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, 2010
OR
o
|
TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
|
FOR THE TRANSITION PERIOD FROM TO .
Commission file number 001-14775
DYNAMIC MATERIALS CORPORATION
(Exact name of Registrant as Specified in its Charter)
Delaware
|
84-0608431
|
(State of Incorporation or Organization)
|
(I.R.S. Employer Identification No.)
|
5405 Spine Road, Boulder,
Colorado 80301
(Address of principal executive offices, including zip code)
(303) 665-5700
(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
|
Smaller reporting company
o
|
(Do not check if smaller reporting company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
under the Act). Yes
o
No
x
The
number of shares of Common Stock outstanding was 13,202,177 as of October 28,
2010.
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 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,
2010
(unaudited)
|
|
December 31,
2009
|
|
ASSETS
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11,097
|
|
$
|
22,411
|
|
Accounts receivable, net of allowance for doubtful
accounts of $444 and $390, respectively
|
|
27,390
|
|
25,807
|
|
Inventories
|
|
36,797
|
|
32,501
|
|
Prepaid expenses and other
|
|
3,465
|
|
2,397
|
|
Related party receivables and loans
|
|
|
|
2,806
|
|
Current deferred tax assets
|
|
885
|
|
2,052
|
|
|
|
|
|
|
|
Total current assets
|
|
79,634
|
|
87,974
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT
|
|
66,826
|
|
64,944
|
|
Less - accumulated depreciation
|
|
(26,356
|
)
|
(22,892
|
)
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
40,470
|
|
42,052
|
|
|
|
|
|
|
|
GOODWILL, net
|
|
40,414
|
|
43,164
|
|
|
|
|
|
|
|
PURCHASED INTANGIBLE ASSETS, net
|
|
50,962
|
|
49,079
|
|
|
|
|
|
|
|
DEFERRED TAX ASSETS
|
|
940
|
|
332
|
|
|
|
|
|
|
|
OTHER ASSETS, net
|
|
1,046
|
|
1,443
|
|
|
|
|
|
|
|
INVESTMENT IN JOINT VENTURES
|
|
|
|
1,132
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
213,466
|
|
$
|
225,176
|
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
4
Table of
Contents
DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Data)
|
|
September 30,
2010
(unaudited)
|
|
December 31,
2009
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
Accounts payable
|
|
$
|
11,386
|
|
$
|
9,183
|
|
Accrued expenses
|
|
3,613
|
|
4,808
|
|
Dividend payable
|
|
528
|
|
515
|
|
Accrued income taxes
|
|
847
|
|
1,485
|
|
Accrued employee compensation and benefits
|
|
3,185
|
|
4,048
|
|
Customer advances
|
|
5,128
|
|
6,528
|
|
Lines of credit
|
|
6,735
|
|
1,777
|
|
Current maturities on long-term debt
|
|
7,567
|
|
13,485
|
|
Current portion of capital lease obligations
|
|
301
|
|
306
|
|
Current deferred tax liabilities
|
|
23
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
39,313
|
|
42,135
|
|
|
|
|
|
|
|
LONG-TERM DEBT
|
|
23,541
|
|
34,120
|
|
|
|
|
|
|
|
CAPITAL LEASE OBLIGATIONS
|
|
214
|
|
436
|
|
|
|
|
|
|
|
DEFERRED TAX LIABILITIES
|
|
13,469
|
|
15,217
|
|
|
|
|
|
|
|
OTHER LONG-TERM LIABILITIES
|
|
1,140
|
|
1,157
|
|
|
|
|
|
|
|
Total liabilities
|
|
77,677
|
|
93,065
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
Preferred stock, $0.05 par value; 4,000,000 shares
authorized; no issued and outstanding shares
|
|
|
|
|
|
Common stock, $0.05 par value; 25,000,000 shares
authorized; 13,202,177 and 12,870,363 shares issued and outstanding,
respectively
|
|
660
|
|
643
|
|
Additional paid-in capital
|
|
51,332
|
|
46,080
|
|
Retained earnings
|
|
87,424
|
|
85,048
|
|
Other cumulative comprehensive income (loss)
|
|
(3,627
|
)
|
340
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
135,789
|
|
132,111
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
213,466
|
|
$
|
225,176
|
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
5
Table of
Contents
DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(Dollars in Thousands, Except Share Data)
(unaudited)
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
NET SALES
|
|
$
|
41,298
|
|
$
|
34,690
|
|
$
|
109,913
|
|
$
|
122,268
|
|
|
|
|
|
|
|
|
|
|
|
COST OF PRODUCTS SOLD
|
|
30,445
|
|
25,936
|
|
82,819
|
|
89,032
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
10,853
|
|
8,754
|
|
27,094
|
|
33,236
|
|
|
|
|
|
|
|
|
|
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
3,487
|
|
2,749
|
|
9,990
|
|
9,318
|
|
Selling expenses
|
|
3,047
|
|
2,212
|
|
7,918
|
|
6,376
|
|
Amortization of purchased intangible assets
|
|
1,376
|
|
1,293
|
|
3,913
|
|
3,709
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
7,910
|
|
6,254
|
|
21,821
|
|
19,403
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
2,943
|
|
2,500
|
|
5,273
|
|
13,833
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
Gain on step acquisition of joint ventures
|
|
|
|
|
|
2,117
|
|
|
|
Other income (expense), net
|
|
(416
|
)
|
(633
|
)
|
(402
|
)
|
(560
|
)
|
Interest expense
|
|
(667
|
)
|
(752
|
)
|
(2,473
|
)
|
(2,521
|
)
|
Interest income
|
|
6
|
|
41
|
|
71
|
|
145
|
|
Equity in earnings of joint ventures
|
|
|
|
91
|
|
255
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
1,866
|
|
1,247
|
|
4,841
|
|
11,067
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX PROVISION
|
|
540
|
|
151
|
|
891
|
|
3,540
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
1,326
|
|
$
|
1,096
|
|
$
|
3,950
|
|
$
|
7,527
|
|
|
|
|
|
|
|
|
|
|
|
INCOME PER SHARE:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
$
|
0.09
|
|
$
|
0.30
|
|
$
|
0.59
|
|
Diluted
|
|
$
|
0.10
|
|
$
|
0.08
|
|
$
|
0.30
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
12,939,274
|
|
12,632,406
|
|
12,807,826
|
|
12,597,023
|
|
Diluted
|
|
12,951,397
|
|
12,645,500
|
|
12,820,508
|
|
12,621,970
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS DECLARED PER COMMON SHARE
|
|
$
|
0.04
|
|
$
|
0.04
|
|
$
|
0.12
|
|
$
|
0.08
|
|
The accompanying notes are in integral part of these Condensed
Consolidated Financial Statements.
6
Table
of Contents
DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010
(Amounts in Thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Cumulative
|
|
|
|
Comprehensive
|
|
|
|
Common Stock
|
|
Paid-In
|
|
Retained
|
|
Comprehensive
|
|
|
|
Loss
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Income/(loss)
|
|
Total
|
|
for the Period
|
|
Balances, December 31, 2009
|
|
12,870
|
|
$
|
643
|
|
$
|
46,080
|
|
$
|
85,048
|
|
$
|
340
|
|
$
|
132,111
|
|
|
|
Shares issued for AECO acquisition
|
|
222
|
|
11
|
|
3,290
|
|
|
|
|
|
3,301
|
|
|
|
Shares issued in connection with stock
compensation plans
|
|
110
|
|
6
|
|
64
|
|
|
|
|
|
70
|
|
|
|
Tax impact of stock-based compensation
|
|
|
|
|
|
(639
|
)
|
|
|
|
|
(639
|
)
|
|
|
Stock-based compensation
|
|
|
|
|
|
2,537
|
|
|
|
|
|
2,537
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
(1,574
|
)
|
|
|
(1,574
|
)
|
|
|
Net income
|
|
|
|
|
|
|
|
3,950
|
|
|
|
3,950
|
|
3,950
|
|
Derivative valuation, net of tax of $248
|
|
|
|
|
|
|
|
|
|
365
|
|
365
|
|
365
|
|
Change in cumulative foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
(4,332
|
)
|
(4,332
|
)
|
(4,332
|
)
|
Balances, September 30, 2010
|
|
13,202
|
|
$
|
660
|
|
$
|
51,332
|
|
$
|
87,424
|
|
$
|
(3,627
|
)
|
$
|
135,789
|
|
$
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
7
Table of
Contents
DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(Dollars in Thousands)
(unaudited)
|
|
2010
|
|
2009
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net income
|
|
$
|
3,950
|
|
$
|
7,527
|
|
Adjustments to reconcile net income to net cash provided
by operating activities:
|
|
|
|
|
|
Depreciation (including capital lease
amortization)
|
|
3,908
|
|
3,701
|
|
Amortization of purchased intangible assets
|
|
3,913
|
|
3,709
|
|
Amortization of capitalized debt issuance costs
|
|
489
|
|
215
|
|
Stock-based compensation
|
|
2,537
|
|
2,657
|
|
Deferred income tax benefit
|
|
(953
|
)
|
(1,875
|
)
|
Equity in earnings of joint ventures
|
|
(255
|
)
|
(170
|
)
|
Gain on step acquisition of joint ventures
|
|
(2,117
|
)
|
|
|
Change in (excluding assets acquired):
|
|
|
|
|
|
Accounts receivable, net
|
|
2,465
|
|
13,632
|
|
Inventories
|
|
1,198
|
|
3,334
|
|
Prepaid expenses and other
|
|
321
|
|
496
|
|
Accounts payable
|
|
(2,075
|
)
|
(5,980
|
)
|
Customer advances
|
|
(1,327
|
)
|
246
|
|
Accrued expenses and other liabilities
|
|
(1,800
|
)
|
(4,078
|
)
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
10,254
|
|
23,414
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
Acquisition of Austin Explosives Company
|
|
(3,620
|
)
|
|
|
Step acquisition of joint ventures, net of cash
acquired
|
|
(2,065
|
)
|
|
|
Acquisition of property, plant and equipment
|
|
(2,309
|
)
|
(3,238
|
)
|
Change in other non-current assets
|
|
(59
|
)
|
42
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(8,053
|
)
|
(3,196
|
)
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
8
Table of
Contents
DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(Dollars in Thousands)
(unaudited)
|
|
2010
|
|
2009
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
Payment on syndicated term loans
|
|
(15,374
|
)
|
(3,912
|
)
|
Payment on Nord LB term loans
|
|
(593
|
)
|
(653
|
)
|
Borrowings on bank lines of credit, net
|
|
4,682
|
|
|
|
Payment on capital lease obligations
|
|
(215
|
)
|
(132
|
)
|
Payment of dividends
|
|
(1,561
|
)
|
(513
|
)
|
Payment of deferred debt issuance costs
|
|
|
|
(58
|
)
|
Net proceeds from issuance of common stock to employees
and directors
|
|
70
|
|
373
|
|
Tax impact of stock-based compensation
|
|
(639
|
)
|
90
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
(13,630
|
)
|
(4,805
|
)
|
|
|
|
|
|
|
EFFECTS OF EXCHANGE RATES ON CASH
|
|
115
|
|
258
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
(11,314
|
)
|
15,671
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of the period
|
|
22,411
|
|
14,360
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of the period
|
|
$
|
11,097
|
|
$
|
30,031
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
9
Table of
Contents
DYNAMIC MATERIALS CORPORATION &
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Currency Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
1.
