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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
Form 10-Q
 (Mark One)
 
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022
 
OR
 
         TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934

FOR THE TRANSITION PERIOD FROM                   TO                   .
 
Commission file number 001-14775

 DMC GLOBAL INC.
(Exact name of Registrant as Specified in its Charter)
Delaware
 
84-0608431
(State of Incorporation or Organization) (I.R.S. Employer Identification No.)
11800 Ridge Parkway, Suite 300, Broomfield, Colorado 80021
(Address of principal executive offices, including zip code)
 
(303) 665-5700
(Registrant’s telephone number, including area code)
 
Title of each classTrading SymbolName of exchange on which registered
Common Stock, $0.05 Par Value
BOOMThe Nasdaq Global Select Market

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    No 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes    No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
Accelerated filer ☐
   
Non-accelerated filer ☐
 
Smaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 under the Act).  Yes    No 
 
The number of shares of Common Stock outstanding was 19,529,644 as of November 3, 2022.





CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
 
This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. We intend the forward-looking statements throughout this quarterly report on Form 10-Q to be covered by the safe harbor provisions for forward-looking statements. Statements contained in this report which are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from projected results. These statements can sometimes be identified by our use of forward-looking words such as “may,” “believe,” “plan,” “anticipate,” “estimate,” “expect,” “intend,” and other phrases of similar meaning. Such statements include expectations regarding the resiliency of DynaEnergetics’ end markets and customer pricing, planned price increases at DynaEnergetics, DynaEnergetics’ ability to benefit from strengthening prices, projected growth in Arcadia’s core geographic regions and end markets, plans to install new finishing capacity and targets for such lines to be operational, our ability to access our at-the-market offerings or the capital markets in the future, the ability of DynaEnergetics to realize the anticipated benefits of its patent strategy and expected continuing litigation costs, expected material and labor cost trends, the availability of funds to support our liquidity position and our expected future liquidity position. The forward-looking information is based on information available as of the date of this quarterly report and on numerous assumptions and developments that are not within our control. Although we believe that our expectations as expressed in these forward-looking statements are reasonable, we cannot assure you that our expectations will turn out to be correct. Factors that could cause actual results to differ materially include, but are not limited to, those factors referenced in our Annual Report on Form 10-K for the year ended December 31, 2021 and such things as the following: geopolitical and economic instability, including recessions or depressions; inflation; supply chain delays and disruptions; the availability and cost of energy; transportation disruptions; 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; fluctuations in customer demand; fluctuations in foreign currencies; 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, aluminum, and other raw materials; fluctuations in tariffs or quotas; changes in laws and regulations, both domestic and foreign, impacting our business and the business of the end-market users we serve; the adequacy of local labor supplies at our facilities; current or future limits on manufacturing capacity at our various operations; our ability to successfully integrate Arcadia and future-acquired businesses; the impact of pending or future litigation or regulatory matters; the availability and cost of funds; our ability to access our borrowing capacity under our credit facility or access the capital markets; global economic conditions; and wars, terrorism and armed conflicts. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.



INDEX
 
  Page
   
 
 
 
 
 
 
   
   
   
   
   
   
   
   
   
   
   
   
 

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Part I - FINANCIAL INFORMATION

ITEM 1.  Condensed Consolidated Financial Statements
DMC GLOBAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share and Per Share Data)
September 30, 2022December 31, 2021
(unaudited)
ASSETS  
Current assets:  
Cash and cash equivalents$18,486 $30,810 
Accounts receivable, net of allowance for doubtful accounts of $3,361 and $2,773, respectively
94,191 71,932 
Inventories152,573 124,214 
Prepaid expenses and other9,977 12,240 
Total current assets275,227 239,196 
Property, plant and equipment199,540 191,022 
Less - accumulated depreciation(76,248)(68,944)
Property, plant and equipment, net123,292 122,078 
Goodwill139,922 141,266 
Purchased intangible assets, net221,753 255,576 
Deferred tax assets7,887 6,930 
Other assets97,028 99,366 
Total assets$865,109 $864,412 
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST, AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$41,573 $40,276 
Accrued expenses9,575 13,585 
Accrued income taxes3,206 9 
Accrued employee compensation and benefits15,535 9,766 
Contract liabilities30,030 21,052 
Current portion of long-term debt15,000 15,000 
Other current liabilities6,994 6,126 
Total current liabilities121,913 105,814 
Long-term debt121,409 132,425 
Deferred tax liabilities1,547 2,202 
Other long-term liabilities62,625 66,250 
Total liabilities307,494 306,691 
Commitments and contingencies (Note 12)
Redeemable noncontrolling interest194,962 197,196 
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 shares authorized; 20,127,679 and 19,920,829 shares issued, respectively
1,007 996 
Additional paid-in capital301,003 294,515 
Retained earnings115,016 111,031 
Other cumulative comprehensive loss(33,801)(26,538)
Treasury stock, at cost, and company stock held for deferred compensation, at par; 597,822 and 570,415 shares, respectively
(20,572)(19,479)
Total stockholders’ equity362,653 360,525 
Total liabilities, redeemable noncontrolling interest, and stockholders’ equity$865,109 $864,412 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Share and Per Share Data)
(unaudited)

Three months ended September 30,Nine months ended September 30,
 2022202120222021
Net sales$174,465 $67,175 $479,012 $188,271 
Cost of products sold123,127 50,513 338,669 141,725 
Gross profit51,338 16,662 140,343 46,546 
Costs and expenses:    
General and administrative expenses19,796 9,721 56,330 26,121 
Selling and distribution expenses10,748 5,593 31,383 16,380 
Amortization of purchased intangible assets7,385 211 33,154 823 
Restructuring expenses8  53 127 
Total costs and expenses37,937 15,525 120,920 43,451 
Operating income13,401 1,137 19,423 3,095 
Other income (expense):    
Other income (expense), net120 (198)(35)304 
Interest expense, net(1,771)(14)(4,058)(230)
Income before income taxes11,750 925 15,330 3,169 
Income tax provision3,537 522 4,938 610 
Net income$8,213 $403 $10,392 $2,559 
Less: Net income attributable to redeemable noncontrolling interest1,496  1,411  
Net income attributable to DMC Global Inc. stockholders$6,717 $403 $8,981 $2,559 
Net income per share attributable to DMC Global Inc. stockholders:  
Basic$0.46 $0.02 $0.20 $0.15 
Diluted$0.46 $0.02 $0.20 $0.15 
Weighted average shares outstanding:    
Basic19,381,489 18,728,278 19,352,638 17,239,306 
Diluted19,381,794 18,739,085 19,357,333 17,250,525 

Reconciliation to net income attributable to DMC Global Inc. stockholders after adjustment of redeemable noncontrolling interest for purposes of calculating earnings per share
Three months ended September 30,
Nine months ended September 30,
2022202120222021
Net income attributable to DMC Global Inc. stockholders$6,717 $403 $8,981 $2,559 
Adjustment of redeemable noncontrolling interest2,256  (4,996) 
Net income attributable to DMC Global Inc. common stockholders after adjustment of redeemable noncontrolling interest$8,973 $403 $3,985 $2,559 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in Thousands)
(unaudited)

 
Three months ended September 30,Nine months ended September 30,
 2022202120222021
Net income$8,213 $403 $10,392 $2,559 
Change in cumulative foreign currency translation adjustment(3,472)(1,347)(7,263)(2,841)
Other comprehensive income (loss)$4,741 $(944)$3,129 $(282)
Less: comprehensive income attributable to redeemable noncontrolling interest1,496  1,411  
Comprehensive income (loss) attributable to DMC Global Inc. stockholders$3,245 $(944)$1,718 $(282)
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
(Amounts in Thousands, Except Share Data)
(unaudited)

     OtherTreasury Stock, at cost, andTotalRedeemable
   Additional CumulativeCompany Stock Held forDMC Global Inc.Non-
 Common StockPaid-InRetainedComprehensive Deferred Compensation, at parStockholders’Controlling
 SharesAmountCapitalEarningsLossSharesAmountEquityInterest
Balances, June 30, 202220,119,929 $1,006 $298,905 $106,043 $(30,329)(597,758)$(20,570)$355,055 $197,196 
Net income— — — 6,717 — — — 6,717 1,496 
Change in cumulative foreign currency translation adjustment— — — — (3,472)— — (3,472)— 
Shares issued in connection with stock compensation plans7,750 1 (1)— — — —  — 
Consideration adjustment related to redeemable noncontrolling interest (Note 3)— — — — — — — — 1,783 
Stock-based compensation— — 2,099 — — — — 2,099 143 
Distribution to redeemable noncontrolling interest holder— — — — — — — — (3,400)
Adjustment of redeemable noncontrolling interest to redemption value— — — 2,256 — — — 2,256 (2,256)
Treasury stock activity— — — — — (64)(2)(2)— 
Balances, September 30, 202220,127,679 $1,007 $301,003 $115,016 $(33,801)(597,822)$(20,572)$362,653 $194,962 

     OtherTreasury Stock, at cost, andTotal
   Additional CumulativeCompany Stock Held forDMC Global Inc.
 Common StockPaid-InRetainedComprehensiveDeferred Compensation, at parStockholders’
 SharesAmountCapitalEarningsLossSharesAmountEquity
Balances, June 30, 202119,294,745 $965 $269,375 $117,813 $(24,456)(569,737)$(17,660)$346,037 
Net income— — — 403 — — — 403 
Change in cumulative foreign currency translation adjustment— — — — (1,347)— — (1,347)
Stock-based compensation— — 1,618 — — — 1,618 
Treasury stock activity— — — — — (177)(1,811)(1,811)
Balances, September 30, 202119,294,745 $965 $270,993 $118,216 $(25,803)(569,914)$(19,471)$344,900 


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DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
(Amounts in Thousands, Except Share Data)
(unaudited)


