Document

 

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

For the fiscal year ended December 31, 2016
 

o         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.)
 5405 Spine Road, Boulder, Colorado 80301
(Address of principal executive offices, including zip code)
 
(303) 665-5700
(Registrant’s telephone number, including area code)


Dynamic Materials Corporation
(Former Name or Former Address if Changed Since Last Report)

 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Common Stock, $.05 Par Value
 
The Nasdaq Global Select Market

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  o  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act from their obligations under those sections. Yes  o  No x

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  x  No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No  o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer o
 
Accelerated filer x
 
 
 
Non-accelerated filer o
(Do not check if smaller reporting company)
 
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 under the Act).  Yes  o  No x
 
The approximate aggregate market value of the voting stock held by non-affiliates of the registrant was $125,064,812 as of June 30, 2016.

The number of shares of Common Stock outstanding was 14,761,024 as of March 9, 2017.

Certain information required by Items 10, 11, 12, 13 and 14 of Form 10-K is incorporated by reference into Part III hereof from the registrant’s proxy statement for its 2014 Annual Meeting of Shareholders, which is expected to be filed with the Securities and Exchange Commission (“SEC”) within 120 days of the close of the registrant’s fiscal year ended December 31, 2016.

 



TABLE OF CONTENTS
 
 
 
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PART I

ITEM 1.                                                Business
 
References made in this Annual Report on Form 10-K to “we”, “our”, “us”, “DMC” and the “Company” refer to DMC Global Inc. (formerly Dynamic Materials Corporation) and its consolidated subsidiaries.

Overview
 
DMC Global Inc. (formerly "Dynamic Materials Corporation") operates a diversified family of technical product and process businesses serving the energy, industrial and infrastructure markets. Our businesses operate globally through an international network of manufacturing, distribution and sales facilities.

Our business is organized into two segments: NobelClad and DynaEnergetics. NobelClad is a global leader in the production of explosion-welded clad metal plates for use in the construction of corrosion resistant industrial processing equipment and specialized transition joints. DynaEnergetics designs, manufactures and distributes products utilized by the global oil and gas industry principally for the perforation of oil and gas wells. See Note 6 within Item 8 — Financial Statements and Supplementary Data for net sales, operating income, and total assets for each of our segments.

Our Strategy
Our business segments each provide a suite of unique technical products to niche segments of the global energy, industrial and infrastructure markets; and each of our businesses has established a strong or leading position in the markets in which it participates. With an underlying focus on free-cash flow generation, our objective is to sustain and grow the market share of our businesses through increased market penetration, development of new applications, and research and development of new and adjacent products that can be sold across our global network of sales and distribution facilities. We also intend to explore potential acquisitions of complementary businesses that could strengthen or add to our existing product portfolio, or expand our geographic footprint and market presence.

Business Segments

NobelClad

Clad metal plates are typically used in the construction of heavy, corrosion resistant pressure vessels and heat exchangers. Clad metal plates consist of a thin layer of an expensive, corrosion resistant cladder metal, such as titanium or nickel alloy, which is metallurgically welded to a less expensive structural backing metal, such as carbon steel.  For heavy equipment, clad plates generally provide an economical alternative to building the equipment solely of a corrosion resistant alloy. While a large portion of the demand for our clad metal products is driven by new plant construction and large plant expansion projects, maintenance and retrofit projects at existing chemical processing, petrochemical processing, oil refining, and aluminum smelting facilities 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.
 
There are three major industrial clad plate manufacturing technologies: explosion welding, hot rollbonding and weld overlay. Detaclad®, NobelClad’s process-controlled explosion clad, uses explosion welding, the most versatile of the clad plate manufacturing methods. Created using a robust cold welding technology, explosion-welded clad products exhibit high bond strength and combine the corrosion resistance of the cladder material with the mechanical properties and structural strength of the lower cost of the backer material.  The explosion welding process is suitable for joining virtually any combination of common engineered metals. This represents a competitive advantage versus the hot rollbonding and weld overlay processes, which generally can only clad compatible metals such as nickel alloys and stainless steels.

Explosion-welded clad metal is produced as flat plates or concentric cylinders, which can be further formed and fabricated into a broad range of industrial processing equipment or specialized transition joints. When fabricated properly, the two metals will not come apart, as the bond zone is generally stronger than the parent metals. The dimensional capabilities of the process are broad: cladding metal layers can range from a few thousandths of an inch to several inches in thickness and base metal thickness and lateral dimensions are primarily limited only by the capabilities of the world’s metal production mills.  Explosion welding is used to clad to steel a broad range of metals, including aluminum, titanium, zirconium, nickel alloys and stainless steels.
 


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Clad Metal End Use Markets
 
Explosion-welded clad metal is primarily used in the construction of large industrial processing equipment that is subject to high pressures and temperatures and/or corrosive processes. Explosion welded clad plates also can be cut into transition joints, which are used to facilitate conventional welding of dissimilar metals. The eight broad industrial sectors discussed below comprise the bulk of demand for NobelClad’s products with oil and gas and chemical and petrochemical constituting approximately two-thirds of NobelClad sales in 2016. This demand is driven by the underlying need for both new equipment and facility maintenance in these primary market sectors.

Oil and Gas: Oil and gas end use markets include both oil and gas production and petroleum refining. Oil and gas production covers a broad scope of operations related to recovering oil and/or gas for subsequent processing in refineries. Clad metal is used in separators, glycol contractors, pipe lines, heat exchangers and other related equipment. Increased oil and gas production from deep, hot, and more corrosive fields has also increased the demand for clad equipment. Clad is commonly used in these facilities. The primary clad metals for the oil and gas production market are stainless steel and nickel alloys clad to steel, with some use of reactive metals, such as titanium.

Petroleum refining processes frequently are corrosive, hot, and operate at high pressures. Clad metal is extensively used in a broad range of equipment including desulfurization hydrotreaters, coke drums, distillation columns, separators and heat exchangers. The increasing reliance upon low quality, high sulfur crude drives additional demand for new corrosion resistant equipment. Worldwide trends in regulatory control of sulfur emissions in gas, diesel and jet fuel are also increasing the need for clad equipment. Like the upstream oil and gas sector, the clad metals are primarily stainless steel and nickel alloys.

Chemical and Petrochemical: Many common products, ranging from plastics to prescription drugs to electronic materials, are produced by chemical processes. Because the production of these items often involves corrosive agents and is conducted under high pressures or temperatures, corrosion resistant equipment is needed. One of the larger applications for clad equipment is in the manufacture of Purified Terephthalic Acid, a precursor product for polyester, which is used in everything from carpets to plastic bottles. The chemical market requires extensive use of stainless steel and nickel alloys, but also uses titanium, zirconium and tantalum.

Alternative Energy: Some alternative energy technologies involve conditions that necessitate clad metals. Solar panels predominantly incorporate high purity polysilicon. Processes for manufacturing high purity silicon utilize a broad range of highly corrosion-resistant clad alloys. Many geothermal fields are corrosive, requiring high alloy clad separators to handle the hot steam. Some ethanol technologies may require corrosion resistant metals at thicknesses where clad is an attractive alternative.

Hydrometallurgy: The processes for production of nickel, gold, and copper involve acids, high pressures, and high temperatures; and titanium-clad plates are used extensively for construction of associated leaching and peripheral equipment.

Aluminum Production: Aluminum is reduced from its oxide in large electric smelters called potlines. The electric current is carried via aluminum conductors. The electricity must be transmitted into steel components for the high temperature smelting operations. Aluminum cannot be welded to steel conventionally. Explosion-welded aluminum-steel transition joints provide an energy efficient and highly durable solution for making these connections. Modern potlines use a large number of transition joints, which are typically replaced after approximately five years in service. Although aluminum production is the major electrochemical application for NobelClad products, there are a number of other electrochemical applications including production of magnesium, chlorine and chlorate.

Shipbuilding: The combined problems of corrosion and top-side weight drive demand for our aluminum-steel transition joints, which serve as the juncture between a ship's upper and lower structures. Top-side weight is often a significant problem with tall ships, including cruise ships, naval vessels, ferries and yachts. Use of aluminum in the upper structure and steel in the lower structure provides stability. Since aluminum cannot be welded directly to steel using traditional welding processes, and since bolted joints between aluminum and steel corrode quickly in seawater, explosion welded transition joints are a common solution. NobelClad's transition joints have been used in the construction of many well-known ships, including the Queen Elizabeth II and modern U.S. Navy aircraft carriers.

Power Generation: Fossil fuel and nuclear power generation plants require extensive use of heat exchangers, many of which require corrosion resistant alloys to handle low quality cooling water. Our clad plates are used extensively for heat exchanger tubesheets. The largest clad tubesheets are used in the final low-pressure condensers. For most coastal and brackish water-cooled plants, titanium is the metal of choice, and titanium-clad tubesheets are the low-cost solution for power plant condensers.

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Industrial Refrigeration: Heat exchangers are a core component of refrigeration systems. When the cooling fluid is seawater, brackish, or even slightly polluted, corrosion resistant metals are necessary. Metal selection can range from stainless steel to copper alloy to titanium. Explosion-welded clad metal is often the low cost solution for making the tubesheets. Applications range from refrigeration chillers on fishing boats to massive air conditioning units for skyscrapers, airports, and deep underground mines.

Operations

The NobelClad segment seeks to build on its leadership position in its markets.  During the three years ended December 31, 2016, 2015 and 2014, the NobelClad segment represented approximately 58%, 54% and 48% of our consolidated net sales, respectively.  The three manufacturing plants and their respective shooting sites in Pennsylvania, Germany and France provide the production capacity to address concurrent projects for NobelClad’s international customer base.
 
The principal product of metal cladding, regardless of the process used, is a metal plate composed of two or more dissimilar metals, usually a corrosion resistant metal (the "cladder") bonded to a steel backing plate. Prior to the explosion-welding process, the materials are inspected, the mating surfaces are ground, and the metal plates are assembled for cladding. The process involves placing a sheet of the cladder over a parallel plate of backer material and then covering the cladder with a layer of specifically formulated explosive powder. A small gap or “standoff space” is maintained between the cladder and backer using small spacers. The explosion is then initiated on one side of the cladder and travels across the surface of the cladder forcing it onto the backer. The explosion happens in approximately one-thousandth of a second.  The collision conditions cause a thin layer of the mating surfaces, as well as the spacers, to be spalled away in a jet.  This action removes oxides and surface contaminants immediately ahead of the collision point.  The extreme pressures force the two metal components together, creating a metallurgical bond between them.  The explosion welding process produces a strong, ductile, continuous metallurgical weld over the clad surface.  After the explosion is completed, the resulting clad plates are flattened and cut, and then undergo testing and inspection to assure conformance with internationally accepted product specifications.

EXPLOSION-WELDING PROCESS
 
explosionwelding2016a01.jpg

Explosion-welded cladding technology is a method for welding metals that cannot be joined using conventional welding processes, such as titanium-steel, aluminum-steel, and aluminum-copper. Explosion welding also can be used to weld compatible metals, such as stainless steels and nickel alloys to steel.  The cladding metals are typically titanium, stainless steel, aluminum, copper alloys, nickel alloys, tantalum, and zirconium. The base metals are typically carbon steel, alloy steel,

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stainless steel and aluminum.  Although the patents for the basic explosion-welded cladding process have expired, NobelClad has developed a proprietary knowledge of process control that distinguishes it from its competitors by yielding rejection rates and costs of quality significantly less than 1%. The entire explosion-welding process involves significant precision in all stages, and any errors can be extremely costly as they often result in the discarding of the expensive raw material metals.  NobelClad’s technological expertise is a significant advantage in preventing costly waste.

NobelClad’s metal products are primarily produced for custom projects and conform to requirements set forth in customers’ purchase orders. Upon receipt of an order, NobelClad obtains the component materials from a variety of sources based on quality, availability and cost and then produces the order in one of its three manufacturing plants.  Final products are processed to meet contract specific requirements for product configuration and quality/inspection level.
 
Suppliers and Raw Materials
 
NobelClad's operations involve a range of alloys, steels and other materials, such as stainless steel, copper alloys, nickel alloys, titanium, zirconium, tantalum, aluminum and other metals.  NobelClad sources its raw materials from a number of different producers and suppliers. It holds a limited metal inventory and purchases its raw materials based on contract specifications. Under most contracts, any raw material price increases are passed on to NobelClad’s customers.  NobelClad closely monitors the quality of its supplies and inspects the type, dimensions, markings, and certification of all incoming metals to ensure that the materials will satisfy applicable construction codes. NobelClad also manufactures a majority of its own explosives from standard raw materials, thus achieving higher quality and lower cost.
 
Competition
 
Metal Cladding.  NobelClad faces competition from two primary alternative cladding technologies: hot rollbonding and weld overlay. Usually the three processes do not compete directly, as each has its own preferential domain of application relating to metal used and thicknesses required.  However, due to specific project considerations such as technical specifications, price and delivery time, explosion-welding may have the opportunity to compete successfully against these technologies.  Rollbond is only produced by a few steel mills in the world. In this process, the clad metal and base metal are bonded during the hot rolling operation in which the metal slab is converted to plate. Being a high temperature process that yields the formation of detrimental intermetallics, hot rollbond is limited to joining similar metals, such as stainless steel and nickel alloys to steel.  Rollbond’s niche is production of large quantities of light to medium gauge clad plates.  Rollbond products are generally suitable for most pressure vessel applications but have lower bond shear strength and may have inferior corrosion resistance.

The weld overlay process, which is used by the many vessel fabricators that are often also NobelClad customers, is a slow and labor-intensive process that requires a large amount of floor space for the equipment. In weld overlay cladding, the clad metal layer is deposited on the base metal using arc-welding type processes.  Weld overlay is a cost-effective technology for complicated shapes, for field service jobs, and for production of some very heavy-wall pressure vessel reactors.  During overlay welding, the cladding metal and base metal are melted together at their interface. The resulting dilution of the cladding metal chemistry may compromise corrosion performance and limit use in certain applications.  Weld metal shrinkage during cooling potentially causes distortion when the base layer is thin.  As with rollbond, weld overlay is limited to metallurgically similar metals, primarily stainless steels and nickel alloys joined to steel.   Weld overlay is typically performed in conventional metal fabrication shops.

