DMC Global Inc. (BOOM) FY 2022 MD&A

ITEM 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our historical Consolidated Financial Statements and notes included elsewhere in this annual report. A discussion regarding our financial condition and results of operations as well as our liquidity and capital resources for fiscal 2021 compared to fiscal 2020 can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which is available on the SEC’s website at www.sec.gov and our Investor Relations website at www.dmcglobal.com/investors.

Unless stated otherwise, all dollar figures in this report are presented in thousands (000s). N/M indicates that the change in dollars or percentage was not meaningful.

Overview

General

DMC Global Inc. (“DMC”, "we", "us", "our", or the "Company") owns and operates Arcadia, DynaEnergetics and NobelClad, three innovative, asset-light manufacturing businesses that provide differentiated products and engineered solutions to niche segments of the construction, energy, industrial processing and transportation markets. Each of our businesses provides a unique suite of highly engineered products and differentiated solutions, and each has established a leadership position in its respective market. Our businesses seek to capitalize on their product and service differentiation to grow market share, expand profit margins, increase cash flow and enhance shareholder value.

Our businesses follow a clear and compelling strategy and are led by excellent leadership teams that we support with business resources and capital. We take a focused approach to capital allocation and work with our business leaders to identify investments that will advance their operating strategies and generate attractive returns. Our approach helps our portfolio companies grow their core businesses, launch new initiatives, upgrade technologies and systems, expand their markets and improve their competitive positions. Our culture is to foster local innovation versus centralized control. Based in Broomfield, Colorado, DMC trades on Nasdaq under the symbol “BOOM.”

Arcadia

On December 23, 2021, DMC completed the acquisition of 60% of the membership interests in Arcadia Products, LLC, a Colorado limited liability company resulting from the conversion of Arcadia, Inc. (collectively, “Arcadia”). Arcadia supplies architectural building products, including exterior and interior framing systems, curtain walls, windows, doors, and interior partitions to the commercial construction market; it also supplies customized windows and doors to the high-end residential construction market.

Cost of products sold for Arcadia includes the cost of aluminum, paint, and other raw materials used to manufacture windows, curtain walls, doors, and interior partitions as well as employee compensation and benefits, manufacturing facility lease expense, depreciation expense of property, plant and equipment related to manufacturing, supplies and other manufacturing overhead expenses.

DynaEnergetics

DynaEnergetics designs, manufactures and distributes highly engineered products utilized by the global oil and gas industry principally for the perforation of oil and gas wells. These products are sold to oilfield service companies in the U.S., Europe, Canada, Africa, the Middle East, and Asia. DynaEnergetics also sells directly to end-users. The market 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.

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NobelClad

NobelClad produces explosion-welded clad metal plates for use in the construction of corrosion resistant industrial processing equipment, as well as specialized transition joints for use in construction of commuter rail cars, ships, and LNG processing equipment. 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 ship most orders in our backlog within twelve months. NobelClad's backlog increased to $55,451 at December 31, 2022 from $41,181 at December 31, 2021.

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 2021, pursuant to legislation enacted in December 2020, the Company became eligible for the Employee Retention Credit (“ERC”) under the Coronavirus Aid, Relief, and Economic Security Act, as amended (“CARES Act”). As a result of the new legislation, the Company was able to claim a refundable tax credit equal to 70% of the qualified wages it paid to employees for portions of calendar year 2021. The ERC favorably impacted the financial statement results of the Company for the year ended December 31, 2021 as described further in the “Consolidated Results of Operations” section below. The ERC had no impact on the financial statement results of the Company for the year ended December 31, 2022.

Factors Affecting Results

•Consolidated net sales were $654,086. Excluding Arcadia, 2022 sales were $354,559, an increase of 36% versus 2021. The improved performance primarily was driven by higher energy prices and a growing reliance on North American oil and gas, which led to increased drilling and well completion activity in North America and increased sales at DynaEnergetics.

•Arcadia reported sales of $299,527 in 2022. Sales performance was largely attributable to higher customer pricing in response to higher base aluminum metal prices experienced throughout a significant portion of 2022, as well as increases in other input costs.

•DynaEnergetics' sales of $264,327 in 2022 increased 51% compared with 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 35% compared with 2021.

