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, 2007

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 0-8328

DYNAMIC MATERIALS CORPORATION

(Exact name of Registrant as Specified in its Charter)

 

 

 

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, or a non-accelerated filer.    Large accelerated filer  o  Accelerated filer  x  Non-accelerated filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 under the Act).  o  No  x

 

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- Financial Statements, Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations and 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; competitive factors; the timely completion of contracts; the timing and size of expenditures; the timely receipt of government approvals and permits; 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.

 

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INDEX

 

PART I - FINANCIAL INFORMATION

 

Item 1 - Condensed Consolidated Financial Statements				4
Consolidated Balance Sheets as of September 30, 2007 (unaudited) and December 31, 2006				4
Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and 2006 (unaudited)				6
Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2007 (unaudited)				7
Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006 (unaudited)				8
Notes to Condensed Consolidated Financial Statements (unaudited)				10
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations				17
Item 3 - Quantitative and Qualitative Disclosures about Market Risk				28
Item 4 - Controls and Procedures				28
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings				29
Item 1A - Risk Factors				29
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds				29
Item 3 - Defaults Upon Senior Securities				29
Item 4 - Submission of Matters to a Vote of Security Holders				29
Item 5 - Other Information				29
Item 6 - Exhibits				29
Signatures				31

 

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Part I - FINANCIAL INFORMATION

 

ITEM 1.  Condensed Consolidated Financial Statements

 

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

ASSETS		September 30, 2007			December 31, 2006
		(unaudited)
CURRENT ASSETS:
Cash and cash equivalents		$	22,044		$	17,886
Restricted cash		—			3,059
Accounts receivable, net of allowance for doubtful accounts of $321 and $260, respectively		20,077			21,549
Inventories		33,793			19,226
Prepaid expenses and other		2,183			1,419
Current deferred tax assets		804			708
Total current assets		78,901			63,847
PROPERTY, PLANT AND EQUIPMENT		39,904			31,963
Less - Accumulated depreciation		(13,320		)	(11,703		)
Property, plant and equipment, net		26,584			20,260
GOODWILL, net		847			847
OTHER ASSETS, net		23			19
TOTAL ASSETS		$	106,355		$	84,973
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Share Data)

 

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

(Dollars in Thousands, Except Share Data)

(unaudited)

 

		Three months ended September 30,						Nine months ended September 30,
		2007			2006			2007			2006
NET SALES		$	42,099		$	24,852		$	109,964		$	77,781
COST OF PRODUCTS SOLD		27,807			16,542			72,741			50,270
Gross profit		14,292			8,310			37,223			27,511
COSTS AND EXPENSES:
General and administrative expenses		1,903			1,267			5,419			3,948
Selling expenses		1,811			904			4,913			3,174
Total costs and expenses		3,714			2,171			10,332			7,122
INCOME FROM OPERATIONS OF CONTINUING OPERATIONS		10,578			6,139			26,891			20,389
OTHER INCOME (EXPENSE):
Interest income, net		213			121			578			347
Other income (expense)		23			(23		)	3			(40		)
INCOME BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS		10,814			6,237			27,472			20,696
INCOME TAX PROVISION		3,697			2,547			9,813			7,865
INCOME FROM CONTINUING OPERATIONS		7,117			3,690			17,659			12,831
INCOME FROM DISCONTINUED OPERATIONS, net of tax		—			—			—			1,357
NET INCOME		$	7,117		$	3,690		$	17,659		$	14,188
INCOME PER SHARE - BASIC:
Continuing operations		$	0.59		$	0.31		$	1.47		$	1.09
Discontinued operations		—			—			—			0.11
Net income		$	0.59		$	0.31		$	1.47		$	1.20
INCOME PER SHARE - DILUTED:
Continuing operations		$	0.58		$	0.30		$	1.44		$	1.05
Discontinued operations		—			—			—			0.11
Net income		$	0.58		$	0.30		$	1.44		$	1.16
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING -
Basic		12,094,181			11,865,336			12,039,593			11,813,371
Diluted		12,301,772			12,210,791			12,245,212			12,216,283
ANNUAL DIVIDENDS DECLARED PER COMMON SHARE		$	—		$	—		$	0.15		$	0.15
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007

(Amounts in Thousands)

(unaudited)

 