Explosion-Welded Metal Cladding.  Competition in the explosion-welded clad metal business is fragmented.  NobelClad holds a strong market position in the clad metal industry. It is the leading producer of explosion-welded clad products in North America, and has a strong position in Europe against smaller competitors. NobelClad’s has mixed competition in Asia ranging from competitors with competitive technology and strong brand names to other producers which are technically limited and offer minimal exports outside of their domestic markets. To remain competitive, NobelClad intends to continue developing and providing technologically advanced manufacturing services, maintaining quality levels, offering flexible delivery schedules, delivering finished products on a reliable basis and competing favorably on the basis of price.
 
Customer Profile
 
NobelClad’s products are used in critical applications in a variety of industries, including upstream oil and gas, oil refining, chemical and petrochemical, hydrometallurgy, aluminum production, shipbuilding, power generation, industrial refrigeration and other similar industries.  NobelClad’s customers in these industries require metal products that can withstand exposure to corrosive materials, high temperatures and high pressures.  NobelClad’s customers can be divided into three tiers: the product end users (e.g., operators of chemical processing plants), the engineering contractors that design and construct

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plants for end users, and the metal fabricators that manufacture the products or equipment that utilize NobelClad’s metal products.  It is typically the fabricator that places the purchase order with NobelClad and pays the corresponding invoice.  NobelClad has developed strong relationships over the years with the engineering contractors, process licensors, and equipment operating companies that frequently act as buying agents for fabricators.
 
Marketing, Sales, Distribution
 
NobelClad conducts its selling efforts by marketing its services to potential customers' senior management, direct sales personnel, program managers, and independent sales representatives. Prospective customers in specific industries are identified through networking in the industry, cooperative relationships with suppliers, public relations, customer references, inquiries from technical articles and seminars and trade shows.  NobelClad’s sales office in the United States covers the Americas and East Asia.  Its sales offices in Europe cover the full European continent, Africa, the Middle East, India, and Southeast Asia.  NobelClad also has sales offices in South Korea and China to address these markets. These sales teams are further supported by local sales offices in the Middle East and India, with contract agents in most other developed countries, including Russia and Brazil.  Contract agents typically work under multi-year agreements which are subject to sales performance as well as compliance with NobelClad quality and customer service expectations.  Members of the global sales team may be called to work on projects located outside their usual territory.  By maintaining relationships with its existing customers, developing new relationship with prospective customers, and educating all its customers as to the technical benefits of NobelClad’s products, NobelClad endeavors to assist in the writing of specifications, both by our customers and American Society of Mechanical Engineers and ASTM industry standards, to ensure that the highest quality and reliability are achieved.
 
NobelClad’s products are generally shipped from its manufacturing locations in the United States, Germany and France.  Any shipping costs or duties for which NobelClad is responsible typically will be included in the price paid by the customer.  Regardless of where the sale is booked, NobelClad will produce it, capacity permitting, at the location closest to the delivery place. In the event that there is a short-term capacity issue, NobelClad produces the order at any of its production sites, prioritizing timing.  The various production sites allow NobelClad to meet customer production needs in a timely manner.
 
Research and Development
 
We prepare a formal research and development plan annually. It is implemented at our cladding sites in France, Germany, and the U.S. and is supervised by a Technical Committee that reviews progress quarterly and meets once a year to establish the plan for the following 12 months.  The research and development projects concern process support, new products, and special customer-paid projects.

DynaEnergetics

DynaEnergetics designs, manufactures, markets, and sells perforating explosives and associated hardware, as well as seismic explosives, for the international oil and gas industry. The oil and gas industry uses perforating products to punch holes in the casing or liner of wells, thereby connecting the well to the surrounding reservoir. During the drilling process, steel casing and cement are inserted into the well to isolate and support the wellbore. As part of the well completion process, the perforating guns, which contain a series of specialized shaped charges, are lowered into the well to the desired area of the targeted formation. When fired, the shaped charges shoot a plasma jet through the casing and cement and into the formation. The resulting channels in the formation allow hydrocarbons to flow into the wellbore.


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DynaEnergetics designs, manufactures and sells all five primary components of a perforating system, which are: 1) carrier tubes and charge tubes, 2) shaped charges, 3) detonating cord, 4) detonators, and 5) control panels. In addition, DynaEnergetics has leveraged its broad product portfolio and detonator technology to create a unique factory-assembled, performance-assured well perforating system known as DynaStageTM. The DynaStage system arrives fully assembled at the well, thereby reducing the customers’ need for field assembly crews and associated infrastructure.

PRIMARY COMPONENTS OF A PERFORATING GUN
perforatinggun2016.jpg


The perforating products manufactured by DynaEnergetics are essential to certain types of modern oil and gas recovery.  These products are sold to large, mid-sized, and small oilfield service companies around the world. DynaEnergetics also promotes its technologies and systems directly with end-user exploration and production companies. The market for perforating products, which are used during the well completion process, generally corresponds with oil and gas exploration and production (E&P) activity. Modern E&P activity has led to increasingly complex well completion operations, which in turn, have increased the demand for high quality and technically advanced perforating products.

Operations

The DynaEnergetics segment seeks to build on its products and technologies, as well as its sales, supply chain and distribution network.  During the three years ended December 31, 2016, 2015 and 2014, the DynaEnergetics segment represented approximately 42%, 46% and 52% of our consolidated net sales, respectively. 

DynaEnergetics has been producing detonating cord and detonators and selling these along with seismic explosives systems for decades. Since 1994, the business has placed significant emphasis on enhancing its offering by improving existing products and adding new products through research and development, as well as acquisitions.  Today, DynaEnergetics offers a comprehensive portfolio of detonating cord, detonators, bi-directional boosters, shaped charges, and corresponding gun systems.

In recent years, DynaEnergetics has increased its development efforts and introduced several new products specifically designed for safe and selective perforating. Included among these products is the DynaSelectTM family of intrinsically safe integrated switch-detonators. DynaSelect detonators require a specific electronic code for firing and are immune to induced currents and voltages, static electricity and high-frequency irradiation. These safety features substantially reduce the risk of unintentional detonation and enable concurrent perforating and hydraulic fracturing operations at drilling sites with multiple wellbores, improving operating efficiencies for customers.

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Our DynaSelect products integrate our earlier Selectronic Switches with our Intrinsically Safe Detonator technologies in a unique one-piece system for improved well site efficiency, reliability, simplicity and service quality. The fully integrated design incorporates advanced software controls and reduces the size of the detonator and switch assembly. DynaSelect reduces by 40% the number of electrical connections required within each perforating gun versus prior detonator models. This improves set-up times and significantly increases reliability. The DynaSelect detonator is controlled by our Mulitronic IV Firing Panel. This system enables safe and reliable firing of up to 20 guns in a single run and incorporates a signal output function to monitor the movement and position of the tool string, resulting in significant time and cost savings.

Our DynaStageTM factory-assembled, quality assured, perforating system combines all our advanced technologies into a preassembled perforating gun that can be armed at the well site with the wireless DynaStage detonator, which incorporates all of the features of the intrinsically safe DynaSelect detonator. The DynaStage system is operated using our latest Multitronic V Firing Panel, and can be tested before going down hole using our Surface Tester. The Multitronic V Firing Panel is highly intuitive and allows the gun string to be safely tested and monitored throughout the pump-down operation. The Multitronic V panel introduces several new features designed to ease the use and the reliability of the system, including “shoot-on-the-fly” operation through an instant-fire capability. By safely checking perforating guns on the surface, the DynaStage Surface Tester greatly reduces the risk of lost time, mishaps, misruns and misfires due to a system fault. The Surface Tester is fully RP67 compliant and cannot initiate any type of detonator or explosive device. The patent-pending plug-n-go design of the DynaStage wireless detonator reduces the potential for errors by eliminating the need for wiring and crimping. The fully integrated design of DynaStage minimizes uncertainty and operational risks, achieving industry-leading perforating performance.

Our DynaSlotTM perforating system is designed for well abandonment operations. During abandonment the wellbore is encased and permanently sealed so that layers of sedimentary rock, and in particular freshwater aquifers, are pressure isolated from the wellbore. The DynaSlot perforating system facilitates this process by creating access to a full 360-degree area between the rock formations and the tubing and casing. Customers use the unique, helical perforation pattern created by DynaSlot to perform cement squeeze operations that seal off the wellbore.

DynaEnergetics develops and sells a wide range of shaped charges for use in its perforating systems.  These include the family of HaloFrac™ charges, which incorporate advancements in liner materials and shaped charge geometry designed to improve hydraulic fracturing performance through lower and more consistent breakdown pressures, uniform proppant placement, uniform frac clusters and higher well productivity ratios.  Another line, FracTune™, delivers uniform hole diameter in the well casing independent of shot phasing and gun positioning within the well bore.  DynaEnergetics also sells the DPEX™ family of charges, which feature energetic liners. All three lines can be used with the DynaStage perforating system, as well as conventional perforating gun systems across a range of gun diameters.

DynaEnergetics Tubing Conveyed Perforating, (TCP) systems are customized for individual customer needs and well applications. TCP enables perforating of more complex highly deviated and horizontal wells. These types of wells are increasingly being drilled by the industry. TCP tools also perforate long intervals in a single trip, which significantly improves rig efficiency. Our TCP tool range includes mechanical and hydraulic firing systems, gun releases, under-balancing devices and auxiliary components. Our tools are designed to withstand downhole temperatures of up to 260 degrees Celsius (500 degrees Fahrenheit), for safe and quick assembly at the well site, and to allow unrestricted total system length.

DynaEnergetics’ manufacturing facilities are located in Germany, the United States and Russia. During 2013 DynaEnergetics completed a new shaped charge manufacturing facility in Blum, Texas and a perforating gun manufacturing facility in Tyumen, Siberia. The construction of a new shaped charge manufacturing facility in Tyumen, Siberia, was completed in 2015, and in 2016, we received all the necessary permits to start production of charges. The facility was fully operational by the end of the third quarter 2016. These investments have significantly expanded our global capacity for shaped charge and perforating gun production and improve our delivery and customer service capabilities in these two key markets.
 
Suppliers and Raw Materials

DynaEnergetics' product offering consists of complex components that require numerous high-end inputs. DynaEnergetics utilizes a variety of raw materials for the production of oilfield perforating and seismic products, including high-quality steel tubes, steel and copper, explosives (RDX, HMX, HNS), granulates, plastics and ancillary plastic product components.  DynaEnergetics obtains its raw materials primarily from a number of different producers in Germany, other European countries, and the U.S. but also purchases materials from other international suppliers.




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Competition

DynaEnergetics faces competition from independent producers of perforating products and from each of the industry's three largest oil and gas service companies, which produce most of their own shaped charges but also buy other perforating components and specialty products from independent suppliers such as DynaEnergetics.  DynaEnergetics competes for sales primarily on customer service, product quality, reliability, safety, performance, price and, in North America, proximity of distribution centers to oilfield drilling activity.

Customer Profile

DynaEnergetics' perforating and seismic products are purchased by international and regional oilfield service companies of all sizes working in both onshore and offshore oil and gas fields. Our customers select perforating products based on their leading performance, system compatibility and ability to address a broad spectrum of factors, including pressures and temperatures in the borehole and geological characteristics of the targeted formation.
 
The customers for our oilfield products can be divided into four broad categories: purchasing centers of large service companies, international service companies, oil companies with and without their own service companies, and local resellers. 

Marketing, Sales, Distribution

DynaEnergetics’ worldwide marketing and sales efforts for its oilfield and seismic products are located in Troisdorf, Germany, Houston, Texas, and Tyumen, Siberia.  DynaEnergetics’ sales strategy focuses on direct selling, distribution through licensed distributors and independent sales representatives, the establishment of international distribution centers to better service our customers, and educating current and potential customers about our products and technologies.  Currently, DynaEnergetics sells its oilfield and seismic products through wholly owned affiliates in Germany, the U.S., Canada, Russia and Kazakhstan, and through independent sales agents in other parts of the world.  DynaEnergetics serves the Americas region through its network of sales and distributions centers in the United States and Canada.

DynaEnergetics also designs and manufactures customized perforating products for third-party customers according to their designs and requirements.

Research and Development

DynaEnergetics attaches great importance to its research and development capabilities and has devoted substantial resources to its R&D programs.  Based predominantly in Troisdorf, Germany, the R&D team works closely with sales, product management, and operations management teams to establish priorities and effectively manage individual projects.  Through its ongoing involvement in oil and gas industry trade shows and conferences, DynaEnergetics has increased its profile in the oil and gas industry.  An R&D Plan, which focuses on new technology, products, process support and contracted projects, is prepared and reviewed at least quarterly. Research and development costs are included in our cost of products sold and were $4.0 million, $2.4 million, and $2.5 million for the years ended December 31, 2016, 2015 and 2014, respectively.

Corporate History and Recent Developments
 
The genesis of the Company was an unincorporated business called “Explosive Fabricators,” which was formed in Colorado in 1965.  The business was incorporated in Colorado in 1971 under the name “E. F. Industries, Inc.,” which was later changed to “Explosive Fabricators, Inc.”  The Company became publicly traded in 1976.  In 1994, it changed its name to “Dynamic Materials Corporation.”  The Company reincorporated in Delaware in 1997.
 
In 1976, the Company became a licensee of Detaclad, the explosion-welded clad process developed by DuPont in 1959.  In 1996, the Company purchased the Detaclad operating business from DuPont.

In 1998, the Company acquired AMK Technical Services ("AMK"), a specialty welding business.

In 2001, the Company acquired substantially all of the stock of Nobelclad Europe SA, a French company (“NobelClad France”).  Early in its history, NobelClad France was a licensee of the Detaclad technology.  The acquisition of NobelClad France expanded the Company’s explosive metalworking operations to Europe.
 
In 2007, the Company acquired the German company DynaEnergetics GmbH and Co. KG (“DynaEnergetics”) and certain affiliates.  DynaEnergetics was comprised of two primary businesses: explosive metalworking and oilfield products. 

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This acquisition expanded the Company’s explosive metalworking operations in Europe and added a complementary oilfield products business.
 
Over the next several years the Company further grew the DynaEnergetics business by acquiring additional related sales and manufacturing companies in Canada and the United States and purchasing minority interests in certain Russian joint ventures.
 
In 2013, the Company branded its explosive metalworking operations under the single name NobelClad.  The NobelClad segment is comprised of the Company’s U.S. clad operations as well as the explosion metalworking assets and operations purchased in the NobelClad France and DynaEnergetics acquisitions.  In 2014, the Company re-branded the oilfield products segment as DynaEnergetics, which is comprised entirely of DynaEnergetics (other than its explosion metalworking operations), its subsidiaries and sister companies. 

