DMC Global Inc. (BOOM) FY 2021 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, as well as the selected historical consolidated financial data included elsewhere in this annual report. A discussion regarding our financial condition and results of operations as well as our liquidity and capital resources for fiscal 2020 compared to fiscal 2019 can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, 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") is a diversified holding company. Our innovative businesses provide differentiated products and services to niche industrial and commercial markets around the world. DMC’s objective is to identify well-run businesses and strong management teams and support them with long-term capital and strategic, legal, technology and operating resources. DMC’s culture is to foster local innovation versus centralized control. We help our portfolio companies grow core businesses, launch new initiatives, upgrade technologies and systems to support their long-term strategy, and make acquisitions that improve their competitive positions and expand their markets. Today, DMC’s portfolio consists of Arcadia, DynaEnergetics, and NobelClad, which collectively address the building products, energy, industrial processing and transportation markets. Based in Broomfield, Colorado, DMC trades on Nasdaq under the symbol “BOOM.”

Arcadia

On December 23, 2021, DMC completed the acquisition of 60% of the membership interests in Arcadia Products, LLC, a Colorado limited liability company resulting from the conversion of Arcadia, Inc. (collectively, “Arcadia”). Arcadia is a leading U.S. supplier of architectural building products, which include exterior and interior framing systems, windows, curtain walls, doors, interior partitions, and highly engineered windows and doors for the high-end residential real estate market.

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

DynaEnergetics

DynaEnergetics designs, manufactures and distributes 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.

NobelClad

NobelClad produces explosion-welded clad metal plates for use in the construction of corrosion resistant industrial processing equipment and specialized transition joints. While a significant portion of the demand for our clad metal products is driven by maintenance and retrofit projects at existing chemical processing, petrochemical processing, oil refining, and aluminum smelting facilities, new plant construction and large plant expansion projects also account for a significant portion of total demand. These industries tend to be cyclical in nature and timing of new order inflow remains difficult to predict. We use backlog as a primary means to measure the immediate outlook for our NobelClad business. We define “backlog” at any given point in time as all firm, unfulfilled purchase orders and commitments at that time. Most firm purchase orders and commitments

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are realized, and we expect to fill most backlog orders within the following 12 months. NobelClad's backlog increased to $41,181 at December 31, 2021 from $39,884 at December 31, 2020.

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, depreciation of manufacturing facilities and equipment, manufacturing supplies and other manufacturing overhead expenses.

Factors Affecting Results

The following items impacted the comparability of the Company's results for the years ended December 31, 2021 and 2020:

•Consolidated sales of $260,115 increased 14% versus 2020 primarily due to a recovery in energy demand, North American drilling and well completions activity and sales at DynaEnergetics, which was severely impacted by the COVID-19 pandemic.

•DynaEnergetics' sales of $175,356 in 2021 increased 20% compared with 2020 due to a recovery in energy demand, which led to higher North American drilling and well completions, and increased sales of DynaEnergetics’ DS perforating systems. The increase in North America was offset by a delayed recovery in international markets due to supply chain disruptions and travel restrictions caused by the COVID-19 pandemic.

•NobelClad’s sales of $84,759 in 2021 increased 2% compared with 2020 reflecting increased shipments of projects out of backlog.

•Consolidated gross profit of 23% in 2021 decreased from 25% in 2020. The decline primarily related to lower average selling prices and a decrease in international sales at DynaEnergetics. The decline was partially offset by nonrecurring excess capacity and inventory charges that were recorded at DynaEnergetics in the second quarter of 2020, as well as favorable project mix in NobelClad, and receipt of $4,899 Employee Retention Credit ("ERC") under the CARES Act in 2021.

•Consolidated selling, general, and administrative expenses were $58,783 in 2021 compared with $53,013 in 2020. The increase primarily was due to patent infringement litigation expenses in which DynaEnergetics is the plaintiff, restoration of variable compensation, and resumption of business-related travel. These increases were partially offset by receipt of $2,264 ERC under the CARES Act.

