The following discussion should be read in conjunction with our historical Consolidated Financial Statements and notes, as well as the selected historical consolidated financial data that is included in our Annual Report filed on Form 10-K for the year ended December 31, 2021.

Unless stated otherwise, all dollar figures are presented in thousands (000s).

Overview

General

DMC Global Inc. ("DMC") is a diversified holding company. Our innovative businesses provide differentiated products and services to niche industrial and commercial markets around the world. DMC's objective is to identify well-run businesses and strong management teams and support them with long-term capital and strategic, legal, technology and operating resources. DMC's culture is to foster local innovation versus centralized control. We help our portfolio companies grow core businesses, launch new initiatives, upgrade technologies and systems to support their long-term strategy, and make acquisitions that improve their competitive positions and expand their markets. Today, DMC's portfolio consists of Arcadia, DynaEnergetics, and NobelClad, which collectively address the building products, energy, industrial processing and transportation markets. Based in Broomfield, Colorado, DMC trades on Nasdaq under the symbol "BOOM."

Arcadia

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

Cost of products sold for Arcadia includes the cost of aluminum, paint, and other raw materials used to manufacture windows, curtain walls, doors, and interior partitions as well as employee compensation and benefits, 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 to perforate oil and gas wells. These products are sold to oilfield service companies in the U.S., Europe, Canada, Africa, the Middle East, and Asia. DynaEnergetics also sells directly to end-users. The market for perforating products, which are used during the well completion process, generally corresponds with oil and gas exploration and production activity. Well completion operations are increasingly complex, which in turn has increased the demand for intrinsically-safe, reliable and technically advanced perforating systems.

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

NobelClad

NobelClad produces explosion-welded clad metal plates for use in the construction of corrosion resistant industrial processing equipment and specialized transition joints. While a significant portion of the demand for our clad metal products is driven by maintenance and retrofit projects at existing chemical processing, petrochemical processing, oil refining, and aluminum smelting facilities, new plant construction and large plant expansion projects also account for a significant portion of total demand. These industries tend to be cyclical in nature and timing of new order inflow remains difficult to predict. We use backlog as a primary means to measure the immediate outlook for our NobelClad business. We define "backlog" at any given point in time as all firm, unfulfilled purchase orders and commitments at that time. Most firm purchase orders and commitments are realized, and we expect to fill most backlog orders within the following 12 months. NobelClad's backlog increased to $46,786 at June 30, 2022 from $41,181 at December 31, 2021.



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Cost of products sold for NobelClad includes the cost of metals, explosive powders and other raw materials used to manufacture clad metal plates as well as employee compensation and benefits, outside processing costs, depreciation of manufacturing facilities and equipment, manufacturing supplies and other manufacturing overhead expenses.

Employee Retention Credit

In the first quarter of 2021, under provisions of legislation enacted in December 2020 the Company became eligible for the Employee Retention Credit ("ERC") under the Coronavirus Aid, Relief, and Economic Security Act, as amended ("CARES Act"). As a result of the new legislation, the Company was able to claim a refundable tax credit equal to 70% of the qualified wages it paid to employees for portions of calendar year 2021. The ERC favorably impacted the financial statement results of the Company for the three and six months ended June 30, 2021, as described further in the "Consolidated Results of Operations" section below. The ERC had no impact on the financial statement results of the Company for the three and six months ended June 30, 2022.

Factors Affecting Results

•Consolidated sales were $165,831 in the second quarter of 2022. Excluding the Arcadia acquisition, second quarter sales were $89,369, an increase of 37% versus the second quarter of 2021. The improved performance primarily was driven by high energy prices and a growing reliance on North American oil and gas, which has led to increased drilling and well completion activity in North America and increased sales at DynaEnergetics.

•Arcadia reported sales of $76,462 in the second quarter of 2022, representing a sequential increase of 12%. The increase was largely attributable to higher customer pricing in response to higher base aluminum metal prices and increases in other input costs.

•DynaEnergetics sales of $67,517 in the second quarter of 2022 increased 60% compared with the second quarter of 2021 due to improved oil and gas demand, which led to higher North American drilling and well completions, and increased demand and improved pricing for DynaEnergetics' DS perforating systems. DynaEnergetics' international sales also improved, increasing 42% compared with the second quarter of 2021.

•NobelClad sales of $21,852 in the second quarter of 2022 decreased 6% compared with the second quarter of 2021 reflecting decreased shipments out of backlog. NobelClad sales in 2022 were also negatively impacted by the weakening of the Euro compared to the United States Dollar.

