Table
of Contents
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,
2009
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
(Registrants
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
(
Do not check if smaller reporting company)
|
|
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 12,886,890 as of October 30,
2009.
Table of Contents
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 - Managements
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, 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:
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 managements 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
Table of Contents
Part I
- FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated
Financial Statements
DYNAMIC MATERIALS
CORPORATION & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in
Thousands)
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
30,031
|
|
$
|
14,360
|
|
Accounts
receivable, net of allowance for doubtful accounts of $599 and $614,
respectively
|
|
21,945
|
|
34,719
|
|
Inventories
|
|
32,565
|
|
35,300
|
|
Prepaid
expenses and other
|
|
2,150
|
|
2,956
|
|
Related
party receivable and loan
|
|
2,626
|
|
2,611
|
|
Current
deferred tax assets
|
|
1,867
|
|
1,103
|
|
|
|
|
|
|
|
Total
current assets
|
|
91,184
|
|
91,049
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT
|
|
62,473
|
|
58,454
|
|
Less
- Accumulated depreciation
|
|
(21,705
|
)
|
(17,997
|
)
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
40,768
|
|
40,457
|
|
|
|
|
|
|
|
GOODWILL,
net
|
|
44,045
|
|
43,066
|
|
|
|
|
|
|
|
PURCHASED
INTANGIBLE ASSETS, net
|
|
50,137
|
|
52,264
|
|
|
|
|
|
|
|
DEFERRED
TAX ASSETS
|
|
344
|
|
331
|
|
|
|
|
|
|
|
OTHER
ASSETS, net
|
|
1,259
|
|
1,449
|
|
|
|
|
|
|
|
INVESTMENT
IN JOINT VENTURES
|
|
1,182
|
|
970
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
228,919
|
|
$
|
229,586
|
|
The accompanying
notes are an integral part of these Condensed Consolidated Financial
Statements.
4
Table of
Contents
DYNAMIC MATERIALS
CORPORATION & SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Dollars in
Thousands, Except Share Data)
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
Accounts
payable
|
|
$
|
9,403
|
|
$
|
15,402
|
|
Accrued
expenses
|
|
4,717
|
|
6,605
|
|
Dividend
payable
|
|
515
|
|
|
|
Accrued
income taxes
|
|
72
|
|
846
|
|
Accrued
employee compensation and benefits
|
|
4,501
|
|
5,579
|
|
Customer
advances
|
|
3,039
|
|
2,685
|
|
Related
party accounts payable
|
|
28
|
|
17
|
|
Current
maturities on long-term debt
|
|
10,690
|
|
14,450
|
|
Current
portion of capital lease obligations
|
|
116
|
|
163
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
33,081
|
|
45,747
|
|
|
|
|
|
|
|
LONG-TERM
DEBT
|
|
45,957
|
|
46,178
|
|
|
|
|
|
|
|
CAPITAL
LEASE OBLIGATIONS
|
|
259
|
|
336
|
|
|
|
|
|
|
|
DEFERRED
TAX LIABILITIES
|
|
15,909
|
|
16,833
|
|
|
|
|
|
|
|
OTHER
LONG-TERM LIABILITIES - RELATED PARTY
|
|
366
|
|
303
|
|
|
|
|
|
|
|
OTHER
LONG-TERM LIABILITIES
|
|
1,178
|
|
1,687
|
|
|
|
|
|
|
|
Total
liabilities
|
|
96,750
|
|
111,084
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
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; 12,877,306 and
12,780,877 shares issued and outstanding, respectively
|
|
644
|
|
639
|
|
Additional
paid-in capital
|
|
45,165
|
|
42,050
|
|
Retained
earnings
|
|
84,541
|
|
78,042
|
|
Other
cumulative comprehensive income (loss)
|
|
1,819
|
|
(2,229
|
)
|
|
|
|
|
|
|
Total
stockholders equity
|
|
132,169
|
|
118,502
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
228,919
|
|
$
|
229,586
|
|
The accompanying
notes are an integral part of these Condensed Consolidated Financial
Statements.
5
Table of
Contents
DYNAMIC MATERIALS
CORPORATION & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Dollars in
Thousands, Except Share Data)
(unaudited)
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
NET
SALES
|
|
$
|
34,690
|
|
$
|
52,380
|
|
$
|
122,268
|
|
$
|
173,957
|
|
COST
OF PRODUCTS SOLD
|
|
25,936
|
|
35,355
|
|
89,032
|
|
120,171
|
|
Gross
profit
|
|
8,754
|
|
17,025
|
|
33,236
|
|
53,786
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
2,749
|
|
3,679
|
|
9,318
|
|
10,612
|
|
Selling
expenses
|
|
2,212
|
|
2,611
|
|
6,376
|
|
8,085
|
|
Amortization
expense of purchased intangible assets
|
|
1,293
|
|
1,363
|
|
3,709
|
|
6,188
|
|
Total
costs and expenses
|
|
6,254
|
|
7,653
|
|
19,403
|
|
24,885
|
|
INCOME
FROM OPERATIONS
|
|
2,500
|
|
9,372
|
|
13,833
|
|
28,901
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
Other
income (expense), net
|
|
(633
|
)
|
(268
|
)
|
(560
|
)
|
(227
|
)
|
Interest
expense
|
|
(752
|
)
|
(1,469
|
)
|
(2,521
|
)
|
(4,203
|
)
|
Interest
income
|
|
41
|
|
153
|
|
145
|
|
477
|
|
Equity
in earnings (losses) of joint ventures
|
|
91
|
|
(19
|
)
|
170
|
|
270
|
|
INCOME
BEFORE INCOME TAXES
|
|
1,247
|
|
7,769
|
|
11,067
|
|
25,218
|
|
INCOME
TAX PROVISION
|
|
151
|
|
546
|
|
3,540
|
|
6,535
|
|
NET
INCOME
|
|
$
|
1,096
|
|
$
|
7,223
|
|
$
|
7,527
|
|
$
|
18,683
|
|
INCOME
PER SHARE:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.09
|
|
$
|
0.57
|
|
$
|
0.59
|
|
$
|
1.48
|
|
Diluted
|
|
$
|
0.08
|
|
$
|
0.57
|
|
$
|
0.58
|
|
$
|
1.47
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING -
|
|
|
|
|
|
|
|
|
|
Basic
|
|
12,632,406
|
|
12,463,060
|
|
12,597,023
|
|
12,426,369
|
|
Diluted
|
|
12,645,500
|
|
12,556,320
|
|
12,621,970
|
|
12,546,743
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS
DECLARED PER COMMON SHARE
|
|
$
|
0.04
|
|
$
|
|
|
$
|
0.08
|
|
$
|
0.15
|
|
The accompanying
notes are in integral part of these Condensed Consolidated Financial
Statements.
6
Table of
Contents
DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(Amounts in Thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Cumulative
|
|
|
|
Comprehensive
|
|
|
|
Common
Stock
|
|
Paid-In
|
|
Retained
|
|
Comprehensive
|
|
|
|
Income
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Income
(loss)
|
|
Total
|
|
for the
Period
|
|
Balances,
December 31, 2008
|
|
12,781
|
|
$
|
639
|
|
$
|
42,050
|
|
$
|
78,042
|
|
$
|
(2,229
|
)
|
$
|
118,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for stock option exercises
|
|
78
|
|
4
|
|
260
|
|
|
|
|
|
264
|
|
|
|
Restricted
stock awards
|
|
12
|
|
1
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Shares
issued in connection with the employee stock purchase plan
|
|
6
|
|
|
|
109
|
|
|
|
|
|
109
|
|
|
|
Excess
tax benefit related to stock options
|
|
|
|
|
|
90
|
|
|
|
|
|
90
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
2,657
|
|
|
|
|
|
2,657
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
(1,028
|
)
|
|
|
(1,028
|
)
|
|
|
Net
income
|
|
|
|
|
|
|
|
7,527
|
|
|
|
7,527
|
|
7,527
|
|
Derivative
valuation adjustment, net of tax of $172
|
|
|
|
|
|
|
|
|
|
301
|
|
301
|
|
301
|
|
Change
in cumulative foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
3,747
|
|
3,747
|
|
3,747
|
|
Balances,
September 30, 2009
|
|
12,877
|
|
$
|
644
|
|
$
|
45,165
|
|
$
|
84,541
|
|
$
|
1,819
|
|
$
|
132,169
|
|
$
|
11,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
7
Table of
Contents
DYNAMIC MATERIALS
CORPORATION & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Dollars in Thousands)
(unaudited)
|
|
2009
|
|
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
income
|
|
$
|
7,527
|
|
$
|
18,683
|
|
Adjustments
to reconcile net income to net cash provided by operating activities -
|
|
|
|
|
|
Depreciation
(including capital lease amortization)
|
|
3,701
|
|
3,621
|
|
Amortization
of purchased intangible assets
|
|
3,709
|
|
6,188
|
|
Amortization
of capitalized debt issuance costs
|
|
215
|
|
210
|
|
Stock-based
compensation
|
|
2,657
|
|
2,363
|
|
Deferred
income tax benefit
|
|
(1,875
|
)
|
(2,735
|
)
|
Equity
in earnings of joint ventures
|
|
(170
|
)
|
(270
|
)
|
Change
in -
|
|
|
|
|
|
Accounts
receivable, net
|
|
13,632
|
|
7,631
|
|
Inventories
|
|
3,334
|
|
262
|
|
Prepaid
expenses and other
|
|
496
|
|
(2,549
|
)
|
Accounts
payable
|
|
(5,980
|
)
|
(3,771
|
)
|
Customer
advances
|
|
246
|
|
218
|
|
Accrued
expenses and other liabilities
|
|
(4,078
|
)
|
(5,046
|
)
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
23,414
|
|
24,805
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
Acquisition
of property, plant and equipment
|
|
(3,238
|
)
|
(7,325
|
)
|
Change
in other non-current assets
|
|
42
|
|
50
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
(3,196
|
)
|
(7,275
|
)
|
|
|
|
|
|
|
|
|
The accompanying
notes are an integral part of these Condensed Consolidated Financial
Statements.