BASIS
OF PRESENTATION
The
information included in the Condensed Consolidated Financial Statements is
unaudited but includes all normal and recurring adjustments which, in the
opinion of management, are necessary for a fair presentation of the interim
periods presented. These Condensed Consolidated Financial Statements should be
read in conjunction with the financial statements that are included in the
Companys Annual Report filed on Form 10-K for the year ended December 31,
2009.
2.
SIGNIFICANT
ACCOUNTING POLICIES
Principles
of Consolidation
The
Condensed Consolidated Financial Statements include the accounts of the Company
and its controlled subsidiaries. Only
subsidiaries in which controlling interests are maintained are
consolidated. The equity method is used
to account for our ownership in subsidiaries where we do not have a controlling
interest. All significant intercompany
accounts, profits, and transactions have been eliminated in consolidation.
Foreign Operations and Foreign Exchange Rate Risk
The
functional currency for the Companys foreign operations is the applicable
local currency for each affiliate company. Assets and liabilities of foreign
subsidiaries for which the functional currency is the local currency are
translated at exchange rates in effect at period-end, and the statements of
operations are translated at the average exchange rates during the period. Exchange rate fluctuations on translating
foreign currency financial statements into U.S. Dollars that result in
unrealized gains or losses are referred to as translation adjustments.
Cumulative translation adjustments are recorded as a separate component of
stockholders equity and are included in other cumulative comprehensive income
(loss). Transactions denominated in currencies other than the local currency
are recorded based on exchange rates at the time such transactions arise.
Subsequent changes in exchange rates result in transaction gains and losses
which are reflected in income as unrealized (based on period-end translations)
or realized upon settlement of the transactions. Cash flows from the 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.
In
September 2010, the Companys German subsidiary, DYNAenergetics, entered
into a currency swap agreement with its bank to hedge the currency risk
associated with a large U.S. Dollar order ($2,700) that was recently awarded to
the Company. Under the agreement,
DYNAenergetics will exchange $2,700 for Euros at an exchange rate of 1.269 U.S.
Dollars per Euro between January 18, 2011 and February 15, 2011 (the
date range of expected payment settlement on this order). The Company has not designated this
derivative as an effective cash
10
Table of Contents
flow hedge and as such, gains and losses
related to changes in its valuation will be recorded in the statement of operations. During the three months and nine months ended
September 30, 2010, the Company recorded a gain on this currency swap
agreement of $185 based on the U.S. Dollar to Euro exchange rate as of
September 30, 2010. The gain is
classified in other income in the Companys statement of operations.
Revenue Recognition
Sales of clad metal products and welding services
are generally based upon customer specifications set forth in customer purchase
orders and require us to provide certifications relative to metals used,
services performed, and the results of any non-destructive testing that the
customer has requested be performed. All
issues of conformity of the product to specifications are resolved before the
product is shipped and billed. Products
related to the oilfield products segment, which include detonating cords,
detonators, bi-directional boosters, and shaped charges, as well as seismic
related explosives and accessories, are standard in nature. In all cases, revenue is recognized only when
all four of the following criteria have been satisfied: persuasive evidence of
an arrangement exists; the price is fixed or determinable; delivery has
occurred; and collection is reasonably assured.
For contracts that require multiple shipments, revenue is recorded only
for the units included in each individual shipment. If, as a contract proceeds toward completion,
projected total cost on an individual contract indicates a probable loss, the
Company will account for such anticipated loss.
Fair Value of Financial Instruments
The carrying values of cash and cash
equivalents, trade accounts receivable and payable, and accrued expenses are
considered to approximate fair value due to the short-term nature of these
instruments. Based upon the 150 basis
point increase in our LIBOR/EURIBOR basis borrowing spread negotiated in the
October 21, 2009 amendment to our syndicated credit agreement, we believe
the fair value of our long-term debt approximates its carrying value at
September 30, 2010. The majority of
the Companys debt was incurred in connection with the acquisition of
DYNAenergetics.
Additionally, the Company has an interest
rate swap agreement (see Note 9) and a foreign currency hedge agreement (see
disclosure above in Note 2), which are recorded at fair value. Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The Company is
required to use an established hierarchy for fair value measurements based upon
the inputs to the valuation and the degree to which they are observable or not
observable in the market. The three levels in the hierarchy are as follows:
·
Level
1 Inputs to the valuation based upon quoted prices (unadjusted) for identical
assets or liabilities in active markets that are accessible as of the
measurement date.
·
Level
2 Inputs to the valuation include quoted prices in either markets that are
not active, or in active markets for similar assets or liabilities, inputs
other than quoted prices that are observable, and inputs that are derived
principally from or corroborated by observable market data.
·
Level
3 Inputs to the valuation that are unobservable inputs for the asset or
liability.
The highest priority is assigned to
Level 1 inputs and the lowest priority to Level 3 inputs.
11
Table of Contents
The Companys interest rate swap and foreign currency hedge agreements
are not exchange listed and are therefore valued with models that use Level 2
inputs. The degree to which the
Companys credit worthiness impacts the value requires management judgment but
as of September 30, 2010 and December 31, 2009, the impact of this
assessment on the overall value of the outstanding interest rate swap was not
significant and the Companys valuation of the agreement is classified within
Level 2 of the hierarchy.
The Company has recorded the fair value of its
derivatives as follows:
|
|
September 30, 2010
|
|
December 31, 2009
|
|
|
|
Balance sheet location
|
|
Fair value
|
|
Balance sheet location
|
|
Fair value
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
Accrued
expenses
|
|
$
|
164
|
|
Accrued
expenses
|
|
$
|
820
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency hedge
|
|
Prepaid
expenses and other
|
|
$
|
185
|
|
Prepaid
expenses and other
|
|
$
|
|
|
Related Party Transactions
Prior
to acquiring the remaining outstanding interests in its unconsolidated joint
ventures on April 30, 2010 (See Note 3), the Company had related party
transactions with these joint ventures.
Additionally the Company had related party transactions with the former
owners of LRI Oil Tools Inc. (LRI).
The Company also had transactions in the period from January 1
through September 30, 2009 with LRI who, at the time, was the
non-controlling interest partner in one of the Companys consolidated joint
ventures. A summary of related party
balances as of December 31, 2009 is summarized below:
|
|
Accounts receivable
|
|
|
|
from and loan to
|
|
DYNAenergetics RUS
|
|
$
|
2,265
|
|
Perfoline
|
|
466
|
|
Former owners of LRI
|
|
75
|
|
|
|
|
|
Total
|
|
$
|
2,806
|
|
12
Table of
Contents
A
summary of related party transactions for the three months ended September 30,
2009 and the nine months ended September 30, 2010 and 2009 is summarized
below:
|
|
Three Months Ended
|
|
|
|
September 30, 2009
|
|
|
|
|
|
Interest
|
|
|
|
Sales to
|
|
income from
|
|
DYNAenergetics RUS
|
|
$
|
366
|
|
$
|
|
|
Perfoline
|
|
3
|
|
12
|
|
Minority Interest Partner
|
|
301
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
670
|
|
$
|
12
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30, 2010
|
|
September 30, 2009
|
|
|
|
|
|
Interest
|
|
|
|
Interest
|
|
|
|
Sales to
|
|
income from
|
|
Sales to
|
|
income from
|
|
DYNAenergetics RUS
|
|
$
|
663
|
|
$
|
|
|
$
|
1,100
|
|
$
|
|
|
Perfoline
|
|
19
|
|
13
|
|
59
|
|
31
|
|
Minority Interest Partner
|
|
|
|
|
|
745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
682
|
|
$
|
13
|
|
$
|
1,904
|
|
$
|
31
|
|
Earnings Per Share
Unvested awards of share-based payments with rights
to receive dividends or dividend equivalents, such as the Companys restricted
stock awards (RSAs), are considered participating securities for purposes of
calculating earnings per share (EPS) and require the use of the two class
method for calculating EPS. Under this method,
a portion of net income is allocated to these participating securities and
therefore is excluded from the calculation of EPS allocated to common stock, as
shown in the table below.