•On December 23, 2021, the Company completed the acquisition of a 60% controlling interest in Arcadia for closing consideration of $261,000 in cash (excluding $7,654 in acquired cash) and 551,458 shares of its common stock, par value $0.05 per share. Acquisition transaction costs were $1,581 and primarily included legal, accounting, and due diligence expenses.

•Restructuring expenses of $127 in 2021 related to additional severance accruals for employee terminations associated with closing manufacturing operations in France in 2018. Restructuring expenses and asset impairments in 2020 included asset impairments, severance costs related to downsizing our direct labor workforce in response to the COVID-19 impact on demand for DynaEnergetics’ products, and costs related to the sale of the Tyumen, Siberia manufacturing facility.

•Net debt of $116,615 (comprised of $30,810 in cash and marketable securities net of $147,425 of total debt) at December 31, 2021 compared to net cash of $42,659 at December 31, 2020. Net debt, a non-GAAP measure, is calculated as total debt less total cash, cash equivalents and marketable securities.

Outlook

We remain in a period of rising material and labor costs. Each of our businesses could also be impacted by continued supply-chain disruptions and availability of direct labor. In addition, we continue to monitor the increasing cost of aluminum, which is a key raw material component used in recently acquired Arcadia’s architectural building products.

In North America, rising crude prices led to higher well completion activity in the fourth quarter of 2021, which drove continued strong unit sales of DynaEnergetics’ fully integrated and factory-assembled DS perforating systems. However, pricing for products and services remained weak. Additionally, continued rising material and labor costs combined with

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availability of direct labor are negatively impacting the recovery in DynaEnergetics. As market conditions continue to improve and operators implement their 2022 budgets, we believe well completion activity will continue to rise and pricing will begin to improve as well. We expect DynaEnergetics will be among the first to benefit from strengthening prices, as it offers a highly differentiated product line. Factory-assembled DS systems are delivered just in time to the wellsite, eliminating assembly operations and requiring fewer people on location.

In the fourth quarter of 2021, DynaEnergetics announced a 5% price increase. The increase was implemented to partially offset higher labor and material costs, as well as the impacts of the expiration of the previously enacted CARES Act for which no benefit was recognized during the fourth quarter of 2021. DynaEnergetics expects to implement additional price increases in 2022 as it seeks to return margins to levels that reflect the inherent value of its products.

We believe many of the pre-wired carriers in the market incorporate features that violate DynaEnergetics patents, and we are taking aggressive legal action against the companies that make these products. DynaEnergetics has made significant investments in technologies and products that have improved the safety, efficiency and performance of its customers’ well completions, and have enhanced the effectiveness and profitability of the industry as a whole. Our patent strategy is designed to protect these investments and provide transparency so others can innovate without violating our intellectual property. These lawsuits have increased our general and administrative expenses in 2021, and we expect these costs to be ongoing throughout 2022.

Arcadia services both commercial building and high-end residential markets. Arcadia’s current geographic regions of focus include the western and southwestern regions of the United States. The building products industry is forecasting both short-term and long-term growth, particularly in Arcadia’s geographic regions and end markets. We have begun to implement several initiatives to enhance Arcadia’s operating efficiencies and to increase its manufacturing capacity.

From time to time, we also may continue to use our ATM equity program, which commenced in October 2020, to raise additional capital efficiently and responsibly. We did not sell shares under our ATM equity program during the second, third or fourth quarters of 2021. During the first quarter of 2021, we sold 397,820 shares of common stock at a weighted average price per share of $64.47 through our ATM equity program and received net proceeds of $25,262. In addition to sales under our ATM equity program, during the second quarter of 2021 we issued a total of 2,875,000 shares of our common stock through a registered public offering at a market price of $45 per share and received net proceeds of $123,461. Such proceeds were used in part to fund the acquisition of Arcadia.

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

Adjusted operating income (loss) is defined as operating income (loss) plus restructuring and impairment charges and, when appropriate, other items that management does not utilize in assessing DMC’s operating performance.