8
Table of
Contents
DYNAMIC MATERIALS
CORPORATION & SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Dollars in
Thousands)
|
|
2009
|
|
2008
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
Payment
on syndicated term loans
|
|
(3,912
|
)
|
|
|
Payment
on term loan with French bank
|
|
|
|
(441
|
)
|
Payment
on Nord LB term loans
|
|
(653
|
)
|
(810
|
)
|
Borrowings
on bank lines of credit, net
|
|
|
|
7,247
|
|
Payment
of capital lease obligations
|
|
(132
|
)
|
(308
|
)
|
Payment
of dividends
|
|
(513
|
)
|
(1,894
|
)
|
Payment
of deferred debt issuance costs
|
|
(58
|
)
|
(167
|
)
|
Net
proceeds from issuance of common stock to employees and directors
|
|
373
|
|
333
|
|
Excess
tax benefit related to exercise of stock options
|
|
90
|
|
9
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
(4,805
|
)
|
3,969
|
|
|
|
|
|
|
|
EFFECTS
OF EXCHANGE RATES ON CASH
|
|
258
|
|
(36
|
)
|
|
|
|
|
|
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
15,671
|
|
21,463
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of the period
|
|
14,360
|
|
9,045
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of the period
|
|
$
|
30,031
|
|
$
|
30,508
|
|
|
|
|
|
|
|
|
|
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
Companys Annual Report filed on Form 10-K for the year ended December 31,
2008. Certain prior year balances in the
consolidated financial statements and notes have been reclassified to conform
to the 2009 presentation.
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 entities 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 Companys foreign operations is the applicable
local currency for each affiliate company. Assets and liabilities of foreign
subsidiaries 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 Companys 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.
10
Table of Contents
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 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 credit agreement (see Note 6), we believe the fair value
of our long-term debt is approximately 5% less than its carrying value at September 30,
2009. The majority of the Companys debt
was incurred in connection with the acquisition of DYNAenergetics.
Additionally, the Company has an interest rate swap agreement (see Note
6), which is 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.
The Companys interest rate swap agreement is not exchange listed and
is therefore valued with models that use Level 2 inputs. The degree to which the Companys credit
worthiness impacts the value requires management judgment but as of September 30,
2009 and December 31, 2008, the impact of this assessment on the overall
value of the outstanding interest rate swap was not significant and the
Companys valuation of the agreement is classified within Level 2 of the
hierarchy.
11
Table of
Contents
Related
Party Transactions
The
Company has related party transactions with its unconsolidated joint ventures,
as well as with the minority shareholder of one of its consolidated joint
ventures. A summary of related party
balances as of September 30, 2009 and December 31, 2008 is summarized
below:
|
|
As of September 30, 2009
|
|
As of December 31, 2008
|
|
|
|
Accounts
|
|
Accounts
|
|
Other
|
|
Accounts
|
|
Accounts
|
|
Other
|
|
|
|
receivable from
|
|
payable to
|
|
long-term
|
|
receivable from
|
|
payable to
|
|
long-term
|
|
|
|
and loan to
|
|
and loan from
|
|
loan from
|
|
and loan to
|
|
and loan from
|
|
loan from
|
|
Perfoline
|
|
$
|
483
|
|
$
|
18
|
|
$
|
|
|
$
|
449
|
|
$
|
17
|
|
$
|
|
|
DYNAenergetics
RUS
|
|
1,273
|
|
|
|
|
|
1,582
|
|
|
|
|
|
Minority
Interest Partner
|
|
870
|
|
10
|
|
366
|
|
580
|
|
|
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,626
|
|
$
|
28
|
|
$
|
366
|
|
$
|
2,611
|
|
$
|
17
|
|
$
|
303
|
|
A summary of related
party transactions for the three and nine months ended September 30, 2009
and 2008 is summarized below:
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
|
September 30, 2009
|
|
September 30, 2008
|
|
|
|
|
|
Interest
|
|
|
|
Interest
|
|
|
|
Sales to
|
|
income from
|
|
Sales to
|
|
income from
|
|
Perfoline
|
|
$
|
3
|
|
$
|
12
|
|
$
|
115
|
|
$
|
11
|
|
DYNAenergetics RUS
|
|
366
|
|
|
|
1,008
|
|
|
|
Minority Interest Partner
|
|
301
|
|
|
|
547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
670
|
|
$
|
12
|
|
$
|
1,670
|
|
$
|
11
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30, 2009
|
|
September 30, 2008
|
|
|
|
|
|
Interest
|
|
|
|
Interest
|
|
|
|
Sales to
|
|
income from
|
|
Sales to
|
|
income from
|
|
Perfoline
|
|
$
|
59
|
|
$
|
31
|
|
$
|
162
|
|
$
|
37
|
|
DYNAenergetics RUS
|
|
1,100
|
|
|
|
2,145
|
|
|
|
Minority Interest Partner
|
|
745
|
|
|
|
1,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,904
|
|
$
|
31
|
|
$
|
3,838
|
|
$
|
37
|
|
Earnings
Per Share
Unvested
awards of share-based payments with rights to receive dividends or dividend
equivalents, such as our 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
12
Table of Contents
shown in the table below. The Company was required to adopt this method
on January 1, 2009 retrospectively for periods prior to the adoption date
and as a result, all prior period earnings per share data presented herein have
been adjusted to conform to these provisions.
The Companys adoption of this method resulted in a $.01 per share
reduction to the previously reported basic EPS and no change to the diluted EPS
for the three months ended September 30, 2008. The adoption of this method resulted in a
$.02 per share reduction to the previously reported basic EPS and diluted EPS
for the nine months ended September 30, 2008.
Computation
and reconciliation of earnings per common share are as follows:
|
|
For the Three Months Ended
|
|
For the Three Months Ended
|
|
|
|
September 30, 2009
|
|
September 30, 2008
|
|
|
|
Income
|
|
Shares
|
|
EPS
|
|
Income
|
|
Shares
|
|
EPS
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,096
|
|
|
|
|
|
$
|
7,223
|
|
|
|
|
|
Less
income allocated to RSAs
|
|
22
|
|
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income allocated to common stock for EPS calculation
|
|
$
|
1,074
|
|
12,632,406
|
|
$
|
0.09
|
|
$
|
7,111
|
|
12,463,060
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjust
shares for Dilutives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation plans
|
|
|
|
13,094
|
|
|
|
|
|
93,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,096
|
|
|
|
|
|
$
|
7,223
|
|
|
|
|
|
Less
income allocated to RSAs
|
|
22
|
|
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income allocated to common stock for EPS calculation
|
|
$
|
1,074
|
|
12,645,500
|
|
$
|
0.08
|
|
$
|
7,111
|
|
12,556,320
|
|
$
|
0.57
|
|
|
|
For the Nine Months Ended
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2009
|
|
September 30, 2008
|
|
|
|
Income
|
|
Shares
|
|
EPS
|
|
Income
|
|
Shares
|
|
EPS
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
7,527
|
|
|
|
|
|
$
|
18,683
|
|
|
|
|
|
Less
income allocated to RSAs
|
|
148
|
|
|
|
|
|
295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income allocated to common stock for EPS calculation
|
|
$
|
7,379
|
|
12,597,023
|
|
$
|
0.59
|
|
$
|
18,388
|
|
12,426,369
|
|
$
|
1.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjust
shares for Dilutives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation plans
|
|
|
|
24,947
|
|
|
|
|
|
120,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
7,527
|
|
|
|
|
|
$
|
18,683
|
|
|
|
|
|
Less
income allocated to RSAs
|
|
148
|
|
|
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income allocated to common stock for EPS calculation
|
|
$
|
7,379
|
|
12,621,970
|
|
$
|
0.58
|
|
$
|
18,391
|
|
12,546,743
|
|
$
|
1.47
|
|
13
Table of Contents
Recent
Accounting Pronouncements
In December 2007, the Financial Accounting
Standards Board (FASB) issued authoritative guidance on business combinations
and the accounting for noncontrolling interests. This new guidance significantly changed the
accounting for and reporting of business combination transactions and
noncontrolling (minority) interests in consolidated financial statements on January 1,
2009. The adoption of this guidance in
2009 did not have a significant impact on the Companys results of operations
or financial position.