In 2014, the Company sold AMK. Also in 2014, the Company acquired a modern manufacturing and office complex in Liebenscheid, Germany. The facility enhances NobelClad's manufacturing capabilities and serves as a state-of-the-art production and administrative resource for NobelClad's European operations.

In 2016, the Company changed its name to DMC Global Inc., as it is no longer a materials company as implied by the name Dynamic Materials Corporation but is instead the parent company to a diversified portfolio of technical product and process businesses serving niche markets around the world.

Employees
 
As of December 31, 2016, we had 428 employees (200 U.S. and 228 non-U.S.), the majority of whom are engaged in manufacturing operations, with the remainder primarily in sales, marketing and administrative functions. Most of our manufacturing employees are not unionized.  In addition, we use a number of temporary workers at any given time, depending on the workload.
 
In the last three years, the Company has experienced two work stoppages, which lasted for three days in November 2014 and eight days in December 2014, at NobelClad's production facility in Rivesaltes, France. The stoppages related to a consolidation program of NobelClad's European explosion welding operations. A restructuring agreement with the labor union at Rivesaltes was reached in January 2015, at which point work was restarted.  We currently believe that employee relations are good.
 
Insurance
 
Our operations expose us to potential liabilities for personal injury or death as a result of the failure of a component that has been designed, manufactured, serviced, processed, or distributed by us. We maintain liability insurance that we believe adequately protects us from potential product liability claims.
 
Intellectual Property
 
Protection of Proprietary Information.   We hold a variety of intellectual property through our NobelClad business, including but not limited to proprietary information and know-how, trade secrets, and registered and unregistered trademarks. Much of our proprietary manufacturing expertise lies in the knowledge of the factors that affect the quality of the finished clad product, including the types of metals to be explosion-welded, the setting of the explosion, the composition of the explosive, and the preparation of the plates to be bonded.  We have developed this specialized knowledge over our 40 years of experience in the explosive metalworking business. 

We hold a variety of intellectual property through our DynaEnergetics business including but not limited to patents, patent applications, registered and unregistered trademarks, trade secrets, proprietary information and know-how. We have followed a policy of seeking patent and trademark protection in numerous countries and regions throughout the world for products and methods that appear to have commercial significance. DynaEnergetics seeks and holds numerous patents covering various products and processes, including but not limited to perforating guns and their various components, shaped charges, packaging of explosive materials, detonating cord, and electronics.  No single patent or trademark is considered to be critical to DynaEnergetics' business.
We are careful in protecting our proprietary know-how and manufacturing expertise in both NobelClad and DynaEnergetics, and we have implemented measures and procedures to ensure that the information remains confidential.

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Foreign and Domestic Operations and Export Sales
 
All of our sales are shipped from our manufacturing facilities and distribution centers located in the United States, Germany, France, Canada, Russia and Kazakhstan. The following chart represents our net sales based on the geographic location to where we shipped the product, regardless of the country of the actual end user.  NobelClad products are usually shipped to the fabricator before being passed on to the end user.
 
 
 
(Dollars in Thousands)
 
 
For the years ended December 31,
 
 
2016
 
2015
 
2014
United States
 
$
78,999

 
$
81,634

 
$
91,009

Canada
 
16,021

 
13,000

 
23,532

United Arab Emirates
 
7,449

 
7,891

 
3,694

France
 
3,744

 
6,624

 
5,478

South Korea
 
1,690

 
5,709

 
7,362

Germany
 
5,979

 
5,182

 
7,721

Russia
 
3,731

 
4,937

 
7,992

India
 
5,066

 
4,566

 
7,617

Egypt
 
1,942

 
4,080

 
2,227

Spain
 
1,500

 
3,858

 
892

Iraq
 
13

 
3,758

 
11,348

China
 
7,012

 
2,426

 
1,800

Italy
 
2,577

 
2,327

 
2,350

Hong Kong
 
699

 
2,207

 
1,967

Sweden
 
2,124

 
1,699

 
1,227

Rest of the world
 
20,029

 
17,020

 
26,345

 
 
 
 
 
 
 
Total
 
$
158,575

 
$
166,918

 
$
202,561

 
Company Information
 
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act").  We therefore file periodic reports, proxy statements and other information with the Securities Exchange Commission (the “SEC”).  Such reports may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330.  In addition, the SEC maintains an internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.
 
Our Internet address is www.dmcglobal.com. Information contained on our website does not constitute part of this Annual Report on Form 10-K.  Our annual report on SEC Form 10-K, quarterly reports on Forms 10-Q, current reports on Forms 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our website as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC.  We also regularly post information about our Company on our website under the "Investors" tab.

ITEM 1A. Risk Factors

Risk Factors Related to our NobelClad Segment

NobelClad’s business is dependent on sales to a limited number of customers in cyclical markets and our results are affected by the price of metals.

NobelClad revenues are affected both by the demand for NobelClad’s explosion-welded cladding services and the base price of metal used in explosion-welded cladding operations.  The explosion-welded cladding market is dependent upon sales of products for use by customers in a limited number of heavy industries, including oil and gas, chemicals and petrochemicals,

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alternative energy, hydrometallurgy, aluminum production, shipbuilding, power generation, and industrial refrigeration.  These industries tend to be cyclical in nature and an economic slowdown in one or all of these industries-whether due to traditional cyclicality, general economic conditions or other factors-could impact capital expenditures within that industry.  In addition, metals prices affect the demand for cladded products and our margins. Higher metal prices increase demand by making it more economical for customers to use cladding on less-expensive metal than using solid metal plates.  Higher metal prices also lead to higher sales (in terms of dollars rather than square meters of cladding) and generally higher margins for NobelClad. We have experienced a significant decline in the demand for clad products in recent years in a low-metals price environment, with sales of $91.3 million in 2016, compared to sales of $195.0 million in 2008. If demand or metals prices fail to improve or decline further, our sales would be adversely affected, which could have a material adverse effect on our business, financial condition, and results of operations.

Our backlog figures may not accurately predict future sales.

We use backlog to predict our anticipated future sales. Our year-end backlog was $31.6 million, $41.8 million, and $41.2 million in 2016, 2015 and 2014, respectively. We define “backlog” at any given point in time to consist of all firm, unfulfilled purchase orders and commitments at that time.  We expect to fill most items of backlog within the following 12 months.  However, since orders may be rescheduled or canceled and a significant portion of our net sales is derived from a small number of customers, backlog is not necessarily indicative of future sales levels.  Moreover, we cannot be sure of when during the future 12-month period we will be able to recognize revenue corresponding to our backlog nor can we be certain that revenues corresponding to our backlog will not fall into periods beyond the 12-month horizon.

There is a limited availability of sites suitable for cladding operations.

Our cladding process involves the detonation of large amounts of explosives. As a result, the sites where we perform cladding must meet certain criteria, including adequate distance from densely populated areas, the specific geological characteristics of the site, and the ability to comply with local noise and vibration abatement regulations in conducting the process. In addition, our primary U.S. shooting site is subleased under an arrangement pursuant to which we provide certain contractual services to the sub-landlord.  The efforts to identify suitable sites and obtain permits for using the sites from local government agencies can be time-consuming and may not be successful.  In addition, we could experience difficulty in obtaining or renewing permits because of resistance from residents in the vicinity of proposed sites.  The failure to obtain required governmental approvals or permits could limit our ability to expand our cladding business in the future, and the failure to maintain such permits or satisfy other conditions to use the sites would have a material adverse effect on our business, financial condition and results of operations.

There is no assurance that we will continue to compete successfully against other manufacturers of competitive products.

Our explosion-welded clad products compete with explosion-welded clad products made by other manufacturers in the clad metal business located throughout the world and with clad products manufactured using other technologies. Our combined North American and European operations typically supply explosion-welded clad to the worldwide market. There is one other well-known explosion-welded clad supplier worldwide- a division of Asahi-Kasei Corporation of Japan. There are also a number of smaller companies worldwide with explosion-welded clad manufacturing capability, including several companies in China and in South Korea that appear to be growing significantly in their domestic markets.  Explosion-welded clad products also compete with those manufactured by rollbond and weld overlay cladding processes. In rollbond technology, the clad and base metal are bonded together during a hot rolling process in which slab is converted to plate. In weld overlay, which is typically performed by our fabricator customers, the cladding layer is deposited on the base metal through a fusion welding process. The technical and commercial niches of each cladding process are well understood within the industry and vary from one world market location to another.  We focus strongly on reliability, product quality, on-time delivery performance, and low cost manufacturing to minimize the potential of future competitive threats.  However, there is no guarantee we will be able to maintain our competitive position.

The use of explosives subjects us to additional regulation, and any accidents or injuries could subject us to significant liabilities.

Our operations involve the detonation of large amounts of explosives.  The use of explosives is an inherently dangerous activity.  As a result, we are required to use specific safety precautions under U.S. Occupational Safety and Health Administration guidelines and guidelines of similar entities in Germany and France.  These include precautions which must be taken to protect employees from exposure to sound and ground vibration or falling debris associated with the detonation of explosives.  There is a risk that an accident or death could occur in one of our facilities. 

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Explosions, even if occurring as intended, can lead to damage to the shooting site or manufacturing facility or to equipment used at the facility or injury or death to persons at the facility. Any accident could result in significant manufacturing delays, disruption of operations or claims for damages resulting from death or injuries, which could result in decreased sales and increased expenses. To date, we have not incurred any significant delays, disruptions or claims resulting from accidents at our facilities.  If an accident occurred, we might be required to suspend our operations for a period of time while an investigation is undertaken or repairs are made.  Such a delay might impact our ability to meet the demand for our products.  In addition, our shooting facilities located in Pennsylvania and in Dillenburg, Germany are located in mines. If a mine were seriously damaged, we might not be able to locate a suitable replacement site to continue our operations.

Customers have the right to change orders until products are completed.

Customers have the right to change orders after they have been placed.  If orders are changed, the extra expenses associated with the change will be passed on to the customer.  However, because a change in an order may delay completion of the project, recognition of income for the project may also be delayed.


Risk Factors Related to DynaEnergetics

Demand for DynaEnergetics’ products is substantially dependent on the levels of expenditures by the oil and gas industry. Expenditures in the oil and gas industry and related demand for oilfield services remains well below 2014 levels, which has had, and may continue to have, a significant adverse impact on our financial condition, results of operations and cash flows.

Demand for the majority of our products depends substantially on the level of expenditures by the oil and gas industry for the exploration, development and production of oil and natural gas reserves. These expenditures are generally dependent on the industry’s view of future oil and natural gas prices and are sensitive to the industry’s view of future economic growth and the resulting impact on demand for oil and natural gas. Since 2014, oil and gas prices have declined significantly, resulting in lower expenditures by the oil and gas industry. As a result, many of our customers have reduced or delayed their oil and gas exploration and production spending, reducing the demand for our products and exerting downward pressure on the prices that we charge. These conditions have had, and may continue to have, an adverse impact on our financial condition. DynaEnergetics’ revenues were 36.2% less in 2016 than in 2014 and 27.0% less in 2015 than in 2014.

A decline in oil and gas prices could cause a further reduction in cash flows for our customers, which could have significant adverse effects on the financial condition of some of our customers. This could result in project modifications, delays or cancellations, general business disruptions, and delays in payment of, or nonpayment of, amounts that are owed to us. These effects could have a material adverse effect on our financial condition, results of operations and cash flows. There can be no assurance that the demand or pricing for oil and natural gas will follow historic patterns or recover in the near term. Worsening conditions in the oil and gas industry could further adversely affect our financial condition, results of operations and cash flows.

The prices for oil and natural gas have historically been volatile and can be affected by a variety of factors, including:

• demand for hydrocarbons, which is affected by general economic and business conditions;
• the ability or willingness of the Organization of Petroleum Exporting Countries (“OPEC”) to set and maintain production levels for oil;
• oil and gas production levels by non-OPEC countries;
• the level of excess production capacity;
• political and economic uncertainty and geopolitical unrest;
• the level of worldwide oil and gas exploration and production activity;
• access to potential resources;
• governmental policies and subsidies;
• the costs of exploring for, producing and delivering oil and gas;
• technological advances affecting energy consumption; and
• weather conditions.

Constraints in the supply of, prices for, and availability of transportation of raw materials can have a material adverse effect on our business and consolidated results of operations.


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Raw materials essential to our business, such as explosives, steel, metal powder, and electronics are normally readily available. Shortage of raw materials or long-lead times in receiving such materials as a result of high levels of demand or loss of suppliers during market challenges can trigger constraints in the supply chain of those raw materials, particularly where we have a relationship with a single supplier for a particular resource. An increase in military activity in certain parts of the world could impact the availability of explosives as capacity could potentially be diverted to supply military requirements. These delays and constraints could have a material adverse effect on our business and consolidated results of operations. In addition, price increases imposed by our vendors for raw materials used in our business and the inability to pass these increases through to our customers could have a material adverse effect on our business and consolidated results of operations.

The adoption of any future laws or regulations imposing reporting obligations on, or limiting or banning, the hydraulic fracturing process could cause a decrease in natural gas and oil well perforating and could materially adversely affect DynaEnergetics’ sales and economic performance.

DynaEnergetics' perforating products are used for oil and gas well hydraulic fracturing processes, among other uses. Various federal, state and local legislative and regulatory initiatives have been undertaken, which could result in additional requirements or restrictions being imposed on hydraulic fracturing operations. The adoption of these or other laws or implementation of regulations imposing reporting obligations on, or limiting or banning, the hydraulic fracturing process could make it more difficult to use hydraulic fracturing for natural gas and oil well development, which would reduce the demand for some of DynaEnergetics' products and could have a material adverse effect on its sales and financial performance.

If we are not able to design, develop, and produce commercially competitive products in a timely manner in response to changes in the market, customer requirements, competitive pressures, and technology trends, our business and consolidated results of operations could be materially and adversely affected, and the value of our intellectual property may be reduced.

The market for our products is characterized by continual technological developments to provide better and more reliable performance. If we are not able to design, develop, and produce commercially competitive products in a timely manner in response to changes in the market, customer requirements, competitive pressures, and technology trends, our business and consolidated results of operations could be materially and adversely affected, and the value of our intellectual property may be reduced. Likewise, if our proprietary technologies, equipment, facilities, or work processes become obsolete, we may no longer be competitive, and our business and consolidated results of operations could be materially and adversely affected.

