NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
1. BASIS OF PRESENTATION
The information included in the Condensed Consolidated Financial Statements is unaudited but includes all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the interim periods presented. Certain information and footnote disclosures, including critical and significant accounting policies normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted for this quarterly presentation. These Condensed Consolidated Financial statements should be read in conjunction with the financial statements that are included in our Annual Report filed on Form 10-K for the year ended December 31, 2021.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of DMC Global Inc. (“DMC”, “we”, “us”, “our”, or the “Company”) and its controlled subsidiaries. Only subsidiaries in which controlling interests are maintained are consolidated. All significant intercompany accounts, profits, and transactions have been eliminated in consolidation.
Accounts and Notes Receivable
The Company measures expected credit losses for its accounts receivable using a current expected credit loss model, which is based on historical experience, adjusted for current conditions and reasonable and supportable forecasts. The Company has disaggregated pools of accounts receivable balances by business, geography and/or customer risk profile and has used history and other experience to establish an allowance for credit losses at the time the receivable is recognized. To measure expected credit losses, we have elected to pool trade receivables by segment and analyze each segment’s accounts receivable balances as separate populations. Within each segment, receivables exhibit similar risk characteristics.
During the three and nine months ended September 30, 2022, our expected loss rate reflects uncertainties in market conditions that could impact our businesses, including COVID-19 related considerations, supply chain disruptions, as well as global geopolitical and economic instability. In addition, we reviewed receivables outstanding, including aged balances, and in circumstances where we are aware of a specific customer’s inability to meet its financial obligation to us, we recorded a specific allowance for credit losses (with the offsetting expense charged to “Selling and distribution expenses” in our Condensed Consolidated Statements of Operations) against the amounts due, reducing the net recognized receivable to the amount we estimate will be collected. During the three and nine months ended September 30, 2022, provisions of $568 and $696, respectively, were recorded.
The following table summarizes year-to-date activity in the allowance for credit losses on receivables from customers in each of our business segments:
| | | | | | | | | | | | | | | | | | | | | | | |
| Arcadia | | DynaEnergetics | | NobelClad | | DMC Global Inc. |
Allowance for doubtful accounts, December 31, 2021 | $ | — | | | $ | 2,758 | | | $ | 15 | | | $ | 2,773 | |
| | | | | | | |
| Current period provision for expected credit losses | $ | 584 | | | 97 | | | 62 | | | 743 | |
| Write-offs charged against the allowance | | | (97) | | | — | | | (97) | |
| Recoveries of amounts previously reserved | $ | — | | | (47) | | | — | | | (47) | |
| Impacts of foreign currency exchange rates and other | $ | — | | | (6) | | | (5) | | | (11) | |
Allowance for doubtful accounts, September 30, 2022 | $ | 584 | | | $ | 2,705 | | | $ | 72 | | | $ | 3,361 | |
Revenue Recognition
The Company’s revenues are primarily derived from consideration paid by customers for tangible goods. The Company analyzes its different goods by segment to determine the appropriate basis for revenue recognition. Revenue is not generated from sources other than contracts with customers and revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. There are no material upfront costs for operations that are incurred from contracts with customers.
Our rights to payments for goods transferred to customers within our DynaEnergetics and NobelClad business segments arise when control is transferred at a point in time and not on any other criteria. Our rights to payments for goods transferred to customers within our Arcadia business segment also generally arise when control is transferred at a point in time; however, at times, control of certain customized, project-based products passes to the customer over time. Payment terms and conditions vary by contract, although terms generally include a requirement of payment within 30 to 90 days across all of our segments. In instances when we require customers to make advance payments prior to the shipment of their orders, we record a contract liability. We have determined that our contract liabilities do not include a significant financing component given the short duration between order initiation and order fulfillment within each of our segments. Refer to Note 6 "Contract Liabilities" for further information on contract liabilities and Note 10 "Business Segments" for disaggregated revenue disclosures.
See additional revenue recognition policy disclosures specific to the DynaEnergetics and NobelClad business segments within our Annual Report filed on Form 10-K for the year ended December 31, 2021.
Arcadia
Customers agree to terms and conditions at the time of initiating an order. A significant portion of transactions contain standard architectural building materials that are not made-to-order, which include standard storefronts and entrances, windows, curtain walls, doors and interior partitions. In instances where multiple products are included within an order, each product represents a separate performance obligation given that: (1) the customer can benefit from each product on a standalone basis and (2) each product is distinct within the context of the contract.
The transaction price is readily determinable and fixed at the time the transaction is entered into with the customer. Arcadia is entitled to each product’s transaction price upon the customer obtaining control of the item. For standard architectural building materials that are not made-to-order, such control transfers at a point in time, which is generally when the product has been shipped to the customer and the legal title has been transferred. Upon shipment and title transfer, Arcadia has performed its contractual requirements such that it has a present right to payment, and the customer from that point forward bears all risks and rewards of ownership. In addition, at this date, the customer has the ability to direct the use of, or restrict access to, the asset. Payment discounts, rebates, refunds, or any other forms of variable consideration are typically not granted to Arcadia customers.
For contracts that contain only one performance obligation, the total transaction price is allocated to the sole performance obligation. For contracts which contain multiple distinct performance obligations, judgment is required to determine the standalone selling price (“SSP”) for each performance obligation. However, such judgment is largely mitigated given that standard architectural building materials purchased are generally shipped at the same time. In instances where products purchased are not shipped at the same time, Arcadia uses the contractually stated price to determine SSP as this price approximates the price of each good as sold separately.
At times, Arcadia will also contract with customers to supply customized architectural building materials based on design specifications, measurements, finishes, framing materials, and other options selected by the customer at the time an order is initiated. For these contracts, Arcadia has an enforceable right to payment from its customers at the time an order is received and accepted for all manufacturing efforts expended on behalf of its customers. Due to the customized nature of these products, the Company has concluded that the substantial portion of the related goods produced have no alternative use, and therefore control of these products passes to the customer over time. We have concluded that recognizing revenue utilizing an over-time output method based upon units delivered reasonably depicts the fulfillment of our performance obligations under our contracts and the value received by the customer based upon our performance to date. This conclusion is further supported by the frequency of shipments in fulfilling these contracts. We have elected not to disclose our unsatisfied performance obligations as of September 30, 2022 under the short-term contract exemption as we expect such performance obligations will be satisfied within the next 12 months following the end of the reporting period.
