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, 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 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, 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. (Check one):

 

 

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 12,602,768 as of April 30, 2008.

 

 

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; 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 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

 

INDEX

 

PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements			4
	Consolidated Balance Sheets as of March 31, 2008 (unaudited) and December 31, 2007		4
	Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007 (unaudited)		6
	Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2008 (unaudited)		7
	Consolidated Statements of Cash Flows for the three months ended March 31, 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			21
Item 3 - Quantitative and Qualitative Disclosures about Market Risk			32
Item 4 - Controls and Procedures			32
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings			34
Item 1A - Risk Factors			34
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds			34
Item 3 - Defaults Upon Senior Securities			34
Item 4 - Submission of Matters to a Vote of Security Holders			34
Item 5 - Other Information			34
Item 6 - Exhibits			34
	Signatures		36

 

3

 

Part I - FINANCIAL INFORMATION

 

ITEM 1.  Condensed Consolidated Financial Statements

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

		March 31,			December 31,
		2008			2007
		(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	17,610		$	9,045
Restricted cash		—			371
Accounts receivable, net of allowance for doubtful accounts of $493 and $534, respectively		35,341			39,833
Inventories		44,293			41,628
Prepaid expenses and other		2,371			2,022
Related party receivable and loan		1,245			1,103
Current deferred tax assets		899			728
Total current assets		101,759			94,730
PROPERTY, PLANT AND EQUIPMENT		53,287			49,590
Less - Accumulated depreciation		(15,552		)	(14,144		)
Property, plant and equipment, net		37,735			35,446
GOODWILL, net		49,620			45,862
PURCHASED INTANGIBLE ASSETS, net		63,925			61,914
DEFERRED TAX ASSETS		84			42
OTHER ASSETS, net		1,618			1,544
INVESTMENT IN JOINT VENTURES		1,474			1,361
TOTAL ASSETS		$	256,215		$	240,899

 

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

 

4

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Share Data)

 

		March 31,			December 31,
		2008			2007
		(unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	19,703		$	22,590
Accrued expenses		8,971			8,566
Accrued income taxes		3,286			1,212
Accrued employee compensation and benefits		3,863			5,521
Customer advances		2,563			4,593
Related party accounts payable and loans		351			325
Lines of credit - current		7,265			7,587
Current maturities on long-term debt		8,293			8,035
Current portion of capital lease obligations		417			389
Total current liabilities		54,712			58,818
LINES OF CREDIT		4,741			—
LONG-TERM DEBT		62,778			61,530
CAPITAL LEASE OBLIGATIONS		448			521
DEFERRED TAX LIABILITIES		21,046			20,604
OTHER LONG-TERM LIABILITIES		1,234			1,147
COMMITMENTS AND CONTINGENT LIABILITIES		—			—
Total liabilities		144,959			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; 12,602,768 and 12,433,768 shares issued and outstanding, respectively		630			622
Additional paid-in capital		38,995			38,246
Retained earnings		61,113			55,868
Other cumulative comprehensive income		10,518			3,543
Total stockholders’ equity		111,256			98,279
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	256,215		$	240,899

 

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

 

5

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007

(Dollars in Thousands, Except Share Data)

(unaudited)

 

		Three months ended
		March 31,
		2008			2007
NET SALES		$	58,393		$	33,094
COST OF PRODUCTS SOLD		40,682			22,243
Gross profit		17,711			10,851
COSTS AND EXPENSES:
General and administrative expenses		3,119			1,662
Selling expenses		2,841			1,647
Amortization expense of purchased intangible assets		2,361			—
Total costs and expenses		8,321			3,309
INCOME FROM OPERATIONS		9,390			7,542
OTHER INCOME (EXPENSE):
Other expense		(149		)	(7		)
Interest expense		(1,279		)	—
Interest income		239			188
Equity in earnings of joint ventures		16			—
INCOME BEFORE INCOME TAXES		8,217			7,723
INCOME TAX PROVISION		2,972			2,841
NET INCOME		$	5,245		$	4,882
INCOME PER SHARE:
Basic		$	0.42		$	0.41
Diluted		$	0.42		$	0.40
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic		12,377,019			12,009,577
Diluted		12,557,068			12,222,601

 

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

 

