ITEM 2
. Managements 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 Companys 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 (000s).
Executive Overview
Our
business is organized into two segments:
Explosive Metalworking and AMK Welding.
For the three months ended September 30, 2007, Explosive Metalworking
accounted for 96% 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. Year to date Explosive Metalworking accounted
for 96% of our net sales and 98% or our income from operations of continuing
operations before consideration of stock-based compensation expense.
Our
year to date 2007 net sales increased by $32,183 (41.4%) compared to the first
nine months of 2006, reflecting year-to-year net sales increases of $30,921
(41.6%) and $1,262 (36.6%) for our Explosive Metalworking and AMK Welding
segments, respectively. Our operating
income from continuing operations increased by 31.9% to $26,891 in the first
nine months of 2007 from $20,389 in the first nine months of 2006, reflecting a
$6,993 improvement in Explosive Metalworkings operating income and a decrease
of $15 in AMK Weldings operating income.
Income from continuing operations increased by 37.6% to $17,659 for the
nine months ended September 30, 2007 from $12,831 in the same period of
2006. Our net income increased to $17,659
in the first nine months of 2007 from $14,188 in the first nine months of
2006. For the nine months ended
September 30, 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 Metalworkings 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 also account
for a significant portion of total demand. 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 Weldings 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.
17
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 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 Metalworkings 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.
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 Weldings 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 decreased to 35.7% for the first nine months of 2007 from 38.0%
for the first nine 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%.
18
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 increased to
approximately $77.1 million at September 30, 2007 from approximately $68.8
million at December 31, 2006 but was down from the record backlog of
approximately $84.7 million that we reported as of June 30, 2007.
Three
and Nine Months Ended September 30, 2007 Compared to Three and Nine Months
Ended September 30, 2006
Net sales
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
Net sales
|
|
$
|
42,099
|
|
$
|
24,852
|
|
$
|
17,247
|
|
69.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
Percentage
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
Net sales
|
|
$
|
109,964
|
|
$
|
77,781
|
|
$
|
32,183
|
|
41.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales for the third quarter of 2007 increased 69.4% to $42,099 from $24,852 in
the third quarter of 2006. Explosive Metalworking sales increased 71.5% to
$40,326 in the three months ended September 30, 2007 (96% of total sales)
from $23,511 in the same period of 2006 (95% of total sales). Net sales for the nine months ended
September 30, 2007 increased by 41.4% to $109,964 from $77,781 in the same
period of 2006. Sales for our Explosive
Metalworking Group increased 41.6% to $105,257 in the first nine months of 2007
(96% of total sales) from $74,336 for the first nine months 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 $1,773 to third quarter 2007 sales (4% of total sales)
which represented a 32.2% increase from sales of $1,341 in the third quarter of
2006 (5% of total sales). AMK Weldings
year to date 2007 sales increased by 36.6% to $4,707 (4% of total sales)
compared to $3,445 (4% of total sales) in year to date 2006 sales. The
increases in AMKs third quarter and year to date sales relates principally to
increased revenues from H System ground-based gas turbine work.
19
Gross profit
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
Gross profit
|
|
$
|
14,292
|
|
$
|
8,310
|
|
$
|
5,982
|
|
72.0
|
%
|
Consolidated gross profit margin rate
|
|
33.9
|
%
|
33.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
Gross profit
|
|
$
|
37,223
|
|
$
|
27,511
|
|
$
|
9,712
|
|
35.3
|
%
|
Consolidated gross profit margin rate
|
|
33.9
|
%
|
35.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit increased
by 72.0% to $14,292 for the three months ended September 30, 2007 from
$8,310 for the three months ended September 30, 2006. Our third quarter
2007 consolidated gross profit margin rate increased to 33.9% from 33.4% in the
third quarter of 2006. The gross profit margin for Explosive Metalworking
increased from 33.1% in the third quarter of 2006 to 34.3% in the third quarter
of 2007 and the gross profit margin for AMK Welding decreased to 27.7% in the
third quarter of 2007 from 40.8% in the third quarter of 2006.
For the nine months
ended September 30, 2007, gross profit increased to $37,223 from $27,511
for the same period of 2006, a 35.3% increase.
Our year to date consolidated gross profit margin rate decreased to
33.9% from 35.4% for the first nine months of 2006. The gross profit margin rate for Explosive
Metalworking decreased to 34.3% from 35.6%.
For the nine months ended September 30, 2007, the gross profit margin
for AMK Welding decreased to 26.5% from 31.1% for the same period of 2006.