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

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

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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, cash equivalents and marketable securities. 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. Because 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 expected financial position and operating results, our growth and business strategy, planned developments with respect to human capital matters, our expectations regarding the oil and gas industry, expected product developments in DynaEnergetics, expected impacts to demand and pricing for DynaEnergetics’ products, growth expectations in Arcadia’s markets, expected developments in our litigation matters, 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:

•Continuing impacts of the COVID-19 pandemic and related governmental actions;

•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;

•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;

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•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.

Consolidated Results of Operations

Net sales increased $30,954 compared with 2020 primarily due to the recovery in energy demand, which led to higher energy prices, increased drilling and well completion activity in North America and increased sales of DynaEnergetics’ DS perforating systems. Net sales in 2020 were severely impacted by the decline in demand for oil and gas and related drilling and well completion activity due to the COVID-19 pandemic.

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Gross profit percentage decreased to 22.9% primarily due to lower average selling prices and a decrease in international sales at DynaEnergetics. The decline was partially offset by nonrecurring excess capacity and inventory charges that were recorded at DynaEnergetics in the second quarter of 2020, as well as favorable project mix in NobelClad, and receipt of $4,899 ERC under the CARES Act in 2021.

General and administrative expenses increased $7,126 compared with 2020 primarily due to a $5,730 increase in outside services costs mostly related to patent infringement litigation in which DynaEnergetics is the plaintiff, restoration of variable compensation by $1,421, and an increase in stock-based compensation expense by $951. The increases were partially offset by receipt of $1,028 ERC under the CARES Act.

Selling and distribution expenses decreased $1,356 compared with 2020 primarily due to reductions in provisions for expected credit losses by $2,868 and receipt of $1,236 ERC under the CARES Act. The decreases were partially offset by an increase in depreciation expense by $1,252, an increase in salaries by $596 due to headcount additions and merit increases, increases from the restoration of variable compensation by $416, and an increase in outside service costs by $376.

Acquisition expenses of $1,581 primarily included legal, accounting, and due diligence expenses in connection with our acquisition of a 60% controlling interest in Arcadia.

Restructuring expenses, net and asset impairments of $127 in 2021 primarily related to additional severance accruals for employee terminations associated with closing manufacturing operations in France in 2018. Expenses in 2020 included asset impairments, severance costs related to downsizing our direct labor workforce in response to the COVID-19 impact on demand for DynaEnergetics’ products, and costs related to the sale of the Tyumen, Siberia manufacturing facility.

Operating loss of $2,402 compared with $996 in 2020 was primarily due to lower average selling prices at DynaEnergetics combined with higher general and administrative and acquisition-related expenses in 2021. A planned shutdown of Arcadia between the acquisition date and December 31, 2021 also contributed to the operating loss. During that time, Arcadia had no sales activity but incurred expenses of $2,020.

Other income, net of $152 in 2021 primarily related to a gain on the sale of a fully depreciated fixed asset in DynaEnergetics partially offset by net unrealized and realized foreign currency exchange losses. In 2020, other expense, net primarily related to the non-service cost components of our defined benefit pension plans at certain foreign subsidiaries. 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 $304 decreased compared with 2020 primarily due to repayment of debt in the first quarter of 2021. Interest expense, net was also favorably impacted by interest on our investments in marketable securities.

Income tax benefit of $1,544 for 2021 compared with an income tax benefit of $548 for 2020. Our most significant operations are in the United States, which has a 21% statutory tax rate and Germany, which has a 32% statutory tax rate. The mix of pretax income between these jurisdictions is one of the main drivers of the difference between our 21% statutory tax rate and our effective tax rate. Additionally, the current year 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. The 2020 tax rate was impacted unfavorably by nondeductible losses related to the closure of DynaEnergetics’ operations in Tyumen, Siberia, partially offset by benefits from the vesting of equity-based compensation.

Net loss attributable to DMC Global Inc. in 2021 was $202 compared with net loss of $1,412 in 2020.

Adjusted EBITDA increased compared with 2020 due to the factors discussed above. See "Overview" above for the explanation of the use of non-GAAP measures. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.

