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DMC Global Inc. 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

Form 10-Q

 

(Mark One)

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2008

 

OR

 

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

 


 

DYNAMIC MATERIALS CORPORATION

(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)

 

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 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 number of shares of Common Stock outstanding was 12,676,527 as of October 31, 2008.

 

 

 



Table of Contents

 

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. In particular, we direct your attention to Part I, Item 1- Condensed Consolidated Financial Statements; Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations; Item 3 - Quantitative and Qualitative Disclosures About Market Risk; and Part II, Item 1A – Risk Factors. We intend the forward-looking statements throughout this quarterly report on Form 10-Q and the information incorporated by reference herein to be covered by the safe harbor provisions for forward-looking statements. Statements contained in this report which are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from projected results. All projections and statements regarding our expected financial position and operating results, our business strategy, our financing plans and the outcome of any contingencies are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as “may,” “believe,” “plan,” “anticipate,” “estimate,” “expect,” “intend,” and other phrases of similar meaning. The forward-looking information is based on information available as of the date of this quarterly report and on numerous assumptions and developments that are not within our control. Although we believe that our expectations as expressed in these forward-looking statements are reasonable, we cannot assure you that our expectations will turn out to be correct. Factors that could cause actual results to differ materially include, but are not limited to, the following: the ability to obtain new contracts at attractive prices; the size and timing of customer orders and shipment; fluctuations in customer demand; fluctuations in foreign currencies; competitive factors; the timely completion of contracts; the timing and size of expenditures; the timely receipt of government approvals and permits; the price and availability of metal and other raw material; the adequacy of local labor supplies at our facilities; current or future limits on manufacturing capacity at our various operations; the availability and cost of funds; and general economic conditions, both domestic and foreign, impacting our business and the business of the end-market users we serve. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

2



Table of Contents

 

INDEX

 

PART I - FINANCIAL INFORMATION

 

 

 

Item 1 - Condensed Consolidated Financial Statements

4

 

 

 

 

Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007

4

 

Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007 (unaudited)

6

 

Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2008 (unaudited)

7

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited)

8

 

Notes to Condensed Consolidated Financial Statements (unaudited)

10

 

 

 

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

 

 

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

37

 

 

Item 4 - Controls and Procedures

37

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1 - Legal Proceedings

38

 

 

Item 1A - Risk Factors

38

 

 

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

38

 

 

Item 3 - Defaults Upon Senior Securities

38

 

 

Item 4 - Submission of Matters to a Vote of Security Holders

38

 

 

Item 5 - Other Information

38

 

 

Item 6 - Exhibits

39

 

 

 

 Signatures

40

 

3



Table of Contents

 

Part I - FINANCIAL INFORMATION

 

ITEM 1.  Condensed Consolidated Financial Statements

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

 

 

September 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

30,508

 

$

9,045

 

Restricted cash

 

 

371

 

Accounts receivable, net of allowance for doubtful accounts of $617 and $534, respectively

 

31,031

 

39,833

 

Inventories

 

40,900

 

41,628

 

Prepaid expenses and other

 

4,706

 

2,022

 

Related party receivable and loan

 

1,965

 

1,103

 

Current deferred tax assets

 

1,058

 

728

 

 

 

 

 

 

 

Total current assets

 

110,168

 

94,730

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

 

56,303

 

49,590

 

Less - Accumulated depreciation

 

(17,594

)

(14,144

)

 

 

 

 

 

 

Property, plant and equipment, net

 

38,709

 

35,446

 

 

 

 

 

 

 

GOODWILL, net

 

44,797

 

45,862

 

 

 

 

 

 

 

PURCHASED INTANGIBLE ASSETS, net

 

54,876

 

61,914

 

 

 

 

 

 

 

DEFERRED TAX ASSETS

 

107

 

42

 

 

 

 

 

 

 

OTHER ASSETS, net

 

1,446

 

1,544

 

 

 

 

 

 

 

INVESTMENT IN JOINT VENTURES

 

1,325

 

1,361

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

251,428

 

$

240,899

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Share Data)

 

 

 

September 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

18,722

 

$

22,590

 

Accrued expenses

 

3,502

 

8,566

 

Accrued income taxes

 

993

 

1,212

 

Accrued employee compensation and benefits

 

5,292

 

5,521

 