The manufacturing of explosives subjects DynaEnergetics to various environmental, health and safety laws and any accidents or injuries could subject us to significant liabilities.

The use of explosive is inherently dangerous. DynaEnergetics is subject to a number of environmental, health, and safety laws and regulations covering all aspects of the business including general operating licenses, transportation domestically and internationally, storage requirements, waste disposal, manufacturing regulations, employee training and certification requirements, and labor regulations. Violation of these laws and regulations could result in significant penalties or in interruption of our business activities.  DynaEnergetics’ continued success depends on continued compliance with applicable laws and regulations.  In addition, new environmental, health and safety laws and regulations could be passed that could create costly compliance issues.  While DynaEnergetics endeavors to comply with all applicable laws and regulations, compliance with future laws and regulations may not be economically feasible or even possible. Even with compliance with applicable health and safety laws, it is possible that accidents may occur, potentially resulting in injury to our employees, equipment and facilities. Any accident could result in significant manufacturing delays, disruption of operations or claims for damages resulting from death or injuries, which could result in decreased sales and increased expenses.

We may not be able to continue to compete successfully against other perforating companies.

DynaEnergetics competes principally with perforating companies based in North America, South America, and Russia, which produce and market perforating services and products.  DynaEnergetics also competes with oil and gas service companies that are able to satisfy a portion of their perforating needs through in-house production.  To remain competitive, DynaEnergetics must continue to provide innovative products and maintain an excellent reputation for quality, safety, and value.  There can be no assurances that we will continue to compete successfully against these companies.

Risk Factors Related to our Businesses Generally

Our operating results fluctuate from quarter to quarter.


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We have experienced, and expect to continue to experience, fluctuations in annual and quarterly operating results caused by various factors at both NobelClad and DynaEnergetics. At NobelClad, quarterly sales and operating results depend on the volume and timing of the orders in our backlog as well as bookings during the quarter.  At DynaEnergetics, the level of demand from our customers is impacted by oil and gas prices as well as a variety of other factors and can vary significantly from quarter to quarter. Significant portions of our operating expenses are fixed, and planned expenditures are based primarily on sales forecasts and product development programs. If sales do not meet our expectations in any given period, the adverse impact on operating results may be magnified by our inability to adjust operating expenses sufficiently or quickly enough to compensate for such a shortfall. Results of operations in any period should not be considered indicative of the results for any future period. Fluctuations in operating results may also result in fluctuations in the price of our common stock.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We are exposed to potentially volatile fluctuations of the U.S. dollar (our reporting currency) against the currencies of many of our operating subsidiaries.

Many of our operating subsidiaries conduct business in Euros or other foreign currencies such as the Russian Ruble.  Sales made in currencies other than U.S. dollars accounted for 28%, 23%, and 32% of total sales for the years ended 2016, 2015 and 2014, respectively. Any increase (decrease) in the value of the U.S. dollar against any foreign currency that is the functional currency of any of our operating subsidiaries will cause us to experience foreign currency translation (gains) losses with respect to amounts already invested in such foreign currencies. In addition, our company and our operating subsidiaries are exposed to foreign currency risk to the extent that we or they enter into transactions denominated in currencies other than our or their respective functional currencies. For example, DynaEnergetics KG’s functional currency is Euros, but its sales often occur in U.S. dollars.  Changes in exchange rates with respect to these items will result in unrealized (based upon period-end exchange rates) or realized foreign currency transaction gains and losses upon settlement of the transactions. In addition, we are exposed to foreign exchange rate fluctuations related to our operating subsidiaries’ assets and liabilities and to the financial results of foreign subsidiaries and affiliates when their respective financial statements are translated into U.S. dollars for inclusion in our consolidated financial statements. Cumulative translation adjustments are recorded in accumulated other comprehensive income (loss) as a separate component of equity. As a result of foreign currency risk, we may experience economic loss and a negative impact on earnings and equity with respect to our holdings solely as a result of foreign currency exchange rate fluctuations. Our primary exposure to foreign currency risk is the Euro due to the percentage of our U.S. dollar revenue that is derived from countries where the Euro is the functional currency and the Russian Ruble due to our operations in Tyumen, Siberia.

The terms of our indebtedness contain a number of restrictive covenants, the breach of any of which could result in acceleration of payment of our credit facilities.

As of December 31, 2016, we had an outstanding balance of approximately $16.3 million on our syndicated credit agreement. This agreement includes various covenants and restrictions and certain of these relate to the incurrence of additional indebtedness, mortgaging, pledging or disposing of major assets. We are also required to maintain certain financial ratios on a quarterly basis. A breach of any of these covenants could impair our ability to borrow and could result in acceleration of our obligations to repay our debt, if we are unable to obtain a waiver or amendment from our lenders. As of December 31, 2016, we were in compliance with all financial covenants and other provisions of the credit agreement and our other loan agreements. On March 6, 2017, we entered into an amendment of our syndicated credit agreement which reduced the amount of U.S. borrowings available under the credit facility, increased the maximum debt-to-EBITDA leverage ratio for the first, second, and third quarters of 2017, waived the applicability of the minimum debt service coverage ratio for first, second, and third quarters of 2017, and added a minimum EBITDA covenant for those same periods, which is inapplicable thereafter.

Any failure to remain in compliance with any material provision or covenant of our credit agreement could result in a default, which would, absent a waiver or amendment, require immediate repayment of outstanding indebtedness under our credit facilities.

We are dependent on a relatively small number of large projects and customers for a significant portion of our net sales.

A significant portion of our net sales is derived from a relatively small number of projects and customers; therefore, the failure to complete existing contracts on a timely basis, to receive payment for such services in a timely manner, or to enter into future contracts at projected volumes and profitability levels could adversely affect our ability to meet cash requirements exclusively through operating activities. We attempt to minimize the risk of losing customers or specific contracts by continually improving commercial execution, product quality, delivering product on time and competing aggressively on the basis of price.  We expect to continue to depend upon our principal customers for a significant portion of our sales, although

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our principal customers may not continue to purchase products and services from us at current levels, if at all. The loss of one or more major customers or a change in their buying patterns could have a material adverse effect on our business, financial condition, and results of operations.

If our customers delay paying or fail to pay a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.

We depend on a limited number of significant customers. While none of these customers represented more than 10% of consolidated revenue in any period presented, the loss of one or more significant customers could have a material adverse effect on our business and our consolidated results of operations.

In most cases, we bill our customers for our services in arrears and are, therefore, subject to our customers delaying or failing to pay our invoices. In weak economic environments, we may experience increased delays and failures due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to the credit markets. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.

Failure to attract and retain key personnel could adversely affect our current operations.

Our continued success depends to a large extent upon the efforts and abilities of key managerial and technical employees. The loss of services of certain of these key personnel could have a material adverse effect on our business, results of operations, and financial condition. There can be no assurance that we will be able to attract and retain such individuals on acceptable terms, if at all; and the failure to do so could have a material adverse effect on our business, financial condition, and results of operations.

We are subject to extensive government regulation and failure to comply could subject us to future liabilities and could adversely affect our ability to conduct or to expand our business.

We are subject to extensive government regulation in the United States, Germany, France, Canada and Russia, including guidelines and regulations for the purchase, manufacture, handling, transport, storage and use of explosives issued by the U.S. Bureau of Alcohol, Tobacco and Firearms; the Federal Motor Carrier Safety Regulations set forth by the U.S. Department of Transportation; the Safety Library Publications of the Institute of Makers of Explosive; and similar guidelines of their European counterparts.  In Germany, the transport, storage and use of explosives is governed by a permit issued under the Explosives Act (Sprengstoffgesetz). In France, the manufacture and transportation of explosives is subcontracted to a third party which is responsible for compliance with regulations established by various State and local governmental agencies concerning the handling and transportation of explosives.  Our French operations could be adversely affected if the third party does not comply with these regulations. We must comply with licensing requirements and regulations for the purchase, transport, storage, manufacture, handling and use of explosives. In addition, while our shooting facilities in Tautavel, France are located outdoors, our shooting facilities located in Pennsylvania and in Dillenburg, Germany are located in mines, which subject us to certain regulations and oversight of governmental agencies that oversee mines.

We are also subject to extensive environmental, health and safety regulation, as described below under “Liabilities under environmental, health and safety laws could result in restrictions or prohibitions on our facilities, substantial civil or criminal liabilities, as well as the assessment of strict liability and/or joint and several liability” and above under “The use of explosives subjects us to additional regulation, and any accidents or injuries could subject us to significant liabilities.”

In addition, the shipment of goods, services, and technology across international borders subjects us to extensive trade laws and regulations. Our import activities are governed by the unique customs laws and regulations in each of the countries where we operate. Moreover, many countries, including the United States, control the export and re-export of certain goods, services and technology and impose related export recordkeeping and reporting obligations. Governments may also impose economic sanctions against certain countries, persons, and entities that may restrict or prohibit transactions involving such countries, persons and entities, which may limit or prevent our conduct of business in certain jurisdictions.

The laws and regulations concerning import activity, export recordkeeping and reporting, export control, and economic sanctions are complex and constantly changing. These laws and regulations can cause delays in shipments and unscheduled operational downtime. Moreover, any failure to comply with applicable legal and regulatory trading obligations could result in criminal and civil penalties and sanctions, such as fines, imprisonment, debarment from governmental contracts, seizure of shipments and loss of import and export privileges.


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Any failure to comply with current and future regulations in the countries where we operate could subject us to future liabilities. In addition, such regulations could restrict our ability to expand our facilities, construct new facilities, or compete in certain markets or could require us to incur significant expenses in order to maintain compliance. Accordingly, our business, results of operations or financial condition could be adversely affected by our non-compliance with applicable regulations, by any significant limitations on our business as a result of our inability to comply with applicable regulations, or by any requirement that we spend substantial amounts of capital to comply with such regulations.

Our operations are subject to political and economic instability and risk of government actions that could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition.

We are exposed to risks inherent in doing business in each of the countries in which we operate. Our operations are subject to various risks unique to each country that could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition. With respect to any particular country, these risks may include:
political and economic instability, including:    
civil unrest, acts of terrorism, force majeure, war, other armed conflict, and sanctions;
inflation; and
currency fluctuations, devaluations, and conversion restrictions; and
governmental actions that may:    
result in expropriation and nationalization of our assets in that country;
result in confiscatory taxation or other adverse tax policies;
limit or disrupt markets or our operations, restrict payments, or limit the movement of funds;
result in the deprivation of contract rights; and
result in the inability to obtain or retain licenses required for operation.

Liabilities under environmental, health and safety laws could result in restrictions or prohibitions on our facilities, substantial civil or criminal liabilities, as well as the assessment of strict liability and/or joint and several liability.

We are subject to extensive environmental, health and safety regulation in the countries where our manufacturing facilities are located. Any failure to comply with current and future environmental and safety regulations could subject us to significant liabilities. In particular, any failure to control the discharge of hazardous materials and wastes could subject us to significant liabilities, which could adversely affect our business, results of operations or financial condition.

We and all our activities in the United States are subject to federal, state and local environmental and safety laws and regulations, including but not limited to, noise abatement and air emissions regulations, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, regulations issued and laws enforced by the labor and employment departments of the U.S. and the states in which we conduct business, the U.S. Department of Commerce, and the U.S. Environmental Protection Agency. In Germany, we and all our activities are subject to various safety and environmental regulations of the federal state which are enforced by the local authorities, including the Federal Act on Emission Control (Bundes-Immissionsschutzgesetz).  The Federal Act on Emission Control permits are held by companies jointly owned by DynaEnergetics and the other companies that are located at the Troisdorf manufacturing site and are for an indefinite period of time.  In France, we and all our activities are subject to state environmental and safety regulations established by various departments of the French Government, including the Ministry of Labor, the Ministry of Ecology and the Ministry of Industry, and to local environmental and safety regulations and administrative procedures established by DRIRE (Direction Régionale de l’Industrie, de la Recherche et de l’Environnement) and the Préfecture des Pyrénées Orientales.  In addition, our shooting operations in France may be particularly vulnerable to noise abatement regulations because these operations are primarily conducted outdoors. The Dillenburg, Germany facility is operated based on a specific permit granted by the local mountain authority and must be renewed every three years.

Changes in or compliance with environmental, health and safety laws and regulations could inhibit or interrupt our operations, or require modifications to our facilities. Any actual or alleged violations of environmental, health or safety laws could result in restrictions or prohibitions on our facilities, substantial civil or criminal sanctions, as well as the assessment of strict liability and/or joint and several liability under applicable law.  Under certain environmental laws, we could be held responsible for all of the costs relating to any contamination at our facilities and at third party waste disposal sites, even where such contamination was caused by a predecessor. We could also be held liable for any and all consequences arising out of human exposure to hazardous substances or other environmental damage.  Accordingly, environmental, health or safety matters may result in significant unanticipated costs or liabilities.


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Our failure to comply with Foreign Corrupt Practices Act (“FCPA”) and other laws could have a negative impact on our ongoing operations.

We are subject to complex U.S. and foreign laws and regulations, such as the FCPA and the U.K. Bribery Act, and various other anti-bribery and anticorruption laws. The internal controls, policies and procedures, and employee training and compliance programs we have implemented to deter prohibited practices may not be effective in preventing employees, contractors or agents from violating or circumventing such internal policies and violating applicable laws and regulations. Any determination that we have violated or are responsible for violations of anti-bribery or anti-corruption laws could have a material adverse effect on our financial condition. Violations of international and U.S. laws and regulations may result in fines and penalties, criminal sanctions, administrative remedies, restrictions on business conduct and could have a material adverse effect on our reputation and our business, operating results and financial condition.

Changes in or interpretation of tax law and currency/repatriation control could impact the determination of our income tax liabilities for a tax year.

We have worldwide operations. Consequently, we are subject to the jurisdiction of a significant number of taxing authorities. The income earned in these various jurisdictions is taxed on differing bases, including net income actually earned, net income deemed earned, and revenue-based tax withholding. The final determination of our income tax liabilities involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction, as well as the use of estimates and assumptions regarding the scope of future operations and results achieved and the timing and nature of income earned and expenditures incurred. Changes in the operating environment, including changes in or interpretation of tax law and currency/repatriation controls, could impact the determination of our income tax liabilities for a tax year.

Work stoppages and other labor relations matters may make it substantially more difficult or expensive for us to produce our products, which could result in decreased sales or increased costs, either of which would negatively impact our financial condition and results of operations.