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Adjusted Net Income (Loss) increased compared with 2020 due to the factors discussed above. See "Overview" above for the explanation of the use of non-GAAP measures. The following is a reconciliation of the most directly comparable GAAP measures to Adjusted Net Income and Adjusted Diluted Earnings Per Share.

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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 stock-based compensation expense, which are not allocated to our business segments. Segment operating income will reconcile to consolidated income (loss) before income taxes by deducting unallocated corporate expenses, including 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. Given that Arcadia was acquired in late December 2021 and no sales were recorded in the period from the date of acquisition to December 31, 2021, segment disclosures have been omitted.

DynaEnergetics

Net sales were $28,961 higher than in 2020 due to a recovery in energy demand, which led to increased energy prices, drilling and well completion activity in North America, and increased sales of DynaEnergetics’ DS perforating systems. DynaEnergetics reported a 54% year-over-year increase in unit sales of its fully integrated and factory-assembled DS perforating systems in North America. The year-over-year increase in net sales was partially offset by lower international sales. Sales in 2020 were severely impacted by the drop in energy demand and related drilling and completion activity due to the COVID-19 pandemic.

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Gross profit percentage decreased to 22.2% primarily due to lower average selling prices in 2021, which also contributed to lower fixed cost absorption, as well as a decline in international sales, which typically have a higher gross profit percentage than domestic sales. The decline was partially offset by receipt of $3,390 ERC under the CARES Act.

General and administrative expenses increased by $4,016 compared with 2020 primarily due to an increase in outside services costs by $5,480 mostly related to patent infringement litigation in which DynaEnergetics is the plaintiff. The increase was partially offset by reductions in salaries, wages, and other payroll-related costs by $1,409, including receipt of $333 ERC under the CARES Act.

Selling and distribution expenses decreased by $1,775 compared with 2020 primarily due to reductions in provisions for expected credit losses by $2,690 and receipt of $800 ERC under the CARES Act. These decreases were partially offset by increases in depreciation expense by $1,249, increases from the restoration of variable compensation by $322, and increases in salaries and wages by $267 due to headcount additions and merit increases.

Amortization of purchased intangibles decreased by $521 compared with 2020 primarily due to fully amortizing certain customer relationship intangible assets during 2021.

Restructuring expenses, net and asset impairments in 2020 included asset impairments, severance costs related to downsizing our direct labor workforce in response to the COVID-19 impact on demand for DynaEnergetics’ products, and costs related to the sale of the Tyumen, Siberia manufacturing facility.

Operating income increased by $2,085 compared with 2020 due to increased sales volume in North America, receipt of $4,523 ERC under the CARES Act, and a reduction in the provisions for expected credit losses which more than offset lower average selling prices and a decline in international sales volume.

Adjusted operating income and Adjusted EBITDA changed compared with 2020 primarily due to the factors discussed above. See "Overview" above for the explanation of the use of non-GAAP measures. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted operating income and Adjusted EBITDA.

NobelClad

Net sales increased by $1,993 compared with 2020 due to the timing of shipment of projects out of backlog.

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Gross profit percentage increased to 26.2% primarily due to improved project mix, the favorable impact of higher sales volume on fixed expenses, and receipt of $1,509 ERC under the CARES Act.

General and administrative expenses decreased by $171 compared with 2020 primarily due to reductions in outside service costs of $88 and receipt of $84 ERC under the CARES Act.

Selling and distribution expenses increased by $133 compared with 2020 primarily due to an increase in salaries, wages, and other payroll-related costs by $427, an increase from resumption of business-related travel by $182, and an increase from the restoration of variable compensation by $94. These increases were partially offset by receipt of $436 ERC under the CARES Act and a prior year provision for expected credit losses of $178 associated with a customer that declared bankruptcy.

Restructuring expenses, net and asset impairments of $127 in 2021 related to additional severance liabilities for employees terminated as part of closing manufacturing operations in France in 2018. Expenses in 2020 primarily related to asset impairments for manufacturing and software assets that were no longer in use and severance costs related to downsizing our direct labor workforce in response to the COVID-19 pandemic.