•Consolidated gross profit was 31% in the second quarter of 2022 versus 26% in the second quarter of 2021. The improvement compared to prior year primarily was due to the acquisition of Arcadia, which had a higher gross profit percentage than DMC's other business units. The impact of higher sales volume on fixed manufacturing overhead expenses and increases in the average selling price of DS perforating systems at DynaEnergetics also contributed to the improved performance. These favorable impacts were partially offset by higher material and other input costs at each business segment. Additionally, the 2021 second quarter gross profit was favorably impacted by the receipt of $1,488 ERC under the CARES Act.

•Consolidated selling, general and administrative expenses were $29,361 in the second quarter of 2022 compared with $14,015 in the second quarter of 2021. Arcadia's incremental selling, general and administrative expenses were $11,372 in the second quarter of 2022. The year-over-year increase also was attributable to higher salaries, benefits, and other-payroll related costs including variable incentive compensation, litigation expenses related to patent enforcement actions against companies that we believe infringe on DynaEnergetics' patents, and stock-based compensation expense. Additionally, SG&A in the second quarter of 2021 included receipt of $765 of ERC under the CARES Act.

•Cash of $11,819 at June 30, 2022 decreased $18,991 from $30,810 at December 31, 2021. The decrease in cash primarily related to principal and interest payments on the Company's credit facility and funding working capital at DynaEnergetics and Arcadia. Both businesses increased their investments in inventory due to rising raw material prices, longer-lead times and expected sales volume growth. Outlook

We remain in a period of rising raw material and other input costs as well as continued supply chain disruptions and challenges. Each of our businesses has been and may continue to be impacted by rising raw material prices (particularly aluminum at Arcadia and steel at DynaEnergetics), increasing wages, the availability of labor, and supply chain disruptions such as increased lead times related to raw materials.


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In North America, crude prices and well completion activity increased in the second quarter of 2022 which positively impacted DynaEnergetics' end customers' activity levels. These conditions led to a significant increase in unit sales of DynaEnergetics' fully integrated and factory-assembled DS perforating systems.

We believe well completion activity and customer pricing will be resilient. DynaEnergetics has instituted price increases in the fourth quarter of 2021 and first half of 2022 to offset higher labor and material costs and the expiration of the previously enacted CARES Act. DynaEnergetics is planning on additional price increases in the second half of 2022 as it seeks to return margins to levels that reflect the inherent value of its products. We believe DynaEnergetics is among the first to benefit from strengthening prices, as it offers a highly differentiated product line. Factory-assembled DS perforating systems are delivered just in time to the wellsite, eliminating assembly operations and requiring fewer people on location.

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

Arcadia 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 core geographic regions and end markets served. We are working to design and install new finishing capacity to increase manufacturing throughput. We expect the additional finishing capacity will be operational next year. The design and implementation of a new enterprise resource planning system is underway and will improve operating efficiencies and enhance the buying experience for Arcadia's commercial and residential customers.

Use of Non-GAAP Financial Measures

Adjusted EBITDA is a non-GAAP (generally accepted accounting principles) measure that we believe provides an important indicator of our ongoing operating performance and that we use in operational and financial decision-making. We define EBITDA as net income or loss plus or minus net interest, taxes, depreciation and amortization. Adjusted EBITDA excludes from EBITDA stock-based compensation, restructuring expenses and asset impairment charges and, when appropriate, other items that management does not utilize in assessing DMC's operating performance (as further described in the tables below). Adjusted EBITDA attributable to DMC Global Inc. excludes the adjusted EBITDA attributable to the 40% redeemable noncontrolling interest in Arcadia. For our business segments, Adjusted EBITDA is defined as operating income (loss) plus depreciation, amortization, allocated stock-based compensation, restructuring expenses and asset impairment charges and, when appropriate, other items that management does not utilize in assessing operating performance. As a result, internal management reports used during monthly operating reviews feature Adjusted EBITDA and certain management incentive awards are based, in part, on the amount of Adjusted EBITDA achieved during the year.

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

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

Net debt is a non-GAAP measure we use to supplement information in our Condensed Consolidated Financial Statements. We define net debt as total debt less total cash and cash equivalents. In addition to conventional measures prepared in accordance with GAAP, the Company uses this information to evaluate its performance, and we believe that certain investors may do the same.



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The presence of non-GAAP financial measures in this report is not intended to suggest that such measures be considered in isolation or as a substitute for, or as superior to, DMC's GAAP information, and investors are cautioned that the non-GAAP financial measures are limited in their usefulness. 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.


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