We are subject to the risk of work stoppages and other labor relations matters, particularly in Germany and France, where some of our employees are unionized. In the fourth quarter of 2014, we experienced a total of 11 days work stoppage at our facility in Rivesaltes, France related to the consolidation program of NobelClad's European explosion welding operations. The employees at our U.S. manufacturing facilities are not unionized. While we believe our relations with employees are good, any prolonged work stoppage or strike at any one of our principal facilities could have a negative impact on our business, financial condition or results of operations.

We are subject to litigation and may be subject to additional litigation in the future.
 
We are currently, and may in the future become, subject to litigation, arbitration or other legal proceedings with other parties. Managing or defending such legal proceedings may result in substantial legal fees, expenses and costs and diversion of management resources. If decided adversely to DMC, these legal proceedings, or others that could be brought against us in the future, could have a material adverse effect on our financial position or prospects. For a more detailed discussion of pending litigation, see Note 7 to our Consolidated Financial Statements.
 
In the event of a dispute arising at our foreign operations, we may be subject to the exclusive jurisdiction of foreign courts or arbitral panels, or may not be successful in subjecting foreign persons to the jurisdiction of courts or arbitral panels in the United States. Our inability to enforce our rights and the enforcement of rights on a prejudicial basis by foreign courts or arbitral panels could have an adverse effect on our results of operations and financial position.

Our failure to protect our proprietary information and any successful intellectual property challenges or infringement proceedings against us could materially and adversely affect our competitive position.

We rely on a variety of intellectual property rights that we use in our services and products. We may not be able to successfully preserve these intellectual property rights in the future, and these rights could be invalidated, circumvented, or challenged. In addition, the laws of some foreign countries in which our services and products may be sold do not protect intellectual property rights to the same extent as the laws of the United States. Our failure to protect our proprietary information and any successful intellectual property challenges or infringement proceedings against us could materially and adversely affect our competitive position. Our competitors may be able to develop technology independently that is similar to ours without infringing on our patents or gaining access to our trade secrets, which could adversely affect our financial condition, results of operations and cash flows.


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We may be subject to litigation if another party claims that we have infringed upon its intellectual property rights.

The tools, techniques, methodologies, programs and components we use to provide our services may infringe upon the intellectual property rights of others. Infringement claims, such as those raised in the ongoing GEODynamics litigation, generally result in significant legal and other costs and may distract management from running our core business. Royalty payments under licenses from third parties, if available, would increase our costs. Additionally, developing non-infringing technologies would increase our costs. If a license were not available, we might not be able to continue providing a particular service or product, which could adversely affect our financial condition, results of operations and cash flows.

We are dependent upon information technology systems, which are subject to disruption, damage, failure and risks associated with implementation and integration.
 
We are dependent upon information technology systems in the conduct of our operations. Our information technology systems are subject to disruption, damage or failure from a variety of sources, including, without limitation, computer viruses, security breaches, cyber-attacks, natural disasters and defects in design. Cybersecurity incidents, in particular, are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and the corruption of data. Various measures have been implemented to manage our risks related to information technology systems and network disruptions. However, given the unpredictability of the timing, nature and scope of information technology disruptions, we could potentially be subject to production downtimes, operational delays, the compromising of confidential or otherwise protected information, destruction or corruption of data, security breaches, other manipulation or improper use of our systems and networks or financial losses from remedial actions, any of which could have a material adverse effect on our cash flows, competitive position, financial condition or results of operations.  

We could also be adversely affected by system or network disruptions if new or upgraded information technology systems are defective, not installed properly or not properly integrated into our operations. Various measures have been implemented to manage our risks related to system implementation and modification, but system modification failures could have a material adverse effect on our business, financial position and results of operations and could, if not successfully implemented, adversely impact the effectiveness of our internal controls over financial reporting.

To the extent that we seek to expand our business through acquisitions, we may experience issues in executing acquisitions or integrating acquired operations.
 
From time to time, we examine opportunities to make selective acquisitions in order to provide increased returns to our shareholders and to expand our operations and, potentially, generate synergies. The success of any acquisition would depend on a number of factors, including, but not limited to:
 
Identifying suitable candidates for acquisition and negotiating acceptable terms;
Obtaining approval from regulatory authorities and potentially DMC’s shareholders;
Maintaining our financial and strategic focus and avoiding distraction of management during the process of integrating the acquired business;
Implementing our standards, controls, procedures and policies at the acquired business and addressing any pre-existing liabilities or claims involving the acquired business; and
To the extent the acquired operations are in a country in which we have not operated historically, understanding the regulations and challenges of operating in that new jurisdiction.  
 
There can be no assurance that we will be able to conclude any acquisitions successfully or that any acquisition will achieve the anticipated synergies or other positive results. Any material problems that we encounter in connection with such an acquisition could have a material adverse effect on our business, results of operations and financial position.

If we are unable to maintain effective internal controls, our operating results and financial condition could be harmed.

In early 2015, we identified material weaknesses in our internal control over financial reporting and at that time restated our previously-issued financial statements included in our 2014 annual report on Form 10-K. Such material weaknesses were remediated; however, we continue to be subject to a number of requirements as a public company, including the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and the listing standards of the Nasdaq Stock Market. These requirements have placed significant demands on our systems and resources. The Exchange Act

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requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things that our internal control over financial reporting be assessed by management and attested to by our auditors as of December 31 of each year. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight are required. As a result, our management's attention might be diverted from other business concerns, which could have a material adverse effect on our business, prospects, financial condition and results of operations. In addition, if we experience a material weakness, investors could lose confidence in our financial reporting, particularly if such weakness results in a restatement of our financial results, and our stock price could decline. For more information relating to the Company’s internal control over financial reporting and disclosure controls and procedures, see Part II, Item 9A, “Controls and Procedures.”

Risk Factors Related to Our Common Stock

The price of our common stock may be volatile, which may make it difficult for you to resell the common stock when you want or at prices you find attractive.
 
The market price and volume of our common stock may be subject to significant fluctuations due not only to general stock market conditions but also to a change in sentiment in the market regarding our operations, business prospects or liquidity. Among the factors that could affect the price of our common stock are:
changes in the oil and gas, industrial, or infrastructure markets;
operating and financial performance that vary from the expectations of management, securities analysts and investors;
developments in our business or in our business sectors generally;
regulatory changes affecting our industry generally or our business and operations;
the operating and stock price performance of companies that investors consider to be comparable to us;
announcements of strategic developments, acquisitions and other material events by us or our competitors;
our ability to integrate and operate the companies and the businesses that we acquire; and
changes in global financial markets and global economies and general market conditions, such as interest or foreign exchange rates, stock, commodity, credit or asset valuations or volatility.
 
The stock markets in general have experienced extreme volatility that has at times been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.

Holders of our common stock may not receive dividends.
 
Holders of our common stock are entitled to receive only such dividends as our Board of Directors may declare out of funds legally available for such payments. We are incorporated in Delaware and governed by the Delaware General Corporation Law. Delaware law allows a corporation to pay dividends only out of surplus, as determined under Delaware law or, if there is no surplus, out of net profits for the fiscal year in which the dividend was declared and for the preceding fiscal year. Under Delaware law, however, we cannot pay dividends out of net profits if, after we pay the dividend, our capital would be impaired. Our ability to pay dividends will be subject to our future earnings, capital requirements and financial condition, as well as our compliance with covenants and financial ratios related to existing or future indebtedness. Although we have historically declared cash dividends on our common stock, we are not required to do so and our Board of Directors may modify the dividend policy or reduce, defer or eliminate our common stock dividend in the future.
 


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ITEM 1B.                                       Unresolved Staff Comments

None.

ITEM 2.                                       Properties

Corporate Headquarters
 
Our corporate headquarters are located in Boulder, Colorado.  The term of the lease for the office space is through November 30, 2022.
 
NobelClad
 
We own our principal domestic manufacturing site, which is located in Mount Braddock, Pennsylvania.  We currently lease our primary domestic shooting site, which is located in Dunbar, Pennsylvania, and we also have license and risk allocation agreements relating to the use of a secondary shooting site that is located within a few miles of our Mount Braddock, Pennsylvania manufacturing facility. The shooting site in Dunbar and the nearby secondary shooting site support our Mount Braddock manufacturing facility. The lease for the Dunbar property will expire on December 15, 2020, but we have options to renew the lease which extend through December 15, 2029.  The license and risk allocation agreements will expire on December 31, 2018, but we have options to renew these agreements through December 31, 2028. 

NobelClad owns a manufacturing site in Liebenscheid, Germany and leases a shooting site in Dillenburg, Germany. The Dillenburg shooting site lease expires August 31, 2021. NobelClad owns the land and the buildings housing its operations in Rivesaltes, France.
 
DynaEnergetics
 
DynaEnergetics leases a manufacturing site and sales office in Troisdorf, Germany.  The Troisdorf manufacturing site lease expires December 31, 2020. The sales office lease expires December 31, 2020.  DynaEnergetics also leases office and warehouse space in various cities throughout Alberta, Canada and also leases bunkers for storage of its explosives in various locations throughout Alberta, Canada.  These agreements are on a month to month basis.  In the United States, DynaEnergetics owns manufacturing and assembly sites in Texas and Pennsylvania and leases storage bunkers and office and warehouse space in various cities throughout Texas and Louisiana.  We also lease office space in Moscow, Russia and office and warehouse space in Aktobe, Kazakhstan.  DynaEnergetics acquired 100% ownership of the land for its manufacturing site and sales office site in Tyumen, Siberia, which it previously leased.

The tables below summarize our properties by segment, including their location, type, size, whether owned or leased and expiration terms, if applicable.
 
Corporate Headquarters

Location
 
Facility Type
 
Facility Size
 
Owned/Leased
 
Expiration Date of Lease
(if applicable)
Boulder, Colorado
 
Corporate and Sales Office
 
14,630 sq. ft.
 
Leased
 
November 30, 2022


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NobelClad
 
Location
 
Facility Type
 
Facility Size
 
Owned/Leased
 
Expiration Date of Lease
(if applicable)
Mt. Braddock, Pennsylvania (a)
 
Clad plate manufacturing and administration office
 
Land: 14 acres
Buildings: 100,129 sq. ft.
 
Owned
 
 
Dunbar, Pennsylvania
 
Clad plate shooting site
 
Land: 322 acres
Buildings: 18,040 sq. ft.
 
Leased
 
December 15, 2020, with renewal options through December 15, 2029
Cool Spring, Pennsylvania
 
Clad plate shooting site
 
1,200,000 sq. ft.
 
Leased
 
December 31, 2018, with renewal options
Rivesaltes, France
 
Clad plate manufacturing
 
6.6 acres
 
Owned
 
 
Rivesaltes, France
 
Clad plate manufacturing, sales and administration office
 
49,643 sq. ft.
 
Owned
 
 
Tautavel, France (b)
 
Clad shooting site
 
116 acres
 
109 acres owned, 7 acres leased
 
December 31, 2021
Dillenburg, Germany
 
Clad plate shooting site
 
11.4 acres
 
 
Owned
 
 
 
 
 
 
 
25,791 sq. ft.
 
Leased
 
August 31, 2021
Würgendorf, Germany (b)
 
Manufacturing
 
Land: 24.6 acres
 
 
Owned
 
 
 
 
 
 
 
Storehouse 174 and 265: 2,756 sq. ft.
 
Leased
 
December 31, 2020
 
 
 
 
Building: 34,251 sq. ft.
 
Owned
 
 
Liebenscheid, Germany
 
Manufacturing
 
10.47 acres
 
Owned
 
 




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DynaEnergetics

Location
 
Facility Type
 
Facility Size
 
Owned/Leased
 
Expiration Date of Lease
(if applicable)
Troisdorf, Germany
 
Manufacturing and administration office
 
Manufacturing: 263,201 sq. ft.
Office: 2,033 sq. ft.
 
Leased
 
December 31, 2020, with renewal options for 5 years
Troisdorf, Germany
 
Office, Sieglarer Strasse
 
9,203 sq. ft.
 
Leased
 
February 28, 2017 with yearly renewal options
Liebenscheid, Germany
 
Manufacturing and office
 
33,497 sq. ft.
 
Owned
 
 
Edmonton, Alberta (c)
 
Sales office and warehouse
 
24,000 sq. ft.
 
Leased
 
January 31, 2019
Grande Prairie, Alberta
 
Sales office and warehouse
 
3,504 sq. ft.
 
Leased
 
December 31, 2019
Grande Prairie, Alberta
 
Storage magazines
 
144 sq. ft.
 
Leased
 
Month to month agreement
Red Deer, Alberta (d)
 
Sales office and warehouse
 
12,500 sq. ft.
 
Leased
 
March 30, 2018
Red Deer, Alberta
 
Storage magazines
 
1,000 sq. ft.
 
Leased
 
May 31, 2017. Lease is continuous until either party gives 120 days notice
Bonnyville, Alberta (c)
 
Sales office and warehouse
 
5,355 sq. ft.
 
Leased
 
April 30, 2019
Bonnyville, Alberta
 
Storage magazines
 
95 sq. ft.
 
Leased
 
Month to month agreement
Andrews, Texas
 
Office and warehouse
 
4,000 sq. ft.
 
Leased
 
Month to month agreement
Andrews, Texas
 
Land for magazines
 
600 sq. ft.
 
Leased
 
Month to month agreement
Austin, Texas (d)
 
Office
 
2,400 sq. ft.
 
Leased
 
April 30, 2017
Houston, Texas
 
Office
 
4,572 sq. ft.
 
Leased
 
April 30, 2023
Blum, Texas
 
Office, warehouse, and manufacturing
 
16,800 sq. ft.
 
Owned
 
 
Blum, Texas
 
Land for magazines
 
206.3 acres
 
Owned
 
 
Bridgeport, Texas
 
Office and warehouse
 
4,000 sq. ft.
 
Leased
 
Month to month agreement
Bridgeport, Texas
 
Land for magazines
 
100 acres
 
Leased
 
Month to month agreement
Corpus Christi, Texas (d)
 
Office and warehouse
 
6,000 sq. ft.
 
Leased
 
August 31, 2018

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Location
 
Facility Type
 
Facility Size
 
Owned/Leased
 
Expiration Date of Lease
(if applicable)
Victoria, Texas
 
Office and warehouse
 
4,000 sq. ft.
 
Leased
 
Month to month agreement
Victoria, Texas
 
Storage magazine
 
4,000 sq. ft.
 
Leased
 
Month to month agreement
Whitney, Texas
 
Office, warehouse, and manufacturing
 
36,000 sq. ft.
 
