DMC Global Inc. - Quarter Report: 2010 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

Form 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2010

 

OR

 

o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM             TO             .

 

Commission file number 001-14775

 

 

DYNAMIC MATERIALS CORPORATION

(Exact name of Registrant as Specified in its Charter)

 

Delaware	84-0608431
(State of Incorporation or Organization)	(I.R.S. Employer Identification No.)

 

5405 Spine Road, Boulder, Colorado 80301

(Address of principal executive offices, including zip code)

 

(303) 665-5700

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
(Do not check if smaller reporting company)

 

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 13,202,177 as of October 28, 2010.

 

 

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CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. In particular, we direct your attention to Part I, Item 1- Condensed Consolidated Financial Statements; Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations; Item 3 - Quantitative and Qualitative Disclosures About Market Risk; and Part II, Item 1A — Risk Factors. We intend the forward-looking statements throughout this quarterly report on Form 10-Q and the information incorporated by reference herein to be covered by the safe harbor provisions for forward-looking statements. Statements contained in this report which are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from projected results. All projections, guidance and other statements regarding our expected financial position and operating results, our business strategy 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: changes in global economic conditions; the ability to obtain new contracts at attractive prices; the size and timing of customer orders and shipment; our ability to realize sales from our backlog; fluctuations in customer demand; fluctuations in foreign currencies; competitive factors; the timely completion of contracts; the timing and size of expenditures; the timely receipt of government approvals and permits; the price and availability of metal and other raw material; the adequacy of local labor supplies at our facilities; current or future limits on manufacturing capacity at our various operations; our ability to successfully integrate acquired businesses; 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, 2010 (unaudited) and December 31, 2009	4
	Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009 (unaudited)	6
	Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2010 (unaudited)	7
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (unaudited)	8
	Notes to Condensed Consolidated Financial Statements (unaudited)	10
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3 — Quantitative and Qualitative Disclosure about Market Risk		42
Item 4 — Controls and Procedures		42
PART II - OTHER INFORMATION
Item 1 — Legal Proceedings		43
Item 1A — Risk Factors		43
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds		43
Item 3 — Defaults Upon Senior Securities		43
Item 4 — Removed and Reserved		43
Item 5 — Other Information		43
Item 6 — Exhibits		43
Signatures		44

 

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Part I - FINANCIAL INFORMATION

 

ITEM 1.  Condensed Consolidated Financial Statements

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

		September 30, 2010 (unaudited)			December 31, 2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	11,097		$	22,411
Accounts receivable, net of allowance for doubtful accounts of $444 and $390, respectively		27,390			25,807
Inventories		36,797			32,501
Prepaid expenses and other		3,465			2,397
Related party receivables and loans		—			2,806
Current deferred tax assets		885			2,052
Total current assets		79,634			87,974
PROPERTY, PLANT AND EQUIPMENT		66,826			64,944
Less - accumulated depreciation		(26,356		)	(22,892		)
Property, plant and equipment, net		40,470			42,052
GOODWILL, net		40,414			43,164
PURCHASED INTANGIBLE ASSETS, net		50,962			49,079
DEFERRED TAX ASSETS		940			332
OTHER ASSETS, net		1,046			1,443
INVESTMENT IN JOINT VENTURES		—			1,132
TOTAL ASSETS		$	213,466		$	225,176

 

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

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Share Data)

 

		September 30, 2010 (unaudited)			December 31, 2009
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	11,386		$	9,183
Accrued expenses		3,613			4,808
Dividend payable		528			515
Accrued income taxes		847			1,485
Accrued employee compensation and benefits		3,185			4,048
Customer advances		5,128			6,528
Lines of credit		6,735			1,777
Current maturities on long-term debt		7,567			13,485
Current portion of capital lease obligations		301			306
Current deferred tax liabilities		23			—
Total current liabilities		39,313			42,135
LONG-TERM DEBT		23,541			34,120
CAPITAL LEASE OBLIGATIONS		214			436
DEFERRED TAX LIABILITIES		13,469			15,217
OTHER LONG-TERM LIABILITIES		1,140			1,157
Total liabilities		77,677			93,065
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.05 par value; 4,000,000 shares authorized; no issued and outstanding shares		—			—
Common stock, $0.05 par value; 25,000,000 shares authorized; 13,202,177 and 12,870,363 shares issued and outstanding, respectively		660			643
Additional paid-in capital		51,332			46,080
Retained earnings		87,424			85,048
Other cumulative comprehensive income (loss)		(3,627		)	340
Total stockholders’ equity		135,789			132,111
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	213,466		$	225,176