Billings for customized architectural building materials occur at times upon delivery, but also can occur via pre-established billing schedules agreed upon at the commencement of the contract. Therefore, we frequently generate contract liabilities in instances when we have billed the customer in excess of revenue recognized for units delivered.
Income Taxes
We recognize deferred tax assets and liabilities for the expected future income tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. The deferred income tax impact of tax credits is recognized as an immediate adjustment to income tax expense. We recognize deferred tax assets for the expected future effects of all deductible temporary differences to the extent we believe these assets will more likely than not be realized. We record a valuation allowance when, based on current circumstances, it is more likely than not that all or a portion of the deferred tax assets will not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, recent financial operations and their associated valuation allowances, if any.
We recognize the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position that it will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that is more likely than not to be realized upon ultimate resolution. We recognize interest and penalties related to uncertain tax positions in operating expense.
Earnings Per Share
In periods with net income, the Company computes earnings per share (“EPS”) using a two-class method, which is an earnings allocation formula that determines EPS for (i) each class of common stock (the Company has a single class of common stock), and (ii) participating securities according to dividends declared and participation rights in undistributed earnings. Restricted stock awards are considered participating securities in periods of net income as they receive non-forfeitable rights to dividends as common stock. Restricted stock awards do not participate in net losses.
Basic EPS is calculated by dividing net income (loss) attributable to the Company’s stockholders after adjustment of redeemable noncontrolling interest by the weighted average number of common shares outstanding during the period. Refer to Note 3 "Business Combination" for further discussion of the calculation of the adjustment of the redeemable noncontrolling interest to redemption value as of the end of the period presented. Diluted EPS adjusts basic EPS for the effects of restricted stock awards, restricted stock units, performance share units and other potentially dilutive financial instruments (dilutive securities), only in the periods in which such effect is dilutive. The effect of the dilutive securities is reflected in diluted EPS by application of the more dilutive of (1) the treasury stock method or (2) the two-class method. For the applicable periods presented, diluted EPS using the two-class method was more dilutive than the treasury stock method; as such, only the two-class method has been included below.
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| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net income attributable to DMC Global Inc. stockholders, as reported | $ | 6,717 | | | $ | 403 | | | 8,981 | | | 2,559 | |
| Adjustment of redeemable noncontrolling interest | 2,256 | | | — | | | (4,996) | | | — | |
| | | | | | | |
| Less: Undistributed net income available to participating securities | (136) | | | (3) | | | (61) | | | (25) | |
| Numerator for basic net income per share: | 8,837 | | | 400 | | | 3,924 | | | 2,534 | |
| Add: Undistributed net income allocated to participating securities | 136 | | | 3 | | | 61 | | | 25 | |
| Less: Undistributed net income reallocated to participating securities | (136) | | | (3) | | | (61) | | | (25) | |
| Numerator for diluted net income per share: | 8,837 | | | 400 | | | 3,924 | | | 2,534 | |
| Denominator: | | | | | | | |
| Weighted average shares outstanding for basic net income per share | 19,381,489 | | | 18,728,278 | | | 19,352,638 | | | 17,239,306 | |
Effect of dilutive securities (1) | 305 | | | 10,807 | | | 4,695 | | | 11,219 | |
| Weighted average shares outstanding for diluted net income per share | 19,381,794 | | | 18,739,085 | | | 19,357,333 | | | 17,250,525 | |
| Net income per share attributable to DMC Global Inc. stockholders | | | | | | |
| Basic | $ | 0.46 | | | $ | 0.02 | | | $ | 0.20 | | | $ | 0.15 | |
| Diluted | $ | 0.46 | | | $ | 0.02 | | | $ | 0.20 | | | $ | 0.15 | |
(1) For the three and nine months ended September 30, 2022, 128,145 and 69,846 shares, respectively, have been excluded as their effect would have been anti-dilutive.
Deferred compensation
The Company maintains a Non-Qualified Deferred Compensation Plan (the “Plan”) as part of its overall compensation package for certain employees. Participants are eligible to defer a portion of their annual salary, their annual incentive bonus, and their equity awards through the Plan on a tax-deferred basis. Deferrals into the Plan are not matched or subsidized by the Company, nor are they eligible for above-market or preferential earnings.
The Plan provides for deferred compensation obligations to be settled either by delivery of a fixed number of shares of DMC’s common stock or in cash, in accordance with participant contributions and elections. For deferred equity awards, subsequent to equity award vesting and after a period prescribed by the Plan, participants can elect to diversify contributions of equity awards into other investment options available to Plan participants. If diversified, these contributions will be subsequently settled by delivery of cash.
The Company has established a grantor trust commonly known as a “rabbi trust” and contributed certain assets to satisfy the future obligations to participants in the Plan. These assets are subject to potential claims of the Company’s general creditors. The assets held in the trust include unvested restricted stock awards (“RSAs”), vested company stock awards, company-owned life insurance (“COLI”) on certain employees, and money market and mutual funds. Unvested RSAs and common stock held by the trust are reflected in the Condensed Consolidated Balance Sheets within “Treasury stock, at cost, and company stock held for deferred compensation, at par” and are recorded at par value of the common stock or unvested RSAs. These accounts are not adjusted for subsequent changes in the fair value of the common stock. COLI is accounted for at the cash surrender value while money market and mutual funds held by the trust are accounted for at fair value.
Deferred compensation obligations that will be settled in cash are accounted for on an accrual basis in accordance with the terms of the Plan. These obligations are adjusted based on changes in value of the underlying investment options chosen by Plan participants. Deferred compensation obligations that will be settled by delivery of a fixed number of previously vested shares of the Company’s common stock are reflected in the Condensed Consolidated Statements of Stockholders’ Equity and Redeemable Noncontrolling Interest within “Common stock” at the par value of the common stock or unvested RSAs. These accounts are not adjusted for subsequent changes in the fair value of the common stock.