Owned
 
 
Lafayette, Louisiana
 
Office and warehouse
 
6,800 sq. ft.
 
Leased
 
Month to month agreement
Beaux Bridge, Louisiana
 
Storage magazine
 
600 sq. ft.
 
Leased
 
Month to month agreement
Dunbar, Pennsylvania
 
Storage magazines
 
400 sq. ft.
 
Owned
 
 
Mt. Braddock, Pennsylvania
 
Storage magazines
 
120 sq. ft.
 
Owned
 
 
Russia, Nizhnetavdinskiy District
 
Land
 
59.7 acres
 
Owned
 
 
 
 
 
 
1.6 acres
 
Owned
 
 
Russia, Nizhnetavdinskiy District
 
Office
 
9,860 sq. ft.
 
Owned
 
 
Russia, Nizhnetavdinskiy District
 
Manufacturing
 
58,216 sq. ft.
 
Owned
 
 
Moscow, Russia
 
Sales office
 
270 sq. ft.
 
Leased
 
November 30, 2017
Chapaevsk, Russia
 
Warehouse
 
3,000 sq. ft.
 
Leased
 
December 31, 2017
Noyabrsk, Russia
 
Warehouse
 
3,229 sq. ft.
 
Leased
 
December 31, 2017
Urengoy, Russia
 
Warehouse
 
900 sq. ft.
 
Leased
 
December 31, 2017
Nizhnevartovsk, Russia
 
Warehouse
 
900 sq. ft.
 
Leased
 
December 31, 2017
Sheremetyevo, Russia (Mezdunarodnoye Shosse 9)
 
Warehouse
 
Any shipped quantity of goods
 
Leased
 
Not limited
Aktobe, Kazakhstan
 
Sales Office
 
548 sq. ft.
 
Owned
 
 
Aktobe, Kazakhstan
 
Land (sales office)
 
0.09 acres
 
Owned
 
 
Aktobe, Kazakhstan
 
Storage
 
1,076 sq. ft.
 
Leased
 
Subject for prolongation every year
Aktobe, Kazakhstan
 
Bunker
 
2,273 sq. ft.
 
Owned
 
 
Aktobe, Kazakhstan
 
Land
 
19.76 acres
 
Leased
 
2050
Aktobe, Kazakhstan
 
Land (power line)
 
0.5 acres
 
Leased
 
2050
(a) The Mt. Braddock, Pennsylvania location is also used as a distribution center for our DynaEnergetics business segment.

(b) In connection with the purchase of the manufacturing facility in Liebenscheid, Germany, NobelClad ceased use of the manufacturing facility and sales and administration office in Würgendorf, Germany and the leased property in Tautevel, France in the first quarter of 2015.


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(c) The Edmonton, Alberta sales office and warehouse and a portion of the Bonnyville, Alberta sales office and warehouse have been subleased for the duration of their remaining leases.

(d) The Red Deer, Alberta, Austin, Texas, and Corpus Christi, Texas offices are vacant as of December 31, 2016.

ITEM 3.                Legal Proceedings
 
Anti-dumping and Countervailing Duties

In June 2015, U.S. Customs and Border Protection (“U.S. Customs”) sent us a Notice of Action that proposed to classify certain of our imports as subject to anti-dumping duties pursuant to a 2010 anti-dumping duty (“AD”) order on Oil Country Tubular Goods (“OCTG”) from China. A companion countervailing duty (“CVD”) order on the same product is in effect as well. The Notice of Action covered one entry of certain raw material steel mechanical tubing made in China and imported into the U.S. from Canada by our DynaEnergetics segment during 2015 for use in manufacturing perforating guns.

In July 2015, we sent a response to U.S. Customs outlining the reasons for our position that our mechanical tubing imports do not fall within the scope of the AD order on OCTG from China and should not be subject to anti-dumping duties. U.S. Customs proposed to take similar action with respect to other entries of this product and requested an approximately $1.1 million cash deposit or bond for AD/CVD duties.

In August 2015, we posted bonds of approximately $1.1 million to U.S. Customs. Subsequently, U.S. Customs declined to conclude that the mechanical tubing the Company had been importing was not within the scope of the AD order on OCTG from China. As a result, on September 25, 2015 the Company filed a request for a scope ruling with the U.S. Department of Commerce ("Commerce Department").

In its financial statements for the year ended December 31, 2015, the Company recorded a $6.4 million reserve for AD/CVD duties and interest ($6.2 million of which was recorded as cost of products sold and $169 thousand as interest expense in our statement of operations) that the Company expects to pay if it is unsuccessful in the remand redetermination and any subsequent appeals.

On February 15, 2016, the Company received the Commerce Department’s scope ruling, which determined that certain imports, primarily used for gun carrier tubing, are included in the scope of the AD/CVD orders on OCTG from China and thus are subject to AD/CVD duties.

On March 11, 2016, the Company filed an appeal with the U.S. Court of International Trade (“CIT”) related to the Commerce Department’s scope ruling. On February 7, 2017, CIT ruled on the appeal, remanding the scope ruling and ordering the Commerce Department to reconsider its position (the “Remand Order”). Under the Remand Order, the Commerce Department must issue its final remand determination on or before June 7, 2017, and such remand determination would be subject to the ongoing appeal with CIT.

On December 27, 2016, we received notice from U.S. Customs that it may pursue penalties against us related to the AD/CVD issue and demanding tender of alleged loss of AD/CVD duties in an amount of $3,049 thousand, which are covered by our reserve. We filed a response to the notice on February 6, 2017 asserting our position that any decision to pursue penalties would be premature in light of the Remand Order and that penalties would not be appropriate under the applicable legal standards. On February 16, 2017, we received notice that U.S. Customs was assessing formal penalties in the amount of $14.8 million. U.S. Customs also reasserted its demand for tender of alleged loss of AD/CVD duties in the amount of $3,049 thousand. We believe that this penalty assessment is premature and patently unreasonable in the face of the pending Remand Order and ongoing CIT appeal and that penalties are not appropriate under applicable legal standards. Further, even if penalties are found to be justified, we believe the amount of penalties asserted by U.S. Customs is unreasonable and subject to challenge on various grounds. We will vigorously defend against any imposition of penalties and seek a stay of penalty proceedings pending resolution of the remand determination and the ultimate resolution of the CIT appeal and any further appeals. We expect to submit a petition for relief and mitigation of penalties on or before April 17, 2017.

We tendered $3,049 thousand in AD amounts (“Tendered Amounts”) on March 6, 2017 into a suspense account pending ultimate resolution of the AD/CVD case.

For the year ended December 31, 2016, the Company recorded $176 thousand of interest on its reserve for AD/CVD duties, bringing the total reserved amount related to AD/CVD duties as of December 31, 2016 to $6.6 million The Tendered Amounts will be applied to reduce the reserve. The Company will continue to incur legal defense costs and could also be

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subject to additional interest and penalties. Accruals for the potential penalties discussed above are not reflected in our financial statements as of December 31, 2016 as we do not believe they are probable at this time.
Patent and Trademark Infringement

On September 22, 2015, GEODynamics, Inc., a U.S.-based oil and gas perforating equipment manufacturer based in Fort Worth, TX, filed a patent and trademark infringement action against DynaEnergetics in the United States District Court for the Eastern District of Texas (“District Court”) regarding alleged infringement of U.S. Patent No. 9,080,431 granted on July 14, 2015 (“the ‘431 patent”) and a related U.S. trademark for REACTIVE, alleging that DynaEnergetics’ U.S. sales of DPEX® shaped charges infringe the ‘431 patent and the trademark.  Summary judgment motions were filed by DynaEnergetics in December 2016, and no decisions have been issued on such motions. On July 1, 2016, GEODynamics filed a second patent infringement action against DynaEnergetics in District Court alleging infringement of US Patent No. 8,544,563 (“the ‘563 patent”), also based on DynaEnergetics’ US sales of DPEX™ shaped charges. On September 20, 2016, DynaEnergetics instituted an Inter Parties Review (IPR) against the ‘563 patent at the U.S. Patent and Trademark Office (“USPTO”), requesting that the ’563 patent be declared invalid by the USPTO. Trial for the '431 case is scheduled to begin March 27, 2017.  GEODynamics is seeking, among other things, compensatory damages and injunctive relief from further infringement in both actions.  We believe that the claims are meritless and that we have substantial legal and factual defenses to the claims and allegations contained in the complaints.  At this time, no assessment can be made as to the likely outcome of these actions or whether the outcome will be material to us.

ITEM 4.                Mine Safety Disclosures
 
Not applicable.


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PART II

ITEM 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is publicly traded on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “BOOM.”  The following table sets forth quarterly high and low sales prices for the common stock during our last two fiscal years, as reported by Nasdaq.
 
2016
 
High
 
Low
First Quarter
 
$
7.23

 
$
4.84

Second Quarter
 
$
11.62

 
$
5.98

Third Quarter
 
$
12.38

 
$
9.20

Fourth Quarter
 
$
17.19

 
$
9.80

 
2015
 
High
 
Low
First Quarter
 
$
16.57

 
$
12.60

Second Quarter
 
$
13.92

 
$
10.28

Third Quarter
 
$
12.67

 
$
8.30

Fourth Quarter
 
$
11.27

 
$
5.73

 
As of March 8, 2017, there were 269 holders of record of our common stock (does not include beneficial holders of shares held in “street name”).

Dividend Policy

We declared and paid quarterly dividends aggregating $0.08 per share in 2016 and $0.14 per share in 2015. We may pay quarterly dividends subject to capital availability and periodic determinations that cash dividends are in the best interests of our stockholders, but we cannot assure you that such payments will continue.  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.

Equity Compensation Plan
Refer to “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding securities authorized for issuance under our equity compensation plans, which is incorporated in this Item by this reference.


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Stock Performance Graph

The following graph compares the performance of our common stock with the Nasdaq Non-Financial Stocks Index and the Nasdaq Composite (U.S.) Index. The comparison of total return (change in year-end stock price plus reinvested dividends) for each of the years assumes that $100 was invested on December 31, 2011, in each of the Company, Nasdaq Non-Financial Stocks Index and the Nasdaq Composite (U.S.) Index with investment weighted on the basis of market capitalization.  The comparisons in the graph below are based upon historical data and are not indicative of, or intended to forecast, future performance of our common stock.



a2013123110_chart-55634a04.jpg
Total Return Analysis
12/31/11
12/31/12
12/30/13
12/31/14
12/31/15
12/31/16
DMC Global Inc.
$100
$70.27
$109.91
$80.99
$35.34
$80.13
Nasdaq Non-Financial Stocks
$100
$118.35
$162.04
$193.48
$212.35
$227.8
Nasdaq Composite (U.S.)
$100
$116.43
$155.41
$174.78
$175.62
$198.47


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ITEM 6.                  Selected Financial Data
 
The following selected financial data should be read in conjunction with the Consolidated Financial Statements, including the related Notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  The 2012 selected financial data includes the operating results of TRX from the January 3, 2012 acquisition date through December 31, 2012 and the balance sheet information as of December 31, 2012. Years 2014 and prior reflect the classification of AMK into discontinued operations.
 
 
(Dollars in Thousands, Except Per Share Data)
 
 
Year Ended December 31,
Statement of Operations
 
2016
 
2015
 
2014
 
2013
 
2012
Net sales
 
$
158,575

 
$
166,918

 
$
202,561

 
$
202,060

 
$
192,737

Gross profit
 
38,680

 
35,624

 
61,419

 
58,134

 
57,652

Cost and expenses
 
42,752

 
43,776

 
47,973

 
47,156

 
41,653

Restructuring expenses
 
1,202

 
4,063

 
6,781

 

 

Goodwill impairment
 

 
11,464

 

 

 

Income (loss) from operations
 
(5,274
)
 
(23,679
)
 
6,665

 
10,978

 
15,999

Other income (expense), net
 
(434
)
 
(2,410
)
 
(826
)
 
(1,169
)
 
(851
)
Income (loss) before income taxes, discontinued operations and non-controlling interest
 
(5,708
)
 
(26,089
)
 
5,839

 
9,809

 
15,148

Income tax provision (benefit)
 
797

 
(2,118
)
 
3,913

 
3,736

 
5,316

Income (loss) from continuing operations
 
(6,505
)
 
(23,971
)
 
1,926

 
6,073

 
9,832

Income from discontinued operations
 

 

 
641

 
478

 
943

Net income (loss) attributable to non-controlling interest
 

 

 

 
92

 
(2
)
Net income (loss) attributable to DMC Global Inc.
 
$
(6,505
)
 
$
(23,971
)
 
$
2,567

 
$
6,459

 
$
10,779

Net income (loss) per share attributable to DMC Global Inc. - Basic:
 
 

 
 

 
 

 
 

 
 

Continuing operations
 
$
(0.46
)
 
$
(1.72
)
 
$
0.13

 
$
0.44

 
$
0.73

Discontinued operations
 
$

 
$

 
$
0.05

 
$
0.03

 
$
0.07

Net income (loss)
 
$
(0.46
)
 
$
(1.72
)
 
$
0.18

 
$
0.47

 
$
0.80

Net income (loss) per share attributable to DMC Global Inc. - Diluted:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.46
)
 
$
(1.72
)
 
$
0.13

 
$
0.44

 
$
0.73

Discontinued operations
 
$

 
$

 
$
0.05

 
$
0.03

 
$
0.07

Net income (loss)
 
$
(0.46
)
 
$
(1.72
)
 
$
0.18

 
$
0.47

 
$
0.80

 
 
 
 
 
 
 
 
 
 
 
Dividends Declared per Common Share
 
$
0.08

 
$
0.14

 
$
0.16

 
$
0.16

 
$
0.16

 
 
 
 
 
 
 
 
 
 
 
Financial Position
 
 

 
 

 
 

 
 

 
 

Total assets
 
$
162,555

 
$
182,192

 
$
219,329

 
$
240,545

 
$
235,206

Long-term debt
 
$
15,732

 
$
26,826

 
$
22,782

 
$
26,400

 
$
37,853


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Table of Contents

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.
 
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., formerly Dynamic Materials Corporation, ("DMC") operates a diversified family of technical product and process businesses serving the energy, industrial and infrastructure markets. Our businesses operate globally through an international network of manufacturing, distribution and sales facilities. Our business is organized into two segments: NobelClad and DynaEnergetics.

