ITEM 2. Management’s 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 our Annual Report filed on Form 10-K for the year ended
December 31, 2012
.
Unless stated otherwise, all currency amounts in this discussion are presented in thousands (000’s).
Executive Overview
Our business is organized into three segments: Explosive Metalworking (which we also refer to as Nobelclad), Oilfield Products and AMK Welding. For the
six months ended June 30, 2013
, Explosive Metalworking accounted for 56% of our net sales and 66% of our income from operations before consideration of unallocated corporate expenses and stock-based compensation expense, which are not allocated to our business segments. Our Oilfield Products segment accounted for 40% and 33% of our first half 2013 sales and income from operations, respectively, while the AMK Welding segment accounted for 4% of net sales and 1% of our income from operations for the first half of 2013.
Our consolidated net sales for the
six months ended June 30, 2013
increased by $5,230, or 5.3%, compared to the same period of 2012. The year-to-year consolidated net sales increase reflects sales increases of $3,664 (6.7%) for our Explosive Metalworking segment and $1,920 (4.8%) for our Oilfield Products segment which were partially offset by a sales decrease of $354 (8.6%) for our AMK Welding segment. As a result of an increase of $4,295 in operating expenses, our consolidated income from operations decreased to $4,958 for the first half of 2013 compared to operating income of $7,787 in the same period of 2012. This $2,829 decrease in operating income reflects a flat year-to-year operating income reported by our Explosive Metalworking segment, small increases of $133 and $33 in the operating income reported by our Oilfield Products and AMK Welding segments, respectively, and a net increase of $2,996 in aggregate unallocated corporate expenses and stock-based compensation expense which includes $2,965 of non-recurring expenses associated with executive management retirements. Reported consolidated operating income for the six months ended June 30, 2013 and 2012 includes amortization expense of $3,153 and $3,064, respectively, relating to purchased intangible assets associated with several acquisitions executed between November 2007 and January 2012. Net income was $3,655 for the first half of 2013 compared to net income of $5,079 for the same period of 2012.
Impact of Current Economic Situation on the Company
We were only minimally impacted in 2008 by the global economic slowdown. However, during 2009 and 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, chemicals and petrochemicals, aluminum production, power generation, shipbuilding, industrial refrigeration, alternative energy and hydrometallurgy. These industries tend to be cyclical in nature and the uneven worldwide economic recovery has affected many of these markets. While certain sectors continue to be slow, including alternative energy, hydrometallurgy and power generation, quoting activity in other end markets remains healthy, and we continue to track an extensive list of projects. While timing of new order inflow remains difficult to predict, our Explosive Metalworking segment has benefited from the modest improvement in some of the industries it supplies and we believe that it is well-positioned to further benefit as global economic conditions improve.
As a result of acquisitions made during 2009, 2010 and 2012 and strong organic sales growth beginning in the third quarter of 2010 and continuing through the second quarter of 2012, our Oilfield Products segment has grown into a second core business for us, generating 39% of our consolidated net sales in 2012 and 40% of our year-to-date 2013 consolidated net sales as compared to only 13% of our consolidated net sales in 2009.
Our Explosive Metalworking backlog decreased slightly to $44,151 at June 30, 2013 from $46,398 and $47,558 at December 31, 2012 and March 31, 2013, respectively. Based upon the June 30, 2013 Explosive Metalworking backlog, recent quoting activity for this segment and positive sales trends in our Oilfield Products segment, we expect our third quarter 2013 consolidated net sales to be comparable to the $57,859 in consolidated sales that we reported in the second quarter and believe that our full year 2013 consolidated net sales could increase by 6% to 8% from the $201,567 in consolidated net sales that we reported in 2012.
Net sales
Explosive Metalworking's 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 boosters and perforating guns to customers who perform the perforation of oil and gas wells and from sales of seismic products to customers involved in oil and gas exploration activities.
AMK Welding's 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 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 Welding's 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.
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 $44,151 at
June 30, 2013
from $46,398 at December 31, 2012.