The balances related to the deferred compensation plan were as follows:
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| | Balance Sheet location | | September 30, 2022 | | December 31, 2021 |
| Deferred compensation assets | | Other assets | | $ | 13,337 | | | $ | 13,812 | |
| Deferred compensation obligations | | Other long-term liabilities | | $ | 14,982 | | | $ | 15,944 | |
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Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We are required to use an established hierarchy for fair value measurements based upon the inputs to the valuation and the degree to which they are observable or not observable in the market. The three levels in the hierarchy are as follows:
•Level 1 — Inputs to the valuation based upon quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date.
•Level 2 — Inputs to the valuation include quoted prices in either markets that are not active, or in active markets for similar assets or liabilities, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data.
•Level 3 — Inputs to the valuation that are unobservable inputs for the asset or liability.
The highest priority is assigned to Level 1 inputs and the lowest priority to Level 3 inputs.
The carrying value of accounts receivable and payable, accrued expenses, and the revolving loans and term loan under our credit facility, when outstanding, approximate their fair value.
Our foreign currency forward contracts are valued using quoted market prices or are determined using a yield curve model based on current market rates. As a result, we classify these instruments as Level 2 in the fair value hierarchy. Money market funds and mutual funds of $8,379 as of September 30, 2022 and $9,083 as of December 31, 2021 held to satisfy future deferred compensation obligations are valued based upon the market values of underlying securities and are classified as Level 2 in the fair value hierarchy.
We did not hold any Level 3 assets or liabilities as of September 30, 2022 or December 31, 2021. However, the fair value measurements of certain assets and liabilities acquired as part of the Arcadia acquisition were based on significant inputs not observable in the market and represent Level 3 measurements within the fair value measurement hierarchy.
Recent Accounting Pronouncements
The Company reviews recent accounting pronouncements on a quarterly basis. We have considered all recent accounting pronouncements issued, but not yet effective, and we do not expect any to have a material effect on the Company’s Condensed Consolidated Financial Statements.
3. BUSINESS COMBINATION
On December 16, 2021, the Company entered into an equity purchase agreement with Arcadia, Inc., a California corporation, the shareholders of Arcadia, Inc. and certain other parties (the “Equity Purchase Agreement”). On December 23, 2021, pursuant to the Equity Purchase Agreement, the Company completed the acquisition of a 60% controlling interest in Arcadia Products, LLC, a Colorado limited liability company resulting from the conversion of Arcadia, Inc. (collectively, “Arcadia”) for closing consideration of $261,000 in cash (excluding $7,654 in acquired cash) and 551,458 shares of its common stock, par value $0.05 per share. A portion of the cash consideration was placed into escrow and is subject to certain post-closing adjustments.
DMC acquired Arcadia as part of its strategy of building a diversified portfolio of industry-leading businesses with differentiated products and services. Arcadia is a leading U.S. supplier of architectural building products, which include exterior and interior framing systems, windows, curtain walls, doors, and interior partitions for the commercial buildings market, and highly engineered windows and doors for the high-end residential real estate market.
The acquisition was funded by the Company through cash and marketable securities, equity, and debt financing. Assets acquired and liabilities assumed have been recorded at their fair values. Certain fair values were determined by management using the assistance of third-party valuation specialists. The valuation methods used to determine the fair value of intangible assets included the income approach—excess earnings method for customer relationships and the income approach—relief from royalty method for the trade name acquired. A number of assumptions and estimates were involved in the application of these valuation methods, including forecasts of revenues, costs of revenues, operating expenses, tax rates, forecasted capital expenditures, customer attrition rate, discount rates and working capital changes.
The following table sets forth the preliminary components of the fair value of the total consideration transferred and preliminary purchase price allocation of the net assets acquired at the date of acquisition, along with the measurement period adjustments that occurred during the nine months ended September 30, 2022. The assets acquired and liabilities assumed exclude Arcadia's right-of-use asset and lease liabilities, respectively, as they have an immaterial impact on the total net assets acquired. Refer to Note 7 “Leases” for additional discussion of lease accounting. The total consideration transferred is still subject to potential adjustment, with any remaining adjustment not expected to impact long-lived asset balances recorded as of September 30, 2022.
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| Preliminary | | Measurement Period Adjustments | | Preliminary |
| December 23, 2021 | | | September 30, 2022 |
Cash, including cash acquired(1) | $ | 268,654 | | | $ | 2,034 | | | $ | 270,688 | |
Equity(2) | 21,716 | | | — | | | 21,716 | |
| Total fair value of consideration transferred | 290,370 | | | 2,034 | | | 292,404 | |
| | | | | |
| Assets acquired: | | | | | |
| Cash and cash equivalents | $ | 7,654 | | | $ | — | | | $ | 7,654 | |
| Accounts receivable | 31,456 | | | — | | | 31,456 | |
| Inventories | 60,503 | | | — | | | 60,503 | |
| Prepaid expenses and other | 2,438 | | | — | | | 2,438 | |
Property, plant and equipment(3) | 17,323 | | | 4,770 | | | 22,093 | |
Goodwill(4) | 141,266 | | | (1,344) | | | 139,922 | |
Intangible assets(5) | 254,500 | | | — | | | 254,500 | |
| Other long-term assets | 122 | | | (36) | | | 86 | |
| Total assets acquired | 515,262 | | | 3,390 | | | 518,652 | |
| Liabilities assumed: | | | | | |
| Accounts payable | 8,792 | | | — | | | 8,792 | |
| Other current liabilities | 22,520 | | | — | | | 22,520 | |
| | | | | |
| | | | | |
| Total liabilities assumed | 31,312 | | | — | | | 31,312 | |
Redeemable noncontrolling interest(6) | 193,580 | | | 1,356 | | | 194,936 | |
| Total assets acquired and liabilities assumed | $ | 290,370 | | | $ | 2,034 | | | $ | 292,404 | |
(1) Cash sources of funding included $150,000 in new term loan debt and $118,654 of cash and marketable securities on hand. During the quarter ended March 31, 2022, working capital estimates at the time of acquisition were finalized. In April 2022, $640 was returned to the Company from the funds previously placed into escrow. During the quarter ended September 30, 2022, the Company paid the prior shareholders of Arcadia $2,674 in additional consideration to compensate for certain tax impacts of the transaction, as provided in the Equity Purchase Agreement.