•NobelClad’s sales of $90,232 in 2022 increased 6% compared with 2021. Net sales improved due to project mix that resulted in higher sales prices, which exceeded declines observed in 2022 project volume. The increase in NobelClad 2022 sales was partially offset by the weakening of the Euro compared to the U.S. Dollar.

•Consolidated gross profit of 28% in 2022 increased from 23% in 2021. The improvement compared to the prior year was due in part to the impact of higher sales volume, primarily increases in unit sales of DS perforating systems at DynaEnergetics, on fixed manufacturing overhead expenses. The acquisition of Arcadia also contributed to the improved performance. These favorable impacts were partially offset by higher material and other input costs at each business segment. Additionally, 2021 gross profit was favorably impacted by the receipt of $4,899 pursuant to the ERC.

•Consolidated selling, general, and administrative ("SG&A") expenses were $118,349 in 2022 compared with $58,783 in 2021. Arcadia’s incremental selling, general and administrative expenses were $48,056 in 2022. The year-over-year increase also was attributable to higher headcount and salaries, benefits, and other-payroll related costs including variable incentive compensation, higher stock-based compensation expense, and increased business travel. Additionally, SG&A in 2021 included receipt of $2,264 pursuant to the ERC.

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•Cash and cash equivalents of $25,144 at December 31, 2022 decreased $5,666 from $30,810 at December 31, 2021. The decrease in cash primarily related to principal and interest payments on the Company’s credit facility and funding working capital at DynaEnergetics and Arcadia. Both businesses increased their investments in inventory due to rising raw material prices, longer-lead times and continued sales volume growth.

•Net debt, a non-GAAP measure, of $107,654 (comprised of $132,798 of total debt less $25,144 in cash and cash equivalents) at December 31, 2022 decreased $8,961 from $116,615 at December 31, 2021. The decrease was driven by $15,000 in Term Loan payments in 2022.

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 has been and may continue to be impacted by volatility of 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.

In North America, well completion activity continued to increase in the fourth quarter of 2022, which positively impacted activity levels of DynaEnergetics’ end customers. These conditions, along with the attainment of higher market share, have led to continued increases in unit sales of DynaEnergetics’ fully integrated and factory-assembled DS perforating systems. We believe well completion activity and customer pricing will remain resilient. DynaEnergetics instituted price increases throughout 2022 to offset higher labor and material costs, and additional price increases are expected in 2023. DynaEnergetics offers a highly differentiated product line, and its factory-assembled DS perforating systems are delivered just in time to the well site, eliminating customer assembly operations and requiring fewer people on location.

DynaEnergetics has made significant investments in technologies and products that have improved the safety, efficiency and performance of its customers’ well completions, and enhanced the effectiveness and profitability of the industry as a whole. Our patent strategy is designed to protect these investments and our competitive position. In the past several years, we have engaged in lawsuits seeking to enforce our patents and defend against accusations of infringement of others’ patents. These lawsuits have increased our general and administrative expenses in recent years; however, we expect these costs to be substantially lower in 2023.

Arcadia serves the commercial building market primarily in the western and southwestern United States as well as 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 improved financial performance in the first half of 2023. In addition, we expect the building products industry to remain resilient, particularly in Arcadia’s core geographic regions and end markets. We expect new finishing capacity to be installed in 2023 which will increase manufacturing throughput. The design and implementation of phase one of a new enterprise resource planning system is nearing completion and will improve operating efficiencies and enhance the buying experience for Arcadia’s commercial and residential customers.

NobelClad, DMC’s composite metals business, is seeing encouraging signs that several large industrial projects are moving closer to the vendor-selection phase. In addition, demand for repair and maintenance work from the downstream energy and petrochemical industries is also improving. Our backlog was $55,451 as of December 31, 2022 in comparison to $41,181 million as of December 31, 2021. We expect to ship most orders in our backlog within twelve months.

On January 17, 2023, the Company announced the appointment of Michael Kuta and David Aldous as interim co-Presidents and Chief Executive Officers. In connection with this leadership change, near-term priorities are expected to include the acceleration of Arcadia’s integration, strengthening the profitability of DynaEnergetics, achieving commercial success with new products introduced in NobelClad, and improving the Company’s overall cash flow through more effective working capital management and targeted cost reductions.

