMC Global Inc. | $ | (18,853 | ) | $ | (6,505 | ) | $ | (23,971 | ) | $ | 2,567 | $ | 6,459 | |||||||
| Net income (loss) per share attributable to DMC Global Inc. - Basic: | ||||||||||||||||||||
| Continuing operations | $ | (1.31 | ) | $ | (0.46 | ) | $ | (1.72 | ) | $ | 0.13 | $ | 0.44 | |||||||
| Discontinued operations | $ | — | $ | — | $ | — | $ | 0.05 | $ | 0.03 | ||||||||||
| Net income (loss) | $ | (1.31 | ) | $ | (0.46 | ) | $ | (1.72 | ) | $ | 0.18 | $ | 0.47 | |||||||
| Net income (loss) per share attributable to DMC Global Inc. - Diluted: | ||||||||||||||||||||
| Continuing operations | $ | (1.31 | ) | $ | (0.46 | ) | $ | (1.72 | ) | $ | 0.13 | $ | 0.44 | |||||||
| Discontinued operations | $ | — | $ | — | $ | — | $ | 0.05 | $ | 0.03 | ||||||||||
| Net income (loss) | $ | (1.31 | ) | $ | (0.46 | ) | $ | (1.72 | ) | $ | 0.18 | $ | 0.47 | |||||||
| Dividends Declared per Common Share | $ | 0.08 | $ | 0.08 | $ | 0.14 | $ | 0.16 | $ | 0.16 | ||||||||||
| Financial Position | ||||||||||||||||||||
| Total assets | $ | 173,083 | $ | 162,555 | $ | 219,329 | $ | 219,329 | $ | 240,545 | ||||||||||
| Lines of credit | $ | 17,984 | $ | 15,732 | $ | 22,782 | $ | 22,782 | $ | 26,400 | ||||||||||
ITEM 7. 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 included elsewhere in this annual report. A discussion regarding our financial condition and results of operations as well as our liquidity and capital resources for fiscal 2021 compared to fiscal 2020 can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which is available on the SEC’s website at www.sec.gov and our Investor Relations website at www.dmcglobal.com/investors.
Unless stated otherwise, all dollar figures in this report are presented in thousands (000s). N/M indicates that the change in dollars or percentage was not meaningful.
Overview
General
DMC Global Inc. (“DMC”, "we", "us", "our", or the "Company") owns and operates a diversified familyArcadia, DynaEnergetics and NobelClad, three innovative, asset-light manufacturing businesses that provide differentiated products and engineered solutions to niche segments of technical product and process businesses serving the construction, energy, industrial processing and infrastructuretransportation markets. OurEach of our businesses operate throughprovides a global network of manufacturing, distribution and sales facilities. Our business is organized into two segments: NobelClad and DynaEnergetics.
Our businesses follow a clear and compelling strategy and are led by excellent leadership teams that we support with business resources and capital. We take a focused approach to capital allocation and work with our objectivebusiness leaders to identify investments that will advance their operating strategies and generate attractive returns. Our approach helps our portfolio companies grow their core businesses, launch new initiatives, upgrade technologies and systems, expand their markets and improve their competitive positions. Our culture is to sustainfoster local innovation versus centralized control. Based in Broomfield, Colorado, DMC trades on Nasdaq under the symbol “BOOM.”
Arcadia
On December 23, 2021, DMC completed the acquisition of 60% of the membership interests in Arcadia Products, LLC, a Colorado limited liability company resulting from the conversion of Arcadia, Inc. (collectively, “Arcadia”). Arcadia supplies architectural building products, including exterior and growinterior framing systems, curtain walls, windows, doors, and interior partitions to the commercial construction market; it also supplies customized windows and doors to the high-end residential construction market.
Cost of products sold for Arcadia includes the cost of aluminum, paint, and other raw materials used to manufacture windows, curtain walls, doors, and interior partitions as well as employee compensation and benefits, manufacturing facility lease expense, depreciation expense of property, plant and equipment related to manufacturing, supplies and other manufacturing overhead expenses.
DynaEnergetics
DynaEnergetics designs, manufactures and distributes highly engineered 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 sharefor perforating products, which are used during the well completion process, generally corresponds with oil and gas exploration and production activity. Well completion operations are increasingly complex, which in turn has increased the demand for intrinsically-safe, reliable and technically advanced perforating systems.
Cost of our businesses through increased market penetration, developmentproducts sold for DynaEnergetics includes the cost of new applications,metals, explosives and researchother raw materials used to manufacture shaped charges, detonating products and developmentperforating guns as well as employee compensation and benefits, depreciation of newmanufacturing facilities and adjacent products that can be sold across our global networkequipment, manufacturing supplies and other manufacturing overhead expenses.
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NobelClad
NobelClad is a global leader in the production ofproduces explosion-welded clad metal plates for use in the construction of corrosion resistant industrial processing equipment, andas well as specialized transition joints.joints for use in construction of commuter rail cars, ships, and LNG processing equipment. 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 fillship most orders in our backlog orders within the following 12twelve months. NobelClad's backlog increased to $37,529$55,451 at December 31, 20172022 from $31,634$41,181 at December 31, 2016.2021.
Cost of products sold for DynaEnergeticsNobelClad includes the cost of metals, explosivesexplosive powders and other raw materials used to manufacture shaped charges, detonating products and perforating gunsclad metal plates as well as employee compensation and benefits, outside processing costs, depreciation of manufacturing facilities and equipment, manufacturing facility lease expense, supplies and other manufacturing overhead expenses.
Employee Retention Credit
In 2021, pursuant to 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 it paid to employees for portions of calendar year 2021. The ERC favorably impacted the financial statement results of the Company for the year ended December 31, 2021 as described further in the “Consolidated Results of Operations” section below. The ERC had no impact on the financial statement results of the Company for the year ended December 31, 2022.
Factors Affecting Results
•Consolidated net sales were $654,086. Excluding Arcadia, 2022 sales were $354,559, an increase of 36% versus 2021. The following items impacted the comparabilityimproved performance primarily was driven by higher energy prices and a growing reliance on North American oil and gas, which led to increased drilling and well completion activity in North America and increased sales at DynaEnergetics.
•Arcadia reported sales of the company's results for the years ended December 31, 2017 and 2016:$299,527 in 2022. Sales performance was largely attributable to higher customer pricing in response to higher base aluminum metal prices experienced throughout a significant portion of 2022, as well as increases in other input costs.
•DynaEnergetics' sales of $121,253$264,327 in 20172022 increased 80%51% compared with 2016 driven by a recovery in the2021 due to improved oil and gas demand, which led to higher North American unconventional well-completions sectordrilling and reflected increased well-stage counts; higher completion intensity and longer laterals;well completions, and increased market penetration ofdemand and improved pricing for DynaEnergetics’ DS perforating products and systems, including the DynaSelect detonator and the DynaStage system.systems. DynaEnergetics’ international sales also improved, increasing 35% compared with 2021.
•NobelClad’s sales of $71,550$90,232 in 2017 decreased 22%2022 increased 6% compared with 2016 as weak capital spending in NobelClad's industrial infrastructure and energy markets2021. Net sales improved due to project mix that resulted in a declinehigher sales prices, which exceeded declines observed in core repair and maintenance work and2022 project volume. The increase in NobelClad 2022 sales was partially offset by the absenceweakening of large projects. the Euro compared to the U.S. Dollar.
•Consolidated gross profit of 31%28% in 20172022 increased from 25%23% in 2016.2021. The improvement primarily related to a higher proportion of DynaEnergetics sales relative to NobelClad sales, combined with higher average selling prices as well as improved product mix in DynaEnergetics.
•Consolidated selling, general, and administrative ("SG&A") expenses were $118,349 in the third quarter of 2017 to reflect the decline2022 compared with $58,783 in activity levels in NobelClad’s primary end markets during the second half of the year.
42
•Cash and cash equivalents of $25,144 at December 31, 2022 decreased $5,666 from $30,810 at December 31, 2021. The decrease in cash primarily related to principal and interest payments on the Company’s credit facility and funding working capital at DynaEnergetics and Arcadia. Both businesses increased salariestheir investments in inventory due to rising raw material prices, longer-lead times and wages from headcount additions and higher variable incentive compensation expense.continued sales volume growth.
•Net debt, a non-GAAP measure, is calculated as amounts borrowed under lines of credit$107,654 (comprised of $132,798 of total debt less $25,144 in cash and cash equivalents.equivalents) at December 31, 2022 decreased $8,961 from $116,615 at December 31, 2021. The decrease was driven by $15,000 in Term Loan payments in 2022.
In North America, well completion activity continued to increase in December 2017, DynaEnergetics commenced construction of a new 74,000 square foot manufacturing, assembly and administrative space on its manufacturing campus in Blum, Texas. The facility, which is scheduled to open during the thirdfourth quarter of 2018,2022, which positively impacted activity levels of DynaEnergetics’ end customers. These conditions, along with the attainment of higher market share, have led to continued increases in unit sales of DynaEnergetics’ fully integrated and factory-assembled DS perforating systems. We believe well completion activity and customer pricing will substantially increase DynaEnergetics' component manufacturingremain resilient. DynaEnergetics instituted price increases throughout 2022 to offset higher labor and DynaStage assembly capacity. During the first half of 2018,material costs, and additional price increases are expected in 2023. DynaEnergetics plans to addoffers a second automated DynaSelect detonator line at its facility in Troisdorf, Germany. In the second half of 2018, the business plans to add a second automated shaped-charge manufacturing line at Blum, which will more than double its shaped charge production capacity in the U.S.
DynaEnergetics has made significant investments in technologies and products that have improved efficiencies, greater reliabilitythe safety, efficiency and performance of its customers’ well completions, and enhanced the effectiveness and profitability of the industry as a whole. Our patent strategy is designed to protect these investments and our competitive position. In the past several years, we have engaged in lawsuits seeking to enforce our patents and defend against accusations of infringement of others’ patents. These lawsuits have increased our general and administrative expenses in recent years; however, we expect these costs to be substantially lower operating costs. in 2023.
Arcadia serves the downstream energy industry has continuedcommercial building market primarily in the first quarter of 2018. Despite that, fabricator customers expect improved demand for long-delayed repair, maintenancewestern and upgrade work. It appears higher energy pricessouthwestern United States as well as the high-end residential market across the United States. Both commercial and renewed enthusiasm for domestic infrastructure spending may pull forward a number of these projects,residential operations have built substantial order backlogs and are benefiting from relatively strong markets, which we believe willcollectively are expected to lead to a recovery in bookings activity during 2018. In October 2017, NobelClad received a $7.4 million purchase order related to a petrochemical project in Asia, which is reflected in NobelClad's year-end backlog, and is expected to be shippedimproved financial performance in the first half of 2018.2023. In addition, we expect the building products industry to remain resilient, particularly in Arcadia’s core geographic regions and end markets. We expect new finishing capacity to be installed in 2023 which will increase manufacturing throughput. The orderdesign and implementation of phase one of a new enterprise resource planning system is nearing completion and will improve operating efficiencies and enhance the largest booked by buying experience for Arcadia’s commercial and residential customers.
NobelClad, DMC’s composite metals business, is seeing encouraging signs that several large industrial projects are moving closer to the vendor-selection phase. In addition, demand for repair and maintenance work from the downstream energy and petrochemical industries is also improving. Our backlog was $55,451 as of December 31, 2022 in comparison to $41,181 million as of December 31, 2021. We expect to ship most orders in our backlog within twelve months.
On January 17, 2023, the Company announced the appointment of Michael Kuta and David Aldous as interim co-Presidents and Chief Executive Officers. In connection with this leadership change, near-term priorities are expected to include the acceleration of Arcadia’s integration, strengthening the profitability of DynaEnergetics, achieving commercial success with new products introduced in NobelClad, and improving the Company’s overall cash flow through more than four years.effective working capital management and targeted cost reductions.
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 or loss plus or minus net interest, taxes, depreciation and amortization. Adjusted EBITDA excludes from EBITDA stock-based compensation, restructuring expenses and asset impairment charges and, when appropriate, othernonrecurring items that management does not utilize in assessing DMC’s operating performance (as further described in the
43
tables below). Adjusted EBITDA attributable to DMC Global Inc. stockholders excludes the adjusted EBITDA attributable to the 40% redeemable noncontrolling interest in Arcadia. For our business segments, Adjusted EBITDA is defined as operating income (loss) plus depreciation, amortization, allocated stock-based compensation, restructuring expenses and asset impairment charges and, when appropriate, nonrecurring items that management does not utilize in assessing operating performance. 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 net income (loss) is defined as net income (loss) attributable to DMC Global Inc. stockholders plus restructuring expenses and asset impairment charges and, when appropriate, nonrecurring items that management does not utilize in assessing DMC’s operating performance. Adjusted diluted earnings per share is defined as diluted earnings per share attributable to DMC Global Inc. stockholders (exclusive of adjustment of redeemable noncontrolling interest) plus restructuring expenses and asset impairment charges and, when appropriate, other nonrecurring items that management does not utilize in assessing DMC’s operating performance.
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, impairment, and other nonrecurring charges on DMC’s net income (loss) and diluted earnings per share, respectively.
Net Debtdebt is a non-GAAP measure we use to supplement information in our Consolidated Financial Statements. We define net debt as lines of credittotal debt less total 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 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. BecauseGiven that 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.
Forward-Looking Statements
This annual report and the documents incorporated by reference into it contain certain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigations Reform Act of 1995. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will,” “continue,” “project,” “forecast,” and similar expressions, as well as statements in the future tense, identify forward-looking statements. Such statements include projections, guidance and other statements regarding our future expectedexpectations and plans with respect to: well completion activity and customer pricing within DynaEnergetics, DynaEnergetics’ ability to implement future price increases, decreased litigation costs within DynaEnergetics in 2023, positive developments with respect to large industrial projects and improvements in repair and maintenance work within NobelClad, the ability of Arcadia to realize sales under it backlog and the expectation of improved financial position and operating results, our growth and business strategy, our expectations regardingperformance for Arcadia in the oil and gas industry,first half of 2023, the resiliency of the building products market, the timing of new finishing capacity and costsbenefits to be realized from the new ERP system in Arcadia, our near term priorities of our Blum, Texasaccelerating the integration of Arcadia, strengthening profitability of DynaEnergetics, achieving commercial success with new NobelClad products and other expansion plans, our plans to consolidate NobelClad's European production facilities, including the timing and costs involved in closing manufacturing operations in France, our expectations regarding NobelClad's sales, bookings, and backlog in 2018, impacts of the Tax Cuts and Jobs Act,improving overall cash flow, our financing plans, our future liquidity position and factors impacting such position, and the outcome of the pending GEODynamics and anti-dumping matters.position.
These forward-looking statements are not guarantees of our future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. These risks and uncertainties include those relating to:
•Changes in global economic conditions;
•The ability to obtain new contracts at attractive prices;
•The size and timing of customer orders and shipments;
•Product pricing and margins;
•Our ability to realize sales from our backlog and our ability to adjust our manufacturing and supply chain;
•Fluctuations in customer demand;
•Our ability to manage periods of growth and contraction effectively;
44
•General economic conditions, both domestic and foreign, impacting our business and the business of the end-market users we serve;
•Competitive factors;
•The timely completion of contracts;
•The timing and size of expenditures;
•The timely receipt of government approvals and permits;
•The price and availability of metal and other raw material;materials;
•The adequacy of local labor supplies at our facilities;
•Current or future limits on manufacturing capacity at our various operations;
•The impact of catastrophic weather events on our business and that of our customers;
•Our ability to successfully integrate Arcadia and any future acquired businesses;
•The ability to remain an innovative leader in our fields of business;
•The costs and impacts of pending or future litigation or regulatory matters;
•The impacts of trade and economic sanctions or other restrictions imposed by the European Union, the United States or other countries;
•Costs and risks associated with compliance with laws and regulations, including the United States Foreign Corrupt Practices Act (“FCPA”) and similar legislation;
•The availability and cost of funds; and
•Fluctuations in foreign currencies.
The effects of these factors are difficult to predict. New factors emerge from time to time, and we cannot assess the potential impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. All forward-looking statements speak only as of the date of this annual report, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of such statement or to reflect the occurrence of unanticipated events. In addition, see “Risk Factors” for a discussion of these and other factors that could materially affect our results of operations and financial condition.
45
Consolidated Results of Operations
| 2022 | 2021 | $ change | % change | ||||||||||||||||||||
| Net sales | $ | 654,086 | $ | 260,115 | $ | 393,971 | 151 | % | |||||||||||||||
| Gross profit | 185,447 | 59,480 | 125,967 | 212 | % | ||||||||||||||||||
| Gross profit percentage | 28.4 | % | 22.9 | % | |||||||||||||||||||
| COSTS AND EXPENSES: | |||||||||||||||||||||||
| General and administrative expenses | 76,119 | 36,276 | 39,843 | 110 | % | ||||||||||||||||||
| % of net sales | 11.6 | % | 13.9 | % | |||||||||||||||||||
| Selling and distribution expenses | 42,230 | 22,507 | 19,723 | 88 | % | ||||||||||||||||||
| % of net sales | 6.5 | % | 8.7 | % | |||||||||||||||||||
| Amortization of purchased intangible assets | 36,926 | 1,391 | 35,535 | 2,555 | % | ||||||||||||||||||
| % of net sales | 5.6 | % | 0.5 | % | |||||||||||||||||||
| Acquisition expenses | — | 1,581 | (1,581) | (100) | % | ||||||||||||||||||
| Restructuring expenses, net and asset impairments | 182 | 127 | 55 | 43 | % | ||||||||||||||||||
| Operating income (loss) | 29,990 | (2,402) | 32,392 | 1,349 | % | ||||||||||||||||||
| Other (expense) income, net | (594) | 152 | (746) | (491) | % | ||||||||||||||||||
| Interest expense, net | (6,187) | (304) | (5,883) | 1,935 | % | ||||||||||||||||||
| Income (loss) before income taxes | 23,209 | (2,554) | 25,763 | 1,009 | % | ||||||||||||||||||
| Income tax provision (benefit) | 9,376 | (1,544) | 10,920 | 707 | % | ||||||||||||||||||
| Net income (loss) | 13,833 | (1,010) | 14,843 | 1,470 | % | ||||||||||||||||||
| Less: Net income (loss) attributable to redeemable noncontrolling interest | 1,586 | (808) | 2,394 | 296 | % | ||||||||||||||||||
| Net income (loss) attributable to DMC Global Inc. | 12,247 | (202) | 12,449 | 6,163 | % | ||||||||||||||||||
| Adjusted EBITDA attributable to DMC Global Inc. | $ | 74,199 | $ | 20,179 | $ | 54,020 | 268 | % | |||||||||||||||
Net sales were $654,086. Excluding Arcadia, net sales were $354,559 for the twelve months ended December 31, 2017 compared to Year Ended December 31, 2016
| 2017 | 2016 | $ change | % change | ||||||||||||
| Net sales | $ | 192,803 | $ | 158,575 | $ | 34,228 | 22 | % | |||||||
| Gross profit | 59,391 | 38,680 | 20,711 | 54 | % | ||||||||||
| Gross profit percentage | 30.8 | % | 24.4 | % | |||||||||||
| COSTS AND EXPENSES: | |||||||||||||||
| General and administrative expenses | 27,135 | 22,115 | 5,020 | 23 | % | ||||||||||
| % of net sales | 14.1 | % | 13.9 | % | |||||||||||
| Selling and distribution expenses | 18,589 | 16,626 | 1,963 | 12 | % | ||||||||||
| % of net sales | 9.6 | % | 10.5 | % | |||||||||||
| Amortization of purchased intangible assets | 4,060 | 4,011 | 49 | 1 | % | ||||||||||
| % of net sales | 2.1 | % | 2.5 | % | |||||||||||
| Restructuring expenses | 4,283 | 1,202 | 3,081 | 256 | % | ||||||||||
| Goodwill impairment charge | 17,584 | — | 17,584 | ||||||||||||
| Operating loss | (12,260 | ) | (5,274 | ) | (6,986 | ) | (132 | )% | |||||||
| Other income (expense), net | (1,376 | ) | 633 | (2,009 | ) | (317 | )% | ||||||||
| Interest expense, net | (1,648 | ) | (1,067 | ) | (581 | ) | (54 | )% | |||||||
| Income tax provision | 3,569 | 797 | 2,772 | 348 | % | ||||||||||
| Net loss | (18,853 | ) | (6,505 | ) | (12,348 | ) | (190 | )% | |||||||
| Adjusted EBITDA | $ | 23,148 | $ | 9,021 | $ | 14,127 | 157 | % | |||||||
Gross profit percentage increasedwas 28.4%. Excluding Arcadia, gross profit percentage was 27.4% versus 22.9% in 2021. The improvement compared with 2016to prior year was primarily dueattributable to higher average selling prices and improved product mixunit sales volume of DS perforating systems in DynaEnergetics, and better project mix in NobelClad.which led to improved absorption of fixed manufacturing overhead expenses. Additionally, 2021 gross profit was favorably impacted by the receipt of $4,899 pursuant to the ERC.
General and administrative expenses increased $39,843 compared with 2016 primarily2021. Arcadia contributed $31,259 to the increase. The remainder of the increase was due to higher outside legal expensesheadcount and salaries, benefits, and other-payroll related to patent infringement defense costs in DynaEnergetics, higher salaries and wages from headcount additions and increasedincluding variable incentive compensation andof $3,959, higher business-related travel of $1,816, an increase in stock-based compensation expense.of $1,509, and the expiration of the 2021 ERC which contributed $1,028 of benefit in the prior year.
Selling and distribution expenses increased $19,723 compared with 2016 principally due2021. Arcadia contributed $16,184 to the increase. The remainder of the increase was attributable to the expiration of the 2021 ERC which contributed $1,236 of benefit in the prior year, higher salaries, and benefits, and other payroll related costs including variable incentive compensation of $793, increased outside professional services partially offset by a reductionlease and selling expense of $811, and higher business-related travel of $528.
Acquisition expenses were $1,581 in bad debt expense.
DynaEnergetics' operating income. Operating loss increased compared with 2016 duefor 2021 of $2,402 was also favorably impacted by receipt of $7,163 pursuant to the goodwill impairment charge and restructuring expenses combined with higher corporate unallocated and stock-based compensation expenses. The one-time impairment and restructuring charges and increased operating expenses partially were offset by increased sales volume, higher average sellingERC.
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Other expense, net of $594 in DynaEnergetics. Corporate unallocated and stock-based compensation expenses are not allocated2022 primarily related to our business segments.
Interest expense, net of these contracts are designated as accounting hedges, and all changes$6,187 in the fair value of the forward contracts are recognized immediately in "Other income (expense), net" within our Consolidated Statements of Operations.
Income tax provision of $3,569 for 2017 compared with$9,376 was recorded on income before taxes of $23,209. Our most significant operations are in the United States, which has a 21% statutory tax rate, and Germany, which has a 32% combined statutory tax rate. The mix of income or loss before income taxes between these jurisdictions is one of the primary drivers of the difference between our 21% statutory tax rate and our effective tax rate of 40.4% in 2022. The effective rate was impacted unfavorably by the geographic mix of pretax income, state taxes, stock-based compensation shortfalls, and certain compensation expenses that are not tax deductible in the U.S. The operating results of Arcadia that are attributable to the redeemable noncontrolling interest holder are not taxed at DMC, which resulted in a favorable impact to the effective tax rate. We recorded an income tax provisionbenefit of $797 for 2016. The current-year income tax provision included $946 of which was a transition tax related to the recently enacted Tax Cuts and Jobs Act ("TCJA"). The transition tax is a tax$1,544 on previously untaxed accumulated and current earnings and profits (“E&P”) of certain of our foreign subsidiaries. To determine the amount of the transition tax, we must determine, among other things, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S.loss before income taxes paid on such earnings. We made a reasonable estimate of the transition$2,554 in 2021. The 2021 effective tax and recorded a provisional transition tax obligation of $946, of which $871 is recordedrate was impacted favorably by valuation allowance changes in other long-term liabilities in our Consolidated Balance Sheets. However, we continue to gather additional information to compute more precisely the post-1986 E&P and related non-U.S. income taxes paid. The TCJA’s transition tax is payable over eight years beginning in 2018. Upon completion of the analysis of post-1986 E&P and related non-U.S. income taxes paid, revisions to our transition tax obligation, if necessary, will be recorded in the 2018 tax provision. Additionally, we currently are unable to recognize tax benefits associated with losses incurred in certain jurisdictions due to valuation allowances recorded against deferred tax assets in those jurisdictions.
Net loss income attributable to DMC Global Inc. in 20172022 was $18,853,$12,247, or $1.31$0.72 per diluted share, after adjustment to the redeemable noncontrolling interest, compared with a net loss of $6,505,$202, or $0.46$0.26 per diluted share, in 2016.2021.
