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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, 2023
 
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 19,761,581 as of October 30, 2023.





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 North American well completion activity in the fourth quarter of 2023, anticipated profit margin improvements resulting from changes in manufacturing processes and the introduction of new products in DynaEnergetics, our expectations regarding the decrease in patent litigation expenses in DynaEnergetics during the remainder of 2023, the expected improved performance in Arcadia during the remainder of 2023, the expected benefits of the completion of phase one of the new enterprise resource planning system at Arcadia, projected increases in demand at NobelClad, our backlog at NobelClad, our ability to access capital markets transactions in the future, 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, 2022 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; 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
 
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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, 2023December 31, 2022
(unaudited)
ASSETS  
Current assets:  
Cash and cash equivalents$28,060 $25,144 
Marketable securities7,516  
Accounts receivable, net of allowance for doubtful accounts of $945 and $925, respectively
105,519 94,415 
Inventories185,777 156,590 
Prepaid expenses and other9,945 10,723 
Total current assets336,817 286,872 
Property, plant and equipment217,791 211,277 
Less - accumulated depreciation(91,696)(81,832)
Property, plant and equipment, net126,095 129,445 
Goodwill141,725 141,725 
Purchased intangible assets, net200,925 217,925 
Deferred tax assets6,843 7,633 
Other assets83,873 95,378 
Total assets$896,278 $878,978 
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST, AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$45,589 $46,816 
Accrued expenses12,623 8,415 
Accrued income taxes11,527 4,256 
Accrued employee compensation and benefits15,638 14,441 
Contract liabilities28,557 32,080 
Current portion of long-term debt15,000 15,000 
Other current liabilities8,693 7,042 
Total current liabilities137,627 128,050 
Long-term debt104,460 117,798 
Deferred tax liabilities3,336 1,908 
Other long-term liabilities58,167 63,053 
Total liabilities303,590 310,809 
Commitments and contingencies (Note 11)
Redeemable noncontrolling interest187,522 187,522 
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; 20,457,257 and 20,140,654 shares issued, respectively
1,022 1,007 
Additional paid-in capital312,152 303,893 
Retained earnings146,421 125,215 
Other cumulative comprehensive loss(29,846)(28,758)
Treasury stock, at cost, and company stock held for deferred compensation, at par; 693,538 and 605,723 shares, respectively
(24,583)(20,710)
Total stockholders’ equity405,166 380,647 
Total liabilities, redeemable noncontrolling interest, and stockholders’ equity$896,278 $878,978 

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,
 2023202220232022
Net sales$172,147 $174,465 $545,152 $479,012 
Cost of products sold119,550 123,127 378,454 338,669 
Gross profit52,597 51,338 166,698 140,343 
Costs and expenses:    
General and administrative expenses16,259 19,796 60,285 56,330 
Selling and distribution expenses12,454 10,748 36,978 31,383 
Amortization of purchased intangible assets5,667 7,385 17,001 33,154 
Restructuring expenses and asset impairments515 8 515 53 
Total costs and expenses34,895 37,937 114,779 120,920 
Operating income17,702 13,401 51,919 19,423 
Other income (expense):    
Other income (expense), net302 120 (337)(35)
Interest expense, net(2,392)(1,771)(7,205)(4,058)
Income before income taxes15,612 11,750 44,377 15,330 
Income tax provision4,087 3,537 13,187 4,938 
Net income$11,525 $8,213 $31,190 $10,392 
Less: Net income attributable to redeemable noncontrolling interest2,642 1,496 7,695 1,411 
Net income attributable to DMC Global Inc. stockholders$8,883 $6,717 $23,495 $8,981 
Net income per share attributable to DMC Global Inc. stockholders:  
Basic$0.38 $0.46 $1.07 $0.20 
Diluted$0.38 $0.46 $1.07 $0.20 
Weighted average shares outstanding:    
Basic19,543,251 19,381,489 19,492,212 19,352,638 
Diluted19,596,575 19,381,794 19,540,978 19,357,333 