(2) Equity consideration included 551,458 shares of DMC common stock.
(3) Property, plant and equipment consists of the following:
| | | | | | | | | |
| | | | | |
| | | | |
| Land | $ | 1,500 | | | | | |
| Buildings and improvements | 6,451 | | | | | |
| Manufacturing equipment and tooling | 12,634 | | | | | |
| Furniture, fixtures, and computer equipment | 211 | | | | | |
| Other | 1,297 | | | | | |
| | | | | |
| Total property, plant and equipment | $ | 22,093 | | | | | |
The useful lives of property, plant and equipment are consistent with the Company's accounting policies.
(4) Amounts recorded for goodwill resulting in a tax basis step-up are generally expected to be deductible for tax purposes. Tax deductible goodwill is estimated to be $85,308.
(5) Intangible assets consist of $210,500 of customer relationships, $22,000 of trade name, and $22,000 of customer backlog. During the quarter ended September 30, 2022, the Company reclassified $500 from customer relationships to customer backlog due to changes in purchase price allocation estimates.
(6) Redeemable noncontrolling interest represents 40% of the total fair value of Arcadia upon acquisition.
The final fair value determination of the assets acquired and liabilities assumed will be completed prior to one year from the transaction completion date, consistent with Accounting Standards Codification (“ASC”) 805 Business Combinations ("ASC 805"). Measurement period adjustments will be recognized in the reporting period in which the adjustments are determined and calculated as if the accounting had been completed as of the acquisition date.
Redeemable noncontrolling interest
The limited liability company operating agreement for Arcadia (the “Operating Agreement”) contains a right for the Company to purchase the remaining interest in Arcadia from the minority interest holder on or after the third anniversary of the acquisition closing date (“Call Option”). Similarly, the minority interest holder of Arcadia has the right to sell its remaining interest in Arcadia to the Company on or after the third anniversary of the acquisition closing date (“Put Option”). Both the Call Option and Put Option enable the respective holder to exercise their rights based upon a predefined calculation as included within the Operating Agreement.
The Company initially accounted for the noncontrolling interest at its acquisition date fair value. We determined that both the Call Option and Put Option do not meet the definition of a derivative under ASC 815 Derivatives and Hedging as the Operating Agreement does not allow for contractual net settlement, the options cannot be settled outside the Operating Agreement through a market mechanism, and the underlying shares are deemed illiquid as they are not publicly traded and thus not considered readily convertible to cash. Additionally, the settlement price for both options is based upon a predefined calculation tied to adjusted earnings rather than a fixed price, and the formula is based upon a multiple of Arcadia’s average adjusted earnings for the preceding two fiscal years and its projected adjusted earnings for the then-current fiscal year. As such, we have concluded that the Call Option and Put Option are embedded within the noncontrolling interest and therefore do not represent freestanding instruments.
Given that the noncontrolling interest is subject to possible redemption (with redemption rights that are not entirely within the control of the Company), we have concluded that the noncontrolling interest should be accounted for in accordance with ASC 480 Distinguishing Liabilities from Equity ("ASC 480"). The Company has also concluded that the noncontrolling interest is probable of redemption, as the only criteria for the security to become redeemable is the passage of time. As such, the Company has classified the redeemable noncontrolling interest separate from the stockholders’ equity section in the Condensed Consolidated Balance Sheets.
At each balance sheet date subsequent to acquisition, the carrying value of the redeemable noncontrolling interest has been adjusted to its estimated redemption value as if redemption were to occur at the balance sheet date based upon the predefined calculation in the Operating Agreement described above. This immediate adjustment is charged or credited directly to retained earnings and therefore does not impact the Condensed Consolidated Statements of Operations or Comprehensive Income (Loss). As of September 30, 2022, the Company’s estimated redemption value of the redeemable noncontrolling interest decreased to $194,962 in comparison to our previous estimates at each balance sheet date subsequent to acquisition of $197,196 due to a change in our forecast of adjusted earnings for calendar year 2022. During the three months ended September
30, 2022, the Company recorded an adjustment of $2,256 to decrease the redeemable noncontrolling interest to its estimated redemption value. This adjustment was recorded after ascribing net income and cash distributions attributable to the redeemable noncontrolling interest in accordance with ASC 480.
Promissory Note
In order to equalize after-tax consideration to the redeemable noncontrolling interest holder relative to an alternative transaction structure, immediately following the closing of the acquisition, the Company loaned approximately $24,902 to the redeemable noncontrolling interest holder. The loan was evidenced by an unsecured promissory note, and the loan will be repaid out of proceeds from the sale of the redeemable noncontrolling interest holder’s interests in Arcadia, whether received upon exercise of the Put Option, the Call Option or upon sales to third parties permitted under the terms of the Operating Agreement. The loan must be repaid in full by December 16, 2051 and has been recorded within “Other Assets” in the Condensed Consolidated Balance Sheets.
Unaudited Pro Forma Financial Information
Pro forma financial information is presented for informational purposes and is not intended to represent or be indicative of the actual results of operations of the combined business that would have been reported had the acquisition of Arcadia been completed at an earlier date, nor is it representative of future operating results of the Company.
ASC 805 requires pro forma adjustments to reflect the effects of fair value adjustments, transaction costs, capital structure changes, the tax effects of such adjustments, and also requires nonrecurring adjustments to be prepared and presented. For the three and nine months ended September 30, 2021, operating results have been adjusted to reflect (a) fair value adjustments related to incremental intangible asset amortization, (b) interest expense with the higher principal and interest rates associated with the Company's new term loan debt incurred to finance, in part, the acquisition of Arcadia, (c) the effects of integration costs on the results of Arcadia's operations, and (d) the effects of the adjustments on income taxes.