Adjusted EBITDA increased compared with 2016 primarily2021 due to the factors discussed above. See "Overview""Use of Non-GAAP Financial Measures" above for the explanation of the use of Adjusted EBITDA.EBITDA, a non-GAAP measure. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
| 2022 | 2021 | ||||||||||
| Net income (loss) | $ | 13,833 | $ | (1,010) | |||||||
| Interest expense, net | 6,187 | 304 | |||||||||
| Income tax provision (benefit) | 9,376 | (1,544) | |||||||||
| Depreciation | 14,281 | 11,303 | |||||||||
| Amortization of purchased intangible assets | 36,926 | 1,391 | |||||||||
| EBITDA | 80,603 | 10,444 | |||||||||
| Restructuring expenses, net and asset impairments | 182 | 127 | |||||||||
| Nonrecurring retirement expenses | 1,100 | — | |||||||||
| Amortization of acquisition-related inventory valuation step-up | 430 | — | |||||||||
| Stock-based compensation | 10,058 | 6,574 | |||||||||
| Other expense (income), net | 594 | (152) | |||||||||
| Acquisition expenses | — | 1,581 | |||||||||
| Arcadia stub period expenses excluding depreciation and amortization | — | 1,605 | |||||||||
| Adjusted EBITDA attributable to redeemable noncontrolling interest | (18,768) | — | |||||||||
| Adjusted EBITDA attributable to DMC Global Inc. stockholders | $ | 74,199 | $ | 20,179 | |||||||
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| 2017 | 2016 | |||||||
| Net loss | $ | (18,853 | ) | $ | (6,505 | ) | ||
| Interest expense | 1,651 | 1,070 | ||||||
| Interest income | (3 | ) | (3 | ) | ||||
| Provision for income taxes | 3,569 | 797 | ||||||
| Depreciation | 6,506 | 6,756 | ||||||
| Amortization of purchased intangible assets | 4,060 | 4,011 | ||||||
| EBITDA | (3,070 | ) | 6,126 | |||||
| Restructuring expenses | 4,283 | 1,202 | ||||||
| Goodwill impairment charge | 17,584 | — | ||||||
| Stock-based compensation | 2,975 | 2,326 | ||||||
| Other (income) expense, net | 1,376 | (633 | ) | |||||
| Adjusted EBITDA | $ | 23,148 | $ | 9,021 | ||||
| 2016 | 2015 | $ change | % change | ||||||||||||
| Net sales | $ | 158,575 | $ | 166,918 | $ | (8,343 | ) | (5 | )% | ||||||
| Gross profit | 38,680 | 35,624 | 3,056 | 9 | % | ||||||||||
| Gross profit percentage | 24.4 | % | 21.3 | % | |||||||||||
| COSTS AND EXPENSES: | |||||||||||||||
| General and administrative expenses | 22,115 | 20,998 | 1,117 | 5 | % | ||||||||||
| % of net sales | 13.9 | % | 12.6 | % | |||||||||||
| Selling and distribution expenses | 16,626 | 18,745 | (2,119 | ) | (11 | )% | |||||||||
| % of net sales | 10.5 | % | 11.2 | % | |||||||||||
| Amortization of purchased intangible assets | 4,011 | 4,033 | (22 | ) | (1 | )% | |||||||||
| % of net sales | 2.5 | % | 2.4 | % | |||||||||||
| Restructuring expenses | 1,202 | 4,063 | (2,861 | ) | (70 | )% | |||||||||
| Goodwill impairment charge | — | 11,464 | (11,464 | ) | (100 | )% | |||||||||
| Operating income (loss) | (5,274 | ) | (23,679 | ) | 18,405 | 78 | % | ||||||||
| Other income (expense), net | 633 | (669 | ) | 1,302 | 195 | % | |||||||||
| Interest income (expense), net | (1,067 | ) | (1,741 | ) | 674 | 39 | % | ||||||||
| Income tax provision | 797 | (2,118 | ) | 2,915 | 138 | % | |||||||||
| Net income (loss) | (6,505 | ) | (23,971 | ) | 17,466 | 73 | % | ||||||||
| Adjusted EBITDA | $ | 9,021 | $ | 13,080 | $ | (4,059 | ) | (31 | )% | ||||||
Adjusted Net sales decreased compared with 2015 due to a 13% decrease in DynaEnergetics, which partially was offset by a 1% increase in NobelClad. The decline in DynaEnergetics was due to declining activity levels in the oilIncome and gas well-completions sector and lower average selling prices. The increase in NobelClad primarily related to a large project for the semiconductor capital equipment industry that shipped in the second quarter of 2016.
| Twelve months ended December 31, 2022 | |||||||||||
| Amount | Per Share(1) | ||||||||||
| Net income attributable to DMC Global Inc. | $ | 12,247 | $ | 0.63 | |||||||
| Nonrecurring retirement expenses, net of tax | 905 | 0.05 | |||||||||
| Amortization of acquisition-related inventory valuation step-up, net of tax | 199 | 0.01 | |||||||||
| NobelClad restructuring expenses and asset impairments, net of tax | 124 | 0.01 | |||||||||
| Adjusted net income attributable to DMC Global Inc. stockholders | $ | 13,475 | $ | 0.70 | |||||||
(1) Calculated using diluted weighted average shares outstanding of 19,369,165
| Twelve months ended December 31, 2021 | |||||||||||
| Amount | Per Share(1) | ||||||||||
| Net loss attributable to DMC Global Inc. common stockholders | $ | (202) | $ | (0.01) | |||||||
| NobelClad restructuring expenses and asset impairments, net of tax | 127 | — | |||||||||
| Acquisition expenses, net of tax | 1,217 | 0.07 | |||||||||
| Arcadia stub period expenses, net of tax | 1,741 | 0.10 | |||||||||
| Adjusted net income attributable to DMC Global Inc. stockholders | $ | 2,883 | $ | 0.16 | |||||||
(1) Calculated using diluted weighted average shares outstanding of 17,610,711
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| 2016 | 2015 | |||||||
| Net income | $ | (6,505 | ) | $ | (23,971 | ) | ||
| Interest expense | 1,070 | 1,745 | ||||||
| Interest income | (3 | ) | (4 | ) | ||||
| Provision (benefit) for income taxes | 797 | (2,118 | ) | |||||
| Depreciation | 6,756 | 6,244 | ||||||
| Amortization of purchased intangible assets | 4,011 | 4,033 | ||||||
| EBITDA | 6,126 | (14,071 | ) | |||||
| Restructuring charges | 1,202 | 4,063 | ||||||
| Goodwill impairment charge | — | 11,464 | ||||||
| Accrued anti-dumping duties | — | 6,205 | ||||||
| DynaEnergetics inventory reserves | — | 1,924 | ||||||
| Stock-based compensation | 2,326 | 2,826 | ||||||
| Other (income) expense, net | (633 | ) | 669 | |||||
| Adjusted EBITDA | $ | 9,021 | $ | 13,080 | ||||
Business Segment Financial Information
We primarily evaluate performance and allocate resources based on segment revenues, operating income and Adjusted EBITDA as well as projected future performance. Segment operating income (loss) is defined as revenues less expenses identifiable to the segment. DMC operating income (loss) and Adjusted EBITDA include unallocated corporate expenses and unallocated stock-based compensation expense, which areexpense. Stock-based compensation is not allocated to our business segments.wholly owned segments, DynaEnergetics and NobelClad. Stock-based compensation is allocated to the Arcadia segment as 60% of such expense is attributable to the Company, whereas the remaining 40% is attributable to the redeemable noncontrolling interest holder. Segment operating income will reconcile to consolidated income (loss) before income taxes by deducting unallocated corporate expenses, includingunallocated stock-based compensation, other income (expense), net, other expense, netand interest expense, and income tax provision (benefit).net.
| December 31, 2017 | ||||||||||||
| NobelClad | DynaEnergetics | DMC Global Inc. | ||||||||||
| Net Sales | $ | 71,550 | $ | 121,253 | $ | 192,803 | ||||||
| % of Consolidated | 37 | % | 63 | % | ||||||||
| Operating Income (Loss) | (17,360 | ) | 15,470 | (12,260 | ) | |||||||
| Adjusted EBITDA | 7,736 | 22,807 | 23,148 | |||||||||
| December 31, 2016 | ||||||||||||
| NobelClad | DynaEnergetics | DMC Global Inc. | ||||||||||
| Net Sales | $ | 91,285 | $ | 67,290 | $ | 158,575 | ||||||
| % of Consolidated | 58 | % | 42 | % | ||||||||
| Operating Income (Loss) | 8,878 | (5,380 | ) | (5,274 | ) | |||||||
| Adjusted EBITDA | 12,877 | 2,516 | 9,021 | |||||||||
| December 31, 2015 | ||||||||||||
| NobelClad | DynaEnergetics | DMC Global Inc. | ||||||||||
| Net Sales | $ | 89,980 | $ | 76,938 | $ | 166,918 | ||||||
| % of Consolidated | 54 | % | 46 | % | ||||||||
| Operating Income (Loss) | 5,819 | (19,245 | ) | (23,679 | ) | |||||||
| Adjusted EBITDA | 10,727 | 8,127 | 13,080 | |||||||||
| 2022 | |||||||||||||||||||||||
| Arcadia | DynaEnergetics | NobelClad | DMC Global Inc. | ||||||||||||||||||||
| Net Sales | $ | 299,527 | $ | 264,327 | $ | 90,232 | $ | 654,086 | |||||||||||||||
| % of Consolidated | 46 | % | 40 | % | 14 | % | |||||||||||||||||
| Operating income | 3,962 | 39,055 | 7,989 | 29,990 | |||||||||||||||||||
| Adjusted EBITDA attributable to DMC Global Inc. | 28,152 | 46,932 | 11,901 | 74,199 | |||||||||||||||||||
| 2021 | |||||||||||||||||
| DynaEnergetics | NobelClad | DMC Global Inc. | |||||||||||||||
| Net Sales | $ | 175,356 | $ | 84,759 | $ | 260,115 | |||||||||||
| % of Consolidated | 67 | % | 33 | % | |||||||||||||
| Operating income (loss) | 8,235 | 9,783 | (2,402) | ||||||||||||||
| Adjusted EBITDA attributable to DMC Global Inc. | 16,361 | 13,717 | 20,179 | ||||||||||||||
Arcadia
| 2022 | |||||||||||||||||||||||
| Net sales | $ | 299,527 | |||||||||||||||||||||
| Gross profit | 88,334 | ||||||||||||||||||||||
| Gross profit percentage | 29.5 | % | |||||||||||||||||||||
| COSTS AND EXPENSES: | |||||||||||||||||||||||
| General and administrative expenses | 31,872 | ||||||||||||||||||||||
| Selling and distribution expenses | 16,184 | ||||||||||||||||||||||
| Amortization of purchased intangible assets | 36,316 | ||||||||||||||||||||||
| Operating income (loss) | 3,962 | ||||||||||||||||||||||
| Adjusted EBITDA | 46,920 | ||||||||||||||||||||||
| Less: adjusted EBITDA attributable to redeemable noncontrolling interest | (18,768) | ||||||||||||||||||||||
| Adjusted EBITDA attributable to DMC Global Inc. | $ | 28,152 | |||||||||||||||||||||
Arcadia’s profitability is dependent, in large part, on the spread between its input costs, for which the primary raw material is aluminum metal, and the subsequent value received from selling its products, which include exterior and interior framing systems, curtain walls, windows, doors, and interior partitions for the commercial buildings market; and highly engineered windows and doors for the high-end residential market.
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In 2022, both net sales and cost of products sold increased in comparison to Year Ended December 31, 2016
| 2017 | 2016 | $ change | % change | ||||||||||||
| Net sales | $ | 71,550 | $ | 91,285 | $ | (19,735 | ) | -22 | % | ||||||
| Gross profit | 15,644 | 19,103 | (3,459 | ) | -18 | % | |||||||||
| Gross profit percentage | 21.9 | % | 20.9 | % | |||||||||||
| COSTS AND EXPENSES: | |||||||||||||||
| General and administrative expenses | 4,031 | 4,024 | 7 | — | % | ||||||||||
| Selling and distribution expenses | 7,178 | 5,823 | 1,355 | 23 | % | ||||||||||
| Amortization of purchased intangible assets | 386 | 378 | 8 | 2 | % | ||||||||||
| Restructuring expenses | 3,825 | — | 3,825 | N/M | |||||||||||
| Goodwill impairment charge | 17,584 | — | 17,584 | N/M | |||||||||||
| Operating income (loss) | (17,360 | ) | 8,878 | (26,238 | ) | -296 | % | ||||||||
| Adjusted EBITDA | $ | 7,736 | $ | 12,877 | $ | (5,141 | ) | -40 | % | ||||||
purchase accounting. Gross profit dollars generated were consistent with pre-acquisition periods; however, the related gross profit percentage decreased as increased compared with 2016 primarily due to better margins oninput costs outpaced the mix of projectsincrease in the current year.
| 2022 | |||||||||||
| Operating income | $ | 3,962 | |||||||||
| Adjustments: | |||||||||||
| Amortization of acquisition-related inventory valuation step-up | 430 | ||||||||||
| Depreciation | 2,906 | ||||||||||
| Amortization of purchased intangible assets | 36,316 | ||||||||||
| Stock-based compensation | 2,206 | ||||||||||
| Nonrecurring retirement expenses | $ | 1,100 | |||||||||
| Adjusted EBITDA | $ | 46,920 | |||||||||
| Less: adjusted EBITDA attributable to redeemable noncontrolling interest | (18,768) | ||||||||||
| Adjusted EBITDA attributable to DMC Global Inc. | $ | 28,152 | |||||||||
DynaEnergetics
| 2017 | 2016 | |||||||
| Operating (loss) income | $ | (17,360 | ) | $ | 8,878 | |||
| Adjustments: | ||||||||
| Restructuring expenses | 3,825 | — | ||||||
| Goodwill impairment charge | 17,584 | — | ||||||
| Depreciation | 3,301 | 3,621 | ||||||
| Amortization of purchased intangibles | 386 | 378 | ||||||
| Adjusted EBITDA | $ | 7,736 | $ | 12,877 | ||||
| 2022 | 2021 | $ change | % change | ||||||||||||||||||||
| Net sales | $ | 264,327 | $ | 175,356 | $ | 88,971 | 51 | % | |||||||||||||||
| Gross profit | 75,569 | 38,955 | 36,614 | 94 | % | ||||||||||||||||||
| Gross profit percentage | 28.6 | % | 22.2 | % | |||||||||||||||||||
| COSTS AND EXPENSES: | |||||||||||||||||||||||
| General and administrative expenses | 19,627 | 17,132 | 2,495 | 15 | % | ||||||||||||||||||
| Selling and distribution expenses | 16,588 | 13,050 | 3,538 | 27 | % | ||||||||||||||||||
| Amortization of purchased intangible assets | 299 | 538 | (239) | (44) | % | ||||||||||||||||||
| Operating income | 39,055 | 8,235 | 30,820 | 374 | % | ||||||||||||||||||
| Adjusted EBITDA | $ | 46,932 | $ | 16,361 | $ | 30,571 | 187 | % | |||||||||||||||
| 2016 | 2015 | $ change | % change | ||||||||||||
| Net sales | $ | 91,285 | $ | 89,980 | $ | 1,305 | 1 | % | |||||||
| Gross profit | 19,103 | 17,206 | 1,897 | 11 | % | ||||||||||
| Gross profit percentage | 20.9 | % | 19.1 | % | |||||||||||
| COSTS AND EXPENSES: | |||||||||||||||
| General and administrative expenses | 4,024 | 4,539 | (515 | ) | -11 | % | |||||||||
| Selling and distribution expenses | 5,823 | 5,719 | 104 | 2 | % | ||||||||||
| Amortization of purchased intangible assets | 378 | 379 | (1 | ) | — | % | |||||||||
| Restructuring expenses | — | 750 | (750 | ) | -100 | % | |||||||||
| Operating income | 8,878 | 5,819 | 3,059 | 53 | % | ||||||||||
| Adjusted EBITDA | $ | 12,877 | $ | 10,727 | $ | 2,150 | 20 | % | |||||||
Net sales were $88,971 higher than in 2021 due to higher energy prices and a growing reliance on North American oil and gas, which led to increased compared with 2015drilling and well completion activity in North America and increased sales of DynaEnergetics’ DS perforating systems. International sales also increased, which favorably impacted results in 2022.
Gross profit percentage increased to 28.6% primarily due to timing differences with respect to when orders entered our backlog and the subsequent shipmenthigher unit sales volume of these orders. During the second quarter of 2016, NobelClad shipped a large project related to specialized explosion clad plates to be used in the fabrication of equipment for a semiconductor material production facility in East Asia.
General and administrative expenses declinedincreased by $2,495 compared with 20152021 primarily due to lower salaries and wages and outside service costs.
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Selling and distribution expenses increased by a reduction of bad debt expense.
Operating income increased by $30,820 compared with 2021 due to the factors discussed above.
Adjusted EBITDAincreasedcompared with 2021 primarily due to the factors discussed above. See "Overview""Use of Non-GAAP Financial Measures" above for the explanation of the use of Adjusted EBITDA.EBITDA, a non-GAAP measure. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
| 2022 | 2021 | ||||||||||
| Operating income | $ | 39,055 | $ | 8,235 | |||||||
| Adjustments: | |||||||||||
| Depreciation | 7,578 | 7,588 | |||||||||
| Amortization of purchased intangible assets | 299 | 538 | |||||||||
| Adjusted EBITDA | $ | 46,932 | $ | 16,361 | |||||||
NobelClad
| 2016 | 2015 | |||||||
| Operating income | $ | 8,878 | $ | 5,819 | ||||
| Adjustments: | ||||||||
| Restructuring expenses | — | 750 | ||||||
| Depreciation | 3,621 | 3,779 | ||||||
| Amortization of purchased intangibles | 378 | 379 | ||||||
| Adjusted EBITDA | $ | 12,877 | $ | 10,727 | ||||
| 2022 | 2021 | $ change | % change | |||||||||||||||||||||||
| Net sales | $ | 90,232 | $ | 84,759 | $ | 5,473 | 6 | % | ||||||||||||||||||
| Gross profit | 22,050 | 22,173 | (123) | (1) | % | |||||||||||||||||||||
| Gross profit percentage | 24.4 | % | 26.2 | % | ||||||||||||||||||||||
| COSTS AND EXPENSES: | ||||||||||||||||||||||||||
| General and administrative expenses | 4,587 | 3,217 | 1,370 | 43 | % | |||||||||||||||||||||
| Selling and distribution expenses | 8,981 | 8,556 | 425 | 5 | % | |||||||||||||||||||||
| Amortization of purchased intangible assets | 311 | 490 | (179) | (37) | % | |||||||||||||||||||||
| Restructuring expenses, net and asset impairments | 182 | 127 | 55 | 43 | % | |||||||||||||||||||||
| Operating income | 7,989 | 9,783 | (1,794) | (18) | % | |||||||||||||||||||||
| Adjusted EBITDA | $ | 11,901 | $ | 13,717 | $ | (1,816) | (13) | % | ||||||||||||||||||
| 2017 | 2016 | $ change | % change | ||||||||||||
| Net sales | $ | 121,253 | $ | 67,290 | $ | 53,963 | 80 | % | |||||||
| Gross profit | 44,029 | 19,811 | 24,218 | 122 | % | ||||||||||
| Gross profit percentage | 36.3 | % | 29.4 | % | |||||||||||
| COSTS AND EXPENSES: | |||||||||||||||
| General and administrative expenses | 13,373 | 9,964 | 3,409 | 34 | % | ||||||||||
| Selling and distribution expenses | 11,054 | 10,467 | 587 | 6 | % | ||||||||||
| Amortization of purchased intangible assets | 3,674 | 3,633 | 41 | 1 | % | ||||||||||
| Restructuring expenses | 458 | 1,128 | (670 | ) | (59 | )% | |||||||||
| Operating income (loss) | 15,470 | (5,381 | ) | 20,851 | 387 | % | |||||||||
| Adjusted EBITDA | $ | 22,807 | $ | 2,515 | $ | 20,292 | 807 | % | |||||||
Gross profit percentageincreased compared with 2016 primarily due decreased to higher average selling prices, improved product mix and24.4% in 2022. Gross profit in 2021 was favorably impacted by the favorable impactreceipt of higher volume on fixed overhead expenses.$1,509 pursuant to the ERC. Excluding the ERC, gross profit performance was consistent year over year.
General and administrative expensesincreased by $1,370 compared with 2016 primarily2021 due to higher outside legal expensesservices costs by $988 primarily related to patent infringement defense coststhe implementation of a new enterprise resource planning system and higher salaries and wages from headcount additions and variable incentive compensation expense.the expiration of the 2021 ERC which contributed $84 of benefit in the prior year.
Selling and distribution expenses increased by $425 compared with 20162021 primarily due to higher salaries and wages and higher outside service costs, partially offsetthe expiration of the 2021 ERC which contributed $436 of benefit in the prior year.
Operating income decreased by lower bad debt expense.
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Adjusted EBITDAincreased compared with 2016 primarily decreased due to the factors discussed above. See "Overview""Use of Non-GAAP Financial Measures" above for the explanation of the use of Adjusted EBITDA.EBITDA, a non-GAAP measure. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
| 2022 | 2021 | |||||||||||||||||||
| Operating income | Operating income | $ | 7,989 | $ | 9,783 | |||||||||||||||
| Adjustments: | Adjustments: | |||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||
| Operating income (loss) | $ | 15,470 | — | $ | (5,381 | ) | ||||||||||||||
| Adjustments: | ||||||||||||||||||||
| Restructuring expenses | 458 | 1,128 | ||||||||||||||||||
| Restructuring expenses, net and asset impairments | Restructuring expenses, net and asset impairments | 182 | 127 | |||||||||||||||||
| Depreciation | 3,205 | 3,135 | Depreciation | 3,419 | 3,317 | |||||||||||||||
| Amortization of purchased intangibles | 3,674 | 3,633 | ||||||||||||||||||
| Amortization of purchased intangible assets | Amortization of purchased intangible assets | 311 | 490 | |||||||||||||||||
| Adjusted EBITDA | $ | 22,807 | $ | 2,515 | Adjusted EBITDA | $ | 11,901 | $ | 13,717 | |||||||||||
| 2016 | 2015 | $ change | % change | ||||||||||||
| Net sales | $ | 67,290 | $ | 76,938 | $ | (9,648 | ) | (13 | )% | ||||||
| Gross profit | 19,811 | 18,662 | 1,149 | 6 | % | ||||||||||
| Gross profit percentage | 29.4 | % | 24.3 | % | |||||||||||
| COSTS AND EXPENSES: | |||||||||||||||
| General and administrative expenses | 9,964 | 8,423 | 1,541 | 18 | % | ||||||||||
| Selling and distribution expenses | 10,467 | 12,706 | (2,239 | ) | (18 | )% | |||||||||
| Amortization of purchased intangible assets | 3,633 | 3,654 | (21 | ) | (1 | )% | |||||||||
| Restructuring expenses | 1,128 | 1,660 | (532 | ) | (32 | )% | |||||||||
| Goodwill impairment charge | — | 11,464 | (11,464 | ) | (100 | )% | |||||||||
| Operating loss | (5,381 | ) | (19,245 | ) | 13,864 | 72 | % | ||||||||
| Adjusted EBITDA | $ | 2,515 | $ | 8,127 | $ | (5,612 | ) | (69 | )% | ||||||
| 2016 | 2015 | |||||||
| Operating loss | $ | (5,381 | ) | $ | (19,245 | ) | ||
| Adjustments: | ||||||||
| Restructuring expenses | 1,128 | 1,660 | ||||||
| Goodwill impairment charge | — | 11,464 | ||||||
| Accrued anti-dumping duties | — | 6,205 | ||||||
| DynaEnergetics inventory reserves | — | 1,924 | ||||||
| Depreciation | 3,135 | 2,465 | ||||||
| Amortization of purchased intangibles | 3,633 | 3,654 | ||||||
| Adjusted EBITDA | $ | 2,515 | $ | 8,127 | ||||
Liquidity and Capital Resources
We have historically financed our operations from a combination of internally generated cash flow, revolving credit borrowings, and various long-term debt arrangements. Our net debt position was $107,654 at December 31, 2022 compared to $116,615 at December 31, 2021. Net debt decreased during 2022 due primarily to $15,000 in Term Loan payments. We have a fully undrawn and available $50,000 revolving credit facility at December 31, 2022.
On October 22, 2020, we commenced an at-the-market equity ("ATM") program under a shelf registration statement filed in May 2020 under which we have sold a total of 1,006,180 shares of common stock for net proceeds of $51,002 through the end of 2021.
Additionally, in May 2021, the Company completed a registered public offering of its stock under an automatic shelf registration statement on Form S-3ASR filed on May 3, 2021, issuing a total of 2,875,000 shares of its common stock, which included the exercise of the over-allotment option, at a market price of $45 per share resulting in gross proceeds of $129,375. Net proceeds from the offering were $123,461 after deducting underwriter fees and other expenses of $5,914. We used proceeds from the ATM program and the registered public offering as part of the consideration used to acquire our 60% controlling interest in Arcadia. We may in the future seek to reengage under an at-the-market offering program or otherwise access the capital markets, but there can be no assurance that any future capital will be available on acceptable terms or at all.
We believe that cash and cash equivalents on hand, cash flow from operations, and funds available under our current credit facilities and any future replacement thereof will be sufficient to fund the working capital, required minimum debt service dividends, announced expansion plans for DynaEnergetics as well aspayments, and other capital expenditure requirements of our current business operations for the foreseeable future. We may also execute capital markets transactions, including at-the-market offering programs, to raise additional funds if we believe market conditions are favorable, but there can be no assurance that any future capital will be available on acceptable terms or at all. Nevertheless, our ability to generate sufficient cash flows from operations will depend upon our success in executing our strategies. If we are unable to (i) realize sales from our backlog; (ii) secure new customer orders; (iii) continue selling products at attractiveprofitable margins; and (iv) continue to implement cost-effective internal processes, our ability to meet cash requirements through operating activities could be impacted. Also, continued heightened litigation costs or unfavorable court decisions in ongoing patent infringement litigation or anti-dumping and countervailing duties ("AD/CVD") matters could negatively impact our ability to meet future cash requirements. Furthermore, any restriction on the availability of borrowings under our credit facilities could negatively affect our ability to meet future cash requirements. In March 2017, we filed a shelf registration statementWe will continue to monitor financial market conditions, including the related impact on Form S-3credit availability and capital markets.