In March 2008, the FASB issued authoritative
guidance on the disclosures about derivative instruments and hedging activities. This guidance requires additional disclosures
related to the use of derivative instruments, the accounting for derivatives
and how derivatives impact financial statements on January 1, 2009.
The adoption of this guidance in 2009 did not have any impact on the
Companys results of operations or financial position.
In April 2009, the FASB issued
authoritative guidance requiring disclosures about the fair value of financial
instruments for interim financial statements of publicly traded companies.
This guidance became effective for interim
reporting periods ending after June 15, 2009 and the
adoption of it in the second quarter of 2009 did not have any
impact on the
Companys results of operations or financial position.
In May 2009, the FASB issued authoritative
guidance that provides general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. Specifically, this standard sets
forth the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. This guidance is effective for financial
statements issued for fiscal years and interim periods beginning after June 15,
2009 and will be applied prospectively.
The Company adopted this guidance in the periods ended June 30,
2009 and has evaluated for subsequent events through October 30, 2009, the
issuance date of the Companys September 30, 2009 consolidated financial
statements. Besides the amendment to our
credit agreement and the acquisition of a Canadian-based LRI Oil Tools company
discussed in Notes 6 and 9, respectively, no other recognized or non-recognized
subsequent events were noted.
3. INVESTMENT IN JOINT
VENTURES
Operating results include the Companys
proportionate share of income from unconsolidated joint ventures, which are
accounted for under the equity method.
These investments (all of which resulted from the acquisition of
DYNAenergetics and pertain to the Companys Oilfield Products business segment)
include the following: (1) 65.19% interest in Perfoline, which is a
Russian manufacturer of perforating gun systems and (2) 55% interest in
DYNAenergetics RUS which is a Russian trading company that sells the Companys
oilfield products. Due to certain
noncontrolling interest veto rights that allow the noncontrolling 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 $1,182 and $970 as of September 30,
2009 and December 31, 2008, respectively.
14
Table of
Contents
Summarized unaudited financial information for the
joint ventures accounted for under the equity method as of September 30,
2009 and December 31, 2008 and for the three and nine months ended September 30,
2009 and 2008 is as follows:
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Current assets
|
|
$
|
4,070
|
|
$
|
4,667
|
|
Noncurrent assets
|
|
672
|
|
714
|
|
Total assets
|
|
$
|
4,742
|
|
$
|
5,381
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
1,531
|
|
$
|
2,064
|
|
Noncurrent liabilities
|
|
651
|
|
830
|
|
Equity
|
|
2,560
|
|
2,487
|
|
Total liabilities and equity
|
|
$
|
4,742
|
|
$
|
5,381
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net sales
|
|
$
|
1,645
|
|
$
|
1,875
|
|
$
|
4,427
|
|
$
|
6,600
|
|
Operating income
|
|
$
|
233
|
|
$
|
120
|
|
$
|
596
|
|
$
|
908
|
|
Net income
|
|
$
|
168
|
|
$
|
60
|
|
$
|
310
|
|
$
|
595
|
|
Equity in earnings (losses) of joint ventures
|
|
$
|
91
|
|
$
|
(19
|
)
|
$
|
170
|
|
$
|
270
|
|
4. INVENTORY
The
components of inventory are as follows at September 30, 2009 and December 31,
2008:
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Raw materials
|
|
$
|
10,671
|
|
$
|
11,610
|
|
Work-in-process
|
|
16,154
|
|
18,950
|
|
Finished goods
|
|
4,913
|
|
3,903
|
|
Supplies
|
|
827
|
|
837
|
|
|
|
|
|
|
|
|
|
$
|
32,565
|
|
$
|
35,300
|
|
15
Table of
Contents
5. PURCHASED INTANGIBLE ASSETS
The following table
presents details of our purchased intangible assets, other than goodwill, as of
September 30, 2009:
|
|
|
|
Accumulated
|
|
|
|
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Core technology
|
|
$
|
24,424
|
|
$
|
(2,290
|
)
|
$
|
22,134
|
|
Customer relationships
|
|
32,955
|
|
(6,866
|
)
|
26,089
|
|
Trademarks / Trade names
|
|
2,660
|
|
(746
|
)
|
1,914
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
60,039
|
|
$
|
(9,902
|
)
|
$
|
50,137
|
|
The following table
presents details of our purchased intangible assets, other than goodwill, as of
December 31, 2008:
|
|
|
|
Accumulated
|
|
|
|
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Core technology
|
|
$
|
23,596
|
|
$
|
(1,327
|
)
|
$
|
22,269
|
|
Customer relationships
|
|
31,837
|
|
(3,980
|
)
|
27,857
|
|
Trademarks / Trade names
|
|
2,570
|
|
(432
|
)
|
2,138
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
58,003
|
|
$
|
(5,739
|
)
|
$
|
52,264
|
|
The
increase in the gross value of our purchased intangible assets from December 31,
2008 to September 30, 2009 is due solely to the impact of foreign currency
translation. The increase in goodwill
from $43,066 at December 31, 2008 to $44,045 at September 30, 2009 is
also due solely to the impact of foreign currency translation.
6. DEBT
Long-term debt consists of the
following at September 30, 2009 and December 31, 2008:
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Syndicated credit agreement term loan
|
|
$
|
37,756
|
|
$
|
40,500
|
|
Syndicated credit agreement Euro term loan
|
|
17,140
|
|
17,763
|
|
Nord LB 3,000 Euro term loan
|
|
1,751
|
|
2,326
|
|
Nord LB 500 Euro term loan
|
|
|
|
39
|
|
|
|
56,647
|
|
60,628
|
|
Less current maturities
|
|
(10,690
|
)
|
(14,450
|
)
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
45,957
|
|
$
|
46,178
|
|
Loan
Covenants and Restrictions
The Companys existing loan agreements include
various covenants and restrictions, certain of which relate to the incurrence
of additional indebtedness; mortgaging, pledging or disposition of
16
Table of Contents
major assets; limits on capital expenditures; and
maintenance of specified financial ratios.
As of September 30, 2009, the Company was in compliance with all
financial covenants and other provisions of its debt agreements.
On October 21, 2009, the Companys syndicated
credit agreement (credit facility) was amended, effective September 30,
2009, to revise the leverage ratios and fixed charge coverage ratios that the
Company is required to satisfy on a quarterly basis throughout the term of the
credit facility, which expires on November 16, 2012. These revised ratios will ease the Companys
ability to comply with certain covenants of the credit agreement. The pricing
grid applicable to drawn and undrawn amounts under the credit facility was also
amended and will increase our going forward effective interest rate on
outstanding borrowings by 1.5% per annum.
Swap
Agreement
On November 17, 2008, the Company entered
into a two-year interest rate swap agreement with an initial notional amount of
$40,500 (decreasing to $33,750 in November 2009) that effectively
converted the LIBOR based variable rate US borrowings under the syndicated
credit agreement to a fixed rate of 4.87% (4.62% effective May 15, 2009
due to an improvement in the Companys leverage ratio). The Company had designated the swap agreement
as an effective cash flow hedge with matched terms and, as a result,
changes in the fair value of the swap agreement were recorded in other
comprehensive income with the offset as a swap agreement asset or liability.
During the quarter ended June 30, 2009, the Company made an
unanticipated repayment of $2,744 on its variable rate US borrowings and
elected to de-designate this portion of the cash flow hedge. Settlements and changes in the fair value related
to the de-designated portion of the cash flow hedge are recorded as realized
and unrealized gains/losses on swap agreement within other income in the
Companys statement of operations. The
Company recorded an immaterial loss of less than $100 during the quarter ended June 30,
2009 and less than $10 during the quarter ended September 30, 2009.
The Company has recorded the fair value of its
interest rate swap agreement as follows:
|
|
September 30, 2009
|
|
December 31, 2008
|
|
Interest rate swap liability
|
|
Balance sheet location
|
|
Fair value
|
|
Balance sheet location
|
|
Fair value
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion
|
|
Accrued expenses
|
|
$
|
894
|
|
Accrued expenses
|
|
$
|
759
|
|
Long-term
portion
|
|
Other long-term
liabilities
|
|
136
|
|
Other long-term
liabilities
|
|
647
|
|
|
|
|
|
$
|
1,030
|
|
|
|
$
|
1,406
|
|
7. 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
products of this group are clad metal plates which are used by customers in the
fabrication of pressure vessels, heat exchangers and other equipment for
various industries, including upstream oil and gas, oil refinery,
petrochemicals, alternative energy, hydrometallurgy, power generation,
industrial refrigeration, and similar industries and internally to produce
transition joints for use in the aluminum production and shipbuilding
industries. The Oilfield Products segment
manufactures, markets and sells oilfield perforating equipment and explosives,
including detonating cords, detonators, bi-
17
Table of Contents
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
engine 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 Companys reportable segments are
separately managed strategic business units that offer different products and
services. Each segments products are marketed to different customer types and
require different manufacturing processes and technologies.
