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 March 31, 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.

 

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 12,097,499 as of April 20, 2007.

 

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. 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.

 

1

 

INDEX

PART I - FINANCIAL INFORMATION

Item 1 -		Condensed Consolidated Financial Statements		3
		Consolidated Balance Sheets as of March 31, 2007 (unaudited) and December 31, 2006		3
		Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006 (unaudited)		5
		Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2007 (unaudited)		6
		Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006 (unaudited)		7
		Notes to Condensed Consolidated Financial Statements (unaudited)		9
Item 2 -		Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3 -		Quantitative and Qualitative Disclosures about Market Risk		25
Item 4 -		Controls and Procedures		25
		PART II - OTHER INFORMATION
Item 1 -		Legal Proceedings		26
Item 1A -		Risk Factors		26
Item 2 -		Unregistered Sales of Equity Securities and Use of Proceeds		26
Item 3 -		Defaults Upon Senior Securities		26
Item 4 -		Submission of Matters to a Vote of Security Holders		26
Item 5 -		Other Information		26
Item 6 -		Exhibits		26
		Signatures		28

 

2

 

Part I - FINANCIAL INFORMATION

ITEM 1.  Condensed Consolidated Financial Statements

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)

	ASSETS			March 31,			December 31,
				2007			2006
				(unaudited)
CURRENT ASSETS:
Cash and cash equivalents				$	19,779		$	17,886
Restricted cash				—			3,059
Accounts receivable, net of allowance for doubtful accounts of $368 and $260, respectively				20,999			21,549
Inventories				21,723			19,226
Prepaid expenses and other				1,413			1,419
Current deferred tax assets				701			708
Total current assets				64,615			63,847
PROPERTY, PLANT AND EQUIPMENT				35,253			31,963
Less - Accumulated depreciation				(12,108		)	(11,703		)
Property, plant and equipment, net				23,145			20,260
GOODWILL, net				847			847
OTHER ASSETS, net				15			19
TOTAL ASSETS				$	88,622		$	84,973

 

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

3

DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Data)

	LIABILITIES AND STOCKHOLDERS’ EQUITY			March 31,			December 31,
				2007			2006
				(unaudited)
CURRENT LIABILITIES:
Accounts payable				$	11,552		$	13,572
Accrued expenses				2,179			3,347
Accrued income taxes				3,909			1,892
Accrued employee compensation and benefits				3,156			3,710
Customer advances				2,369			2,394
Current maturities on long-term debt				386			382
Total current liabilities				23,551			25,297
LONG-TERM DEBT				386			382
DEFERRED TAX LIABILITIES				1,451			1,512
OTHER LONG-TERM LIABILITIES				209			202
COMMITMENTS AND CONTINGENT LIABILITIES				—			—
Total liabilities				25,597			27,393
STOCKHOLDERS’ EQUITY:
Preferred stock, $.05 par value; 4,000,000 shares authorized; no issued and outstanding shares				—			—
Common stock, $.05 par value; 15,000,000 shares authorized; 12,093,999 and 11,981,999 shares issued and outstanding, respectively				605			599
Additional paid-in capital				22,662			22,166
Retained earnings				37,984			33,102
Other cumulative comprehensive income				1,774			1,713
Total stockholders’ equity				63,025			57,580
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY				$	88,622		$	84,973

 

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

4

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Dollars in Thousands, Except Share Data)
(unaudited)

		Three months ended
		March 31,
		2007			2006
NET SALES		$	33,094		$	25,175
COST OF PRODUCTS SOLD		22,243			15,894
Gross profit		10,851			9,281
COSTS AND EXPENSES:
General and administrative expenses		1,662			1,527
Selling expenses		1,647			1,324
Total costs and expenses		3,309			2,851
INCOME FROM OPERATIONS OF CONTINUING OPERATIONS		7,542			6,430
OTHER INCOME (EXPENSE):
Interest income, net		188			94
Other income (expense), net		(7		)	(6		)
INCOME BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS		7,723			6,518
INCOME TAX PROVISION		2,841			2,379
INCOME FROM CONTINUING OPERATIONS		4,882			4,139
INCOME FROM DISCONTINUED OPERATIONS, net of tax		—			1,357
NET INCOME		$	4,882		$	5,496
INCOME PER SHARE - BASIC:
Continuing operations		$	0.41		$	0.35
Discontinued operations		—			0.12
Net income		$	0.41		$	0.47
INCOME PER SHARE - DILUTED:
Continuing operations		$	0.40		$	0.34
Discontinued operations		—			0.11
Net income		$	0.40		$	0.45
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING -
Basic		12,009,577			11,768,098
Diluted		12,222,601			12,217,547
ANNUAL DIVIDENDS DECLARED PER COMMON SHARE		$	—		$	0.15