13
Table of
Contents
Computation and reconciliation of earnings per
common share are as follows:
|
|
For the Three Months Ended
|
|
For the Three Months Ended
|
|
|
|
September 30, 2010
|
|
September 30, 2009
|
|
|
|
Income
|
|
Shares
|
|
EPS
|
|
Income
|
|
Shares
|
|
EPS
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,326
|
|
|
|
|
|
$
|
1,096
|
|
|
|
|
|
Less income allocated to RSAs
|
|
(26
|
)
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to common stock for EPS
calculation
|
|
$
|
1,300
|
|
12,939,274
|
|
$
|
0.10
|
|
$
|
1,074
|
|
12,632,406
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjust shares for Dilutives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation plans
|
|
|
|
12,123
|
|
|
|
|
|
13,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,326
|
|
|
|
|
|
$
|
1,096
|
|
|
|
|
|
Less income allocated to RSAs
|
|
(26
|
)
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to common stock for EPS
calculation
|
|
$
|
1,300
|
|
12,951,397
|
|
$
|
0.10
|
|
$
|
1,074
|
|
12,645,500
|
|
$
|
0.08
|
|
|
|
For the Nine Months Ended
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2010
|
|
September 30, 2009
|
|
|
|
Income
|
|
Shares
|
|
EPS
|
|
Income
|
|
Shares
|
|
EPS
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,950
|
|
|
|
|
|
$
|
7,527
|
|
|
|
|
|
Less income allocated to RSAs
|
|
(79
|
)
|
|
|
|
|
(148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to common stock for EPS
calculation
|
|
$
|
3,871
|
|
12,807,826
|
|
$
|
0.30
|
|
$
|
7,379
|
|
12,597,023
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjust shares for Dilutives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation plans
|
|
|
|
12,682
|
|
|
|
|
|
24,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,950
|
|
|
|
|
|
$
|
7,527
|
|
|
|
|
|
Less income allocated to RSAs
|
|
(79
|
)
|
|
|
|
|
(148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to common stock for EPS
calculation
|
|
$
|
3,871
|
|
12,820,508
|
|
$
|
0.30
|
|
$
|
7,379
|
|
12,621,970
|
|
$
|
0.58
|
|
3.
ACQUISITIONS
Austin Explosives
On June 4, 2010, the Company completed its acquisition of
Texas-based, Austin Explosives Company (AECO), which is now operating under
the name DYNAenergetics US, Inc.
This business is now part of the Companys Oilfield Products business
segment. AECO had been a long-time
distributor of DYNAenergetics shaped charges.
This acquisition, along with the acquisition of the outstanding
interests in our Russian joint ventures (discussed below), further expands the
Companys Oilfield Products business, and positions the segment to capitalize
on the long-term demand from the oil and gas industry. From June 5, 2010 through September 30,
2010,
14
Table of Contents
DYNAenergetics US, Inc. contributed
incremental net sales of $2,187 and an incremental net loss of $10 after the
elimination of intercompany sales and the related gross profit. On a standalone
basis, DYNAenergetics U.S., Inc. reported sales of $6,097 and net income
of $290 for the same period.
The acquisition was structured as an asset purchase valued at $6,921
which was financed by (i) the payment of $3,620 in cash and (ii) the
issuance of 222,445 shares of common stock of the Company (valued at $3,301).
The purchase price of the acquisition was allocated to the Companys
tangible and identifiable intangible assets based on their fair values as
determined by appraisals performed as of the acquisition date. The allocation of the purchase price to the
assets of AECO was as follows:
Current assets
|
|
$
|
5,792
|
|
Property, plant and equipment
|
|
368
|
|
Intangible assets
|
|
4,773
|
|
Deferred tax assets
|
|
7
|
|
Other assets
|
|
81
|
|
|
|
|
|
Total assets acquired
|
|
11,021
|
|
|
|
|
|
Current liabilities
|
|
4,100
|
|
|
|
|
|
Total liabilities assumed
|
|
4,100
|
|
|
|
|
|
Net assets acquired
|
|
$
|
6,921
|
|
The Company acquired identifiable finite-lived intangible assets as a
result of the acquisition of AECO. The
finite-lived intangible assets acquired were classified as customer
relationships and were valued at $4,773 which will be amortized over 11
years. These amounts are included in
Intangible Assets and are further discussed in Note 7.
Russian Joint Ventures
On April 30, 2010 the Company purchased the outstanding
minority-owned interests in its two Russian joint ventures that were previously
majority-owned by the Companys Oilfield Products business segment. These joint ventures include DYNAenergetics
RUS, which is a Russian trading company
that sells the Companys oilfield products, and Perfoline, which is a Russian
manufacturer of perforating gun systems.
The Company paid a combined $2,065 for the respective 45% and
34.81% outstanding stakes in DYNAenergetics RUS and Perfoline. From April 30, 2010 through September 30,
2010, DYNAenergetics RUS and Perfoline contributed incremental net sales of
$2,548 and incremental net income of $213 after the elimination of intercompany
sales and the related gross profit. As
standalone companies, these two entities reported sales of $3,165 and net
income of $311 for the same period.
Prior to the acquisition date, the Company accounted for its 55% and
65.19% interest in DYNAenergetics RUS and Perfoline, respectively, as
equity-method investments (See Note 4).
The acquisition date fair value of the previous equity interest was
$3,533. The Company recognized a gain of
$2,117 as a result of revaluing its prior equity interest held before the
acquisition. The gain is included in the
line item gain on step acquisition of joint ventures in the consolidated
statement of operations.
15
Table of
Contents
Appraisals performed as of the acquisition date resulted in a new fair
value of the combined entities of $5,598 which was allocated to the Companys
tangible and identifiable intangible assets as follows:
Current assets
|
|
$
|
5,243
|
|
Property, plant and equipment
|
|
411
|
|
Intangible assets
|
|
3,669
|
|
Deferred tax assets
|
|
12
|
|
Other assets
|
|
56
|
|
|
|
|
|
Total assets acquired
|
|
9,391
|
|
|
|
|
|
Line of credit
|
|
36
|
|
Other current liabilities
|
|
2,547
|
|
Deferred tax liabilities
|
|
813
|
|
Other long term liabilities
|
|
397
|
|
|
|
|
|
Total liabilities assumed
|
|
3,793
|
|
|
|
|
|
Fair value of net assets following step
acquisition
|
|
$
|
5,598
|
|
The Company acquired identifiable finite-lived intangible assets as a
result of acquiring the remaining interests of DYNAenergetics RUS and
Perfoline. The finite-lived intangible
assets acquired were classified as customer relationships and were valued at
$3,669 which will be amortized over 11 years.
These amounts are included in Intangible Assets and are further
discussed in Note 7.
LRI Oil Tools Inc.
On October 1, 2009, the Company completed its acquisition of LRI
Oil Tools Inc. (LRI), which is part of the Oilfield Products business. LRI produces and distributes perforating
equipment for use by the oil and gas exploration and production industry. The business had a long-term strategic
relationship with the Companys Oilfield Products segment and had served for
several years as its sole Canadian distributor.
From January 1, 2010 through September 30, 2010, LRI
contributed incremental net sales of $7,399 and incremental net income of $525
after the elimination of intercompany sales and related gross profit. On a
standalone basis, LRI reported sales of $10,808 and net income of $666 for the
same period.
The acquisition was valued at $5,946 and was financed by (i) the
payment of $284 in cash, net of cash acquired of $15, (ii) the issuance of
4,875 shares of common stock of the Company (valued at $94), and (iii) the
assumption of $5,553 (5,982 Canadian Dollars (CAD)) of LRIs debt. The assumed debt consisted of $2,676 (2,883
CAD) for a line of credit, $2,445 (2,634 CAD) for loans with the former owners
of LRI and $432 (465 CAD) for capital lease obligations.
16
Table
of Contents
The purchase price of the acquisition was allocated to the Companys
tangible and identifiable intangible assets based on their fair values as
determined by appraisals performed as of the acquisition date. The allocation of the purchase price to the
assets and liabilities of LRI was as follows:
Current assets
|
|
$
|
5,430
|
|
Property, plant and equipment
|
|
2,191
|
|
Intangible assets
|
|
1,117
|
|
Deferred tax assets
|
|
298
|
|
Other assets
|
|
1
|
|
|
|
|
|
Total assets acquired
|
|
9,037
|
|
|
|
|
|
Line of credit
|
|
2,676
|
|
Other current liabilities
|
|
2,448
|
|
Long term debt
|
|
2,877
|
|
Deferred tax liabilities
|
|
643
|
|
|
|
|
|
Total liabilities assumed
|
|
8,644
|
|
|
|
|
|
Net assets acquired
|
|
$
|
393
|
|
The Company acquired identifiable finite-lived intangible assets as a
result of the acquisition of LRI. The
finite-lived intangible assets acquired are classified and valued as follows:
|
|
|
|
Amortization
|
|
|
|
Value
|
|
Period
|
|
Core technology
|
|
$
|
347
|
|
15 years
|
|
Customer relationships
|
|
770
|
|
15 years
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
1,117
|
|
|
|
These amounts are included in Intangible Assets and
are further discussed in Note 7.