Use of Non-GAAP Financial Measures

Adjusted EBITDA is a non-GAAP (generally accepted accounting principles) measure that we believe provides an important indicator of our ongoing operating performance and that we use in operational and financial decision-making. We define EBITDA as net income or loss plus or minus net interest, taxes, depreciation and amortization. Adjusted EBITDA excludes from EBITDA stock-based compensation, restructuring expenses and asset impairment charges and, when appropriate, nonrecurring items that management does not utilize in assessing DMC’s operating performance (as further described in the

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tables below). Adjusted EBITDA attributable to DMC Global Inc. stockholders excludes the adjusted EBITDA attributable to the 40% redeemable noncontrolling interest in Arcadia. For our business segments, Adjusted EBITDA is defined as operating income (loss) plus depreciation, amortization, allocated stock-based compensation, restructuring expenses and asset impairment charges and, when appropriate, nonrecurring items that management does not utilize in assessing operating performance. As a result, internal management reports used during monthly operating reviews feature Adjusted EBITDA and certain management incentive awards are based, in part, on the amount of Adjusted EBITDA achieved during the year.

Adjusted net income (loss) is defined as net income (loss) attributable to DMC Global Inc. stockholders plus restructuring expenses and asset impairment charges and, when appropriate, nonrecurring items that management does not utilize in assessing DMC’s operating performance. Adjusted diluted earnings per share is defined as diluted earnings per share attributable to DMC Global Inc. stockholders (exclusive of adjustment of redeemable noncontrolling interest) plus restructuring expenses and asset impairment charges and, when appropriate, other nonrecurring items that management does not utilize in assessing DMC’s operating performance.

Adjusted net income (loss) and adjusted diluted earnings per share are presented because management believes these measures are useful to understand the effects of restructuring, impairment, and other nonrecurring charges on DMC’s net income (loss) and diluted earnings per share, respectively.

Net debt is a non-GAAP measure we use to supplement information in our 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.

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 that 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.

Forward-Looking Statements

This annual report and the documents incorporated by reference into it contain certain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigations Reform Act of 1995. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will,” “continue,” “project,” “forecast,” and similar expressions, as well as statements in the future tense, identify forward-looking statements. Such statements include statements regarding our future expectations and plans with respect to: well completion activity and customer pricing within DynaEnergetics, DynaEnergetics’ ability to implement future price increases, decreased litigation costs within DynaEnergetics in 2023, positive developments with respect to large industrial projects and improvements in repair and maintenance work within NobelClad, the ability of Arcadia to realize sales under it backlog and the expectation of improved financial performance for Arcadia in the first half of 2023, the resiliency of the building products market, the timing of new finishing capacity and benefits to be realized from the new ERP system in Arcadia, our near term priorities of accelerating the integration of Arcadia, strengthening profitability of DynaEnergetics, achieving commercial success with new NobelClad products and improving overall cash flow, our financing plans, our future liquidity position and factors impacting such position.

These forward-looking statements are not guarantees of our future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. These risks and uncertainties include those relating to:

•Changes in global economic conditions;

•The ability to obtain new contracts at attractive prices;

•The size and timing of customer orders and shipments;

•Product pricing and margins;

•Our ability to realize sales from our backlog and our ability to adjust our manufacturing and supply chain;

•Fluctuations in customer demand;

•Our ability to manage periods of growth and contraction effectively;

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•General economic conditions, both domestic and foreign, impacting our business and the business of the end-market users we serve;

•Competitive factors;

•The timely completion of contracts;

•The timing and size of expenditures;

•The timely receipt of government approvals and permits;

•The price and availability of metal and other raw materials;

•The adequacy of local labor supplies at our facilities;

•Current or future limits on manufacturing capacity at our various operations;

•The impact of catastrophic weather events on our business and that of our customers;

•Our ability to successfully integrate Arcadia and any future acquired businesses;

•The ability to remain an innovative leader in our fields of business;

•The costs and impacts of pending or future litigation or regulatory matters;

•Changes to legislation, regulation or public sentiment related to our business and the industries in which our customers operate;

•The impacts of trade and economic sanctions or other restrictions imposed by the European Union, the United States or other countries;

•Costs and risks associated with compliance with laws and regulations, including the United States Foreign Corrupt Practices Act (“FCPA”) and similar legislation;

•The availability and cost of funds; and

•Fluctuations in foreign currencies.