		Common Stock						Additional Paid-In				Retained			Other Cumulative Comprehensive						Comprehensive Income
		Shares		Amount				Capital				Earnings			Income			Total			for the Period
Balances, December 31, 2006		11,982		$		599		$		22,166		$	33,102		$	1,713		$	57,580
Shares issued for stock option exercises		127		6				465				—			—			471
Restricted stock awards		35		2				(2			)	—			—			—
Shares issued in connection with the employee stock purchase plan		4		—				92				—			—			92
Tax benefit related to stock options		—		—				5				—			—			5
Stock-based compensation		—		—				912				—			—			912
Dividends paid		—		—				—				(1,821		)	—			(1,821		)
Net income		—		—				—				17,659			—			17,659			17,659
Change in cumulative foreign currency translation adjustment		—		—				—				—			1,158			1,158			1,158
Balances, September 30, 2007		12,148		$	607			$	23,638			$	48,940		$	2,871		$	76,056		$	18,817
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

(Dollars in Thousands)

(unaudited)

 

		2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	17,659		$	14,188
Adjustments to reconcile net income to net cash provided by operating activities -
Income from discontinued operations, net of tax		—			(1,357		)
Depreciation		1,394			1,020
Amortization of capitalized debt issuance costs		—			50
Stock-based compensation		912			436
Deferred income tax provision (benefit)		(239		)	923
Change in -
Restricted cash		3,059			—
Accounts receivable, net		2,001			(3,885		)
Inventories		(13,541		)	(1,608		)
Prepaid expenses and other		(636		)	150
Accounts payable		3,125			568
Customer advances		132			5,961
Accrued expenses and other liabilities		(1,080		)	(189		)
Net cash provided by operating activities		12,786			16,257
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment		(7,347		)	(5,154		)
Sale of marketable securities		—			1,950
Loan to related party		—			(1,206		)
Repayment on loan to related party		—			1,206
Change in other non-current assets		(11		)	219
Payment received on other receivables related to discontinued operations		—			3
Cash flows provided by investing activities of discontinued operations		—			2,197
Net cash flows used in investing activities		(7,358		)	(785		)
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

(Dollars in Thousands)

(unaudited)

 

		2007			2006
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on related party lines of credit, net		—			(47		)
Payment on industrial development revenue bond		—			(1,720		)
Payment on term loan with French bank		(389		)	(361		)
Payment of dividends		(1,821		)	(1,766		)
Change in other long-tem liabilities		15			22
Net proceeds from issuance of common stock to employees and directors		563			523
Tax benefit related to exercise of stock options		5			948
Net cash flows used in financing activities		(1,627		)	(2,401		)
EFFECTS OF EXCHANGE RATES ON CASH		357			327
NET INCREASE IN CASH AND CASH EQUIVALENTS		4,158			13,398
CASH AND CASH EQUIVALENTS, beginning of the period		17,886			5,763
CASH AND CASH EQUIVALENTS, end of the period		$	22,044		$	19,161
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

 

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, 2006.

 

2.      SIGNIFICANT ACCOUNTING POLICIES

 

                Principles of Consolidation

                The Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. 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.

 

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                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.  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 recognizes such anticipated loss at such time.

          Loan to Related Party

          The Company’s subsidiary, Nobelclad Europe, S.A. (“Nobelclad”), had a Euro-denominated cash management agreement with SNPE, the parent company of SNPE, Inc., the Company’s former majority stockholder, which provided for loans to or from either party of up to approximately $3,400, based on the December 31, 2005 exchange rates. Amounts outstanding under this agreement bore interest at EURIBOR plus 1.5% annually. Due to Nobelclad’s excess cash position during the first quarter of 2006, it began advancing cash to SNPE through this intercompany cash agreement. At March 31, 2006, these advances to SNPE totaled 1,003 Euros ($1,211). The interest rate earned on these advances exceeded the interest rate that Nobelclad could earn on excess cash and cash equivalents held at its local bank. The agreement allowed Nobelclad to request repayment on the advances at any time. The balance outstanding at March 31, 2006 was repaid in full in April 2006 and the agreement was terminated upon the sale of our common stock by SNPE.