Operating income increased by $2,897 compared to 2020 primarily due to improved project mix, the favorable impact of higher sales volume on fixed expenses, and receipt of $2,029 ERC under the CARES Act.

Adjusted operating income and Adjusted EBITDA increased due to the factors discussed above. See "Overview" above for the explanation of the use of non-GAAP measures. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted operating income and 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. The COVID-19 pandemic drove a sharp decline in oil and gas well completion activity, and corresponding demand for and pricing of DynaEnergetics' perforating systems late in the first quarter of 2020. In April 2020, DMC announced several cost-containment actions to reduce our activity-based cost structure, limit spending and protect our balance sheet, including suspending the quarterly dividend. Oil prices and oil and gas demand improved throughout 2021, resulting in increased unit sales in DynaEnergetics, though product pricing has continued to be lower than 2019 levels. In NobelClad, downstream energy projects have continued to be delayed and the continuing COVID-19 pandemic and related government shutdowns, labor issues and supply chain disruptions have resulted in numerous project and shipment delays. NobelClad’s order backlog increased to $41,181 at December 31, 2021 from $39,884 at December 31, 2020.

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 a 60% controlling interest in Arcadia.

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Our net debt position was $116,615 at December 31, 2021 compared to net cash of $42,659 at December 31, 2020. Indebtedness increased during 2021 to fund a portion of the purchase price of the Arcadia acquisition. We have a fully undrawn and available $50,000 revolving credit facility. We may in the future seek to implement a new 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 and marketable securities on hand, cash flow from operations, funds available under our current credit facilities and any future replacement thereof will be sufficient to fund the working capital, debt service, and other capital expenditure requirements of our current business operations for the foreseeable future. We may also execute capital markets transactions to raise additional funds if we believe market conditions are favorable. 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 the continuing unprecedented financial and market conditions, including the impacts COVID-19 will have on credit availability and capital markets.

We declared a quarterly dividend of $0.125 per share in the first quarter of 2020. 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.

Debt facilities

On December 23, 2021, in connection with the Arcadia acquisition, we entered into a five-year $200,000 syndicated credit agreement (“credit facility”) which included a $150,000 Term Loan, which is amortizable at 10% of principal per year with a balloon payment for the outstanding balance upon the credit facility maturity date in 2026, and allows for revolving loans of up to $50,000. The credit facility has an accordion feature to increase the commitments by $100,000 under the revolving loan class and/or by adding a term loan subject to approval by applicable lenders. We entered into the credit facility with a syndicate of four banks, with KeyBank, N.A. acting as administrative agent. The credit facility is secured by the assets of DMC including accounts receivable, inventory, and fixed assets, including Arcadia and its subsidiary, as well as guarantees and share pledges by DMC and its subsidiaries.

Borrowings under the $150,000 Term Loan and $50,000 revolving loan limit can be in the form of Adjusted Daily Simple Secured Overnight Financing Rate ("SOFR") loans or one month Adjusted Term SOFR loans. Additionally, U.S. dollar borrowings on the revolving loan can be in the form of Base Rate loans (Base Rate borrowings are based on the greater of the administrative agent’s Prime rate, an adjusted Federal Funds rate or an adjusted SOFR rate). SOFR loans bear interest at the applicable SOFR rate plus an applicable margin (varying from 1.50% to 3.00%). Base Rate loans bear interest at the defined Base rate plus an applicable margin (varying from 0.50% to 2.00%). As of December 31, 2021, no amounts had been drawn on the revolver since the credit facility was executed.

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 the Consolidated Pro Forma EBITDA for such period. The maximum leverage ratio permitted by our credit facility is 3.5 to 1.0 through the quarter ended March 31, 2022, 3.25 to 1.0 from the quarter ended June 30, 2022 through the quarter ended March 31, 2023, and 3.0 to 1.0 from the quarter ended June 30, 2023 and thereafter. The actual leverage ratio as of December 31, 2021, calculated in accordance with the credit facility, as amended, was 3.0 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, 2021 was 1.7 to 1.0.