The effects of these factors are difficult to predict. New factors emerge from time to time, and we cannot assess the potential impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. All forward-looking statements speak only as of the date of this annual report, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of such statement or to reflect the occurrence of unanticipated events. In addition, see “Risk Factors” for a discussion of these and other factors that could materially affect our results of operations and financial condition.

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Consolidated Results of Operations

Net sales were $654,086. Excluding Arcadia, net sales were $354,559 for the twelve months ended December 31, 2022, an increase of 36% compared with 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 28.4%. Excluding Arcadia, gross profit percentage was 27.4% versus 22.9% in 2021. The improvement compared to prior year was primarily attributable to higher unit sales volume of DS perforating systems in DynaEnergetics, which led to improved absorption of fixed manufacturing overhead expenses. Additionally, 2021 gross profit was favorably impacted by the receipt of $4,899 pursuant to the ERC.

General and administrative expenses increased $39,843 compared with 2021. Arcadia contributed $31,259 to the increase. The remainder of the increase was due to higher headcount and salaries, benefits, and other-payroll related costs including variable incentive compensation of $3,959, higher business-related travel of $1,816, an increase in stock-based compensation of $1,509, and the expiration of the 2021 ERC which contributed $1,028 of benefit in the prior year.

Selling and distribution expenses increased $19,723 compared with 2021. Arcadia contributed $16,184 to the increase. The remainder of the increase was attributable to the expiration of the 2021 ERC which contributed $1,236 of benefit in the prior year, higher salaries, benefits, and other payroll related costs including variable incentive compensation of $793, increased lease and selling expense of $811, and higher business-related travel of $528.

Acquisition expenses were $1,581 in 2021 and primarily included legal, accounting, and due diligence expenses in connection with our acquisition of a 60% controlling interest in Arcadia. We did not incur acquisition expenses in 2022.

Operating income of $29,990 increased $32,392 compared with 2021. The improved performance was primarily attributable to an increase of $30,820 in DynaEnergetics' operating income. Operating loss for 2021 of $2,402 was also favorably impacted by receipt of $7,163 pursuant to the ERC.

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Other expense, net of $594 in 2022 primarily related to net realized and unrealized foreign currency exchange losses. Foreign currency exchange 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 $6,187 in 2022 increased compared with 2021 due to the principal balance outstanding on the credit facility entered into in December 2021 in conjunction with the Arcadia acquisition, as well as an increase in interest rates during 2022.

Income tax provision of $9,376 was recorded on income before taxes of $23,209. Our most significant operations are in the United States, which has a 21% statutory tax rate, and Germany, which has a 32% combined statutory tax rate. The mix of income or loss before income taxes between these jurisdictions is one of the primary drivers of the difference between our 21% statutory tax rate and our effective tax rate of 40.4% in 2022. The effective rate was impacted unfavorably by the geographic mix of pretax income, state taxes, stock-based compensation shortfalls, and certain compensation expenses that are not tax deductible in the U.S. The operating results of Arcadia that are attributable to the redeemable noncontrolling interest holder are not taxed at DMC, which resulted in a favorable impact to the effective tax rate. We recorded an income tax benefit of $1,544 on loss before income taxes of $2,554 in 2021. The 2021 effective tax rate was impacted favorably by valuation allowance changes in France, Germany, and the U.S. and by benefits from the vesting of equity-based compensation.

Net income attributable to DMC Global Inc. in 2022 was $12,247, or $0.72 per diluted share, after adjustment to the redeemable noncontrolling interest, compared with net loss of $202, or $0.26 per diluted share, in 2021.

Adjusted EBITDA increased compared with 2021 due to the factors discussed above. See "Use of Non-GAAP Financial Measures" above for explanation of the use of Adjusted EBITDA, a non-GAAP measure. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.

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Adjusted Net Income and Adjusted Diluted Earnings Per Share increased compared with 2021 due to the factors discussed above. See "Use of Non-GAAP Financial Measures" above for 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.

(1) Calculated using diluted weighted average shares outstanding of 19,369,165

(1) Calculated using diluted weighted average shares outstanding of 17,610,711

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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. DMC operating income and Adjusted EBITDA include unallocated corporate expenses and unallocated stock-based compensation expense. 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. Segment operating income will reconcile to consolidated income (loss) before income taxes by deducting unallocated corporate expenses, unallocated stock-based compensation, other income (expense), net, and interest expense, net.