The decreased year to
date gross margin rate for Explosive Metalworking relates primarily to changes
in product mix during the first nine months of 2007 as compared to that for the
first nine months of 2006. AMK Weldings decreased year to date gross margin
rate relates to an increase in fixed manufacturing overhead expenses and
changes in products mix. The increase in
fixed manufacturing overhead expenses at AMK Welding is attributable to the
recently competed facility expansion and staffing additions as AMK readies
itself for anticipated increases in production levels during the remainder of
2007 and in 2008. 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
September 30,
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
General & administrative expenses
|
|
$
|
1,903
|
|
$
|
1,267
|
|
$
|
636
|
|
50.2
|
%
|
Percentage of net sales
|
|
4.5
|
%
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
General & administrative expenses
|
|
$
|
5,419
|
|
$
|
3,948
|
|
$
|
1,471
|
|
37.3
|
%
|
Percentage of net sales
|
|
4.9
|
%
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses increased by
$636, or 50.2%, to $1,903 in the third quarter of 2007 from $1,267 in the third
quarter of 2006. Expense increases
reflect a $229 increase in stock-based compensation, an increase of $179 in
accrued incentive compensation expense, a $154 increase in legal and consulting
expenses, an impact of $61 from annual salary adjustments and staffing changes,
and minor net increases of $13 in a number of other expense categories. As a percentage of net sales, general and
administrative expenses decreased to 4.5% in the third quarter of 2007 from
5.1% in the third quarter of 2006.
General and administrative expenses for the nine
months ended September 30, 2007 totaled $5,419 compared to $3,948 for the same
period of 2006. This reflects an
increase of 37.3%. The $1,471 increase
in 2007 general and administrative expenses for the nine-month period reflects
an impact of $399 from annual salary adjustments and staffing changes, a $308
increase in legal and consulting expenses, a $294 increase in accrued incentive
compensation expense, a $262 increase in stock-based compensation and net
increases of $208 in a number of other expense categories. As a percentage of net sales, general and
administrative expenses decreased to 4.9% in the first nine months of 2007 from
5.1% in the first nine months of 2006.
Selling expenses
|
|
Three Months Ended
September 30,
|
|
|
|
Percentage
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
Selling expenses
|
|
$
|
1,811
|
|
$
|
904
|
|
$
|
907
|
|
100.3
|
%
|
Percentage of net sales
|
|
4.3
|
%
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
Percentage
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
Selling expenses
|
|
$
|
4,913
|
|
$
|
3,174
|
|
$
|
1,739
|
|
54.8
|
%
|
Percentage of net sales
|
|
4.5
|
%
|
4.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses,
which include sales commissions of $663 in 2007 and $79 in 2006, increased by
100.3% to $1,811 in the third quarter of 2007 from $904 in the third quarter of
2006. The $907 increase in selling
expenses reflects an increase in sales commissions of $584, an $86 increase in
accrued incentive compensation expense, an impact of $70 from annual salary
adjustments and staffing changes, and a $53 increase in stock-based
compensation expense. As a percentage of
net sales, selling expenses increased to 4.3% in the third quarter of 2007 from
3.6% in the third quarter of 2006.
Selling expenses increased
by 54.8% to $4,913 in the first nine months of 2007 from $3,174 in the same
period of 2006. These expenses include
sales commissions of $1,378 and $674 for 2007 and 2006, respectively. The $1,739 increase in 2007 selling expenses
for the nine-month period includes an increase in sales commissions of $704, an
impact of $290 from annual salary
21
adjustments and staffing
changes, an increase of $173 in accrued incentive compensation expense, a $107
increase in the provision for doubtful accounts and an increase of $130 in
stock-based compensation expense. As a
percentage of net sales, selling expenses increased to 4.5% in the first nine
months of 2007 from 4.1% in the first nine months of 2006.
Income
from operations of continuing operations
|
|
Three Months Ended
September 30,
|
|
|
|
Percentage
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
Income from operations of continuing operations
|
|
$
|
10,578
|
|
$
|
6,139
|
|
$
|
4,439
|
|
72.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
Percentage
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
Income from
operations
of continuing operations
|
|
$
|
26,891
|
|
$
|
20,389
|
|
$
|
6,502
|
|
31.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations increased by 72.3% to $10,578 in the third quarter of 2007 from
$6,139 in the third quarter of 2006.
Explosive Metalworking reported income from operations of $10,646 in the
third quarter of 2007 as compared to $5,831 in the third quarter of 2006. This 82.6% increase is largely attributable
to the 71.5% sales increase discussed above.
AMK Welding reported income from operations of $325 for the three months
ended September 30, 2007 as compared to $391 for the same period of 2006.
Income
from operations increased by 31.9% to $26,891 in the first nine months of 2007
from $20,389 in the first nine months of 2006.