 

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

5

DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2007
(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, 2006		11,982		$	599		$	22,166		$	33,102		$	1,713		$	57,580
Shares issued for stock option exercises		112		6			272			—			—			278
Stock-based compensation		—		—			224			—			—			224
Net income		—		—			—			4,882			—			4,882			4,882
Change in cumulative foreign currency translation adjustment		—		—			—			—			61			61			61
Balances, March 31, 2007		12,094		$	605		$	22,662		$	37,984		$	1,774		$	63,025		$	4,943

 

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

6

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Dollars in Thousands)
(unaudited)

 

		2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	4,882		$	5,496
Adjustments to reconcile net income to net cash provided by operating activities -
Income from discontinued operations, net of tax		—			(1,357		)
Depreciation		395			317
Amortization of capitalized debt issuance costs		—			7
Stock-based compensation		224			336
Deferred income tax provision (benefit)		(46		)	320
Change in -
Restricted cash		3,059			—
Accounts receivable, net		553			689
Inventories		(2,487		)	(531		)
Prepaid expenses and other		6			(803		)
Accounts payable		(2,011		)	120
Customer advances		46			124
Accrued expenses and other liabilities		212			1,775
Net cash provided by operating activities		4,833			6,493
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment		(3,257		)	(469		)
Sale of marketable securities		—			1,950
Loan to related party		—			(1,206		)
Change in other non-current assets		—			79
Payment received on other receivables related to discontinued operations		—			3
Cash flows provided by investing activities of discontinued operations		—			2,197
Net cash flows provided by (used in) investing activities		(3,257		)	2,554

 

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

7

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Dollars in Thousands)
(unaudited)

		2007			2006
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on related party lines of credit, net		—			(45		)
Payment on industrial development revenue bond		—			(45		)
Payment of dividends		—			(1,766		)
Change in other long-tem liabilities		5			7
Net proceeds from issuance of common stock to employees and directors		278			74
Tax benefit related to exercise of stock options		—			54
Net cash flows provided by (used in) financing activities		283			(1,721		)
EFFECTS OF EXCHANGE RATES ON CASH		34			25
NET INCREASE IN CASH AND CASH EQUIVALENTS		1,893			7,351
CASH AND CASH EQUIVALENTS, beginning of the period		17,886			5,763
CASH AND CASH EQUIVALENTS, end of the period		$	19,779		$	13,114

 

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

8

 

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.

9

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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

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 March 31, 2007
							Per share
		Income			Shares		Amount
Basic earnings per share:
Net income		$	4,882		12,009,577		$	0.41
Dilutive effect of options to purchase common stock		—			209,141
Dilutive effect of restricted stock awards		—			3,883
Dilutive earnings per share:
Net income		$	4,882		12,222,601		$	0.40

 

10

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		For the three months ended March 31, 2006
							Per share
		Income			Shares		Amount
Basic earnings per share:
Net income		$	5,496		11,768,098		$	0.47
Dilutive effect of options to purchase common stock		—			449,449
Dilutive earnings per share:
Net income		$	5,496		12,217,547		$	0.45

 

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 March 31, 2007, the balance of unrecognized tax benefits remains at $394, and primarily relates to uncertain U.S. Federal tax positions. 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 March 31, 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.

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4.      INVENTORY

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

 

5.      DEBT

Long-term debt consists of the following at March 31, 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 March 31, 2007, the Company was in compliance with all financial covenants and other provisions of its debt agreements.

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 months ended March 31, 2007 and 2006 as follows:

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		Explosive
		Metalworking			AMK
		Group			Welding			Total
For the three months ended March 31, 2007:
Net sales		$	31,495		$	1,599		$	33,094
Depreciation		$	335		$	60		$	395
Income from operations of continuing operations		$	7,502		$	264		$	7,766
Unallocated amounts:
Stock-based compensation								(224		)
Interest income, net								188
Other expense								(7		)
Consolidated income before income taxes								$	7,723

 

		Explosive
		Metalworking			AMK
		Group			Welding			Total
For the three months ended March 31, 2006:
Net sales		$	24,176		$	999		$	25,175
Depreciation		$	262		$	55		$	317
Income from operations of continuing operations		$	6,658		$	108		$	6,766
Unallocated amounts:
Stock-based compensation								(336		)
Interest income, net								94
Other expense								(6		)
Consolidated income before income taxes								$	6,518

 

During the three months ended March 31, 2007, sales to one customer represented approximately $5,417 (16%) of total net sales.  During the three months ended March 31, 2006, sales to one customer represented approximately $3,665 (15%) of total net sales.