Three and Six Months Ended June 30, 2013 Compared to the Three and Six Months Ended June 30, 2012
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Percentage
|
|
2013
|
|
2012
|
|
Change
|
|
Change
|
Net sales
|
$
|
57,859
|
|
|
$
|
48,687
|
|
|
$
|
9,172
|
|
|
18.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Percentage
|
|
2013
|
|
2012
|
|
Change
|
|
Change
|
Net sales
|
$
|
104,129
|
|
|
$
|
98,899
|
|
|
$
|
5,230
|
|
|
5.3
|
%
|
Our consolidated net sales for the second quarter of 2013 increased
18.8%
to
$57,859
from
$48,687
for the second quarter of 2012. Explosive Metalworking sales increased 18.3% to $32,390 for the
three months ended June 30, 2013
(56% of total sales) from $27,374 for the same period of 2012 (56% of total sales). Despite our Explosive Metalworking backlog at the beginning of the respective quarters of 2012 and 2013 decreasing from $57,253 at March 31, 2012 to $47,558 at March 31, 2013, our second quarter 2013 Explosive Metalworking sales increased by $5,016, which indicates that the increase relates principally to the timing
of orders entering our backlog and the subsequent shipment of these orders. To further explain, second quarter 2012 sales were lower than one might expect because the backlog at March 31, 2012 included certain large orders that were booked late in the quarter for which minimal or no shipments were made in the second quarter of 2012 due to lead times on metal purchases for these orders.
Oilfield Products contributed $23,164 to second quarter 2013 sales (40% of total sales), which represents an increase of 22.4% from sales of $18,924 for the second quarter of 2012 (39% of total sales). This $4,240 increase relates principally to timing of shipments on an annual tender order from India. Oilfield Products first quarter 2012 sales included approximately $2.5 million in sales relating to the Indian tender order; however, full shipment of the 2013 tender order valued at approximately $3.2 million shipped in the second quarter.
AMK Welding contributed $2,305 to second quarter 2013 sales (4% of total sales) compared to sales of $2,389 for the second quarter of 2012 (5% of total sales), a sales decrease of $84 or 3.5%. As was the case in the first quarter of 2012, AMK continues to experience a decline in ground power sales that is attributable to a customer's decision to discontinue new production work on a ground turbine platform that has accounted for a major portion of AMK's historical ground power revenues. While we believe that AMK can replace this lost revenue stream over time by developing new business opportunities with both existing and new customers in the aircraft engine, ground turbine, and oil and gas industries, we view 2013 as another transition year for AMK and, at this point, do not expect AMK's full year 2013 sales to improve from the $8,830 in sales that AMK reported in 2012.
Our consolidated net sales for the first half of 2013 increased 5.3% to $104,129 from $98,899 in the first half of 2012. Explosive Metalworking sales increased 6.7% to $58,572 for the six months ended June 30, 2013 (56% of total sales) from $54,908 (56% of total sales) for the same period of 2012. The $3,664 increase in year-to-date Explosive Metalworking sales is smaller than their second quarter 2013 sales increase of $5,016 and, as discussed above, this sales increase relates principally to timing of shipments out of backlog.
Oilfield Products contributed $41,818 to first half 2013 sales (40% of total sales), which represents an increase of 4.8% from sales of $39,898 for the first half of 2012 (40% of total sales). Since average North American rig count in the oil and gas industry was down slightly from the first half of 2012 to the first half of 2013, the sales increase is largely attributable to a combination of market shares gains, geographical expansion initiatives and favorable changes in product/customer mix.
AMK Welding contributed $3,739 to first half 2013 sales (4% of total sales) compared to $4,093 for the first half of 2012 (4% of total sales), which represents a decrease of $354 or 8.6%.
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Percentage
|
|
2013
|
|
2012
|
|
Change
|
|
Change
|
Gross profit
|
$
|
17,063
|
|
|
$
|
13,939
|
|
|
$
|
3,124
|
|
|
22.4
|
%
|
Consolidated gross profit margin rate
|
29.5
|
%
|
|
28.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Percentage
|
|
2013
|
|
2012
|
|
Change
|
|
Change
|
Gross profit
|
$
|
29,782
|
|
|
$
|
28,316
|
|
|
$
|
1,466
|
|
|
5.2
|
%
|
Consolidated gross profit margin rate
|
28.6
|
%
|
|
28.6
|
%
|
|
|
|
|
|
|
Our consolidated second quarter 2013 gross profit increased by 22.4% to $17,063 from $13,939 for the three months ended June 30, 2012. Our second quarter 2013 consolidated gross profit margin rate increased to 29.5% from 28.6% for the second quarter of 2012. For the six months ended June 30, 2013, consolidated gross profit increased by 5.2% to $29,782 from $28,316 for the same period of 2012. Our year-to-date consolidated gross profit margin rate remained flat at 28.6% in both 2012 and 2013.