Segment information is
presented for the three and nine months ended September 30, 2009 and 2008
as follows:
|
|
Explosive
|
|
|
|
|
|
|
|
|
|
Metalworking
|
|
Oilfield
|
|
AMK
|
|
|
|
|
|
Group
|
|
Products
|
|
Welding
|
|
Total
|
|
For
the three months ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
27,327
|
|
$
|
5,123
|
|
$
|
2,240
|
|
$
|
34,690
|
|
Depreciation
and amortization
|
|
$
|
1,527
|
|
$
|
912
|
|
$
|
114
|
|
$
|
2,553
|
|
Income
from operations
|
|
$
|
3,370
|
|
$
|
(414
|
)
|
$
|
441
|
|
$
|
3,397
|
|
Equity
in earnings of joint ventures
|
|
$
|
|
|
$
|
91
|
|
$
|
|
|
91
|
|
Unallocated
amounts:
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
(897
|
)
|
Other
expense
|
|
|
|
|
|
|
|
(633
|
)
|
Interest
expense
|
|
|
|
|
|
|
|
(752
|
)
|
Interest
income
|
|
|
|
|
|
|
|
41
|
|
Consolidated
income before income taxes
|
|
|
|
|
|
|
|
$
|
1,247
|
|
|
|
Explosive
|
|
|
|
|
|
|
|
|
|
Metalworking
|
|
Oilfield
|
|
AMK
|
|
|
|
|
|
Group
|
|
Products
|
|
Welding
|
|
Total
|
|
For
the three months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
42,703
|
|
$
|
6,756
|
|
$
|
2,921
|
|
$
|
52,380
|
|
Depreciation
and amortization
|
|
$
|
1,574
|
|
$
|
947
|
|
$
|
109
|
|
$
|
2,630
|
|
Income
from operations
|
|
$
|
8,593
|
|
$
|
725
|
|
$
|
874
|
|
$
|
10,192
|
|
Equity
in losses of joint ventures
|
|
$
|
|
|
$
|
(19
|
)
|
$
|
|
|
(19
|
)
|
Unallocated
amounts:
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
(820
|
)
|
Other
expense
|
|
|
|
|
|
|
|
(268
|
)
|
Interest
expense
|
|
|
|
|
|
|
|
(1,469
|
)
|
Interest
income
|
|
|
|
|
|
|
|
153
|
|
Consolidated
income before income taxes
|
|
|
|
|
|
|
|
$
|
7,769
|
|
18
Table of Contents
|
|
Explosive
|
|
|
|
|
|
|
|
|
|
Metalworking
|
|
Oilfield
|
|
AMK
|
|
|
|
|
|
Group
|
|
Products
|
|
Welding
|
|
Total
|
|
For
the nine months ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
102,403
|
|
$
|
13,171
|
|
$
|
6,694
|
|
$
|
122,268
|
|
Depreciation
and amortization
|
|
$
|
4,452
|
|
$
|
2,616
|
|
$
|
342
|
|
$
|
7,410
|
|
Income
from operations
|
|
$
|
17,381
|
|
$
|
(2,013
|
)
|
$
|
1,122
|
|
$
|
16,490
|
|
Equity
in earnings of joint ventures
|
|
$
|
|
|
$
|
170
|
|
$
|
|
|
170
|
|
Unallocated
amounts:
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
(2,657
|
)
|
Other
expense
|
|
|
|
|
|
|
|
(560
|
)
|
Interest
expense
|
|
|
|
|
|
|
|
(2,521
|
)
|
Interest
income
|
|
|
|
|
|
|
|
145
|
|
Consolidated
income before income taxes
|
|
|
|
|
|
|
|
$
|
11,067
|
|
|
|
Explosive
|
|
|
|
|
|
|
|
|
|
Metalworking
|
|
Oilfield
|
|
AMK
|
|
|
|
|
|
Group
|
|
Products
|
|
Welding
|
|
Total
|
|
For
the nine months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
147,344
|
|
$
|
19,128
|
|
$
|
7,485
|
|
$
|
173,957
|
|
Depreciation
and amortization
|
|
$
|
6,619
|
|
$
|
2,866
|
|
$
|
324
|
|
$
|
9,809
|
|
Income
from operations
|
|
$
|
28,393
|
|
$
|
775
|
|
$
|
2,096
|
|
$
|
31,264
|
|
Equity
in earnings of joint ventures
|
|
$
|
|
|
$
|
270
|
|
$
|
|
|
270
|
|
Unallocated
amounts:
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
(2,363
|
)
|
Other
expense
|
|
|
|
|
|
|
|
(227
|
)
|
Interest
expense
|
|
|
|
|
|
|
|
(4,203
|
)
|
Interest
income
|
|
|
|
|
|
|
|
477
|
|
Consolidated
income before income taxes
|
|
|
|
|
|
|
|
$
|
25,218
|
|
During the three months ended September 30,
2009, sales to one customer represented approximately $4,033 (11.6%) of total
net sales. During the nine months ended September 30,
2009, no sales to any one customer accounted for more than 10% of total
sales. During the three and nine months
ended September 30, 2008, no sales to any one customer accounted for more
than 10% of total net sales.
19
Table of Contents
8. COMPREHENSIVE INCOME
The Companys comprehensive income
for the three and nine months ended September 30, 2009 and 2008 was as
follows:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net income for the period
|
|
$
|
1,096
|
|
$
|
7,223
|
|
$
|
7,527
|
|
$
|
18,683
|
|
Interest rate swap valuation adjustment, net of
tax
|
|
104
|
|
167
|
|
301
|
|
77
|
|
Foreign currency translation adjustment
|
|
3,942
|
|
(9,117
|
)
|
3,747
|
|
(2,010
|
)
|
Comprehensive income
|
|
$
|
5,142
|
|
$
|
(1,727
|
)
|
$
|
11,575
|
|
$
|
16,750
|
|
Other cumulative
comprehensive income (loss) as of September 30, 2009 and December 31,
2008 consisted of the following:
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Currency translation adjustment
|
|
$
|
2,404
|
|
$
|
(1,343
|
)
|
Interest rate swap valuation adjustment, net of
tax of $335 and $520, respectively
|
|
(585
|
)
|
(886
|
)
|
|
|
$
|
1,819
|
|
$
|
(2,229
|
)
|
9. SUBSEQUENT EVENT
On
October 1, 2009, the Company acquired all of the stock of Alberta, Canada
based LRI Oil Tools Inc. (LRI). The
purchase price was comprised of cash of $500 Canadian dollars (CAD), 9,584
shares of the Companys restricted common stock (valued at approximately $200
CAD) and the assumption of approximately $8,400 CAD of LRIs liabilities. Immediately following the closing of the transaction,
the Company repaid $1,200 CAD of loans payable to the former shareholders of
LRI. These loans were included in the
debt assumed by the Company.
LRI
produces and distributes perforating equipment for use by the oil and gas
exploration and production industry. The
business has had a long-term strategic relationship with the Companys Oilfield
Products segment, and has served for several years as its sole Canadian
distributor.
20
Table of Contents
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, 2008.
Unless stated
otherwise, all dollar figures in this discussion are presented in thousands
(000s).
Executive Overview
Our business is
organized into three segments: Explosive
Metalworking, Oilfield Products, and AMK Welding. For the nine months ended September 30,
2009, Explosive Metalworking accounted for 84% of our net sales and 105% of our
income from continuing operations before consideration of stock-based
compensation expense, which is not allocated to our business segments. Our Oilfield Products and AMK Welding
segments accounted for 11% and 5%, respectively, of our year-to-date 2009 net
sales.
Our net sales for the
nine months ended September 30, 2009 decreased by $51,689 (29.7%) compared
to the same period of 2008, reflecting year-to-year net sales decreases of
$44,941 (30.5%), $5,957 (31.1%), and $791 (10.6%) for our Explosive
Metalworking, Oilfield Products, and AMK Welding segments, respectively. The sales decrease of approximately $51.7
million includes a sales volume decrease of approximately $42.8 million and an
unfavorable foreign exchange translation adjustment of approximately $8.9
million on our European sales as a result of the increased value of the U.S.
dollar against the Euro. Income from
operations decreased 52.1% to $13,833 in the nine months ended September 30,
2009 from $28,901 in the same period of 2008.
This $15,068 decrease reflects declines in Explosive Metalworkings,
Oilfield Products, and AMK Weldings operating income of $11,012, $2,788, and
$974, respectively, and a $294 increase in stock-based compensation
expense. Our net income decreased by
59.7% to $7,527 for the nine months ended September 30, 2009 from $18,683
for the same period of 2008.
Impact of Current Economic
Situation on the Company
The
Company was only minimally impacted in 2008 by the global economic
slowdown. However, during the first
nine months of 2009, we have seen a significant slowdown in Explosive
Metalworking sales to
some of the markets we serve. The explosion-weld clad plate market is
dependent upon sales of products for use by customers in a number of heavy
industries, including oil and gas, alternative energy, chemicals and
petrochemicals, hydrometallurgy, aluminum production, shipbuilding, power
generation, and industrial refrigeration.