Explosive Metalworking reported income from operations of $27,197 in the
first nine months of 2007 as compared to $20,204 in the first nine months of
2006. This 34.6% increase is largely
attributable to the 41.6% sales increase discussed above. AMK Welding reported income from operations
of $606 for the nine months ended September 30, 2007 as compared to the $621
that it reported for the same period of 2006.
Income from operations of continuing operations
for the three and nine months ended September 30, 2007 includes $393 and $912,
respectively, of stock-based compensation expense compared to stock-based
compensation expense for the three and nine months ended September 30, 2006 of
$83 and $436, respectively. This expense
is not allocated to our two business segments and thus is not included in the
above third quarter and year to date operating income totals for Explosive
Metalworking and AMK Welding.
Interest income (expense), net
|
|
Three Months Ended
September 30,
|
|
|
|
Percentage
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
Interest income, net
|
|
$
|
213
|
|
$
|
121
|
|
$
|
92
|
|
76.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.
|
|
Nine Months Ended
September 30,
|
|
|
|
Percentage
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
Interest income, net
|
|
$
|
578
|
|
$
|
347
|
|
$
|
231
|
|
66.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Net interest
income improved by $92 to a net of $213 in interest income for the third
quarter 2007 from a net of $121 in interest income in the third quarter of
2006. We recorded net interest income of
$578 for the first nine months of 2007 compared to a net interest income of
$347 for the first nine months of 2006, an improvement of $231. This change in net interest income reflects
increased investment earnings on larger average cash balances during 2007.
Income tax provision
|
|
Three Months Ended
September 30,
|
|
|
|
Percentage
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
Income tax provision
|
|
$
|
3,697
|
|
$
|
2,547
|
|
$
|
1,150
|
|
45.2
|
%
|
Effective tax rate
|
|
34.2
|
%
|
40.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
Percentage
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
Income tax provision
|
|
$
|
9,813
|
|
$
|
7,865
|
|
$
|
1,948
|
|
24.8
|
%
|
Effective tax rate
|
|
35.7
|
%
|
38.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded an
income tax provision of $3,697 in the third quarter of 2007 compared to $2,547
in the third quarter of 2006. The
effective tax rate decreased to 34.2% in the third quarter of 2007 from 40.8%
in the third quarter of 2006. The income
tax provisions for the three months ended September 30, 2007 and 2006 include
$3,274 and $2,370, 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. The
lower than expected third quarter 2007 effective tax rate of 34.2% relates to a
favorable tax provision adjustment that was recorded in the third quarter in
connection with the reconciliation of our tax accounts to the actual federal
and state tax returns for 2006 that were completed and filed during the quarter
and to minor adjustments to our estimated effective tax rate for the full year
2007.
For the nine months ended
September 30, 2007, we recorded an income tax provision of $9,813 compared to
$7,865 for the same period of 2006. The
effective tax rate decreased to 35.7% for the first nine months of 2007 from
38.0% for the first nine months of 2006.
The income tax provisions for the nine months ended September 30, 2007
and 2006 include $8,317 and $6,551, respectively, related to U.S. taxes, with
the remainder relating to foreign taxes associated with the operations of
Nobelclad and Nitro Metall.
We
expect our full year 2007 effective tax rate on consolidated pre-tax income to
approximate 36% and our 2008 effective tax rate to range between 36% and 38%.
Income from discontinued operations
|
|
Three Months Ended
September 30,
|
|
|
|
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,
23
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 $2,880, a price
that was below the real estates appraised value. On January 10, 2006, we sold our purchase
option on 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 in discontinued operations, net
of related taxes.
Liquidity and Capital Resources
We have historically financed our
operations from a combination of internally generated cash flow, revolving
credit borrowings, various long-term debt arrangements and the issuance of
common stock. We believe that cash flow
from operations and funds available under our current credit facilities and any
future replacement thereof will be sufficient to fund the working capital, debt
service and capital expenditure requirements of our current business operations
for the foreseeable future.
Nevertheless, our ability to generate sufficient cash flows from operations
will depend upon our success in executing our strategies, including our ability
to secure new customer orders at our operating divisions, and to continue to
implement cost-effective internal processes.
We continue to evaluate potential investment opportunities including
strategic acquisitions and joint ventures.
A significant acquisition or joint venture may require us to secure
additional debt or equity financing.
Debt and other contractual obligations and
commitments
We
have a $10,000 credit facility with Wells Fargo Bank, N.A.
Any restriction on the availability of borrowing under this credit
facility could negatively affect our ability to meet future cash requirements.