On October 1, 2014 we completed the sale of our AMK business. We have reflected the results of AMK as discontinued operations in the consolidated statements of operations for all periods presented. Accordingly, historical consolidated statements of operations included in the Management's Discussion and Analysis of Financial Condition and Results of Operations have been restated to reflect the discontinued operation.

Our diversified business segments each provide a suite of unique technical products to niche segments of the global energy, industrial and infrastructure markets; and each of our businesses has established a strong or leading position in the markets in which it participates. With an underlying focus on free-cash flow generation, our objective is to sustain and grow the market share of our businesses through increased market penetration, development of new applications, and research and development of new and adjacent products that can be sold across our global network of sales and distribution facilities. We also intend to explore acquisitions of complementary businesses that could strengthen or add to our existing product portfolio, or expand our geographic footprint and market presence.

NobelClad

NobelClad is a global leader in the production of explosion-welded clad metal plates for use in the construction of corrosion resistant industrial processing equipment and specialized transition joints.While a large portion of the demand for our clad metal products is driven by new plant construction and large plant expansion projects, maintenance and retrofit projects at existing chemical processing, petrochemical processing, oil refining, and aluminum smelting facilities 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 decreased to $31,634 at December 31, 2016 from $41,832 at December 31, 2015.

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 large, mid-sized, and small oilfield service companies in the U.S., Europe, Canada, South America, Africa, the Middle East, Russia, 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. Exploration activity over the last several years has led to increasingly complex well completion operations, which in turn, has increased the demand for high quality and technically advanced perforating products.

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.

Factors Affecting Results


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Table of Contents

The following items impacted the comparability of the company's results for the years ended December 31, 2016 and 2015:

NobelClad's gross profit, operating income, and Adjusted EBITDA (see "Use of Non-GAAP Financial Measures" below) improved due to favorable customer and project mix, lower manufacturing overhead expenses from the consolidation of European manufacturing facilities, lower general and administrative expenses, and no restructuring charges in 2016.
DynaEnergetics was impacted by continued pressure on selling prices from the prolonged downturn in the oil and gas well-completions sector, which is the segment's primary end market. However, we continued to increase DynaEnergetics' market share in the perforating market in 2016. Unit sales of our DynaSelectTM family of detonators continued to grow during 2016, as an increasing number of operators and service providers are leveraging the reliability, efficiency and safety of this product.
The Company continued its investments in research and development, as well as technology, product and market development initiatives. DynaEnergetics' research and development spending in 2016 was $3,990 compared with $2,357 in 2015. Research and development expenses are included in the costs of product sold line item in the consolidated statements of operations.
Restructuring expenses of $1,202 were incurred in 2016, primarily related to severance for headcount reductions and lease termination costs in DynaEnergetics compared to $4,063 in 2015, primarily related to closing distribution and production centers, consolidating manufacturing to more cost-effective locations, and reducing corporate headcount.
A goodwill impairment charge of $11,464 in 2015 related to the DynaEnergetics reporting unit.
Selling, general, and administrative expenses of $38,741 for 2016 compared favorably to $39,743 for 2015. In 2016, general and administrative expenses included the impact of ongoing patent infringement and AD/CVD litigation.    
Net debt of $9,313 decreased 55% from December 31, 2015. Net debt, a non-GAAP measure, is calculated as lines of credit less cash and cash equivalents.

Business Outlook

Demand from North America’s onshore oil and gas industry showed additional signs of improvement during the fourth quarter and helped fuel a stronger-than-expected performance at DynaEnergetics. Year-over-year top-line growth in DynaEnergetics has continued early in the first quarter of 2017. There is also expanded customer interest in DynaEnergetics’ factory-assembled DynaStage perforating system.
DynaEnergetics announced a series of price increases during the first quarter of 2017. We believe the increase in demand in the industry, combined with our focus on selling high value products to tier-1 and tier-2 service companies, will help address our margin recovery initiatives as the year proceeds.
NobelClad capitalized on the early arrival of materials to accelerate production and shipment of multiple orders in the fourth quarter of 2016 that were originally scheduled for delivery in early 2017. This, along with soft activity levels in our end markets for NobelClad, is contributing to lower expected sales in the first half of 2017. Our fabricator customers expect improved demand particularly for long-delayed repair, maintenance and upgrade work.  It appears higher energy prices and renewed enthusiasm for domestic infrastructure spending may pull forward a number of these projects, which we believe will lead to a recovery in bookings activity during the second half of 2017.
The Company tendered $3,049 in anti-dumping and countervailing (AD/CVD) duties on March 6, 2017 into a suspense account with U.S. Customs pending ultimate resolution of the AD/CVD case. See Item 3 — Legal Proceedings for further discussion.
The improved customer demand at DynaEnergetics is requiring increased investments in working capital.  To fund our near-term working capital needs and the $3,049 tender of AD/CVD duties to U.S. Customs, we recently entered an amended credit facility with our commercial banking syndicate to address potential near-term constraints on our covenants.  The new facility steps up the maximum allowable leverage ratio and provides relief under our debt service coverage ratio through the third quarter of 2017.  Our borrowings available under the credit facility were reduced to $35 million from the prior $75 million. The smaller credit facility provides us with adequate liquidity to fund our anticipated working capital needs. See — "Liquidity and Capital Resources" for further discussion.

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 plus or minus net interest, taxes, depreciation and amortization. Adjusted EBITDA excludes

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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). 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.

The presence of non-GAAP financial measures in this report is not intended to be considered in isolation or as a substitute for, or 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 other 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 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 projections, guidance and other statements regarding our future expected financial position and operating results, our growth and business strategy, our expectations regarding the oil and gas industry and the impacts on DynaEnergetics' sales growth and margin recovery efforts, our expectations regarding NobelClad's sales and bookings in 2017, our financing plans, our future liquidity position and factors impacting such position, and the outcome of the pending GEODynamics and anti-dumping matters.
 
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:

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;
Fluctuations in customer demand;
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 material;
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 acquired businesses;
The ability to remain an innovative leader in our fields of business;
The impacts of pending or future litigation or regulatory matters;
The application of governmental regulation and oversight of our operations and products and the industries in which our customers operate;

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Table of Contents

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 statement speaks only as of the date of this annual report, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of such statement or to reflect the occurrence of unanticipated events.  In addition, see “Risk Factors” for a discussion of these and other factors that could materially affect our results of operations and financial condition.

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Table of Contents

Consolidated Results of Operations

Year ended December 31, 2016 compared to Year Ended December 31, 2015

 
 
2016
 
2015
 
$ change
 
% change
Net sales
 
$
158,575

 
$
166,918

 
$
(8,343
)
 
(5
)%
Gross profit
 
38,680

 
35,624

 
3,056

 
9
 %
Gross profit percentage
 
24.4
%
 
21.3
%
 
 
 
 
COSTS AND EXPENSES:
 
 
 
 
 
 
 
 
General and administrative expenses
 
22,115

 
20,998

 
1,117

 
5
 %
% of net sales
 
13.9
%
 
12.6
%
 
 
 
 
Selling and distribution expenses
 
16,626

 
18,745

 
(2,119
)
 
(11
)%
% of net sales
 
10.5
%
 
11.2
%
 
 
 
 
Amortization of purchased intangible assets
 
4,011

 
4,033

 
(22
)
 
(1
)%
% of net sales
 
2.5
%
 
2.4
%
 
 
 
 
Restructuring expenses
 
1,202

 
4,063

 
(2,861
)
 
(70
)%
Goodwill impairment charge
 

 
11,464

 
(11,464
)
 
(100
)%
Operating income (loss)
 
(5,274
)
 
(23,679
)
 
18,405

 
78
 %
Other income (expense), net
 
633

 
(669
)
 
1,302

 
195
 %
Interest income (expense), net
 
(1,067
)
 
(1,741
)
 
674

 
39
 %
Income tax provision (benefit)
 
797

 
(2,118
)
 
2,915

 
138
 %
Net loss
 
(6,505
)
 
(23,971
)
 
17,466

 
73
 %
Adjusted EBITDA
 
9,021

 
13,080

 
(4,059
)
 
(31
)%

Net sales The decrease compared with 2015 was due to a 13% decrease in DynaEnergetics partially offset by a 1% increase in NobelClad. The decline in DynaEnergetics was due to a decline in demand and average selling prices due to lower activity levels in the oil and gas well-completions sector. The increase in NobelClad primarily related to a large project for the semiconductor capital equipment industry that shipped in the second quarter of 2016.

Gross profit The increase in gross profit and gross profit percentage compared with 2015 primarily was due to the impact in 2015 of a $6,205 accrual for anti-dumping and countervailing duties resulting from an unfavorable scope ruling from the Department of Commerce on prior imports of metals primarily used by DynaEnergetics for gun carrier tubing. Gross profit and gross profit percentage in 2016 were adversely affected by lower average selling prices in DynaEnergetics, a lower proportion of sales in DynaEnergetics relative to NobelClad, and the impact of higher research and development costs in DynaEnergetics.

General and administrative expenses The increase compared with 2015 primarily was due to higher outside legal expenses in DynaEnergetics due to patent infringement and anti-dumping litigation.

Selling and distribution expenses The decrease compared with 2015 principally was due to lower salaries and benefits, a reduction in bad debt expense, and lower outside sales agent commissions in DynaEnergetics driven by sales volume in territories in which we do not have an internal sales team.

Restructuring expenses The components of 2016 restructuring expenses are detailed as follows:

 
 
Severance and benefits
 
Asset impairments
 
Contract termination
 
Equipment moving ant other exit costs
 
Total
DynaEnergetics
 
$
684

 
$

 
$
386

 
$
58

 
$
1,128

Corporate
 
74

 

 

 

 
74

Total restructuring expenses
 
$
758

 
$

 
$
386

 
$
58

 
$
1,202


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Table of Contents

    
DynaEnergetics restructuring expenses relate to severance for headcount reductions in Troisdorf, Germany and Austin, Texas, as well as lease termination costs in Austin. Corporate restructuring charges relate to the accelerated vesting of stock awards in connection with the elimination of certain positions in DynaEnergetics.

The components of 2015 restructuring expenses are detailed as follows:
 
 
Severance and benefits
 
Asset impairments
 
Contract termination
 
Equipment moving ant other exit costs
 
Total
NobelClad
 
$
238

 
$

 
$
40

 
$
472

 
$
750

DynaEnergetics
 
735

 
205

 
498

 
222

 
1,660

Corporate
 
1,653

 

 

 

 
1,653

Total restructuring expenses
 
$
2,626

 
$
205

 
$
538

 
$
694

 
$
4,063


NobelClad restructuring expenses relate to the shifting of the majority of clad metal plate production from facilities in both Rivesaltes, France and Würgendorf, Germany to the new manufacturing facility in Liebenscheid, Germany.

DynaEnergetics restructuring expenses relate to the consolidation of perforating gun manufacturing centers, the closure of distribution centers, and the reduction of the administrative workforce at the corporate offices in Troisdorf, Germany.

Corporate restructuring expenses relate to the elimination of certain positions in our corporate office and the severance and expense related to the acceleration of unvested stock awards.

Operating loss The decrease in operating loss compared with 2015 was due to a 72% increase in DynaEnergetics operating income, a 53% increase in NobelClad operating income, an 8% decrease in corporate unallocated costs and a 29% decrease in stock-based compensation. Corporate unallocated and stock-based compensation expenses are not allocated to our business segments.

Other income (expense), net The change from expense to income compared with 2015 primarily was due to a shift to unrealized foreign currency gains from unrealized foreign currency losses. Our subsidiaries frequently enter into inter-company and third party transactions that are denominated in currencies other than their functional currency. Changes in exchange rates with respect to these transactions will result in unrealized gains or losses if unsettled at the end of the reporting period or realized foreign currency transaction gains or losses at settlement of the transaction.

Interest income (expense), net The decrease in expense compared with last year primarily was due to writing off $508 of deferred debt issuance costs in December 2015 after entering into a credit facility amendment. Interest expense on our lines of credit was lower in 2016 from lower interest on a smaller average outstanding balance, partially offset by higher interest on the accrued anti-dumping and countervailing duties in DynaEnergetics.

Goodwill impairment charge The impairment charge in 2015 related to fully writing off DynaEnergetics' goodwill balance.

Income tax provision (benefit) We recorded an income tax expense of $797 for 2016 compared with an income tax benefit of $2,118 for 2015. We currently are unable to recognize tax benefits associated with losses incurred in certain jurisdictions due to valuation allowances recorded against deferred tax assets in those jurisdictions.

Net loss Primarily as a result of the reduction of restructuring charges as well as non-recurring goodwill impairment charges in 2015 along with the other factors discussed above, net loss in 2016 was $6,505, or $0.46 per diluted share, compared with a net loss of $23,971, or $1.72 per diluted share in 2015.

Adjusted EBITDA The decrease compared with 2015 primarily was due to a decline in profitability from lower average selling prices and volume in DynaEnergetics. See "Overview" above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBIDTA.

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Table of Contents

 
 
 
2016
 
2015
Net income
 
$
(6,505
)
 
$
(23,971
)
Interest expense
 
1,070

 
1,745

Interest income
 
(3
)
 
(4
)
Provision for income taxes
 
797

 
(2,118
)
Depreciation
 
6,756

 
6,244

Amortization of purchased intangible assets
 
4,011

 
4,033

EBITDA
 
6,126

 
(14,071
)
Restructuring expenses
 
1,202

 
4,063

Goodwill impairment charge
 

 
11,464

Accrued anti-dumping duties
 

 
6,205

DynaEnergetics inventory reserves
 

 
1,924

Stock-based compensation
 
2,326

 
2,826

Other (income) expense, net
 
(633
)
 
669

Adjusted EBITDA
 
$
9,021

 
$
13,080




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Table of Contents

Year ended December 31, 2015 compared to Year Ended December 31, 2014

 
 
2015
 
2014
 
$ change
 
% change
Net sales
 
$
166,918

 
$
202,561

 
$
(35,643
)
 
(18
)%
Gross profit
 
35,624

 
61,419

 
(25,795
)
 
(42
)%
Gross profit percentage
 
21.3
%
 
30.3
%
 
 
 
 
COSTS AND EXPENSES:
 
 
 
 
 
 
 
 
General and administrative expenses
 
20,998

 
23,766

 
(2,768
)
 
(12
)%
% of net sales
 
12.6
%
 
11.7
%
 
 
 
 
Selling and distribution expenses
 
18,745

 
18,104

 
641

 
4
 %
% of net sales
 
11.2
%
 
8.9
%
 
 
 
 
Amortization of purchased intangible assets
 
4,033

 
6,103

 
(2,070
)
 
(34
)%
% of net sales
 
2.4
%
 
3.0
%
 
 
 
 
Restructuring expenses
 
4,063

 
6,781

 
(2,718
)
 
(40
)%
Goodwill impairment charge
 
11,464

 

 
11,464

 
NM

Operating income (loss)
 
(23,679
)
 
6,665

 
(30,344
)
 
(455
)%
Other income (expense), net
 
(669
)
 
(313
)
 
(356
)
 
(114
)%
Interest income (expense), net
 
(1,741
)
 
(513
)
 
(1,228
)
 
(239
)%
Income tax provision
 
(2,118
)
 
3,913

 
(6,031
)
 
(154
)%
Income from discontinued operations, net of tax
 

 
641

 
(641
)
 
(100
)%
Net income (loss)
 
(23,971
)
 
2,567

 
(26,538
)
 
(1,034
)%
Adjusted EBITDA
 
$
13,080

 
$
31,475

 
$
(18,395
)
 
(58
)%

Net sales The decrease compared with 2014 was due to a 27% decrease in DynaEnergetics and a 7% decrease in NobelClad. Excluding the impact of unfavorable foreign currency fluctuations, NobelClad's net sales increased 1% and DynaEnergetics' decreased 21%. The decline in DynaEnergetics resulted from the global downturn in the oil and gas market, which outweighed higher sales of new products and technologies.