Customer advances

 

4,780

 

4,593

 

Related party accounts payable and loans

 

520

 

325

 

Lines of credit - current

 

4,785

 

7,587

 

Current maturities on long-term debt

 

7,471

 

8,035

 

Current portion of capital lease obligations

 

382

 

389

 

 

 

 

 

 

 

Total current liabilities

 

46,447

 

58,818

 

 

 

 

 

 

 

LINES OF CREDIT

 

9,536

 

 

 

 

 

 

 

 

LONG-TERM DEBT

 

60,440

 

61,530

 

 

 

 

 

 

 

CAPITAL LEASE OBLIGATIONS

 

218

 

521

 

 

 

 

 

 

 

DEFERRED TAX LIABILITIES

 

18,040

 

20,604

 

 

 

 

 

 

 

OTHER LONG-TERM LIABILITIES

 

907

 

1,147

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENT LIABILITIES

 

 

 

 

 

 

 

 

 

Total liabilities

 

135,588

 

142,620

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Preferred stock, $.05 par value; 4,000,000 shares authorized; no issued and outstanding shares

 

 

 

Common stock, $.05 par value; 25,000,000 shares authorized; 12,665,027 and 12,433,768 shares issued and outstanding, respectively

 

634

 

622

 

Additional paid-in capital

 

40,939

 

38,246

 

Retained earnings

 

72,657

 

55,868

 

Other cumulative comprehensive income

 

1,610

 

3,543

 

 

 

 

 

 

 

Total stockholders’ equity

 

115,840

 

98,279

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

251,428

 

$

240,899

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Dollars in Thousands, Except Share Data)

(unaudited)

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

NET SALES

 

$

52,380

 

$

42,099

 

$

173,957

 

$

109,964

 

COST OF PRODUCTS SOLD

 

35,355

 

27,807

 

120,171

 

72,741

 

Gross profit

 

17,025

 

14,292

 

53,786

 

37,223

 

COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

3,679

 

1,903

 

10,612

 

5,419

 

Selling expenses

 

2,611

 

1,811

 

8,085

 

4,913

 

Amortization expense of purchased intangible assets

 

1,363

 

 

6,188

 

 

Total costs and expenses

 

7,653

 

3,714

 

24,885

 

10,332

 

INCOME FROM OPERATIONS

 

9,372

 

10,578

 

28,901

 

26,891

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Other income (expense)

 

(268

)

23

 

(227

)

3

 

Interest expense

 

(1,469

)

(20

)

(4,203

)

(20

)

Interest income

 

153

 

233

 

477

 

598

 

Equity in earnings (losses) of joint ventures

 

(19

)

 

270

 

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

7,769

 

10,814

 

25,218

 

27,472

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX PROVISION

 

546

 

3,697

 

6,535

 

9,813

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

7,223

 

$

7,117

 

$

18,683

 

$

17,659

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME PER SHARE:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.58

 

$

0.59

 

$

1.50

 

$

1.47

 

Diluted

 

$

0.57

 

$

0.58

 

$

1.49

 

$

1.44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

Basic

 

12,463,060

 

12,094,181

 

12,426,369

 

12,039,593

 

Diluted

 

12,567,912

 

12,301,772

 

12,572,226

 

12,245,212

 

 

 

 

 

 

 

 

 

 

 

ANNUAL DIVIDENDS DECLARED PER COMMON SHARE

 

$

 

$

 

$

0.15

 

$

0.15

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

6



Table of Contents

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Amounts in Thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Cumulative

 

 

 

Comprehensive

 

 

 

Common Stock

 

Paid-In

 

Retained

 

Comprehensive

 

 

 

Income

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income

 

Total

 

for the Period

 

Balances, December 31, 2007

 

12,434

 

$

622

 

$

38,246

 

$

55,868

 

$

3,543

 

$

98,279

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued for stock option exercises

 

74

 

4

 

224

 

 

 

228

 

 

 

Restricted stock awards

 

153

 

8

 

(8

)

 

 

 

 

 

Shares issued in connection with the employee stock purchase plan

 

4

 

 

105

 

 

 

105

 

 

 

Excess tax benefit related to stock options

 

 

 

9

 

 

 

9

 

 

 

Stock-based compensation

 

 

 

2,363

 

 

 

2,363

 