Our existing loan agreements include various covenants and restrictions, certain
of which relate to the payment of dividends or other distributions to
stockholders, redemption of capital stock, incurrence of additional
indebtedness, mortgaging, pledging or disposition of major assets and
maintenance of specified financial ratios.
As of September 30, 2007, we were in compliance with all financial
covenants and other provisions of our debt agreements
.
The Companys principal cash flows related to debt
obligations and other contractual obligations and commitments have not
materially changed since December 31, 2006.
Cash flows from operating activities
Net
cash flows provided by operating activities for the nine months ended September
30, 2007 totaled $12,786. Significant
sources of operating cash flow included net income of $17,659, non-cash
depreciation expense of $1,394 and stock-based compensation of $912. These sources of operating cash flow were
partially offset by net negative changes in various components of working
capital in the amount of $6,940. Net
negative changes in working capital included increases in inventories and
prepaid expenses of $13,541 and $636, respectively, and decreases in accrued
expenses and other liabilities of $1,080.
These negative changes in working capital were partially offset by a
decrease in restricted cash and accounts receivable of $3,059 and $2,001,
respectively, and increases in accounts payable and customer advances of $3,125
and $132, respectively. The net negative
changes in working capital are reflective of the growth in our business from
2006 to 2007.
Net
cash flows provided by operating activities for the nine months ended September
30, 2006 totaled $16,257. Significant
sources of operating cash flow included net income of $14,188, non-cash
depreciation and amortization expense of $1,070, $923 from provision for
deferred
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income
taxes, stock-based compensation of $436 and net positive changes in various
components of working capital in the amount of $997. Net positive changes in working capital
included increases in customer advances and accounts payable of $5,961 and
$568, respectively. These positive
changes in working capital were largely offset by increases in accounts
receivable and inventories of $3,885 and $1,608, respectively.
Cash flows from investing activities
Net
cash flows used in investing activities for the first nine months of 2007
totaled $7,358 and consisted primarily of capital expenditures.
Net
cash flows used by investing activities for the first nine months of 2006
totaled $785 and consisted primarily of $5,154 in capital expenditures that
were largely offset by $1,950 from the sale of marketable securities and $2,197
for investment activities of discontinued operations that consisted of the sale
of the Spin Forge real estate purchase option.
Cash flows from financing activities
Net
cash flows used in financing activities for the first nine months of 2007 were
$1,627. Significant uses of cash for
financial activities included a $1,821 payment of annual dividends and a $389
principal payment on a term loan with French bank. Sources of cash flow from financing
activities include $563 in net proceeds from the issuance of common stock
relating to the exercise of stock options.
Net
cash flows used in financing activities for the nine months ended September 30,
2006 were $2,401. Significant uses of
cash for financing activities included a $1,766 payment of annual dividends, a
$361 principal payment on a term loan with French bank and final principal
payments on the industrial development revenue bond in the amount of $1,720,
including $1,630 that was redeemed in advance of scheduled maturity dates. Sources of cash flow from financing
activities included $523 in net proceeds from the issuance of common stock
relating to the exercise of stock options and $948 for tax benefits related to
the exercise of stock options.
Payment of Dividends
We
paid annual dividends in both 2006 and 2007 and may continue to pay annual
dividends in the future subject to capital availability and periodic
determinations that cash dividends are in the best interests of our
stockholders, but we cannot assure you that such payments will continue. Future dividends may be affected by, among
other items, our views on potential future capital requirements, future
business prospects, changes in federal income tax law and any other factors
that our board of directors deems relevant.
Any decision to pay cash dividends is and will continue to be at the
discretion of the board of directors.
Critical Accounting Policies
Our historical consolidated financial
statements and notes to our historical consolidated financial statements
contain information that is pertinent to our managements discussion and
analysis of financial condition and results of operations. Preparation of
financial statements in conformity with accounting principles generally
accepted in the United States requires that our management make estimates,
judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities. However, the accounting principles used by us generally do not
change our reported cash flows or liquidity. Interpretation of the existing
rules must be done and judgments made on how the specifics of a given rule
apply to us.
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In managements opinion, the more
significant reporting areas impacted by managements judgments and estimates
are revenue recognition, asset impairments, inventory valuation and impact of
foreign currency exchange rate risks. Managements judgments and estimates in
these areas are based on information available from both internal and external
sources, and actual results could differ from the estimates, as additional
information becomes known. We believe
the following to be our most critical accounting policies.
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.
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, we provide currently for such anticipated loss.