     OtherTreasury Stock, at cost, andTotalRedeemable
   Additional CumulativeCompany Stock Held forDMC Global Inc.Non-
 Common StockPaid-InRetainedComprehensiveDeferred Compensation, at parStockholders’Controlling
 SharesAmountCapitalEarningsLossSharesAmountEquityInterest
Balances, December 31, 202119,920,829 $996 $294,515 $111,031 $(26,538)(570,415)$(19,479)$360,525 $197,196 
Net income— — — 8,981 — — — 8,981 1,411 
Change in cumulative foreign currency translation adjustment— — — — (7,263)— — (7,263)— 
Shares issued in connection with stock compensation plans206,850 11 (11)— — — —  — 
Consideration adjustments related to redeemable noncontrolling interest (Note 3)— — — — — — — — 1,356 
Stock-based compensation— — 6,499 — — — — 6,499 403 
Distribution to redeemable noncontrolling interest holder— — — — — — — — (10,400)
Adjustment of redeemable noncontrolling interest to redemption value— — — (4,996)— — — (4,996)4,996 
Treasury stock activity— — — — — (27,407)(1,093)(1,093)— 
Balances, September 30, 202220,127,679 $1,007 $301,003 $115,016 $(33,801)(597,822)$(20,572)$362,653 $194,962 

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DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
(Amounts in Thousands, Except Share Data)
(unaudited)
     OtherTreasury Stock, at cost, andTotal
   Additional CumulativeCompany Stock Held forDMC Global Inc.
 Common StockPaid-InRetainedComprehensiveDeferred Compensation, at parStockholders’
 SharesAmountCapitalEarningsLossSharesAmountEquity
Balances, December 31, 202015,917,559 $796 $117,387 $115,657 $(22,962)(528,274)(13,964)$196,914 
Net income— — — 2,559 — — — 2,559 
Change in cumulative foreign currency translation adjustment— — — — (2,841)— — (2,841)
Shares issued in connection with equity offering2,875,000 144 123,317 — — — — 123,461 
Shares issued in connection with at-the-market offering program397,820 20 25,242 — — — — 25,262 
Shares issued in connection with stock compensation plans104,366 5 248 — — — — 253 
Stock-based compensation— — 4,799 — — — 4,799 
Treasury stock activity— —  — — (41,640)(5,507)(5,507)
Balances, September 30, 202119,294,745 $965 $270,993 $118,216 $(25,803)(569,914)$(19,471)$344,900 
    

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

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DMC GLOBAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(unaudited)
Nine months ended September 30,
 20222021
Cash flows provided by (used in) operating activities:  
Net income$10,392 $2,559 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:  
Depreciation10,578 8,400 
Amortization of purchased intangible assets33,154 823 
Amortization of deferred debt issuance costs412 168 
Amortization of acquisition-related inventory valuation step-up430  
Stock-based compensation6,891 4,904 
Deferred income taxes(1,612)(2,046)
Other(295)(298)
Restructuring expenses53 127 
Change in:  
Accounts receivable, net(24,421)(8,562)
Inventories(31,311)(10,620)
Prepaid expenses and other3,736 (15,892)
Accounts payable2,925 6,861 
Contract liabilities9,277 4,957 
Accrued expenses and other liabilities4,126 6,713 
Net cash provided by (used in) operating activities24,335 (1,906)
Cash flows used in investing activities:   
Consideration adjustments related to acquisition of business (Note 3)(2,034) 
Investment in marketable securities (123,984)
Proceeds from maturities of marketable securities 4,799 
Acquisition of property, plant and equipment(11,277)(6,348)
Proceeds on sale of property, plant and equipment 1,019 
Net cash used in investing activities(13,311)(124,514)
Cash flows (used in) provided by financing activities:   
Repayments on term loan(11,250) 
Repayments on capital expenditure facility (11,750)
Payments of debt issuance costs(179) 
Distributions to redeemable noncontrolling interest holder(10,293) 
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 
Net proceeds from issuance of common stock to employees and directors 253 
Treasury stock purchases(1,092)(2,476)
Net cash (used in) provided by financing activities(22,814)134,750 
Effects of exchange rates on cash(534)503 
Net (decrease) increase in cash and cash equivalents(12,324)8,833 
Cash and cash equivalents, beginning of the period30,810 28,187 
Cash and cash equivalents, end of the period$18,486 $37,020 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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DMC GLOBAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
 
1.      BASIS OF PRESENTATION
 
The information included in the Condensed Consolidated Financial Statements is unaudited but includes all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the interim periods presented. Certain information and footnote disclosures, including critical and significant accounting policies normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted for this quarterly presentation. These Condensed Consolidated Financial statements should be read in conjunction with the financial statements that are included in our Annual Report filed on Form 10-K for the year ended December 31, 2021.

2.      SIGNIFICANT ACCOUNTING POLICIES
 
Principles of Consolidation
 
The Condensed Consolidated Financial Statements include the accounts of DMC Global Inc. (“DMC”, “we”, “us”, “our”, or the “Company”) and its controlled subsidiaries. Only subsidiaries in which controlling interests are maintained are consolidated. All significant intercompany accounts, profits, and transactions have been eliminated in consolidation.

Accounts and Notes Receivable

The Company measures expected credit losses for its accounts receivable using a current expected credit loss model, which is based on historical experience, adjusted for current conditions and reasonable and supportable forecasts. The Company has disaggregated pools of accounts receivable balances by business, geography and/or customer risk profile and has used history and other experience to establish an allowance for credit losses at the time the receivable is recognized. To measure expected credit losses, we have elected to pool trade receivables by segment and analyze each segment’s accounts receivable balances as separate populations. Within each segment, receivables exhibit similar risk characteristics.

During the three and nine months ended September 30, 2022, our expected loss rate reflects uncertainties in market conditions that could impact our businesses, including COVID-19 related considerations, supply chain disruptions, 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 meet its financial obligation to us, we recorded a specific allowance for credit losses (with the offsetting expense charged to “Selling and distribution expenses” in our Condensed Consolidated Statements of Operations) against the amounts due, reducing the net recognized receivable to the amount we estimate will be collected. During the three and nine months ended September 30, 2022, provisions of $568 and $696, respectively, were recorded.

The following table summarizes year-to-date activity in the allowance for credit losses on receivables from customers in each of our business segments:

ArcadiaDynaEnergeticsNobelCladDMC Global Inc.
Allowance for doubtful accounts, December 31, 2021
$ $2,758 $15 $2,773 
Current period provision for expected credit losses$584 97 62 743 
Write-offs charged against the allowance(97) (97)
Recoveries of amounts previously reserved$ (47) (47)
Impacts of foreign currency exchange rates and other$ (6)(5)(11)
Allowance for doubtful accounts, September 30, 2022
$584 $2,705 $72 $3,361 





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Revenue Recognition

The Company’s revenues are primarily derived from consideration paid by customers for tangible goods. The Company analyzes its different goods by segment to determine the appropriate basis for revenue recognition. Revenue is not generated from sources other than contracts with customers and revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. There are no material upfront costs for operations that are incurred from contracts with customers.

Our rights to payments for goods transferred to customers 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 6 "Contract Liabilities" for further information on contract liabilities and Note 10 "Business Segments" for disaggregated revenue disclosures.

See additional revenue recognition policy disclosures specific to the DynaEnergetics and NobelClad business segments within our Annual Report filed on Form 10-K for the year ended December 31, 2021.

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 transaction price is readily determinable and fixed at the time the transaction is entered into with the customer. Arcadia is entitled to each product’s transaction price upon the customer obtaining control of the item. For standard architectural building materials that are not made-to-order, such control transfers at a point in time, which is generally when the product has been shipped to the customer and the legal title has been transferred. Upon shipment and title transfer, Arcadia 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. Payment discounts, rebates, refunds, or any other forms of variable consideration are typically not granted to Arcadia customers.

For contracts that contain only one performance obligation, the total transaction price is allocated to the sole performance obligation. For contracts which contain multiple distinct performance obligations, judgment is required to determine the standalone 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 this price approximates the price of each good as 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, 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 related goods produced have no alternative use, and therefore control of these products passes to the customer over time. We have concluded that recognizing revenue utilizing an over-time output method based upon units delivered reasonably depicts the fulfillment 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 September 30, 2022 under the short-term contract exemption as we expect such performance obligations will be satisfied within the next 12 months following the end of the reporting period.

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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 recognized for units delivered.

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 basis 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 is recognized as an immediate adjustment to income tax expense. We recognize deferred tax assets for the expected future effects of all deductible temporary differences to the extent we believe these assets will more likely than not be realized. We record a valuation allowance when, based on current circumstances, it is more likely than not that all or a portion of the deferred tax assets will not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, recent financial operations and their associated valuation allowances, if any.

We recognize the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position that it will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that is more likely than not to be realized upon ultimate resolution. We recognize interest and penalties related to uncertain tax positions in operating expense.

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 dividends as common stock. Restricted stock awards do not participate in net losses.

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. Refer to Note 3 "Business Combination" for further discussion of the calculation of the adjustment of the redeemable noncontrolling interest to redemption value as of the end of the period presented. Diluted EPS adjusts basic EPS for the effects of restricted stock awards, restricted stock units, performance share units and other potentially dilutive financial instruments (dilutive securities), only in the periods in which such effect is dilutive. The effect of the dilutive securities is reflected in diluted EPS by application of the more dilutive of (1) the treasury stock method or (2) the two-class method. For the applicable periods 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.
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Three months ended September 30,Nine months ended September 30,
2022202120222021
Net income attributable to DMC Global Inc. stockholders, as reported$6,717 $403 8,981 2,559 
Adjustment of redeemable noncontrolling interest2,256  (4,996) 
Less: Undistributed net income available to participating securities(136)(3)(61)(25)
Numerator for basic net income per share:8,837 400 3,924 2,534 
Add: Undistributed net income allocated to participating securities136 3 61 25 
Less: Undistributed net income reallocated to participating securities(136)(3)(61)(25)
Numerator for diluted net income per share:8,837 400 3,924 2,534 
Denominator:
Weighted average shares outstanding for basic net income per share19,381,489 18,728,278 19,352,638 17,239,306 
Effect of dilutive securities (1)
305 10,807 4,695 11,219 
Weighted average shares outstanding for diluted net income per share19,381,794 18,739,085 19,357,333 17,250,525 
Net income per share attributable to DMC Global Inc. stockholders
Basic$0.46 $0.02 $0.20 $0.15 
Diluted$0.46 $0.02 $0.20 $0.15 

(1) For the three and nine months ended September 30, 2022, 128,145 and 69,846 shares, respectively, have been excluded as their effect would have been anti-dilutive.