Debt facilities
On December 23, 2021, in connection with the SecuritiesArcadia acquisition, we entered into a five-year $200,000 syndicated credit agreement (“credit facility”) which included a $150,000 Term Loan (the "Term Loan"), which is amortizable at 10% of principal per year with a balloon payment for the outstanding balance upon the credit facility maturity date in 2026, and Exchange Commission, which has been declared effective, and on which we registeredallows for salerevolving loans of up to $150 million$50,000. The credit facility has an accordion feature to increase the commitments by $100,000 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 four banks, with KeyBank, N.A. acting as administrative agent. The credit facility is secured by the assets of DMC including accounts receivable, inventory, and fixed assets, including Arcadia and its subsidiary, as well as guarantees and share pledges by DMC and its subsidiaries.
Borrowings under the $150,000 Term Loan and $50,000 revolving loan limit can be in the form of Adjusted Daily Simple Secured Overnight Financing Rate ("SOFR") loans or one month Adjusted Term SOFR loans. Additionally, U.S. 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
52
administrative agent’s prime rate, an adjusted Federal Funds rate or an adjusted SOFR rate). SOFR loans bear interest at the applicable SOFR 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%).
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 December 31, 2022, we were in compliance with all financial covenants and other provisions of our securities from time to time and on terms that we may determinedebt agreements.
The leverage ratio is defined in the future. Our ability to access this capital may be limited by market conditions atcredit facility as the timeratio of Consolidated Funded Indebtedness (as defined in the credit facility) on the last day of any future potential offering. There can be no assurance thattrailing four quarter period to Consolidated Pro Forma EBITDA (as defined in the credit facility) for such period. Consolidated Pro Forma EBITDA equals Adjusted EBITDA as calculated within the Consolidated Results of Operations section plus certain predefined add-backs, which include up to $5,000 for one-time integration expenses incurred in the twelve-month period following the closing date of the Arcadia acquisition. The maximum leverage ratio permitted by our credit facility is 3.25 to 1.0 through the quarter ended March 31, 2023, and 3.0 to 1.0 from the quarter ended June 30, 2023 and thereafter. The actual leverage ratio as of December 31, 2022, calculated in accordance with the credit facility, as amended, was 1.69 to 1.0.
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 (other than those made with respect to preferred stock issued under the Operating Agreement), Consolidated Unfunded Capital Expenditures (as defined in the credit facility), and net cash income taxes to the sum of cash interest expense, any such capital will bedividends on the preferred stock paid in cash, and scheduled principal payments on funded indebtedness. Under our credit facility, the minimum debt service coverage ratio permitted is 1.35 to 1.0. The actual debt service coverage ratio for the trailing twelve months ended December 31, 2022 was 2.83 to 1.0.
As of December 31, 2022, borrowings of $135,000 on the Term Loan under our credit facility were outstanding. No revolving loans were outstanding, and our available on acceptable terms or at all.borrowing capacity was $50,000 as of December 31, 2022.
We declaredalso maintain a line of credit with a German bank for certain European operations. This line of credit provides a borrowing capacity of €7,000.
Redeemable noncontrolling interest
The Operating Agreement for Arcadia contains a right for the Company to purchase the remaining interest in Arcadia from the minority interest holder on or after the third anniversary of the acquisition closing date (“Call Option”). Similarly, the minority interest holder of Arcadia has the right to sell its remaining interest in Arcadia to the Company on or after the third anniversary of the acquisition closing date (“Put Option”). Both the Call Option and paid quarterly dividends aggregating $0.08 per sharePut Option enable the respective holder to exercise their rights based upon a predefined calculation as included within the Operating Agreement.
As of December 31, 2022, the redeemable noncontrolling interest is $187,522 in 2017 and $0.08 per share in 2016. We may pay quarterly dividends subjectcomparison to capital availability and periodic determinations that cash dividends areour previous estimate at December 31, 2021 of $197,196. The decrease is attributable to a decline in the best interestsestimated settlement amount of the redeemable noncontrolling interest due to a reduction in average adjusted earnings. Refer to Note 3 within Item 8 — Financial Statements and Supplementary Data for further information related to the valuation of the redeemable noncontrolling interest.
Other contractual obligations and commitments
The table below presents principal cash flows by expected maturity dates for our debt obligations and other contractual obligations and commitments as of December 31, 2022:
| Payment Due by Period | ||||||||||||||||||||||||||||||||
| As of December 31, 2022 | ||||||||||||||||||||||||||||||||
| Less than | More than | |||||||||||||||||||||||||||||||
| Other Contractual Obligations | 1 Year | 1-3 Years | 3-5 Years | 5 Years | Total | |||||||||||||||||||||||||||
Credit facility(1) | $ | 15,000 | $ | 30,000 | $ | 90,000 | $ | — | $ | 135,000 | ||||||||||||||||||||||
Operating lease obligations(2) | 9,011 | 16,979 | 13,954 | 19,553 | 59,497 | |||||||||||||||||||||||||||
Purchase obligations(3) | 132,047 | 1,337 | — | — | 133,384 | |||||||||||||||||||||||||||
Total(4) | $ | 156,058 | $ | 48,316 | $ | 103,954 | $ | 19,553 | $ | 327,881 | ||||||||||||||||||||||
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(1) Represents outstanding borrowings under our credit facility but excludes future interest expense on outstanding credit facility borrowings. For more information about our debt obligations, refer to Note 7 "Debt" of our stockholders.Consolidated Financial Statements.
(2) The operating lease obligations presented reflect future minimum lease payments due under non-cancelable portions of our leases as of December 31, 2022. Our operating lease obligations are described in Note 6 "Leases" of our Consolidated Financial Statements.
(3) Amounts represent firm commitments to purchase goods or services to be utilized in the normal course of business. These amounts are not reflected in the Consolidated Balance Sheets.
(4) The above table does not include amounts potentially payable upon exercise of the Put Option or Call Option associated with the redeemable noncontrolling interest.
Cash flows from operating activities
Net cash provided by operating activities was $44,936 in 2022 compared with net cash outflows of $12,812 in 2021. The increase primarily was due to higher net income and higher non-cash reconciling adjustments related to amortization of purchased intangible assets from the Arcadia acquisition. These increases were partially offset by use of cash for working capital, including higher inventory levels at DynaEnergetics and Arcadia due to increased input costs and expected increases in sales volume.
Cash flows from investing activities
Net cash used in investing activities in 2022 of $20,926 primarily related to the acquisition of property, plant and equipment of $18,584 and consideration adjustments related to the Arcadia acquisition of $2,404.
Net cash used in investing activities in 2021 was $267,806 and primarily related to $261,000 used to fund a portion of the Arcadia acquisition, investments in marketable securities of $123,984, issuance of a promissory note in conjunction with the Arcadia acquisition of $24,902, and acquisition of property, plant and equipment of $8,659. These uses of cash were partially offset by proceeds from sales of marketable securities of $144,921 and proceeds from maturities of marketable securities of $4,799.
Cash flows from financing activities
Net cash used in financing activities in 2022 totaled $28,510, which included payments on our Term Loan of $15,000, distributions to the redeemable noncontrolling interest holder of $12,300, and treasury stock purchases of $1,231.
Net cash provided by financing activities in 2021 totaled $282,585, which included Term Loan borrowings of $150,000, net proceeds from our equity offering of $123,461 and ATM equity program of $25,262, partially offset by repayment in full of outstanding indebtedness under our previous credit facility of $11,750, treasury stock purchases of $2,485, and payment of debt issuance costs of $2,337.
Payment of dividends
On April 23, 2020, DMC announced that its Board of Directors suspended the quarterly dividend indefinitely due to the uncertain economic outlook caused by the COVID-19 pandemic. Future dividends may be affected by, among other items, our views on potential future capital requirements, future business prospects, debt covenant compliance considerations, changes in income tax laws, and any other factors that our Board of Directors deems relevant. Any determination to pay cash dividends will be at the discretion of the Board of Directors.
Payment Due by Period As of December 31, 2017 | ||||||||||||||||||||
| Less than | More than | |||||||||||||||||||
| Other Contractual Obligations | 1 Year | 1-3 Years | 3-5 Years | 5 Years | Total | |||||||||||||||
| Multicurrency revolver (1) | $ | — | $ | 18,250 | $ | — | $ | — | $ | 18,250 | ||||||||||
| Operating lease obligations (2) | 1,365 | 1,625 | 832 | 100 | 3,922 | |||||||||||||||
| License agreements obligations (3) | 398 | 398 | — | — | 796 | |||||||||||||||
| Purchase obligations (4) | 29,099 | — | — | — | 29,099 | |||||||||||||||
| Total | $ | 30,862 | $ | 20,273 | $ | 832 | $ | 100 | $ | 52,067 | ||||||||||
Critical Accounting Policies and Estimates
Our historical Consolidated Financial Statements and notes to our historical Consolidated Financial Statements contain information that is pertinent to our management’s discussion and analysis of financial condition and results of operations.operations and financial condition. Preparation of financial statements in conformity with generally accepted accounting principles generally accepted in the United States requires that our management make estimates, judgments and assumptions that affect the amounts reported amounts offor revenues, expenses, assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. However, the accounting principles used by us generally do not change our reported cash flows or liquidity. Existing rules must be interpreted and judgments made on how the specifics of a given rule apply to us.
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Our critical accounting estimates, described below, are important to the portrayal of our results of operations and income taxes.financial condition. Management’s judgments and estimates in these areas are based on information available from both internal and external sources,at times requires management to make difficult, subjective, and actualcomplex judgments. Actual results couldmay or may not differ from the estimates, as additional information becomes known. We believe the following to be our most critical accounting policies.these estimates.
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 recordwrite down inventory to its net realizable value by recording provisions and maintain reserves for excess, slow moving and obsolete inventory. To determine reserveprovision amounts, 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.
Business Combination
The Company accounts for acquisitions under the acquisition method. Net assets and results of operations are included in our Consolidated Financial Statements commencing at the date of acquisition. We allocate the fair value of an acquisition’s purchase consideration to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values assigned to identifiable assets and liabilities is recognized as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to purchased intangible assets. These estimates and assumptions can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted average cost of capital, and the estimated useful lives. Changes in these assumptions could materially affect the carrying value of these assets.
Intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise. Intangible assets primarily consist of customer relationships, customer backlog and trademarks / trade names, which are recorded at acquisition date fair value, less accumulated amortization. The determination of estimated useful lives and the allocation of purchase price to intangible assets requires significant judgment and affects the amount of future amortization and possible impairment charges. We determine the appropriate useful life of intangible assets by performing an analysis of expected cash flows of the acquired assets.
The Company completed the acquisition of Arcadia, Inc. during the year ended December 31, 2021 and initially recorded $254,500 in purchased intangible assets and $141,266 of goodwill using the aforementioned valuation estimates. There were no material changes to prior estimates during the year ended December 31, 2022 upon completion of purchase accounting.
Goodwill
Goodwill represents the amount by which the purchase price exceeds the fair value of identifiable tangible and intangible assets and liabilities acquired in a business combination. Goodwill acquired in a business combination and determined to have an indefinite useful life is not amortized, but instead is tested for impairment at least annually during the fourth quarter or whenever events or changes in circumstances indicate that the carrying value might not be fully recoverable. For goodwill, impairment is assessed at the reporting unit level. A reporting unit is defined as an operating segment or a component of an operating segment to the extent discrete financial information is available that is reviewed by segment management. The Company's reporting units are each of the three operating segments disclosed in Note 11 within Item 8 — Financial Statements and Supplementary Data.
To test goodwill for impairment, we first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. For the qualitative assessment, we consider macroeconomic and market conditions, cost factors, financial performance and other relevant entity-specific events. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying value during the qualitative assessment, then we quantitatively estimate the fair value of the reporting unit and compare the estimated fair value to its carrying value. Based on the results of the quantitative assessment, if the carrying value exceeds the fair value of the reporting unit, then an impairment loss is recognized for the difference.
The assumptions used in a quantitative assessment require significant judgment, which include assumptions about future economic conditions and company-specific conditions and plans. In a quantitative assessment, a company estimates the fair value of a reporting unit by using the income approach, specifically a discounted cash flow analysis. A number of assumptions
55
and estimates are required in performing the discounted cash flow analysis, including forecasts of revenues, costs of revenues, operating expenses, capital expenditures, discount rates, working capital changes, and terminal growth rates. Actual results may differ from those assumed in the forecasts.
As of December 31, 2022, the carrying value of goodwill was $141,725 and relates entirely to the Arcadia operating segment and reporting unit. As of the date of the 2022 annual impairment test, we performed a quantitative assessment and concluded that the fair value of Arcadia exceeded its carrying value by approximately 10%. Discount rates are one of the more significant assumptions used in the income approach. If the Company increased the discount rate used by 75 basis points, the fair value of Arcadia would still exceed its carrying value. A decline in general economic conditions or equity valuations could impact the judgments and assumptions used to estimate the fair value of Arcadia, and the Company could be required to record an impairment charge in the future. If the Company was required to recognized an impairment charge, the Consolidated Balance Sheets and Consolidated Statements of Operations and Comprehensive Income (Loss) could be materially impacted; however, the non-cash charge would not impact the Company's consolidated cash flows, current liquidity, and capital resources.
Asset impairments
Finite-lived assets, including purchased intangible assets, property, plant and equipment, and right-of-use assets, are tested for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. We compare the expected undiscounted future operating cash flows associated with these finite-lived assets to their respective carrying values to determine if they are fully recoverable when indicators of impairment are present. If the expected future operating cash flows of an asset are not sufficient to recover the related carrying value, we estimate the fair value of the asset.asset group. Impairment is recognized when the carrying amount of the asset group is not recoverable and when carrying value exceeds fair value. Long-lived assets to be disposed of, if any, are reported at the lower of carrying amount or fair value less cost to sell.
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. As of December 31, 2022, we have a valuation allowance of $6,277 recorded against deferred tax assets primarily in our foreign jurisdictions.
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, the tax position 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. During the year-ended December 31, 2022, we recorded an uncertain tax position liability of $2,106 related to tax positions taken in the current year.
Off Balance Sheet Arrangements
At December 31, 2017,2022, we had no off-balance sheet arrangements, as defined by SEC rules, that have or are reasonably likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Recent Accounting Pronouncements
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ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Risk
Our Consolidated Financial Statements are expressed in U.S. dollars, but a portion of our business is conducted in currencies other than U.S. dollars. Changes in the exchange rates for such currencies into U.S. dollars can affect our revenues, earnings, and the carrying value of our assets and liabilities in our Consolidated Balance Sheets, either positively or negatively. Sales made in currencies other than U.S. dollars accounted for 28%6%, 28%16%, and 23%17% of total sales for the years ended 2017, 2016,2022, 2021, and 2015,2020, respectively. As a result of foreign currency risk, we may experience economic loss and a negative impact on earnings and equity with respect to our holdings solely as a result of foreign currency exchange rate fluctuations. Our primary exposure to foreign currency risk is the Euro due to the percentage of our U.S. dollar revenue that is derived from countries where the Euro is the functional currency and the Russian Ruble due to DynaEnergetics' manufacturing and sales operations in Tyumen, Siberia.currency.
We use foreign currency forward contracts to offset foreign exchange rate fluctuation on foreign currency denominated asset and liability positions. Foreign currency forward contracts are sensitive to changes in foreign currency exchange rates. Consistent with the use of these contracts to neutralize the effect of exchange rate fluctuations, such unrealized lossesgains or gainslosses would be offset by corresponding gains or losses, respectively, in the remeasurement of the asset and liability positions being hedged. As such, these forward currency contracts and the offsetting underlying asset and liability positions do not create material market risk. The notional amount of the foreign exchange contracts at December 31, 2022 and 2021 was $21,907 and $13,032, respectively.
Interest Rate Risk
The Company's interest expense is sensitive to the general level of interest rates in North America and Europe. At December 31, 2022, all of the Company's debt was subject to variable interest rates. A one percentage point increase in average interest rates would cause interest expense, net in 2022 to increase by $1,157. This was determined by considering the impact of a hypothetical interest rate on the Company's average outstanding variable debt. This analysis does not consider the effect of the level of overall economic activity that could exist. In the event of a change in the level of economic activity, which may adversely impact interest rates, the Company could likely take actions to further mitigate any potential negative exposure to the change. However, due to the uncertainty of the specific actions that might be taken and their possible effects, the sensitivity analysis assumes no changes in the Company's financial structure.
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ITEM 8. Financial Statements and Supplementary Data
DMC GLOBAL INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 20172022 and 20162021 and for Each of the Three Years Ended
December 31, 2017, 20162022, 2021 and 20152020
| Page | |||||||||
| Financial Statements: | |||||||||
58
Report of Independent Registered Public Accounting Firm
To The Shareholdersthe Stockholders and the
Board of Directors of DMC Global Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of DMC Global Inc. (the Company) as of December 31, 20172022 and 2016, and2021, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and redeemable noncontrolling interest and cash flows for each of the three years in the period ended December 31, 2017,2022, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated“(consolidated) financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20172022 and 2016,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 8, 2018February 27, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
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Valuation of Goodwill
| Description of the Matter | At December 31, 2022, the Company had a consolidated goodwill balance of $141.7 million. As discussed in Note 2 to the consolidated financial statements, goodwill is tested for impairment at least annually during the fourth quarter or whenever events or changes in circumstances indicate the carrying value might not be fully recoverable. All goodwill recorded within the Consolidated Balance Sheet relates to the Arcadia reporting unit. The Company performed a quantitative impairment assessment by estimating the fair value of the Arcadia reporting unit using the discounted cashflow method. Auditing management's annual goodwill impairment test was complex due to the significant estimation involved in estimating the fair value of the Arcadia reporting unit. The Company used the income approach – discounted cashflow method to value the Arcadia reporting unit. The significant assumptions used to estimate the value of the Arcadia reporting unit included the discount rate and certain assumptions that form the basis of the forecasted results including revenue growth rates and gross profit. These significant assumptions are forward looking and could be affected by future economic and market conditions. | |||||||||||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s internal controls over the valuation of goodwill, including controls over management’s judgements and evaluation over the underlying assumptions with regard to the valuation model applied to determine the fair value of the Arcadia reporting unit and management’s review of its annual financial forecasts. We also tested management's internal controls to validate that the data used in the discounted cashflow model was complete and accurate. To test the estimated fair value of the Arcadia reporting unit, our audit procedures included, among others, evaluating the Company’s use of the income approach and testing the discounted cashflow model and significant assumptions as noted above used in the valuation models, including the completeness and accuracy of the underlying data. For example, we compared the significant assumptions to current industry and market trends and to the historical results of the Arcadia reporting unit. We also performed sensitivity analyses of the significant assumptions to evaluate the changes in the fair value of the Arcadia reporting unit that would result from changes in the assumptions. In addition, we involved internal valuation specialists to assist in our evaluation of the valuation methodology and certain significant assumptions as noted above used by the Company. Our internal valuation specialists’ procedures included, among others, developing a range of independent estimates for the discount rate and comparing those to the discount rate selected by management. In addition, we tested management’s reconciliation of the fair value of the reporting units to the market capitalization of the Company. | |||||||||||||
| /s/ Ernst & Young LLP | |||||
| We have served as the | |||||
| Denver, Colorado | |||||
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DMC GLOBAL INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share and Per Share Data)
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 25,144 | $ | 30,810 | |||||||
| Accounts receivable, net of allowance for doubtful accounts of $925 and $2,773, respectively | 94,415 | 71,932 | |||||||||
| Inventories | 156,590 | 124,214 | |||||||||
| Prepaid expenses and other | 10,723 | 12,240 | |||||||||
| Total current assets | 286,872 | 239,196 | |||||||||
| Property, plant and equipment | 211,277 | 191,022 | |||||||||
| Less - accumulated depreciation | (81,832) | (68,944) | |||||||||
| Property, plant and equipment, net | 129,445 | 122,078 | |||||||||
| Goodwill | 141,725 | 141,266 | |||||||||
| Purchased intangible assets, net | 217,925 | 255,576 | |||||||||
| Deferred tax assets | 7,633 | 6,930 | |||||||||
| Other assets | 95,378 | 99,366 | |||||||||
| Total assets | $ | 878,978 | $ | 864,412 | |||||||
| LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST, AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 46,816 | $ | 40,276 | |||||||
| Accrued expenses | 8,415 | 13,585 | |||||||||
| Accrued income taxes | 4,256 | 9 | |||||||||
| Accrued employee compensation and benefits | 14,441 | 9,766 | |||||||||
| Contract liabilities | 32,080 | 21,052 | |||||||||
| Current portion of long-term debt | 15,000 | 15,000 | |||||||||
| Other current liabilities | 7,042 | 6,126 | |||||||||
| Total current liabilities | 128,050 | 105,814 | |||||||||
| Long-term debt | 117,798 | 132,425 | |||||||||
| Deferred tax liabilities | 1,908 | 2,202 | |||||||||
| Other long-term liabilities | 63,053 | 66,250 | |||||||||
| Total liabilities | 310,809 | 306,691 | |||||||||
| Commitments and Contingencies (Note 13) | |||||||||||
| Redeemable noncontrolling interest | 187,522 | 197,196 | |||||||||
| Stockholders' Equity: | |||||||||||
| Preferred stock, $0.05 par value; 4,000,000 shares authorized; no issued and outstanding shares | — | — | |||||||||
| Common stock, $0.05 par value; 50,000,000 and 25,000,000 shares authorized, respectively; 20,140,654 and 19,920,829 shares issued, respectively | 1,007 | 996 | |||||||||
| Additional paid-in capital | 303,893 | 294,515 | |||||||||
| Retained earnings | 125,215 | 111,031 | |||||||||
| Other cumulative comprehensive loss | (28,758) | (26,538) | |||||||||
| Treasury stock, at cost, and company stock held for deferred compensation, at par; 605,723 and 570,415 shares, respectively | (20,710) | (19,479) | |||||||||
| Total stockholders' equity | 380,647 | 360,525 | |||||||||
| Total liabilities, redeemable noncontrolling interest, and stockholders' equity | $ | 878,978 | $ | 864,412 | |||||||
| As of December 31, | |||||||
| 2017 | 2016 | ||||||
| ASSETS | |||||||
| CURRENT ASSETS: | |||||||
| Cash and cash equivalents | $ | 8,983 | $ | 6,419 | |||