These industries tend to be cyclical in nature and the current worldwide
economic downturn has affected many of these markets. Despite the slowdown we have already seen
in certain sectors, including chemical, petrochemical and hydrometallurgy,
quoting activity in other end markets remains healthy and we continue to track
an extensive list of large infrastructure projects. While timing of new order
inflow remains difficult to predict, we believe that our Explosive Metalworking
segment is well-positioned to benefit as global economic conditions improve.
As
a result of the 29.7% decline in our net sales during the nine months ended September 30,
2009 and the decrease in our Explosive Metalworking backlog from $97,247 at December 31,
2008 to $62,912 at September 30, 2009, we now expect our consolidated net
sales in 2009 to decrease approximately 29% to 31% from the amount we achieved
in 2008. In light of the
21
Table
of Contents
slowdown in order
inflow that we are experiencing, we are continuing to carefully manage
expenses. We generated cash flow from
operations of $23,414 during the nine months ended September 30, 2009 and
expect to generate additional positive cash flow from operations over the next
several quarters.
Net sales
Explosive
Metalworkings revenues 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
oil and gas, petrochemicals, alternative energy, hydrometallurgy, aluminum
production, shipbuilding, power generation, industrial refrigeration, and
similar industries. While a large
portion of the demand for our clad metal products is driven by new plant
construction and large plant expansion projects, maintenance and retrofit
projects at existing chemical processing, petrochemical processing, oil
refining, and aluminum smelting facilities also account for a significant
portion of total demand.
Oilfield
Products revenues are generated principally from sales of shaped charges,
detonators and detonating cord, boosters and perforating guns to customers who
perform the perforation of oil and gas wells and from sales of seismic products
to customers involved in oil and gas exploration activities.
AMK
Weldings revenues 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.
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.
Cost
of products sold for Oilfield Products include the cost of metals, explosives
and other raw materials used to manufacture shaped charges, detonating
products, and perforating guns as well as employee compensation and benefits,
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.
Income taxes
Our effective income tax rate increased to 32% for the nine months
ended September 30, 2009 from 25.9% for the same period of 2008. Going forward, based upon existing tax
regulations and current federal, state and foreign statutory tax rates, we
expect our full year 2009 effective tax rate on our projected consolidated
pre-tax income to range between 32% and 33%.
22
Table of Contents
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 as consisting 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.
Our
backlog with respect to the Explosive Metalworking segment decreased to $62,912
at September 30, 2009 from $97,247 at December 31, 2008 but increased
slightly from the $57,090 in backlog that we reported at June 30,
2009. As a result of the lower sales
that we reported during the first nine months of 2009 and shipments that we
expect to make in the fourth quarter from our September 30 backlog, we are
now forecasting that our consolidated net sales for fiscal 2009 will decline
approximately 29% to 31% from those reported for fiscal 2008.
Three and Nine Months Ended September 30, 2009
Compared to Three and Nine Months Ended September 30, 2008
Net sales
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
Net sales
|
|
$
|
34,690
|
|
$
|
52,380
|
|
$
|
(17,690
|
)
|
(33.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
Net sales
|
|
$
|
122,268
|
|
$
|
173,957
|
|
$
|
(51,689
|
)
|
(29.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales for the third
quarter of 2009 decreased 33.8% to $34,690 from $52,380 for the third quarter
of 2008. Explosive Metalworking sales
decreased 36.0% to $27,327 for the three months ended September 30, 2009
(79% of total sales) from $42,703 for the same period of 2008 (81% of total
sales). The decrease in Explosive
Metalworking sales reflects a business slowdown in several of the industries
that this business segment serves and includes approximately $1.0 million of
unfavorable foreign exchange translation adjustments.
Oilfield Products
contributed $5,123 to third quarter 2009 sales (15% of total sales), which represents
a 24.2% decrease from sales of $6,756 for the third quarter of 2008 (13% of
total sales). The $1,633 decline in
sales reflects a significant volume decrease as well as approximately $300,000
in unfavorable foreign exchange adjustments.
AMK
Welding contributed $2,240 to third quarter 2009 sales (6% of total sales),
which represents a 23.3% decrease from sales of $2,921 for the third quarter of
2008 (6% of total sales).
Net sales for the nine
months ended September 30, 2009 decreased 29.7% to $122,268 from $173,957
for the same period of 2008. Explosive
Metalworking sales decreased 30.5% to $102,403 for the nine months ended September 30,
2009 (84% of total sales) from $147,344 for the same period of 2008 (85% of
total sales). The decrease in Explosive
Metalworking sales reflects a business slowdown in several of the industries
that this business segment serves and includes approximately $7.0 million of
unfavorable foreign exchange translation adjustments.
23
Table
of Contents
Oilfield Products
contributed $13,171 to the nine months ended September 30, 2009 sales (11%
of total sales), which represents a 31.1% decrease from sales of $19,128 for
the same period of 2008 (11% of total sales).
The $5,957 decline in sales reflects both a volume decrease and a
negative impact of approximately $1.9 million from unfavorable foreign exchange
adjustments.
AMK
Welding contributed $6,694 to the nine month ended September 30, 2009
sales (5% of total sales), which represents a 10.6% decrease from sales of
$7,485 for the same period of 2008 (4% of total sales).
Gross profit
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
Gross profit
|
|
$
|
8,754
|
|
$
|
17,025
|
|
$
|
(8,271
|
)
|
(48.6
|
)%
|
Consolidated gross profit margin rate
|
|
25.2
|
%
|
32.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
Gross profit
|
|
$
|
33,236
|
|
$
|
53,786
|
|
$
|
(20,550
|
)
|
(38.2
|
)%
|
Consolidated gross profit margin rate
|
|
27.2
|
%
|
30.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit decreased by 48.6% to $8,754 for the three months ended September 30,
2009 from $17,025 for the three months ended September 30, 2008. Our third
quarter 2009 consolidated gross profit margin rate decreased to 25.2% from
32.5% for the third quarter of 2008. For
the nine months ended September 30, 2009, gross profit decreased to
$33,236 from $53,786 for the same period of 2008. Our year to date consolidated gross profit
margin rate decreased to 27.2% from 30.9% for the same period of 2008.
The
gross profit margin rate for Explosive Metalworking decreased from 31.9% for
the third quarter of 2008 to 25.8% for the third quarter of 2009. The decreased third quarter 2009 gross profit
margin rate for Explosive Metalworking relates entirely to our European
cladding operations where the gross margin rate for the quarter was 59% lower
than the gross margin rate reported for the third quarter of 2008 on a year to
year sales decline of 53%. Our U.S. clad
division reported only a slightly lower gross margin rate (32% vs. 33%) for the
third quarter of 2009 versus the comparable period of 2008 despite a 24% drop
in sales. Our year to date gross profit
margin rate for Explosive Metalworking decreased to 28.3% from 30.6%. Historically, gross margins for our European
explosion welding divisions have been lower than those reported by our U.S.
division due to less efficient fixed manufacturing cost structures associated
with our smaller European facilities. We
are taking steps to reduce fixed manufacturing overhead costs at all of our
facilities but the benefit of these actions will not be fully reflected in our
gross margin performance until 2010 and will likely be muted by the expected
continuation of a very competitive pricing environment. As has been the case historically, we expect
to see continued fluctuations in Explosive Metalworkings quarterly gross
margin rates in the fourth quarter of 2009 and throughout 2010 that result from
anticipated fluctuations in quarterly sales volume and changes in product mix.
Based upon the volume and mix of product that we expect to ship in the fourth
quarter of 2009, we currently expect fourth quarter gross margins for Explosive
Metalworking to be in a range of 23% to 25% and full year gross margins to be
in a range of 26% to 27%.
24
Table
of Contents
Oilfield
Products reported a gross profit margin rate of 22.4% for the third quarter of
2009 compared to a gross profit margin rate of 35.6% for the third quarter of
2008. Oilfield Products reported a gross
profit margin rate of 21.7% for the nine months ended September 30, 2009
compared to a gross profit margin rate of 32.4% for the same period of 2008.
The large decrease in Oilfield Products third quarter and year to date gross
margin relate principally to third quarter and year to date sales declines of
24.2% and 31.1%, respectively, and resultant less favorable absorption of fixed
manufacturing overhead expenses but also include the impact of non-recurring
costs associated with the relocation of certain production activities during
the second quarter and changes in product/customer mix. Based upon the expected
improvement in this segments sequential quarterly sales and gross margin
performance during the fourth quarter of 2009, we expect Oilfield Products to
report a gross margin in the range of 23% to 25% for the full year 2009.
The
gross profit margin rate for AMK Welding decreased to 29.7% for the third
quarter of 2009 from 37.9% for the third quarter of 2008. The gross profit
margin rate for AMK Welding decreased to 26.5% for the nine months ended September 30,
2009 from 36.3% for the same period of 2008.