Asset impairments
We review our long-lived assets held and
used by us for impairment whenever events or changes in circumstances indicate
their carrying amount may not be recoverable. In so doing, we estimate the
future net cash flows expected to result from the use of the asset and its
eventual disposition. If the sum of the expected future net cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized to reduce the asset to its
estimated fair value. Otherwise, an impairment loss is not recognized. Long-lived assets to be disposed of, if any,
are reported at the lower of carrying amount or fair value less cost to sell.
Goodwill
Goodwill is tested for impairment at
least annually on reporting units one level below the segment level and any
impairment is based on the reporting units estimated fair value. Fair value can be determined based on
discounted cash flows, comparable sales or valuations of similar
businesses. Impairment occurs when the
carrying amount of goodwill exceeds its estimated fair value. Our policy is to test goodwill for impairment
in the fourth quarter of each year unless an indicator of impairment arises
earlier.
The entire amount of goodwill, which had
a carrying value of $847 on our balance sheet as of September 30, 2007, relates
to our Explosive Metalworking segment.
Based on the analysis performed in the fourth quarter of 2006, no
impairment was recorded to the carrying value of goodwill.
Impact of foreign currency
exchange rate risks
The functional currency for our 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
26
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 our 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.
Income taxes
We account for income taxes in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109),
which requires the recognition of deferred tax assets and deferred tax
liabilities for the expected future income tax consequences of transactions
that have been included in our financial statements but not our tax
returns. Deferred tax assets and
liabilities are determined based on the temporary differences between the
Consolidated Financial Statement basis and the tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to reverse. We routinely
evaluate deferred tax assets to determine if they will more likely than not be
recovered from future projected taxable income and, if not, we record an
appropriate valuation allowance.
We
adopted the provisions of Financial Accounting Standards Board Interpretation
No. 48, Accounting for Uncertainty in Income Taxes an interpretation of SFAS
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. A
s a result of the implementation of FIN
48, we recognized no material adjustment in the liability for unrecognized
income tax benefits. On the adoption
date of January 1, 2007, we had $394 of unrecognized tax benefits, all of which
would affect our effective tax rate if recognized. At September 30, 2007, the balance of
unrecognized tax benefits remains at $394, and primarily relates to uncertain
U.S. Federal tax positions.
We recognize interest and penalties related to
uncertain tax positions in operating expense.
As of September 30, 2007, our accrual for interest and penalties related
to uncertain tax positions is insignificant.
Our U.S.
Federal tax returns for the tax years 2003-2006 remain open to examination
while most of our state tax returns remain open to examination for the tax
years 2002-2006. Our foreign tax returns
remain open to examination for the tax years 2003-2006 in France and 2001-2006
in Sweden.
During 2005, we completed an
analysis of prior year tax credits and related items. As a result of the analysis, we filed amended
federal and state income tax returns.
The amended state returns reported additional net operating losses and
credits above the amounts we had previously recorded in our books and
records. In assessing these additional
losses and credits, we determined that the utilization of a portion of these
did not meet the more likely than not criteria, due to potential changes in the
states in which we have income tax nexus.
Thus, we recorded a net valuation allowance of approximately $177
against the deferred tax assets during 2005.
As of September 30, 2007, the balance of this allowance is $143.
27
Stock-Based Compensation
Expense
We account for stock-based compensation in
accordance with the provisions of Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment (SFAS 123R). Under the fair value recognition provisions
of SFAS 123R, stock-based compensation cost is estimated at the grant date
based on the value of the award and is recognized as expense ratably over the
requisite service period of the award.
Determining the appropriate fair value model and calculating the fair
value of stock options at the grant date requires judgment, including
estimating stock price volatility, forfeiture rates and expected option life.
ITEM 3
. Quantitative
and Qualitative Disclosure about Market Risk
There have been no events that
materially affect our quantitative and qualitative disclosure about market risk
from that reported in our Annual Report on Form 10-K for the year ended
December 31, 2006.
ITEM 4
.
Controls and Procedures
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Companys
Exchange Act reports is accurately recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms, and that such
information is accumulated and communicated to the Companys management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management
necessarily applied its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
As of September 30, 2007, the Company carried out an evaluation, under
the supervision and with the participation of the Companys management,
including the Companys Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Companys disclosure
controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Based on that evaluation, the Companys Chief
Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures were effective. There have been no changes in the Companys
internal controls during the quarter ended September 30, 2007 or in other
factors that could materially affect the Companys internal controls over
financial reporting.
The Companys management, including the Companys Chief Executive
Officer and Chief Financial Officer, does not expect that the Companys
disclosure controls or its internal controls will prevent all errors and all
fraud. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. As a result of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the Company have
been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake. As a result of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected. Accordingly, the
Companys disclosure controls and procedures are designed to provide
reasonable, not absolute, assurance that the disclosure controls and procedures
are met.
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