Net sales, segment operating income, and Adjusted EBITDA for each segment were as follows for years ended December 31:

Arcadia

Arcadia’s profitability is dependent, in large part, on the spread between its input costs, for which the primary raw material is aluminum metal, and the subsequent value received from selling its products, which include exterior and interior framing systems, curtain walls, windows, doors, and interior partitions for the commercial buildings market; and highly engineered windows and doors for the high-end residential market.

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In 2022, both net sales and cost of products sold increased in comparison to pre-acquisition periods, largely driven by higher customer pricing in response to higher base aluminum metal prices and increases in other input costs. Cost of products sold was also negatively impacted in 2022 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, higher employee headcount and compensation, nonrecurring 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 “Use of Non-GAAP Financial Measures” above for explanation of the use of Adjusted EBITDA, a non-GAAP measure. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.

DynaEnergetics

Net sales were $88,971 higher than in 2021 due to higher energy prices and a growing reliance on North American oil and gas, which led to increased 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 28.6% primarily due to higher unit sales volume of DS perforating systems, which led to improved absorption of fixed manufacturing overhead expenses. 2021 was impacted favorably by the receipt of $3,390 pursuant to the ERC.

General and administrative expenses increased by $2,495 compared with 2021 primarily due to higher salaries, benefits, and other-payroll related costs including variable incentive compensation of $1,149, the expiration of the 2021 ERC which contributed $333 of benefit in the prior year, an increase in outside services costs of $121, and higher business-related travel of $121.

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Selling and distribution expenses increased by $3,538 compared with 2021 primarily due to increases in salaries, benefits, and other-payroll related costs including variable incentive compensation of $1,278, increases in lease and selling expense of $842, expiration of the 2021 ERC which contributed $800 of benefit in the prior year, higher business-related travel of $306, and an increase in outside services costs of $289.

Operating income increased by $30,820 compared with 2021 due to the factors discussed above.

Adjusted EBITDA increased compared with 2021 primarily due to the factors discussed above. See "Use of Non-GAAP Financial Measures" above for explanation of the use of Adjusted EBITDA, a non-GAAP measure. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.

NobelClad

Net sales increased $5,473 compared with 2021. Net sales improved due to project mix that resulted in higher sales prices, which exceeded declines observed in 2022 project volume. The increase in net sales was partially offset by the weakening of the Euro compared to the U.S. Dollar.

Gross profit percentage decreased to 24.4% in 2022. Gross profit in 2021 was favorably impacted by the receipt of $1,509 pursuant to the ERC. Excluding the ERC, gross profit performance was consistent year over year.

General and administrative expenses increased by $1,370 compared with 2021 due to higher outside services costs by $988 primarily related to the implementation of a new enterprise resource planning system and the expiration of the 2021 ERC which contributed $84 of benefit in the prior year.

Selling and distribution expenses increased by $425 compared with 2021 primarily due to the expiration of the 2021 ERC which contributed $436 of benefit in the prior year.

Operating income decreased by $1,794 compared to 2021 primarily due to the above described ERC impacts.

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Adjusted EBITDA decreased due to the factors discussed above. See "Use of Non-GAAP Financial Measures" above for explanation of the use of Adjusted EBITDA, a non-GAAP measure. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.

Liquidity and Capital Resources

We have historically financed our operations from a combination of internally generated cash flow, revolving credit borrowings, and various long-term debt arrangements. Our net debt position was $107,654 at December 31, 2022 compared to $116,615 at December 31, 2021. Net debt decreased during 2022 due primarily to $15,000 in Term Loan payments. We have a fully undrawn and available $50,000 revolving credit facility at December 31, 2022.

On October 22, 2020, we commenced an at-the-market equity ("ATM") program under a shelf registration statement filed in May 2020 under which we have sold a total of 1,006,180 shares of common stock for net proceeds of $51,002 through the end of 2021.