13

 

7.               COMPREHENSIVE INCOME

The Company’s comprehensive income for the three months ended March 31, 2007 and 2006 was as follows:

 

As of March 31, 2007 and December 31, 2006 other cumulative comprehensive income of $1,774 and $1,713, respectively, consists entirely of cumulative foreign currency translation adjustment.

8.      DISCONTINUED OPERATIONS

On September 17, 2004, DMC completed the divestiture of its Spin Forge division under an agreement that involved subleasing the Spin Forge real estate and leasing the manufacturing equipment and tooling to a third party.  Under the master agreement relating to this divestiture transaction, the Company sold all inventory, books and records, intangible personal property, business information and technology, customer contracts, and licenses and permits relating to the Spin Forge business to this third party for a sales price of approximately $1,700.  The third party also assumed full responsibility for Spin Forge business activities and operating expenses.  Despite the fact that the Company retained ownership of the equipment and continued to carry a capital lease asset of $2,880 on its books, the Company concluded that the Spin Forge divestiture transaction qualified for treatment as discontinued operations since the Company had completely exited the Spin Forge operating business and had no intent to ever again operate any of the leased assets.  In December 2006, the third party purchaser of the Spin Forge business purchased the majority of these leased assets while the remainder of the leased assets was liquidated by the Company.  This transaction resulted in a pretax gain of $228, which was recorded as discontinued operations in the fourth quarter of 2006.   The Company had received rent of $23 per month on these leased assets until the date of their sale.

On January 10, 2006, the Company sold its purchase option on the Spin Forge real estate to the property owner for $2,300.  The completion of this transaction resulted in a pretax gain of $2,197, which was recorded as discontinued operations in the first quarter of 2006.  In connection with the sale of the purchase option, the underlying lease agreement was terminated.  Accordingly, the capital lease asset of $2,880 and the related lease obligation of the same amount were removed from the Company’s balance sheet in the first quarter of 2006.

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Discontinued operations for the three months ended March 31, 2006 is summarized as follows:

 

 

15

 

ITEM 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our historical consolidated financial statements and notes, as well as the selected historical consolidated financial data that are included in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2006.

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

Executive Overview

Our business is organized into two segments:  Explosive Metalworking and AMK Welding.  For the three months ended March 31, 2007, Explosive Metalworking accounted for 95% of our net sales and 97% of our income from operations of continuing operations before consideration of stock-based compensation expense, which is not allocated to our business segments.

For the three months ended March 31, 2007, net sales increased by $7,919 (31.5%) compared to the first three months of 2006, reflecting year-to-year net sales increases of $7,319 (30.3%) and $600 (60.1%) for our Explosive Metalworking and AMK Welding segments, respectively.  Our operating income from continuing operations increased by 17.3% to $7,542 in the first three months of 2007 from $6,430 in the first three months of 2006, reflecting an $844 improvement in Explosive Metalworking’s operating income and a $156 improvement in AMK Welding’s operating income.  Income from continuing operations increased by 18.0% to $4,882 for the three months ended March 31, 2007 from $4,139 in the same period of 2006.  Our net income decreased to $4,882 in the first three months of 2007 from $5,496 in the first three months of 2006.  For the three months ended March 31, 2006, net income included $1,357 of income from discontinued operations, net of tax, relating to the sale of the Spin Forge real estate option as further discussed below.

Net sales

Explosive Metalworking’s net sales are generated principally from sales of clad metal plates and sales of transition joints, which are made from clad plates, to customers that fabricate industrial equipment for various industries, including upstream oil and gas, oil refinery, petrochemicals, hydrometallurgy, aluminum production, shipbuilding, power generation, industrial refrigeration and similar industries.  While demand for our clad metal products in the United States is largely driven by new plant construction and large plant expansion projects, maintenance and retrofit projects at existing chemical processing, petrochemical processing and oil refining facilities account for a significant portion of total demand.  In contrast to the U.S. market, demand for our clad products in Europe and Asia is more dependent on new construction projects, such as the building of new purified terephthalic acid (“PTA”) plants in different parts of the world, including China, and on sales of electrical transition joints that are used in the aluminum production industry.

AMK Welding’s net sales are generated from welding, heat treatment and inspection services that are provided with respect to customer-supplied parts for customers primarily involved in the power generation industry and aircraft engine markets.