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

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disposition of major assets; and maintenance of specified ratios. As of December 31, 2021, we were in compliance with all financial covenants and other provisions of our debt agreements.

As of December 31, 2021, U.S. dollar revolving loans of zero and borrowings of $150,000 on the Term Loan were outstanding under our credit facility and our available borrowing capacity was $50,000.

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.

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, 2021:

(1)  Represents outstanding borrowings under our credit facility but excludes interest expense on outstanding credit facility borrowings. For more information about our debt obligations, please see Note 4 "Debt" to 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, 2021. Our operating lease obligations are described in Note 2 "Summary of Significant Accounting Policies" of our Consolidated Financial Statements.

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

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

Cash flows from operating activities

Net cash used in operating activities was $12,812 in 2021 compared with cash flows provided by operating activities of $30,362 in 2020. The decrease primarily was due to an increased use of cash for working capital, which included higher accounts receivable, higher inventory levels to mitigate global supply chain bottlenecks and in anticipation of increased sales activity in future periods, lower accrued income taxes after payment of German income taxes during the fourth quarter of 2021, and higher prepaid expenses and other assets related in part to payments to fund our Non-Qualified Deferred Compensation Plan and other prepaid service contracts. The increases in working capital were partially offset by higher accounts payable resulting from increased purchasing activity.

Cash flows from investing activities

Net cash used in investing activities in 2021 totaled $267,806 and primarily consisted of $261,000 in cash 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 $5,455 for DynaEnergetics and $2,730 for NobelClad. 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.

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Net cash used in investing activities in 2020 totaled $39,557 and primarily consisted of acquisition of investments in marketable securities of $25,740 and acquisitions of property, plant and equipment of $11,741 for DynaEnergetics and $1,975 for NobelClad.

Cash flows from financing activities

Net cash provided by financing activities for 2021 totaled $282,585, which included borrowing of our Term Loan of $150,000, net proceeds from our equity offering of $123,461 and our 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 deferred debt issuance costs of $2,337

Net cash provided by financing activities for 2020 totaled $17,317, which included proceeds from our ATM equity program of $25,740 partially offset by payment of quarterly dividends of $3,749, repayments on the capital expenditure facility under our previous credit facility of $3,125, and treasury stock purchases of $1,890.

Critical Accounting Policies and Estimates

Our historical Consolidated Financial Statements and notes to our historical Consolidated Financial Statements contain information that is pertinent to our management’s discussion and analysis of financial condition and results of operations. Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that our management make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. However, the accounting principles used by us generally do not change our reported cash flows or liquidity. Existing rules must be interpreted and judgments made on how the specifics of a given rule apply to us.

In management’s opinion, the more significant reporting areas impacted by management’s judgments and estimates are business combination, revenue recognition, inventories, asset impairments, and income taxes. Management’s judgments and estimates in these areas are based on information available from both internal and external sources, and actual results could differ from the estimates as additional information becomes known. We believe the following to be our most critical accounting policies.

Business Combination

The Company accounts for acquisitions under the acquisition method. Net assets and results of operations are included in our financial statements commencing at the acquisition date. We allocate the fair value of the 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 of these 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 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 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.

Revenue Recognition

The Company’s revenues are primarily derived from consideration paid by customers for tangible goods. The Company analyzes its different products by segment to determine the appropriate basis for revenue recognition, as described below. Given that Arcadia was purchased in late December 2021 and no revenue was recorded in the period from the date of acquisition to December 31, 2021, related accounting policies have not been included herein. Revenue is not generated from sources other than contracts with customers and revenue is recognized net of any taxes collected from customers, which are

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subsequently remitted to governmental authorities. There are no material upfront costs for operations that are incurred from contracts with customers.

Our rights to payments for goods transferred to customers arise when control is transferred at a point in time and not on any other criteria. Payment terms and conditions vary by contract, although terms generally include a requirement of payment within 30 to 90 days. In instances when we require customers to make advance payments prior to the shipment of their orders, we record a contract liability. We have determined that our contract liabilities do not include a significant financing component given the short duration between order initiation and order fulfillment within each of our segments.