The decrease in AMK Weldings gross margin relates principally to an
increase in manufacturing overhead associated with engineering and product
development expenses as AMK seeks to expand both its service offerings and
customer base. We expect AMK Weldings
fourth quarter sales and gross margins to be comparable to those reported in
the third quarter of 2009.
General
and administrative expenses
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
General & administrative expenses
|
|
$
|
2,749
|
|
$
|
3,679
|
|
$
|
(930
|
)
|
(25.3
|
)%
|
Percentage of net sales
|
|
7.9
|
%
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
General & administrative expenses
|
|
$
|
9,318
|
|
$
|
10,612
|
|
$
|
(1,294
|
)
|
(12.2
|
)%
|
Percentage of net sales
|
|
7.6
|
%
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and
administrative expenses decreased by $930, or 25.3%, to $2,749 in the third
quarter of 2009 from $3,679 in the third quarter of 2008. This decrease includes a $199 decrease in
accrued incentive compensation, a decrease of $331 in legal, audit and
consulting expenses, and a net decrease of $399 in all other expenses
categories that reflects the impact of tight controls over discretionary
spending as well as certain non-recurring professional service fees that we
incurred in 2008 relating to the integration of DYNAenergetics. The $930
decrease in total general and administrative expenses also reflects the
positive effect of $70 in favorable foreign exchange translation
adjustments. As a percentage of net
sales, general and administrative expenses increased to 7.9% in the third
quarter of 2009 from 7.0% in the third quarter of 2008.
General and
administrative expenses for the nine months ended September 30, 2009
totaled $9,318 compared to $10,612 for the same period of 2008. General and
administrative expenses of our European divisions decreased by $687, or 15.5%,
as a result of a 5.2% decrease in net expenses as measured in Euros and $463 in
favorable foreign exchange translation adjustments. Our U.S. general and administrative expenses
decreased by $607 or 9.8%. The U.S. decrease reflects a $367 decrease in
accrued incentive compensation and a $307 decrease in legal, audit and
25
Table
of Contents
consulting expenses. As a percentage of net sales, general and
administrative expenses increased to 7.6% in the nine months ended September 30,
2009 from 6.1% in the same period of 2008.
Selling
expenses
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
Selling expenses
|
|
$
|
2,212
|
|
$
|
2,611
|
|
$
|
(399
|
)
|
(15.3
|
)%
|
Percentage of net sales
|
|
6.4
|
%
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
Selling expenses
|
|
$
|
6,376
|
|
$
|
8,085
|
|
$
|
(1,709
|
)
|
(21.1
|
)%
|
Percentage of net sales
|
|
5.2
|
%
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses, which include sales commissions of $237 in 2009 and $157 in 2008,
decreased by 15.3% to $2,212 in the third quarter of 2009 from $2,611 in the
third quarter of 2008. The $399 decrease
in our consolidated selling expenses includes decreased selling expenses of
$219 and $180 at our European and U.S. divisions, respectively. The decrease in European selling expenses
relates principally to staff reductions within our European explosion welding
divisions and also includes $81 of favorable foreign exchange translation adjustments.
The $180 decrease in our U.S. selling expenses reflects decreased sales
commissions of $36, a $68 decrease in bad debt expense, a $68 decrease in
accrued incentive compensation and a net decrease of $8 in other spending
categories. As a percentage of net sales, selling expenses increased to 6.4% in
the third quarter of 2009 from 5.0% in the third quarter of 2008.
Selling expenses decreased
by 21.1% to $6,376 in the nine months ended September 30, 2009 from $8,085
in the same period of 2008. These
selling expenses include sales commissions of $1,045 and $1,209 for 2009 and
2008, respectively.
The $1,709
decrease in our consolidated selling expenses includes decreased year to date
selling expenses of $1,320 and $389 at our European and U.S. divisions,
respectively. The decrease in European selling expenses relates principally to
staff reductions within our European explosion welding divisions and
non-recurring expenses in the first quarter of 2008 relating to the termination
of contracts with former sales agents and also includes $478 of favorable
foreign exchange translation adjustments.
The $389 decrease in our U.S. selling expenses reflects decreased
sales commissions of $103, a $120 decrease in bad debt expense, a $166 decrease
in accrued incentive compensation, a $109 decrease in travel expenses and a
$141 reduction in business development, advertising and promotional expenses
that were partially offset by a $100 increase in salary expense, a $68 increase
in stock-based compensation and a net increase of $82 in other spending categories. As a
percentage of net sales, selling expenses increased to 5.2% in the nine months
ended September 30, 2009 from 4.6% in the same period of 2008.
26
Table
of Contents
Amortization expenses
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
Amortization expense of purchased intangible assets
|
|
$
|
1,293
|
|
$
|
1,363
|
|
$
|
(70
|
)
|
(5.1
|
)%
|
Percentage of net sales
|
|
3.7
|
%
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
Amortization expense of purchased intangible
assets
|
|
$
|
3,709
|
|
$
|
6,188
|
|
$
|
(2,479
|
)
|
(40.1
|
)%
|
Percentage of net sales
|
|
3.0
|
%
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense relates entirely to the amortization of values
assigned to intangible assets in connection with the November 15, 2007
acquisition of DYNAenergetics.
Amortization expense for the three months ended September 30, 2009
includes $897, $299 and $97 relating to values assigned to customer
relationships, core technology and trademarks/trade names, respectively. Amortization expense for the three months
ended September 30, 2008 includes $945, $315 and $103 relating to values
assigned to customer relationships, core technology and trademarks/trade names,
respectively.
Amortization expense for the nine months ended September 30, 2009
includes $2,572, $858 and $279 relating to values assigned to customer
relationships, core technology and trademarks/trade names, respectively. Amortization expense for the nine months
ended September 30, 2008 includes $2,055, $2,866, $956 and $311 relating
to values assigned to order backlog, customer relationships, core technology
and trademarks/trade names, respectively.
The value assigned to order backlog was fully amortized during the first
six months of 2008. Amortization expense
variances for the other categories of purchased intangible assets relate to
foreign exchange translation adjustments.
Amortization expense for 2009 (as measured in Euros) is expected to
approximate 905 for the remaining quarter of 2009 and is expected to remain at
this level for most of calendar year 2010.
Operating income
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
Operating income
|
|
$
|
2,500
|
|
$
|
9,372
|
|
$
|
(6,872
|
)
|
(73.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
Operating income
|
|
$
|
13,833
|
|
$
|
28,901
|
|
$
|
(15,068
|
)
|
(52.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations (operating
income) decreased by 73.3% to $2,500 in the third quarter of 2009 from $9,372
in the third quarter of 2008. For the
nine months ended September 30, 2009 operating income decreased by 52.1%
to $13,833 from $28,901 for the same period of 2008.
27
Table
of Contents
Explosive Metalworking
reported operating income of $3,370 in the third quarter of 2009 as compared to
$8,593 in the third quarter of 2008.
This 60.8% decrease in Explosive Metalworking operating income is
largely attributable to the 36% decrease in net sales discussed above. Explosive Metalworking reported operating
income of $17,381 in the nine months ended September 30, 2009 as compared
to $28,393 in the same period of 2008.
This 38.8% decrease in Explosive Metalworking operating income is
largely attributable to the 30.5% decrease in net sales discussed above.
Oilfield Products
reported an operating loss of $414 for the third quarter of 2009 as compared to
operating income of $725 for the third quarter of 2008. For the nine months ended September 30,
2009, Oilfield Products reported an operating loss of $2,013 as compared to
operating income of $775 for the same period of 2008.
AMK Welding reported
operating income of $441 for the three months ended September 30, 2009 as
compared to $874 for the same period of 2008.
AMK Welding reported operating income of $1,122 for the nine months
ended September 30, 2009 as compared to $2,096 for the same period of
2008.
Operating income for the
three and nine months ended September 30, 2009 includes $897 and $2,657,
respectively, of stock-based compensation compared to stock-based compensation
expense for the three and nine months ended September 30, 2008 of $820 and
$2,363, respectively. This expense is
not allocated to our business segments and thus is not included in the above
first quarter operating income or loss totals for Explosive Metalworking,
Oilfield Products and AMK Welding.
Other income (expense), net
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
Other income (expense), net
|
|
$
|
(633
|
)
|
$
|
(268
|
)
|
$
|
(365
|
)
|
136.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
Other income (expense), net
|
|
$
|
(560
|
)
|
$
|
(227
|
)
|
$
|
(333
|
)
|
146.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other expense for the three months ended September 30, 2009
was $633 compared to net other expense of $268 for the same period of
2008. For year to date 2009, we recorded
net other expense of $560 compared to net other expense of $227 for the same
period of 2008. The large increase in net other expense for the three and nine
month periods relates principally to realized and unrealized foreign exchange
losses recognized in the third quarter of 2009 by consolidated subsidiaries
that prepare their financial statements in functional currencies other than the
U.S. dollar. The foreign exchange losses recorded by our Swedish, German and
Kazakhstan subsidiaries during the third quarter reflect the weakening of the Euro
against the Swedish Krona, the weakening of the U.S. Dollar against the Euro
and weakening of the Kazakhstan Tenge against the Euro, respectively.