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,
2023202220232022
Net income attributable to DMC Global Inc. stockholders$8,883 $6,717 $23,495 $8,981 
Adjustment of redeemable noncontrolling interest(1,263)2,256 (2,289)(4,996)
Net income attributable to DMC Global Inc. stockholders after adjustment of redeemable noncontrolling interest$7,620 $8,973 $21,206 $3,985 

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
(Amounts in Thousands)
(unaudited)

Three months ended September 30,Nine months ended September 30,
 2023202220232022
Net income$11,525 $8,213 $31,190 $10,392 
Change in cumulative foreign currency translation adjustment(2,303)(3,472)(1,088)(7,263)
Other comprehensive income$9,222 $4,741 $30,102 $3,129 
Less: comprehensive income attributable to redeemable noncontrolling interest2,642 1,496 7,695 1,411 
Comprehensive income attributable to DMC Global Inc. stockholders$6,580 $3,245 $22,407 $1,718 
 
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, December 31, 202220,140,654 $1,007 $303,893 $125,215 $(28,758)(605,723)$(20,710)$380,647 $187,522 
Net income— — — 909 — — — 909 1,230 
Change in cumulative foreign currency translation adjustment— — — — 769 — — 769 — 
Shares issued in connection with stock compensation plans258,807 13 (13)— — — — — — 
Stock-based compensation— — 4,795 — — — — 4,795 232 
Distribution to redeemable noncontrolling interest holder— — — — — — — — (2,600)
Adjustment of redeemable noncontrolling interest— — — (1,138)— — — (1,138)1,138 
Treasury stock activity— — — — — (77,184)(3,705)(3,705)— 
Balances, March 31, 202320,399,461 $1,020 $308,675 $124,986 $(27,989)(682,907)$(24,415)$382,277 $187,522 
Net income— — — 13,703 — — — 13,703 3,823 
Change in cumulative foreign currency translation adjustment— — — — 446 — — 446 — 
Shares issued in connection with stock compensation plans50,582 2 210 — — — — 212 — 
Stock-based compensation— — 1,570 — — — — 1,570 129 
Distribution to redeemable noncontrolling interest holder— — — — — — — — (3,840)
Adjustment of redeemable noncontrolling interest— — — 112 — — — 112 (112)
Treasury stock activity— — — — — (2,635)(14)(14)— 
Balances, June 30, 202320,450,043 $1,022 $310,455 $138,801 $(27,543)(685,542)$(24,429)$398,306 $187,522 
Net income— — — 8,883 — — — 8,883 2,642 
Change in cumulative foreign currency translation adjustment— — — — (2,303)— — (2,303)— 
Shares issued in connection with stock compensation plans7,214 — — — — — — — — 
Stock-based compensation— — 1,697 — — — — 1,697 135 
Distribution to redeemable noncontrolling interest holder— — — — — — — — (4,040)
Adjustment of redeemable noncontrolling interest— — — (1,263)— — — (1,263)1,263 
Treasury stock activity— — — — — (7,996)(154)(154)— 
Balances, September 30, 202320,457,257 $1,022 $312,152 $146,421 $(29,846)(693,538)$(24,583)$405,166 $187,522 