 

 

Dividends declared

 

 

 

 

(1,894

)

 

(1,894

)

 

 

Net income

 

 

 

 

18,683

 

 

18,683

 

18,683

 

Derivative valuation adjustment, net of tax of $48

 

 

 

 

 

77

 

77

 

77

 

Change in cumulative foreign currency translation adjustment

 

 

 

 

 

(2,010

)

(2,010

)

(2,010

)

Balances, September 30, 2008

 

12,665

 

$

634

 

$

40,939

 

$

72,657

 

$

1,610

 

$

115,840

 

$

16,750

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

7



Table of Contents

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Dollars in Thousands)

(unaudited)

 

 

 

2008

 

2007

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

18,683

 

$

17,659

 

Adjustments to reconcile net income to net cash provided by operating activities -

 

 

 

 

 

Depreciation (including capital lease amortization)

 

3,621

 

1,394

 

Amortization of purchased intangible assets

 

6,188

 

 

Amortization of capitalized debt issuance costs

 

210

 

 

Stock-based compensation

 

2,363

 

912

 

Deferred income tax benefit

 

(2,735

)

(239

)

Equity in earnings of joint ventures

 

(270

)

 

Change in -

 

 

 

 

 

Restricted cash

 

 

3,059

 

Accounts receivable, net

 

7,631

 

2,001

 

Inventories

 

262

 

(13,541

)

Prepaid expenses and other

 

(2,549

)

(636

)

Accounts payable

 

(3,771

)

3,125

 

Customer advances

 

218

 

132

 

Accrued expenses and other liabilities

 

(5,046

)

(1,065

)

 

 

 

 

 

 

Net cash provided by operating activities

 

24,805

 

12,801

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Acquisition of property, plant and equipment

 

(7,325

)

(7,347

)

Change in other non-current assets

 

50

 

(11

)

 

 

 

 

 

 

Net cash used in investing activities

 

(7,275

)

(7,358

)

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

8



Table of Contents

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Dollars in Thousands)

(unaudited)

 

 

 

2008

 

2007

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Borrowings on bank lines of credit, net

 

7,247

 

 

Payment on term loan with French bank

 

(441

)

(389

)

Payment on Nord LB term loans

 

(810

)

 

Payment of capital lease obligations

 

(308

)

 

Payment of dividends

 

(1,894

)

(1,821

)

Payment of deferred debt issuance costs

 

(167

)

 

Net proceeds from issuance of common stock to employees and directors

 

333

 

563

 

Excess tax benefit related to exercise of stock options

 

9

 

5

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

3,969

 

(1,642

)

 

 

 

 

 

 

EFFECTS OF EXCHANGE RATES ON CASH

 

(36

)

357

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

21,463

 

4,158

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, beginning of the period

 

9,045

 

17,886

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, end of the period

 

$

30,508

 

$

22,044

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

9



Table of Contents

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(Dollars 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. These Condensed Consolidated Financial Statements should be read in conjunction with the financial statements that are included in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2007.

 

2.                   SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries. Only subsidiaries in which controlling interests are maintained are consolidated. The equity method is used to account for our ownership in subsidiaries where we do not have controlling interest. All significant intercompany accounts, profits, and transactions have been eliminated in consolidation.

 

Foreign Operations and Foreign Exchange Rate Risk

 

The functional currency for the Company’s foreign operations is the applicable local currency for each affiliate company. Assets and liabilities of foreign subsidiaries for which the functional currency is the local currency are translated at exchange rates in effect at period-end, and the statements of operations are translated at the average exchange rates during the period. Exchange rate fluctuations on translating foreign currency financial statements into U.S. dollars that result in unrealized gains or losses are referred to as translation adjustments. Cumulative translation adjustments are recorded as a separate component of stockholders’ equity and are included in other cumulative comprehensive income. Transactions denominated in currencies other than the local currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses which are reflected in income as unrealized (based on period-end translations) or realized upon settlement of the transactions. Cash flows from the Company’s operations in foreign countries are translated at actual exchange rates when known or at the average rate for the period. As a result, amounts related to assets and liabilities reported in the consolidated statements of cash flows will not conform with changes in the corresponding balances in the Consolidated Balance Sheets. The effects of exchange rate changes on cash balances held in foreign currencies are reported as a separate line item below cash flows from financing activities.