17
Table of
Contents
Pro Forma Statement of Operations
The following table presents the pro-forma combined results of
operations for the three months ended September 30, 2009 and the nine
months ended September 30, 2010 and September 30, 2009, respectively,
assuming (i) the acquisitions of LRI, AECO and the Russian joint ventures
had occurred on January 1, 2010 and January 1, 2009; (ii) pro-forma
amortization expense of the purchased intangible assets; (iii) pro-forma
depreciation expense of the fair value of purchased property, plant and
equipment; (iv) reduction of interest expense assuming the Company paid
down LRIs debt by 2,200 CAD (1,200 CAD for the loans to former owners of LRI
and 1,000 CAD for the line of credit) immediately following the acquisition
(net of a related pro forma reduction in interest income); (v) elimination
of intercompany sales; and (vi) increase in interest expense for borrowing
1,500 Euros to fund the acquisition of the Russian joint ventures:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2010
|
|
2009
|
|
Net sales
|
|
$
|
38,781
|
|
$
|
117,202
|
|
$
|
134,613
|
|
Income from operations
|
|
$
|
2,027
|
|
$
|
5,620
|
|
$
|
12,646
|
|
Net income
|
|
$
|
527
|
|
$
|
3,852
|
|
$
|
6,127
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
$
|
0.29
|
|
$
|
0.47
|
|
Diluted
|
|
$
|
0.04
|
|
$
|
0.29
|
|
$
|
0.47
|
|
Since all acquisitions were completed prior to June 30, 2010, a
pro forma statement of operations was not necessary for the three months ended
September 20, 2010. The pro-forma
results above are not necessarily indicative of the operating results that
would have actually occurred if the acquisitions had been in effect on the
dates indicated, nor are they necessarily indicative of future results of the
combined companies.
4. INVESTMENT IN JOINT
VENTURES
As
discussed in Note 2, on April 30, 2010, the Company acquired the remaining
minority-owned interests in two joint ventures that were previously
majority-owned by the Companys Oilfield Products business segment. Prior to the April 30, 2010 step
acquisition, these investments, which include DYNAenergetics RUS and Perfoline, were accounted for under the equity
method due to certain non-controlling interest veto rights that allowed the
non-controlling interest shareholders to participate in ordinary course of
business decisions. Operating results
from January 1, 2010 through April 30, 2010 include the Companys
proportionate share of income from these unconsolidated joint ventures. Investments in these joint ventures totaled
$1,132 as of December 31, 2009. As
a result of the step acquisition, the Company now consolidates the financial
statements of these entities.
18
Table of
Contents
Summarized unaudited financial information for the
joint ventures accounted for under the equity method as of December 31,
2009 and for the three months ended September 30, 2009 and the nine months
ended September 30, 2010 and 2009 is as follows:
|
|
December 31,
|
|
|
|
2009
|
|
Current assets
|
|
$
|
5,350
|
|
Noncurrent assets
|
|
655
|
|
Total assets
|
|
$
|
6,005
|
|
|
|
|
|
Current liabilities
|
|
$
|
2,892
|
|
Noncurrent liabilities
|
|
555
|
|
Equity
|
|
2,558
|
|
Total liabilities and equity
|
|
$
|
6,005
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2010 (a)
|
|
2009
|
|
Net sales
|
|
$
|
1,645
|
|
$
|
2,575
|
|
$
|
4,427
|
|
Gross Profit
|
|
$
|
455
|
|
$
|
656
|
|
$
|
1,271
|
|
Operating income
|
|
$
|
233
|
|
$
|
302
|
|
$
|
596
|
|
Net income
|
|
$
|
168
|
|
$
|
468
|
|
$
|
310
|
|
Equity in earnings of joint ventures
|
|
$
|
91
|
|
$
|
255
|
|
$
|
170
|
|
(a) Through April 30, 2010
5. INVENTORY
The components of inventory are as follows at
September 30, 2010 and December 31, 2009:
|
|
September 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Raw materials
|
|
$
|
10,262
|
|
$
|
10,321
|
|
Work-in-process
|
|
14,641
|
|
15,963
|
|
Finished goods
|
|
11,164
|
|
5,526
|
|
Supplies
|
|
730
|
|
691
|
|
|
|
|
|
|
|
|
|
$
|
36,797
|
|
$
|
32,501
|
|
19
Table of
Contents
6. GOODWILL
The
changes to the carrying amount of goodwill during the period are summarized
below:
|
|
Explosive
|
|
|
|
|
|
|
|
Metalworking
|
|
Oilfield
|
|
|
|
|
|
Group
|
|
Products
|
|
Total
|
|
Goodwill balance at December 31, 2009
|
|
$
|
24,577
|
|
$
|
18,587
|
|
$
|
43,164
|
|
Adjustment due to recognition of tax benefit of
tax amortization of certain goodwill
|
|
(256
|
)
|
(327
|
)
|
(583
|
)
|
Adjustment due to exchange rate differences
|
|
(1,194
|
)
|
(973
|
)
|
(2,167
|
)
|
|
|
|
|
|
|
|
|
Goodwill balance at September 30, 2010
|
|
$
|
23,127
|
|
$
|
17,287
|
|
$
|
40,414
|
|
7. PURCHASED INTANGIBLE
ASSETS
The
following table presents details of our purchased intangible assets, other than
goodwill, as of September 30, 2010:
|
|
|
|
Accumulated
|
|
|
|
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Core technology
|
|
$
|
23,147
|
|
$
|
(3,299
|
)
|
$
|
19,848
|
|
Customer relationships
|
|
39,854
|
|
(10,154
|
)
|
29,700
|
|
Trademarks / Trade names
|
|
2,481
|
|
(1,067
|
)
|
1,414
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
65,482
|
|
$
|
(14,520
|
)
|
$
|
50,962
|
|
The
following table presents details of our purchased intangible assets, other than
goodwill, as of December 31, 2009:
|
|
|
|
Accumulated
|
|
|
|
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Core technology
|
|
$
|
24,347
|
|
$
|
(2,555
|
)
|
$
|
21,792
|
|
Customer relationships
|
|
33,161
|
|
(7,657
|
)
|
25,504
|
|
Trademarks / Trade names
|
|
2,613
|
|
(830
|
)
|
1,783
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
60,121
|
|
$
|
(11,042
|
)
|
$
|
49,079
|
|
The
change in the gross value of our purchased intangible assets from December 31,
2009 to September 30, 2010 reflects the additional intangible assets
associated with the acquisitions of AECO and the two Russian joint ventures
(see Note 3) and by the impact of foreign currency translation adjustments.
8. CUSTOMER ADVANCES
On occasion, customers make
advance payments prior to the shipment of their orders in order to help finance
the Companys inventory investment on large orders or to keep credit limits at
acceptable levels. As of September 30,
2010 and December 31, 2009, customer advances totaled $5,128 and $6,528
respectively.
20
Table of
Contents
9. DEBT
Lines of credit consisted of the following at
September 30, 2010 and December 31, 2009:
|
|
September 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
HSBC line of credit
|
|
$
|
81
|
|
$
|
1,774
|
|
Syndicated credit agreement revolving loan
|
|
3,403
|
|
|
|
Commerzbank line of credit
|
|
1,518
|
|
3
|
|
Nord LB line of credit
|
|
1,733
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,735
|
|
$
|
1,777
|
|
Long-term debt consists of the following at
September 30, 2010 and December 31, 2009:
|
|
September 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Syndicated credit agreement term loan
|
|
$
|
28,997
|
|
$
|
31,005
|
|
Syndicated credit agreement Euro term loan
|
|
|
|
13,826
|
|
Nord LB 3,000 Euro term loan
|
|
817
|
|
1,505
|
|
Loans with former owners of LRI
|
|
1,294
|
|
1,269
|
|
|
|
|
|
|
|
|
|
31,108
|
|
47,605
|
|
Less current maturities
|
|
(7,567
|
)
|
(13,485
|
)
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
23,541
|
|
$
|
34,120
|
|
In
March of 2010, the Company made required prepayments of principal under
the U.S. Dollar and Euro term loans in the amounts of $2,008 and 626 Euros
($868), respectively, from excess cash flow generated in 2009. Additionally,
the Company made a March payment of 9,020 Euros ($12,498) to retire the
remaining principal balance outstanding under the Euro term loan, which was
scheduled to mature on November 16, 2012.
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 major
assets; limits on capital expenditures; and maintenance of specified financial
ratios. As of September 30, 2010,
the Company was in compliance with all financial covenants and other provisions
of its debt agreements.
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 U.S.
borrowings under the syndicated credit agreement to a fixed rate of 4.87%
(6.37% effective October 21, 2009 due to an amendment in the Companys
syndicated credit facility and the Companys current 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 March 2009 and March
21
Table of Contents
2010, the Company made repayments of $2,744
and $2,008, respectively, on its variable rate U.S. borrowings and in both
cases elected to de-designate the related portion of the cash flow hedge. These principal payments were required under
the terms of the Companys syndicated credit facility since certain annually
calculated cash flow measures were met.
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 2009 and an immaterial gain of approximately
$43 during the nine months ended September 30, 2010.
10. BUSINESS SEGMENTS
The
Company is organized in the following three segments: Explosive Metalworking, Oilfield Products,
and AMK Welding. The Explosive Metalworking segment uses explosives to perform
metal cladding and shock synthesis of industrial diamonds. The most significant
product of this group is clad metal which is used in the fabrication of
pressure vessels, heat exchangers, and transition joints for various
industries, including upstream oil and gas, oil refinery, petrochemicals,
hydrometallurgy, aluminum production, shipbuilding, power generation,
industrial refrigeration, and similar industries. The Oilfield Products segment manufactures,
markets and sells oilfield perforating equipment and explosives, including
detonating cords, detonators, bi-directional boosters and shaped charges, and
seismic related explosives and accessories.