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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 loss— — — (3,288)— — — (3,288)(992)
Change in cumulative foreign currency translation adjustment— — — — (1,204)— — (1,204)— 
Shares issued in connection with stock compensation plans163,443 8 (8)— — — — — — 
Consideration adjustment related to redeemable noncontrolling interest— — — — — — — — (427)
Stock-based compensation— — 2,267 — — — — 2,267 102 
Distribution to redeemable noncontrolling interest holder— — — — — — — — (4,400)
Adjustment of redeemable noncontrolling interest— — — (5,717)— — — (5,717)5,717 
Treasury stock activity— — — — — (16,773)(1,088)(1,088)— 
Balances, March 31, 202220,084,272 $1,004 $296,774 $102,026 $(27,742)(587,188)$(20,567)$351,495 $197,196 
Net income— — — 5,552 — — — 5,552 907 
Change in cumulative foreign currency translation adjustment— — — — (2,587)— — (2,587)— 
Shares issued in connection with stock compensation plans35,657 2 (2)— — — — — — 
Stock-based compensation— — 2,133 — — — 2,133 158 
Distribution to redeemable noncontrolling interest holder— — — — — — — — (2,600)
Adjustment of redeemable noncontrolling interest— — — (1,535)— — — (1,535)1,535 
Treasury stock activity— — — — — (10,570)(3)(3)— 
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 adjustments related to redeemable noncontrolling interest— — — — — — — — 1,783 
Adjustment of redeemable noncontrolling interest— — — 2,256 — — — 2,256 (2,256)
Stock-based compensation— — 2,099 — — — — 2,099 143 
Distribution to redeemable noncontrolling interest holder— — — — — — — — (3,400)
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 

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,
 20232022
Cash flows provided by operating activities:  
Net income$31,190 $10,392 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation10,294 10,578 
Amortization of purchased intangible assets17,001 33,154 
Amortization of deferred debt issuance costs412 412 
Amortization of acquisition-related inventory valuation step-up 430 
Stock-based compensation8,558 6,891 
Deferred income taxes2,218 (1,612)
Restructuring expenses and asset impairments515 53 
Other(2,040)(295)
Change in:  
Accounts receivable, net(11,416)(24,421)
Inventories(29,460)(31,311)
Prepaid expenses and other14,185 3,736 
Accounts payable(1,485)2,925 
Contract liabilities(3,450)9,277 
Accrued expenses and other liabilities6,226 4,126 
Net cash provided by operating activities42,748 24,335 
Cash flows used in investing activities:   
Investment in marketable securities(7,516) 
Consideration adjustments related to acquisition of business (2,034)
Acquisition of property, plant and equipment(7,455)(11,277)
Net cash used in investing activities(14,971)(13,311)
Cash flows used in financing activities:   
Repayments on term loan(13,750)(11,250)
Payment of debt issuance costs (179)
Distributions to redeemable noncontrolling interest holder(10,345)(10,293)
Net proceeds from issuance of common stock to employees and directors212  
Treasury stock purchases(2,328)(1,092)
Net cash used in financing activities(26,211)(22,814)
Effects of exchange rates on cash1,350 (534)
Net increase (decrease) in cash and cash equivalents2,916 (12,324)
Cash and cash equivalents, beginning of the period25,144 30,810 
Cash and cash equivalents, end of the period$28,060 $18,486 

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, 2022.

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 intercompany accounts, profits, and transactions have been eliminated in consolidation.

Accounts 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 business 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, 2023, our expected loss rate reflects uncertainties in market conditions present in our businesses, including supply chain disruptions, rising interest rates, as well as global geopolitical and economic instability. In addition, we reviewed receivables outstanding, including aged balances, and in circumstances where we are aware of a specific customer’s inability to meet its financial obligation to us, we recorded a specific allowance against the amounts due, reducing the net receivable recognized to the amount we estimate will be collected. The offsetting expense for allowances recorded is charged to “Selling and distribution expenses” in our Condensed Consolidated Statements of Operations. During the three and nine months ended September 30, 2023, net provisions of $317 and $141, 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, 2022
$244 $603 $78 $925 
Current period provision for expected credit losses 451  451 
Write-offs charged against the allowance(120) (120)
Recoveries of amounts previously reserved(184)(126) (310)
Impacts of foreign currency exchange rates and other 1 (2)(1)
Allowance for doubtful accounts, September 30, 2023
$60 $809 $76 $945 

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Redeemable noncontrolling interest

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

The Company initially accounted for the noncontrolling interest at its acquisition date fair value. We determined that neither the Call Option nor the Put Option meet the definition of a derivative 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 over a three-year period. As such, we have concluded that the Call Option and Put Option are embedded within the noncontrolling interest and therefore do not represent freestanding instruments.