The following unaudited pro forma combined financial information presents combined results of the Company and Arcadia. Arcadia’s operating results have been included in the Company’s operating results for the three and nine months ended September 30, 2022.
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| Three months ended September 30, 2021 | | Nine months ended September 30, 2021 |
| As Reported | | Pro Forma | | As Reported | | Pro Forma |
| Net sales | $ | 67,175 | | | $ | 132,488 | | | $ | 188,271 | | | $ | 371,963 | |
| Net income attributable to DMC Global Inc. stockholders | $ | 403 | | | $ | 5,522 | | | $ | 2,559 | | | $ | 15,965 | |
4. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Significant cost elements included in inventory are material, labor, freight, subcontract costs, and manufacturing overhead. As necessary, we write down inventory to its net realizable value by recording provisions for excess, slow moving and obsolete inventory. We regularly review inventory quantities on hand and values, and compare them to estimates of future product demand, market conditions, production requirements and technological developments.
Inventories consisted of the following at September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Arcadia | | DynaEnergetics | | NobelClad | | DMC Global Inc. |
| Raw materials | $ | 14,290 | | | $ | 16,646 | | | $ | 7,517 | | | $ | 38,453 | |
| Work-in-process | 10,072 | | | 17,652 | | | 8,624 | | | 36,348 | |
| Finished goods | 56,038 | | | 21,380 | | | 129 | | | 77,547 | |
| Supplies | — | | | — | | | 225 | | | 225 | |
| Total inventories | $ | 80,400 | | | $ | 55,678 | | | $ | 16,495 | | | $ | 152,573 | |
Inventories consisted of the following at December 31, 2021: | | | | | | | | | | | | | | | | | | | | | | | |
| Arcadia | | DynaEnergetics | | NobelClad | | DMC Global Inc. |
| Raw materials | $ | 12,168 | | | $ | 15,209 | | | $ | 7,655 | | | $ | 35,032 | |
| Work-in-process | 3,987 | | | 13,672 | | | 10,257 | | | 27,916 | |
| Finished goods | 44,348 | | | 14,998 | | | 1,651 | | | 60,997 | |
| Supplies | — | | | — | | | 269 | | | 269 | |
| Total inventories | $ | 60,503 | | | $ | 43,879 | | | $ | 19,832 | | | $ | 124,214 | |
5. PURCHASED INTANGIBLE ASSETS
Our purchased intangible assets consisted of the following as of September 30, 2022: | | | | | | | | | | | | | | | | | |
| Gross | | Accumulated
Amortization | | Net |
| Core technology | $ | 12,951 | | | $ | (12,693) | | | $ | 258 | |
| Customer relationships | 242,642 | | | (42,016) | | | 200,626 | |
| Customer backlog | 22,000 | | | (22,000) | | | — | |
| Trademarks / Trade names | 23,751 | | | (2,882) | | | 20,869 | |
| Total intangible assets | $ | 301,344 | | | $ | (79,591) | | | $ | 221,753 | |
Our purchased intangible assets consisted of the following as of December 31, 2021: | | | | | | | | | | | | | | | | | |
| Gross | | Accumulated
Amortization | | Net |
| Core technology | $ | 15,647 | | | $ | (14,209) | | | $ | 1,438 | |
| Customer relationships | 246,718 | | | (36,047) | | | 210,671 | |
| Customer backlog | 21,500 | | | — | | | 21,500 | |
| Trademarks / Trade names | 24,037 | | | (2,070) | | | 21,967 | |
| Total intangible assets | $ | 307,902 | | | $ | (52,326) | | | $ | 255,576 | |
The change in the gross value of our purchased intangible assets at September 30, 2022 from December 31, 2021 was primarily due to foreign currency translation. Additionally, there was an adjustment due to recognition of tax benefit from tax amortization previously applied to certain goodwill related to the DynaEnergetics and NobelClad reporting units. After the goodwill associated with each reporting unit was impaired at December 31, 2015 and September 30, 2017, respectively, the tax amortization reduces other intangible assets related to the historical acquisition.
6. CONTRACT LIABILITIES
At times, we require customers to make advance payments prior to the shipment of their orders in order to help finance our inventory investment on large orders or to keep customers’ credit limits at acceptable levels. Contract liabilities were as follows: | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Arcadia | $ | 26,123 | | | $ | 14,697 | |
| NobelClad | 3,453 | | | 5,881 | |
| DynaEnergetics | 454 | | | 474 | |
| Total contract liabilities | $ | 30,030 | | | $ | 21,052 | |
We generally expect to recognize the revenue associated with contract liabilities over a time period no longer than one year, but unforeseen circumstances can cause delays in shipments associated with contract liabilities.
7. LEASES
The Company leases real properties for use in manufacturing and as administrative and sales offices, and also leases automobiles and office equipment. The Company determines if a contract contains a lease arrangement at the inception of the contract. For leases in which the Company is the lessee, leases are classified as either finance or operating. Right-of-use (“ROU”) assets are initially measured at the present value of lease payments over the lease term plus initial direct costs, if any. If a lease does not provide a discount rate and the rate cannot be readily determined, an incremental borrowing rate is used to determine the present value of future lease payments. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term within the Condensed Consolidated Statement of Operations. Lease and non-lease components within the Company’s lease agreements are accounted for together. Variable lease payments are recognized in the period in which the obligation for those payments is incurred. The Company has no leases in which the Company is the lessor.
Nearly all of the Company’s leasing arrangements are classified as operating leases. ROU asset and lease liability balances were as follows for the periods presented:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| ROU asset | $ | 50,145 | | | $ | 52,219 | |
| | | |
| Current lease liability | 6,994 | | | 6,126 | |
| Long-term lease liability | 44,634 | | | 47,000 | |
| Total lease liability | $ | 51,628 | | | $ | 53,126 | |
The ROU asset is reported in “Other assets” while the current lease liability is reported in “Other current liabilities” and the long-term lease liability is reported in “Other long-term liabilities” in the Company’s Condensed Consolidated Balance Sheets. Cash paid for operating lease liabilities are recorded as operating cash outflows in the Company’s Condensed Consolidated Statements of Cash Flows.