Deferred compensation

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. If diversified, these contributions will be subsequently 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 restricted stock awards (“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 Condensed Consolidated Balance Sheets within “Treasury stock, at cost, and company stock held for deferred compensation, at par” and are recorded at 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 Condensed Consolidated Statements of Stockholders’ Equity and Redeemable Noncontrolling Interest 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.
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The balances related to the deferred compensation plan were as follows:
Balance Sheet locationSeptember 30, 2022December 31, 2021
Deferred compensation assetsOther assets$13,337 $13,812 
Deferred compensation obligationsOther long-term liabilities$14,982 $15,944 

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We are required to use an established hierarchy for fair value measurements based upon the inputs to the valuation and the degree to which they are observable or not observable in the market. The three levels in the hierarchy are as follows:                   

Level 1 — Inputs to the valuation based upon quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date.

Level 2 — Inputs to the valuation include quoted prices in either markets that are not active, or in active markets for similar assets or liabilities, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data.

Level 3 — Inputs to the valuation that are unobservable inputs for the asset or liability. 

The highest priority is assigned to Level 1 inputs and the lowest priority to Level 3 inputs.

The carrying value of accounts receivable and payable, accrued expenses, and the revolving loans and term loan under our credit facility, when outstanding, approximate their fair value.

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 $8,379 as of September 30, 2022 and $9,083 as of December 31, 2021 held to satisfy future deferred compensation obligations are valued based upon the market values of underlying securities and are classified as Level 2 in the fair value hierarchy.

We did not hold any Level 3 assets or liabilities as of September 30, 2022 or December 31, 2021. However, the fair value measurements of certain assets and liabilities acquired as part of the Arcadia acquisition were based on significant inputs not observable in the market and represent Level 3 measurements within the fair value measurement hierarchy.

Recent Accounting Pronouncements

    The Company reviews recent accounting pronouncements on a quarterly basis. We have considered all recent accounting pronouncements issued, but not yet effective, and we do not expect any to have a material effect on the Company’s Condensed Consolidated Financial Statements.

3.      BUSINESS COMBINATION

On December 16, 2021, the Company entered into an equity purchase agreement with Arcadia, Inc., a California corporation, the shareholders 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 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 is 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 is a leading U.S. supplier of architectural building products, which include exterior and interior framing systems, windows, curtain walls, doors, and interior partitions for the commercial buildings market, and highly engineered windows and doors for the high-end residential real estate market.

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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 fair 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 the income approach—relief from royalty method for the trade name acquired. A number of assumptions and estimates were involved in the application of these valuation methods, including forecasts of revenues, costs of revenues, operating expenses, tax rates, forecasted capital expenditures, customer attrition rate, discount rates and working capital changes.

The following table sets forth the preliminary components of the fair value of the total consideration transferred and preliminary purchase price allocation of the net assets acquired at the date of acquisition, along with the measurement period adjustments that occurred during the nine months ended September 30, 2022. The assets acquired and liabilities assumed exclude Arcadia's right-of-use asset and lease liabilities, respectively, as they have an immaterial impact on the total net assets acquired. Refer to Note 7 “Leases” for additional discussion of lease accounting. The total consideration transferred is still subject to potential adjustment, with any remaining adjustment not expected to impact long-lived asset balances recorded as of September 30, 2022.

PreliminaryMeasurement Period AdjustmentsPreliminary
December 23, 2021September 30, 2022
Cash, including cash acquired(1)
$268,654 $2,034 $270,688 
Equity(2)
21,716 — 21,716 
Total fair value of consideration transferred290,370 2,034 292,404 
Assets acquired:
Cash and cash equivalents$7,654 $— $7,654 
Accounts receivable31,456 — 31,456 
Inventories60,503 — 60,503 
Prepaid expenses and other2,438 — 2,438 
Property, plant and equipment(3)
17,323 4,770 22,093 
Goodwill(4)
141,266 (1,344)139,922 
Intangible assets(5)
254,500 — 254,500 
Other long-term assets122 (36)86 
Total assets acquired515,262 3,390 518,652 
Liabilities assumed:
Accounts payable8,792 — 8,792 
Other current liabilities22,520 — 22,520 
Total liabilities assumed31,312 — 31,312 
Redeemable noncontrolling interest(6)
193,580 1,356 194,936 
Total assets acquired and liabilities assumed$290,370 $2,034 $292,404 

(1) Cash sources of funding included $150,000 in new term loan debt and $118,654 of cash and marketable securities on hand. During the quarter ended March 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. During the quarter ended September 30, 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) Equity consideration included 551,458 shares of DMC common stock.






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(3) Property, plant and equipment consists of the following:
Land$1,500 
Buildings and improvements6,451 
Manufacturing equipment and tooling12,634 
Furniture, fixtures, and computer equipment211 
Other1,297 
Total property, plant and equipment$22,093 

The useful lives of property, plant and equipment are consistent with the Company's accounting policies.

(4) Amounts recorded for goodwill resulting in a tax basis step-up are generally expected to be deductible for tax purposes. Tax deductible goodwill is estimated to be $85,308.

(5) Intangible assets consist of $210,500 of customer relationships, $22,000 of trade name, and $22,000 of customer backlog. During the quarter ended September 30, 2022, the Company reclassified $500 from customer relationships to customer backlog due to changes in purchase price allocation estimates.

(6) Redeemable noncontrolling interest represents 40% of the total fair value of Arcadia upon acquisition.

The final fair value determination of the assets acquired and liabilities assumed will be completed prior to one year from the transaction completion date, consistent with Accounting Standards Codification (“ASC”) 805 Business Combinations ("ASC 805"). Measurement period adjustments will be recognized in the reporting period in which the adjustments are determined and calculated as if the accounting had been completed as of the acquisition date.

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 both the Call Option and Put Option do not 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 based 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 for the preceding two fiscal years and its projected adjusted earnings for the then-current fiscal year. 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 Company has also concluded that the noncontrolling interest is probable of redemption, as the only criteria for the security to become redeemable is the passage of time. As such, the Company has classified the redeemable noncontrolling interest separate from the stockholders’ equity section in the Condensed Consolidated Balance Sheets.

At each balance sheet date subsequent to acquisition, the carrying value of the redeemable noncontrolling interest has been adjusted to its estimated redemption value as if redemption were to occur at the balance sheet date based upon the predefined calculation in the Operating Agreement described above. This immediate adjustment is charged or credited directly to retained earnings and therefore does not impact the Condensed Consolidated Statements of Operations or Comprehensive Income (Loss). As of September 30, 2022, the Company’s estimated redemption value of the redeemable noncontrolling interest decreased to $194,962 in comparison to our previous estimates at each balance sheet date subsequent to acquisition of $197,196 due to a change in our forecast of adjusted earnings for calendar year 2022. During the three months ended September
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30, 2022, the Company recorded an adjustment of $2,256 to decrease the redeemable noncontrolling interest to its estimated redemption value. This adjustment was recorded after ascribing net income and cash distributions attributable to the redeemable noncontrolling interest in accordance with ASC 480.

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 the 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 has been recorded within “Other Assets” in the Condensed 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 an earlier date, 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 such adjustments, and also requires nonrecurring adjustments to be prepared and presented. For the three and nine months ended September 30, 2021, operating results have been adjusted to reflect (a) fair value adjustments related to incremental intangible asset amortization, (b) interest expense with the higher principal and interest rates associated with the Company's new term loan debt 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 the adjustments on income taxes.

The following unaudited pro forma combined financial information presents combined results of the Company and Arcadia. Arcadia’s operating results have been included in the Company’s operating results for the three and nine months ended September 30, 2022.

Three months ended September 30, 2021Nine months ended September 30, 2021
As ReportedPro FormaAs ReportedPro Forma
Net sales$67,175 $132,488 $188,271 $371,963 
Net income attributable to DMC Global Inc. stockholders$403 $5,522 $2,559 $15,965 

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 at September 30, 2022:
ArcadiaDynaEnergeticsNobelCladDMC Global Inc.
Raw materials$14,290 $16,646 $7,517 $38,453 
Work-in-process10,072 17,652 8,624 36,348 
Finished goods56,038 21,380 129 77,547 
Supplies  225 225 
Total inventories$80,400 $55,678 $16,495 $152,573 
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Inventories consisted of the following at December 31, 2021:
ArcadiaDynaEnergeticsNobelCladDMC Global Inc.
Raw materials$12,168 $15,209 $7,655 $35,032 
Work-in-process3,987 13,672 10,257 27,916 
Finished goods44,348 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 consisted of the following as of September 30, 2022:
GrossAccumulated
Amortization
Net
Core technology$12,951 $(12,693)$258 
Customer relationships242,642 (42,016)200,626 
Customer backlog22,000 (22,000) 
Trademarks / Trade names23,751 (2,882)20,869 
Total intangible assets$301,344 $(79,591)$221,753 
 
Our purchased intangible assets consisted of the following as of December 31, 2021:
GrossAccumulated
Amortization
Net
Core technology$15,647 $(14,209)$1,438 
Customer relationships246,718 (36,047)210,671 
Customer backlog21,500  21,500 
Trademarks / Trade names24,037 (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 September 30, 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 intangible assets related to the historical acquisition.

6.      CONTRACT LIABILITIES
 
At times, 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. Contract liabilities were as follows:
September 30, 2022December 31, 2021
Arcadia$26,123 $14,697 
NobelClad3,453 5,881 
DynaEnergetics454 474 
Total contract liabilities$30,030 $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.

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7.      LEASES

The Company leases real properties for use in manufacturing and as administrative and sales offices, and also 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 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 Condensed 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 period in which the obligation for those payments is incurred. The Company has no leases in which the Company is the lessor.