                   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, 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
Dilutive earnings per share:
Net income		$	7,117		12,301,772		$	0.58

 

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		For the three months ended September 30, 2006
							Per share
		Income			Shares		Amount
Basic earnings per share:
Net income		$	3,690		11,865,336		$	0.31
Dilutive effect of options to purchase common stock		—			345,455
Dilutive earnings per share:
Net income		$	3,690		12,210,791		$	0.30

 

		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
Dilutive earnings per share:
Net income		$	17,659		12,245,212		$	1.44

 

		For the nine months ended September 30, 2006
							Per share
		Income			Shares		Amount
Basic earnings per share:
Net income		$	14,188		11,813,371		$	1.20
Dilutive effect of options to purchase common stock		—			402,912
Dilutive earnings per share:
Net income		$	14,188		12,216,283		$	1.16

 

3.      INCOME TAXES

 

The Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB No. 109 (“FIN 48”), which clarifies the accounting and disclosure for uncertainty in tax positions, on January 1, 2007.  FIN 48 seeks to harmonize certain accounting practices associated with the recognition and measurement of income taxes.  As a result of the implementation of FIN 48, the Company recognized no material adjustment in the liability for unrecognized income tax benefits.  On the adoption date of January 1, 2007, the Company had $394 of unrecognized tax benefits, all of which would affect our effective tax rate if recognized.  At September 30, 2007, the balance of unrecognized tax benefits remains at $394, and primarily relates to uncertain U.S. Federal tax positions.  The unrecognized tax benefits have been reclassified from deferred tax liabilities to

 

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other long-term liabilities in 2007.  The Company has identified no uncertain tax position for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the 12 months following the date of adoption of FIN 48.

 

The Company recognizes interest and penalties related to uncertain tax positions in operating expense.  As of September 30, 2007, the Company’s accrual for interest and penalties related to uncertain tax positions is insignificant.

 

The Company’s U.S. Federal tax returns for the tax years 2003-2006 remain open to examination while most of the Company’s state tax returns remain open to examination for the tax years 2002-2006.  The Company’s foreign tax returns remain open to examination for the tax years 2003-2006 in France and 2001-2006 in Sweden.

 

4.      INVENTORY

 

The components of inventory are as follows at September 30, 2007 and December 31, 2006:

 

 

 

5.      DEBT

 

Long-term debt consists of the following at September 30, 2007 and December 31, 2006:

 

 

 

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, 2007, the Company was in compliance with all financial covenants and other provisions of its debt agreements.

 

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6.      BUSINESS SEGMENTS

 

The Company is organized in the following two segments:  the Explosive Metalworking segment 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. AMK Welding utilizes a number of welding technologies to weld components for manufacturers of jet engines and ground-based turbines.

            The accounting policies of both segments are the same as those described in the summary of significant accounting policies.  The Company’s reportable segments are strategic business units that offer different products and services and are separately managed. Each segment is marketed to different customer types and requires different manufacturing processes and technologies.  Segment information is presented for the three and nine months ended September 30, 2007 and 2006 as follows:

		Explosive Metalworking Group			AMK 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 of continuing operations		$	10,646		$	325		$	10,971
Unallocated amounts:
Stock-based compensation								(393		)
Interest income, net								213
Other income								23
Consolidated income before income taxes								$	10,814

 

 

 

		Explosive Metalworking Group			AMK Welding			Total
For the three months ended September 30, 2006:
Net sales		$	23,511		$	1,341		$	24,852
Depreciation		$	320		$	55		$	375
Income from operations of continuing operations		$	5,831		$	391		$	6,222
Unallocated amounts:
Stock-based compensation								(83		)
Interest income, net								121
Other expense								(23		)
Consolidated income before income taxes								$	6,237

 

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		Explosive Metalworking Group				AMK Welding			Total
For the nine months ended September 30, 2007:
Net sales		$	105,257			$	4,707		$	109,964
Depreciation		$	1,190			$	204		$	1,394
Income from operations of continuing operations		$		27,197		$	606		$	27,803
Unallocated amounts:
Stock-based compensation									(912		)
Interest income, net									578
Other income									3
Consolidated income before income taxes									$	27,472

 

 

		Explosive Metalworking Group			AMK Welding			Total
For the nine months ended September 30, 2006:
Net sales		$	74,336		$	3,445		$	77,781
Depreciation		$	854		$	166		$	1,020
Income from operations of continuing operations		$	20,204		$	621		$	20,825
Unallocated amounts:
Stock-based compensation								(436		)
Interest income, net								347
Other expense								(40		)
Consolidated income before income taxes								$	20,696

 

 

During the three months ended September 30, 2007, sales to one customer represented approximately $7,333 (17%) of total net sales.  During the nine months ended September 30, 2007, no sales to any one customer accounted for more than 10% of total net sales.  During the three and nine months ended September 30, 2006, no sales to any one customer accounted for more than 10% of total net sales.

 

7.               COMPREHENSIVE INCOME

 

   The Company’s comprehensive income for the three and nine months ended September 30, 2007 and 2006 was as follows:

 

 

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