AMK Welding utilizes a number of welding technologies to weld components
for manufacturers of jet 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.
22
Table of
Contents
Segment
information is presented for the three and nine months ended September 30,
2010 and 2009 as follows:
|
|
Explosive
|
|
|
|
|
|
|
|
|
|
Metalworking
|
|
Oilfield
|
|
AMK
|
|
|
|
|
|
Group
|
|
Products
|
|
Welding
|
|
Total
|
|
For the three months ended September 30,
2010:
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
24,925
|
|
$
|
13,208
|
|
$
|
3,165
|
|
$
|
41,298
|
|
Depreciation and amortization
|
|
$
|
1,608
|
|
$
|
1,152
|
|
$
|
120
|
|
$
|
2,880
|
|
Income from operations
|
|
$
|
1,225
|
|
$
|
1,691
|
|
$
|
861
|
|
$
|
3,777
|
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
(834
|
)
|
Other expense
|
|
|
|
|
|
|
|
(416
|
)
|
Interest expense
|
|
|
|
|
|
|
|
(667
|
)
|
Interest income
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income before income taxes
|
|
|
|
|
|
|
|
$
|
1,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (loss) 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 nine months ended September 30, 2010:
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
72,921
|
|
$
|
28,868
|
|
$
|
8,124
|
|
$
|
109,913
|
|
Depreciation and amortization
|
|
$
|
4,340
|
|
$
|
3,131
|
|
$
|
350
|
|
$
|
7,821
|
|
Income from operations
|
|
$
|
4,408
|
|
$
|
1,490
|
|
$
|
1,912
|
|
$
|
7,810
|
|
Equity in earnings of joint ventures
|
|
$
|
|
|
$
|
255
|
|
$
|
|
|
255
|
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
(2,537
|
)
|
Other income
|
|
|
|
|
|
|
|
1,715
|
|
Interest expense
|
|
|
|
|
|
|
|
(2,473
|
)
|
Interest income
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income before income taxes
|
|
|
|
|
|
|
|
$
|
4,841
|
|
23
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 (loss) 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
|
|
During the three months ended September 30,
2010, no sales to any one customer accounted for more than 10% of total net
sales. During the nine months ended
September 30, 2010, sales to one customer represented $11,882 (10.8%) of
total net sales. 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.
11. COMPREHENSIVE
INCOME (LOSS)
The
Companys comprehensive income (loss) for the three and nine months ended
September 30, 2010 and 2009 was as follows:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Net income for the period
|
|
$
|
1,326
|
|
$
|
1,096
|
|
$
|
3,950
|
|
$
|
7,527
|
|
Interest rate swap valuation adjustment, net of
tax
|
|
123
|
|
104
|
|
365
|
|
301
|
|
Foreign currency translation adjustment
|
|
11,240
|
|
3,942
|
|
(4,332
|
)
|
3,747
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
12,689
|
|
$
|
5,142
|
|
$
|
(17
|
)
|
$
|
11,575
|
|
Other
cumulative comprehensive income (loss) as of September 30, 2010 and
December 31, 2009 consisted of the following:
|
|
September 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Currency translation adjustment
|
|
$
|
(3,538
|
)
|
$
|
794
|
|
Interest rate swap valuation adjustment, net of
tax of $51 and $299, respectively
|
|
(89
|
)
|
(454
|
)
|
|
|
|
|
|
|
|
|
$
|
(3,627
|
)
|
$
|
340
|
|
24
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,
2009.
Unless
stated otherwise, all currency amounts 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,
2010, Explosive Metalworking accounted for 66% of our net sales and 56% of our
income from 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 26% and 8%, respectively, of our year-to-date 2010 net
sales and 19% and 25 %, respectively, of our year-to-date income from
operations before consideration of stock-based compensation expense.
Our
net sales for the nine months ended September 30, 2010 decreased by
$12,355 (10.1%) compared to the same period of 2009, reflecting a year-to-year
net sales decrease of $29,482 (28.8%) for our Explosive Metalworking segment,
which was partially offset by sales increases of $15,697 (119.2%) and $1,430
(21.4%) for our Oilfield Products and AMK Welding segments, respectively. Excluding incremental sales of $12,134 from
the acquisitions of LRI and Austin Explosives on October 1, 2009 and June 4,
2010, respectively, and the step acquisition of two Russian joint ventures that
was completed on April 30, 2010, our Oilfield Products segment reported an
increase of $3,563 or 27.1% in its year-to-date 2010 net sales. Our consolidated income from operations
decreased to $5,273 for the nine months ended September 30, 2010 from $13,833
for the same period of 2009. This $8,560
decrease reflects a decline in Explosive Metalworkings operating income of
$12,973 which was partially offset by a $3,503 increase in the operating
results reported by our Oilfield Products segment from an operating loss of
$2,013 in 2009 to operating income of $1,490 for the first nine months of 2010,
an increase in operating income for AMK Welding of $790, and a $120 decrease in
stock-based compensation expense. We
recorded net income of $3,950 for the nine months ended September 30, 2010
compared to net income of $7,527 for the same period of 2009.
Impact of Current Economic Situation on the Company
The
Company was only minimally impacted in 2008 by the global economic
slowdown. However, during 2009 and the
first nine months of 2010, we experienced a significant slowdown in Explosive
Metalworking sales to some of the markets we serve. The explosion-welded 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 relatively healthy, and we continue to track an extensive list
of 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.
25
Table of
Contents
As
a result of our Explosive Metalworking backlog decreasing from $97,247 at
December 31, 2008 to $49,584 at December 31, 2009 and relatively low
booking activity during the first nine months of 2010 which further reduced our
backlog amount to $41,154 at September 30, 2010, we currently expect that
our 2010 consolidated net sales will decline by approximately 8% from the
consolidated net sales that we reported in 2009. In light of the slowdown in order inflow that
we have experienced, we continue to manage expenses carefully. Despite the significant sales and net income
declines that we reported in the first nine months of 2010, we generated cash
flow from operations of $10,254 and expect to generate positive cash flow from
operations for the full year 2010.
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, and bidirectional booster sand 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.
A
significant portion of our revenue is derived from a relatively small number of
customers; therefore, the failure to complete existing contracts on a timely
basis, to receive payment for such services in a timely manner, or to enter
into future contracts at projected volumes and profitability levels could
adversely affect our ability to meet cash requirements exclusively through
operating activities. We attempt to minimize the risk of losing customers or
specific contracts by continually improving product quality, delivering product
on time and competing aggressively on the basis of price.
Gross profit and cost of products sold
Cost
of products sold for Explosive Metalworking includes 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 includes 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.
26
Table of
Contents
Income taxes
Our
effective income tax rate decreased to 18.4% for the nine months ended
September 30, 2010 from 32.0% for the same period of 2009. After adjusting for the non-recurring gain on
the step acquisition of two Russian joint ventures, our effective tax rate on
the remaining ordinary pretax income that we reported for the first nine
months of 2010 was 30.5%. Based upon
existing tax regulations and current federal, state and foreign statutory tax
rates, an expected reduction in our 2010 consolidated pre-tax income from that
reported in 2009, and the amount of our projected 2010 consolidated pre-tax
income that we expect to be generated by our U.S. and foreign operations,
respectively, we currently expect our blended effective tax rate for 2010 to
range between 22% and 23%. Our full year
2009 effective tax rate was 33.9% and, for 2011 and subsequent years, we expect
that our blended effective tax rate will to return to a normalized level of 33%
to 35%.
Backlog
We use backlog as a primary means of measuring
the immediate outlook for our Explosive Metalworking 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 $41,154 at September 30, 2010 from
$49,584 at December 31, 2009 and was well below the backlog of $97,247
that we reported at December 31, 2008.
In light of the slowdown in order inflow and decrease in backlog that we
have experienced for our Explosive Metalworking segment, we are currently
anticipating that our consolidated net sales for fiscal 2010 will be
approximately 8% lower than the consolidated net sales that we reported in
2009.
Three and Nine Months Ended September 30, 2010 Compared
to Three and Nine Months Ended September 30, 2009
Net sales
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
Net sales
|
|
$
|
41,298
|
|
$
|
34,690
|
|
$
|
6,608
|
|
19.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
Net sales
|
|
$
|
109,913
|
|
$
|
122,268
|
|
$
|
(12,355
|
)
|
(10.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales for the third quarter of 2010 increased 19.0% to $41,298 from $34,690 for
the third quarter of 2009. Explosive
Metalworking sales decreased 8.8% to $24,925 for the three months ended
September 30, 2010 (60% of total sales) from $27,327 for the same period
of 2009 (79% of total sales). The
decrease in Explosive Metalworking sales reflects a business slowdown in
several of the industries that this business segment serves.
Oilfield
Products contributed $13,208 to third quarter 2010 sales (32% of total sales),
which represents a 157.8% increase from sales of $5,123 for the third quarter
of 2009 (15% of
27
Table of
Contents
total
sales). Excluding incremental sales of $5,194 from our acquisitions of LRI and
Austin Explosives and the step acquisition of two Russian joint ventures, the
third quarter 2010 sales increase for Oilfield Products was $2,891 or 56.4%.
AMK
Welding contributed $3,165 to third quarter 2010 sales (8% of total sales),
which represents a 41.3% increase from sales of $2,240 for the third quarter of
2009 (6% of total sales).
Our
consolidated net sales for the nine months ended September 30, 2010
decreased 10.1% to $109,913 from $122,268 in the same period of 2009. Explosive Metalworking sales decreased 28.8%
to $72,921 for the nine months ended September 30, 2010 (66% of total
sales) from $102,403 for the same period of 2009 (84% of total sales).