Nearly all of the Company’s leasing arrangements are classified as operating leases. ROU asset and lease liability balances were as follows for the periods presented:
September 30, 2022December 31, 2021
ROU asset$50,145 $52,219 
Current lease liability6,994 6,126 
Long-term lease liability44,634 47,000 
Total lease liability$51,628 $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 Condensed Consolidated Balance Sheets. Cash paid for operating lease liabilities are recorded as operating cash outflows in the Company’s Condensed Consolidated Statements of Cash Flows.

Arcadia leases certain office, manufacturing, distribution and warehouse facilities from entities affiliated with the redeemable noncontrolling interest holder and the president of Arcadia. There were eight related party leases in effect as of September 30, 2022, with expiration dates ranging from calendar years 2023 to 2031. As of September 30, 2022, the total ROU asset and related lease liability recognized for related party leases was $29,753 and $30,131, respectively.

For the three months ended September 30, 2022 and 2021, operating lease expense was $2,872 and $1,064, respectively. For the nine months ended September 30, 2022 and 2021, operating lease expense was $8,413 and $3,074, respectively. Related party lease expense for the three and nine months ended September 30, 2022 was $1,156 and $3,469, respectively, which is included in overall operating lease expense. There was no related party lease expense recorded through September 30, 2021. Short term and variable lease costs were not material for the three and nine months ended September 30, 2022 and 2021.

8.      DEBT
 
As of September 30, 2022 and December 31, 2021, outstanding borrowings consisted of the following:
September 30, 2022December 31, 2021
Syndicated credit agreement:  
U.S. Dollar revolving loan$ $ 
Term loan138,750 150,000 
Commerzbank line of credit  
Outstanding borrowings138,750 150,000 
Less: debt issuance costs(2,341)(2,575)
Total debt136,409 147,425 
Less: current portion of long-term debt(15,000)(15,000)
Long-term debt$121,409 $132,425 

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Syndicated Credit Agreement

On December 23, 2021, we entered into a five-year $200,000 syndicated credit agreement (“credit facility”) which included a $150,000 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 allows for revolving loans of up to $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 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.

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 September 30, 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 the 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 September 30, 2022, we were in compliance with all financial covenants and other provisions of our debt agreements.

We also maintain a line of credit with a German bank of €7,000 for our NobelClad and DynaEnergetics operations in Europe. This line of credit is also used to issue bank guarantees to customers to secure advance payments made by them. As of September 30, 2022 and December 31, 2021, we had no outstanding borrowings under this line of credit and bank guarantees of €2,559 and €2,997 were secured by the line of credit, respectively. The line of credit has open-ended terms and can be canceled by the bank at any time.

Deferred debt issuance costs are being amortized over the remaining term of the credit facility which expires on December 23, 2026.

9.     INCOME TAXES

The effective tax rate for each of the periods reported differs from the U.S. statutory rate primarily due to variation in contribution to consolidated pre-tax income from each jurisdiction for the respective periods, differences between the U.S. and foreign tax rates (which range from 20% to 33%), permanent differences between book and taxable income, income or loss attributable to the redeemable noncontrolling interest holder, and changes to valuation allowances on our deferred tax assets.

Arcadia is treated as a partnership for U.S. tax purposes. With the exception of certain state taxes, income or loss flows through to the shareholders and is taxed at the shareholder level. Tax impacts related to income or loss from Arcadia that are included in consolidated pretax results but are attributable to the redeemable noncontrolling interest holder are not included in the consolidated income tax provision.

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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. During the three and nine months ended September 30, 2022 and September 30, 2021, we did not record any adjustments to previously established valuation allowances, except for adjustments related to the changes in balances of the related deferred tax assets. The Company will continue to monitor the realizability of deferred tax assets and the need for valuation allowances and will record adjustments in the periods in which facts support such changes.

The Tax Cuts and Jobs Act (“TCJA”) provides that foreign earnings generally can be repatriated to the U.S. without federal tax consequence. We have assessed 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.

10.      BUSINESS SEGMENTS
 
Our business is organized into three segments: Arcadia, DynaEnergetics and NobelClad. In December 2021, DMC acquired a 60% controlling interest in Arcadia, a leading U.S. supplier of architectural building products, including storefronts and entrances, windows, curtain walls, doors and interior partitions for the commercial buildings market. Arcadia also supplies the luxury home market with highly engineered steel, aluminum and wood door and window systems. DynaEnergetics designs, manufactures and distributes products utilized by the global oil and gas industry principally to perforate 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 and specialized transition joints.

Our reportable segments are separately managed strategic business units that offer different products and services. Each segment’s products are marketed to different customer types and require different manufacturing processes and technologies.
Segment information is as follows:
 
Three months ended September 30,Nine months ended September 30,
2022202120222021
Net sales:
Arcadia$80,697 $ $225,127 $ 
DynaEnergetics70,372 44,237 186,776 124,677 
NobelClad23,396 22,938 67,109 63,594 
Net sales$174,465 $67,175 $479,012 $188,271 

Three months ended September 30,Nine months ended September 30,
2022202120222021
Income (loss) before income taxes:
Arcadia$3,742 $ $3,521 $ 
DynaEnergetics11,978 1,585 26,585 6,307 
NobelClad2,505 3,620 5,690 8,595 
Segment operating income18,225 5,205 35,796 14,902 
Unallocated corporate expenses(2,939)(2,499)(10,490)(6,903)
Unallocated stock-based compensation*(1,885)(1,569)(5,883)(4,904)
Other income (expense), net120 (198)(35)304 
Interest expense, net(1,771)(14)(4,058)(230)
Income before income taxes$11,750 $925 $15,330 $3,169 
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Three months ended September 30,Nine months ended September 30,
2022202120222021
Depreciation and amortization:
Arcadia$7,966 $ $34,818 $ 
DynaEnergetics1,957 2,012 5,908 6,095 
NobelClad899 967 2,725 2,851 
Segment depreciation and amortization10,822 2,979 43,451 8,946 
Corporate and other104 102 281 277 
Consolidated depreciation and amortization$10,926 $3,081 $43,732 $9,223 

* Stock-based compensation is not allocated to 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.

The disaggregation of revenue earned from contracts with customers based on the geographic location of the customer is as follows. For Arcadia, net sales have been presented consistent with United States regional definitions as provided by the American Institute of Architects.

Arcadia
 Three months endedNine months ended
 September 30, 2022September 30, 2022
West$63,281 $176,288 
South12,139 27,362 
Northeast2,958 11,880 
Midwest2,319 9,597 
Total Arcadia$80,697 $225,127 

DynaEnergetics
 Three months ended September 30,Nine months ended September 30,
 2022202120222021
United States$55,999 $36,543 $146,297 $96,316 
Canada4,341 2,798 14,453 9,304 
Indonesia1,051 240 1,903 933 
Egypt652 671 3,120 2,398 
India615 243 4,625 904 
Oman704 665 2,695 2,117 
Rest of the world7,010 3,077 13,683 12,705 
Total DynaEnergetics$70,372 $44,237 $186,776 $124,677 





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NobelClad
 Three months ended September 30,Nine months ended September 30,
 2022202120222021
United States$9,120 $11,033 $29,055 $30,448 
Canada3,161 1,254 6,952 3,985 
Germany2,055 761 3,215 1,539 
China1,100 892 3,467 3,775 
Sweden1,096 494 2,179 676 
United Arab Emirates1,003 929 2,705 2,030 
Australia844 576 1,499 1,171 
India742 299 3,007 1,371 
South Korea672 328 1,510 1,426 
Norway508 265 1,087 757 
France472 509 1,625 1,929 
Netherlands357 507 1,464 1,628 
Italy143 831 840 1,268 
Saudi Arabia 242 1,995 310 
Russia* 1,519 191 3,586 
Rest of the world2,123 2,499 6,318 7,695 
Total NobelClad$23,396 $22,938 $67,109 $63,594 

*Future sales to Russia have been indefinitely suspended due to the ongoing conflict in Ukraine.

During the three and nine months ended September 30, 2022 and 2021, no single customer accounted for greater than 10% of consolidated net sales. As of September 30, 2022, one DynaEnergetics customer accounted for greater than 10% of consolidated accounts receivable. As of December 31, 2021, no single customer accounted for greater than 10% of consolidated accounts receivable.

11.      DERIVATIVE INSTRUMENTS

We are exposed to foreign currency exchange risk resulting from fluctuations in exchange rates, primarily the U.S. dollar to euro, the U.S. dollar to the Canadian dollar, and, to a lesser extent, other currencies, arising from intercompany and third-party transactions entered into by our subsidiaries that are denominated in currencies other than their functional currency. Changes in exchange rates with respect to these transactions result in unrealized gains or losses if such transactions are unsettled at the end of the reporting period or realized gains or losses at settlement of the transaction. We use foreign currency forward contracts to offset foreign exchange rate fluctuations on foreign currency denominated asset and liability positions. None of these contracts are designated as accounting hedges, and all changes in the fair value of the forward contracts are recognized in “Other income (expense), net” within our Condensed Consolidated Statements of Operations.

We execute derivatives with a specialized foreign exchange brokerage firm as well as other large financial institutions. The primary credit risk inherent in derivative agreements is the possibility that a loss may occur from the nonperformance of a counterparty to the agreements. We perform a review of the credit risk of our counterparties at the inception of the contract and on an ongoing basis. We anticipate that our counterparties will be able to fully satisfy their obligations under the agreements but will take action if doubt arises regarding the counterparties’ ability to perform.

As of September 30, 2022 and December 31, 2021, the net notional amount of the forward currency contracts the Company held were $8,591 and $13,032, respectively. At September 30, 2022 and December 31, 2021, the fair values of outstanding foreign currency forward contracts were $0.