Given that the noncontrolling interest is subject to possible redemption with redemption rights that are not entirely within the control of the Company, we have concluded that the noncontrolling interest should be accounted for in accordance with ASC 480 Distinguishing Liabilities from Equity ("ASC 480"). The noncontrolling interest is also probable of redemption, as the only criteria for the security to become redeemable is the passage of time. As such, the redeemable noncontrolling interest is classified in temporary equity, separate from the stockholders’ equity section, in the Condensed Consolidated Balance Sheets.

At each balance sheet date subsequent to acquisition, two separate calculations must be performed to determine the value of the redeemable noncontrolling interest. First, the redeemable noncontrolling interest must be accounted for in accordance with ASC 810 Consolidation (“ASC 810”) whereby income (loss) and cash distributions attributable to the redeemable noncontrolling interest holder are ascribed. After this occurs, applicable provisions of ASC 480 must be considered to determine whether any further adjustment is necessary to increase the carrying value of the redeemable noncontrolling interest. An adjustment would only be necessary if the estimated settlement amount of the redeemable noncontrolling interest, per the terms of the Operating Agreement, exceeds the carrying value calculated in accordance with ASC 810. If such adjustment is required, the impact is immediately recorded to retained earnings and therefore does not impact the Condensed Consolidated Statements of Operations or Comprehensive Income (Loss). As of September 30, 2023 and December 31, 2022, the redeemable noncontrolling interest is $187,522.

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 $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 at the earlier of the exercise of the Put or Call Option, or by December 16, 2051, and has been recorded within “Other assets” in the Condensed Consolidated Balance Sheets.

Revenue Recognition

The Company’s revenues are primarily derived from consideration paid by customers for tangible goods. The Company analyzes its different products by business 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.

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Our rights to payments for goods transferred to customers within our DynaEnergetics and NobelClad business segments arise when control is transferred at a point in time and not on any other criteria. Our rights to payments for goods transferred to customers within our Arcadia business segment also generally arise when control is transferred at a point in time; however, at times, control of certain customized, project-based products passes to the customer over time. Payment terms and conditions vary by contract, although terms generally include a requirement of payment within 30 to 90 days across all of our segments. In instances when we require customers to make advance payments prior to the shipment of their orders, we record a contract liability. We have determined that our contract liabilities do not include a significant financing component given the short duration between order initiation and order fulfillment within each of our segments. Refer to Note 9 "Business Segments" for disaggregated revenue disclosures.

See additional revenue recognition policy disclosures specific to each of our business segments within our Annual Report filed on Form 10-K for the year ended December 31, 2022.

Income Taxes

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

We recognize the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the Condensed 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. Net income (loss) available to common shareholders of the Company includes any adjustment to the redeemable noncontrolling interest value as of the end of the period presented. Refer to the "Redeemable noncontrolling interest" section above for further discussion of the calculation of the adjustment of the redeemable noncontrolling interest. Diluted EPS adjusts basic EPS for the effects of restricted stock awards, restricted stock units, performance share units and 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,
2023202220232022
Net income attributable to DMC Global Inc. stockholders, as reported$8,883 $6,717 $23,495 $8,981 
Adjustment of redeemable noncontrolling interest(1,263)2,256 (2,289)(4,996)
Less: Undistributed net income available to participating securities(118)(136)(329)(61)
Numerator for basic net income per share:7,502 8,837 20,877 3,924 
Add: Undistributed net income allocated to participating securities118 136 329 61 
Less: Undistributed net income reallocated to participating securities(117)(136)(328)(61)
Numerator for diluted net income per share:$7,503 $8,837 $20,878 $3,924 
Denominator:
Weighted average shares outstanding for basic net income per share19,543,251 19,381,489 19,492,212 19,352,638 
Effect of dilutive securities (1)
53,324 305 48,766 4,695 
Weighted average shares outstanding for diluted net income per share19,596,575 19,381,794 19,540,978 19,357,333 
Net income per share attributable to DMC Global Inc. stockholders
Basic$0.38 $0.46 $1.07 $0.20 
Diluted$0.38 $0.46 $1.07 $0.20 

(1) For the three and nine months ended September 30, 2023, 3,239 and 9,447 shares, respectively, have been excluded as their effect would have been anti-dilutive.