| Accounts receivable, net of allowance for doubtful accounts of $1,088 and $1,146, respectively | 49,468 | 32,959 | |||||
| Inventory, net | 35,742 | 28,833 | |||||
| Prepaid expenses and other | 5,763 | 5,148 | |||||
| Total current assets | 99,956 | 73,359 | |||||
| PROPERTY, PLANT AND EQUIPMENT | 121,339 | 109,427 | |||||
| Less - accumulated depreciation | (61,467 | ) | (52,294 | ) | |||
| Property, plant and equipment, net | 59,872 | 57,133 | |||||
| GOODWILL, net | — | 16,097 | |||||
| PURCHASED INTANGIBLE ASSETS, net | 12,861 | 15,827 | |||||
| DEFERRED TAX ASSETS | 98 | — | |||||
| OTHER ASSETS, net | 296 | 139 | |||||
| TOTAL ASSETS | $ | 173,083 | $ | 162,555 | |||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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| As of December 31, | |||||||
| 2017 | 2016 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| CURRENT LIABILITIES: | |||||||
| Accounts payable | $ | 19,826 | $ | 13,260 | |||
| Accrued expenses | 6,884 | 4,173 | |||||
| Accrued anti-dumping duties | 3,609 | 6,550 | |||||
| Dividend payable | 295 | 290 | |||||
| Accrued income taxes | 2,939 | 548 | |||||
| Accrued employee compensation and benefits | 6,186 | 3,307 | |||||
| Customer advances | 5,888 | 2,619 | |||||
| Total current liabilities | 45,627 | 30,747 | |||||
| LINES OF CREDIT | 17,984 | 15,732 | |||||
| DEFERRED TAX LIABILITIES | 573 | 1,448 | |||||
| OTHER LONG-TERM LIABILITIES | 3,119 | 2,219 | |||||
| Total liabilities | 67,303 | 50,146 | |||||
| COMMITMENTS AND CONTINGENT LIABILITIES (See Note 8) | — | — | |||||
| STOCKHOLDERS’ EQUITY: | |||||||
| Preferred stock, $0.05 par value; 4,000,000 shares authorized; no issued and outstanding shares | — | — | |||||
| Common stock, $0.05 par value; 25,000,000 shares authorized; 14,782,018 and 14,496,359 shares outstanding, respectively | 741 | 725 | |||||
| Additional paid-in capital | 76,146 | 73,116 | |||||
| Retained earnings | 60,074 | 80,107 | |||||
| Other cumulative comprehensive loss | (30,819 | ) | (41,514 | ) | |||
| Treasury stock, at cost; 39,783 and 2,378 shares, respectively | (362 | ) | (25 | ) | |||
| Total stockholders’ equity | 105,780 | 112,409 | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 173,083 | $ | 162,555 | |||
DMC GLOBAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Share and Per Share Data)
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Net sales | $ | 654,086 | $ | 260,115 | $ | 229,161 | |||||||||||
| Cost of products sold | 468,639 | 200,635 | 172,308 | ||||||||||||||
| Gross profit | 185,447 | 59,480 | 56,853 | ||||||||||||||
| Costs and expenses: | |||||||||||||||||
| General and administrative expenses | 76,119 | 36,276 | 29,150 | ||||||||||||||
| Selling and distribution expenses | 42,230 | 22,507 | 23,863 | ||||||||||||||
| Amortization of purchased intangible assets | 36,926 | 1,391 | 1,449 | ||||||||||||||
| Acquisition expenses | — | 1,581 | — | ||||||||||||||
| Restructuring expenses, net and asset impairments | 182 | 127 | 3,387 | ||||||||||||||
| Total costs and expenses | 155,457 | 61,882 | 57,849 | ||||||||||||||
| Operating income (loss) | 29,990 | (2,402) | (996) | ||||||||||||||
| Other (expense) income: | |||||||||||||||||
| Other (expense) income, net | (594) | 152 | (233) | ||||||||||||||
| Interest expense, net | (6,187) | (304) | (731) | ||||||||||||||
| Income (loss) before income taxes | 23,209 | (2,554) | (1,960) | ||||||||||||||
| Income tax provision (benefit) | 9,376 | (1,544) | (548) | ||||||||||||||
| Net income (loss) | 13,833 | (1,010) | (1,412) | ||||||||||||||
| Less: Net income (loss) attributable to redeemable noncontrolling interest | 1,586 | (808) | — | ||||||||||||||
| Net income (loss) attributable to DMC Global Inc. stockholders | $ | 12,247 | $ | (202) | $ | (1,412) | |||||||||||
| Net income (loss) per share attributable to DMC Global Inc. stockholders: | |||||||||||||||||
| Basic | $ | 0.72 | $ | (0.26) | $ | (0.10) | |||||||||||
| Diluted | $ | 0.72 | $ | (0.26) | $ | (0.10) | |||||||||||
| Weighted-average shares outstanding: | |||||||||||||||||
| Basic | 19,360,677 | 17,610,711 | 14,790,296 | ||||||||||||||
| Diluted | 19,369,165 | 17,610,711 | 14,790,296 | ||||||||||||||
| Dividends declared per common share | $ | — | $ | — | $ | 0.125 | |||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| NET SALES | $ | 192,803 | $ | 158,575 | $ | 166,918 | |||||
| COST OF PRODUCTS SOLD | 133,412 | 119,895 | 131,294 | ||||||||
| Gross profit | 59,391 | 38,680 | 35,624 | ||||||||
| COSTS AND EXPENSES: | |||||||||||
| General and administrative expenses | 27,135 | 22,115 | 20,998 | ||||||||
| Selling and distribution expenses | 18,589 | 16,626 | 18,745 | ||||||||
| Amortization of purchased intangible assets | 4,060 | 4,011 | 4,033 | ||||||||
| Restructuring expenses | 4,283 | 1,202 | 4,063 | ||||||||
| Goodwill impairment charge | 17,584 | — | 11,464 | ||||||||
| Total costs and expenses | 71,651 | 43,954 | 59,303 | ||||||||
| OPERATING LOSS | (12,260 | ) | (5,274 | ) | (23,679 | ) | |||||
| OTHER INCOME (EXPENSE): | |||||||||||
| Other income (expense), net | (1,376 | ) | 633 | (669 | ) | ||||||
| Interest expense | (1,651 | ) | (1,070 | ) | (1,745 | ) | |||||
| Interest income | 3 | 3 | 4 | ||||||||
| LOSS BEFORE INCOME TAXES | (15,284 | ) | (5,708 | ) | (26,089 | ) | |||||
| INCOME TAX PROVISION (BENEFIT) | 3,569 | 797 | (2,118 | ) | |||||||
| NET LOSS | (18,853 | ) | (6,505 | ) | (23,971 | ) | |||||
| LOSS PER SHARE | |||||||||||
| Basic | $ | (1.31 | ) | $ | (0.46 | ) | $ | (1.72 | ) | ||
| Diluted | $ | (1.31 | ) | $ | (0.46 | ) | $ | (1.72 | ) | ||
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: | |||||||||||
| Basic | 14,346,851 | 14,126,108 | 13,935,097 | ||||||||
| Diluted | 14,346,851 | 14,126,108 | 13,935,097 | ||||||||
| DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.08 | $ | 0.08 | $ | 0.14 | |||||
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Net income (loss) attributable to DMC Global Inc. | $ | 12,247 | $ | (202) | $ | (1,412) | |||||||||||
| Adjustment of redeemable noncontrolling interest | 1,937 | (4,424) | — | ||||||||||||||
| Net income (loss) attributable to DMC Global Inc. common shareholders after adjustment of redeemable noncontrolling interest | $ | 14,184 | $ | (4,626) | $ | (1,412) | |||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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DMC GLOBAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in Thousands)
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Net loss | $ | (18,853 | ) | $ | (6,505 | ) | $ | (23,971 | ) | ||
| Change in cumulative foreign currency translation adjustment | 10,695 | (1,049 | ) | (13,869 | ) | ||||||
| Total comprehensive loss | $ | (8,158 | ) | $ | (7,554 | ) | $ | (37,840 | ) | ||
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Net income (loss) | $ | 13,833 | $ | (1,010) | $ | (1,412) | |||||||||||
| Change in cumulative foreign currency translation adjustment | (2,220) | (3,576) | 2,841 | ||||||||||||||
| Other comprehensive income (loss) | $ | 11,613 | $ | (4,586) | $ | 1,429 | |||||||||||
| Less: comprehensive income (loss) attributable to redeemable noncontrolling interest | 1,586 | (808) | — | ||||||||||||||
| Comprehensive income (loss) attributable to DMC Global Inc. stockholders | $ | 10,027 | $ | (3,778) | $ | 1,429 | |||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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DMC GLOBAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
(Amounts in Thousands, Except Share Data)
| Other | Treasury Stock, at cost, and | Total | Redeemable | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Additional | Cumulative | Company Stock Held for | DMC Global Inc. | Non- | |||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Retained | Comprehensive | Deferred Compensation, at par | stockholders’ | Controlling | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Loss | Shares | Amount | equity | Interest | |||||||||||||||||||||||||||||||||||||||||||||
| Balances, December 31, 2019 | 15,117,207 | $ | 756 | $ | 85,639 | $ | 119,002 | $ | (25,803) | (464,532) | $ | (7,453) | $ | 172,141 | $ | — | |||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (1,412) | — | — | — | (1,412) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | — | — | — | — | 2,841 | — | — | 2,841 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued in connection with at-the-market offering program | 608,360 | 30 | 25,710 | — | — | — | — | 25,740 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued in connection with stock compensation plans | 191,992 | 10 | 421 | — | — | — | — | 431 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Adjustment for cumulative effect from change in accounting principle (ASU 2016-13) | — | — | — | (50) | — | — | — | (50) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 5,608 | — | — | — | — | 5,608 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | (1,883) | — | — | — | (1,883) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock activity | — | — | 9 | — | — | (63,742) | (6,511) | (6,502) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Balances, December 31, 2020 | 15,917,559 | $ | 796 | $ | 117,387 | $ | 115,657 | $ | (22,962) | (528,274) | $ | (13,964) | $ | 196,914 | $ | — | |||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (202) | — | — | — | (202) | (808) | ||||||||||||||||||||||||||||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | — | — | — | — | (3,576) | — | — | (3,576) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued in connection with equity offering | 2,875,000 | 144 | 123,317 | — | — | — | — | 123,461 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued in connection with at-the-market offering program | 397,820 | 20 | 25,242 | — | — | — | — | 25,262 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued in connection with stock compensation plans | 178,992 | 9 | 425 | — | — | — | — | 434 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued in connection with acquisition | 551,458 | 27 | 21,689 | — | — | — | — | 21,716 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Acquired redeemable noncontrolling interest | — | — | — | — | — | — | — | — | 193,580 | ||||||||||||||||||||||||||||||||||||||||||||
| Adjustment of redeemable noncontrolling interest | — | — | — | (4,424) | — | — | — | (4,424) | 4,424 | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 6,455 | — | — | — | — | 6,455 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock activity | — | — | — | — | — | (42,141) | (5,515) | (5,515) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Balances, December 31, 2021 | 19,920,829 | $ | 996 | $ | 294,515 | $ | 111,031 | $ | (26,538) | (570,415) | $ | (19,479) | $ | 360,525 | $ | 197,196 | |||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 12,247 | — | — | — | 12,247 | 1,586 | ||||||||||||||||||||||||||||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | — | — | — | — | (2,220) | — | — | (2,220) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued in connection with stock compensation plans | 219,825 | 11 | 190 | — | — | — | — | 201 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Consideration adjustments related to redeemable noncontrolling interest (Note 3) | — | — | — | — | — | — | — | — | 2,095 | ||||||||||||||||||||||||||||||||||||||||||||
| Distribution to redeemable noncontrolling interest holder | — | — | — | — | — | — | — | — | (12,300) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 9,188 | — | — | — | — | 9,188 | 882 | ||||||||||||||||||||||||||||||||||||||||||||
| Adjustment of redeemable noncontrolling interest | — | — | — | 1,937 | — | — | — | 1,937 | (1,937) | ||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock activity | — | — | — | — | — | (35,308) | (1,231) | (1,231) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Balances, December 31, 2022 | 20,140,654 | $ | 1,007 | $ | 303,893 | $ | 125,215 | $ | (28,758) | (605,723) | $ | (20,710) | $ | 380,647 | $ | 187,522 | |||||||||||||||||||||||||||||||||||||
| DMC Global Inc. Stockholders | |||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Additional | Cumulative | ||||||||||||||||||||||||||||
| Common Stock | Paid-In | Retained | Comprehensive | Treasury Stock | |||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Loss | Shares | Amount | Total | ||||||||||||||||||||||
| Balances, December 31, 2014 | 13,997,076 | $ | 700 | $ | 67,088 | $ | 113,723 | $ | (26,596 | ) | — | $ | — | $ | 154,915 | ||||||||||||||
| Net loss | — | — | — | (23,971 | ) | — | — | — | (23,971 | ) | |||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | — | — | — | — | (13,869 | ) | — | — | (13,869 | ) | |||||||||||||||||||
| Shares issued in connection with stock compensation plans | 215,039 | 11 | 261 | — | — | — | — | 272 | |||||||||||||||||||||
| Tax impact of stock-based compensation | — | — | (303 | ) | — | — | — | — | (303 | ) | |||||||||||||||||||
| Stock-based compensation | — | — | 3,362 | — | — | — | — | 3,362 | |||||||||||||||||||||
| Dividends declared | — | — | — | (1,985 | ) | — | — | — | (1,985 | ) | |||||||||||||||||||
| Balances, December 31, 2015 | 14,212,115 | $ | 711 | $ | 70,408 | $ | 87,767 | $ | (40,465 | ) | — | $ | — | $ | 118,421 | ||||||||||||||
| Net loss | — | — | — | (6,505 | ) | — | — | — | (6,505 | ) | |||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | — | — | — | — | (1,049 | ) | — | — | (1,049 | ) | |||||||||||||||||||
| Shares issued in connection with stock compensation plans | 286,622 | 14 | 308 | — | — | — | — | 322 | |||||||||||||||||||||
| Stock-based compensation | — | — | 2,400 | — | — | — | — | 2,400 | |||||||||||||||||||||
| Dividends declared | — | — | — | (1,155 | ) | — | — | — | (1,155 | ) | |||||||||||||||||||
| Treasury stock purchases | — | — | — | — | — | (2,378 | ) | (25 | ) | (25 | ) | ||||||||||||||||||
| Balances, December 31, 2016 | 14,498,737 | $ | 725 | $ | 73,116 | $ | 80,107 | $ | (41,514 | ) | (2,378 | ) | $ | (25 | ) | $ | 112,409 | ||||||||||||
| Net loss | — | — | — | (18,853 | ) | — | — | — | (18,853 | ) | |||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | — | — | — | — | 10,695 | — | — | 10,695 | |||||||||||||||||||||
| Shares issued in connection with stock compensation plans | 323,064 | 16 | 280 | — | — | — | — | 296 | |||||||||||||||||||||
| Stock-based compensation | — | — | 2,750 | — | — | — | — | 2,750 | |||||||||||||||||||||
| Dividends declared | — | — | — | (1,180 | ) | — | — | — | (1,180 | ) | |||||||||||||||||||
| Treasury stock purchases | — | — | — | — | — | (37,405 | ) | (337 | ) | (337 | ) | ||||||||||||||||||
| Balances, December 31, 2017 | 14,821,801 | $ | 741 | $ | 76,146 | $ | 60,074 | $ | (30,819 | ) | (39,783 | ) | $ | (362 | ) | $ | 105,780 | ||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
64
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Cash flows provided by (used in) operating activities: | |||||||||||||||||
| Net income (loss) | $ | 13,833 | $ | (1,010) | $ | (1,412) | |||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||||||||
| Depreciation | 14,281 | 11,303 | 9,632 | ||||||||||||||
| Amortization of purchased intangible assets | 36,926 | 1,391 | 1,449 | ||||||||||||||
| Amortization of deferred debt issuance costs | 553 | 248 | 207 | ||||||||||||||
| Amortization of acquisition-related inventory valuation step-up | 430 | — | — | ||||||||||||||
| Stock-based compensation | 10,058 | 6,574 | 5,675 | ||||||||||||||
| Deferred income taxes | (599) | (1,846) | (2,313) | ||||||||||||||
| Restructuring expenses, net and asset impairments | 182 | 127 | 3,387 | ||||||||||||||
| Other | 1,344 | (204) | 247 | ||||||||||||||
| Change in: | |||||||||||||||||
| Accounts receivable, net | (23,108) | (9,769) | 30,227 | ||||||||||||||
| Inventories | (33,766) | (12,440) | 2,992 | ||||||||||||||
| Prepaid expenses and other | 9,118 | (19,413) | 675 | ||||||||||||||
| Accounts payable | 7,086 | 13,584 | (14,772) | ||||||||||||||
| Contract liabilities | 11,183 | 1,613 | 1,985 | ||||||||||||||
| Accrued expenses and other liabilities | (2,585) | (2,970) | (7,617) | ||||||||||||||
| Net cash provided by (used in) operating activities | 44,936 | (12,812) | 30,362 | ||||||||||||||
| Cash flows used in investing activities: | |||||||||||||||||
| Acquisition of business, net of cash acquired | — | (261,000) | — | ||||||||||||||
| Consideration adjustments related to acquisition of business (Note 3) | (2,404) | — | — | ||||||||||||||
| Promissory note to redeemable noncontrolling interest holder | — | (24,902) | — | ||||||||||||||
| Investment in marketable securities | — | (123,984) | (25,740) | ||||||||||||||
| Proceeds from maturities of marketable securities | — | 4,799 | — | ||||||||||||||
| Proceeds from sales of marketable securities | — | 144,921 | — | ||||||||||||||
| Acquisition of property, plant and equipment | (18,584) | (8,659) | (13,853) | ||||||||||||||
| Proceeds on sale of property, plant and equipment | 62 | 1,019 | 36 | ||||||||||||||
| Net cash used in investing activities | (20,926) | (267,806) | (39,557) | ||||||||||||||
| Cash flows (used in) provided by financing activities: | |||||||||||||||||
| Borrowings on term loan | — | 150,000 | — | ||||||||||||||
| Repayments on term loan | (15,000) | — | — | ||||||||||||||
| Repayments on capital expenditure facility | — | (11,750) | (3,125) | ||||||||||||||
| Payments of debt issuance costs | (180) | (2,337) | (90) | ||||||||||||||
| Distributions to redeemable noncontrolling interest holder | (12,300) | — | — | ||||||||||||||
| Net proceeds from issuance of common stock through equity offering | — | 123,461 | — | ||||||||||||||
| Net proceeds from issuance of common stock through at-the-market offering program | — | 25,262 | 25,740 | ||||||||||||||
| Net proceeds from issuance of common stock to employees and directors | 201 | 434 | 431 | ||||||||||||||
| Treasury stock purchases | (1,231) | (2,485) | (1,890) | ||||||||||||||
| Payment of dividends | — | — | (3,749) | ||||||||||||||
| Net cash (used in) provided by financing activities | (28,510) | 282,585 | 17,317 | ||||||||||||||
| Effects of exchange rates on cash | (1,166) | 656 | (288) | ||||||||||||||
| Net (decrease) increase in cash and cash equivalents | (5,666) | 2,623 | 7,834 | ||||||||||||||
| Cash and cash equivalents, beginning of the period | 30,810 | 28,187 | 20,353 | ||||||||||||||
| Cash and cash equivalents, end of the period | $ | 25,144 | $ | 30,810 | $ | 28,187 | |||||||||||
65
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net loss | $ | (18,853 | ) | $ | (6,505 | ) | $ | (23,971 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
| Depreciation (including capital lease amortization) | 6,506 | 6,756 | 6,244 | ||||||||
| Amortization of purchased intangible assets | 4,060 | 4,011 | 4,033 | ||||||||
| Amortization and write-off of deferred debt issuance costs | 390 | 156 | 752 | ||||||||
| Stock-based compensation | 2,975 | 2,326 | 2,826 | ||||||||
| Deferred income tax benefit | (556 | ) | (284 | ) | (725 | ) | |||||
| (Gain) loss on disposal of property, plant and equipment | 125 | 455 | (23 | ) | |||||||
| Restructuring and asset impairment expenses | 4,283 | 1,202 | 4,063 | ||||||||
| Goodwill impairment charge | 17,584 | — | 11,464 | ||||||||
| Transition tax liability | 946 | — | — | ||||||||
| Other | — | — | 23 | ||||||||
| Change in: | |||||||||||
| Accounts receivable, net | (14,425 | ) | 2,679 | (2,394 | ) | ||||||
| Inventory, net | (5,294 | ) | 6,829 | 1,386 | |||||||
| Prepaid expenses and other | (440 | ) | 1,002 | (3,570 | ) | ||||||
| Accounts payable | 5,216 | (1,338 | ) | 758 | |||||||
| Customer advances | 3,207 | 223 | (857 | ) | |||||||
| Accrued anti-dumping duties | (2,941 | ) | 176 | 6,374 | |||||||
| Accrued expenses and other liabilities | 3,964 | 510 | (4,765 | ) | |||||||
| Net cash provided by operating activities | 6,747 | 18,198 | 1,618 | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Acquisition of property, plant and equipment | (6,186 | ) | (5,719 | ) | (5,433 | ) | |||||
| Proceeds on sale of property, plant and equipment | 2 | 26 | — | ||||||||
| Change in other non-current assets | — | (9 | ) | 107 | |||||||
| Net cash used in investing activities | (6,184 | ) | (5,702 | ) | (5,326 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Borrowings (payments) on lines of credit | 2,000 | (11,250 | ) | 5,003 | |||||||
| Payment on capital lease obligations | — | (4 | ) | (5 | ) | ||||||
| Payment of dividends | (1,174 | ) | (1,150 | ) | (2,260 | ) | |||||
| Payment of deferred debt issuance costs | (138 | ) | — | (1,222 | ) | ||||||
| Net proceeds from issuance of common stock to employees and directors | 296 | 322 | 272 | ||||||||
| Treasury stock purchases | (337 | ) | (25 | ) | — | ||||||
| Net cash provided by (used in) financing activities | 647 | (12,107 | ) | 1,788 | |||||||
| EFFECTS OF EXCHANGE RATES ON CASH | 1,354 | (261 | ) | (1,189 | ) | ||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 2,564 | 128 | (3,109 | ) | |||||||
| CASH AND CASH EQUIVALENTS, beginning of the period | 6,419 | 6,291 | 9,400 | ||||||||
| CASH AND CASH EQUIVALENTS, end of the period | 8,983 | 6,419 | 6,291 | ||||||||
| Supplemental cash flow information: | |||||||||||||||||
| Non-cash consideration for acquisition of business, net of cash acquired | $ | 740 | $ | 21,716 | $ | — | |||||||||||
| Non-cash lease liabilities arising from obtaining right-of-use assets | 3,978 | 41,219 | — | ||||||||||||||
| Cash paid during the period for - | |||||||||||||||||
| Interest | 6,236 | 51 | 402 | ||||||||||||||
| Income taxes, net | 2,860 | 7,533 | 497 | ||||||||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |||||||||||
| Cash paid during the period for - | |||||||||||
| Interest | $ | 1,150 | $ | 575 | $ | 624 | |||||
| Income taxes, net | $ | 124 | $ | 354 | $ | 2,491 | |||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
66
DMC GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 20172022
(Amounts in Thousands, Except Share and Per Share Data)
1. ORGANIZATION AND BUSINESS
DMC Global Inc. (“DMC”, "we", "us", "our", or the "Company") was incorporated in the state of Colorado in 1971 and reincorporated in the state of Delaware in 1997. DMC is headquartered in Boulder,Broomfield, Colorado and has manufacturing facilities in the United States Germany, France, and Russia. CustomersGermany. DMC’s portfolio currently consists of three businesses: Arcadia, DynaEnergetics, and NobelClad, which are located throughoutthree innovative, asset-light manufacturing businesses that provide differentiated products and engineered solutions to niche segments of the world.construction, energy, industrial processing and transportation markets. In December 2021, DMC currently operates twoacquired a controlling interest in Arcadia. Arcadia supplies architectural building products, including exterior and interior framing systems, curtain walls, windows, doors, and interior partitions to the commercial construction market; and also supplies customized windows and doors to the high-end residential construction market. DynaEnergetics designs, manufactures and distributes highly engineered products utilized by the global oil and gas industry principally for the perforation of oil and gas wells. NobelClad is a leader in the production of explosion-welded clad metal plates for use in the construction of corrosion resistant industrial processing equipment, as well as specialized transition joints for use in construction of commuter rail cars, ships, and liquified natural gas (LNG) processing equipment. Refer to Note 3 “Business Combination” for additional discussion of the Arcadia acquisition.
Our businesses follow a clear and compelling strategy and are led by excellent leadership teams that we support with business segments: NobelCladresources and DynaEnergetics. NobelClad metallurgically joins or alters metals by using explosives. DynaEnergetics manufactures,capital. We take a focused approach to capital allocation and work with our business leaders to identify investments that will advance their operating strategies and generate attractive returns. Our approach helps our portfolio companies grow their core businesses, launch new initiatives, upgrade technologies and systems, expand their markets and sells oilfield perforating equipment and explosives.improve their competitive positions. Our culture is to foster local innovation versus centralized control. DMC trades on Nasdaq under the symbol “BOOM.”
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The Company's consolidated financial statements ("Consolidated Financial StatementsStatements") include the accounts of DMC 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.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Business Combination
The results of a business acquired in a business combination are included in the Company’s financial statements from the date of acquisition. Acquisition-related transaction costs are expensed in the period in which the costs are incurred. The Company allocates purchase price to the identifiable assets and liabilities of the acquired business at their acquisition date fair values. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill.
Determining the fair value of assets acquired and liabilities assumed requires management to make significant judgments and estimates, including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies.
Foreign Operations and Foreign Exchange Rate Risk
The functional currency forof our foreign operations is the applicable local currency for each affiliate company. Assets and liabilities of foreign subsidiaries for which the functional currency is the local currency are translated at exchange rates in effect
67
at period-end, and the statementsStatements of operationsOperations are translated at the average exchange rates during the period. Exchange rate fluctuations on translating foreign currency financial statements into U.S. dollars that result in unrealized gains or losses are referred to as translation adjustments. Cumulative translationTranslation adjustments are recorded as a separate component of stockholders’ equity and are included in other"Other cumulative comprehensive loss." Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses, which are reflected in other"Other (expense) income, (expense)net" as unrealized, (basedbased on period-end translations)exchange rates, or realized, upon settlement of the transactions.transaction. Cash flows from our operations in foreign countries are translated at actual exchange rates when known, or at the average rate for the period. As a result, amounts related to assets and liabilities reported in the Consolidated Statements of Cash Flows will not agree to changes in the corresponding balances in the Consolidated Balance Sheets. The effects of exchange rate changes on cash balances held in foreign currencies are reported as a separate line item below cash flows from financing activities.
Cash and Cash Equivalents
For purposes of the Consolidated Financial Statements, we consider highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Marketable Securities
In periods where we hold excess cash and cash equivalents, we invest in highly rated securities, with the primary objectives of preserving principal, providing access to liquidity to fund the ongoing operations and strategic needs of the Company and its subsidiaries, and achieving a yield that is commensurate with low risk and highly liquid securities. The Company’s investment policy generally limits the amount of credit exposure to any one issuer.
During the year ended December 31, 2022, we did not hold marketable securities. During the year ended December 31, 2021, we held investments in U.S. Treasuries as well as A-1 or P-1 rated commercial paper. Our marketable securities were converted to cash and used in part to fund the acquisition of Arcadia; refer to Note 3 “Business Combination” for additional discussion of the Arcadia acquisition. The Company’s investments in U.S. Treasury securities are measured at fair value with gains and losses recognized in the Consolidated Statement of Operations within “Other (expense) income, net."