Arcadia leases certain office, manufacturing, distribution and warehouse facilities from entities affiliated with the redeemable noncontrolling interest holder and the president of Arcadia. There were eight related party leases in effect as of September 30, 2022, with expiration dates ranging from calendar years 2023 to 2031. As of September 30, 2022, the total ROU asset and related lease liability recognized for related party leases was $29,753 and $30,131, respectively.
For the three months ended September 30, 2022 and 2021, operating lease expense was $2,872 and $1,064, respectively. For the nine months ended September 30, 2022 and 2021, operating lease expense was $8,413 and $3,074, respectively. Related party lease expense for the three and nine months ended September 30, 2022 was $1,156 and $3,469, respectively, which is included in overall operating lease expense. There was no related party lease expense recorded through September 30, 2021. Short term and variable lease costs were not material for the three and nine months ended September 30, 2022 and 2021.
8. DEBT
As of September 30, 2022 and December 31, 2021, outstanding borrowings consisted of the following:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Syndicated credit agreement: | | | |
| U.S. Dollar revolving loan | $ | — | | | $ | — | |
| Term loan | 138,750 | | | 150,000 | |
| | | |
| | | |
| Commerzbank line of credit | — | | | — | |
| Outstanding borrowings | 138,750 | | | 150,000 | |
| Less: debt issuance costs | (2,341) | | | (2,575) | |
| Total debt | 136,409 | | | 147,425 | |
| Less: current portion of long-term debt | (15,000) | | | (15,000) | |
| Long-term debt | $ | 121,409 | | | $ | 132,425 | |
Syndicated Credit Agreement
On December 23, 2021, we entered into a five-year $200,000 syndicated credit agreement (“credit facility”) which included a $150,000 Term Loan, which is amortizable at 10% of principal per year with a balloon payment for the outstanding balance upon the credit facility maturity date in 2026, and allows for revolving loans of up to $50,000. The credit facility has an accordion feature to increase the commitments by $100,000 under the revolving loan class and/or by adding a term loan subject to approval by applicable lenders. We entered into the credit facility with a syndicate of four banks, with KeyBank, N.A. acting as administrative agent. The credit facility is secured by the assets of DMC including accounts receivable, inventory, and fixed assets, including Arcadia and its subsidiary, as well as guarantees and share pledges by DMC and its subsidiaries.
Borrowings under the $150,000 Term Loan and $50,000 revolving loan limit can be in the form of Adjusted Daily Simple Secured Overnight Financing Rate ("SOFR") loans or one month Adjusted Term SOFR loans. Additionally, U.S. dollar borrowings on the revolving loan can be in the form of Base Rate loans (Base Rate borrowings are based on the greater of the administrative agent’s Prime rate, an adjusted Federal Funds rate or an adjusted SOFR rate). SOFR loans bear interest at the applicable SOFR rate plus an applicable margin (varying from 1.50% to 3.00%). Base Rate loans bear interest at the defined Base rate plus an applicable margin (varying from 0.50% to 2.00%).
The credit facility includes various covenants and restrictions, certain of which relate to the payment of dividends or other distributions to stockholders; redemption of capital stock; incurrence of additional indebtedness; mortgaging, pledging or disposition of major assets; and maintenance of specified ratios.
The leverage ratio is defined in the credit facility as the ratio of Consolidated Funded Indebtedness (as defined in the credit facility) on the last day of any trailing four quarter period to Consolidated Pro Forma EBITDA (as defined in the credit facility) for such period. The maximum leverage ratio permitted by our credit facility is 3.25 to 1.0 from the quarter ended September 30, 2022 through the quarter ended March 31, 2023, and 3.0 to 1.0 from the quarter ended June 30, 2023 and thereafter.
The debt service coverage ratio is defined in the credit facility as the ratio of Consolidated Pro Forma EBITDA less the sum of capital distributions paid in cash (other than those made with respect to the preferred stock issued under the Operating Agreement), Consolidated Unfunded Capital Expenditures (as defined in the credit facility), and net cash income taxes to the sum of cash interest expense, any dividends on the preferred stock paid in cash, and scheduled principal payments on funded indebtedness. Under our credit facility, the minimum debt service coverage ratio permitted is 1.35 to 1.0.
As of September 30, 2022, we were in compliance with all financial covenants and other provisions of our debt agreements.
We also maintain a line of credit with a German bank of €7,000 for our NobelClad and DynaEnergetics operations in Europe. This line of credit is also used to issue bank guarantees to customers to secure advance payments made by them. As of September 30, 2022 and December 31, 2021, we had no outstanding borrowings under this line of credit and bank guarantees of €2,559 and €2,997 were secured by the line of credit, respectively. The line of credit has open-ended terms and can be canceled by the bank at any time.
Deferred debt issuance costs are being amortized over the remaining term of the credit facility which expires on December 23, 2026.
9. INCOME TAXES
The effective tax rate for each of the periods reported differs from the U.S. statutory rate primarily due to variation in contribution to consolidated pre-tax income from each jurisdiction for the respective periods, differences between the U.S. and foreign tax rates (which range from 20% to 33%), permanent differences between book and taxable income, income or loss attributable to the redeemable noncontrolling interest holder, and changes to valuation allowances on our deferred tax assets.
Arcadia is treated as a partnership for U.S. tax purposes. With the exception of certain state taxes, income or loss flows through to the shareholders and is taxed at the shareholder level. Tax impacts related to income or loss from Arcadia that are included in consolidated pretax results but are attributable to the redeemable noncontrolling interest holder are not included in the consolidated income tax provision.
We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use existing deferred tax assets. Additionally, a three-year cumulative loss at a consolidated financial statement level may be viewed as negative evidence impacting a jurisdiction that by itself is not in a three-year cumulative loss position. During the three and nine months ended September 30, 2022 and September 30, 2021, we did not record any adjustments to previously established valuation allowances, except for adjustments related to the changes in balances of the related deferred tax assets. The Company will continue to monitor the realizability of deferred tax assets and the need for valuation allowances and will record adjustments in the periods in which facts support such changes.