Deferred Compensation Plan

The Company maintains a Non-Qualified Deferred Compensation Plan (the “Plan”) as part of its overall compensation package for certain employees. Participants are eligible to defer a portion of their annual salary, their annual incentive bonus, and their equity awards through the Plan on a tax-deferred basis. Deferrals into the Plan are not matched or subsidized by the Company, nor are they eligible for above-market or preferential earnings.

The Plan provides for deferred compensation obligations to be settled either by delivery of a fixed number of shares of DMC’s common stock or in cash, in accordance with participant contributions and elections. For deferred equity awards, subsequent to equity award vesting and after a period prescribed by the Plan, participants can elect to diversify contributions of equity awards into other investment options available to Plan participants. Once diversified, such contributions will be settled by delivery of cash.

The Company has established a grantor trust commonly known as a “rabbi trust” and contributed certain assets to satisfy the future obligations to participants in the Plan. These assets are subject to potential claims of the Company’s general creditors. The assets held in the trust include unvested restricted stock awards (“RSAs”), vested company stock awards, company-owned life insurance (“COLI”) on certain current and former 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” at the par value of the common stock or unvested RSAs. These accounts are not adjusted for subsequent changes in the fair value of the common stock. COLI is accounted for at the cash surrender value while money market and mutual funds held by the trust are accounted for at fair value.

Deferred compensation obligations that will be settled in cash are accounted for on an accrual basis in accordance with the terms of the Plan. These obligations are adjusted based on changes in value of the underlying investment options chosen by Plan participants. Deferred compensation obligations that will be settled by delivery of a fixed number of previously vested shares of the Company’s common stock are reflected in the 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 for the periods presented. The amount included within “Prepaid expenses and other” and “Other current liabilities” pertains to scheduled distributions per the terms of the Plan to our former Chief Executive Officer (“CEO”) that will occur within twelve months of September 30, 2023. Refer to Note 12 for additional information regarding the CEO transition.

Balance Sheet locationSeptember 30, 2023December 31, 2022
Deferred compensation assetsPrepaid expenses and other$1,428 $ 
Deferred compensation assetsOther assets8,087 13,566 
Deferred compensation obligationsOther current liabilities1,428  
Deferred compensation obligationsOther long-term liabilities11,673 15,292 

Fair Value of Financial Instruments

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

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

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

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

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

The carrying value of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their fair value. Our marketable securities are valued using quoted prices in active markets that are accessible as of the measurement date. The carrying value of our revolving loans and term loan under our credit facility, when outstanding, approximate their fair value because of the variable interest rate associated with those instruments, which reset each month at market interest rates. All of these account balances are considered Level 1 assets and liabilities.

Our foreign currency forward contracts are valued using quoted market prices or are determined using a yield curve model based on current market rates. As a result, we classify these instruments as Level 2 in the fair value hierarchy. Money market funds and mutual funds of $3,175 as of September 30, 2023 and $8,444 as of December 31, 2022 held to satisfy future deferred compensation obligations are valued based upon the market values of underlying securities and are classified as Level 2 assets in the fair value hierarchy.

We did not hold any Level 3 assets or liabilities as of September 30, 2023 or December 31, 2022.

Recent Accounting Pronouncements

    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.      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.