 

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

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(Dollars in Thousands, Except Share Data)

(unaudited)

 

		Three months ended						Nine months ended
		September 30,						September 30,
		2010			2009			2010			2009
NET SALES		$	41,298		$	34,690		$	109,913		$	122,268
COST OF PRODUCTS SOLD		30,445			25,936			82,819			89,032
Gross profit		10,853			8,754			27,094			33,236
COSTS AND EXPENSES:
General and administrative expenses		3,487			2,749			9,990			9,318
Selling expenses		3,047			2,212			7,918			6,376
Amortization of purchased intangible assets		1,376			1,293			3,913			3,709
Total costs and expenses		7,910			6,254			21,821			19,403
INCOME FROM OPERATIONS		2,943			2,500			5,273			13,833
OTHER INCOME (EXPENSE):
Gain on step acquisition of joint ventures		—			—			2,117			—
Other income (expense), net		(416		)	(633		)	(402		)	(560		)
Interest expense		(667		)	(752		)	(2,473		)	(2,521		)
Interest income		6			41			71			145
Equity in earnings of joint ventures		—			91			255			170
INCOME BEFORE INCOME TAXES		1,866			1,247			4,841			11,067
INCOME TAX PROVISION		540			151			891			3,540
NET INCOME		$	1,326		$	1,096		$	3,950		$	7,527
INCOME PER SHARE:
Basic		$	0.10		$	0.09		$	0.30		$	0.59
Diluted		$	0.10		$	0.08		$	0.30		$	0.58
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic		12,939,274			12,632,406			12,807,826			12,597,023
Diluted		12,951,397			12,645,500			12,820,508			12,621,970
DIVIDENDS DECLARED PER COMMON SHARE		$	0.04		$	0.04		$	0.12		$	0.08

 

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

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

(Amounts in Thousands)

(unaudited)

 

													Other
							Additional						Cumulative						Comprehensive
		Common Stock					Paid-In			Retained			Comprehensive						Loss
		Shares		Amount			Capital			Earnings			Income/(loss)			Total			for the Period
Balances, December 31, 2009		12,870		$	643		$	46,080		$	85,048		$	340		$	132,111
Shares issued for AECO acquisition		222		11			3,290			—			—			3,301
Shares issued in connection with stock compensation plans		110		6			64			—			—			70
Tax impact of stock-based compensation		—		—			(639		)	—			—			(639		)
Stock-based compensation		—		—			2,537			—			—			2,537
Dividends		—		—			—			(1,574		)	—			(1,574		)
Net income		—		—			—			3,950			—			3,950			3,950
Derivative valuation, net of tax of $248		—		—			—			—			365			365			365
Change in cumulative foreign currency translation adjustment		—		—			—			—			(4,332		)	(4,332		)	(4,332		)
Balances, September 30, 2010		13,202		$	660		$	51,332		$	87,424		$	(3,627	)	$	135,789		$	(17	)

 

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

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(Dollars in Thousands)

(unaudited)

 

		2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	3,950		$	7,527
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation (including capital lease amortization)		3,908			3,701
Amortization of purchased intangible assets		3,913			3,709
Amortization of capitalized debt issuance costs		489			215
Stock-based compensation		2,537			2,657
Deferred income tax benefit		(953		)	(1,875		)
Equity in earnings of joint ventures		(255		)	(170		)
Gain on step acquisition of joint ventures		(2,117		)	—
Change in (excluding assets acquired):
Accounts receivable, net		2,465			13,632
Inventories		1,198			3,334
Prepaid expenses and other		321			496
Accounts payable		(2,075		)	(5,980		)
Customer advances		(1,327		)	246
Accrued expenses and other liabilities		(1,800		)	(4,078		)
Net cash provided by operating activities		10,254			23,414
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Austin Explosives Company		(3,620		)	—
Step acquisition of joint ventures, net of cash acquired		(2,065		)	—
Acquisition of property, plant and equipment		(2,309		)	(3,238		)
Change in other non-current assets		(59		)	42
Net cash used in investing activities		(8,053		)	(3,196		)