Additionally, in May 2021, the Company completed a registered public offering of its stock under an automatic shelf registration statement on Form S-3ASR filed on May 3, 2021, issuing a total of 2,875,000 shares of its common stock, which included the exercise of the over-allotment option, at a market price of $45 per share resulting in gross proceeds of $129,375. Net proceeds from the offering were $123,461 after deducting underwriter fees and other expenses of $5,914. We used proceeds from the ATM program and the registered public offering as part of the consideration used to acquire our 60% controlling interest in Arcadia. We may in the future seek to reengage under an at-the-market offering program or otherwise access the capital markets, but there can be no assurance that any future capital will be available on acceptable terms or at all.

We believe that cash and cash equivalents on hand, cash flow from operations, funds available under our current credit facilities and any future replacement thereof will be sufficient to fund the working capital, required minimum debt service payments, 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 (the "Term Loan"), which is amortizable at 10% of principal per year with a balloon payment for the outstanding balance upon the credit facility maturity date in 2026, and 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

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administrative agent’s prime rate, an adjusted Federal Funds rate or an adjusted SOFR rate). SOFR loans bear interest at the applicable SOFR rate plus an applicable margin (varying from 1.50% to 3.00%). Base Rate loans bear interest at the defined Base rate plus an applicable margin (varying from 0.50% to 2.00%).

The credit facility includes various covenants and restrictions, certain of which relate to the payment of dividends or other distributions to stockholders; redemption of capital stock; incurrence of additional indebtedness; mortgaging, pledging or disposition of major assets; and maintenance of specified ratios. As of December 31, 2022, we were in compliance with all financial covenants and other provisions of our debt agreements.

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 through the quarter ended March 31, 2023, and 3.0 to 1.0 from the quarter ended June 30, 2023 and thereafter. The actual leverage ratio as of December 31, 2022, calculated in accordance with the credit facility, as amended, was 1.69 to 1.0.

The debt service coverage ratio is defined in the credit facility as the ratio of Consolidated Pro Forma EBITDA less the sum of capital distributions paid in cash (other than those made with respect to preferred stock issued under the Operating Agreement), Consolidated Unfunded Capital Expenditures (as defined in the credit facility), and net cash income taxes to the sum of cash interest expense, any 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 December 31, 2022 was 2.83 to 1.0.

As of December 31, 2022, borrowings of $135,000 on the Term Loan under our credit facility were outstanding. No revolving loans were outstanding, and our available borrowing capacity was $50,000 as of December 31, 2022.

We also maintain a line of credit with a German bank for certain European operations. This line of credit provides a borrowing capacity of €7,000.

Redeemable noncontrolling interest

The Operating Agreement for Arcadia contains a right for the Company to purchase the remaining interest in Arcadia from the minority interest holder on or after the third anniversary of the acquisition closing date (“Call Option”). Similarly, the minority interest holder of Arcadia has the right to sell its remaining interest in Arcadia to the Company on or after the third anniversary of the acquisition closing date (“Put Option”). Both the Call Option and Put Option enable the respective holder to exercise their rights based upon a predefined calculation as included within the Operating Agreement.

As of December 31, 2022, the redeemable noncontrolling interest is $187,522 in comparison to our previous estimate at December 31, 2021 of $197,196. The decrease is attributable to a decline in the estimated settlement amount of the redeemable noncontrolling interest due to a reduction in average adjusted earnings. Refer to Note 3 within Item 8 — Financial Statements and Supplementary Data for further information related to the valuation of the redeemable noncontrolling interest.

Other contractual obligations and commitments

The table below presents principal cash flows by expected maturity dates for our debt obligations and other contractual obligations and commitments as of December 31, 2022:

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(1)  Represents outstanding borrowings under our credit facility but excludes future interest expense on outstanding credit facility borrowings. For more information about our debt obligations, refer to Note 7 "Debt" of our Consolidated Financial Statements.

(2) The operating lease obligations presented reflect future minimum lease payments due under non-cancelable portions of our leases as of December 31, 2022. Our operating lease obligations are described in Note 6 "Leases" of our Consolidated Financial Statements.

(3)  Amounts represent firm commitments to purchase goods or services to be utilized in the normal course of business. These amounts are not reflected in the Consolidated Balance Sheets.

(4) The above table does not include amounts potentially payable upon exercise of the Put Option or Call Option associated with the redeemable noncontrolling interest.

Cash flows from operating activities

Net cash provided by operating activities was $44,936 in 2022 compared with net cash outflows of $12,812 in 2021. The increase primarily was due to higher net income and higher non-cash reconciling adjustments related to amortization of purchased intangible assets from the Arcadia acquisition. These increases were partially offset by use of cash for working capital, including higher inventory levels at DynaEnergetics and Arcadia due to increased input costs and expected increases in sales volume.