The Tax Cuts and Jobs Act (“TCJA”) provides that foreign earnings generally can be repatriated to the U.S. without federal tax consequence. We have assessed the assertion that cumulative earnings by our foreign subsidiaries are indefinitely reinvested. We continue to permanently reinvest the earnings of our international subsidiaries and therefore we do not provide for U.S. income taxes or withholding taxes that could result from the distribution of those earnings to the U.S. parent. If any such earnings were ultimately distributed to the U.S. in the form of dividends or otherwise, or if the shares of our international subsidiaries were sold or transferred, we could be subject to additional U.S. federal and state income taxes. Due to the multiple avenues in which earnings can be repatriated, and because a large portion of these earnings are not liquid, it is not practical to estimate the amount of additional taxes that might be payable on these amounts of undistributed foreign income.
10. BUSINESS SEGMENTS
Our business is organized into three segments: Arcadia, DynaEnergetics and NobelClad. In December 2021, DMC acquired a 60% controlling interest in Arcadia, a leading U.S. supplier of architectural building products, including storefronts and entrances, windows, curtain walls, doors and interior partitions for the commercial buildings market. Arcadia also supplies the luxury home market with highly engineered steel, aluminum and wood door and window systems. DynaEnergetics designs, manufactures and distributes products utilized by the global oil and gas industry principally to perforate oil and gas wells. NobelClad is a leader in the production of explosion-welded clad metal plates for use in the construction of corrosion resistant industrial processing equipment and specialized transition joints.
Our reportable segments are separately managed strategic business units that offer different products and services. Each segment’s products are marketed to different customer types and require different manufacturing processes and technologies.
Segment information is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net sales: | | | | | | | |
| Arcadia | $ | 80,697 | | | $ | — | | | $ | 225,127 | | | $ | — | |
| DynaEnergetics | 70,372 | | | 44,237 | | | 186,776 | | | 124,677 | |
| NobelClad | 23,396 | | | 22,938 | | | 67,109 | | | 63,594 | |
| Net sales | $ | 174,465 | | | $ | 67,175 | | | $ | 479,012 | | | $ | 188,271 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Income (loss) before income taxes: | | | | | | | |
| Arcadia | $ | 3,742 | | | $ | — | | | $ | 3,521 | | | $ | — | |
| DynaEnergetics | 11,978 | | | 1,585 | | | 26,585 | | | 6,307 | |
| NobelClad | 2,505 | | | 3,620 | | | 5,690 | | | 8,595 | |
| Segment operating income | 18,225 | | | 5,205 | | | 35,796 | | | 14,902 | |
| | | | | | | |
| Unallocated corporate expenses | (2,939) | | | (2,499) | | | (10,490) | | | (6,903) | |
| Unallocated stock-based compensation* | (1,885) | | | (1,569) | | | (5,883) | | | (4,904) | |
| Other income (expense), net | 120 | | | (198) | | | (35) | | | 304 | |
| Interest expense, net | (1,771) | | | (14) | | | (4,058) | | | (230) | |
| Income before income taxes | $ | 11,750 | | | $ | 925 | | | $ | 15,330 | | | $ | 3,169 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Depreciation and amortization: | | | | | | | |
| Arcadia | $ | 7,966 | | | $ | — | | | $ | 34,818 | | | $ | — | |
| DynaEnergetics | 1,957 | | | 2,012 | | | 5,908 | | | 6,095 | |
| NobelClad | 899 | | | 967 | | | 2,725 | | | 2,851 | |
| Segment depreciation and amortization | 10,822 | | | 2,979 | | | 43,451 | | | 8,946 | |
| Corporate and other | 104 | | | 102 | | | 281 | | | 277 | |
| Consolidated depreciation and amortization | $ | 10,926 | | | $ | 3,081 | | | $ | 43,732 | | | $ | 9,223 | |
* Stock-based compensation is not allocated to wholly owned segments DynaEnergetics and NobelClad. Stock-based compensation is allocated to the Arcadia segment as 60% of such expense is attributable to the Company, whereas the remaining 40% is attributable to the redeemable noncontrolling interest holder.
The disaggregation of revenue earned from contracts with customers based on the geographic location of the customer is as follows. For Arcadia, net sales have been presented consistent with United States regional definitions as provided by the American Institute of Architects.
Arcadia
| | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended | | | | |
| | September 30, 2022 | | September 30, 2022 | | | | |
| West | $ | 63,281 | | | $ | 176,288 | | | | | |
| South | 12,139 | | | 27,362 | | | | | |
| Northeast | 2,958 | | | 11,880 | | | | | |
| Midwest | 2,319 | | | 9,597 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total Arcadia | $ | 80,697 | | | $ | 225,127 | | | | | |
DynaEnergetics | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| United States | $ | 55,999 | | | $ | 36,543 | | | $ | 146,297 | | | $ | 96,316 | |
| Canada | 4,341 | | | 2,798 | | | 14,453 | | | 9,304 | |
| Indonesia | 1,051 | | | 240 | | | 1,903 | | | 933 | |
| Egypt | 652 | | | 671 | | | 3,120 | | | 2,398 | |
| India | 615 | | | 243 | | | 4,625 | | | 904 | |
| Oman | 704 | | | 665 | | | 2,695 | | | 2,117 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Rest of the world | 7,010 | | | 3,077 | | | 13,683 | | | 12,705 | |
| Total DynaEnergetics | $ | 70,372 | | | $ | 44,237 | | | $ | 186,776 | | | $ | 124,677 | |
NobelClad
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| United States | $ | 9,120 | | | $ | 11,033 | | | $ | 29,055 | | | $ | 30,448 | |
| Canada | 3,161 | | | 1,254 | | | 6,952 | | | 3,985 | |
| Germany | 2,055 | | | 761 | | | 3,215 | | | 1,539 | |
| China | 1,100 | | | 892 | | | 3,467 | | | 3,775 | |
| Sweden | 1,096 | | | 494 | | | 2,179 | | | 676 | |
| United Arab Emirates | 1,003 | | | 929 | | | 2,705 | | | 2,030 | |
| Australia | 844 | | | 576 | | | 1,499 | | | 1,171 | |
| India | 742 | | | 299 | | | 3,007 | | | 1,371 | |
| South Korea | 672 | | | 328 | | | 1,510 | | | 1,426 | |
| Norway | 508 | | | 265 | | | 1,087 | | | 757 | |
| France | 472 | | | 509 | | | 1,625 | | | 1,929 | |
| Netherlands | 357 | | | 507 | | | 1,464 | | | 1,628 | |
| Italy | 143 | | | 831 | | | 840 | | | 1,268 | |
| Saudi Arabia | — | | | 242 | | | 1,995 | | | 310 | |
| Russia* | — | | | 1,519 | | | 191 | | | 3,586 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Rest of the world | 2,123 | | | 2,499 | | | 6,318 | | | 7,695 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total NobelClad | $ | 23,396 | | | $ | 22,938 | | | $ | 67,109 | | | $ | 63,594 | |
*Future sales to Russia have been indefinitely suspended due to the ongoing conflict in Ukraine.