The following table presents the location and amount of net (losses) from hedging activities, which offset foreign currency gains and losses recorded in the normal course of business that are not presented below.
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Three months ended September 30,Nine months ended September 30,
DerivativeStatements of Operations Location2022202120222021
Foreign currency contractsOther income (expense), net$(637)$(253)$(789)$(187)

12.    COMMITMENTS AND CONTINGENCIES

Contingent Liabilities

The Company records an accrual for contingent liabilities when a loss is both probable and reasonably estimable. If some amount within a range of loss appears to be a better estimate than any other amount within the range, that amount is accrued. When no amount within a range of loss appears to be a better estimate than any other amount, the lowest amount in the range is accrued.

Legal Proceedings

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results except as set forth below:

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 announced the intent to commence arbitration on individual claims, but no claims have yet been filed.

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 now limited to PAGA collective action claims. As in Felipe, those PAGA representative claims are currently stayed and will likely remain stayed until the California Supreme Court addresses the state law issues left open by the U.S. Supreme Court’s decision in Viking River Cruises, Inc. versus Moriana. The plaintiff has however commenced arbitration on a solely individual basis of his wage and hour claims. The arbitral body has appointed an arbitrator to adjudicate those claims and a hearing has been set in June 2023. The remaining Mayorga PAGA representative claims have now been combined with the Felipe case.

Arcadia intends to vigorously defend against the Felipe and Mayorga actions. Due to the nature of these matters and inherent uncertainties, it is not possible to provide an evaluation of the likelihood of an unfavorable outcome or an estimate of the amount or range of potential loss, if any. Further, under the Equity Purchase Agreement, certain amounts have been placed in escrow pending resolution of these matters.

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ITEM 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with our historical Consolidated Financial Statements and notes, as well as the selected historical consolidated financial data that is included in our Annual Report filed on Form 10-K for the year ended December 31, 2021.
 
Unless stated otherwise, all dollar figures are presented in thousands (000s).
 
Overview
 
General

DMC Global Inc. (“DMC”) is a diversified holding company. Our innovative businesses provide differentiated products and services to niche industrial and commercial markets around the world. DMC’s objective is to identify well-run businesses and strong management teams and support them with long-term capital and strategic, legal, technology and operating resources. DMC’s culture is to foster local innovation versus centralized control. We help our portfolio companies grow core businesses, launch new initiatives, upgrade technologies and systems to support their long-term strategy, and make acquisitions that improve their competitive positions and expand their markets. Today, DMC’s portfolio consists of Arcadia, DynaEnergetics, and NobelClad, which collectively address the building products, energy, industrial processing and transportation markets. 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 is a leading U.S. supplier of architectural building products, which include exterior and interior framing systems, windows, curtain walls, doors, and interior partitions for the commercial buildings market; and highly engineered windows and doors for the high-end residential real estate 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 products utilized by the global oil and gas industry principally to perforate oil and gas wells. These products are sold to oilfield service companies in the U.S., Europe, Canada, Africa, the Middle East, and Asia. DynaEnergetics also sells directly to end-users. The market for perforating products, which are used during the well completion process, generally corresponds with oil and gas exploration and production activity. Well completion operations are increasingly complex, which in turn has increased the demand for intrinsically-safe, reliable and technically advanced perforating systems.

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

NobelClad

NobelClad produces explosion-welded clad metal plates for use in the construction of corrosion resistant industrial processing equipment and specialized transition joints. While a significant portion of the demand for our products is driven by maintenance and retrofit projects at existing chemical processing, petrochemical processing, oil refining, and aluminum smelting facilities, new plant construction and large plant expansion projects also account for a significant portion of total demand. These industries tend to be cyclical in nature and timing of new order inflow remains difficult to predict. We use backlog as a primary means to measure the immediate outlook for our NobelClad business. We define “backlog” at any given point in time as all firm, unfulfilled purchase orders and commitments at that time. Most firm purchase orders and commitments are realized, and we expect to fill most backlog orders within the following 12 months. NobelClad’s backlog increased to $48,019 at September 30, 2022 from $41,181 at December 31, 2021.
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Cost of products sold for NobelClad includes the cost of metals, explosive powders and other raw materials used to manufacture clad metal plates as well as employee compensation and benefits, outside processing costs, depreciation of manufacturing equipment, manufacturing facility lease expense, supplies and other manufacturing overhead expenses.

Employee Retention Credit

In the first quarter of 2021, under provisions of legislation enacted in December 2020 the Company became eligible for the Employee Retention Credit (“ERC”) under the Coronavirus Aid, Relief, and Economic Security Act, as amended (“CARES Act”). As a result of the new legislation, the Company was able to claim a refundable tax credit equal to 70% of the qualified wages it paid to employees for portions of calendar year 2021. The ERC favorably impacted the financial statement results of the Company for the three and nine months ended September 30, 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 three and nine months ended September 30, 2022.

Factors Affecting Results

Consolidated sales were $174,465 in the third quarter of 2022. Excluding Arcadia, third quarter sales were $93,768, an increase of 40% versus the third quarter of 2021. The improved performance primarily was driven by higher energy prices and a growing reliance on North American oil and gas, which has led to increased drilling and well completion activity in North America and increased sales at DynaEnergetics.

Arcadia reported sales of $80,697 in the third quarter of 2022, representing a sequential increase of 6%. The increase 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 $70,372 in the third quarter of 2022 increased 59% compared with the third quarter of 2021 due to improved oil and gas demand, which led to higher North American drilling and well completions, and increased demand and improved pricing for DynaEnergetics’ DS perforating systems. DynaEnergetics’ international sales also improved, increasing 117% compared with the third quarter of 2021.

NobelClad sales of $23,396 in the third quarter of 2022 increased 2% compared with the third quarter of 2021 reflecting increased shipments out of backlog. The increase in NobelClad 2022 sales was partially offset by the weakening of the Euro compared to the United States Dollar.

Consolidated gross profit was 29% in the third quarter of 2022 versus 25% in the third quarter of 2021. The improvement compared to the prior year primarily was due to the acquisition of Arcadia, which had a higher gross profit percentage than DMC’s other business units. The impact of higher sales volume, primarily increases in unit sales of DS perforating systems at DynaEnergetics, on fixed manufacturing overhead expenses also contributed to the improved performance. These favorable impacts were partially offset by higher material and other input costs at each business segment. Additionally, the 2021 third quarter gross profit was favorably impacted by the receipt of $1,800 ERC under the CARES Act.

Consolidated selling, general and administrative (SG&A) expenses were $30,544 in the third quarter of 2022 compared with $15,314 in the third quarter of 2021. Arcadia’s incremental selling, general and administrative expenses were $12,917 in the third quarter of 2022. The year-over-year increase also was attributable to higher salaries, benefits, and other-payroll related costs including variable incentive compensation and stock-based compensation expense. Additionally, SG&A in the third quarter of 2021 included receipt of $769 of ERC under the CARES Act.

Cash of $18,486 at September 30, 2022 decreased $12,324 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 their investments in inventory due to rising raw material prices, longer-lead times and continued sales volume growth.
Outlook

We remain in a period of volatile raw material and other input costs as well as continued supply chain disruptions and challenges. Each of our businesses have been and may continue to be impacted by high raw material prices, the availability of labor, increased wages, and supply chain disruptions such as longer lead times related to the procurement of raw materials.
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In North America, well completion activity increased in the third quarter of 2022 which positively impacted DynaEnergetics’ end customers’ activity levels. 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 remain resilient. DynaEnergetics has instituted price increases over the past twelve months to offset higher labor and material costs. DynaEnergetics offers a highly differentiated product line, and its factory-assembled DS perforating systems are delivered just in time to the wellsite, eliminating customer assembly operations and requiring fewer people on location.

We believe many of the pre-wired carriers in the market incorporate features that violate DynaEnergetics patents, and we are continuing to take aggressive legal action against the companies that make these products. DynaEnergetics has made significant investments in technologies and products that have improved the safety, efficiency and performance of its customers’ well completions, and have enhanced the effectiveness and profitability of the industry as a whole. Our patent strategy is designed to protect these investments and provide transparency so others can innovate without violating our intellectual property. These lawsuits have increased our general and administrative expenses, and we expect these costs to be ongoing throughout 2022.

Arcadia serves the commercial building market in the western and southwestern United States, and the high-end residential market across the United States. Both commercial and residential operations have built substantial order backlogs and are benefiting from relatively strong markets, which collectively are expected to lead to resilient financial performance. In addition, we expect the building products industry to remain strong, particularly in Arcadia’s core geographic regions and end markets. We are beginning the process to design and install new finishing capacity to increase manufacturing throughput. We expect the finishing capacity will be operational next year. The design and implementation of a new enterprise resource planning system is also underway and will improve operating efficiencies and enhance the buying experience for Arcadia’s commercial and residential customers.
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, other items that management does not utilize in assessing DMC’s operating performance (as further described in the tables below). Adjusted EBITDA attributable to DMC Global Inc. 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, other 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, other items that management does not utilize in assessing DMC’s operating performance. Adjusted diluted earnings per share is defined as diluted earnings per share attributable to DMC Global Inc. stockholders (exclusive of adjustment of redeemable noncontrolling interest) plus restructuring expenses and asset impairment charges and, when appropriate, other 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 non-recurring charges on DMC’s net income (loss) and diluted earnings per share, respectively.

Net debt is a non-GAAP measure we use to supplement information in our Condensed Consolidated Financial Statements. We define net debt as total 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.