Cash flows from investing activities

Net cash used in investing activities in 2022 of $20,926 primarily related to the acquisition of property, plant and equipment of $18,584 and consideration adjustments related to the Arcadia acquisition of $2,404.

Net cash used in investing activities in 2021 was $267,806 and primarily related to $261,000 used to fund a portion of the Arcadia acquisition, investments in marketable securities of $123,984, issuance of a promissory note in conjunction with the Arcadia acquisition of $24,902, and acquisition of property, plant and equipment of $8,659. These uses of cash were partially offset by proceeds from sales of marketable securities of $144,921 and proceeds from maturities of marketable securities of $4,799.

Cash flows from financing activities

Net cash used in financing activities in 2022 totaled $28,510, which included payments on our Term Loan of $15,000, distributions to the redeemable noncontrolling interest holder of $12,300, and treasury stock purchases of $1,231.

Net cash provided by financing activities in 2021 totaled $282,585, which included Term Loan borrowings of $150,000, net proceeds from our equity offering of $123,461 and ATM equity program of $25,262, partially offset by repayment in full of outstanding indebtedness under our previous credit facility of $11,750, treasury stock purchases of $2,485, and payment of debt issuance costs of $2,337.

Payment of dividends

On April 23, 2020, DMC announced that its Board of Directors suspended the quarterly dividend indefinitely due to the uncertain economic outlook caused by the COVID-19 pandemic. Future dividends may be affected by, among other items, our views on potential future capital requirements, future business prospects, debt covenant compliance considerations, changes in income tax laws, and any other factors that our Board of Directors deems relevant. Any determination to pay cash dividends will be at the discretion of the Board of Directors.

Critical Accounting Estimates

Our Consolidated Financial Statements contain information that is pertinent to management’s discussion and analysis of results of operations and financial condition. Preparation of financial statements in conformity with generally accepted accounting principles in the United States requires that management make estimates, judgments and assumptions that affect the amounts reported for revenues, expenses, assets, liabilities, and other related disclosures.

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Our critical accounting estimates, described below, are important to the portrayal of our results of operations and financial condition. Management’s judgments and estimates in these areas are based on information available and at times requires management to make difficult, subjective, and complex judgments. Actual results may or may not differ from these estimates.

Inventories

Inventories are stated at the lower-of-cost (first-in, first-out) or net realizable value. Significant cost elements included in inventory are material, labor, freight, subcontract costs, and manufacturing overhead. As necessary, we write down inventory to its net realizable value by recording provisions for excess, slow moving and obsolete inventory. To determine provision amounts, we regularly review inventory quantities on hand and values, and compare them to estimates of future product demand, market conditions, production requirements and technological developments.

Business Combination

The Company accounts for acquisitions under the acquisition method. Net assets and results of operations are included in our Consolidated Financial Statements commencing at the date of acquisition. We allocate the fair value of an acquisition’s purchase consideration to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values assigned to identifiable assets and liabilities is recognized as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to purchased intangible assets. These estimates and assumptions can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted average cost of capital, and the estimated useful lives. Changes in these assumptions could materially affect the carrying value of these assets.

Intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise. Intangible assets primarily consist of customer relationships, customer backlog and trademarks / trade names, which are recorded at acquisition date fair value, less accumulated amortization. The determination of estimated useful lives and the allocation of purchase price to intangible assets requires significant judgment and affects the amount of future amortization and possible impairment charges. We determine the appropriate useful life of intangible assets by performing an analysis of expected cash flows of the acquired assets.

The Company completed the acquisition of Arcadia, Inc. during the year ended December 31, 2021 and initially recorded $254,500 in purchased intangible assets and $141,266 of goodwill using the aforementioned valuation estimates. There were no material changes to prior estimates during the year ended December 31, 2022 upon completion of purchase accounting.