28
Table
of Contents
Interest income (expense), net
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
Interest income (expense), net
|
|
$
|
(711
|
)
|
$
|
(1,316
|
)
|
$
|
605
|
|
(46.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
Interest income (expense), net
|
|
$
|
(2,376
|
)
|
$
|
(3,726
|
)
|
$
|
1,350
|
|
(36.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded
net interest expense of $711 in the three months ended September 30, 2009
compared to net interest expense of $1,316 in the same time period of
2008. We recorded net interest expense
of $2,376 in the nine months ended September 30, 2009 compared to net
interest expense of $3,726 in the same period of 2008. This decrease in net interest expense
reflects term debt reductions and lower interest rates.
Income tax provision
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
Income tax provision
|
|
$
|
151
|
|
$
|
546
|
|
$
|
(395
|
)
|
(72.3
|
)%
|
Effective tax rate
|
|
12.1
|
%
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
Income tax provision
|
|
$
|
3,540
|
|
$
|
6,535
|
|
$
|
(2,995
|
)
|
(45.8
|
)%
|
Effective tax rate
|
|
32.0
|
%
|
25.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded an income tax provision of $151 in the third quarter of 2009
compared to $546 in the third quarter of 2008.
The effective tax rate increased to 12.1% in the third quarter of 2009
from 7.0% in the third quarter of 2008.
The income tax provisions for the three months ended September 30,
2009 and 2008 include $1,079 and $83, respectively, related to U.S. taxes, with
the remainder relating to foreign taxes and foreign tax benefits associated
with the operations of Nobelclad and its Swedish subsidiary, Nitro Metall, as
well as the DYNAenergetics and Dynaplat divisions and related holding companies
in Germany and Luxembourg.
The third quarter 2009 effective tax rate of 12.1% represents a
significant deviation from the expected full year 2009 effective tax rate of
34% to 35% that was disclosed at the end of the second quarter. The deviation arose primarily from
adjustments that were identified during the third quarter 2009 preparation and
filing of our 2008 income tax returns and from a more tax-favorable blend of
2009 pre-tax income expected in foreign jurisdictions relative to that expected
in the U.S. The book-to-return
adjustments favorably impacted the third quarter tax provision by approximately
$200 and related primarily to federal and state tax credits and changes in
German law on interest expense. The third quarter 2008 effective tax rate of
7.0% represented a
29
Table of Contents
significant deviation from the then expected full year 2008 effective
tax rate of 32% to 33% that was disclosed at the end of the second quarter of
2008. The deviation arose primarily from
the completion during the third quarter of an Internal Revenue Service
examination and from adjustments that were identified during the third quarter
2008 preparation and filing of our 2007 federal and state tax returns. The closure of the Internal Revenue Service
examination enabled the Company to record previously unrecognized tax benefits
of approximately $300. The book-to-return
adjustments favorably impacted the third quarter tax provision by approximately
$1,100 and related primarily to apportionment factors utilized to compute state
income taxes. As a result of these third
quarter tax provision adjustments, we then expected our full year 2008 blended
effective tax rate on our consolidated pre-tax income to approximate 27%. Our blended effective tax rate for 2009 is
expected to increase to a range from 32% to 33%.
For the nine months ended September 30, 2009, we recorded an
income tax provision of $3,540 compared to $6,535 in the same period of
2008. The effective tax rate increased
to 32.0% in the nine months ended September 30, 2009 from 25.9% in the
same period of 2008. The income tax
provisions for the nine months ended September 30, 2009 and 2008, include
$4,250 and $5,643, respectively, related to U.S. taxes, with the remainder
relating to foreign taxes and foreign tax benefits associated with the
operations of Nobelclad and its Swedish subsidiary, Nitro Metall, as well as
the DYNAenergetics and Dynaplat divisions and related holding companies in
Germany and Luxembourg.
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. In
connection with the acquisition of DYNAenergetics, we entered into a five-year
syndicated credit agreement. The credit
agreement, which provided term loans of $45,000 and 14,000 Euros and revolving
credit loan availability of $25,000 and 7,000 Euros, is through a syndicate of
seven banks. On October 21, 2009,
the credit agreement was amended to revise the leverage ratios and fixed charge
coverage ratios that we are required to satisfy on a quarterly basis throughout
the term of the credit facility, which expires on November 16, 2012.
These revised ratios will ease the Companys ability to comply with
certain covenants of the credit agreement.
The pricing grid applicable to drawn and undrawn amounts
under the credit facility was also amended and will increase our going forward
effective interest rate on outstanding borrowings by 1.5% per annum.
As of September 30,
2009, term loans of $37,756 and 11,746 Euros ($17,140) were outstanding under
the credit facility and an additional $1,751 was outstanding under term loan
obligations of DYNAenergetics. We had no
outstanding revolving credit borrowings under our syndicated credit agreement
or under our separate DYNAenergetics line of credit agreements. While we had approximately $41,600 of
unutilized revolving credit loan capacity as of September 30, 2009 under
our various credit facilities, future borrowings are subject to compliance with
financial covenants that could limit availability.
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. If we are unable to (i) realize sales from our backlog; (ii) secure
new customer orders at attractive prices; and (iii) continue to implement
cost-effective internal processes, our ability to meet cash requirements
through operating activities could be
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impacted. Furthermore, any restriction on the
availability of borrowings under our credit facilities could negatively affect
our ability to meet future cash requirements.
Debt
and other contractual obligations and commitments
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, use of cash for acquisitions, and
maintenance of specified financial ratios.
As of September 30, 2009, 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,
2008.
Cash flows
from operating activities
Net cash flows provided
by operating activities for the nine months ended September 30, 2009
totaled $23,414. Significant sources of
operating cash flow included net income of $7,527, non-cash depreciation and
amortization expense of $7,625, stock-based compensation of $2,657 and net
positive changes in various components of working capital in the amount of
$7,650. These sources of operating cash
flow were partially offset by a deferred income tax benefit of $1,875. Net positive changes in working capital
included decreases in accounts receivable, inventories and prepaid expenses of
$13,632, $3,334 and $496, respectively, and an increase in customer advances of
$246. These positive changes in working
capital were partially offset by decreases in accounts payable and accrued
expenses of $5,980 and $4,078, respectively.
Net cash flows provided
by operating activities for the nine months ended September 30, 2008
totaled $24,805. Significant sources of
operating cash flow included net income of $18,683, non-cash depreciation and
amortization expense of $10,019 and stock-based compensation of $2,363. These sources of operating cash flow were
partially offset by a deferred income tax benefit of $2,735, $270 in equity in
losses of joint ventures and net negative changes in various components of
working capital in the amount of $3,255.
Net negative changes in working capital included increases in prepaid
expenses of $2,549 and decreases in accounts payable and accrued expenses and
other liabilities of $3,771 and $5,046, respectively. These negative changes in working capital
were partially offset by decreases in accounts receivable and inventories of
$7,631 and $262, respectively, and increases in customer advances of $218.
Cash
flows from investing activities
Net cash flows used by
investing activities for the nine months ended September 30, 2009 totaled
$3,196 and consisted almost entirely of capital expenditures.
Net cash flows used by
investing activities for the nine months ended September 30, 2008 totaled
$7,275 and consisted almost entirely of capital expenditures.
Cash flows from financing
activities
Net cash flows used in
financing activities for the nine months ended September 30, 2009 were
$4,805, which consisted primarily of $3,912 in required prepayments of term
loans under our syndicated credit agreement from excess cash flow that we
generated in fiscal year 2008, $653 in principal payments on Nord LB term
loans, payment of quarterly dividends of $513 and payment
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on capital lease obligations of $132. These uses of cash flow were slightly offset
by $373 in net proceeds from the issuance of common stock relating to the exercise
of stock options.
Net cash flows provided
by financing activities for the first nine months of 2008 were $3,969, which
included net borrowings on bank lines of credit of $7,247 and $333 in net
proceeds from the issuance of common stock relating to the exercise of stock
options. These sources of cash flow were
partially offset by payment of annual dividends of $1,894, a final principal
payment on a term loan with French bank of $441, an $810 principal payment on a
Nord LB term loan, payments of deferred debt issuance costs of $167 and payment
on capital lease obligations of $308.
Payment of Dividends
On June 8, 2009,
our board of directors declared a quarterly cash dividend of $.04 per share
which was paid on July 15, 2009.
The dividend totaled $513 and was payable to shareholders of record as
of June 30, 2009. On September 17, 2009, our board of directors
declared a quarterly cash dividend of $.04 per share which was paid on October 15,
2009. The dividend totaled $515 and was
payable to shareholders of record as of September 30, 2009. We paid an
annual cash dividend in 2008 of $0.15 per share.
We may continue to pay
quarterly dividends in the future subject to capital availability and periodic
determinations that cash dividends are in compliance with our debt covenants
and 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, debt covenant compliance,
changes in federal income tax laws, or 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 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.
In
managements opinion, the more significant reporting areas impacted by
managements judgments and estimates are revenue recognition, asset
impairments, impact of foreign currency
exchange rate risks and income taxes.