A significant portion of our net sales is derived from a relatively small number of customers; therefore, the failure to complete existing contracts on a timely basis, and to receive payment for such services in a timely manner, or to enter into future contracts at projected volumes

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and profitability levels could adversely affect our ability to meet cash requirements exclusively through operating activities. We attempt to minimize the risk of losing customers or specific contracts by continually improving product quality, delivering product on time and competing favorably on the basis of price.

Explosive Metalworking’s business is cyclical since it is linked to its customers’ end-market activity.  For example, the construction cycle for new manufacturing capacity in the chemical industry has historically been one characterized by significant amplitude.  It is driven both by global economic demand growth and capacity utilization.  As capacity starts to become tight for various chemicals and prices begin to rise, new manufacturing capacity is added in relatively large incremental amounts.  Excess capacity drives prices down and capacity utilization drops.

Gross profit and cost of products sold

Cost of products sold for Explosive Metalworking include the cost of metals and alloys used to manufacture clad metal plates, the cost of explosives, employee compensation and benefits, freight, outside processing costs, depreciation of manufacturing facilities and equipment, manufacturing supplies and other manufacturing overhead expenses.

AMK Welding’s cost of products sold consists principally of employee compensation and benefits, welding supplies (wire and gas), depreciation of manufacturing facilities and equipment, outside services and other manufacturing overhead expenses.

Discontinued operations

In September 2004, we completed the sale of our Spin Forge division.  On January 10, 2006, we sold our option rights to purchase the Spin Forge real estate to the property owner for $2,300.  We recorded a pre-tax gain of approximately $2,197 on this transaction, which was reported as discontinued operations, net of related taxes, in the first quarter of 2006.

Income taxes

Our effective income tax rate increased to 36.8% for the first three months of 2007 from 36.5% for the first three months of 2006.  Income tax provisions on the earnings of Nobelclad and Nitro Metall AB (“Nitro Metall”) have been provided based upon the respective French and Swedish statutory tax rates.  Going forward, based upon existing tax regulations and current federal, state and foreign statutory tax rates, we expect our effective tax rate on our consolidated pre-tax income to range between 36% and 38%.

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Backlog

We use backlog as a primary means of measuring the immediate outlook for our business.  We define “backlog” at any given point in time to consist of all firm, unfulfilled purchase orders and commitments at that time.  Generally speaking, we expect to fill most backlog orders within the following 12 months.  From experience, most firm purchase orders and commitments are realized.  However, since orders may be rescheduled or canceled, and a significant portion of our net sales is derived from a small number of customers, backlog is not necessarily indicative of future sales levels.  Moreover, we cannot be sure of when during the future 12-month period we will be able to recognize revenue corresponding to our backlog nor can we be sure that revenues corresponding to our backlog will not fall into periods beyond the 12-month horizon.

Our backlog with respect to the Explosive Metalworking segment decreased slightly to approximately $67.9 million at March 31, 2007 from approximately $68.8 million at December 31, 2006.

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

Net sales

		Three Months Ended
		March 31,									Percentage
		2007			2006			Change			Change
Net sales		$	33,094		$	25,175		$	7,919		31.5	%

 

Net sales for the first quarter of 2007 increased 31.5% to $33,094 from $25,175 in the first quarter of 2006. Explosive Metalworking sales increased 30.3% to $31,495 in the three months ended March 31, 2007 (95% of total sales) from $24,176 in the same period of 2006 (96% of total sales).  The significant increase in Explosive Metalworking sales is principally attributable to the continued economic strength of the industries that this business segment serves.

AMK Welding contributed $1,599 to first quarter 2007 sales (5% of total sales) which represented a 60.1% increase versus sales of $999 in the first quarter of 2006 (4% of total sales).

Gross profit

		Three Months Ended
		March 31,									Percentage
		2007			2006			Change			Change
Gross profit		$	10,851		$	9,281		$	1,570		16.9	%
Consolidated gross profit margin rate		32.8		%	36.9		%

 

Gross profit increased by 16.9% to $10,851 for the three months ended March 31, 2007 from $9,281 for the three months ended March 31, 2006. Our first quarter 2007 consolidated gross profit margin rate decreased to 32.8% from 36.9% in the first quarter of 2006. The gross profit margin for Explosive Metalworking decreased from 37.4% in the first quarter of 2006 to 33.1% in the first quarter of 2007 and the gross profit margin for AMK Welding increased to 28.8% in the first quarter of 2007 from 24.9% in the first quarter of 2006.