Goodwill

Goodwill represents the amount by which the purchase price exceeds the fair value of identifiable tangible and intangible assets and liabilities acquired in a business combination. Goodwill acquired in a business combination and determined to have an indefinite useful life is not amortized, but instead is tested for impairment at least annually during the fourth quarter or whenever events or changes in circumstances indicate that the carrying value might not be fully recoverable. For goodwill, impairment is assessed at the reporting unit level. A reporting unit is defined as an operating segment or a component of an operating segment to the extent discrete financial information is available that is reviewed by segment management. The Company's reporting units are each of the three operating segments disclosed in Note 11 within Item 8 — Financial Statements and Supplementary Data.

To test goodwill for impairment, we first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. For the qualitative assessment, we consider macroeconomic and market conditions, cost factors, financial performance and other relevant entity-specific events. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying value during the qualitative assessment, then we quantitatively estimate the fair value of the reporting unit and compare the estimated fair value to its carrying value. Based on the results of the quantitative assessment, if the carrying value exceeds the fair value of the reporting unit, then an impairment loss is recognized for the difference.

The assumptions used in a quantitative assessment require significant judgment, which include assumptions about future economic conditions and company-specific conditions and plans. In a quantitative assessment, a company estimates the fair value of a reporting unit by using the income approach, specifically a discounted cash flow analysis. A number of assumptions

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and estimates are required in performing the discounted cash flow analysis, including forecasts of revenues, costs of revenues, operating expenses, capital expenditures, discount rates, working capital changes, and terminal growth rates. Actual results may differ from those assumed in the forecasts.

As of December 31, 2022, the carrying value of goodwill was $141,725 and relates entirely to the Arcadia operating segment and reporting unit. As of the date of the 2022 annual impairment test, we performed a quantitative assessment and concluded that the fair value of Arcadia exceeded its carrying value by approximately 10%. Discount rates are one of the more significant assumptions used in the income approach. If the Company increased the discount rate used by 75 basis points, the fair value of Arcadia would still exceed its carrying value. A decline in general economic conditions or equity valuations could impact the judgments and assumptions used to estimate the fair value of Arcadia, and the Company could be required to record an impairment charge in the future. If the Company was required to recognized an impairment charge, the Consolidated Balance Sheets and Consolidated Statements of Operations and Comprehensive Income (Loss) could be materially impacted; however, the non-cash charge would not impact the Company's consolidated cash flows, current liquidity, and capital resources.

Asset impairments

Finite-lived assets, including purchased intangible assets, property, plant and equipment, and right-of-use assets, are tested for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. We compare the expected undiscounted future operating cash flows associated with these finite-lived assets to their respective carrying values to determine if they are fully recoverable when indicators of impairment are present. If the expected future operating cash flows of an asset are not sufficient to recover the related carrying value, we estimate the fair value of the asset group. Impairment is recognized when the carrying amount of the asset group is not recoverable and when carrying value exceeds the estimated fair value.

The net carrying value of our purchased intangible assets as of December 31, 2022 was $217,925 and includes $217,822 of purchased intangible assets related to Arcadia. The net carrying values of our property, plant and equipment and right-of-use assets as of December 31, 2022 were $129,445 and $48,470, respectively. During the years ended December 31, 2022 and 2021, we did not record impairment charges related to any finite-lived asset.

Income taxes

We recognize deferred tax assets and liabilities for the expected future income tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. The deferred income tax impact of tax credits are recognized as an immediate adjustment to income tax expense. We recognize deferred tax assets for the expected future effects of all deductible temporary differences to the extent we believe these assets will more likely than not be realized. We record a valuation allowance when, based on current circumstances, it is more likely than not that all or a portion of the deferred tax assets will not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, recent financial operations and their associated valuation allowances, if any. As of December 31, 2022, we have a valuation allowance of $6,277 recorded against deferred tax assets primarily in our foreign jurisdictions.

We recognize the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position, the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured as the largest benefit that is more likely than not to be realized upon ultimate resolution. We recognize interest and penalties related to uncertain tax positions in operating expense. During the year-ended December 31, 2022, we recorded an uncertain tax position liability of $2,106 related to tax positions taken in the current year.

Off Balance Sheet Arrangements

At December 31, 2022, we had no off-balance sheet arrangements, as defined by SEC rules, that have or are reasonably likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Recent Accounting Pronouncements

Refer to Note 2 "Significant Accounting Policies" within Item 8 — Financial Statements and Supplementary Data in this annual report for a discussion, as applicable, of recent accounting pronouncements and their anticipated effect on our business.

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