 

10



Table of Contents

 

Revenue Recognition

 

Sales of clad metal products and welding services are generally based upon customer specifications set forth in customer purchase orders and require the Company to provide certifications relative to metals used, services performed and the results of any non-destructive testing that the customer has requested be performed. All issues of conformity of the product to specifications are resolved before the product is shipped and billed. Products related to the oilfield products segment, which include detonating cords, detonators, bi-directional boosters and shaped charges, as well as seismic related explosives and accessories, are standard in nature. In all cases, revenue is recognized only when all four of the following criteria have been satisfied: persuasive evidence of an arrangement exists; the price is fixed or determinable; delivery has occurred; and collection is reasonably assured. For contracts that require multiple shipments, revenue is recorded only for the units included in each individual shipment. If, as a contract proceeds toward completion, projected total cost on an individual contract indicates a potential loss, the Company will account for such anticipated loss.

 

Related Party Transactions

 

The Company has related party transactions with its unconsolidated joint ventures, as well as with the minority partner of one of its consolidated joint ventures. A summary of those transactions for the three and nine months ended September 30, 2008 is presented below:

 

 

 

3 months ended

 

9 months ended

 

 

 

September 30, 2008

 

September 30, 2008

 

 

 

 

 

Interest

 

 

 

Interest

 

 

 

Sales to

 

income from

 

Sales to

 

income from

 

Perfoline

 

$

115

 

$

11

 

$

162

 

$

37

 

DYNAenergetics RUS

 

1,008

 

 

2,145

 

 

Minority Interest Partner

 

547

 

 

1,531

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,669

 

$

11

 

$

3,838

 

$

37

 

 

A summary of related party balances as of September 30, 2008 and December 31, 2007 is presented below:

 

 

 

As of September 30, 2008

 

As of December 31, 2007

 

 

 

Accounts

 

Accounts

 

Accounts

 

Accounts

 

 

 

receivable

 

payable

 

receivable

 

payable

 

 

 

and loan to

 

and loan from

 

and loan to

 

and loan from

 

Perfoline

 

$

451

 

$

137

 

$

523

 

$

120

 

DYNAenergetics RUS

 

660

 

 

449

 

 

KazDYNAenergetics

 

 

 

131

 

 

Minority Interest Partner

 

854

 

383

 

 

205

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,965

 

$

520

 

$

1,103

 

$

325

 

 

11



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Earnings Per Share

 

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted EPS recognizes the potential dilutive effects of dilutive securities. The following represents a reconciliation of the numerator and denominator used in the calculation of basic and diluted EPS:

 

 

 

For the three months ended September 30, 2008

 

 

 

 

 

 

 

Per share

 

 

 

Income

 

Shares

 

Amount

 

Basic earnings per share:

 

 

 

 

 

 

 

Net income

 

$

7,223

 

12,463,060

 

$

0.58

 

 

 

 

 

 

 

 

 

Dilutive effect of options to purchase common stock

 

 

93,260

 

 

 

Dilutive effect of restricted stock awards

 

 

11,592

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

Net income

 

$

7,223

 

12,567,912

 

$

0.57

 

 

 

 

For the three months ended September 30, 2007

 

 

 

 

 

 

 

Per share

 

 

 

Income

 

Shares

 

Amount

 

Basic earnings per share:

 

 

 

 

 

 

 

Net income

 

$

7,117

 

12,094,181

 

$

0.59

 

 

 

 

 

 

 

 

 

Dilutive effect of options to purchase common stock

 

 

182,455

 

 

 

Dilutive effect of restricted stock awards

 

 

25,136

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

Net income

 

$

7,117

 

12,301,772

 

$

0.58

 

 

 

 

For the nine months ended September 30, 2008

 

 

 

 

 

 

 

Per share

 

 

 

Income

 

Shares

 

Amount

 

Basic earnings per share:

 

 

 

 

 

 

 

Net income

 

$

18,683

 

12,426,369

 

$

1.50

 

 

 

 

 

 

 

 

 

Dilutive effect of options to purchase common stock

 

 

120,374

 

 

 

Dilutive effect of restricted stock awards

 

 

25,483

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

Net income

 

$

18,683

 

12,572,226

 

$

1.49

 

 

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For the nine months ended September 30, 2007