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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. Given not all companies use identical calculations, DMC’s presentation of non-GAAP financial measures may not be comparable to similarly titled measures of other companies.
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Consolidated Results of Operations

Three months ended September 30, 2022 compared with three months ended September 30, 2021
Three months ended September 30,
20222021$ change% change
Net sales$174,465 $67,175 $107,290 160 %
Gross profit51,338 16,662 34,676 208 %
Gross profit percentage29.4 %24.8 %
COSTS AND EXPENSES:
General and administrative expenses19,796 9,721 10,075 104 %
% of net sales11.3 %14.5 %
Selling and distribution expenses10,748 5,593 5,155 92 %
% of net sales6.2 %8.3 %
Amortization of purchased intangible assets7,385 211 7,174 3,400 %
% of net sales4.2 %0.3 %
Restructuring expenses— — %
Operating income13,401 1,137 12,264 1,079 %
Other income (expense), net120 (198)318 161 %
Interest expense, net(1,771)(14)(1,757)12,550 %
Income before income taxes11,750 925 10,825 1,170 %
Income tax provision3,537 522 3,015 578 %
Net income8,213 403 7,810 1,938 %
Net income attributable to redeemable noncontrolling interest1,496 — 1,496 — %
Net income attributable to DMC Global Inc.6,717 403 6,314 1,567 %
Adjusted EBITDA attributable to DMC Global Inc.$21,751 $5,787 $15,964 276 %

Net sales were $174,465. Excluding Arcadia, net sales were $93,768 for the three months ended September 30, 2022, or an increase of 40% compared with the same period in 2021 primarily due to increased drilling and well completion activity in North America and a corresponding increase in unit sales of DynaEnergetics’ DS perforating systems.

Gross profit percentage was 29.4%. Excluding Arcadia, gross profit percentage was 29.3% versus 24.8% in the same period in 2021. The improvement compared to the prior year primarily was due to higher sales volume on fixed manufacturing overhead expense, primarily due to increases in unit sales of DS perforating systems at DynaEnergetics. These favorable impacts were partially offset by higher material and other input costs at each business segment. Additionally, the 2021 third quarter gross profit was favorably impacted by the receipt of $1,800 ERC under the CARES Act.

General and administrative expenses increased $10,075 for the three months ended September 30, 2022 compared with the same period in 2021. The Arcadia acquisition contributed $8,782 to the increase. The remainder of the increase primarily was due to higher salaries, benefits, and other-payroll related costs including variable incentive compensation by $1,125 and the expiration of the 2021 ERC under the CARES Act by $349.

Selling and distribution expenses increased $5,155 for the three months ended September 30, 2022 compared with the same period in 2021. Arcadia contributed $4,135 to the increase. The remainder of the increase primarily was due to higher salaries, benefits, and other-payroll related costs including variable incentive compensation by $194, expiration of the 2021 ERC under the CARES Act by $420, higher lease expense by $173, and higher business-related travel by $76.

Operating income was $13,401 for the three months ended September 30, 2022 compared to $1,137 in the same period last year. Excluding Arcadia, operating income was $9,659 due to the improved performance of DynaEnergetics.

Other income, net of $120 for the three months ended September 30, 2022 primarily related to net unrealized and realized foreign currency exchange gains. Currency gains and losses can arise when subsidiaries enter into inter-company and third-party
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transactions that are denominated in currencies other than their functional currency, including foreign currency forward contracts used to offset foreign exchange rate fluctuations on certain foreign currency denominated asset and liability positions.

Interest expense, net of $1,771 for the three months ended September 30, 2022 increased compared with the same period in 2021 due to the principal balance outstanding on the credit facility entered into in December 2021 in conjunction with the acquisition of Arcadia, as well as increasing interest rates during the quarter.

Income tax provision of $3,537 was recorded on income before income taxes of $11,750. Our most significant operations are in the United States, which has a 21% statutory income tax rate, and Germany, which has a 33% statutory income 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. The effective rate was impacted unfavorably by geographic mix of pretax income, state taxes, 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 provision of $522 on loss before income taxes of $925 for the three months ended September 30, 2021. The effective rate was impacted favorably by discrete stock-based compensation windfall benefits of $39. The rate was also impacted unfavorably by geographic mix of pretax income, state taxes, and certain compensation expenses that are not tax deductible in the U.S.

Net income attributable to DMC Global Inc. for the three months ended September 30, 2022 was $6,717, or $0.46 per diluted share after the adjustment related to the redeemable noncontrolling interest, compared to net income of $403, or $0.02 per diluted share, for the same period in 2021.

Adjusted EBITDA for the three months ended September 30, 2022 increased compared with the same period in 2021 primarily due to the acquisition of Arcadia and improved performance of DynaEnergetics. See “Overview” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
Three months ended September 30,
 20222021
Net income$8,213 $403 
Interest expense, net1,771 14 
Income tax provision3,537 522 
Depreciation3,541 2,870 
Amortization of purchased intangible assets7,385 211 
EBITDA24,447 4,020 
Restructuring expenses— 
Stock-based compensation2,242 1,569 
Other (income) expense, net(120)198 
Adjusted EBITDA attributable to redeemable noncontrolling interest(4,826)— 
Adjusted EBITDA attributable to DMC Global Inc.$21,751 $5,787 

Adjusted Net Income and Adjusted Diluted Earnings per Share for the three months ended September 30, 2022 increased compared with the same period in 2021 primarily due to the factors discussed above. See "Overview" above for the explanation of the use of non-GAAP measures. The following is a reconciliation of the most directly comparable GAAP measures to Adjusted Net Income and Adjusted Diluted Earnings Per Share.

Three months ended September 30, 2022
Amount
Per Share (1)
Net income attributable to DMC Global Inc.$6,717 $0.35 
NobelClad restructuring expenses, net of tax— 
As adjusted$6,722 $0.35 
(1) Calculated using diluted weighted average shares outstanding of 19,381,794

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Three months ended September 30, 2021
Amount
Per Share (1)
Net income attributable to DMC Global Inc.$403 $0.02 
As adjusted$403 $0.02 
(1) Calculated using diluted weighted average shares outstanding of 18,739,085


Nine months ended September 30, 2022 compared with nine months ended September 30, 2021
Nine months ended September 30,
20222021$ change% change
Net sales$479,012 $188,271 $290,741 154 %
Gross profit140,343 46,546 93,797 202 %
Gross profit percentage29.3 %24.7 %
COSTS AND EXPENSES:
General and administrative expenses56,330 26,121 30,209 116 %
% of net sales11.8 %13.9 %
Selling and distribution expenses31,383 16,380 15,003 92 %
% of net sales6.6 %8.7 %
Amortization of purchased intangible assets33,154 823 32,331 3,928 %
% of net sales6.9 %0.4 %
Restructuring expenses53 127 (74)(58 %)
Operating income19,423 3,095 16,328 528 %
Other (expense) income, net(35)304 (339)(112 %)
Interest expense, net(4,058)(230)(3,828)1,664 %
Income before income taxes15,330 3,169 12,161 384 %
Income tax provision4,938 610 4,328 710 %
Net income10,392 2,559 7,833 306 %
Net income attributable to redeemable noncontrolling interest1,411 — 1,411 — %
Net income attributable to DMC Global Inc.8,981 2,559 6,422 251 %
Adjusted EBITDA attributable to DMC Global Inc.$54,618 $17,349 $37,269 215 %

Net sales were $479,012. Excluding Arcadia, net sales were $253,885 for the nine months ended September 30, 2022, an increase of 35% compared with the same period in 2021 primarily due to increased drilling and well completion activity in North America and a corresponding increase in unit sales of DynaEnergetics’ DS perforating systems.

Gross profit percentage was 29.3%. Excluding Arcadia, gross profit percentage was 27.6% versus 24.7% in the same period in 2021. The improvement compared to prior year primarily was due to higher sales volume on fixed manufacturing overhead expenses, primarily due to increases in unit sales of DS perforating systems at DynaEnergetics. These increases were partially offset by a less favorable project mix at NobelClad and higher material costs at DynaEnergetics. Additionally, 2021 gross profit was favorably impacted by the receipt of $4,134 ERC under the CARES Act.

General and administrative expenses increased $30,209 for the nine months ended September 30, 2022 compared with the same period in 2021. The Arcadia acquisition contributed $22,337 to the increase. The remainder of the increase was due to higher outside services costs by $1,725, which was primarily related to patent infringement litigation in which DynaEnergetics is the plaintiff, higher headcount and salaries, benefits, and other-payroll related costs including variable incentive compensation by $2,644, higher business-related travel by $1,668, and the expiration of the 2021 ERC under the CARES Act by $1,028.

Selling and distribution expenses increased $15,003 for the nine months ended September 30, 2022 compared with the same period in 2021.The Arcadia acquisition contributed $11,832 to the increase. The remainder of the increase was from the expiration of the 2021 ERC under the CARES Act by $1,236, higher business-related travel by $431, increased lease expense by
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$399, higher depreciation expense by $136, higher outside service costs by $165, and higher salaries, benefits, and other-payroll related costs including variable incentive compensation by $319.

Operating income was $19,423 for the nine months ended September 30, 2022 compared to $3,095 in the same period last year. The improved performance was attributable to DynaEnergetics and the acquisition of Arcadia. Operating income for the nine months ended September 30, 2021 was also favorably impacted by receipt of $6,398 ERC under the CARES Act.

Other expense, net of $35 for the nine months ended September 30, 2022 primarily related to net unrealized and realized foreign currency exchange losses. Currency gains and losses can arise when subsidiaries enter into inter-company and third-party transactions that are denominated in currencies other than their functional currency, including foreign currency forward contracts used to offset foreign exchange rate fluctuations on certain foreign currency denominated asset and liability positions.

Interest expense, net of $4,058 for the nine months ended September 30, 2022 increased compared with the same period in 2021 due to the principal balance outstanding on the credit facility entered into in December 2021 in conjunction with the acquisition of Arcadia, as well as increasing interest rates during the year-to-date period.

Income tax provision of $4,938 was recorded on income before income taxes of $15,330. Our most significant operations are in the United States, which has a 21% statutory income tax rate, and Germany, which has a 33% statutory income 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. The effective rate was impacted unfavorably by geographic mix of pretax income, state taxes, 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. The effective rate was impacted unfavorably by discrete stock-based compensation shortfalls of $454. We recorded an income tax provision of $610 on income before income taxes of $3,169 for the nine months ended September 30, 2021. The effective rate was impacted favorably by discrete stock-based compensation windfall benefits of $832. The rate was also impacted unfavorably by geographic mix of pretax income, state taxes, and certain compensation expenses that are not tax deductible in the U.S.

Net income attributable to DMC Global Inc. for the nine months ended September 30, 2022 was $8,981, or $0.20 per diluted share after the adjustment related to the redeemable noncontrolling interest, compared to net income of $2,559, or $0.15 per diluted share, for the same period in 2021.