6

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 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		25		1			92			—			—			93
Restricted stock awards		144		7			(7		)	—			—			—
Stock-based compensation		—		—			664			—			—			664
Net income		—		—			—			5,245			—			5,245			5,245
Derivative valuation, net of tax of $174		—		—			—			—			(285		)	(285		)	(285		)
Change in cumulative foreign currency translation adjustment		—		—			—			—			7,260			7,260			7,260
Balances, March 31, 2008		12,603		$	630		$	38,995		$	61,113		$	10,518		$	111,256		$	12,220

 

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

 

7

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007

(Dollars in Thousands)

(unaudited)

 

		2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	5,245		$	4,882
Adjustments to reconcile net income to net cash provided by operating activities -
Depreciation (including capital lease amortization)		1,113			395
Amortization of purchased intangible assets		2,361			—
Amortization of capitalized debt issuance costs		60			—
Stock-based compensation		664			224
Deferred income tax benefit		(1,174		)	(46		)
Equity in earnings of joint ventures		(16		)	—
Change in -
Restricted cash		377			3,059
Accounts receivable, net		5,968			553
Inventories		(670		)	(2,487		)
Prepaid expenses and other		(580		)	6
Accounts payable		(3,837		)	(2,011		)
Customer advances		(2,144		)	46
Accrued expenses and other liabilities		(118		)	212
Net cash provided by operating activities		7,249			4,833
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment		(2,361		)	(3,257		)
Change in other non-current assets		15			—
Net cash used in investing activities		(2,346		)	(3,257		)

 

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

 

8

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007

(Dollars in Thousands)

(unaudited)

 

		2008			2007
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on Nord LB term loans		(265		)	—
Borrowings on bank lines of credit, net		3,665			—
Payment of capital lease obligations		(105		)	—
Payment of deferred debt issuance costs		(125		)	—
Change in other long-tem liabilities		16			5
Net proceeds from issuance of common stock to employees and directors		93			278
Net cash provided by financing activities		3,279			283
EFFECTS OF EXCHANGE RATES ON CASH		383			34
NET INCREASE IN CASH AND CASH EQUIVALENTS		8,565			1,893
CASH AND CASH EQUIVALENTS, beginning of the period		9,045			17,886
CASH AND CASH EQUIVALENTS, end of the period		$	17,610		$	19,779

 

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

 

9

 

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

 

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 its consolidated joint venture.  A summary of those transactions and balances as of March 31, 2008 and for the three months ended March 31, 2008 is presented below:

 

								Minority Interest
		Perfoline		DYNAenergetics RUS		KazDYNAenergetics		Partner		Total
Sales to		33		—		235		524		792
Interest income from		13		—		—		—		13
Accounts receivable and loan to		559		1		316		369		1,245
Accounts payable and loan from		112		—		—		239		351

 

A summary of related party balances as of December 31, 2007 is presented below:

 

								Minority Interest
		Perfoline		DYNAenergetics RUS		KazDYNAenergetics		Partner		Total
Accounts receivable and loan to		523		449		131		—		1,103
Accounts payable and loan from		120		—		—		205		325

 

11

 

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, 2008
							Per share
		Income			Shares		Amount
Basic earnings per share:
Net income		$	5,245		12,377,019		$	0.42
Dilutive effect of options to purchase common stock		—			144,717
Dilutive effect of restricted stock awards		—			35,332
Diluted earnings per share:
Net income		$	5,245		12,557,068		$	0.42

 

		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
Diluted earnings per share:
Net income		$	4,882		12,222,601		$	0.40

 

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 interpretation date of SFAS 157 for certain assets and liabilities.  The adoption of SFAS 157 in the three months ended March 31, 2008 did not have a material impact on the Company’s results of operations or financial position.

 

12

 

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 three months ended March 31, 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 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.  We are currently evaluating the impact of adopting SFAS No. 161 on our consolidated financial statements.

 

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, most of which are unconsolidated and accounted for under the equity method (see Note 4).

 

The acquisition was valued at $112,587 and was financed by (i) the payment of $81,667 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

 

13

 

(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 estimated fair values as set forth below. Property, plant and equipment were recorded at fair values based on appraisals performed as of the acquisition date. The preliminary allocation to identifiable intangible assets was based on preliminary valuation data and the estimates and assumptions are subject to change. The excess of the purchase price over the tangible and identifiable intangible assets was recorded as goodwill. The Company is still in the process of analyzing other potential purchase accounting adjustments including compiling remaining acquisition related expenses.