 

 

 

 

 

 

 

Per share

 

 

 

Income

 

Shares

 

Amount

 

Basic earnings per share:

 

 

 

 

 

 

 

Net income

 

$

17,659

 

12,039,593

 

$

1.47

 

 

 

 

 

 

 

 

 

Dilutive effect of options to purchase common stock

 

 

191,652

 

 

 

Dilutive effect of restricted stock awards

 

 

13,967

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

Net income

 

$

17,659

 

12,245,212

 

$

1.44

 

 

Recent Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. SFAS No. 157 was initially effective for financial statements issued for fiscal years beginning after November 15, 2007. The FASB issued a staff position statement (“FSP”) in February 2008 that deferred the required implementation date of SFAS 157 for certain assets and liabilities. The adoption of SFAS 157 in the nine months ended September 30, 2008 did not have a material impact on the Company’s results of operations or financial position.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115. This Statement permits entities to measure many financial instruments and certain other items at fair value. This election is made on an instrument-by-instrument basis and is irrevocable. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. This statement is effective for fiscal years beginning after November 15, 2007. The Company did not elect the fair value option for any of its existing financial assets and liabilities during the nine months ended September 30, 2008.

 

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations and SFAS No. 160, Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51. These new standards will significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests in consolidated financial statements. SFAS Nos. 141(R) and 160 are required to be adopted simultaneously and are effective for the first annual reporting period beginning on or after December 15, 2008. Thus, we are required to adopt these Standards on January 1, 2009. Earlier adoption is prohibited. The Company is in the process of determining the effect, if any, the adoption of SFAS Nos. 141(R) and 160 will have on its results of operations or financial position.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities.  SFAS 161 requires additional disclosures related to the use of derivative instruments, the accounting for derivatives and how derivatives impact financial statements.  SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008.  The Company is currently evaluating the impact of adopting SFAS No. 161 on our consolidated financial statements.

 

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3.                   ACQUISITION

 

On November 15, 2007, the Company and a newly-formed subsidiary, DYNAenergetics Holding GmbH (the “Purchaser”), entered into a Purchase, Sale and Assignment Agreement (the “Purchase Agreement”) with Rolf Rospek, Patrick Xylander, Uwe Gessel, and Oag Beteiligungs-GmbH, a German limited liability company (collectively the “Sellers”). Pursuant to the terms of the Purchase Agreement, on November 15, 2007, the Purchaser acquired 100% of the issued and outstanding shares of DYNAenergetics Beteiligungs-GmbH and all of the interests in DYNAenergetics GmbH and Co. KG (collectively, “DYNAenergetics”) from the Sellers.

 

DYNAenergetics manufactures clad metal plates and various explosives-related oilfield products and operates under two business segments: Explosive Metalworking and Oilfield Products. The acquisition enhances the Company’s ability to address growing worldwide demand for clad metal plates and expands the Company’s position in the global explosion welding market. The addition of the Oilfield Products business segment will augment the Company’s involvement in specialized explosive manufacturing processes and position the Company within the growing international oil and gas services industry.

 

As part of the Oilfield Products business segment, the Company has several joint ventures, some of which are unconsolidated and accounted for under the equity method (see Note 4).

 

The acquisition was valued at $112,701 and was financed by (i) the payment of $81,781 in cash, net of cash acquired of $1,870 and transaction related taxes of $3,708 (2,530 Euros) due from one of the Sellers and withheld by the Purchaser, (ii) the issuance of 251,041 shares of common stock of the Company (valued at $13,509), and (iii) the assumption of approximately $11,833 (8,074 Euros) of DYNAenergetics debt. The cash portion of the purchase price was financed using proceeds from the new syndicated credit agreement and existing available cash.

 

The purchase price of the acquisition was allocated to the Company’s tangible and identifiable intangible assets based on their fair values as determined by appraisals performed as of the acquisition date. The excess of the purchase price over the tangible and identifiable intangible assets was recorded as goodwill.