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
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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.
Asset
impairments
We
review our long-lived assets to be 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 these assets and their eventual disposition. If the sum
of the expected future net cash flows (undiscounted and without interest
charges) is less than the carrying amount of these assets, 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 costs to sell.
Business
Combinations
We
accounted for our business acquisition using the purchase method of accounting.
We allocated the total cost of the acquisition to the underlying net assets
based on their respective estimated fair values. As part of this allocation
process, we identified and attributed values and estimated lives to the
intangible assets acquired. These determinations involved significant estimates
and assumptions regarding multiple, highly subjective variables, including
those with respect to future cash flows, discount rates, asset lives, and the
use of different valuation models and therefore required considerable judgment.
Our estimates and assumptions were based, in part, on the availability of
listed market prices or other transparent market data. These determinations
affect the amount of amortization expense recognized in future periods. We
based our fair value estimates on assumptions we believe to be reasonable but
are inherently uncertain.
Effective
January 1, 2009 we will account for business acquisitions in accordance
with new Financial Accounting Standards Board (FASB) guidance which applies
prospectively to business acquisitions with a closing date following the
effective date. This new guidance
significantly changes the financial accounting and reporting of business
combinations.
Goodwill
and Other Intangible Assets
We
review the carrying value of goodwill at least annually to assess impairment
because it is not amortized.
Additionally, we review the carrying value of any intangible asset or
goodwill whenever events or changes in circumstances indicate that its carrying
amount may not be recoverable. Examples of such events or changes in circumstances,
many of which are subjective in nature, include significant negative industry
or economic trends, significant changes in the manner of our use of the
acquired assets or our strategy, a significant decrease in the market value of
the asset, and a significant change in legal factors or in the business climate
that could affect the value of the asset. We assess impairment by comparing the
fair value of an identifiable intangible asset or goodwill with its carrying
value. The determination of fair value involves significant management judgment
as described further below. Impairments are expensed when incurred.
Specifically, we test for impairment as follows:
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Goodwill
We
test goodwill for impairment on a reporting unit level on at least an annual
basis. A reporting unit is a group of businesses (i) for which discrete
financial information is available and (ii) that have similar economic
characteristics. We test goodwill for impairment using the following two-step
approach:
The
first step is a comparison of each reporting units fair value to its carrying
value. We estimate fair value using the best information available, including
market information and discounted cash flow projections, also referred to as
the income approach. The income approach uses a reporting units projection of
estimated operating results and cash flows that is discounted using a
weighted-average cost of capital that reflects current market conditions. The
projections incorporate our best estimates of economic and market conditions
over the projected period including growth rates in sales and estimates of
future expected changes in operating margins and cash expenditures. Other
significant estimates and assumptions include terminal value growth rates,
future estimates of capital expenditures and changes in future working capital
requirements. We validate our estimates
of fair value under the income approach by comparing the values to fair value
estimates using a market approach.
If
the carrying value of the reporting unit is higher than its fair value, there
is an indication that impairment may exist, and the second step must be
performed to measure the amount of impairment loss. In the second step, we allocate the fair
value of the reporting unit to the assets and liabilities of the reporting unit
as if it had just been acquired in a business combination and as if the
purchase price was equivalent to the fair value of the reporting unit. The excess of the fair value of the reporting
unit over the amounts assigned to its assets and liabilities is referred to as
the implied fair value of goodwill. We then compare that implied fair value of
the reporting units goodwill to the carrying value of that goodwill. If the
implied fair value is less than the carrying value, we recognize an impairment
loss for the excess.
Our
impairment testing in the fourth quarter of 2008 did not result in a
determination that any of our goodwill was impaired; however, the passing
margin of the first step of our goodwill impairment testing relative to the
Oilfield Products reporting unit as of December 31, 2008 was minimal
(estimated fair value was less than 10% greater than the carrying value). Future impairment is possible and will occur
if (i) the units operating results underperform what we have estimated or
(ii) additional volatility of the capital markets cause us to raise the 16
percent discount rate utilized in our discounted cash flow analysis or decrease
the multiples utilized in our market-based analysis. We did not observe any indicators in the nine
months ended September 30, 2009 that would necessitate interim impairment
testing of goodwill.
The
use of different estimates or assumptions within our discounted cash flow model
when determining the fair value of our reporting units or using methodologies
other than as described above could result in different values for reporting
units and could result in an impairment charge.
Intangible assets subject to amortization
An
intangible asset that is subject to amortization is reviewed when impairment
indicators are present. We compare the expected undiscounted future operating
cash flows associated with finite-lived assets to their respective carrying
values to determine if the asset is fully recoverable. If the expected future
operating cash flows are not sufficient to recover the carrying value, we
estimate the fair value of the asset. Impairment is recognized when the
carrying amount of the asset is not recoverable and when the carrying value
exceeds fair value. The projected cash flows require several assumptions
related to, among other things, relevant market factors, revenue growth, if
any, and operating margins.
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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
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
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.
Income
taxes
We
are required to recognize 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 income tax credits and 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; if not, we record an appropriate valuation allowance.
Recent Accounting Pronouncements
In December 2007,
the Financial Accounting Standards Board (FASB) issued authoritative guidance
on business combinations and the accounting for noncontrolling interests. This new guidance significantly changed the
accounting for and reporting of business combination transactions and
noncontrolling (minority) interests in consolidated financial statements on January 1,
2009. The adoption of this guidance in
2009 did not have a significant impact on the Companys results of operations
or financial position.
In March 2008,
the FASB issued authoritative guidance on the disclosures about derivative
instruments and hedging activities. This
guidance requires additional disclosures related to the use of derivative
instruments, the accounting for derivatives and how derivatives impact
financial statements on January 1, 2009. The adoption of this
guidance in 2009 did not have any impact on the Companys results of operations
or financial position.
In April 2009, the FASB issued
authoritative guidance requiring disclosures about the fair value of financial
instruments for interim financial statements of publicly traded companies.
This guidance became effective for interim
reporting periods ending after June 15, 2009 and the
adoption of it in the second quarter of 2009 did not have any
impact on the
Companys results of operations or financial position.
35
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In May 2009, the FASB issued authoritative
guidance that provides general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. Specifically, this standard sets
forth the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. This guidance is effective for
financial statements issued for fiscal years and interim periods beginning
after June 15, 2009 and will be applied prospectively. The Company adopted this guidance in the
periods ended June 30, 2009 and has evaluated for subsequent events
through October 30, 2009, the issuance date of the Companys September 30,
2009 consolidated financial statements.
Besides the amendment to our credit agreement and the acquisition of a
Canadian-based LRI Oil Tools company discussed in Note 6 and 9, respectively,
no other recognized or non-recognized subsequent events were noted.
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, 2008.
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, 2009, 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 at the reasonable assurance
level. There have been no changes in the
Companys internal controls during the quarter ended September 30, 2009 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
36
Table of Contents
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
errors or mistakes. 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.
37
Table of Contents
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk
Factors
Our 2008 Annual Report on Form 10-K
includes a detailed discussion of our risk factors. The information presented below updates and
should be read in conjunction with the risk factors and information disclosed
in our Form 10-K.
We have seen a
recent slowdown in some of our markets and anticipate sales will decline during
2009.
During the
fourth quarter of 2008 and first nine months of 2009, we have seen a slowdown
in our Explosive Metalworking sales to some of the markets we serve and
anticipate our sales to decrease by approximately 29% to 31% for the full year
in 2009 from the amount we achieved in 2008.
The explosion-weld cladding market is dependent upon sales of products
for use by customers in a limited number of heavy industries, including oil and
gas, alternative energy, chemicals and petrochemicals, hydrometallurgy,
aluminum production, shipbuilding, power generation, and industrial
refrigeration. These industries tend to
be cyclical in nature and the current worldwide economic downturn has affected
many of these markets. Indeed, we have
already seen a slowdown in the chemical, petrochemical and hydrometallurgy
sectors. An economic slowdown in one or
all of these industrieswhether due to traditional cyclicality, general
economic conditions or other factorscould impact capital expenditures within
the industry. If demand from such
industries were to decline or to experience reduced growth rates, our sales
would be expected to be affected proportionately, which may have a material
adverse effect on our business, financial condition, and results of operations.
Our
backlog figures may not accurately predict future sales.
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 items of backlog within the following 12
months. 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 certain that revenues
corresponding to our backlog will not fall into periods beyond the 12-month
horizon.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
38
Table of Contents
Item 5. Other Information
None.
Item 6. Exhibits
31.1
|
Certification
of the President and Chief Executive Officer pursuant to 17 CFR
240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification
of the Vice President and Chief Financial Officer pursuant to 17 CFR
240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification
of the President and Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.2
|
Certification of the Vice
President and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
39
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
DYNAMIC
MATERIALS CORPORATION
|
|
(Registrant)
|
|
|
|
|
Date:
October 30, 2009
|
/s/
Richard A. Santa
|
|
Richard A. Santa, Senior Vice President and Chief
Financial Officer (Duly Authorized Officer and Principal Financial and
Accounting Officer)
|
40
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