Adjusted EBITDA for the nine months ended September 30, 2022 increased compared with the same period in 2021 primarily due to the acquisition of Arcadia and improved performance of DynaEnergetics. See “Overview” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
Nine months ended September 30,
 20222021
Net income$10,392 $2,559 
Interest expense, net4,058 230 
Income tax provision4,938 610 
Depreciation10,578 8,400 
Amortization of purchased intangible assets33,154 823 
EBITDA63,120 12,622 
Restructuring expenses53 127 
Amortization of acquisition-related inventory valuation step-up430 — 
Stock-based compensation6,891 4,904 
Other expense (income), net35 (304)
Adjusted EBITDA attributable to redeemable noncontrolling interest(15,911)— 
Adjusted EBITDA attributable to DMC Global Inc.$54,618 $17,349 

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Adjusted Net Income and Adjusted Diluted Earnings per Share increased for the nine months ended September 30, 2022 compared with the same period in 2021 primarily due to the factors discussed above. See "Overview" above for the explanation of the use of non-GAAP measures. The following is a reconciliation of the most directly comparable GAAP measures to Adjusted Net Income and Adjusted Diluted Earnings Per Share.

Nine months ended September 30, 2022
Amount
Per Share (1)
Net income attributable to DMC Global Inc.$8,981 $0.47 
Amortization of acquisition-related inventory valuation step-up, net of tax199 0.01 
NobelClad restructuring expenses, net of tax36 — 
As adjusted$9,216 $0.48 
(1) Calculated using diluted weighted average shares outstanding of 19,357,333

Nine months ended September 30, 2021
Amount
Per Share (1)
Net income attributable to DMC Global Inc.$2,559 0.15 
NobelClad restructuring expenses, net of tax127 0.01 
As adjusted$2,686 $0.16 
(1) Calculated using diluted weighted average shares outstanding of 17,250,525

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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 is defined as revenues less expenses identifiable to the segment. Segment operating income will reconcile to consolidated income before income taxes by deducting unallocated corporate expenses, including stock-based compensation, net other expense, and net interest expense.

Arcadia

As more fully described in the 2021 Form 10-K, a 60% controlling interest in Arcadia was acquired in December 2021. A summary of results of operations for Arcadia for the three and nine months ended September 30, 2022 is as follows (in thousands):

Three and nine months ended September 30, 2022
Three months ended September 30, 2022Nine months ended September 30, 2022
Net sales$80,697 $225,127 
Gross profit23,892 70,364 
Gross profit percentage29.6 %31.3 %
COSTS AND EXPENSES:
General and administrative expenses8,782 22,337 
Selling and distribution expenses4,135 11,832 
Amortization of purchased intangible assets7,233 32,674 
Operating income3,742 3,521 
Adjusted EBITDA12,065 39,777 
Less: adjusted EBITDA attributable to redeemable noncontrolling interest(4,826)(15,911)
Adjusted EBITDA attributable to DMC Global Inc.$7,239 $23,866 

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.

During the three and nine months ended September 30, 2022, both net sales and cost of products sold increased in comparison to pre-acquisition periods, largely driven by higher customer pricing in response to higher base aluminum metal prices and increases in other input costs. During the nine months ended September 30, 2022, cost of products sold was also negatively impacted by the amortization of the inventory step-up recorded in purchase accounting. Gross profit dollars generated were consistent with pre-acquisition periods; however, the related gross profit percentage decreased as increased input costs outpaced the increase in net sales from higher average selling prices. General and administrative and selling and distribution expenses were higher in comparison to pre-acquisition periods. Higher general and administrative expenses were driven by public company related expenses such as internal and external audit fees, investments to support growth, employee headcount and compensation, non-recurring integration costs including outside services costs such as professional services, and depreciation expense related to the increase in fair value of property, plant and equipment recorded as of the date of acquisition. Higher sales and distribution expenses were driven primarily by increases in employee headcount and compensation. Amortization of purchased intangible assets related to identifiable intangible assets recorded as of the date of acquisition.

Adjusted EBITDA was primarily driven by the factors discussed above. See “Overview” above for the explanation of the use of non-GAAP measures. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.

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Three months ended September 30, 2022Nine months ended September 30, 2022
Operating income$3,742 $3,521 
Adjustments:
Amortization of acquisition-related inventory valuation step-up— 430 
Depreciation733 2,144 
Amortization of purchased intangible assets7,233 32,674 
Stock-based compensation357 1,008 
Adjusted EBITDA12,065 39,777 
Less: adjusted EBITDA attributable to redeemable noncontrolling interest(4,826)(15,911)
Adjusted EBITDA attributable to DMC Global Inc.$7,239 $23,866 

DynaEnergetics

Three months ended September 30, 2022 compared with three months ended September 30, 2021
Three months ended September 30,
20222021$ change% change
Net sales$70,372 $44,237 $26,135 59 %
Gross profit21,237 9,924 11,313 114 %
Gross profit percentage30.2 %22.4 %
COSTS AND EXPENSES:
General and administrative expenses4,924 4,990 (66)(1 %)
Selling and distribution expenses4,257 3,260 997 31 %
Amortization of purchased intangible assets78 89 (11)(12 %)
Operating income11,978 1,585 10,393 656 %
Adjusted EBITDA$13,935 $3,597 $10,338 287 %

Net sales increased $26,135 for the three months ended September 30, 2022 compared to the same period in 2021. Higher energy prices and a growing reliance on North American oil and gas has led to increased drilling and well completion activity in North America and increased sales of DynaEnergetics’ DS perforating systems. International sales also increased, which favorably impacted results in the third quarter of 2022.

Gross profit percentage increased to 30.2% for the three months ended September 30, 2022 primarily due to the impact of higher sales volume on fixed manufacturing overhead expenses, primarily due to increases in unit sales of DS perforating systems. The three months ended September 30, 2021 was favorably impacted by the receipt of $1,250 ERC under the CARES Act.

Selling and distribution expenses increased $997 for the three months ended September 30, 2022 compared to the same period in 2021 primarily due to higher salaries, benefits, and other-payroll related costs including variable incentive compensation by $296, the expiration of the 2021 ERC under the CARES Act by $279, and higher lease expense by $196.

Operating income increased $10,393 for the three months ended September 30, 2022 compared to the same period in 2021 due to the factors discussed above.

Adjusted EBITDA for the three months ended September 30, 2022 increased compared with the same period in 2021 due to the factors discussed above. See “Overview” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.

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Three months ended September 30,
20222021
Operating income$11,978 $1,585 
Adjustments:
Depreciation1,879 1,923 
Amortization of purchased intangible assets78 89 
Adjusted EBITDA$13,935 $3,597 

Nine months ended September 30, 2022 compared with nine months ended September 30, 2021
Nine months ended September 30,
20222021$ change% change
Net sales$186,776 $124,677 $62,099 50 %
Gross profit53,805 29,034 24,771 85 %
Gross profit percentage28.8 %23.3 %
COSTS AND EXPENSES:
General and administrative expenses14,657 12,574 2,083 17 %
Selling and distribution expenses12,318 9,702 2,616 27 %
Amortization of purchased intangible assets245 451 (206)(46 %)
Operating income26,585 6,307 20,278 322 %
Adjusted EBITDA$32,493 $12,402 $20,091 162 %

Net sales increased $62,099 for the nine months ended September 30, 2022 compared to the same period in 2021 due to a recovery in energy demand 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 of DynaEnergetics’ DS perforating systems. International sales also increased, which favorably impacted results in 2022.

Gross profit percentage increased to 28.8% for the nine months ended September 30, 2022 compared to the same period in 2021 primarily due to the impact of higher sales volume on fixed manufacturing overhead expenses, primarily increases in unit sales of DS perforating systems. The nine months ended September 30, 2021 was favorably impacted by the receipt of $2,696 ERC under the CARES Act.

General and administrative expenses increased $2,083 for the nine months ended September 30, 2022 compared to the same period in 2021 due to an increase in outside services costs by $831, primarily related to patent infringement litigation in which DynaEnergetics is the plaintiff, higher salaries, benefits, and other-payroll related costs including variable incentive compensation by $541, and the expiration of the 2021 ERC under the CARES Act by $333.

Selling and distribution expenses increased $2,616 for the nine months ended September 30, 2022 compared to the same period in 2021 primarily due to the expiration of the 2021 ERC under the CARES Act by $800, increases in lease expense by $425, increases in salaries, benefits, and other-payroll related costs including variable incentive compensation by $506, higher business-related travel by $239, and increases in depreciation expense by $116.

Operating income increased $20,278 for the nine months ended September 30, 2022 compared to the same period in 2021 due to the factors discussed above.

Adjusted EBITDA increased for the nine months ended September 30, 2022 compared to the same period in 2021 due to the factors discussed above. See “Overview” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.

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Nine months ended September 30,
20222021
Operating income$26,585 $6,307 
Adjustments:
Depreciation5,663 5,644 
Amortization of purchased intangible assets245 451 
Adjusted EBITDA$32,493 $12,402 

NobelClad

Three months ended September 30, 2022 compared with three months ended September 30, 2021
Three months ended September 30,
20222021$ change% change
Net sales$23,396 $22,938 $458 %
Gross profit6,325 6,883 (558)(8 %)
Gross profit percentage27.0 %30.0 %
COSTS AND EXPENSES:
General and administrative expenses1,475 933 542 58 %
Selling and distribution expenses2,263 2,208 55 %
Amortization of purchased intangible assets74 122 (48)(39 %)
Restructuring expenses— — %
Operating income2,505 3,620 (1,115)(31 %)
Adjusted EBITDA$3,412 $4,587 $(1,175)(26 %)

Net sales increased $458 for the three months ended September 30, 2022 compared to the same period in 2021 primarily due to the timing of shipments out of backlog. NobelClad net sales in 2022 were also negatively impacted by the weakening of the Euro compared to the United States Dollar.