 

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The allocation of the purchase price to the assets and liabilities of DYNAenergetics was as follows:

 

Current assets

 

$

30,222

 

Property, plant and equipment

 

7,845

 

Intangible assets

 

62,794

 

Goodwill

 

45,985

 

Investment in joint ventures

 

1,324

 

Other assets

 

11

 

 

 

 

 

Total assets acquired

 

148,181

 

 

 

 

 

Current liabilities

 

14,524

 

Long term debt

 

11,833

 

Deferred tax liabilities

 

19,850

 

Other long term liabilities

 

1,096

 

Minority interest

 

10

 

 

 

 

 

Total liabilities acquired

 

47,313

 

 

 

 

 

Net assets acquired

 

$

100,868

 

 

The Company acquired identifiable finite-lived intangible assets as a result of the acquisition of DYNAenergetics. The finite-lived intangible assets acquired are preliminarily classified and valued as follows:

 

 

 

 

 

Weighted Average

 

 

 

 

 

Amortization

 

 

 

Value

 

Period

 

Core technology

 

$

24,531

 

20 years

 

Customer relationships

 

33,099

 

9 years

 

Trademarks / Trade names

 

2,672

 

9 years

 

Order backlog DYNAplat

 

2,492

 

Within 1 year

 

 

 

 

 

 

 

Total intangible assets

 

$

62,794

 

 

 

 

The Company acquired goodwill in the amount of $45,985 as a result of the acquisition of DYNAenergetics. The amount of goodwill assigned to each reportable segment is as follows:

 

 

 

Value

 

Explosive Metalworking

 

$

25,258

 

Oilfield Products

 

20,727

 

 

 

 

 

Total goodwill

 

$

45,985

 

 

Goodwill as of September 30, 2008 amounts to $44,797 and the change from December 31, 2007 reflects the impact of foreign currency translation and subsequent purchase price adjustments resulting from the compilation of additional acquisition related expenses.

 

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The following table presents the unaudited, pro-forma combined results of operations for the three and nine months ended September 30, 2007 assuming (i) the acquisition had occurred on January 1, 2007; (ii) pro-forma amortization expense of the purchased intangible assets and (iii) pro-forma interest expense assuming the Company utilized its syndicated credit agreement to finance the acquisition:

 

 

 

Three months

 

Nine months

 

 

 

ended

 

ended

 

 

 

September 30,

 

September 30,

 

 

 

2007

 

2007

 

Net sales

 

$

60,180

 

$

154,195

 

Income from operations

 

$

12,483

 

$

28,315

 

Net income

 

$

7,346

 

$

15,793

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

Basic

 

$

0.60

 

$

1.28

 

Diluted

 

$

0.59

 

$

1.26

 

 

The pro-forma results above are not necessarily indicative of the operating results that would have actually occurred if the acquisition had been in effect on the dates indicated, nor are they necessarily indicative of future results of the combined companies.

 

4.                   INVESTMENT IN JOINT VENTURES

 

Operating results include the Company’s proportionate share of income from joint ventures, which consist of unconsolidated joint ventures accounted for under the equity method. These investments (all of which resulted from the acquisition of DYNAenergetics and pertain to the Company’s Oilfield Products business segment) include the following: (1) 65.19% interest in Perfoline, which is a Russian manufacturer of perforating gun systems and (2) 55% interest in DYNAenergetics RUS which is a Russian trading company that sells the Company’s oilfield products. Due to certain minority interest veto rights that effectively require the minority interest shareholders to participate in ordinary course of business decisions, these joint ventures have been accounted for under the equity method instead of being consolidated in these financial statements. Investments in these joint ventures totaled $1,325 and $1,361 as of September 30, 2008 and December 31, 2007, respectively.

 

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Summarized unaudited financial information for the joint ventures accounted for under the equity method as of September 30, 2008 and December 31, 2007 and for the three and nine months ended September 30, 2008 is as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2008

 

2007

 

Current assets

 

$

4,099

 

$

4,148

 

Noncurrent assets

 

848

 

666

 

Total assets

 

$

4,947

 

$

4,814

 

 

 

 

 

 

 

Current liabilities

 

$

1,151

 

$

1,400

 

Noncurrent liabilities

 

917

 

1,048

 

Equity

 

2,879

 

2,366

 

Total liabilities and equity

 

$

4,947

 

$

4,814

 

 

 

 

Three months

 

Nine months

 

 

 

ended

 

ended

 

 

 

September 30,

 

September 30,

 

 

 

2008

 

2008

 

Net sales

 

$

1,875

 

$

6,600

 

Gross profit

 