DynaEnergetics

Customers agree to terms and conditions at the time of initiating an order. Transactions contain standard products, which may include perforating system components, such as detonating cord, or systems and associated hardware, including Factory-Assembled, Performance-AssuredTM DynaStage® perforating systems. In instances where multiple products are included within an order, each product represents a separate performance obligation given that: (1) the customer can benefit from each product on a standalone basis and (2) each product is distinct within the context of the contract.

The transaction price is readily determinable and fixed at the time the transaction is entered into with the customer. DynaEnergetics is entitled to each product’s transaction price upon the customer obtaining control of the item. Such control occurs as of a point in time, which is generally based upon relevant International Commercial Terms (“Incoterms") as it relates to product ownership and legal title being transferred. Upon fulfillment of applicable Incoterms, DynaEnergetics has performed its contractual requirements such that it has a present right to payment, and the customer from that point forward bears all risks and rewards of ownership. In addition, at this date, the customer has the ability to direct the use of, or restrict access to, the asset. No payment discounts, rebates, refunds, or any other forms of variable consideration are included within contracts. DynaEnergetics also does not provide service-type warranties either via written agreement or customary business practice, nor does it allow customer returns without its prior approval.

For orders that contain only one performance obligation, the total transaction price is allocated to the sole performance obligation. For orders that contain multiple products being purchased by the customer, judgment is required to determine standalone selling price (“SSP”) for each distinct performance obligation. However, such judgment is largely mitigated given that products purchased are generally shipped at the same time. In instances where products purchased are not shipped at the same time, DynaEnergetics uses the contractually stated price to determine SSP as this price approximates the price of each good as sold separately.

NobelClad

Customers agree to terms and conditions at the time of initiating an order. The significant majority of transactions contain a single performance obligation - the delivery of a clad metal product. In instances where multiple products are included within an order, each product represents a separate performance obligation given that: (1) the customer can benefit from each product on a standalone basis and (2) each product is distinct within the context of the contract.

The transaction price is readily determinable and fixed at the time the transaction is entered into with the customer. NobelClad is entitled to each product’s transaction price upon the customer obtaining control of the item. Such control occurs as of a point in time, which is generally based upon relevant Incoterms as it relates to product ownership and legal title being transferred. Upon fulfillment of applicable Incoterms, NobelClad has performed its contractual requirements such that it has a present right to payment, and the customer from that point forward bears all risks and rewards of ownership. In addition, at this date, the customer has the ability to direct the use of, or restrict access to, the asset. No payment discounts, rebates, refunds, or any other forms of variable consideration are included within NobelClad contracts. NobelClad also does not provide service-type warranties either via written agreement or customary business practice, nor does it allow customer returns.

For contracts that contain only one performance obligation, the total transaction price is allocated to the sole performance obligation. For contracts which contain multiple distinct performance obligations, judgment is required to determine the SSP for each performance obligation. NobelClad uses the expected cost plus margin approach in order to estimate SSP, whereby an entity forecasts its expected costs of satisfying a performance obligation and then adds an appropriate margin for that good. The required judgment described herein largely is mitigated given the short duration between order initiation and complete order fulfillment.

Inventories

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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.

Shipping and handling costs incurred by us upon shipment from our manufacturing facilities directly to customers are included in "Cost of products sold" while shipping and handling costs incurred by us upon shipment from our distribution centers to customers are included in "Selling and distribution expenses" in the accompanying Consolidated Statements of Operations.

Asset impairments

Finite-lived assets are tested for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. We compare the expected undiscounted future operating cash flows associated with these finite-lived assets to their respective carrying values to determine if they are fully recoverable when indicators of impairment are present. If the expected future operating cash flows of an asset 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. Long-lived assets to be disposed of, if any, are reported at the lower of carrying amount or fair value less cost to sell.

Income taxes

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

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.

Off Balance Sheet Arrangements

At December 31, 2021, 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

Please refer to Note 2 "Significant Accounting Policies" to our Consolidated Financial Statements in this annual report for a discussion of recent accounting pronouncements and their anticipated effect on our business.