Oilfield
Products contributed $28,868 to year-to-date 2010 sales (26% of total sales),
which represents a 119.2% increase from sales of $13,171 for year-to-date 2009
sales (11% of total sales). Excluding
incremental sales of $12,134 from our acquisitions of LRI and Austin Explosives
and step acquisition of two Russian joint ventures, the year-to-date 2010 sales
increase for Oilfield Products was $3,563 or 27.1%.
AMK
Welding contributed $8,124 to the first nine months of 2010 sales (8% of total
sales), which represents a 21.4% increase from sales of $6,694 in the same
period 2009 (5% of total sales).
Gross profit
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
Gross profit
|
|
$
|
10,853
|
|
$
|
8,754
|
|
$
|
2,099
|
|
24.0
|
%
|
Consolidated gross profit margin rate
|
|
26.3
|
%
|
25.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
Gross profit
|
|
$
|
27,094
|
|
$
|
33,236
|
|
$
|
(6,142
|
)
|
(18.5
|
)%
|
Consolidated gross profit margin rate
|
|
24.7
|
%
|
27.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit increased by 24.0% to $10,853 for the three months ended September 30,
2010 from $8,754 for the three months ended September 30, 2009. Our third
quarter 2010 consolidated gross profit margin rate increased to 26.3% from the
25.2% gross margin that we reported for the third quarter of 2009. For the nine months ended September 30,
2010, gross profit decreased by 18.5% to $27,094 from $33,236 for the same
period of 2009. Our year to date
consolidated gross profit margin rate decreased to 24.7% from 27.2% for the
first nine months of 2009.
The
gross margin for Explosive Metalworking decreased from 25.8% for the third
quarter of 2009 to 18.7% for the third quarter of 2010. This 27.5% decrease in the Explosive
Metalworking third quarter gross margin rate relates entirely to our U.S.
cladding division where the gross margin of 20.1% for the third quarter of 2010
was 37% lower than the gross margin reported for the third quarter of 2009 on a
year-to-year sales increase of 1.6%.
Despite a 31.4% decline in their third quarter 2010 sales, our European
cladding divisions reported a gross margin of 14.0% in the third quarter of
2010 which was higher than the third quarter 2009 gross margin of 12.4%. Our gross margin for the Explosive
Metalworking segment decreased to 20.0% for the nine months ended September 30,
2010 from 28.3% for the same period in 2009.
This 29.3%
28
Table of
Contents
decrease
in the nine-month Explosive Metalworking gross margin rate reflects a 31.4%
decrease in our U.S. gross margin from 34.5% in 2009 to 23.7% in 2010 and a
decrease in our European gross margin from 19.0% in 2009 to 11.5% in 2010 on
year-to-year sales declines of 16.9% and 46.3%, respectively. While lower sales
and the resultant less favorable absorption of fixed manufacturing overhead costs
have negatively impacted gross margins reported by all of our cladding
divisions, the significant decline in our U.S. gross margin rate for the third
quarter and first nine months of 2010 compared to the same periods in 2009
relates principally to unfavorable changes in product mix and an extremely
competitive pricing environment in certain end markets that comprise a
significant portion of our 2010 sales. 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 and this has again been the
case during the first nine months of 2010.
While our European cladding divisions also face a competitive pricing
environment, the principal reason for the large decrease in our European gross
margin rate for the first nine months of 2010 compared to the same period in
2009 is the 46.3% decline in sales. As
has been the case historically, we expect to see continued fluctuations in
Explosive Metalworkings quarterly gross margin rates in the future that result
from fluctuations in quarterly sales volume and changes in product mix. Based
upon the reported year-to-date gross margin, the composition of our September 30,
2010 backlog and the anticipated mix of new orders that we expect to ship
before the end of the year, we expect the full year 2010 gross margin to be in
the range of 18% to 20% for our Explosive Metalworking segment.
Oilfield
Products reported a gross margin of 39.2% for the third quarter of 2010
compared to a gross margin of 22.4% for the third quarter of 2009. Oilfield Products reported a gross margin of
35.0% for the first nine months of 2010 compared to a gross margin of 21.7% for
the first nine months of 2009. The
increase in Oilfield Products gross margin for the third quarter and first
nine months of 2010 relates principally to the significant sales increases that
are discussed above and favorable changes in product/customer mix. Gross
margins reported by the Oilfield Products segment also reflect the incremental
margin on intercompany sales to recently acquired former distributors in
Canada, the U.S. and Russia as these acquired entities sell products through to
the end customers. We currently expect
Oilfield Products to report full year 2010 sales in excess of $40,000 and a
gross margin in the range of 33% to 35%.
The
gross margin for AMK Welding increased to 34.9% for the third quarter of 2010
from 29.7% for the third quarter of 2009.
The gross margin for AMK Welding increased to 32.7% in the first nine
months of 2010 from 26.5% in the first nine months of 2009. These increases in AMK Weldings gross margin
relate principally to the sales increases discussed above and resultant more
favorable absorption of fixed manufacturing overhead expenses. AMK Welding sales for the full year 2010 are
expected to approximate $10,500 and its full year gross margin is expected to
be in the range of 32% to 34%.
General and administrative expenses
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
General & administrative expenses
|
|
$
|
3,487
|
|
$
|
2,749
|
|
$
|
738
|
|
26.8
|
%
|
Percentage of net sales
|
|
8.4
|
%
|
7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
Table of Contents
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
General & administrative expenses
|
|
$
|
9,990
|
|
$
|
9,318
|
|
$
|
672
|
|
7.2
|
%
|
Percentage of net sales
|
|
9.1
|
%
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses increased by $738, or 26.8%, to $3,487 in the third
quarter of 2010 from $2,749 in the third quarter of 2009. Excluding incremental general and administrative
expenses of $428 that resulted from the acquisitions of LRI, Austin Explosives
and the Russian joint ventures, our general and administrative expenses
increased by $310 or 11.3% compared to the prior year third quarter. This
increase includes an increase of $178 in salaries, an increase in accrued
incentive compensation of $121 and a net increase of $11 in all other spending
categories. As a percentage of net
sales, general and administrative expenses increased to 8.4% in the third
quarter of 2010 from 7.9% in the third quarter of 2009.
General
and administrative expenses for the nine months ended September 30, 2010
totaled $9,990 compared to $9,318 for the same period of 2009, an increase of
$672 or 7.2%. Excluding incremental
general and administrative expenses of $924 that resulted from the acquisitions
of LRI, Austin Explosives and the Russian joint ventures, our general and
administrative expenses decreased by $252 or 2.7%. This decrease includes an increase of $252 in
salaries that was entirely offset by an $88 decrease in accrued incentive
compensation and a net decrease of $416 in all other expenses categories that
reflects the impact of tight controls over discretionary spending. As a percentage of net sales, general and
administrative expenses increased to 9.1% in the first nine months of 2010 from
7.6% in the first nine months of 2009.
Selling expenses
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
Selling expenses
|
|
$
|
3,047
|
|
$
|
2,212
|
|
$
|
835
|
|
37.7
|
%
|
Percentage of net sales
|
|
7.4
|
%
|
6.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
Selling expenses
|
|
$
|
7,918
|
|
$
|
6,376
|
|
$
|
1,542
|
|
24.2
|
%
|
Percentage of net sales
|
|
7.2
|
%
|
5.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses, which include sales commissions of $75 in 2010 and $237 in 2009,
increased by 37.7% to $3,047 in the third quarter of 2010 from $2,212 in the
third quarter of 2009. Excluding
incremental selling expenses of $1,260 that resulted from the acquisitions of
LRI, Austin Explosives and the Russian joint ventures, our selling expenses
decreased by $425 or 19.2%. This $425
decrease in our selling expenses includes increased selling expenses of $86 at
our U.S. divisions that was offset by decreased selling expenses of $511 at our
European divisions. The decrease in
European selling expenses relates principally to staff reductions within our
European explosion welding facilities and lower sales commissions. The $86
increase in our U.S. selling expenses reflects increased travel expenses of
$62, a $57 increase in bad debt expense and a net decrease of $33 in other
spending categories. As a percentage of net sales, selling expenses increased
to 7.4% in the third quarter of 2010 from 6.4% in the third quarter of 2009.
30
Table of
Contents
Selling
expenses increased by 24.2% to $7,918 in the nine months ended September 30,
2010 from $6,376 in the same period of 2009.
These selling expenses include sales commissions of $646 and $1,045 for
2010 and 2009, respectively. Excluding
incremental selling expenses of $2,489 that resulted from the acquisitions of
LRI, Austin Explosives and the Russian joint ventures, our selling expenses
decreased by $947 or 14.9%. This $947
decrease in our selling expenses includes decreased selling expenses of $907
and $40 at our European and U.S. divisions, respectively. The decrease in European selling expenses
relates principally to staff reductions within our European explosion welding
facilities and lower sales commissions. The $40 decrease in our U.S. selling
expenses reflects decreased sales commissions of $205, a $195 decrease in
salaries and accrued incentive compensation and a net increase of $360 in other
spending categories. As a percentage of net sales, selling expenses increased
to 7.2% in the first nine months of 2010 from 5.2% in the first nine months of
2009.