$

347

 

$

1,580

 

Operating income

 

$

120

 

$

908

 

Net income

 

$

60

 

$

595

 

Equity in earnings (losses) of joint ventures

 

$

(19

)

$

270

 

 

5.      INVENTORY

 

The components of inventory are as follows at September 30, 2008 and December 31, 2007:

 

 

 

September 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(unaudited)

 

 

 

Raw materials

 

$

12,628

 

$

13,744

 

Work-in-process

 

21,992

 

23,699

 

Finished goods

 

5,293

 

3,564

 

Supplies

 

987

 

621

 

 

 

 

 

 

 

 

 

$

40,900

 

$

41,628

 

 

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6.      PURCHASED INTANGIBLE ASSETS

 

The following table presents details of our purchased intangible assets, other than goodwill, as of September 30, 2008:

 

 

 

 

 

Accumulated

 

 

 

 

 

Gross

 

Amortization

 

Net

 

Core technology

 

$

24,185

 

$

(1,058

)

$

23,127

 

Customer relationships

 

32,633

 

(3,173

)

29,460

 

Trademarks / Trade names

 

2,634

 

(345

)

2,289

 

Order backlog DYNAplat

 

2,456

 

(2,456

)

 

 

 

 

 

 

 

 

 

Total intangible assets

 

$

61,908

 

$

(7,032

)

$

54,876

 

 

The following table presents details of our purchased intangible assets, other than goodwill, as of December 31, 2007:

 

 

 

 

 

Accumulated

 

 

 

 

 

Gross

 

Amortization

 

Net

 

Core technology

 

$

24,653

 

$

(154

)

$

24,499

 

Customer relationships

 

33,263

 

(461

)

32,802

 

Trademarks / Trade names

 

2,685

 

(50

)

2,635

 

Order backlog DYNAplat

 

2,504

 

(526

)

1,978

 

 

 

 

 

 

 

 

 

Total intangible assets

 

$

63,105

 

$

(1,191

)

$

61,914

 

 

The decrease in the gross value of our purchased intangible assets from December 31, 2007 to September 30, 2008 is due to the impact of foreign currency translation.

 

7.      DEBT

 

Lines of credit consist of the following at September 30, 2008 and December 31, 2007:

 

 

 

September 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(unaudited)

 

 

 

Syndicated credit agreement revolving loan

 

$

9,536

 

$

 

Commerzbank revolving line of credit

 

1,173

 

3,225

 

Commerzbank line of credit

 

3,612

 

1,473

 

Deutsche Bank revolving line of credit

 

 

680

 

Nord LB line of credit

 

 

2,209

 

 

 

 

 

 

 

 

 

14,321

 

7,587

 

Less current portion

 

(4,785

)

(7,587

)

 

 

 

 

 

 

Long-term lines of credit

 

$

9,536

 

$

 

 

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Long-term debt consists of the following at September 30, 2008 and December 31, 2007:

 

 

 

September 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(unaudited)

 

 

 

Syndicated credit agreement term loan

 

$

45,000

 

$

45,000

 

Syndicated credit agreement Euro term loan

 

20,229

 

20,621

 

Euro term loan - French bank

 

 

427

 

Nord LB 3,000 Euro term loan

 

2,601

 

3,314

 

Nord LB 500 Euro term loan

 

81

 

203

 

 

 

 

 

 

 

 

 

67,911

 

69,565

 

Less current maturities

 

(7,471

)

(8,035

)

 

 

 

 

 

 

Long-term debt

 

$

60,440

 

$

61,530

 

 

Loan Covenants and Restrictions

 

The Company’s existing loan agreements include various covenants and restrictions, certain of which relate to the incurrence of additional indebtedness, mortgaging, pledging or disposition of major assets, limits on capital expenditures and maintenance of specified financial ratios.  As of September 30, 2008, the Company was in compliance with all financial covenants and other provisions of its debt agreements.

 

Swap Agreement

 

On November 15, 2007, the Company entered into an interest swap agreement that effectively converted the LIBOR based variable rate borrowings under the $45,000 term loan to a fixed rate of 6.34%.  The company has designated the swap agreement as an effective cash flow hedge with matched terms in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and as a result, changes in the fair value of the swap agreement are recorded in other comprehensive income with the offset as a swap asset or liability.  As of September 30, 2008, the fair value of the swap agreement was a liability of $70, net of tax.  The swap agreement expires on November 16, 2008.