Accounts Receivable
During the year ended December 31, 2022, our expected loss rate reflects uncertainties in market conditions present in our businesses, including supply chain disruptions, rising interest rates, as well as global geopolitical and economic instability. In addition, we reviewed receivables outstanding, including aged balances, and in circumstances where we are aware of a specific customer’s inability to meetsmeet its financial obligation to us, we recordrecorded a specific
allowance for doubtful accounts (with the offsetting expense charged to selling and distribution expenses in our Consolidated Statements of Operations)credit losses against the amounts due, reducing the net recognized receivable to the amount we estimate will be collected.
| 2017 | 2016 | 2015 | |||||||||
| (Decrease) increase in inventory reserve | $ | (1,158 | ) | $ | 544 | $ | 565 | ||||
| Expense recorded | (22 | ) | 1,738 | 1,952 | |||||||
68
| 2017 | 2016 | ||||||
| Raw materials | $ | 16,255 | $ | 10,926 | |||
| Work-in-process | 6,120 | 5,417 | |||||
| Finished goods | 13,049 | 12,146 | |||||
| Supplies | 318 | 344 | |||||
| $ | 35,742 | $ | 28,833 | ||||
| Arcadia | DynaEnergetics | NobelClad | DMC Global Inc. | ||||||||||||||||||||
| Allowance for doubtful accounts, December 31, 2021 | $ | — | $ | 2,758 | $ | 15 | $ | 2,773 | |||||||||||||||
| Current period provision for expected credit losses | 797 | 169 | 62 | 1,028 | |||||||||||||||||||
| Write-offs charged against the allowance | (321) | (2,245) | — | (2,566) | |||||||||||||||||||
| Recoveries of amounts previously reserved | (232) | (76) | — | (308) | |||||||||||||||||||
| Impacts of foreign currency exchange rates and other | — | (3) | 1 | (2) | |||||||||||||||||||
| Allowance for doubtful accounts, December 31, 2022 | $ | 244 | $ | 603 | $ | 78 | $ | 925 | |||||||||||||||
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, except for assets acquired in acquisitions which are recorded at fair value. Additions and improvements are capitalized. Maintenance and repairs are charged to operations as costs are incurred. Depreciation is computed using the straight-line method over the estimated useful life of the related asset (except leasehold improvements which are depreciated over the shorter of their estimated useful life or the lease term) as follows:
| Buildings and improvements | |||||
| Manufacturing equipment and tooling | 3-15 years | ||||
| Furniture, fixtures, and computer equipment | 3-10 years | ||||
| Other | 3-10 years | ||||
Gross property, plant and equipment consistconsisted of the following at December 31, 2017 and 2016:31:
| 2022 | 2021 | ||||||||||
| Land | $ | 4,215 | $ | 5,725 | |||||||
| Buildings and improvements | 63,184 | 58,536 | |||||||||
| Manufacturing equipment and tooling | 85,477 | 79,855 | |||||||||
| Furniture, fixtures and computer equipment | 24,800 | 18,910 | |||||||||
| Other | 15,775 | 14,926 | |||||||||
| Construction in process | 17,826 | 13,070 | |||||||||
| Total gross property, plant and equipment | $ | 211,277 | $ | 191,022 | |||||||
| 2017 | 2016 | ||||||
| Land | $ | 3,560 | $ | 3,654 | |||
| Buildings and improvements | 46,270 | 41,952 | |||||
| Manufacturing equipment and tooling | 46,814 | 42,851 | |||||
| Furniture, fixtures and computer equipment | 17,266 | 15,997 | |||||
| Other | 3,296 | 4,152 | |||||
| Construction in process | 4,133 | 821 | |||||
| $ | 121,339 | $ | 109,427 | ||||
Asset Impairments
Finite-lived assets are tested for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. We compare the expected undiscounted future operating cash flows associated with these finite-lived assets to their respective carrying values to determine if they are fully recoverable when indicators of impairment are present. If the expected future operating cash flows of an asset group are not sufficient to recover the related carrying value, we estimate the fair value of the asset.asset group. Impairment is recognized when the carrying amount of the asset group is not recoverable and when carrying value exceeds the estimated fair value. Long-lived assets to be disposed of, if any, are reported at the lower of carrying amount or fair value less cost to sell.
For the years ended December 31, 2022 and December 31, 2021, no impairments were recorded. For the year ended December 31, 2017,2020, we recognized an impairment charge of approximately $1,241$1,361 (recorded in restructuring expenses) associated with restructuring our NobelClad operations“Restructuring expenses, net and asset impairments”). The COVID-19 pandemic-related collapse in France, relatedoil and gas demand led to a downturn in well completions and a corresponding downturn in demand for DynaEnergetics’ products. As a result, DynaEnergetics recorded asset impairment charges of $1,181 on certain manufacturing assets usedthat will no longer be utilized in the explosion cladding process.production at its Blum, Texas and Troisdorf, Germany facilities. The fair value of applicable Frenchthe assets upon which an impairment charge was takenrecorded was primarily based upon the utilizationCompany's estimates as we negotiated disposal of a third-party appraiser. For the year ended December 31, 2015, we recognized an impairment charge of approximately $205 (recorded in restructuring expenses) associated with restructuring our DynaEnergetics operations in Canada and Colombia. The impairment charges were primarily associated with assets used in the perforating gun manufacturing facility and distribution center in Edmonton, Alberta and the distribution centers in Colombia, all of which were closed under the restructuring program (See Note 9 "Restructuring").assets.
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Goodwill
Goodwill represents the excess ofamount by which the purchase price exceeds the fair value of identifiable tangible and intangible assets and liabilities acquired in a business combination. Goodwill acquired in a business combination over the fair value of the net tangible and intangible assets acquired. The carrying value of goodwilldetermined to have an indefinite useful life is periodically reviewednot amortized, but instead is tested for impairment (at a minimum annually) andat least annually during the fourth quarter or whenever events or changes in circumstances indicate that the carrying amountvalue might not be fully recoverable. For goodwill, impairment is assessed at the reporting unit level. A reporting unit is defined as an operating segment or a component of an operating segment to the extent discrete financial information is available that is reviewed by segment management. The Company's reporting units are each of the asset maythree operating segments: Arcadia, DynaEnergetics, and NobelClad.
To test goodwill for impairment, we first perform a qualitative assessment to determine whether it is more likely than not be recoverable. Examples of such events or changes in circumstances, many of which are subjective in nature, include significant negative industry or economic trends, significant changes inthat the manner of our use of the acquired assets or our strategy, a significant decrease in the marketfair value of a reporting unit is less than its carrying value. For the assets,qualitative assessment, we consider macroeconomic and a significant change in legalmarket conditions, cost factors, or infinancial performance and other relevant entity-specific events. If we conclude that it is more likely than not that the business climate that could affect thefair value of the assets.
The assumptions used in a quantitative assessment require significant judgment, which include assumptions about future economic conditions and needed to be
As of capital.
| Goodwill balance at December 31, 2015 | $ | 17,190 | |
| Adjustment due to recognition of tax benefit of tax amortization of certain goodwill | (507 | ) | |
| Adjustment due to exchange rate differences | (586 | ) | |
| Goodwill balance at December 31, 2016 | 16,097 | ||
| Adjustment due to recognition of tax benefit of tax amortization of certain goodwill | (450 | ) | |
| Adjustment due to exchange rate differences | 1,937 | ||
| Goodwill impairment | (17,584 | ) | |
| Goodwill balance at December 31, 2017 | $ | — | |
| Gross | Accumulated Amortization | Net | |||||||||
| Core technology | $ | 20,027 | $ | (10,333 | ) | $ | 9,694 | ||||
| Customer relationships | 39,244 | (36,077 | ) | 3,167 | |||||||
| Trademarks / Trade names | 2,149 | (2,149 | ) | — | |||||||
| Total intangible assets | $ | 61,420 | $ | (48,559 | ) | $ | 12,861 | ||||
| Gross | Accumulated Amortization | Net | |||||||||
| Core technology | $ | 17,751 | $ | (8,165 | ) | $ | 9,586 | ||||
| Customer relationships | 36,088 | (29,965 | ) | 6,123 | |||||||
| Trademarks / Trade names | 1,903 | (1,785 | ) | 118 | |||||||
| Total intangible assets | $ | 55,742 | $ | (39,915 | ) | $ | 15,827 | ||||
| For the years ended December 31 - | |||
| 2018 | $ | 2,984 | |
| 2019 | 1,669 | ||
| 2020 | 1,669 | ||
| 2021 | 1,304 | ||
| 2022 | 1,067 | ||
| Thereafter | 4,168 | ||
| $ | 12,861 | ||
On occasion, we require customers to make advance payments prior to the shipment of their orders in order to help finance our inventory investment on large orders or to keep customers’ credit limits at acceptable levels. AsContract liabilities were as follows at December 31:
| 2022 | 2021 | ||||||||||
| Arcadia | $ | 27,634 | $ | 14,697 | |||||||
| DynaEnergetics | 785 | 474 | |||||||||
| NobelClad | 3,661 | 5,881 | |||||||||
| Total | $ | 32,080 | $ | 21,052 | |||||||
We generally expect to recognize the revenue associated with contract liabilities over a time period no longer than one year, but unforeseen circumstances can cause delays in shipments associated with contract liabilities, including supply chain delays and disruptions as well as adequacy of December 31, 2017labor supplies at our facilities and 2016 customer advances totaled $5,888 and $2,619, respectively, and originated from several customers.customers' facilities.
Revenue Recognition
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Our rights to payments for goods transferred to customers within our DynaEnergetics and NobelClad business segments arise when control is transferred at a point in time and not on any other criteria. Our rights to payments for goods transferred to customers within our Arcadia business segment also generally arise when control is transferred at a point in time; however, at times, control of certain customized, project-based products passes to the customer over time. Payment terms and conditions vary by contract, although terms generally include a requirement of payment within 30 to 90 days across all of our segments. 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. Refer to Note 11 “Business Segments” for disaggregated revenue disclosures.
Arcadia
Customers agree to terms and conditions at the time of initiating an order. A significant portion of transactions contain standard architectural building materials that are not made-to-order, which include standard storefronts and entrances, windows, curtain walls, doors and interior partitions. In instances where multiple products are included within an order, each product represents a separate performance obligation given that: (1) the customer can benefit from each product on a standalone basis and (2) each product is distinct within the context of the contract.
The standard will be effective fortransaction price is readily determinable and fixed at the Company on January 1, 2018. The standard can be adopted using either of two methods: (1) retrospective applicationtime the transaction is entered into with the customer. Arcadia is entitled to each prior reporting period presented withproduct’s transaction price upon the option to elect certain practical expedients, as defined within the standard ("full retrospective") or (2) retrospective application with the cumulative effect of adoption recognized at the date of initial application and providing certain additional disclosures, as defined within the standard ("modified retrospective"). The Company will adopt the standard using the modified retrospective approach.
For contracts fromthat contain only one performance obligation, the NobelClad and DynaEnergetics segmentstotal transaction price is allocated to the sole performance obligation. For contracts which contain multiple distinct performance obligations, judgment is required to determine the technical accounting conclusionsstandalone selling price (“SSP”) for each performance obligation. However, such judgment is largely mitigated given that standard architectural building materials purchased are generally shipped at the same time. In instances where products purchased are not shipped at the same time, Arcadia uses the contractually stated price to determine SSP as each performance obligation's price has been approved by the customer and approximates the impactprice sold separately.
At times, Arcadia will also contract with customers to supply customized architectural building materials based on design specifications, measurements, finishes, framing materials, and other options selected by the customer at the time an order is initiated. For these contracts, which are significantly less frequent in both volume and financial statement magnitude, Arcadia has an enforceable right to payment from its customers at the time an order is received and accepted for all manufacturing efforts expended on behalf of its customers. Due to the customized nature of these products, the Company has concluded that the substantial portion of the new revenue standard. In our NobelClad business, contracts are often for unique projects, butrelated goods produced have no alternative use, and therefore control of these products passes to the vast majority of contracts contain standard terms and conditions. In our DynaEnergetics business, we sell a range of products to a wide variety of customers, but the contracts also often contain similar terms and conditions.customer over time. We have reviewed NobelClad and DynaEnergetics revenue contracts and have concluded that applyingrecognizing revenue utilizing an over-time output method based upon units delivered reasonably depicts the new standard will not have a material impact on our financial statements. The impact to our financial statements is not material because the analysisfulfillment of our performance obligations under our contracts and the value received by the customer based upon our performance to date. This conclusion is further supported by the frequency of shipments in fulfilling these contracts. We have elected not to disclose our unsatisfied performance obligations as of December 31, 2022 under the new revenue recognition standard supportsshort-term contract exemption as we expect such performance obligations will be satisfied within the recognitionnext 12 months following the end of the reporting period.
Billings for customized architectural building materials occur at times upon delivery, but also can occur via pre-established billing schedules agreed upon at the commencement of the contract. Therefore, we frequently generate contract liabilities in instances when we have billed the customer in excess of revenue consistent with our current approach. Going forward, revenue from our contracts will continuerecognized for units delivered.
DynaEnergetics
Customers agree to be recognizedterms and conditions at the invoicetime of initiating an order. Transactions contain standard products, which may include perforating system components, such as detonating cord, or systems and associated hardware, including Factory-Assembled, Performance-AssuredTM DynaStage® perforating systems. In instances where multiple products are included within an order, each product represents a separate performance obligation given that: (1) the customer can benefit from each product on a standalone basis and (2) each product is distinct within the context of the contract. However, judgment is significantly mitigated given that products purchased are generally shipped at the same time.
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The transaction price is readily determinable and fixed at the time the transaction is entered into with the customer. DynaEnergetics is entitled to each product’s transaction price upon deliverythe customer obtaining control of the item. Such control occurs as of a point in time, which is generally based upon relevant International Commercial Terms (“Incoterms") as it relates to product ownership and legal title being transferred. Upon fulfillment of applicable Incoterms, DynaEnergetics has performed its contractual requirements such that it has a present right to payment, and the customer becausefrom that is when ourpoint forward bears all risks and rewards of ownership. In addition, at this date, the customer has the ability to direct the use of, or restrict access to, the asset. No payment discounts, rebates, refunds, or any other forms of variable consideration are included within contracts. DynaEnergetics also does not provide service-type warranties either via written agreement or customary business practice, nor does it allow customer returns without its prior approval.
NobelClad
Customers agree to terms and conditions at the time of initiating an order. The significant majority of transactions contain a single performance obligation - the delivery of a clad metal product. In instances where multiple products are included within an order, each product represents a separate performance obligation given that: (1) the customer can benefit from each product on a standalone basis and (2) each product is satisfied.distinct within the context of the contract. However, judgment is significantly mitigated given that products purchased are generally shipped at the same time.
The transaction price is readily determinable and fixed at the time the transaction is entered into with the customer. NobelClad is entitled to each product’s transaction price upon the customer obtaining control of the item. Such control occurs as of a point in time, which is generally based upon relevant Incoterms as it relates to product ownership and legal title being transferred. Upon fulfillment of applicable Incoterms, NobelClad has performed its contractual requirements such that it has a present right to payment, and the customer from that point forward bears all risks and rewards of ownership. In addition, at this date, the customer has the ability to direct the use of, or restrict access to, the asset. No payment discounts, rebates, refunds, or any other forms of variable consideration are included within NobelClad contracts. NobelClad also does not provide service-type warranties either via written agreement or customary business practice, nor does it allow customer returns.
Research and Development
Research and development costs include expenses associated with developing new products and processes as well as improvements to current manufacturing processes. Research and development costs are included in our cost of products soldwere $6,781, $7,240, and are as follows$7,910 for the years ended December 31, 2017, 20162022, 2021 and 2015:2020, respectively.
| 2017 | 2016 | 2015 | |||||||||
| DynaEnergetics research and development costs | $ | 4,335 | $ | 3,990 | $ | 2,357 | |||||
| NobelClad research and development costs | 833 | 609 | 685 | ||||||||
| Total research and development costs | $ | 5,168 | $ | 4,599 | $ | 3,042 | |||||
| 2017 | 2016 | 2015 | |||||||||
| Numerator: | |||||||||||
| Net loss | $ | (18,853 | ) | $ | (6,505 | ) | $ | (23,971 | ) | ||
| Less income allocated to RSAs | — | — | — | ||||||||
| Net loss allocated to common stock for EPS calculation | $ | (18,853 | ) | $ | (6,505 | ) | $ | (23,971 | ) | ||
| Denominator: | |||||||||||
| Weighted average common shares outstanding - basic | 14,346,851 | 14,126,108 | 13,935,097 | ||||||||
| Dilutive stock-based compensation plans | — | — | — | ||||||||
| Weighted average common shares outstanding - diluted | 14,346,851 | 14,126,108 | 13,935,097 | ||||||||
| Net loss allocated to common stock for EPS calculation: | |||||||||||
| Basic | $ | (1.31 | ) | $ | (0.46 | ) | $ | (1.72 | ) | ||
| Diluted | $ | (1.31 | ) | $ | (0.46 | ) | $ | (1.72 | ) | ||
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, i
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 the tax position 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
In periods with net income, 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 of net income as they receive non-forfeitable rights to
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dividends as common stock. For the year ended December 31, 2022, we were in a net income position, and all potential dilutive shares were included in the determination of diluted EPS. Given we were in a net loss position for the years ended December 31, 2021 and 2020, all potentially dilutive shares were anti-dilutive and were therefore excluded from the determination of diluted EPS.
Basic EPS is calculated by dividing net income (loss) attributable to the Company's stockholders after adjustment of redeemable noncontrolling interest by the weighted‑average number of common shares outstanding during the period. Net income (loss) available to common shareholders of the Company includes any adjustment to the redeemable noncontrolling interest value as of the end of the period presented. Refer to Note 3 "Business Combination" for further discussion of the Tax Cutscalculation of the adjustment of the redeemable noncontrolling interest. Diluted EPS adjusts basic EPS for the effects of restricted stock awards, restricted stock units, performance share units and Jobs Actother potentially dilutive financial instruments (dilutive securities), only in the periods in which such effect is dilutive. The effect of 2017.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. For the applicable period presented, diluted EPS using the two-class method was more dilutive than the treasury stock method; as such, only the two-class method has been included below.
EPS was calculated as follows for the years ended December 31:
| 2022 | 2021 | 2020 | |||||||||||||||
| Net income (loss) attributable to DMC Global Inc. stockholders, as reported | $ | 12,247 | $ | (202) | $ | (1,412) | |||||||||||
| Adjustment of redeemable noncontrolling interest | 1,937 | (4,424) | — | ||||||||||||||
| Less: Undistributed net income available to participating securities | (198) | — | — | ||||||||||||||
| Numerator for basic net income (loss) per share: | 13,986 | (4,626) | (1,412) | ||||||||||||||
| Add: Undistributed net income allocated to participating securities | 198 | — | — | ||||||||||||||
| Less: Undistributed net income reallocated to participating securities | (198) | — | — | ||||||||||||||
| Numerator for diluted net income (loss) per share: | 13,986 | (4,626) | (1,412) | ||||||||||||||
| Denominator: | |||||||||||||||||
| Weighted average shares outstanding for basic net income (loss) per share | 19,360,677 | 17,610,711 | 14,790,296 | ||||||||||||||
Effect of dilutive securities (1) | 8,488 | — | — | ||||||||||||||
| Weighted average shares outstanding for diluted net income (loss) per share | 19,369,165 | 17,610,711 | 14,790,296 | ||||||||||||||
| Net income (loss) per share attributable to DMC Global Inc. stockholders: | |||||||||||||||||
| Basic | $ | 0.72 | $ | (0.26) | $ | (0.10) | |||||||||||
| Diluted | $ | 0.72 | $ | (0.26) | $ | (0.10) | |||||||||||
(1) For the year ended December 31, 2022, 93,060 shares were excluded as their effect would have been anti-dilutive.
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.
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•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, accounts payable, and accrued expenses approximate their fair value. The carrying value of our revolving loans and term loan under our credit facility, when outstanding, also approximate their fair value because of the variable interest rate associated with those instruments, which reset each month at market interest rates. All of these items 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 instruments as Level 2 in the fair value hierarchy. Money market funds and mutual funds of $8,444 and $9,083 as of December 31, 2022 and 2021, respectively, held to satisfy future deferred compensation obligations are valued based upon the market values of underlying securities and are classified as Level 2 assets in the fair value hierarchy.
We did not hold any Level 3 assets or liabilities as of December 31, 2022 or December 31, 2021. However, the fair value measurement of certain assets and liabilities acquired as part of the Arcadia acquisition were based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value measurement hierarchy; refer to Note 3 for description of the valuation approaches to measure these assets and liabilities.
Restructuring
Restructuring expenses are incurred from time to time to improve operational efficiency across our businesses. During the years ended December 31, 2022 and 2021, we recorded total restructuring expenses of $182 and $127, respectively. These expenses were primarily related to employee severance. During the year ended December 31, 2020, we incurred charges across each of our businesses in relation to the COVID-19 pandemic. Total restructuring charges incurred are as follows and were reported in the "Restructuring expenses, net and asset impairments" line item in our Consolidated Statements of Operations for the year ended December 31, 2020:
| 2020 | |||||||||||||||||||||||||||||||||||
| Severance | Asset Impairment | Contract Termination Costs | Equipment Moving Costs | Other Exit Costs | Total | ||||||||||||||||||||||||||||||
| DynaEnergetics | $ | 936 | $ | 1,181 | $ | 19 | $ | 126 | $ | 660 | $ | 2,922 | |||||||||||||||||||||||
| NobelClad | 140 | 180 | — | — | 26 | 346 | |||||||||||||||||||||||||||||
| Corporate | 119 | — | — | — | — | 119 | |||||||||||||||||||||||||||||
| Total | $ | 1,195 | $ | 1,361 | $ | 19 | $ | 126 | $ | 686 | $ | 3,387 | |||||||||||||||||||||||
Current year changes to the restructuring liability within accrued expenses are summarized below. The remaining liability is primarily related to previously accrued severance associated with NobelClad restructuring activities that occurred in 2019.
| December 31, 2021 | Expense | Payments | Currency and Other Adjustments | December 31, 2022 | |||||||||||||||||||||||||
| Severance | $ | 829 | $ | 147 | $ | (29) | $ | (51) | $ | 896 | |||||||||||||||||||
| Other exit costs | — | 35 | (21) | — | 14 | ||||||||||||||||||||||||
| Total | $ | 829 | $ | 182 | $ | (50) | $ | (51) | $ | 910 | |||||||||||||||||||
Concentration of Credit Risk and Off Balance Sheet Arrangements
Financial instruments, which potentially subject us to a concentration of credit risk, consist primarily of cash, cash equivalents, and accounts receivable. Generally, we do not require collateral to secure receivables. At December 31, 2017,2022, we had no financial instruments with off-balance sheet risk of accounting losses.
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Other Cumulative Comprehensive Loss
Other cumulative comprehensive loss as of December 31, 2017, 2016,2022, 2021, and 20152020 consisted entirely of currency translation adjustments, including those in intra-entity foreign currency transactions that are classified as long-term investments.
Recent Accounting Pronouncements
3. BUSINESS COMBINATION
On December 16, 2021, the Company entered into an ASU which amendsequity purchase agreement with Arcadia, Inc., a California corporation, the existing accounting standardsshareholders of Arcadia, Inc. and certain other parties (the “Equity Purchase Agreement”). On December 23, 2021, pursuant to the Equity Purchase Agreement, the Company completed the acquisition of a 60% controlling interest in Arcadia Products, LLC, a Colorado limited liability company resulting from the conversion of Arcadia, Inc. (collectively, “Arcadia”) for lease accounting,closing consideration of $261,000 in cash (excluding $7,654 in acquired cash) and 551,458 shares of its common stock, par value $0.05 per share. A portion of the cash consideration was placed into escrow and was subject to certain post-closing adjustments.
DMC acquired Arcadia as part of its strategy of building a diversified portfolio of industry-leading businesses with differentiated products and services. Arcadia supplies architectural building products, including requiring lesseesexterior and interior framing systems, curtain walls, windows, doors, and interior partitions to recognize most leases onthe commercial construction market; and also supplies customized windows and doors to the high-end residential construction market.
The acquisition was funded by the Company through cash and marketable securities, equity, and debt financing. Assets acquired and liabilities assumed have been recorded at their Balance Sheetsfair values. Certain fair values were determined by management using the assistance of third-party valuation specialists. The valuation methods used to determine the fair value of intangible assets included the income approach—excess earnings method for customer relationships and making targeted changes to lessor accounting. This ASU will be effective beginningcustomer backlog and the income approach—relief from royalty method for the trade name acquired. A number of assumptions and estimates were involved in the first quarterapplication of 2019. Early adoption is permitted. these valuation methods, including forecasts of revenues, costs of revenues, operating expenses, tax rates, capital expenditures, customer attrition, discount rates and working capital changes.
The following table sets forth the preliminary and final components of the fair value of total consideration transferred and net assets acquired. Measurement period adjustments were recognized in the period in which the adjustments were determined and calculated as if the accounting had been completed as of the acquisition date.
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| Preliminary | Measurement Period Adjustments | Final | |||||||||||||||
| December 23, 2021 | December 31, 2022 | ||||||||||||||||
Cash, including cash acquired(1) | $ | 268,654 | $ | 2,034 | $ | 270,688 | |||||||||||
| Equity | 21,716 | — | 21,716 | ||||||||||||||
Future contractual consideration to be paid(2) | — | 1,110 | 1,110 | ||||||||||||||
| Total fair value of consideration transferred | 290,370 | 3,144 | 293,514 | ||||||||||||||
| Assets acquired: | |||||||||||||||||
| Cash and cash equivalents | $ | 7,654 | $ | — | $ | 7,654 | |||||||||||
| Accounts receivable | 31,456 | — | 31,456 | ||||||||||||||
| Inventories | 60,503 | — | 60,503 | ||||||||||||||
| Prepaid expenses and other | 2,438 | (187) | 2,251 | ||||||||||||||
Property, plant and equipment(3) | 17,323 | 4,770 | 22,093 | ||||||||||||||
Goodwill(4) | 141,266 | 459 | 141,725 | ||||||||||||||
Intangible assets(5) | 254,500 | — | 254,500 | ||||||||||||||
Other long-term assets(6) | 122 | 41,858 | 41,980 | ||||||||||||||
| Total assets acquired | 515,262 | 46,900 | 562,162 | ||||||||||||||
| Liabilities assumed: | |||||||||||||||||
| Accounts payable | 8,792 | — | 8,792 | ||||||||||||||
Other current liabilities(6) | 22,520 | 4,785 | 27,305 | ||||||||||||||
Other long-term liabilities(6) | — | 36,876 | 36,876 | ||||||||||||||
| Total liabilities assumed | 31,312 | 41,661 | 72,973 | ||||||||||||||
Redeemable noncontrolling interest(7) | 193,580 | 2,095 | 195,675 | ||||||||||||||
| Total assets acquired and liabilities assumed | $ | 290,370 | $ | 3,144 | $ | 293,514 | |||||||||||
(1) Cash sources of funding included $150,000 in new leases standard requiresterm loan debt and $118,654 of cash and marketable securities on hand. During the year ended December 31, 2022, working capital estimates at the time of acquisition were finalized. In April 2022, $640 was returned to the Company from the funds previously placed into escrow. In August 2022, the Company paid the prior shareholders of Arcadia $2,674 in additional consideration to compensate for certain tax impacts of the transaction, as provided in the Equity Purchase Agreement.