 

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

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(Dollars in Thousands)

(unaudited)

 

		2010			2009
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on syndicated term loans		(15,374		)	(3,912		)
Payment on Nord LB term loans		(593		)	(653		)
Borrowings on bank lines of credit, net		4,682			—
Payment on capital lease obligations		(215		)	(132		)
Payment of dividends		(1,561		)	(513		)
Payment of deferred debt issuance costs		—			(58		)
Net proceeds from issuance of common stock to employees and directors		70			373
Tax impact of stock-based compensation		(639		)	90
Net cash used in financing activities		(13,630		)	(4,805		)
EFFECTS OF EXCHANGE RATES ON CASH		115			258
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(11,314		)	15,671
CASH AND CASH EQUIVALENTS, beginning of the period		22,411			14,360
CASH AND CASH EQUIVALENTS, end of the period		$	11,097		$	30,031

 

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

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(Currency Amounts in Thousands, Except Share and Per Share Data)

 

(unaudited)

 

1.                   BASIS OF PRESENTATION

 

The information included in the Condensed Consolidated Financial Statements is unaudited but includes all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the interim periods presented. 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, 2009.

 

2.                   SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The Condensed Consolidated Financial Statements include the accounts of the Company and its controlled 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 a 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 (loss). 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 agree to 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.

 

In September 2010, the Company’s German subsidiary, DYNAenergetics, entered into a currency swap agreement with its bank to hedge the currency risk associated with a large U.S. Dollar order ($2,700) that was recently awarded to the Company.   Under the agreement, DYNAenergetics will exchange $2,700 for Euros at an exchange rate of 1.269 U.S. Dollars per Euro between January 18, 2011 and February 15, 2011 (the date range of expected payment settlement on this order).  The Company has not designated this derivative as an effective cash

 

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flow hedge and as such, gains and losses related to changes in its valuation will be recorded in the statement of operations.  During the three months and nine months ended September 30, 2010, the Company recorded a gain on this currency swap agreement of $185 based on the U.S. Dollar to Euro exchange rate as of September 30, 2010.  The gain is classified in other income in the Company’s statement of operations.

 

Revenue Recognition

 

Sales of clad metal products and welding services are generally based upon customer specifications set forth in customer purchase orders and require us 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 probable loss, the Company will account for such anticipated loss.

 

Fair Value of Financial Instruments

 

The carrying values of cash and cash equivalents, trade accounts receivable and payable, and accrued expenses are considered to approximate fair value due to the short-term nature of these instruments.  Based upon the 150 basis point increase in our LIBOR/EURIBOR basis borrowing spread negotiated in the October 21, 2009 amendment to our syndicated credit agreement, we believe the fair value of our long-term debt approximates its carrying value at September 30, 2010.  The majority of the Company’s debt was incurred in connection with the acquisition of DYNAenergetics.

 

Additionally, the Company has an interest rate swap agreement (see Note 9) and a foreign currency hedge agreement (see disclosure above in Note 2), which are recorded at fair value.  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company is required to use an established hierarchy for fair value measurements based upon the inputs to the valuation and the degree to which they are observable or not observable in the market. The three levels in the hierarchy are as follows:

 

·                  Level 1 — Inputs to the valuation based upon quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date.

 

·                  Level 2 — Inputs to the valuation include quoted prices in either markets that are not active, or in active markets for similar assets or liabilities, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data.

 

·                Level 3 — Inputs to the valuation that are unobservable inputs for the asset or liability.

 

The highest priority is assigned to Level 1 inputs and the lowest priority to Level 3 inputs.

 

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The Company’s interest rate swap and foreign currency hedge agreements are not exchange listed and are therefore valued with models that use Level 2 inputs.  The degree to which the Company’s credit worthiness impacts the value requires management judgment but as of September 30, 2010 and December 31, 2009, the impact of this assessment on the overall value of the outstanding interest rate swap was not significant and the Company’s valuation of the agreement is classified within Level 2 of the hierarchy.