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Inventories consisted of the following at September 30, 2023:
ArcadiaDynaEnergeticsNobelCladDMC Global Inc.
Raw materials$8,761 $25,215 $9,675 $43,651 
Work-in-process9,798 32,776 14,581 57,155 
Finished goods56,665 28,012  84,677 
Supplies  294 294 
Total inventories$75,224 $86,003 $24,550 $185,777 

Inventories consisted of the following at December 31, 2022:
ArcadiaDynaEnergeticsNobelCladDMC Global Inc.
Raw materials$11,099 $23,701 $8,926 $43,726 
Work-in-process11,468 21,198 7,587 40,253 
Finished goods55,074 16,802 456 72,332 
Supplies  279 279 
Total inventories$77,641 $61,701 $17,248 $156,590 

4.      PURCHASED INTANGIBLE ASSETS
 
Our purchased intangible assets consisted of the following at September 30, 2023:
GrossAccumulated
Amortization
Net
Core technology$13,920 $(13,902)$18 
Customer relationships244,404 (62,894)181,510 
Trademarks / Trade names23,894 (4,497)19,397 
Total intangible assets$282,218 $(81,293)$200,925 
 
Our purchased intangible assets consisted of the following at December 31, 2022:
GrossAccumulated
Amortization
Net
Core technology$14,063 $(14,031)$32 
Customer backlog22,000 (22,000) 
Customer relationships244,650 (47,254)197,396 
Trademarks / Trade names23,914 (3,417)20,497 
Total intangible assets$304,627 $(86,702)$217,925 
 
The change in the gross value of our unamortized purchased intangible assets at September 30, 2023 from December 31, 2022 was due to foreign currency translation.

5.      CONTRACT LIABILITIES
 
At times, we require customers to make advance payments prior to the shipment of their orders to help finance our inventory investment on large orders or keep customers’ credit limits at acceptable levels. Contract liabilities were as follows for the periods presented:
September 30, 2023December 31, 2022
Arcadia$16,564 $27,634 
NobelClad10,003 3,661 
DynaEnergetics1,990 785 
Total contract liabilities$28,557 $32,080 

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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, primarily supply chain delays and disruptions.

6.      LEASES

The Company leases real properties for use in manufacturing and as administrative and sales offices, and leases automobiles and office equipment. The Company determines if a contract contains a lease arrangement at the inception of the contract. For leases in which the Company is the lessee, leases are classified as either finance or operating. Right-of-use (“ROU”) assets are initially measured at the present value of lease payments over the lease term plus initial direct costs, if any. If a lease does not provide a discount rate and the implicit rate cannot be readily determined, an incremental borrowing rate is used to determine the present value of future lease payments. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term within the Condensed Consolidated Statements 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 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, 2023December 31, 2022
ROU asset$44,661 $48,470 
Current lease liability7,290 7,041 
Long-term lease liability39,288 43,001 
Total lease liability$46,578 $50,042 

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 is 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 former president of Arcadia. There were eight related party leases in effect as of September 30, 2023, with expiration dates ranging from calendar years 2023 to 2026, excluding any renewal options. As of September 30, 2023, the total ROU asset and related lease liability recognized for related party leases was $26,291 and $27,062, respectively.

For the three months ended September 30, 2023 and 2022, operating lease expense was $3,349 and $2,872, respectively. For the nine months ended September 30, 2023 and 2022, operating lease expense was $9,504 and $8,413, respectively. Related party lease expense for the three and nine months ended September 30, 2023 and 2022 was $1,156 and $3,469, respectively, in each period and is included in total operating lease expense. Short term and variable lease costs were not significant for any period presented.

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7.      DEBT
 
Outstanding borrowings consisted of the following at:
September 30, 2023December 31, 2022
Syndicated credit agreement:  
U.S. Dollar revolving loan$ $ 
Term loan121,250 135,000 
Commerzbank line of credit  
Outstanding borrowings121,250 135,000 
Less: debt issuance costs(1,790)(2,202)
Total debt119,460 132,798 
Less: current portion of long-term debt(15,000)(15,000)
Long-term debt$104,460 $117,798 

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 certain 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%). As of September 30, 2023, no amounts were outstanding on the revolver.

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.

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 3.0 to 1.0 from the quarter ended June 30, 2023 and thereafter.