During the three and nine months ended September 30, 2022 and 2021, no single customer accounted for greater than 10% of consolidated net sales. As of September 30, 2022, one DynaEnergetics customer accounted for greater than 10% of consolidated accounts receivable. As of December 31, 2021, no single customer accounted for greater than 10% of consolidated accounts receivable.
11. DERIVATIVE INSTRUMENTS
We are exposed to foreign currency exchange risk resulting from fluctuations in exchange rates, primarily the U.S. dollar to euro, the U.S. dollar to the Canadian dollar, and, to a lesser extent, other currencies, arising from intercompany and third-party transactions entered into by our subsidiaries that are denominated in currencies other than their functional currency. Changes in exchange rates with respect to these transactions result in unrealized gains or losses if such transactions are unsettled at the end of the reporting period or realized gains or losses at settlement of the transaction. We use foreign currency forward contracts to offset foreign exchange rate fluctuations on foreign currency denominated asset and liability positions. None of these contracts are designated as accounting hedges, and all changes in the fair value of the forward contracts are recognized in “Other income (expense), net” within our Condensed Consolidated Statements of Operations.
We execute derivatives with a specialized foreign exchange brokerage firm as well as other large financial institutions. The primary credit risk inherent in derivative agreements is the possibility that a loss may occur from the nonperformance of a counterparty to the agreements. We perform a review of the credit risk of our counterparties at the inception of the contract and on an ongoing basis. We anticipate that our counterparties will be able to fully satisfy their obligations under the agreements but will take action if doubt arises regarding the counterparties’ ability to perform.
As of September 30, 2022 and December 31, 2021, the net notional amount of the forward currency contracts the Company held were $8,591 and $13,032, respectively. At September 30, 2022 and December 31, 2021, the fair values of outstanding foreign currency forward contracts were $0.
The following table presents the location and amount of net (losses) from hedging activities, which offset foreign currency gains and losses recorded in the normal course of business that are not presented below.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| Derivative | Statements of Operations Location | 2022 | | 2021 | | 2022 | | 2021 |
| Foreign currency contracts | Other income (expense), net | $ | (637) | | | $ | (253) | | | $ | (789) | | | $ | (187) | |
| | | | | | | | |
12. COMMITMENTS AND CONTINGENCIES
Contingent Liabilities
The Company records an accrual for contingent liabilities when a loss is both probable and reasonably estimable. If some amount within a range of loss appears to be a better estimate than any other amount within the range, that amount is accrued. When no amount within a range of loss appears to be a better estimate than any other amount, the lowest amount in the range is accrued.
Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results except as set forth below:
Wage and Hour Matters
Felipe v. Arcadia, Inc. and One Stop Employment Services, Inc. (“One Stop”). This complaint was filed on October 22, 2021 in Los Angeles Superior Court and purports to allege a class action on behalf of all non-exempt California employees who worked on behalf of One Stop or Arcadia at any time during the four years preceding the date of the complaint. One Stop is a staffing agency which provides temporary workers, including to Arcadia. The complaint states claims under California’s labor laws and under its general Unfair Business Practices Act, California Business & Professions Code section 17200. The plaintiff has subsequently dismissed the class action claims without prejudice, acknowledging that Arcadia’s arbitration agreement likely bars such class claims. The plaintiff also filed a separate action under California’s Private Attorneys General Act (“PAGA”) alleging essentially the same wage and hour violations. This action included other Arcadia employees. In Viking River Cruises, Inc. versus Moriana, the U.S. Supreme Court concluded that arbitration agreements may bar representative PAGA claims. However, Viking River left open certain state law issues, which the California Supreme Court has agreed to address. Currently, Felipe’s PAGA representative claims are stayed, and will likely remain stayed until a California Supreme Court ruling. The plaintiff has announced the intent to commence arbitration on individual claims, but no claims have yet been filed.
Mayorga v. Arcadia, Inc. This complaint was filed on November 15, 2021 in Los Angeles Superior Court. It purported to allege a class action on behalf of all of the Company’s non-exempt California employees who worked at the Company within four years before the date the complaint was filed. It asserts claims substantially similar to those asserted in the Felipe case but does not include One Stop as a defendant. The plaintiff amended his complaint to delete class action claims and any individual non-PAGA claims. Accordingly, plaintiff’s complaint is now limited to PAGA collective action claims. As in Felipe, those PAGA representative claims are currently stayed and will likely remain stayed until the California Supreme Court addresses the state law issues left open by the U.S. Supreme Court’s decision in Viking River Cruises, Inc. versus Moriana. The plaintiff has however commenced arbitration on a solely individual basis of his wage and hour claims. The arbitral body has appointed an arbitrator to adjudicate those claims and a hearing has been set in June 2023. The remaining Mayorga PAGA representative claims have now been combined with the Felipe case.
Arcadia intends to vigorously defend against the Felipe and Mayorga actions. Due to the nature of these matters and inherent uncertainties, it is not possible to provide an evaluation of the likelihood of an unfavorable outcome or an estimate of the amount or range of potential loss, if any. Further, under the Equity Purchase Agreement, certain amounts have been placed in escrow pending resolution of these matters.