(2) Represents additional cash consideration to be paid over a modified retrospective transition approach for all leases existing at, or entered into after,three-year time period from the date of initial application,acquisition to certain prior shareholders.
(3) Property, plant and equipment primarily consists of the following:
| Land | $ | 1,500 | |||
| Buildings and improvements | 6,451 | ||||
| Manufacturing equipment and tooling | 12,634 | ||||
| Furniture, fixtures, and computer equipment | 211 | ||||
| Other | 1,297 | ||||
| Total property, plant and equipment | $ | 22,093 | |||
The useful lives of property, plant and equipment are consistent with an optionthe Company's accounting policies.
(4) Amounts recorded for goodwill resulting in a tax basis step-up are generally expected to use certain transition relief. be deductible for tax purposes. Tax deductible goodwill is estimated to be $82,847.
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(5) Intangible assets consist of $210,500 of customer relationships, $22,000 of trade name, and $22,000 of customer backlog after measurement period adjustments. During the year ended December 31, 2022, the Company reclassified $500 from customer relationships to customer backlog due to changes in purchase price allocation estimates. A useful life of 15 years was assigned to both customer relationships and trade name, while a useful life of 7 months was assigned to customer backlog, and as such, customer backlog was fully amortized as of December 31, 2022.
(6) The measurement period adjustments within "Other long-term assets", "Other current liabilities", and "Other long-term liabilities" primarily relate to $41,219 of right-of-use assets, $4,343 of current lease liabilities, and $36,876 of long-term lease liabilities, respectively. These balances were recorded within the Consolidated Balance Sheet as of December 31, 2021; however, they were excluded from the preliminary purchase price footnote given their immaterial impact on total net assets acquired.
(7) Redeemable noncontrolling interest represents 40% of the total fair value of Arcadia upon acquisition, inclusive of measurement period adjustments.
The results of Arcadia's operations have been included in DMC's Consolidated Financial Statements since December 23, 2021, the date of the acquisition. For the year ended December 31, 2021, Arcadia had no sales activity due to a planned shutdown between the acquisition date and December 31, 2021, but it did incur total expenses of $2,020, including manufacturing expenses recorded within cost of products sold of $1,044, selling, general and administrative expenses of $613, and amortization of purchased intangible assets of $363.
Acquisition expenses were $1,581 for the year-ended December 31, 2021 and primarily included legal, accounting, and due diligence fees.
Redeemable noncontrolling interest
The limited liability company operating agreement for Arcadia (the “Operating Agreement”) contains a right for the Company to purchase the remaining interest in Arcadia from the minority interest holder on or after the third anniversary of the acquisition closing date (“Call Option”). Similarly, the minority interest holder of Arcadia has the right to sell its remaining interest in Arcadia to the Company on or after the third anniversary of the acquisition closing date (“Put Option”). Both the Call Option and Put Option enable the respective holder to exercise their rights based upon a predefined calculation as included within the Operating Agreement.
The Company initially accounted for the noncontrolling interest at its acquisition date fair value. We determined that neither the Call Option nor the Put Option meet the definition of a derivative under ASC 815 Derivatives and Hedging as the Operating Agreement does not allow for contractual net settlement, the options cannot be settled outside the Operating Agreement through a market mechanism, and the underlying shares are deemed illiquid as they are not publicly traded and thus not considered readily convertible to cash. Additionally, the settlement price for both options is currently evaluatingbased upon a predefined calculation tied to adjusted earnings rather than a fixed price, and the formula is based upon a multiple of Arcadia’s average adjusted earnings over a three-year period. As such, we have concluded that the Call Option and Put Option are embedded within the noncontrolling interest and therefore do not represent freestanding instruments.
Given that the noncontrolling interest is subject to possible redemption with redemption rights that are not entirely within the control of the Company, we have concluded that the noncontrolling interest should be accounted for in accordance with ASC 480 Distinguishing Liabilities from Equity ("ASC 480"). The noncontrolling interest is also probable of redemption, as the only criteria for the security to become redeemable is the passage of time. As such, the redeemable noncontrolling interest is classified in temporary equity, separate from the stockholders’ equity section, in the Consolidated Balance Sheets.
At each balance sheet date subsequent to acquisition, two separate calculations must be performed to determine the value of the redeemable noncontrolling interest. First, the redeemable noncontrolling interest must be accounted for in accordance with ASC 810 Consolidation (“ASC 810”) whereby income (loss) and cash distributions attributable to the redeemable noncontrolling interest holder are ascribed. After this occurs, applicable provisions of ASC 480 must be considered to determine whether any further adjustment is necessary to increase the carrying value of the redeemable noncontrolling interest. An adjustment would only be necessary if the estimated settlement amount of the redeemable noncontrolling interest, per the terms of the Operating Agreement, exceeds the carrying value calculated in accordance with ASC 810. If such adjustment is required, the impact is immediately recorded to retained earnings and therefore does not impact the Consolidated Statements of adoptingOperations or Comprehensive Income (Loss).
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As of December 31, 2022, the new leases standard onredeemable noncontrolling interest is $187,522 in comparison to our Consolidated Financial Statements.
Promissory Note
In order to equalize after-tax consideration to the redeemable noncontrolling interest holder relative to an alternative transaction structure, immediately following the closing of the acquisition, the Company loaned approximately $24,902 to the redeemable noncontrolling interest holder. The loan was evidenced by an unsecured promissory note, and deferred incomethe loan will be repaid out of proceeds from the sale of the redeemable noncontrolling interest holder’s interests in Arcadia, whether received upon exercise of the Put Option, the Call Option or upon sales to third parties permitted under the terms of the Operating Agreement. The loan must be repaid in full by December 16, 2051 and is recorded within "Other assets" in the Consolidated Balance Sheets.
Unaudited Pro Forma Financial Information
Pro forma financial information is presented for informational purposes and is not intended to represent or be indicative of the actual results of operations of the combined business that would have been reported had the acquisition of Arcadia been completed at the beginning of fiscal year 2020, nor is it representative of future operating results of the Company.
ASC 805 requires pro forma adjustments to reflect the effects of fair value adjustments, transaction costs, capital structure changes, the tax effects of intra-entity transferssuch adjustments, and also requires nonrecurring adjustments to be prepared and presented. The adjustments to the historical Arcadia financial results include removal of nonrecurring transaction costs. Results were further adjusted to reflect a full period of (a) fair value adjustments related to inventory and incremental intangible asset amortization, (b) interest expense with the higher principal and interest rates associated with the Company's term loan incurred to finance, in part, the acquisition of Arcadia, (c) the effects of integration costs on the results of Arcadia's operations, and (d) the effects of adjustments on income taxes.
The following unaudited pro forma combined financial information presents combined results of the Company and Arcadia as if the acquisition of Arcadia had occurred at the beginning of fiscal year 2020:
| Year Ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net sales | $ | 500,460 | $ | 475,125 | |||||||
| Net income attributable to DMC Global Inc. stockholders | $ | 17,541 | $ | 8,324 | |||||||
4. 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 write down 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 as of December 31, 2022:
| Arcadia | DynaEnergetics | NobelClad | DMC Global Inc. | ||||||||||||||||||||
| Raw materials | $ | 11,099 | $ | 23,701 | $ | 8,926 | $ | 43,726 | |||||||||||||||
| Work-in-process | 11,468 | 21,198 | 7,587 | 40,253 | |||||||||||||||||||
| Finished goods | 55,074 | 16,802 | 456 | 72,332 | |||||||||||||||||||
| Supplies | — | — | 279 | 279 | |||||||||||||||||||
| Total inventories | $ | 77,641 | $ | 61,701 | $ | 17,248 | $ | 156,590 | |||||||||||||||
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Inventories consisted of the following as of December 31, 2021:
| Arcadia | DynaEnergetics | NobelClad | DMC Global Inc. | ||||||||||||||||||||
| Raw materials | $ | 12,168 | $ | 15,209 | $ | 7,655 | $ | 35,032 | |||||||||||||||
| Work-in-process | 3,987 | 13,672 | 10,257 | 27,916 | |||||||||||||||||||
| Finished goods | 44,348 | 14,998 | 1,651 | 60,997 | |||||||||||||||||||
| Supplies | — | — | 269 | 269 | |||||||||||||||||||
| Total inventories | $ | 60,503 | $ | 43,879 | $ | 19,832 | $ | 124,214 | |||||||||||||||
5. PURCHASED INTANGIBLE ASSETS
Our purchased intangible assets include finite-lived core technology, customer backlog, customer relationships, and trademarks/trade names. Finite-lived intangible assets are amortized over the estimated useful life of the related assets. Customer relationships are amortized using an accelerated amortization method. The remaining weighted average amortization period of all purchased intangible assets is approximately 14 years in total. The remaining weighted average amortization periods of the purchased intangible assets by asset category are as follows:
| Core technology | 2 years | ||||
| Customer relationships | 14 years | ||||
| Trademarks / Trade names | 14 years | ||||
Our purchased intangible assets consisted of the following as of December 31, 2022:
| Gross | Accumulated Amortization | Net | |||||||||||||||
| Core technology | $ | 14,063 | $ | (14,031) | $ | 32 | |||||||||||
| Customer backlog | 22,000 | (22,000) | — | ||||||||||||||
| Customer relationships | 244,650 | (47,254) | 197,396 | ||||||||||||||
| Trademarks / Trade names | 23,914 | (3,417) | 20,497 | ||||||||||||||
| Total intangible assets | $ | 304,627 | $ | (86,702) | $ | 217,925 | |||||||||||
Our purchased intangible assets consisted of the following as of December 31, 2021:
| Gross | Accumulated Amortization | Net | |||||||||||||||
| Core technology | $ | 15,647 | $ | (14,209) | $ | 1,438 | |||||||||||
| Customer backlog | 21,500 | — | 21,500 | ||||||||||||||
| Customer relationships | 246,718 | $ | (36,047) | 210,671 | |||||||||||||
| Trademarks / Trade names | 24,037 | $ | (2,070) | 21,967 | |||||||||||||
| Total intangible assets | $ | 307,902 | $ | (52,326) | $ | 255,576 | |||||||||||
The change in the gross value of our purchased intangible assets at December 31, 2022 from December 31, 2021 was primarily due to foreign currency translation. Additionally, there was an adjustment due to recognition of tax benefit from tax amortization previously applied to certain goodwill related to the DynaEnergetics and NobelClad reporting units. After the goodwill associated with each reporting unit was impaired at December 31, 2015 and September 30, 2017, respectively, the tax amortization reduces other than inventory. This ASUintangible assets' net value related to the historical acquisition.
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Expected future amortization of purchased intangible assets is effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. as follows:
| For the years ended December 31: | |||||
| 2023 | $ | 22,666 | |||
| 2024 | 21,155 | ||||
| 2025 | 19,053 | ||||
| 2026 | 17,426 | ||||
| 2027 | 15,806 | ||||
| Thereafter | 121,819 | ||||
| $ | 217,925 | ||||
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. If a lease does not provide a discount rate and the implicit rate cannot be readily determined, an incremental borrowing rate is used to determine the present value of future lease payments. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term within the Consolidated Statement of Operations. Lease and non-lease components within the Company’s lease agreements are accounted for together. Variable lease payments are recognized in the processperiod in which the obligation is incurred. The Company has no leases in which the Company is the lessor.
Nearly all of evaluating the impactCompany’s leasing arrangements are classified as operating leases. ROU asset and lease liability balances were as follows for the periods presented:
| December 31, 2022 | December 31, 2021 | ||||||||||
| ROU asset | $ | 48,470 | $ | 52,219 | |||||||
| Current lease liability | 7,041 | 6,126 | |||||||||
| Long-term lease liability | 43,001 | 47,000 | |||||||||
| Total lease liability | $ | 50,042 | $ | 53,126 | |||||||
The ROU asset is reported in “Other assets” while the current lease liability is reported in “Other current liabilities” and the long-term lease liability is reported in “Other long-term liabilities” in the Company’s Consolidated Balance Sheets. Cash paid for operating lease liabilities are recorded as operating cash outflows in the Company’s Consolidated Statements of adopting this standard on itsCash Flows.
Arcadia leases certain office, manufacturing, distribution and warehouse facilities from entities affiliated with the redeemable noncontrolling interest holder and former president of Arcadia. There were eight related party leases in effect as of December 31, 2022, with expiration dates ranging from calendar years 2025 to 2031. As of December 31, 2022, the total ROU asset and related lease liability recognized for related party leases was $28,902 and $29,399, respectively. During the year ended December 31, 2022, related party lease expense was $4,625.
Total operating lease expense included in the Company’s Consolidated Financial Statements.Statements of Operations was $11,883, $4,453 and $3,950 for the years ended December 31, 2022, 2021, and 2020, respectively. Short term and variable lease costs were not significant for any period presented.
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 assets and lease liability due to the likelihood of renewal.
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The following table summarizes the weighted average lease terms and discount rates for operating lease liabilities:
| December 31, 2022 | December 31, 2021 | ||||||||||
| Weighted average remaining lease term | 7.9 years | 9.0 years | |||||||||
| Weighted average discount rate | 4.3 | % | 4.4 | % | |||||||
The following table represents maturities of operating lease liabilities as of December 31, 2022:
| Due within 1 year | $ | 7,041 | |||||||||
| Due after 1 year through 2 years | 8,548 | ||||||||||
| Due after 2 years through 3 years | 8,431 | ||||||||||
| Due after 3 years through 4 years | 7,264 | ||||||||||
| Due after 4 years through 5 years | 6,690 | ||||||||||
| Thereafter | 21,481 | ||||||||||
| Total future minimum lease payments | 59,455 | ||||||||||
| Less imputed interest | (9,413) | ||||||||||
| Total | $ | 50,042 | |||||||||
7. DEBT
| 2017 | 2016 | ||||||
| Syndicated credit agreement: | |||||||
| U.S. Dollar revolving loan | $ | 18,250 | $ | 16,250 | |||
| Euro revolving loan | — | — | |||||
| Commerzbank line of credit | — | — | |||||
| 18,250 | 16,250 | ||||||
| Less current portion | — | — | |||||
| Long-term lines of credit | 18,250 | 16,250 | |||||
| Less: debt issuance costs | 266 | 518 | |||||
| Lines of credit | $ | 17,984 | $ | 15,732 | |||
| 2022 | 2021 | ||||||||||
| Syndicated credit agreement: | |||||||||||
| U.S. Dollar revolving loan | $ | — | $ | — | |||||||
| Term loan | 135,000 | 150,000 | |||||||||
| Commerzbank line of credit | — | — | |||||||||
| Outstanding borrowings | 135,000 | 150,000 | |||||||||
| Less: debt issuance costs | (2,202) | (2,575) | |||||||||
| Total debt | 132,798 | 147,425 | |||||||||
| Less: current portion of long-term debt | (15,000) | (15,000) | |||||||||
| Long-term debt | $ | 117,798 | $ | 132,425 | |||||||
Syndicated Credit Agreement
Borrowings under the credit facility to $65,000 from $90,000$150,000 Term Loan and eliminated the $50,000 termrevolving loan facility, and increased the maximum debt-to-EBITDA leverage ratio until the December 31, 2016 reporting period. On December 30, 2016, we entered into a second amendment which clarified the treatment of cash income tax refunds in the calculation of the debt service coverage ratio and the insurance requirements for the Company.
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 financial ratios.
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The leverage ratio is defined in the credit facility as the ratio of Consolidated Funded Indebtedness (as defined in the credit facility) on the last day of any trailing four quarter period to Consolidated Pro Forma EBITDA (as defined in the credit facility) for such period. The maximum leverage ratio permitted by our credit facility is 3.25 to 1.0 from the quarter ended December 31, 2022 through the quarter ended March 31, 2023, and 3.0 to 1.0 from the quarter ended June 30, 2023 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 (other than those made with respect to preferred stock issued under the Operating Agreement), Consolidated Unfunded Capital Expenditures (as defined in the credit facility), and net cash income taxes to the sum of cash interest expense, any dividends on the preferred stock paid in cash, and scheduled principal payments on funded indebtedness. Under our credit facility, the minimum debt service coverage ratio permitted is 1.35 to 1.0.
As of December 31, 2017,2022, we were in compliance with all financial covenants and other provisions of our debt agreements.
Line of Credit with German Bank
We maintain a line of credit with a German bank with a borrowing capacity of €7,000 for our NobelClad and DynaEnergetics operations in Europe. This line of credit provides a borrowing capacity of 4,000 Euros and is also used to issue bank guarantees to its customers to secure advance payments made by them. As of December 31, 2017,2022 and 2021, we had no outstanding borrowings under this line of credit and bank guarantees of $1,549€2,221 and €2,997, respectively, were secured by the line of credit. The line of credit bears interest at a EURIBOR-based variable rate which at December 31, 20172022 was 3.33%6.76%. The line of credit has open-ended terms and can be canceled by the bank at any time.
Debt Issuance Costs
Included in lines of credit"Long-term debt" are deferred debt issuance costs of $266$2,202 and $518$2,575 as of December 31, 20172022 and 2016,2021, respectively. On March 6, 2017, we amended the credit facility, and we wrote off $261 of previously deferred debt issuance costs, continued capitalization of $229 of deferred debt issuance costs related to the credit agreement prior to amendment, and incurred $138 of additional costs. Remaining deferredDeferred debt issuance costs are being amortized over the remaining term of the amended and restated credit agreementfacility, which expires on FebruaryDecember 23, 2020.2026.
8. STOCKHOLDERS' EQUITY AND EMPLOYEE STOCK PLANS
Employee stock plans
Our stock-based compensation expense results from restricted stock awards (RSAs)("RSAs"), restricted stock units (RSUs)("RSUs"), performance share units (PSUs)("PSUs"), and stock issued under the Employee Stock Purchase Plan. The following table sets forth the total stock-based compensation expense included in the Consolidated Statements of Operations:Operations for the years ended December 31:
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Cost of products sold | $ | 506 | $ | 604 | $ | 652 | ||||||||||||||
| General and administrative expenses | 8,304 | 5,360 | 4,408 | |||||||||||||||||
| Selling and distribution expenses | 1,248 | 610 | 615 | |||||||||||||||||
| Stock-based compensation expense | 10,058 | 6,574 | 5,675 | |||||||||||||||||
| Income tax benefit | (1,716) | (1,342) | (1,313) | |||||||||||||||||
| Stock-based compensation expense, net of income taxes | 8,342 | 5,232 | 4,362 | |||||||||||||||||
| Earnings per share impact | ||||||||||||||||||||
| Basic | $ | 0.43 | $ | 0.30 | $ | 0.29 | ||||||||||||||
| Diluted | $ | 0.43 | $ | 0.30 | $ | 0.29 | ||||||||||||||
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| 2017 | 2016 | 2015 | ||||||||||
| Cost of products sold | $ | 282 | $ | 235 | $ | 243 | ||||||
| General and administrative expenses | 2,337 | 1,755 | 2,240 | |||||||||
| Selling and distribution expenses | 356 | 336 | 343 | |||||||||
| Restructuring expense | — | 74 | 536 | |||||||||
| Stock-based compensation expense before income taxes | 2,975 | 2,400 | 3,362 | |||||||||
| Income tax benefit | — | — | (915 | ) | ||||||||
| Stock-based compensation expense, net of income taxes | 2,975 | 2,400 | 2,447 | |||||||||
| Earnings per share impact | ||||||||||||
| Basic | $ | 0.21 | $ | 0.17 | $ | 0.18 | ||||||
| Diluted | $ | 0.21 | $ | 0.17 | $ | 0.18 | ||||||
On November 4, 2016, our stockholders approved the 2016 Omnibus Incentive Plan (“2016 Plan”). The 2016 Plan provides for the grantgranting of various types of equity-based incentives, including stock options, restricted stock awards, restricted stock units,RSAs, RSUs, stock appreciation rights, performance shares, performance units, other stock-based awards, and cash-based awards. Our stockholders approved a total of 5,000,000 shares available for grant under the 2016 Plan, less the number1,639,881 of awards outstandingRSAs and RSUs previously granted under the 2006 Stock Incentive Plan ("2006 Plan") as of the 2006 Plan's expiration of September 21, 2016. As of the inception of the 2016 Plan on September 21, 2016, which was the expiration date of the 2006 Plan. As of September 21, 2016, we had granted an aggregate of 1,639,8813,360,119 shares of restricted stock awards and restricted stock units under the 2006 Plan, leaving 3,360,119 shareswere available for grant under the 2016 Plan. As of December 31, 2017, we have granted an aggregate of 379,0952022, there are 1,979,627 shares of restricted stock awards and restricted stock units under the 2016 Plan, and 2,981,524 shares are available for future grant.
The fair value of RSAs and RSUs granted to employees and non-employee directors is based on the fair value of DMC’s stock on the grant date. RSAs and RSUs granted to employees and non-employee directors are amortized to compensation expense over the vesting period on a straight-line basis. Our policy is to recognize forfeitures of RSAs and RSUs as they occur.
The fair value of PSUs with target Adjusted EBITDA performance conditions is based on the fair value of DMC’s stock on the grant date, and the value is amortized to compensation expense over the vesting period and is adjusted based on the relativeestimated probable satisfaction of the performance condition to date.at the end of each reporting period. The fair value of PSUs with TSR performance conditions is based on a third-party valuation simulating a range of possible TSR outcomes over the performance period, and the resulting fair value is amortized to
compensation expense over the vesting period based on a straight-line basis. Our policy is to recognize forfeitures of PSUs as they occur.
In December 2022, we recorded a nonrecurring expense of $1,959 associated with the retirement of the former president of Arcadia. Expense recorded includes $859 of accelerated stock-based compensation, with the remainder representing cash compensation to be paid in the future in accordance with the terms of the executive's pre-existing employment agreement.