 

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

 

Current assets		$	30,222
Property, plant and equipment		7,845
Intangible assets		62,794
Goodwill		45,871
Investment in joint ventures		1,324
Other assets		11
Total assets acquired		148,067
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		$	100,754

 

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

 

14

 

The Company acquired Goodwill in the amount of $45,871 as a result of the acquisition of DYNAenergetics. The amount of goodwill assigned to each reportable segment is as follows:

 

		Value
Explosive Metalworking		$	25,196
Oilfield Products		20,675
Total goodwill		$	45,871

 

Goodwill as of March 31, 2008 amounts to $49,620 and the change from December 31, 2007 primarily reflects the impact of foreign currency translation.

 

The following table presents the unaudited, pro-forma combined results of operations for the three months ended March 31, 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:

 

		2007
Net sales		$	46,064
Income from operations		$	7,050
Net income		$	3,690
Net income per share:
Basic		$	0.30
Diluted		$	0.30

 

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) 53.5% interest in Perfoline, which is a Russian manufacturer of perforating gun systems; (2) 55% interest in DYNAenergetics RUS which is a Russian trading company that sells the Company’s oilfield products and (3) 60% interest in KazDYNAenergetics which is a Kazakhstan 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 $1,474 and $1,361 as of March 31, 2008 and December 31, 2007, respectively.

 

15

 

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

 

		March 31,			December 31,
		2008			2007
Current assets		$	4,191		$	4,148
Noncurrent assets		713			666
Total assets		$	4,904		$	4,814
Current liabilities		$	946		$	1,400
Noncurrent liabilities		1,447			1,048
Equity		2,511			2,366
Total liabilities and equity		$	4,904		$	4,814
Net sales		$	2,203
Gross profit		$	413
Operating income		$	171
Net loss		$	(14	)
Equity in earnings of joint ventures		$	16

 

5.             INVENTORY

 

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

 

		March 31,			December 31,
		2008			2007
		(unaudited)
Raw materials		$	13,545		$	13,744
Work-in-process		25,536			23,699
Finished goods		4,614			3,564
Supplies		598			621
		$	44,293		$	41,628

 

6.             PURCHASED INTANGIBLE ASSETS

 

The following table presents details of our purchased intangible assets, other than goodwill, as of March 31, 2008:

 

					Accumulated
		Gross			Amortization			Net
Core technology		$	26,446		$	(496	)	$	25,950
Customer relationships		35,683			(1,487		)	34,196
Trademarks / Trade names		2,880			(162		)	2,718
Order backlog DYNAplat		2,686			(1,625		)	1,061
Total intangible assets		$	67,695		$	(3,770	)	$	63,925

 

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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 increase in the gross value of our purchased intangible assets from December 31, 2007 to March 31, 2008 is due to the impact of foreign currency translation.

 

7.                DEBT

 

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

 

		March 31,			December 31,
		2008			2007
		(unaudited)
Syndicated credit agreement revolving loan		$	4,741		$	—
Commerzbank revolving line of credit		1,388			3,225
Commerzbank line of credit		1,580			1,473
Deutsche Bank revolving line of credit		788			680
Nord LB line of credit		3,509			2,209
		12,006			7,587
Less current portion		(7,265		)	(7,587		)
Long-term lines of credit		$	4,741		$	—

 

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

 

		March 31,			December 31,
		2008			2007
		(unaudited)
Syndicated credit agreement term loan		$	45,000		$	45,000
Syndicated credit agreement Euro term loan		22,120			20,621
Euro term loan - French bank		458			427
Nord LB 3,000 Euro term loan		3,318			3,314
Nord LB 500 Euro term loan		175			203
		71,071			69,565
Less current maturities		(8,293		)	(8,035		)
Long-term debt		$	62,778		$	61,530

 

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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, 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 March 31, 2008, the fair value of the swap agreement was a liability of $696. The swap agreement expires on November 16, 2008.

 

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 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 requires different manufacturing processes and technologies. Segment information is presented for the three months ended March 31, 2008 and 2007 as follows:

 

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