Gross profit The decrease in gross profit percentage compared with 2014 was driven by the impact of a $6,205 accrual for anti-dumping and countervailing duties resulting from an unfavorable scope ruling from the Department of Commerce on prior imports of metals primarily used by DynaEnergetics for gun carrier tubing. The decline also resulted from a lower proportion of sales in DynaEnergetics relative to NobelClad, an unfavorable product mix in NobelClad, lower average selling prices and increased inventory reserves in DynaEnergetics and the impact of lower sales volume on fixed manufacturing overhead expenses in both segments.  

General and administrative expenses The decrease compared with 2014 was primarily due to a reduction in salaries of $1,451, lower stock-based compensation of $894, and a reduction in outside services expenses of $667. In the first half of 2015 we recognized incremental audit and legal expenses of $450 associated with the restatement of previously-issued financial statements included in our 2014 Form 10-K. These one-time expenses were offset by a reduction in fees related to fewer Board of Directors members and lower information technology spending from bringing selected services in-house and the completion of an Enterprise Resource Planning (ERP) project in NobelClad.

Selling and distribution expenses The increase compared with 2014 was principally due to an increase in bad debt expense.

Amortization expense The decrease compared with 2014 was due to fully amortizing NobelClad's customer relationships as of December 31, 2014 and the impact of foreign currency translation. 

Restructuring expenses The components of 2015 restructuring expenses are detailed as follows:

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Table of Contents

 
 
Severance and benefits
 
Asset impairments
 
Contract termination
 
Equipment moving ant other exit costs
 
Total
NobelClad
 
$
238

 
$

 
$
40

 
$
472

 
$
750

DynaEnergetics
 
735

 
205

 
498

 
222

 
1,660

Corporate
 
1,653

 

 

 

 
1,653

Total restructuring expenses
 
$
2,626

 
$
205

 
$
538

 
$
694

 
$
4,063


NobelClad restructuring expenses relate to the shifting of the majority of clad metal plate production from facilities in both Rivesaltes, France and Würgendorf, Germany to the new manufacturing facility in Liebenscheid, Germany.

DynaEnergetics restructuring expenses relate to the consolidation of perforating gun manufacturing centers, the closure of distribution centers, and the reduction of administrative workforce at the corporate offices in Troisdorf, Germany.

Corporate restructuring expenses relate to the elimination of certain positions in our corporate office and the severance and expense related to the acceleration of unvested stock awards.

The components of 2014 restructuring charges are detailed as follows:
 
 
Severance and benefits
 
Asset impairments
 
Contract termination
 
Equipment moving ant other exit costs
 
Total
NobelClad
 
$
2,466

 
$
3,946

 
$

 
$
369

 
$
6,781

Total restructuring expenses
 
$
2,466

 
$
3,946

 
$

 
$
369

 
$
6,781


NobelClad restructuring expenses relate to the shifting of the majority of clad metal plate production from facilities in both Rivesaltes, France and Wurgendorf, Germany to the new manufacturing facility in Liebenscheid, Germany.

Operating income (loss) The operating loss in 2015 versus operating income in 2014 primarily was due to non-recurring charges related to goodwill impairment and accrual for anti-dumping and countervailing duties in DynaEnergetics and lower customer demand and average selling prices in DynaEnergetics resulting from a significant decline in completion activity in the oil and gas sector, partially offset by improved earnings in NobelClad. Corporate unallocated and stock-based compensation expenses are not allocated to our business segments.

Other income (expense), net The increase in expense compared with 2014 primarily was due to an increase in unrealized foreign currency losses. Our subsidiaries frequently enter into inter-company and third party transactions that are denominated in currencies other than their functional currency. Changes in exchange rates with respect to these transactions will result in unrealized gains or losses if unsettled at end of the reporting period or realized foreign currency transaction gains or losses at settlement of the transaction.

Interest income (expense), net The increase in expense compared with 2014 was due to the amortization of loan fees associated with the credit agreement entered into on February 23, 2015, the write off of $508 of loan fees previously deferred in conjunction with our December 2015 credit facility amendment, and higher interest expense on a larger average outstanding debt balance.

Goodwill impairment charge The impairment charge relates to fully writing off goodwill related to the DynaEnergetics segment.

Income tax provision (benefit) We recorded an income tax benefit of $2,118 for 2015 compared to an income tax expense of $3,913 for 2014. Our consolidated income tax benefit for 2015 and expense for 2014 included $1,584 and $76, respectively, related to U.S. taxes, with the remainder relating to a net foreign tax benefit of $534 in 2015 and expense of $3,837 in 2014, respectively, associated with our foreign operations and holding companies.

Net income (loss) Primarily as a result of restructuring expenses and the non-recurring goodwill impairment charge along with the other factors discussed above, net loss in 2015 was $23,971, or $1.72 per diluted share, compared with a net income of $2,567, or $0.18 per diluted share, in 2014.

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Adjusted EBITDA The decrease compared with 2014 primarily was due to the significant net loss in 2015 compared to net income in 2014. See "Overview" above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBITDA.
 
 
 
2015
 
2014
 
 
 
 
 
Net income
 
$
(23,971
)
 
$
2,567

Income from discontinued operations
 

 
(641
)
Interest expense
 
1,745

 
551

Interest income
 
(4
)
 
(38
)
Provision for income taxes
 
(2,118
)
 
3,913

Depreciation
 
6,244

 
7,051

Amortization of purchased intangible assets
 
4,033

 
6,103

EBITDA
 
(14,071
)
 
19,506

Restructuring charges
 
4,063

 
6,781

Goodwill impairment charge
 
11,464

 

Accrued anti-dumping duties
 
6,205

 

DynaEnergetics inventory reserves
 
1,924

 
1,287

Stock-based compensation
 
2,826

 
3,588

Other (income) expense, net
 
669

 
313

Adjusted EBITDA
 
$
13,080

 
$
31,475


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 (loss) is defined as revenues less expenses identifiable to the segment. DMC operating income (loss) 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 before income taxes by deducting unallocated corporate expenses, including stock-based compensation, net other expense, net interest expense, income tax provision, and income from discontinued operations.

For the years ended December 31, 2016, 2015 and 2014, the net sales, segment operating income or loss, and Adjusted EBITDA for each segment was as follows:

 
 
December 31, 2016
 
 
NobelClad
 
DynaEnergetics
 
DMC Global Inc.
Net Sales
 
$
91,285

 
$
67,290

 
$
158,575

% of Consolidated
 
58
%
 
42
%
 
 
 
 
 
 
 
 
 
Operating Income (Loss)
 
8,878

 
(5,380
)
 
(5,274
)
 
 
 
 
 
 
 
Adjusted EBITDA
 
12,877

 
2,516

 
9,021


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December 31, 2015
 
 
NobelClad
 
DynaEnergetics
 
DMC Global Inc.
Net Sales
 
$
89,980

 
$
76,938

 
$
166,918

% of Consolidated
 
54
%
 
46
%
 
 
 
 
 
 
 
 
 
Operating Income (Loss)
 
5,819

 
(19,245
)
 
(23,679
)
 
 
 
 
 
 
 
Adjusted EBITDA
 
10,727

 
8,127

 
13,080

 
 
December 31, 2014
 
 
NobelClad
 
DynaEnergetics
 
DMC Global Inc.
Net Sales
 
$
97,108

 
$
105,453

 
$
202,561

% of Consolidated
 
48
%
 
52
%
 
 
 
 
 
 
 
 
 
Operating Income (Loss)
 
2,155

 
14,479

 
6,665

 
 
 
 
 
 
 
Adjusted EBITDA
 
15,418

 
22,438

 
31,475


NobelClad

Year ended December 31, 2016 compared to Year Ended December 31, 2015

 
 
2016
 
2015
 
$ change
 
% change
Net sales
 
$
91,285

 
$
89,980

 
$
1,305

 
1
 %
Gross profit
 
19,103

 
17,206

 
1,897

 
11
 %
Gross profit percentage
 
20.9
%
 
19.1
%
 
 
 
 
COSTS AND EXPENSES:
 
 
 
 
 
 
 
 
General and administrative expenses
 
4,024

 
4,539

 
(515
)
 
(11
%)
Selling and distribution expenses
 
5,823

 
5,719

 
104

 
2
 %
Amortization of purchased intangible assets
 
378

 
379

 
(1
)
 
 %
Restructuring expenses
 

 
750

 
(750
)
 
(100
)%
Operating income
 
8,878

 
5,819

 
3,059

 
53
 %
Adjusted EBITDA
 
$
12,877

 
$
10,727

 
$
2,150

 
20
 %

Net sales The increase compared with 2015 reflects timing differences with respect to when orders entered our backlog and the subsequent shipment of these orders. During the second quarter of 2016, NobelClad shipped a large project related to specialized explosion clad plates to be used in the fabrication of equipment for a semiconductor material production facility in East Asia.

Gross profit The increase in gross profit and gross profit percentage compared with 2015 primarily was due to improved margins on its mix of projects during 2016 compared with the same period in 2015. Gross profit also benefited from lower manufacturing overhead expenses from the consolidation of European manufacturing facilities.

General and administrative expenses The decrease compared with 2015 primarily was attributable to lower salaries and wages and outside service costs.

Selling and distribution expenses The increase compared with 2015 primarily was attributable to higher salaries and wages partially offset by a reduction of bad debt expense.

Restructuring expense The expense in 2015 related to shifting the majority of clad metal plate production in Europe from facilities in Rivesaltes, France and Würgendorf, Germany to our manufacturing facility in Liebenscheid, Germany.

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Operating income The increase compared with 2015 was driven by higher gross profit from favorable project mix, lower general and administrative expenses and no restructuring charges in 2016.

Adjusted EBITDA The increase compared with 2015 was primarily due to an increase in operating income and no restructuring expenses. See "Overview" above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBIDTA.
 
 
2016
 
2015
Operating income
 
$
8,878

 
$
5,819

Adjustments:
 
 
 
 
Restructuring expenses
 

 
750

Depreciation
 
3,621

 
3,779

Amortization of purchased intangibles
 
378

 
379

Adjusted EBITDA
 
$
12,877

 
$
10,727


Year ended December 31, 2015 compared to Year Ended December 31, 2014

 
 
2015
 
2014
 
$ change
 
% change
Net sales
 
$
89,980

 
$
97,108

 
$
(7,128
)
 
(7
)%
Gross profit
 
17,206

 
21,698

 
(4,492
)
 
(21
)%
Gross profit percentage
 
19.1
%
 
22.3
%
 
 
 
 
COSTS AND EXPENSES:
 
 
 
 
 
 
 
 
General and administrative expenses
 
4,539

 
4,907

 
(368
)
 
(7
)%
Selling and distribution expenses
 
5,719

 
5,928

 
(209
)
 
(4
)%
Amortization of purchased intangible assets
 
379

 
1,927

 
(1,548
)
 
(80
)%
Restructuring expenses
 
750

 
6,781

 
(6,031
)
 
(89
)%
Operating income
 
5,819

 
2,155

 
3,664

 
170
 %
Adjusted EBITDA
 
$
10,727

 
$
15,418

 
$
(4,691
)
 
(30
)%

Net sales The decrease compared to 2014 primarily was due to an unfavorable foreign currency exchange translation of $7,710.    

Gross profit The decrease compared to 2014 was due to unfavorable project mix.

General and administrative expenses The decrease compared to 2014 primarily was due to a reduction in salaries and wages of $113 and a reduction in outside services expenses of $97.

Selling and distribution expenses The decrease compared to 2014 was principally due to a $452 decrease in outside sales agents commission expense due to lower sales into territories in which we don't have an internal sales force, partially offset by a $187 increase in salaries and wages.

Amortization expense The decrease compared to 2014 was due to the complete amortization of NobelClad's customer relationships as of December 31, 2014. 

Restructuring expenses Restructuring expenses relate to the shifting of the majority of clad metal plate production from facilities in both Rivesaltes, France and Würgendorf, Germany to its manufacturing facility in Liebenscheid, Germany.

Operating income The increase compared to 2014 was primarily due to lower restructuring expenses. Excluding the reduction of restructuring expenses, operating income decreased $2,367 (26%) versus prior year primarily due to lower gross margins from unfavorable project mix.


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Adjusted EBITDA The decrease compared to 2014 was primarily due to lower operating income caused by gross margin decline from unfavorable product mix. See "Overview" above for the explanation of the use of Adjusted EBITDA. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBIDTA.
 
 
2015
 
2014
Operating income
 
$
5,819

 
$
2,155

Adjustments:
 
 
 
 
Restructuring expenses
 
750

 
6,781

Depreciation
 
3,779

 
4,555

Amortization of purchased intangibles
 
379

 
1,927

 
 
 
 
 
Adjusted EBITDA
 
$
10,727

 
$
15,418



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Table of Contents

DynaEnergetics

Year ended December 31, 2016 compared to Year Ended December 31, 2015

 
 
2016
 
2015
 
$ change
 
% change
Net sales
 
$
67,290

 
$
76,938

 
$
(9,648
)
 
(13
)%
Gross profit
 
19,811

 
18,662