A summary of the activity of our nonvested shares ofunvested RSAs issued under the 2016 Plan for the year ended December 31, 2017 is as follows:
| 2016 Plan | |||||||||||
| Shares | Weighted Average Grant Date Fair Value | ||||||||||
| Balance at December 31, 2020 | 249,565 | $ | 27.81 | ||||||||
| Granted | 120,872 | 50.48 | |||||||||
| Vested | (140,537) | 26.96 | |||||||||
| Forfeited | (250) | 45.47 | |||||||||
| Balance at December 31, 2021 | 229,650 | $ | 40.26 | ||||||||
| Granted | 196,955 | 26.43 | |||||||||
| Vested | (151,828) | 36.01 | |||||||||
| Forfeited | (1,000) | 29.77 | |||||||||
| Balance at December 31, 2022 | 273,777 | $ | 32.71 | ||||||||
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| Shares | Weighted Average Grant Date Fair Value | ||||||
| Balance at December 31, 2016 | — | $ | — | ||||
| Granted | 260,095 | 15.27 | |||||
| Vested | (4,027 | ) | 13.05 | ||||
| Forfeited | — | — | |||||
| Balance at December 31, 2017 | 256,068 | $ | 15.31 | ||||
A summary of the activity of our nonvested shares of RSAsunvested RSUs issued under the 20062016 Plan for the years ended December 31, 2017, 2016, and 2015 is as follows:
| 2016 Plan | |||||||||||
| Shares | Weighted Average Grant Date Fair Value | ||||||||||
| Balance at December 31, 2020 | 71,440 | $ | 31.65 | ||||||||
| Granted | 12,989 | 67.78 | |||||||||
| Vested | (32,131) | 29.95 | |||||||||
| Forfeited | — | — | |||||||||
| Balance at December 31, 2021 | 52,298 | $ | 41.67 | ||||||||
| Granted | 27,397 | 28.59 | |||||||||
| Vested | (35,101) | 34.29 | |||||||||
| Forfeited | (73) | 25.81 | |||||||||
| Balance at December 31, 2022 | 44,521 | $ | 39.47 | ||||||||
| Shares | Weighted Average Grant Date Fair Value | ||||||
| Balance at December 31, 2014 | 262,720 | $ | 19.55 | ||||
| Granted | 148,972 | 14.65 | |||||
| Vested | (157,673 | ) | 18.81 | ||||
| Forfeited | (12,332 | ) | 18.82 | ||||
| Balance at December 31, 2015 | 241,687 | $ | 19.55 | ||||
| Granted | 228,532 | 8.07 | |||||
| Vested | (144,008 | ) | 15.08 | ||||
| Forfeited | (42,634 | ) | 10.82 | ||||
| Balance at December 31, 2016 | 283,577 | $ | 11.74 | ||||
| Granted | — | — | |||||
| Vested | (130,547 | ) | 12.41 | ||||
| Forfeited | — | — | |||||
| Balance at December 31, 2017 | 153,030 | $ | 11.74 | ||||
A summary of the activity of our nonvested RSUs issued under the 2016 Plan for the year ended December 31, 2017 is as follows:
| Shares | Weighted Average Grant Date Fair Value | ||||||
| Balance at December 31, 2016 | — | $ | — | ||||
| Granted | 73,000 | 15.62 | |||||
| Vested | — | — | |||||
| Forfeited | (500 | ) | 15.60 | ||||
| Balance at December 31, 2017 | 72,500 | $ | 15.62 | ||||
Share Units | Weighted Average Grant Date Fair Value | ||||||
| Balance at December 31, 2014 | 84,566 | $ | 18.33 | ||||
| Granted | 50,167 | 13.90 | |||||
| Vested | (38,405 | ) | 17.58 | ||||
| Forfeited | (9,166 | ) | 14.23 | ||||
| Balance at December 31, 2015 | 87,162 | $ | 18.33 | ||||
| Granted | 48,855 | 6.88 | |||||
| Vested | (40,836 | ) | 16.24 | ||||
| Forfeited | — | — | |||||
| Balance at December 31, 2016 | 95,181 | $ | 16.54 | ||||
| Granted | — | — | |||||
| Vested | (36,450 | ) | 13.30 | ||||
| Forfeited | (333 | ) | 6.22 | ||||
| Balance at December 31, 2017 | 58,398 | $ | 11.71 | ||||
| Shares | Weighted Average Grant Date Fair Value | |||||||||||||
| Balance at December 31, 2020 | 56,110 | $ | 57.63 | |||||||||||
| Granted | 44,861 | 59.65 | ||||||||||||
| Vested | (40,000) | 26.47 | ||||||||||||
| Balance at December 31, 2021 | 60,971 | $ | 79.56 | |||||||||||
| Granted | 84,165 | 31.45 | ||||||||||||
| Vested | (404) | 48.23 | ||||||||||||
| Balance at December 31, 2022 | 144,732 | $ | 51.67 | |||||||||||
| Shares | Weighted Average Grant Date Fair Value | ||||||
| Balance at December 31, 2016 | — | $ | — | ||||
| Granted | 23,000 | 18.18 | |||||
| Vested | — | — | |||||
| Forfeited | — | — | |||||
| Balance at December 31, 2017 | 23,000 | $ | 18.18 | ||||
As of December 31, 2017,2022, total unrecognized stock-based compensation related to unvested awards was as follows:
| Unrecognized stock compensation | Weighted-average recognition period | |||||
| Unvested RSAs | $ | 3,493 | 2.2 years | |||
| Unvested RSUs | 1,281 | 2.0 years | ||||
| Unvested PSUs | 428 | 2.0 years | ||||
| Unrecognized stock compensation | Weighted-average recognition period | |||||||||||||
| Unvested RSAs | $ | 5,275 | 1.4 years | |||||||||||
| Unvested RSUs | $ | 930 | 1.5 years | |||||||||||
| Unvested PSUs | $ | 2,485 | 1.1 years | |||||||||||
Employee Stock Purchase Plan
We have an Employee Stock Purchase Plan (“ESPP”) pursuant to which iswe are authorized to issue up to 850,000 shares of DMC common stock, of which 259,465181,955 shares remain available for future purchase.purchase as of December 31, 2022. The offerings begin on the first day following each previous offering (“Offering Date”) and end six months from the Offering Date (“Purchase Date”). The ESPP provides that full time employees may authorize DMC to withhold up to 15% of their earnings, subject to certain limitations, to be used to purchase common stock of DMC at the lesser of 85% of the fair market value of DMC’s commonthe stock on the Offering Date or the Purchase Date. In connection with the ESPP, 26,519, 45,888,12,975, 12,120, and 33,34618,462 shares of our stock were purchased during the years ended
December 31, 2017, 2016,2022, 2021, and 2015,2020, respectively. Our total stock-based compensation expense for 2017, 2016,2022, 2021, and 20152020 includes $92, $54,$67, $121, and $89$133, respectively, in compensation expense associated with the ESPP.
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Equity Offering
On May 3, 2021, the Company announced a registered public offering (“Offering”) of its stock under an automatic shelf registration statement on Form S-3ASR filed on May 3, 2021. The Company entered into an underwriting agreement with KeyBanc Capital Markets Inc. (“KeyBanc”), as representative of the underwriters (collectively, the “Underwriters”), pursuant to which the Company agreed to sell 2,500,000 shares of its $0.05 par value common stock to the Underwriters. In addition, the Underwriters were granted an option, exercisable within 30 days, to purchase up to an additional 375,000 shares of common stock to cover over-allotments, if any, on the same terms and conditions.
On May 7, 2021, DMC issued a total of 2,875,000 shares of its common stock, which included the exercise of the over-allotment option, at a market price of $45 per share resulting in gross proceeds of $129,375. Net proceeds from the offering were $123,461, after deducting underwriter fees and other expenses of $5,914. The net proceeds from the offering were primarily used in the acquisition of Arcadia. Between the offering date and the acquisition date, we invested the proceeds from the offering in highly liquid marketable securities, including commercial paper and U.S. Treasury securities.
At-the-Market Equity Program
On October 22, 2020, the Company commenced an at-the-market ("ATM") equity program under a shelf registration statement filed on May 12, 2020, which allows it to sell and issue up to $75 million in shares of its common stock from time to time. The Company entered into an Equity Distribution Agreement on October 22, 2020 with KeyBanc relating to the issuance and sale of shares of common stock pursuant to the program. KeyBanc is not required to sell any specific amount of securities but will act as our sales agent using commercially reasonable efforts consistent with its normal trading and sales practices, on mutually agreed terms between KeyBanc and us. KeyBanc is entitled to compensation for shares sold pursuant to the program in an amount up to 1.5% of the gross proceeds of any shares of common stock sold under the Equity Distribution Agreement. The Company may at any time suspend solicitation and offers under the Equity Distribution Agreement, and the Equity Distribution Agreement may be terminated by either KeyBanc or us at any time upon three days' written notice or automatically upon the issuance and sale of all shares subject to the ATM equity program.
During the twelve months ended December 31, 2020, the Company sold 608,360 shares of common stock through its ATM program for gross proceeds of $26,132 at a weighted average price per share of $42.95. Net proceeds from such sales were $25,740, after deducting commissions paid to the sales agents of approximately $392.
During the twelve months ended December 31, 2021, the Company sold 397,820 shares of common stock through its ATM equity program for gross proceeds of $25,647 at a weighted average price per share of $64.47. Net proceeds from such sales were $25,262, after deducting commissions paid to the sales agents of approximately $385.
During the twelve months ended December 31, 2022, the Company did not sell any shares of common stock through its ATM equity program.
Since the inception of the program, the Company has sold 1,006,180 shares of common stock for gross proceeds of $51,779 at a weighted average price per share of $51.46. Total net proceeds from sales through the ATM program have been $51,002. We primarily used the net proceeds from the ATM equity program in the acquisition of Arcadia. Prior to the use of the proceeds in the Arcadia acquisition, a portion of the proceeds from the ATM program were invested in highly liquid marketable securities, including commercial paper and U.S. Treasury securities.
9. EMPLOYEE BENEFIT PLANS
401(k) Plan
We offer a contributory 401(k) plan to our employees.U.S. employees, including Arcadia employees beginning in March 2022. We make matching contributions equal to 100% of each employee’s contribution up to 3% of qualified compensation and 50% of the next 2% of qualified compensation contributed by each employee. Total DMC contributions were $511, $455,$1,772, $1,057, and $526$1,069 for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively.
Foreign Subsidiary Defined Benefit and Defined Contribution Plans
We have defined benefit pension plans at certain foreign subsidiaries for which we have recorded an unfunded pension obligation of $1,374$1,352 and $1,197$2,018 as of December 31, 20172022 and 2016,2021, respectively, which is included in other"Other long-term liabilities
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liabilities" in the Consolidated Balance Sheets. All necessaryAnnual adjustments to the obligation are based upon actuarial calculations and are recorded directly towithin "General and administrative expenses" in the Consolidated Statements of Operations. We recognized net adjustmentsincome of $10, $235$536 and $(16)$222 for the years ended December 31, 2017, 20162022 and 2015, respectively.2021, respectively, and expense of $122 for the year ended December 31, 2020.
During the fourth quarter of 2020, a new defined contribution pension plan went into effect for employees at certain foreign subsidiaries, which replaced the defined benefit plan. Under the new plan, pension benefits will be financed both through contributions by the Company and employees. The Company contributes between 1.5% and 4.5% of the employee's salary annually. During the years ended December 31, 2022, 2021 and 2020, the Company contributed $261, $282 and $323, respectively, to the defined contribution plan. Past contributions into the defined benefit plan were unchanged by the new defined contribution plan.
Deferred Compensation Plan
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.
Deferred compensation obligations that will be settled in cash are accounted for on an accrual basis in accordance with the terms of the Plan. These obligations are adjusted based on changes in value of the underlying investment options chosen by Plan participants. Deferred compensation obligations 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.
The balances related to the deferred compensation plan are as follows for the years ended December 31:
| Consolidated Balance Sheet location | 2022 | 2021 | |||||||||||||||
| Deferred compensation assets | Other assets | $ | 13,566 | $ | 13,812 | ||||||||||||
| Deferred compensation obligations | Other long-term liabilities | $ | 15,292 | $ | 15,944 | ||||||||||||
10. INCOME TAXES
The domestic and foreign components of income (loss) before taxes for our operations consist of the following for the years ended December 31, 2017, 2016 and 2015 are summarized below:
| 2017 | 2016 | 2015 | ||||||||||
| Domestic | $ | (5,942 | ) | $ | (4,346 | ) | $ | (16,167 | ) | |||
| Foreign | (9,342 | ) | (1,362 | ) | (9,922 | ) | ||||||
| Total loss before income taxes | $ | (15,284 | ) | $ | (5,708 | ) | $ | (26,089 | ) | |||
| 2022 | 2021 | 2020 | |||||||||||||||
| Domestic | $ | (302) | $ | (9,970) | $ | (7,103) | |||||||||||
| Foreign | 23,511 | 7,416 | 5,143 | ||||||||||||||
| Total income (loss) before income taxes | $ | 23,209 | $ | (2,554) | $ | (1,960) | |||||||||||
The components of the provision (benefit) for income taxes consist of the following for the years ended December 31, 2017, 2016 and 2015 are as follows:31:
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| 2022 | 2021 | 2020 | |||||||||||||||
| Current – Federal | $ | 2,288 | $ | (707) | $ | 162 | |||||||||||
| Current – State | 927 | 209 | 196 | ||||||||||||||
| Current – Foreign | 6,760 | 800 | 1,407 | ||||||||||||||
| Current income tax expense | 9,975 | 302 | 1,765 | ||||||||||||||
| Deferred – Federal | (1,024) | (1,386) | (1,997) | ||||||||||||||
| Deferred – State | (175) | (996) | 156 | ||||||||||||||
| Deferred -– Foreign | 600 | 536 | (472) | ||||||||||||||
| Deferred income tax benefit | (599) | (1,846) | (2,313) | ||||||||||||||
| Income tax provision (benefit) | $ | 9,376 | $ | (1,544) | $ | (548) | |||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Current - Federal | $ | 946 | $ | (888 | ) | $ | (3,005 | ) | ||||
| Current - State | 91 | 55 | 55 | |||||||||
| Current - Foreign | 3,088 | 1,914 | 1,557 | |||||||||
| Current income tax expense (benefit) | 4,125 | 1,081 | (1,393 | ) | ||||||||
| Deferred - Federal | (393 | ) | — | 1,149 | ||||||||
| Deferred - State | (5 | ) | — | 217 | ||||||||
| Deferred - Foreign | (158 | ) | (284 | ) | (2,091 | ) | ||||||
| Deferred income tax benefit | (556 | ) | (284 | ) | (725 | ) | ||||||
| Income tax provision (benefit) | $ | 3,569 | $ | 797 | $ | (2,118 | ) | |||||
Our deferred tax assets and liabilities at December 31, 2017 and 2016 consist of the following:following at December 31:
| 2022 | 2021 | ||||||||||
| Deferred tax assets: | |||||||||||
| Net operating loss carryforward | $ | 6,565 | $ | 7,388 | |||||||
| Inventory differences | 965 | 805 | |||||||||
| Equity compensation | 1,850 | 1,661 | |||||||||
| Investment in joint venture | 1,658 | 187 | |||||||||
| Restructuring | 201 | 196 | |||||||||
| Purchased intangible assets and goodwill | 527 | 759 | |||||||||
| Accrued employee compensation and benefits | 4,144 | 4,113 | |||||||||
| Lease liabilities | 2,880 | 2,795 | |||||||||
| Other, net | 786 | 826 | |||||||||
| Gross deferred tax assets | 19,576 | 18,730 | |||||||||
| Less valuation allowances | (6,277) | (6,640) | |||||||||
| Total deferred tax assets | 13,299 | 12,090 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Depreciation and amortization | (4,736) | (4,466) | |||||||||
| Right-of-use assets | (2,633) | (2,551) | |||||||||
| Other, net | (205) | (345) | |||||||||
| Total deferred tax liabilities | (7,574) | (7,362) | |||||||||
| Net deferred tax assets | $ | 5,725 | $ | 4,728 | |||||||
| 2017 | 2016 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforward | $ | 10,144 | $ | 9,764 | ||||
| Inventory differences | 570 | 1,222 | ||||||
| Equity compensation | 591 | 688 | ||||||
| Investment in subsidiaries | 3,514 | 581 | ||||||
| Restructuring | 1,389 | 2,328 | ||||||
| Purchased goodwill | 3,331 | — | ||||||
| Accrued employee compensation and benefits | 979 | 841 | ||||||
| Other, net | 144 | 423 | ||||||
| Gross deferred tax assets | 20,662 | 15,847 | ||||||
| Less valuation allowances | (18,063 | ) | (11,679 | ) | ||||
| Total deferred tax assets | 2,599 | 4,168 | ||||||
| Deferred tax liabilities: | ||||||||
| Purchased intangible assets and goodwill | (2,644 | ) | (4,013 | ) | ||||
| Depreciation and amortization | (267 | ) | (1,130 | ) | ||||
| Other, net | (163 | ) | (473 | ) | ||||
| Total deferred tax liabilities | (3,074 | ) | (5,616 | ) | ||||
| Net deferred tax liabilities | $ | (475 | ) | $ | (1,448 | ) | ||
As of December 31, 2017,2022, we had loss carryforwards for tax purposes totaling approximately $76,063,$42,854, comprised of $56,873$38,404 foreign and $19,190$4,450 domestic federal and state loss carryforwards, which will be available to offset future taxable income due to laws in certain jurisdictions. The significant majority of foreign jurisdictions. If not used, the foreign tax loss carryforwards generally maylosses can be carried forward indefinitely, orwhile all other losses generally have at least a ten-year carryforward period.periods of 5 to 20 years, depending on jurisdiction. We have analyzed the foreign net operating losses and placedestablished valuation allowances on those where we have determined the realization is not more likely than not to occur.
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 December 31, 2017 and 2016, the Company is in a consolidated three-year cumulative loss position. Accordingly, we have evaluated the impact on all jurisdictions and have recorded aWe continue to record valuation allowanceallowances against the corresponding net deferred tax assets where we do not believe sufficient future taxable income will be generated. Changes in our valuation allowance in 2022 are primarily attributable to changes in currency revaluation and movements in the underlying deferred tax assets. In 2021, we recorded a net decrease of $1,926 in our valuation allowance,
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primarily comprised of releases in the United States for state taxes and France due to a change in our estimates of future income in those jurisdictions, as well as remeasurement of December 31, 2017our German valuation allowance due to a change in our German effective tax rate and 2016.currency revaluation. The amount of the deferred tax assets considered realizable however, couldcan be adjusted in future periods if positive evidence such as current and expected future taxable income outweighs negative evidence.
A reconciliation of our income tax provision computed by applying the Federal statutory income tax rate of 35%21% to income before taxes is as follows:
| 2017 | 2016 | 2015 | ||||||||||
| Statutory U.S. federal income tax | $ | (5,350 | ) | $ | (1,998 | ) | $ | (9,131 | ) | |||
| U.S. state income tax, net of federal benefit | 27 | (158 | ) | (340 | ) | |||||||
| U.S. TCJA - net impact | 4,435 | — | — | |||||||||
| Foreign rate differential | (1,728 | ) | 164 | 692 | ||||||||
| Tax audit adjustments | 426 | — | — | |||||||||
| Equity compensation | (52 | ) | 339 | 224 | ||||||||
| Deemed repatriation of foreign earnings | — | — | 810 | |||||||||
| Change in State Rate | 278 | — | — | |||||||||
| Impairment of goodwill | 239 | — | 498 | |||||||||
| Other | (94 | ) | 97 | (1,513 | ) | |||||||
| Change in valuation allowances | 5,388 | 2,353 | 6,642 | |||||||||
| Provision for income taxes | $ | 3,569 | $ | 797 | $ | (2,118 | ) | |||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Statutory U.S. federal income tax | $ | 4,874 | $ | (536) | $ | (412) | |||||||||||
| Foreign rate differential | 2,868 | 1,690 | 1,223 | ||||||||||||||
| Permanent items | 980 | 683 | 210 | ||||||||||||||
| U.S. state income tax, net of federal benefit | 569 | (338) | (24) | ||||||||||||||
| (Income) loss attributable to noncontrolling interest | (333) | 170 | — | ||||||||||||||
| Equity compensation | 202 | (1,476) | (715) | ||||||||||||||
| Return to provision adjustments | 134 | (345) | (565) | ||||||||||||||
| Deemed repatriation of foreign earnings | 64 | — | — | ||||||||||||||
| German legal entity structuring | — | — | 1,161 | ||||||||||||||
| DynaEnergetics Siberia shut down | — | — | 324 | ||||||||||||||
| Research credits | — | — | (115) | ||||||||||||||
| Other | (14) | 11 | 10 | ||||||||||||||
| Change in valuation allowances | 32 | (1,403) | (1,645) | ||||||||||||||
| Income tax provision (benefit) | $ | 9,376 | $ | (1,544) | $ | (548) | |||||||||||
DMC files income tax returns in the U.S. federal jurisdiction, as well as various U.S. state and foreign jurisdictions. In theThe Company is not currently under examination in any jurisdiction.
DMC’s U.S., federal tax auditsreturns are open for examination for the tax years 2012 through 2015 were closed during the second quarter of 2017, and no adjustments to the Company's tax provisions were proposed. In the spring of 2016, German tax authorities commenced an examination of the tax returns of our German tax authorities for the 2011 through 2014 tax years. During 2017, German tax authorities proposed and we agreed to a settlement. The key provisions of the settlement resulted in increases to income related to various issues related to transfer pricing. We recorded an additional $251 in income tax expense and $41 of interest to reflect these adjustments and the impact of these adjustments on 2015 and 2016 taxes.
2018 onward. Most of DMC’s state tax returns remain open to examination for the tax years 2013 through 2017.2018 onward. DMC’s foreign tax returns generally remain open to examination for the tax years 2013 through 2017,2018 onward, depending on jurisdiction.
At December 31, 20172022 and 2016,2021, the balance of unrecognized tax benefits was zero.$2,106 and zero, respectively. Included in the balance of unrecognized tax benefits as of December 31, 2022 are $1,835 of tax benefits that, if recognized, would affect the effective tax rate. We recognize interest and penalties related to uncertain tax positions in operating expense. As of December 31, 20172022 and 2016,2021, our accrual for interest and penalties related to uncertain tax positions was zero.
| 2022 | |||||||||||||||||
| Unrecognized tax benefits, December 31, 2021 | $ | — | |||||||||||||||
| Additions based on tax positions related to the current year | 2,106 | ||||||||||||||||
| Additions for tax positions of prior years | — | ||||||||||||||||
| Reductions for tax positions of prior years | — | ||||||||||||||||
| Settlements | — | ||||||||||||||||
| Unrecognized tax benefits, December 31, 2022 | $ | 2,106 | |||||||||||||||
The Tax Cuts and Jobs Act (“TCJA”), enacted in December 2017, 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.
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11. BUSINESS SEGMENTS
Our business is organized into three segments: Arcadia, DynaEnergetics, and NobelClad. In December 2021, DMC acquired a 60% controlling interest in Arcadia. Arcadia supplies architectural building products, including exterior and interior framing systems, curtain walls, windows, doors, and interior partitions to the following two segments: NobelCladcommercial construction market; it also supplies customized windows and DynaEnergetics.doors to the high-end residential construction market. DynaEnergetics designs, manufactures and distributes highly engineered 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, andas well as specialized transition joints. DynaEnergetics designs, manufacturesjoints for use in construction of commuter rail cars, ships, and distributes products utilized by the global oil and gas industry principally for the perforation of oil and gas wells.LNG processing equipment.
The accounting policies of bothour segments are the same as those described in the summary of significant accounting policies.Note 2 "Significant Accounting Policies". Our reportable segments are separately managed, strategic business units that offer different products and services.services, and each segment has separate financial information available that is evaluated regularly by the Chief Operating Decision Maker ("CODM") in allocating resources and assessing performance. Each segment’s products are marketed to different customer types and require different manufacturing processes and technologies.
Segment information is presentedas follows as of and for the years ended December 31, 2017, 2016,31:
| 2022 | 2021 | 2020 | |||||||||||||||
| Net sales: | |||||||||||||||||
| Arcadia | $ | 299,527 | $ | — | $ | — | |||||||||||
| DynaEnergetics | 264,327 | 175,356 | 146,395 | ||||||||||||||
| NobelClad | 90,232 | 84,759 | 82,766 | ||||||||||||||
| Net sales | $ | 654,086 | $ | 260,115 | $ | 229,161 | |||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Income (loss) before income taxes: | |||||||||||||||||
| Arcadia | $ | 3,962 | $ | (2,020) | $ | — | |||||||||||
| DynaEnergetics | 39,055 | 8,235 | 6,150 | ||||||||||||||
| NobelClad | 7,989 | 9,783 | 6,886 | ||||||||||||||
| Segment operating income | 51,006 | 15,998 | 13,036 | ||||||||||||||
| Unallocated corporate expenses | (13,164) | (11,826) | (8,357) | ||||||||||||||
Unallocated stock-based compensation* | (7,852) | (6,574) | (5,675) | ||||||||||||||
| Other (expense) income, net | (594) | 152 | (233) | ||||||||||||||
| Interest expense, net | (6,187) | (304) | (731) | ||||||||||||||
| Income (loss) before income taxes | $ | 23,209 | $ | (2,554) | $ | (1,960) | |||||||||||
*Stock-based compensation is not allocated to wholly owned segments, DynaEnergetics and 2015NobelClad. Stock-based compensation is allocated to the Arcadia segment as follows:60% of such expense is attributable to the Company, whereas the remaining 40% is attributable to the redeemable noncontrolling interest holder.