Gross profit percentage decreased to 27.0% for the three months ended September 30, 2022. The three months ended September 30, 2021 was favorably impacted by the receipt of $550 ERC under the CARES Act. Excluding the CARES Act and foreign currency impacts, the gross profit percentage was consistent period over period.

General and administrative expenses increased $542 for the three months ended September 30, 2022 compared to the same period in 2021 due to higher outside services costs by $472 primarily related to the implementation of a new enterprise resource planning system.

Operating income decreased $1,115 for the three months ended September 30, 2022 compared to the same period in 2021 due to a decrease in gross profit and higher general and administrative expenses. Operating income in 2021 was benefited by the receipt of $719 of ERC under the CARES Act.

Adjusted EBITDA for the three months ended September 30, 2022 decreased compared with the same period in 2021 primarily due to the factors discussed above. See “Overview” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.

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Three months ended September 30,
20222021
Operating income$2,505 $3,620 
Adjustments:
Restructuring expenses— 
Depreciation825 845 
Amortization of purchased intangibles74 122 
Adjusted EBITDA$3,412 $4,587 

Nine months ended September 30, 2022 compared with nine months ended September 30, 2021
Nine months ended September 30,
20222021$ change% change
Net sales$67,109 $63,594 $3,515 %
Gross profit16,532 17,960 (1,428)(8 %)
Gross profit percentage24.6 %28.2 %
COSTS AND EXPENSES:
General and administrative expenses3,644 2,636 1,008 38 %
Selling and distribution expenses6,910 6,230 680 11 %
Amortization of purchased intangible assets235 372 (137)(37 %)
Restructuring expenses53 127 (74)(58 %)
Operating income5,690 8,595 (2,905)(34 %)
Adjusted EBITDA$8,468 $11,573 $(3,105)(27 %)

Net sales increased $3,515 for the nine months ended September 30, 2022 compared to the same period in 2021 primarily due to the timing of shipments out of backlog. The increase in net sales was partially offset by the weakening of the Euro compared to the United States Dollar.

Gross profit percentage decreased to 24.6% for the nine months ended September 30, 2022. The nine months ended September 30, 2021 was favorably impacted by the receipt of $1,438 ERC under the CARES Act. Excluding the CARES Act and foreign currency impacts, the gross profit percentage decreased in 2022 due to a less favorable project mix.

General and administrative expenses increased $1,008 for the nine months ended September 30, 2022 compared to the same period in 2021 due to higher outside services costs by $847 primarily related to the implementation of a new enterprise resource planning system.

Selling and distribution expenses increased $680 for the nine months ended September 30, 2022 compared to the same period in 2021 primarily due the expiration of the 2021 ERC under the CARES Act by $436 and the resumption of business travel by $193.

Operating income decreased $2,905 for the nine months ended September 30, 2022 compared to the same period in 2021 due to lower gross profit and higher general and administrative and selling and distribution expenses.

Adjusted EBITDA for the nine months ended September 30, 2022 decreased compared to the same period in 2021 primarily due to the factors discussed above. See “Overview” above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
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Nine months ended September 30,
20222021
Operating income$5,690 $8,595 
Adjustments:
Restructuring expenses53 127 
Depreciation2,490 2,479 
Amortization of purchased intangibles235 372 
Adjusted EBITDA$8,468 $11,573 

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 $117,923 at September 30, 2022 compared to $116,615 at December 31, 2021. Net debt increased during 2022 to fund a build-up of working capital, which included higher inventory levels due to increased prices and lead times for several key raw materials at DynaEnergetics and Arcadia, and an increase in sales volume at DynaEnergetics in 2022. We have a fully undrawn and available $50,000 revolving credit facility at September 30, 2022.

We believe that cash and cash equivalents on hand, cash flow from operations, funds available under our current credit facilities and any future replacement thereof will be sufficient to fund the working capital, debt service, 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 profitable margins; and (iv) continue to implement cost-effective internal processes, our ability to meet cash requirements through operating activities could be impacted. Furthermore, any restriction on the availability of borrowings under our credit facilities could negatively affect our ability to meet future cash requirements. We will continue to monitor financial market conditions, including the related impact on credit availability and capital markets.

Debt facilities
 
On December 23, 2021, in connection with the Arcadia acquisition, we entered into a five-year $200,000 syndicated credit agreement (“credit facility”) which included a $150,000 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 allows for revolving loans of up to $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 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; incurring additional indebtedness; mortgaging, pledging or disposition of major assets; and maintenance of specified 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. 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 from the quarter ended September 30, 2022 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 September 30, 2022, calculated in accordance with the credit facility, as amended, was 2.10 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 the 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. The actual debt service coverage ratio for the trailing twelve months ended September 30, 2022 was 2.17 to 1.0.

As of September 30, 2022, U.S. dollar revolving loans of $0 and borrowings of $138,750 on the Term Loan were outstanding under our credit facility and our available revolver borrowing capacity was $50,000.

We also maintain a line of credit with a German bank for our NobelClad and DynaEnergetics operations in Europe. This line of credit provides a borrowing capacity of €7,000.

Other contractual obligations and commitments
 
Our debt balance decreased to $136,409 at September 30, 2022 from $147,425 at December 31, 2021. Our other contractual obligations and commitments have not materially changed since December 31, 2021.

Cash flows provided by (used in) operating activities
 
Net cash provided by operating activities was $24,335 for the nine months ended September 30, 2022 compared with net cash used in operating activities of $1,906 in the same period last year. 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, which included higher inventory levels due to increased input costs and lead times for several key raw materials at DynaEnergetics and Arcadia, and an expected increase in sales volume at DynaEnergetics.

Cash flows used in investing activities
 
Net cash used in investing activities for the nine months ended September 30, 2022 of $13,311 related to the acquisition of property, plant and equipment and consideration adjustments related to the Arcadia acquisition. Net cash used in investing activities for the nine months ended September 30, 2021 were $124,514 and primarily related to investment in marketable securities of $123,984 made with the proceeds from our May 2021 equity offering.

Cash flows (used in) provided by financing activities
 
Net cash flows used in financing activities for the nine months ended September 30, 2022 of $22,814 included a distribution to the redeemable noncontrolling interest holder of $10,293, quarterly payments on our term loan of $11,250, and treasury stock purchases of $1,092. Net cash flows provided by financing activities for the nine months ended September 30, 2021 of $134,750 included net proceeds from our equity offering of $123,461 and our ATM equity program of $25,262 partially offset by repayment in full of the Capex Facility of $11,750 and treasury stock purchases of $2,476.
 
Redeemable noncontrolling interest

The Operating Agreement contains a right for the Company to purchase the remaining interest in Arcadia from the minority interest holder on or after December 23, 2024. Similarly, the minority interest holder of Arcadia has the right to sell its remaining interest in Arcadia to the Company on or after December 23, 2024. As of September 30, 2022, the estimated value of the redeemable noncontrolling interest is $194,962, which is based upon a multiple of Arcadia’s average adjusted earnings for the preceding two fiscal years and its projected adjusted earnings for the then-current fiscal year.
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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.  

Critical Accounting Policies

Our critical accounting policies have not changed from those reported in our Annual Report on Form 10-K for the year ended December 31, 2021.

ITEM 3.  Quantitative and Qualitative Disclosure about Market Risk
 
There were no material changes in market risk for changes in foreign currency exchange rates and interest rates from the information provided in Item 7A – Quantitative and Qualitative Disclosures About Market Risk in the company's Annual Report on Form 10-K for the year ended December 31, 2021.

ITEM 4.  Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report, and they have concluded that these controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There were no changes that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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Part II - OTHER INFORMATION

Item 1. Legal Proceedings
 
Please see Note 12 to the Condensed Consolidated Financial Statements.

Item 1A. Risk Factors
     
There have been no significant changes in the risk factors identified as being attendant to our business in our Annual Report on Form 10-K for the year ended December 31, 2021, except as provided below.

Our business, financial condition and results of operations could be adversely affected by disruptions in the global and European economies caused by Russia’s invasion of Ukraine.

The global economy continues to be negatively impacted by increasing tension and uncertainty resulting from Russia's invasion of Ukraine. The adverse and uncertain economic conditions resulting therefrom have and may continue to negatively impact global demand, cause supply chain disruptions and increase costs for transportation, energy and other raw materials. 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. Although we have no operations located in Russia or Ukraine, we do supply regularly into Ukraine and the destabilizing effects of Russia’s invasion of Ukraine could have other adverse effects on our business. 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 originates 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.

In addition, the effects of such military conflict could heighten and increase many of the other risks described in Part I, Item 1A. "Risk Factors" in our Form 10-K for the year ended December 31, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In connection with the vesting of Company restricted common stock under our equity incentive plans during the third quarter of 2022, we retained shares of common stock in satisfaction of withholding tax obligations. These shares are held as treasury shares by the Company.
Total number of shares purchased (1) (2)
Average price paid per share
July 1 to July 31, 202264 $18.03 
August 1 to August 31, 2022— $— 
September 1 to September 30, 2022— $— 
Total64 $18.03 

(1) Share purchases in 2022 represent shares withheld 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 September 30, 2022, the maximum number of shares that may yet be purchased would not exceed the employees’ portion of taxes withheld on unvested shares (495,932) 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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Item 3. Defaults Upon Senior Securities
 
None.
 
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 “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 quarter ended September 30, 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.
 
Item 5. Other Information
 
None.

Item 6. Exhibits
     
10.31 Third Amendment to License Agreement dated March 31, 2018 by and between Coolspring Stone Supply Company (“CSSC”) and the Company.

10.32 Third Amendment to Risk Allocation, Consulting and Services Agreement dated March 31, 2018 by and between Snoddy Management, Inc. (“SMI”) and the Company.
 
31.1 Certification of the President and Chief Executive Officer pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2 Certification of the Chief Financial Officer pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
101 The following materials from the Quarterly Report on Form 10-Q of DMC Global Inc. for the quarter ended September 30, 2022, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statement of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.*
*    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.
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SIGNATURES
 
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
  DMC Global Inc.
  (Registrant)
   
   
Date: November 3, 2022 /s/ Michael Kuta
  Michael Kuta, Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)

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