Amortization expenses
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
Amortization of purchased intangible assets
|
|
$
|
1,376
|
|
$
|
1,293
|
|
$
|
83
|
|
6.4
|
%
|
Percentage of net sales
|
|
3.3
|
%
|
3.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
Amortization of purchased intangible assets
|
|
$
|
3,913
|
|
$
|
3,709
|
|
$
|
204
|
|
5.5
|
%
|
Percentage of net sales
|
|
3.6
|
%
|
3.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense relates to the amortization of
values assigned to intangible assets in connection with the November 15,
2007 acquisition of DYNAenergetics, our October 1, 2009 acquisition of
LRI, our April 30, 2010 acquisition of the Russian joint ventures and our
June 5, 2010 acquisition of Austin Explosives. Amortization expense for the three months
ended September 30, 2010 includes $1,012, $276 and $88 relating to values
assigned to customer relationships, core technology and trademarks/trade names,
respectively. 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 nine months ended
September 30, 2010 includes $2,799, $845 and $269 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 (as measured in Euros) associated with the
DYNAenergetics acquisition is expected to approximate 3,603 in 2010, and 2010
amortization expense (as measured in Canadian Dollars) associated with the LRI
acquisition is expected to approximate 80 CAD.
Amortization expense associated with the acquisition of Austin
Explosives is expected to approximate $249 for approximately seven months of
2010 and amortization expense associated with the acquisition of the Russian
joint ventures is expected to approximate 185 for eight months of 2010.
31
Table of
Contents
Operating income
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
Operating income
|
|
$
|
2,943
|
|
$
|
2,500
|
|
$
|
443
|
|
17.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
Operating income
|
|
$
|
5,273
|
|
$
|
13,833
|
|
$
|
(8,560
|
)
|
(61.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations (operating income) increased by $443 to $2,943 in the third
quarter of 2010 from $2,500 in the third quarter of 2009. For the nine months ended September 30,
2010, operating income decreased by 61.9% to $5,273 from $13,833 for the same
period of 2009.
Explosive
Metalworking reported operating income of $1,225 in the third quarter of 2010
compared to $3,370 in the third quarter of 2009. This 63.6% decrease in Explosive Metalworking
operating income is largely attributable to the 8.8% decrease in net sales and
the 27.5% decline in the gross margin rate as discussed above. Explosive Metalworking reported operating
income of $4,408 in the nine months ended September 30, 2010 compared to
$17,381 in the same period of 2009. This 74.6% decrease in Explosive
Metalworking operating income is largely attributable to the 28.8% decrease in
net sales and the 29.3% decline in the gross margin rate as discussed above.
Oilfield
Products reported operating income of $1,691 for the third quarter of 2010 as
compared to an operating loss of $414 for the third quarter of 2009. For the nine months ended September 30,
2010, Oilfield Products reported operating income of $1,490 compared to an
operating loss of $2,013 for the same period of 2009. The significant
improvement in operating results for our Oilfield Products segment is
attributable to the significant increases in sales and gross profit as
discussed above that reflect the incremental sales and gross profit from the
acquisitions of LRI, Austin Explosives and the Russian joint ventures as well
as an increase in global oil and gas drilling activities, particularly in North
America.
AMK
Welding reported operating income of $861 for the three months ended September 30,
2010 as compared to $441 for the same period of 2009. AMK Welding reporting operating income of
$1,912 for the nine months ended September 30, 2010 compared to $1,122 for
the same nine month period of 2009. The improvement in AMKs operating income
is largely attributable to sales increases of 41.3% and 21.4% for the three and
nine month periods, respectively,
Operating
income for the three and nine months ended September 30, 2010 includes
$834 and $2,537, respectively, of stock-based compensation. Operating income for the three and nine
months ended September 30, 2009 includes $897 and $2,657, respectively, of
stock-based compensation. This expense
is not allocated to our business segments and thus is not included in the above
third quarter operating income or loss totals for Explosive Metalworking,
Oilfield Products and AMK Welding.
32
Table of
Contents
Gain on step acquisition of joint ventures
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
Gain on step acquisition of joint ventures
|
|
$
|
|
|
$
|
|
|
$
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
Gain on step acquisition of joint ventures
|
|
$
|
2,117
|
|
$
|
|
|
$
|
2,117
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the second quarter of 2010, we acquired the remaining
non-controlling interests in two Russian joint ventures that were previously
majority-owned. Prior to the acquisition
date, we accounted for the joint ventures as equity investments. As a result of the acquisition of the
remaining non-controlling interests, we now consolidate these entities. In
accordance with accounting standards applicable to transactions of this nature,
we determined the fair value of our interests in these joint ventures
immediately prior to the purchase and recognized a resultant gain of $2,117.
Other income (expense), net
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
Other income (expense), net
|
|
$
|
(416
|
)
|
$
|
(633
|
)
|
$
|
217
|
|
(34.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
Other income (expense), net
|
|
$
|
(402
|
)
|
$
|
(560
|
)
|
$
|
158
|
|
(28.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other expense for the three months ended
September 30, 2010 was $416 compared to net other expense of $633 for the
same period of 2009. For year to date
2010, we recorded net other expense of $402 compared to net other expense of
$560 for the same period of 2009. The net
other expense for the three and nine month periods relates principally to
realized and unrealized foreign exchange losses recognized by consolidated
subsidiaries that prepare their financial statements in functional currencies
other than the U.S. Dollar. For 2010,
the foreign exchange losses recorded by our Swedish, German and Russian
subsidiaries reflect the weakening of the Euro against the Swedish Krona, the
weakening of the U.S. Dollar against the Euro and the weakening of the Russian
Ruble against the Euro, respectively.
These losses were partially offset by a gain of $185 on our currency swap
agreement. For 2009 the foreign exchange
losses recorded by our Swedish, German and Kazakhstani subsidiaries reflect the
weakening of the Euro against the Swedish Krona, the weakening of the U.S.
Dollar against and Euro and the weakening of the Kazakhstan Tenge against the
Euro, respectively.
33
Table of
Contents
Interest income (expense), net
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
Interest income (expense), net
|
|
$
|
(661
|
)
|
$
|
(711
|
)
|
$
|
50
|
|
(7.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
Interest income (expense), net
|
|
$
|
(2,402
|
)
|
$
|
(2,376
|
)
|
$
|
(26
|
)
|
1.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
recorded net interest expense of $661 in the third quarter of 2010 compared to
net interest expense of $711 in the same period of 2009. We recorded net interest expense of $2,402 in
the nine months ended September 30, 2010 compared to net interest expense
of $2,376 for the same nine month period of 2009. Year-to-date 2010 interest expense included a
non-recurring, non-cash charge of $251 related to the write-off of unamortized
debt issuance costs associated with the March prepayment, in the amount of
$12,498 (9,020 Euros), of the remaining balance of the Euro term loan that was
outstanding under our bank syndicate credit facility. This Euro term loan was scheduled to mature
on November 16, 2012. The decrease
in interest expense for the comparable three month periods ended September 30
is attributable to a significant reduction in average outstanding borrowings
during the respective quarters that resulted from scheduled term loan payments
and the March prepayment of the Euro term loan. Interest savings from
these term loan reductions was partially offset by higher average interest
rates in 2010 that relate principally to the October 2009 amendment to our
bank syndicate credit facility which resulted in an increase in the interest
rate charged on outstanding borrowings of 1.5% per annum.
Income tax provision
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
Income tax provision
|
|
$
|
540
|
|
$
|
151
|
|
$
|
389
|
|
257.6
|
%
|
Effective tax rate
|
|
28.9
|
%
|
12.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
Income tax provision
|
|
$
|
891
|
|
$
|
3,540
|
|
$
|
(2,649
|
)
|
(74.8
|
)%
|
Effective tax rate
|
|
18.4
|
%
|
32.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
recorded an income tax provision of $540 in the third quarter of 2010 compared
to $151 in the third quarter of 2009.
Our overall effective tax rate decreased to 28.9% in the third quarter
of 2010 from an effective tax rate of 12.1% in the prior year third quarter. Our consolidated income tax provision for the
three months ended September 30, 2010 and 2009 included provisions of $510
and $1,079, respectively, related to U.S. taxes, with the remainder relating to
a net foreign tax provision of $30 in 2010 and a net foreign tax benefit of
$928 in 2009 associated with our foreign operations and holding companies
located in Canada, France, Germany, Sweden, Russia, Kazakhstan and Luxembourg.
34
Table of
Contents
For
the nine months ended September 30, 2010, we recorded an income tax
provision of $891 compared to $3,540 in the same period of 2009. Our year-to-date 2010 income tax provision
included a provision of $59 associated with the $2,117 non-recurring gain that
we recorded on the acquisition of non-controlling interests in two Russian
joint ventures as discussed above and a provision of $832 on the remaining
ordinary pretax income of $2,724. The
effective tax rate decreased to 18.4% for the first nine months of 2010 from
32.0% in the first nine months of 2009 due principally to the low tax rate
applicable to the non-recurring gain on the acquisition of non-controlling
interests in two Russian joint ventures.
Our effective tax rate on the $832 of ordinary pretax income that we
reported for the nine months ended September 30, 2010 was 30.5%. Our consolidated income tax provision for the
nine months ended September 30, 2010 and 2009 included $1,359 and $4,250,
respectively, related to U.S. taxes, with the remainder relating to a net
foreign tax benefit of $468 in 2010 and a net foreign tax benefit of $710 in
2009 associated with our foreign operations and holding companies.
We
expect our blended effective tax rate for 2010 to range from 22% to 23% based
upon the low effective tax rate we experienced during the first nine months of
2010 and our current projection of full year consolidated pre-tax income. Our full year 2009 effective tax rate was
33.9% and we expect that our blended effective tax rate will return to a
normalized level of 33% to 35% in 2011 and subsequent years.