| 2022 | 2021 | 2020 | |||||||||||||||
| Depreciation and Amortization: | |||||||||||||||||
| Arcadia | $ | 39,222 | $ | 415 | $ | — | |||||||||||
| DynaEnergetics | 7,877 | 8,126 | 7,263 | ||||||||||||||
| NobelClad | 3,730 | 3,807 | 3,504 | ||||||||||||||
| Segment depreciation and amortization | 50,829 | 12,348 | 10,767 | ||||||||||||||
| Corporate and other | 378 | 346 | 314 | ||||||||||||||
| Consolidated depreciation and amortization | $ | 51,207 | $ | 12,694 | $ | 11,081 | |||||||||||
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| 2022 | 2021 | 2020 | ||||||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||||||||||
| Net sales: | ||||||||||||||||||||||||||||
| Acquisition of property, plant and equipment | Acquisition of property, plant and equipment | |||||||||||||||||||||||||||
| Arcadia | Arcadia | $ | 7,168 | $ | 42 | $ | — | |||||||||||||||||||||
| DynaEnergetics | DynaEnergetics | 5,660 | 5,455 | 11,741 | ||||||||||||||||||||||||
| NobelClad | $ | 71,550 | $ | 91,285 | $ | 89,980 | NobelClad | 5,298 | 2,730 | 1,975 | ||||||||||||||||||
| DynaEnergetics | 121,253 | 67,290 | 76,938 | |||||||||||||||||||||||||
| Consolidated net sales | $ | 192,803 | $ | 158,575 | $ | 166,918 | ||||||||||||||||||||||
| Segment acquisition of property, plant and equipment | Segment acquisition of property, plant and equipment | 18,126 | 8,227 | 13,716 | ||||||||||||||||||||||||
| Corporate and other | Corporate and other | 458 | 432 | 137 | ||||||||||||||||||||||||
| Consolidated acquisition of property, plant and equipment | Consolidated acquisition of property, plant and equipment | $ | 18,584 | $ | 8,659 | $ | 13,853 | |||||||||||||||||||||
| 2022 | 2021 | ||||||||||
| Assets: | |||||||||||
| Arcadia | $ | 498,257 | $ | 501,166 | |||||||
| DynaEnergetics | 183,991 | 156,593 | |||||||||
| NobelClad | 54,528 | 53,467 | |||||||||
| Segment assets | 736,776 | 711,226 | |||||||||
| Cash and cash equivalents | 25,144 | 30,810 | |||||||||
| Prepaid expenses and other assets | 106,101 | 111,606 | |||||||||
| Deferred tax assets | 7,633 | 6,930 | |||||||||
| Corporate property, plant and equipment | 3,324 | 3,840 | |||||||||
| Consolidated assets | $ | 878,978 | $ | 864,412 | |||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Operating income (loss): | |||||||||||
| NobelClad | $ | (17,360 | ) | $ | 8,878 | $ | 5,819 | ||||
| DynaEnergetics | 15,470 | (5,380 | ) | (19,245 | ) | ||||||
| Segment operating income (loss) | (1,890 | ) | 3,498 | (13,426 | ) | ||||||
| Unallocated corporate expenses | (7,395 | ) | (6,372 | ) | (6,891 | ) | |||||
| Stock-based compensation | (2,975 | ) | (2,400 | ) | (3,362 | ) | |||||
| Other income (expense), net | (1,376 | ) | 633 | (669 | ) | ||||||
| Interest expense | (1,651 | ) | (1,070 | ) | (1,745 | ) | |||||
| Interest income | 3 | 3 | 4 | ||||||||
| Loss before income taxes | $ | (15,284 | ) | $ | (5,708 | ) | $ | (26,089 | ) | ||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Depreciation and Amortization: | |||||||||||
| NobelClad | $ | 3,687 | $ | 3,999 | $ | 4,158 | |||||
| DynaEnergetics | 6,879 | 6,768 | 6,119 | ||||||||
| Segment depreciation and amortization | $ | 10,566 | $ | 10,767 | $ | 10,277 | |||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Capital Expenditures: | |||||||||||
| NobelClad | $ | 1,584 | $ | 1,217 | $ | 1,376 | |||||
| DynaEnergetics | 4,025 | 4,448 | 3,668 | ||||||||
| Segment capital expenditures | 5,609 | 5,665 | 5,044 | ||||||||
| Corporate and other | 577 | 54 | 389 | ||||||||
| Consolidated capital expenditures | $ | 6,186 | $ | 5,719 | $ | 5,433 | |||||
| As of December 31, | |||||||
| 2017 | 2016 | ||||||
| Assets: | |||||||
| NobelClad | $ | 57,906 | $ | 74,038 | |||
| DynaEnergetics | 98,640 | 75,728 | |||||
| Segment assets | 156,546 | 149,766 | |||||
| Cash and cash equivalents | 8,983 | 6,419 | |||||
| Prepaid expenses and other assets | 6,058 | 5,287 | |||||
| Deferred tax assets | 98 | — | |||||
| Corporate property, plant and equipment | 1,398 | 1,083 | |||||
| Consolidated assets | $ | 173,083 | $ | 162,555 | |||
The geographic location of our property, plant and equipment, net of accumulated depreciation, is as follows:follows at December 31:
| 2022 | 2021 | ||||||||||
| United States | $ | 102,804 | $ | 94,209 | |||||||
| Germany | 26,479 | 27,680 | |||||||||
| Canada | 84 | 101 | |||||||||
| France | 71 | 75 | |||||||||
| Rest of the world | 7 | 13 | |||||||||
| Total | $ | 129,445 | $ | 122,078 | |||||||
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| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| United States | $ | 23,620 | $ | 23,286 | ||||
| Germany | 25,876 | 21,956 | ||||||
| Russia | 9,323 | 9,338 | ||||||
| France | 837 | 2,168 | ||||||
| Kazakhstan | 15 | 179 | ||||||
| Canada | 193 | 191 | ||||||
| Rest of the world | 8 | 15 | ||||||
| Total | $ | 59,872 | $ | 57,133 | ||||
Arcadia
| 2022 | ||||||||||||||
| West | $ | 235,705 | ||||||||||||
| South | 37,061 | |||||||||||||
| Northeast | 14,103 | |||||||||||||
| Midwest | 12,658 | |||||||||||||
| Total Arcadia | $ | 299,527 | ||||||||||||
DynaEnergetics
| 2022 | 2021 | 2020 | |||||||||||||||
| United States | $ | 211,025 | $ | 136,053 | $ | 110,903 | |||||||||||
| Canada | 17,156 | 12,149 | 3,830 | ||||||||||||||
| Egypt | 5,780 | 3,244 | 3,413 | ||||||||||||||
| India | 5,133 | 1,154 | 5,814 | ||||||||||||||
| Turkey | 4,602 | 3,153 | 2,887 | ||||||||||||||
| Iraq | 3,574 | 72 | 3,287 | ||||||||||||||
| Oman | 3,188 | 2,830 | 2,551 | ||||||||||||||
| Indonesia | 2,022 | 1,131 | 1,832 | ||||||||||||||
| Kuwait | 1,801 | 1,559 | 1,716 | ||||||||||||||
| United Arab Emirates | 1,525 | 230 | 840 | ||||||||||||||
| Algeria | 1,305 | 976 | 1,068 | ||||||||||||||
| Hong Kong | 1,158 | 1,731 | 435 | ||||||||||||||
| Romania | 851 | 776 | 425 | ||||||||||||||
| Pakistan | 843 | 543 | 876 | ||||||||||||||
| Norway | 545 | 1,219 | 368 | ||||||||||||||
| Germany | 521 | 774 | 605 | ||||||||||||||
| Ukraine | — | 3,742 | 1,591 | ||||||||||||||
Rest of the world(1) | 3,298 | 4,020 | 3,954 | ||||||||||||||
| Total DynaEnergetics | $ | 264,327 | $ | 175,356 | $ | 146,395 | |||||||||||
(1) Rest of the world does not include any individual country comprising sales greater than 1% of total DynaEnergetics revenue.
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| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| United States | $ | 116,083 | $ | 78,999 | $ | 81,634 | ||||||
| Canada | 23,377 | 16,021 | 13,000 | |||||||||
| United Arab Emirates | 1,768 | 7,449 | 7,891 | |||||||||
| France | 3,032 | 3,744 | 6,624 | |||||||||
| South Korea | 1,173 | 1,690 | 5,709 | |||||||||
| Germany | 5,397 | 5,979 | 5,182 | |||||||||
| Russia | 4,504 | 3,731 | 4,937 | |||||||||
| India | 2,927 | 5,066 | 4,566 | |||||||||
| Egypt | 2,721 | 1,942 | 4,080 | |||||||||
| Spain | 1,126 | 1,500 | 3,858 | |||||||||
| Iraq | 77 | 13 | 3,758 | |||||||||
| China | 3,673 | 7,012 | 2,426 | |||||||||
| Italy | 1,582 | 2,577 | 2,327 | |||||||||
| Hong Kong | 255 | 699 | 2,207 | |||||||||
| Sweden | 2,009 | 2,124 | 1,699 | |||||||||
| Rest of the world | 23,099 | 20,029 | 17,020 | |||||||||
| Total | $ | 192,803 | $ | 158,575 | $ | 166,918 | ||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| United States | $ | 38,818 | $ | 37,283 | $ | 38,311 | |||||||||||
| Canada | 9,610 | 4,779 | 6,597 | ||||||||||||||
| Germany | 4,630 | 2,496 | 5,100 | ||||||||||||||
| China | 3,902 | 10,365 | 5,389 | ||||||||||||||
| Sweden | 3,743 | 1,205 | 1,569 | ||||||||||||||
| United Arab Emirates | 3,582 | 3,613 | 4,008 | ||||||||||||||
| South Korea | 3,242 | 2,144 | 1,972 | ||||||||||||||
| India | 3,116 | 1,908 | 1,421 | ||||||||||||||
| Saudi Arabia | 2,212 | 328 | 481 | ||||||||||||||
| Netherlands | 2,094 | 1,984 | 1,765 | ||||||||||||||
| France | 2,057 | 2,197 | 2,895 | ||||||||||||||
| South Africa | 1,970 | 886 | 870 | ||||||||||||||
| Australia | 1,799 | 1,301 | 1,519 | ||||||||||||||
| Italy | 1,766 | 1,422 | 1,220 | ||||||||||||||
| Norway | 1,309 | 992 | 2,215 | ||||||||||||||
| Brazil | 1,228 | — | 276 | ||||||||||||||
| Belgium | 603 | 2,547 | 1,213 | ||||||||||||||
| Spain | 449 | 473 | 2,670 | ||||||||||||||
| Taiwan | 431 | 415 | 588 | ||||||||||||||
| Argentina | 230 | 405 | 298 | ||||||||||||||
Russia(1) | 191 | 4,057 | — | ||||||||||||||
| Singapore | 60 | 1,009 | 207 | ||||||||||||||
Rest of the world(2) | 3,190 | 2,950 | 2,182 | ||||||||||||||
| Total NobelClad | $ | 90,232 | $ | 84,759 | $ | 82,766 | |||||||||||
(1) Future sales to Russia have been suspended indefinitely due to the ongoing conflict in Ukraine.
(2) Rest of the world does not include any individual country comprising sales greater than 1% of total NobelClad revenue.
During the yearyears ended December 31, 2017, one2022 and 2021, no single customer in our DynaEnergetics segment was responsibleaccounted for approximatelygreater than 10% of total net sales. During the yearsyear ended December 31, 2016 and 2015, no2020, one customer in our DynaEnergetics segment accounted for approximately 12% of total net sales. As of December 31, 2022, one DynaEnergetics customer accounted for moreapproximately 15% of consolidated accounts receivable. As of December 31, 2021, no single customer accounted for greater than 10% of total net sales.consolidated accounts receivable.
92
We are exposed to foreign currency exchange risk resulting from fluctuations in exchange rates, primarily the U.S. dollar to the euro, the U.S. dollar to the Canadian dollar the euro to the Russian ruble, and, to a lesser extent, other currencies, arising from inter-companyintercompany and third partythird-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. During the third quarter of 2017, we began usingWe 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, (expense), net" within our Consolidated Statements of Operations.
We execute derivatives with a specialized foreign exchange brokerage firm.firm as well as other large financial institutions. The primary credit risk inherent in derivative agreements representsis the possibility that a loss may occur from the nonperformance of a counterparty to the agreements, and thus weagreements. 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'counterparties’ ability to perform.
As of December 31, 2017,2022 and 2021, the notional amounts of the forward currency contracts the Company held to purchase currencies were $13,906,$21,907 and $13,032, respectively. At December 31, 2022 and 2021, the notional amounts of forward contracts the Company held to sell currencies were $6,385. The fair values of outstanding foreign currency forward contracts were approximately $79 (recorded$0.
The following table presents the location and amount of net gains (losses) from hedging activities, which offset foreign currency gains and losses recorded in accrued expenses) atthe normal course of business that are not presented below, for the years ended December 31, 2017.31:
| Derivative type | Income Statement Location | 2022 | 2021 | 2020 | ||||||||||||||||||||||
| Foreign currency contracts | Other (expense) income, net | $ | 352 | $ | (271) | $ | (1,058) | |||||||||||||||||||
| Gain/(Loss) Recognized in Income on Derivatives | ||||||||||||||
| Amount | ||||||||||||||
| Year Ended December 31, | ||||||||||||||
| Derivatives | Income Statement Location | 2017 | 2016 | 2015 | ||||||||||
| Foreign currency contracts | Other income (expense), net | $ | (157 | ) | $ | — | $ | — | ||||||
| Total gain (loss) | $ | (157 | ) | $ | — | $ | — | |||||||
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.
From time to time, we may become involved in various lawsuits and Countervailing Duties
Wage and Hour Matters
Felipe v. Arcadia, Inc. and One Stop Employment Services, Inc. (“One Stop”). This complaint was filed on October 22, 2021 in Los Angeles Superior Court and purports to allege a class action on behalf of all non-exempt California employees who worked on behalf of One Stop or Arcadia at any time during the four years preceding the date of the complaint. One Stop is a staffing agency which provides temporary workers, including to Arcadia. The complaint states claims under California’s labor laws and under its general Unfair Business Practices Act, California Business & Professions Code section 17200. The plaintiff has subsequently dismissed the class action claims without prejudice, acknowledging that Arcadia’s arbitration agreement likely bars such class claims. The plaintiff also filed a separate action under California’s Private Attorneys General Act (“PAGA”) alleging essentially the same wage and hour violations. This action included other Arcadia employees. In Viking River Cruises, Inc. versus Moriana, the U.S. Supreme Court concluded that arbitration agreements may bar representative PAGA claims. However, Viking River left open certain state law issues, which the California Supreme Court has agreed to address. Currently, Felipe’s PAGA representative claims are stayed, and will likely remain stayed until a California Supreme Court ruling. The plaintiff has however commenced arbitration on individual claims, though no dates have yet been set in that arbitration.
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Mayorga v. Arcadia, Inc. This complaint was filed on November 15, 2021 in Los Angeles Superior Court. It purported to allege a class action on behalf of all of the Company’s non-exempt California employees who worked at the Company within four years before the date the complaint was filed. It asserts claims substantially similar to those asserted in the Felipe case but does not include One Stop as a defendant. The plaintiff amended his complaint to delete class action claims and any individual non-PAGA claims. Accordingly, plaintiff’s complaint is continuing.
We have agreed to mediate the Felipe claims in May 2023, and demanding tenderin any settlement arising out of alleged loss of AD/CVD dutiesthis process, we would intend to resolve the claims in an amount of $3,049, which are covered by our reserve. We filed a response both Mayorga and Felipe to the noticeextent asserted on February 6, 2017 asserting our position that any decision to pursue penalties would be premature in lightbehalf of the status of the appeal with CIT and that penalties would not be appropriate under the applicable legal standards. On February 16, 2017, we received notice that U.S. Customs was assessing formal penalties in the amount of $14,783. U.S. Customs also reasserted its demand for tender of alleged loss of AD/CVD duties in the amount of $3,049. We tendered $3,049 in AD amounts (“Tendered Amounts”) on March 6, 2017 into a suspense account pending ultimate resolutionother employees.
14. SUBSEQUENT EVENTS
On January 15, 2023, our former President and weChief Executive Officer ("CEO") stepped down. The Company and former CEO have not accrued for any such losses. Such an evaluation includes,entered into a separation agreement pursuant to which, among other things, a determinationthe former CEO will receive, subject to the terms and conditions of the total number of infringing sales in the United States or infringing products manufactured in Germany, as applicable, what a reasonable royalty, if any, might be under the circumstances; or, alternatively, the scope of damages and the relevant period for which damages would apply, if any.
| Operating Leases | |||
| Year ended December 31 - | |||
| 2018 | $ | 1,365 | |
| 2019 | 922 | ||
| 2020 | 703 | ||
| 2021 | 450 | ||
| 2022 | 382 | ||
| Thereafter | 100 | ||
| Total minimum payments | $ | 3,922 | |
| Year ended December 31 - | |||
| 2018 | $ | 398 | |
| 2019 | 398 | ||
| 2020 | — | ||
| 2021 | — | ||
| 2022 | — | ||
| Thereafter | — | ||
| Total minimum payments | $ | 796 | |
| Year Ended December 31, 2017 | |||||||||||||||||||||||
| Severance | Asset Impairment | Contract Termination Costs | Equipment Moving Costs | Other Exit Costs | Total | ||||||||||||||||||
| NobelClad | $ | 2,513 | $ | 1,241 | $ | — | $ | — | $ | 71 | $ | 3,825 | |||||||||||
| DynaEnergetics | $ | 20 | $ | 143 | $ | — | $ | 295 | $ | 458 | |||||||||||||
| Total | $ | 2,533 | $ | 1,384 | $ | — | $ | — | $ | 366 | $ | 4,283 | |||||||||||
| Year Ended December 31, 2016 | |||||||||||||||||||||||
| Severance | Asset Impairment | Contract Termination Costs | Equipment Moving Costs | Other Exit Costs | Total | ||||||||||||||||||
| DynaEnergetics | $ | 684 | $ | — | $ | 386 | $ | 15 | $ | 43 | $ | 1,128 | |||||||||||
| Corporate | 74 | — | — | — | — | 74 | |||||||||||||||||
| Total | $ | 758 | $ | — | $ | 386 | $ | 15 | $ | 43 | $ | 1,202 | |||||||||||
| Year Ended December 31, 2015 | |||||||||||||||||||||||
| Severance | Asset Impairment | Contract Termination Costs | Equipment Moving Costs | Other Exit Costs | Total | ||||||||||||||||||
| NobelClad | $ | 238 | $ | — | 40 | 476 | $ | (4 | ) | $ | 750 | ||||||||||||
| DynaEnergetics | 735 | 205 | 498 | 391 | (169 | ) | 1,660 | ||||||||||||||||
| Corporate | 1,653 | — | — | — | — | 1,653 | |||||||||||||||||
| Total | $ | 2,626 | $ | 205 | $ | 538 | $ | 867 | $ | (173 | ) | $ | 4,063 | ||||||||||
| December 31, 2016 | Expense | Payments | Currency and Other Adjustments | December 31, 2017 | |||||||||||||||
| Severance | $ | 62 | $ | 2,533 | $ | (62 | ) | $ | 35 | $ | 2,568 | ||||||||
| Contract termination costs | 112 | — | (113 | ) | 1 | — | |||||||||||||
| Other exit costs | — | 71 | (61 | ) | — | 10 | |||||||||||||
| Total | $ | 174 | $ | 2,604 | $ | (236 | ) | $ | 36 | $ | 2,578 | ||||||||
| 2017 | ||||||||||||||||
| Quarter ended March 31, | Quarter ended June 30, | Quarter ended September 30, | Quarter ended December 31, | |||||||||||||
| Net sales | $ | 38,962 | $ | 47,190 | $ | 52,161 | $ | 54,490 | ||||||||
| Gross profit | $ | 10,366 | $ | 14,018 | $ | 17,162 | $ | 17,845 | ||||||||
| Net loss | $ | (3,020 | ) | $ | 189 | $ | (14,064 | ) | $ | (1,958 | ) | |||||
| Loss per share | ||||||||||||||||
| Basic | $ | (0.21 | ) | $ | 0.01 | $ | (0.98 | ) | $ | (0.13 | ) | |||||
| Diluted | $ | (0.21 | ) | $ | 0.01 | $ | (0.98 | ) | $ | (0.13 | ) | |||||
| 2016 | ||||||||||||||||
| Quarter ended March 31, | Quarter ended June 30, | Quarter ended September 30, | Quarter ended December 31, | |||||||||||||
| Net sales | $ | 40,532 | $ | 41,317 | $ | 36,553 | $ | 40,173 | ||||||||
| Gross profit | $ | 10,385 | $ | 9,908 | $ | 8,457 | $ | 9,930 | ||||||||
| Net loss | $ | (413 | ) | $ | (766 | ) | $ | (3,136 | ) | $ | (2,190 | ) | ||||
| Net loss per share | ||||||||||||||||
| Basic | $ | (0.03 | ) | $ | (0.05 | ) | $ | (0.22 | ) | $ | (0.16 | ) | ||||
| Diluted | $ | (0.03 | ) | $ | (0.05 | ) | $ | (0.22 | ) | $ | (0.16 | ) | ||||
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There are no changes in or disagreements with accountants on accounting and financial disclosure for the fiscal year ended December 31, 2017.2022.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Chief Executive OfficerOfficers and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Company’s Chief Executive OfficerOfficers and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2017.2022. Our management’s annual report on internal control over financial reporting is set forth below.
94
Management’s Report on Internal Control over Financial Reporting
The management of DMC Global Inc. (“DMC” or the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
Under the supervision and with the participation of DMC’s management, including its Chief Executive OfficerOfficers and Chief Financial Officer, management conducted an evaluation of the effectiveness of DMC’s internal control over financial reporting as of December 31, 20172022 based on the 2013 framework in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. In designing and evaluating the internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based upon this evaluation, our Chief Executive OfficerOfficers and Chief Financial Officer concluded that, as of December 31, 2017,2022, our internal controls over financial reporting were effective.
DMC’s internal control over financial reporting as of December 31, 2017,2022 has also been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their attestation report which expressed an unqualified opinion and is included elsewhere herein.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during ourthe fourth quarter of 2017,2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| /s/ | |||||
| /s/ Michael Kuta | |||||
| Michael Kuta | |||||
| Co-President and Chief Executive Officer and Chief Financial Officer | |||||
95
Report of Independent Registered Public Accounting Firm
To The Shareholdersthe Stockholders and the
Board of Directors ofDMC Global Inc.
Opinion on Internal Control overOver Financial Reporting
We have audited DMC Global Inc.’s internal control over financial reporting as of December 31, 2017,2022, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, DMC Global Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20172022 and 2016, and2021, the related consolidated statements of operations, comprehensive income (loss), stockholders'stockholders’ equity and redeemable noncontrolling interest and cash flows for each of the three years in the period ended December 31, 2017,2022, and the related notes and financial statement schedules listed in the Index at Item 15(a) and our report dated March 8, 2018February 27, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| /s/ Ernst & Young LLP | |||||
| Denver, Colorado | |||||
96
ITEM 9B. Other Information
Not applicable.
97
PART III
ITEM 10.Directors, Executive Officers and Corporate Governance
Item 10 incorporates information by reference to our Proxy Statement for the 20182023 Annual Meeting of Stockholders, which is expected to be filed with the SEC within 120 days of the close of fiscal year 2017.2022.
ITEM 11.Executive Compensation
Item 11 incorporates information by reference to our Proxy Statement for the 20182023 Annual Meeting of Stockholders, which is expected to be filed with the SEC within 120 days of the close of fiscal year 2017.2022.
ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 12 incorporates information by reference to our Proxy Statement for the 20182023 Annual Meeting of Stockholders, which is expected to be filed with the SEC within 120 days of the close of fiscal year 2017.2022.
For information regarding securities authorized for issuance under our equity compensation plans see the Proxy Statement for our 20182023 Annual Meeting of Shareholders, which information is incorporated herein by reference.
ITEM 13.Certain Relationships and Related Transactions, and Director Independence
Item 13 incorporates information by reference to our Proxy Statement for the 20182023 Annual Meeting of Stockholders, which is expected to be filed with the SEC within 120 days of the close of fiscal year 2017.2022.
ITEM14.Principal Accounting Fees and Services
Item 14 incorporates information by reference to our Proxy Statement for the 20182023 Annual Meeting of Stockholders, which is expected to be filed with the SEC within 120 days of the close of fiscal year 2017.2022.
98
PART IV
ITEM 15.Exhibits and Financial Statement Schedules
(a)(1)Financial Statements
See Index to Financial Statements in Item 8 of this Annual Report on Form 10-K, which is incorporated herein by reference.
(a)(2)Financial Statement Schedules
(a)(3)Exhibits
99
| Exhibit Number | Description | |||||||
| 10.27 | ||||||||
| 10.28 | ||||||||
| 10.30 | ||||||||
100
Exhibit Number | Description | |||||||
| 10.32 | ||||||||
| 21.1 | ||||||||
| 23.1 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 101 | The following materials from the Annual Report on Form 10-K of DMC Global Inc. For the year ended December 31, | |||||||
* Management contract or compensatory plan or arrangement.
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
101
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| DMC Global Inc. | ||||||||
| By: | /s/ Michael Kuta | |||||||
| Michael Kuta | ||||||||
| Co-President and Chief Executive Officer and Chief Financial Officer | ||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
| SIGNATURE | TITLE | DATE | ||||||||||||
| /s/ David C. Aldous | Co-President and Chief Executive Officer and Director | February 27, 2023 | ||||||||||||
| David C. Aldous | (Principal Executive Officer) | |||||||||||||
| /s/ Michael Kuta | Co-President and Chief Executive Officer and Chief Financial Officer | February 27, 2023 | ||||||||||||
| Michael Kuta | (Principal Financial and Accounting Officer) | |||||||||||||
| /s/ Richard P. Graff | Interim Chairman and Director | February 27, 2023 | ||||||||||||
| Richard P. Graff | ||||||||||||||
| /s/ Andrea E. Bertone | Director | February 27, 2023 | ||||||||||||
| Andrea E. Bertone | ||||||||||||||
| /s/ Robert A. Cohen | Director | February 27, 2023 | ||||||||||||
| Robert A. Cohen | ||||||||||||||
| /s/ Ruth I. Dreessen | Director | February 27, 2023 | ||||||||||||
| Ruth I. Dreessen | ||||||||||||||
| /s/ Michael A. Kelly | Director | February 27, 2023 | ||||||||||||
| Michael A. Kelly | ||||||||||||||
| /s/ Clifton Peter Rose | Director | February 27, 2023 | ||||||||||||
| Clifton Peter Rose |
102
Balance at beginning of period | Additions charged to income | Accounts receivable written off | Currency and Other Adjustments | Balance at end of period | ||||||||||||||||
| Year ended - | ||||||||||||||||||||
| December 31, 2015 | $ | 542 | $ | 1,072 | $ | (191 | ) | $ | (449 | ) | $ | 974 | ||||||||
| December 31, 2016 | $ | 974 | $ | 873 | $ | (351 | ) | $ | (350 | ) | $ | 1,146 | ||||||||
| December 31, 2017 | $ | 1,146 | $ | 306 | $ | (174 | ) | $ | (190 | ) | $ | 1,088 | ||||||||
Balance at beginning of period | Additions charged to income | Repairs allowed | Currency and Other Adjustments | Balance at end of period | ||||||||||||||||
| Year ended - | ||||||||||||||||||||
| December 31, 2015 | $ | 130 | $ | 339 | $ | (308 | ) | $ | (31 | ) | $ | 130 | ||||||||
| December 31, 2016 | $ | 130 | $ | 535 | $ | (140 | ) | $ | — | $ | 525 | |||||||||
| December 31, 2017 | $ | 525 | $ | 218 | $ | (466 | ) | $ | 74 | $ | 351 | |||||||||
Balance at beginning of period | Additions charged to income | Inventory write-offs | Currency and Other Adjustments | Balance at end of period | |||||||||||||||
| Year ended - | |||||||||||||||||||
| December 31, 2015 | $ | 3,117 | $ | 1,952 | $ | (1,160 | ) | (227 | ) | $ | 3,682 | ||||||||
| December 31, 2016 | $ | 3,682 | $ | 1,738 | $ | (1,198 | ) | 4 | $ | 4,226 | |||||||||
| December 31, 2017 | $ | 4,226 | $ | (22 | ) | $ | (1,263 | ) | 127 | $ | 3,068 | ||||||||