 

The Company has recorded the fair value of its derivatives as follows:

 

		September 30, 2010					December 31, 2009
		Balance sheet location		Fair value			Balance sheet location		Fair value
Interest rate swap		Accrued expenses		$	164		Accrued expenses		$	820
Foreign currency hedge		Prepaid expenses and other		$	185		Prepaid expenses and other		$	—

 

Related Party Transactions

 

Prior to acquiring the remaining outstanding interests in its unconsolidated joint ventures on April 30, 2010 (See Note 3), the Company had related party transactions with these joint ventures.  Additionally the Company had related party transactions with the former owners of LRI Oil Tools Inc. (“LRI”).  The Company also had transactions in the period from January 1 through September 30, 2009 with LRI who, at the time, was the non-controlling interest partner in one of the Company’s consolidated joint ventures.  A summary of related party balances as of December 31, 2009 is summarized below:

 

		Accounts receivable
		from and loan to
DYNAenergetics RUS		$	2,265
Perfoline		466
Former owners of LRI		75
Total		$	2,806

 

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A summary of related party transactions for the three months ended September 30, 2009 and the nine months ended September 30, 2010 and 2009 is summarized below:

 

		Three Months Ended
		September 30, 2009
					Interest
		Sales to			income from
DYNAenergetics RUS		$	366		$	—
Perfoline		3			12
Minority Interest Partner		301			—
Total		$	670		$	12

 

		Nine Months Ended						Nine Months Ended
		September 30, 2010						September 30, 2009
					Interest						Interest
		Sales to			income from			Sales to			income from
DYNAenergetics RUS		$	663		$	—		$	1,100		$	—
Perfoline		19			13			59			31
Minority Interest Partner		—			—			745			—
Total		$	682		$	13		$	1,904		$	31

 

Earnings Per Share

 

Unvested awards of share-based payments with rights to receive dividends or dividend equivalents, such as the Company’s restricted stock awards (“RSAs”), are considered participating securities for purposes of calculating earnings per share (“EPS”) and require the use of the two class method for calculating EPS.  Under this method, a portion of net income is allocated to these participating securities and therefore is excluded from the calculation of EPS allocated to common stock, as shown in the table below.

 

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Computation and reconciliation of earnings per common share are as follows:

 

		For the Three Months Ended								For the Three Months Ended
		September 30, 2010								September 30, 2009
		Income			Shares		EPS			Income			Shares		EPS
Basic earnings per share:
Net income		$	1,326							$	1,096
Less income allocated to RSAs		(26		)						(22		)
Net income allocated to common stock for EPS calculation		$	1,300		12,939,274		$	0.10		$	1,074		12,632,406		$	0.09
Adjust shares for Dilutives:
Stock-based compensation plans					12,123								13,094
Diluted earnings per share:
Net income		$	1,326							$	1,096
Less income allocated to RSAs		(26		)						(22		)
Net income allocated to common stock for EPS calculation		$	1,300		12,951,397		$	0.10		$	1,074		12,645,500		$	0.08

 

		For the Nine Months Ended								For the Nine Months Ended
		September 30, 2010								September 30, 2009
		Income			Shares		EPS			Income			Shares		EPS
Basic earnings per share:
Net income		$	3,950							$	7,527
Less income allocated to RSAs		(79		)						(148		)
Net income allocated to common stock for EPS calculation		$	3,871		12,807,826		$	0.30		$	7,379		12,597,023		$	0.59
Adjust shares for Dilutives:
Stock-based compensation plans					12,682								24,947
Diluted earnings per share:
Net income		$	3,950							$	7,527
Less income allocated to RSAs		(79		)						(148		)
Net income allocated to common stock for EPS calculation		$	3,871		12,820,508		$	0.30		$	7,379		12,621,970		$	0.58

 

3.                   ACQUISITIONS

 

Austin Explosives

 

On June 4, 2010, the Company completed its acquisition of Texas-based, Austin Explosives Company (“AECO”), which is now operating under the name DYNAenergetics US, Inc.  This business is now part of the Company’s Oilfield Products business segment.  AECO had been a long-time distributor of DYNAenergetics shaped charges.  This acquisition, along with the acquisition of the outstanding interests in our Russian joint ventures (discussed below), further expands the Company’s Oilfield Products business, and positions the segment to capitalize on the long-term demand from the oil and gas industry.  From June 5, 2010 through September 30, 2010,

 

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DYNAenergetics US, Inc. contributed incremental net sales of $2,187 and an incremental net loss of $10 after the elimination of intercompany sales and the related gross profit. On a standalone basis, DYNAenergetics U.S., Inc. reported sales of $6,097 and net income of $290 for the same period.