The decreased gross margin rate for Explosive Metalworking relates primarily to changes in product mix during the first quarter of 2007 as compared that for the first quarter of 2006. AMK

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Welding’s gross margin improvement relates principally to the sales increase discussed above and the resultant more favorable absorption of fixed manufacturing overhead expenses.  Gross profit margins typically fluctuate from one quarter to the next for various reasons, including changes in sales volume and product mix. Our gross margins are likely to continue to fluctuate from quarter-to-quarter.

General and administrative expenses

		Three Months Ended
		March 31,									Percentage
		2007			2006			Change			Change
General & administrative expenses		$	1,662		$	1,527		$	135		8.8	%
Percentage of net sales		5.0		%	6.1		%

 

General and administrative expenses increased by $135, or 8.8%, to $1,662 in the first quarter of 2007 from $1,527 in the first quarter of 2006.  Expense increases reflect an impact of $138 from annual salary adjustments and staffing changes, a $46 increase in accrued incentive compensation expense, a $30 increase in directors and officers’ insurance premiums and minor net increases of $91 in a number of other expense categories.  These increases were partially offset by a decrease of $170 in stock-based compensation expense.  As a percentage of net sales, general and administrative expenses decreased to 5.0% in the first quarter of 2007 from 6.1% in the first quarter of 2006.

Selling expenses

		Three Months Ended
		March 31,									Percentage
		2007			2006			Change			Change
Selling expenses		$	1,647		$	1,324		$	323		24.4	%
Percentage of net sales		5.0		%	5.3		%

 

Selling expenses, which include sales commissions of $423 in 2007 and $472 in 2006, increased by 24.4% to $1,647 in the first quarter of 2007 from $1,324 in the first quarter of 2006.  The $323 increase in selling expenses reflects an impact of $105 from annual salary adjustments and staffing changes, an increase of $81 in the provision for doubtful accounts, a $53 increase in accrued incentive compensation expense and a $31 increase in stock-based compensation expense.  As a percentage of net sales, selling expenses decreased to 5.0% in the first quarter of 2007 from 5.3% in the first quarter of 2006.

Income from operations of continuing operations

		Three Months Ended
		March 31,									Percentage
		2007			2006			Change			Change
Income from operations of continuing operations		$	7,542		$	6,430		$	1,112		17.3	%

 

Income from operations increased by 17.3% to $7,542 in the first quarter of 2007 from $6,430 in the first quarter of 2006.  Explosive Metalworking reported income from operations of $7,502 in the first quarter of 2007 as compared to $6,658 in the first quarter of 2006.  This 12.7%

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increase is largely attributable to the 30.3% sales increase discussed above.  AMK Welding reported income from operations of $264 for the three months ended March 31, 2007 as compared to $108 for the same period of 2006.

Income from operations of continuing operations for the three months ended March 31, 2007 and 2006 includes $224 and $336, respectively, of stock-based compensation expense. This expense is not allocated to our two business segments and thus is not included in the above first quarter operating income totals for Explosive Metalworking and AMK Welding.

Interest income (expense), net

		Three Months Ended
		March 31,									Percentage
		2007			2006			Change			Change
Interest income (expense), net		$	188		$	94		$	94		NM

 

Net interest income (expense) improved by $94, to a net of $188 in interest income for the first quarter 2007 from a net of $94 in interest income in the first quarter of 2006.  This change in net interest income (expense) reflects investment earnings on the large cash balances that we are currently carrying.

Income tax provision

		Three Months Ended
		March 31,									Percentage
		2007			2006			Change			Change
Income tax provision		$	2,841		$	2,379		$	462		19.4	%
Effective tax rate		36.8		%	36.5		%

 

We recorded an income tax provision of $2,841 in the first quarter of 2007 compared to $2,379 in the first quarter of 2006.  The effective tax rate increased to 36.8% in the first quarter of 2007 from 36.5% in the first quarter of 2006.  The income tax provisions for the three months ended March 31, 2007 and 2006 include $2,102 and $1,844, respectively, related to U.S. taxes, with the remainder relating to foreign taxes associated with the operations of Nobelclad and its Swedish subsidiary, Nitro Metall.  We expect our full year 2007 effective tax rate on consolidated pre-tax income to be in the 36% to 38% range.

Income from discontinued operations

		Three Months Ended
		March 31,									Percentage
		2007			2006			Change			Change
Income from discontinued operations		$	—		$	1,357		$	(1,357	)	NA

 

We completed the divestiture of our Spin Forge division in September 2004.  Under the principal divestiture agreement, we sold the assets of the Spin Forge division to a third party, excluding certain equipment and real estate which were leased or subleased to the buyer.  We held a purchase option on the Spin Forge real estate that allowed us to purchase the real estate for

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