Adjusted EBITDA
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
Adjusted EBITDA
|
|
$
|
6,657
|
|
$
|
5,950
|
|
$
|
707
|
|
11.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
Percentage
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
Adjusted EBITDA
|
|
$
|
15,631
|
|
$
|
23,900
|
|
$
|
(8,269
|
)
|
(34.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA is a non-GAAP measure that we use as an indicator of the ongoing
operating performance and the cash generating ability of the Company. The following is a reconciliation of the most
directly comparable GAAP measure to Adjusted EBITDA.
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Income from operations
|
|
$
|
2,943
|
|
$
|
2,500
|
|
$
|
5,273
|
|
$
|
13,833
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
834
|
|
897
|
|
2,537
|
|
2,657
|
|
Depreciation
|
|
1,504
|
|
1,260
|
|
3,908
|
|
3,701
|
|
Amortization of purchased intangibles
|
|
1,376
|
|
1,293
|
|
3,913
|
|
3,709
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
6,657
|
|
$
|
5,950
|
|
$
|
15,631
|
|
$
|
23,900
|
|
Adjusted
EBITDA increased by 11.9% to $6,657 in the third quarter of 2010 from $5,950 in
the third quarter of 2009 primarily due to the $443 increase in operating
income. Adjusted EBITDA decreased by
34.6% to $15,631 in the nine months ended September 30, 2010 from $23,900
in the same period of 2009 primarily due to the $8,560 decrease in operating
income.
35
Table of
Contents
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 in 2007, 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.
There
are two significant financial covenants under our credit facility, the leverage
ratio and fixed charge coverage ratio requirements. The leverage ratio is defined in the credit
facility as Consolidated Funded Indebtedness at the balance sheet date as
compared to Consolidated EBITDA, which is defined as earnings before provisions
for income taxes, interest expense, depreciation and amortization,
extraordinary, non-recurring charges and other non-cash charges, for the
previous twelve months. For the year
ended December 31, 2009 and nine months ended September 30, 2010,
Consolidated EBITDA approximated the Adjusted EBITDA that we reported for the
respective periods. As of
December 31, 2009, the maximum leverage ratio permitted by our credit
facility was 2.0 to 1.0. The actual leverage ratio as of December 31, 2009
was 1.69 to 1.0. The maximum leverage ratio permitted as of September 30
and December 31, 2010 is 2.0 to 1.0 and 1.5 to 1.0, respectively. The actual leverage ratio as of September 30,
2010 was 1.77 to 1.0.
The
fixed charge ratio, as defined in the credit facility, means, for any period,
the ratio of Earnings Available for Fixed Charges to Fixed Charges. Earnings Available for Fixed Charges equals
Consolidated EBITDA plus lease expenses minus cash income taxes and
non-financed capital expenditures. Fixed
Charges equals the sum of cash interest expense, lease expense, scheduled
principal payments and cash dividends.
As of December 31, 2009, the minimum fixed charge ratio permitted
by our credit facility was 1.1 to 1.0. The actual fixed charge ratio as of
December 31, 2009 was 1.31 to 1.0. The minimum fixed charge coverage ratio
permitted for the twelve month periods ending September 30 and December 31,
2010 is 1.0 to 1.0. The actual fixed charge ratio as of September 30, 2010
was 1.19 to 1.0.
As
a result of the slowdown in our business during 2009 which has continued into
the early part of 2010, we were concerned about our ability to comply with
financial covenants as of March 31, 2010 and subsequent quarters of
2010. In an effort to alleviate this
concern and remain in compliance with financial covenants as of March 31,
2010 and in future periods, we made a March prepayment of the remaining
principal balance due under our bank syndicated Euro term loan in the amount of
$12,498 (9,020 Euros) and, on April 19, 2010, amended the credit agreement
to exclude scheduled principal payments under the Euro term loan from fixed
charge coverage ratio computations for March 31, 2010 and forward.
In connection with the October 1, 2009 acquisition of LRI, we
assumed outstanding debt obligations including line of credit loans, loans with
the former owners and capital lease obligations in the amounts of $2,676 (2,883
CAD), $2,445 (2,634 CAD) and $432 (465 CAD), respectively.
As of September 30, 2010, a U.S. Dollar term loan of $28,997 was
outstanding under our syndicated credit agreement, $817 was outstanding under
term loan obligations of DYNAenergetics and $1,294 was outstanding under loan
agreements with the former owners of LRI.
We had $3,403 in outstanding revolving credit borrowings under our
syndicated credit
36
Table of
Contents
agreement
and $3,251 outstanding under our separate DYNAenergetics line of credit
agreements with German banks. We also
had $81 outstanding under the line of credit assumed with the acquisition of
LRI. While we had approximately $38,986
of unutilized revolving credit loan capacity as of September 30, 2010
under our various credit facilities, future borrowings are subject to
compliance with financial covenants that could significantly 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 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,
and maintenance of specified financial ratios.
As of September 30, 2010, we were in compliance with all financial
covenants and other provisions of our debt agreements.
Other than the unscheduled $12,498 (9,020 Euros)
prepayment of the remaining principal balance on our bank syndicate Euro term
loan, the Companys principal cash flows related to debt obligations and other
contractual obligations and commitments have not materially changed since
December 31, 2009.
Cash flows from operating activities
Net
cash flows provided by operating activities for the nine months ended September 30,
2010 totaled $10,254. Significant
sources of operating cash flow included net income of $3,950, non-cash
depreciation and amortization expense of $8,310, stock-based compensation of
$2,537. These sources of operating cash
flow were partially offset by a $2,117 gain on step acquisition of joint
ventures and a deferred income tax benefit of $953 and net negative changes in
working capital of $1,218. Net negative
changes in working capital included decreases in accounts payable, accrued expenses
and customer advances of $2,075, $1,800 and $1,327, respectively. These negative changes in working capital
were partially offset by decreases in accounts receivable and inventory of
$2,465 and $1,198, respectively.
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.
37
Table of
Contents
Cash flows from investing activities
Net
cash flows used in investing activities for the nine months ended September 30,
2010 totaled $8,053 which included investments in acquisitions of $5,685 and
capital expenditures of $2,309.
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.
Cash flows from financing activities
Net
cash flows used in financing activities for the nine months ended September 30,
2010 were $13,630, which included $2,876 in required prepayments of term loans
under our syndicated credit agreement from excess cash flow that we generated
in fiscal year 2009, $12,498 to prepay the remaining principal balance of our
Euro term loan under our syndicated credit agreement, $593 in principal
payments on Nord LB term loans, payment of quarterly dividends of $1,561, $639
for the negative tax impact of stock-based compensation and payment on capital
lease obligations of $215. These uses of
cash were partially offset by net borrowings on bank lines of credit of $4,682
and $70 in net proceeds from the issuance of common stock relating to the
exercise of stock options.
Net
cash flows used in financing activities for the nine months ended September 30,
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 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.
Payment of Dividends
On
September 22, 2010, our board of directors declared a quarterly cash
dividend of $0.04 per share which was paid on October 15, 2010. The dividend totaled $528 and was payable to
shareholders of record as of September 30, 2010. We also paid a quarterly cash dividend of
$0.04 per share in the first and second quarters of 2010 totaling $518 and
$528, respectively. We paid a quarterly
cash dividend of $0.04 per share in the third and fourth quarters of 2009.
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
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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 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
account for our business acquisitions using the purchase method of accounting.
We allocate 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 identify and attribute values and estimated lives to the intangible
assets acquired. These determinations involve 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 require considerable judgment. Our
estimates and assumptions are 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 base our fair
value estimates on assumptions we believe to be reasonable but are inherently
uncertain.
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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:
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 2009 did not result in a
determination that any of our goodwill was impaired. The fair value of the Explosives Metalworking
reporting unit was $171.7 million at December 31, 2009 compared to its
carrying value of $108.4 million. The
fair value of the Oilfield Products reporting unit was $74.2 million at
December 31, 2009 compared to its carrying value of $63.6 million. A discount rate of 17% was utilized in the
income approach component of the model used to measure fair value. A future impairment is possible and could
occur if (i) the units operating results underperform what we have
estimated or (ii) additional volatility of the capital markets or other
factors should cause us to raise the discount rate utilized in our discounted
cash flow analysis or decrease the multiples utilized in our market-based
analysis.
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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.
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 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.
Stock-Based Compensation Expense
We
are required to account for stock-based compensation under fair value
recognition provisions. The stock-based
compensation cost is estimated at the grant date based on the value of the
award and is recognized as expense ratably over the requisite service period of
the award. The fair value of restricted
stock awards is based on the fair value of the Companys stock on the date of
grant. For the last several years we
have not granted stock options. Were we
to do so, determining the appropriate fair value model and calculating the fair
value of stock options at the
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grant
date would require judgment, including estimating stock price volatility,
forfeiture rates, and expected option life.
ITEM 3. Quantitative and Qualitative Disclosure about
Market Risk
There
have been no events that materially affect our quantitative and qualitative
disclosure about market risk from that reported in our Annual Report on Form 10-K
for the year ended December 31, 2009.
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, 2010, 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, 2010 or
in other factors that could materially affect the Companys internal controls
over financial reporting.
The
Companys management, including the Companys Chief Executive Officer and Chief
Financial Officer, does not expect that the Companys disclosure controls or
its internal controls will prevent all errors and all fraud. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. As a result of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the Company have
been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple 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.
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Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
There
have been no significant changes in the risk factors identified as being
attendant to our business in our Annual Report on Form 10-K for the year
ended December 31, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Removed and Reserved
None.
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.
|
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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 28, 2010
|
/s/
Richard A. Santa
|
|
Richard
A. Santa, Senior Vice President and Chief Financial Officer (Duly Authorized
Officer and Principal Financial and Accounting Officer)
|
44
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