 

The acquisition was structured as an asset purchase valued at $6,921 which was financed by (i) the payment of $3,620 in cash and (ii) the issuance of 222,445 shares of common stock of the Company (valued at $3,301).

 

The purchase price of the acquisition was allocated to the Company’s tangible and identifiable intangible assets based on their fair values as determined by appraisals performed as of the acquisition date.  The allocation of the purchase price to the assets of AECO was as follows:

 

Current assets		$	5,792
Property, plant and equipment		368
Intangible assets		4,773
Deferred tax assets		7
Other assets		81
Total assets acquired		11,021
Current liabilities		4,100
Total liabilities assumed		4,100
Net assets acquired		$	6,921

 

The Company acquired identifiable finite-lived intangible assets as a result of the acquisition of AECO.  The finite-lived intangible assets acquired were classified as customer relationships and were valued at $4,773 which will be amortized over 11 years.  These amounts are included in Intangible Assets and are further discussed in Note 7.

 

Russian Joint Ventures

 

On April 30, 2010 the Company purchased the outstanding minority-owned interests in its two Russian joint ventures that were previously majority-owned by the Company’s Oilfield Products business segment.  These joint ventures include DYNAenergetics RUS, which is a Russian trading company that sells the Company’s oilfield products, and Perfoline, which is a Russian manufacturer of perforating gun systems.  The Company paid a combined $2,065 for the respective 45% and 34.81% outstanding stakes in DYNAenergetics RUS and Perfoline.  From April 30, 2010 through September 30, 2010, DYNAenergetics RUS and Perfoline contributed incremental net sales of $2,548 and incremental net income of $213 after the elimination of intercompany sales and the related gross profit.  As standalone companies, these two entities reported sales of $3,165 and net income of $311 for the same period.

 

Prior to the acquisition date, the Company accounted for its 55% and 65.19% interest in DYNAenergetics RUS and Perfoline, respectively, as equity-method investments (See Note 4).  The acquisition date fair value of the previous equity interest was $3,533.  The Company recognized a gain of $2,117 as a result of revaluing its prior equity interest held before the acquisition.  The gain is included in the line item “gain on step acquisition of joint ventures” in the consolidated statement of operations.

 

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Appraisals performed as of the acquisition date resulted in a new fair value of the combined entities of $5,598 which was allocated to the Company’s tangible and identifiable intangible assets as follows:

 

Current assets		$	5,243
Property, plant and equipment		411
Intangible assets		3,669
Deferred tax assets		12
Other assets		56
Total assets acquired		9,391
Line of credit		36
Other current liabilities		2,547
Deferred tax liabilities		813
Other long term liabilities		397
Total liabilities assumed		3,793
Fair value of net assets following step acquisition		$	5,598

 

The Company acquired identifiable finite-lived intangible assets as a result of acquiring the remaining interests of DYNAenergetics RUS and Perfoline.  The finite-lived intangible assets acquired were classified as customer relationships and were valued at $3,669 which will be amortized over 11 years.  These amounts are included in Intangible Assets and are further discussed in Note 7.

 

LRI Oil Tools Inc.

 

On October 1, 2009, the Company completed its acquisition of LRI Oil Tools Inc. (“LRI”), which is part of the Oilfield Products business.  LRI produces and distributes perforating equipment for use by the oil and gas exploration and production industry.  The business had a long-term strategic relationship with the Company’s Oilfield Products segment and had served for several years as its sole Canadian distributor.  From January 1, 2010 through September 30, 2010, LRI contributed incremental net sales of $7,399 and incremental net income of $525 after the elimination of intercompany sales and related gross profit. On a standalone basis, LRI reported sales of $10,808 and net income of $666 for the same period.

 

The acquisition was valued at $5,946 and was financed by (i) the payment of $284 in cash, net of cash acquired of $15, (ii) the issuance of 4,875 shares of common stock of the Company (valued at $94), and (iii) the assumption of $5,553 (5,982 Canadian Dollars (“CAD”)) of LRI’s debt.  The assumed debt consisted of $2,676 (2,883 CAD) for a line of credit, $2,445 (2,634 CAD) for loans with the former owners of LRI and $432 (465 CAD) for capital lease obligations.

 

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