 

On October 15, 2008, the Company entered into a new two-year interest rate swap agreement which becomes effective on November 17, 2008.  Similar to the interest rate swap agreement described above, this new agreement will effectively convert the LIBOR based variable rate US borrowings to a fixed rate of 4.87% and the Company has designated this new swap agreement as an effective cash flow hedge with matched terms in accordance with SFAS No. 133.

 

8.      BUSINESS SEGMENTS

 

The Company is organized in the following three segments:  Explosive Metalworking, Oilfield Products and AMK Welding. The Explosive Metalworking segment uses explosives to perform metal cladding and shock synthesis of industrial diamonds. The most significant product of this group is clad metal which is used in the fabrication of pressure vessels, heat exchangers and transition joints for various industries, including upstream oil and gas, oil refinery, petrochemicals, hydrometallurgy, aluminum production, shipbuilding, power generation, industrial refrigeration, and similar industries. The Oilfield Products segment manufactures, markets and sells oilfield perforating equipment and explosives, including detonating cords, detonators, bi-directional

 

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boosters and shaped charges, and seismic related explosives and accessories.  AMK Welding utilizes a number of welding technologies to weld components for manufacturers of jet engines and ground-based turbines.

 

The accounting policies of all the segments are the same as those described in the summary of significant accounting policies.  The Company’s 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 presented for the three and nine months ended September 30, 2008 and 2007 as follows:

 

 

 

Explosive

 

 

 

 

 

 

 

 

 

Metalworking

 

Oilfield

 

AMK

 

 

 

 

 

Group

 

Products

 

Welding

 

Total

 

For the three months ended September 30, 2008:

 

 

 

 

 

 

 

 

 

Net sales

 

$

42,703

 

$

6,756

 

$

2,921

 

$

52,380

 

Depreciation and amortization

 

$

1,574

 

$

947

 

$

109

 

$

2,630

 

Income from operations

 

$

8,593

 

$

725

 

$

874

 

$

10,192

 

Equity in earnings (losses) of joint ventures

 

$

 

$

(19

)

$

 

(19

)

Unallocated amounts:

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

(820

)

Other expense

 

 

 

 

 

 

 

(268

)

Interest expense

 

 

 

 

 

 

 

(1,469

)

Interest income

 

 

 

 

 

 

 

153

 

 

 

 

 

 

 

 

 

 

 

Consolidated income before income taxes

 

 

 

 

 

 

 

$

7,769

 

 

 

 

Explosive

 

 

 

 

 

 

 

Metalworking

 

AMK

 

 

 

 

 

Group

 

Welding

 

Total

 

For the three months ended September 30, 2007:

 

 

 

 

 

 

 

Net sales

 

$

40,326

 

$

1,773

 

$

42,099

 

Depreciation

 

$

402

 

$

82

 

$

484

 

Income from operations

 

$

10,646

 

$

325

 

$

10,971

 

Unallocated amounts:

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

(393

)

Other income

 

 

 

 

 

23

 

Interest expense

 

 

 

 

 

(20

)

Interest income

 

 

 

 

 

233

 

 

 

 

 

 

 

 

 

Consolidated income before income taxes

 

 

 

 

 

$

10,814

 

 

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Table of Contents

 

 

 

Explosive

 

 

 

 

 

 

 

 

 

Metalworking

 

Oilfield

 

AMK

 

 

 

 

 

Group

 

Products

 

Welding

 

Total

 

For the nine months ended September 30, 2008:

 

 

 

 

 

 

 

 

 

Net sales

 

$

147,344

 

$

19,128

 

$

7,485

 

$

173,957

 

Depreciation and amortization

 

$

6,619

 

$

2,866

 

$

324

 

$

9,809

 

Income from operations

 

$

28,393

 

$

775

 

$

2,096

 

$

31,264

 

Equity in earnings of joint ventures

 

$

 

$

270

 

$

 

270

 

Unallocated amounts:

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

(2,363

)

Other expense

 

 

 

 

 

 

 

(227

)

Interest expense

 

 

 

 

 

 

 

(4,203

)

Interest income

 

 

 

 

 

 

 

477

 

 

 

 

 

 <