The debt service coverage ratio is defined in the credit facility as the ratio of Consolidated Pro Forma EBITDA less the sum of capital distributions paid in cash (other than those made with respect to preferred stock issued under the Operating Agreement), Consolidated Unfunded Capital Expenditures (as defined in the credit facility), and net cash income taxes divided by 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, 2023, 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 with a borrowing capacity of €7,000 for certain European operations. This line of credit is also used to issue bank guarantees to customers to secure advance payments made by them. As of September 30, 2023 and December 31, 2022, we had no outstanding borrowings under this line of credit and bank guarantees of €2,491 and €2,221, respectively, were secured by the line of credit. The line of credit has open-ended terms and can be canceled by the bank at any time.
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Included in “Long-term debt” are deferred debt issuance costs of $1,790 and $2,202 as of September 30, 2023 and December 31, 2022, respectively. Deferred debt issuance costs are being amortized over the remaining term of the credit facility, which expires on December 23, 2026.

8.     INCOME TAXES

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

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.

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, 2023 and September 30, 2022, we did not record any adjustments to previously established valuation allowances, except for corresponding adjustments related to changes in deferred tax asset balances. These adjustments had no impact on the Condensed Consolidated Statements of Operations. 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.

9.      BUSINESS SEGMENTS
 
Our business is organized into three segments: Arcadia, DynaEnergetics and NobelClad. In December 2021, DMC acquired a 60% controlling interest in Arcadia. Arcadia supplies architectural building products, including exterior and interior framing systems, curtain walls, windows, doors, and interior partitions to the commercial construction market; it also supplies customized windows and doors to the high-end residential construction market. DynaEnergetics designs, manufactures and distributes highly engineered products utilized by the global oil and gas industry principally for the perforation of oil and gas wells. NobelClad is a leader in the production of explosion-welded clad metal plates for use in the construction of corrosion resistant industrial processing equipment, as well as specialized transition joints for use in construction of commuter rail cars, ships, and liquified natural gas (LNG) processing equipment.

Our reportable segments are separately managed, strategic business units that offer different products and services, and each segment has separate financial information available that is evaluated regularly by the Chief Operating Decision Maker ("CODM") in allocating resources and assessing performance. Each segment’s products are marketed to different customer types and require different manufacturing processes and technologies.
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Segment information is as follows:
 
Three months ended September 30,Nine months ended September 30,
2023202220232022
Net sales:
Arcadia$71,455 $80,697 $230,951 $225,127 
DynaEnergetics72,998 70,372 239,720 186,776 
NobelClad27,694 23,396 74,481 67,109 
Net sales$172,147 $174,465 $545,152 $479,012 

Three months ended September 30,Nine months ended September 30,
2023202220232022
Income (loss) before income taxes:
Arcadia$6,476 $3,742 $19,189 $3,521 
DynaEnergetics10,871 11,978 41,772 26,585 
NobelClad5,232 2,505 12,560 5,690 
Segment operating income22,579 18,225 73,521 35,796 
Unallocated corporate expenses(3,382)(2,939)(14,283)(10,490)
Unallocated stock-based compensation*
(1,495)(1,885)(7,319)(5,883)
Other income (expense), net302 120 (337)(35)
Interest expense, net(2,392)(1,771)(7,205)(4,058)
Income before income taxes$15,612 $11,750 $44,377 $15,330 

Three months ended September 30,Nine months ended September 30,
2023202220232022
Depreciation and amortization:
Arcadia$6,621 $7,966 $19,631 $34,818 
DynaEnergetics1,697 1,957 5,212 5,908 
NobelClad712 899 2,152 2,725 
Segment depreciation and amortization9,030 10,822 26,995 43,451 
Corporate and other97 104 300 281 
Consolidated depreciation and amortization$9,127 $10,926 $27,295 $43,732 

* 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.

In the tables below, the geographic distribution of net sales for all business segments is based on the customer location. Net sales for Arcadia have been presented consistent with United States regional definitions as provided by the American Institute of Architects.
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Arcadia
 Three months ended September 30,Nine months ended September 30,
 2023202220232022
West$58,572 $63,281 $183,829 176,288 
South6,869 12,139