The gross profit margin for Explosive Metalworking increased from 25.5% in the second quarter of 2012 to 26.3% in the second quarter of 2013. For the six-month period, our gross profit margin for this segment decreased to 24.6% in 2013 from 25.9% in 2012. The increase in our second quarter gross margin rate and the decline in our year-to-date 2013 gross margin rate both relate principally to changes in product mix as compared to the comparable periods of 2012. As has been the case historically, we expect to see continued fluctuations in Explosive Metalworking's quarterly gross margin rates in the future that result from fluctuations in quarterly sales volume and changes in product mix.
Our Oilfield Products segment's gross profit margin decreased to 34.5% in the second quarter of 2013 from 35.1% in the second quarter of 2012 and reflects the negative impact of a $300 increase to our reserve for obsolete and slow-moving inventory that was recorded in the second quarter of 2013. Oilfield Products reported a gross profit margin of 35.8% for the first half of 2013 compared to a gross profit margin of 34.2% for the first half of 2012. The improved year-to-date gross margin performance relates principally to favorable changes in product/customer mix.
The gross profit margin for AMK Welding increased to 27.5% in the second quarter of 2013 from 17.0% in the second quarter of 2012. AMK's second quarter 2013 gross margin performance was favorably impacted by a large volume of high margin repair work that flowed through the shop in the second quarter of 2013. The gross profit margin for AMK Welding decreased slightly to 14.3% for the first half of 2013 from 14.6% for the same period of 2012, with this decrease relating principally to the $354 decrease in AMK's 2013 sales and the fact that the majority of AMK's manufacturing costs are fixed in nature.
Based upon the expected contribution to 2013 consolidated net sales by each of our three business segments, we expect our consolidated full year 2013 gross margin to be in a range of 27% to 29%.
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Percentage
|
|
2013
|
|
2012
|
|
Change
|
|
Change
|
General and administrative expenses
|
$
|
5,158
|
|
|
$
|
4,641
|
|
|
$
|
517
|
|
|
11.1
|
%
|
Percentage of net sales
|
8.9
|
%
|
|
9.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Percentage
|
|
2013
|
|
2012
|
|
Change
|
|
Change
|
General and administrative expenses
|
$
|
13,296
|
|
|
$
|
9,146
|
|
|
$
|
4,150
|
|
|
45.4
|
%
|
Percentage of net sales
|
12.8
|
%
|
|
9.2
|
%
|
|
|
|
|
|
|
General and administrative expenses increased by $517, or 11.1%, to $5,158 for the three months ended June 30, 2013 from $4,641 for the same period of 2012. This increase includes an aggregate increase of $352 in salaries, benefits and payroll taxes, an increase of $107 in professional services and a net increase of $58 in all other expense categories. As a percentage of net sales, general and administrative expenses decreased to 8.9% in the second quarter of 2013 from 9.5% in the second quarter of 2012.
General and administrative expenses increased by $4,150, or 45.4% to $13,296 for the six months ended June 30, 2013 from $9,146 for the same period of 2012. Excluding the impact of $2,965 from non-recurring expenses associated with management retirements, our general and administrative increased $1,185 or 13.0%. This increase includes an aggregate increase of $437 in salaries, benefits and payroll taxes, an increase of $343 in professional services and a net increase of $405 in all other expense categories. Excluding the impact of non-recurring management retirement expenses, general and administrative expenses, as a percentage of net sales, increased to 9.9% for the first half of 2013 from 9.2% for the first half of 2012.
Selling and distribution expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Percentage
|
|
2013
|
|
2012
|
|
Change
|
|
Change
|
Selling and distribution expenses
|
$
|
4,324
|
|
|
$
|
4,128
|
|
|
$
|
196
|
|
|
4.7
|
%
|
Percentage of net sales
|
7.5
|
%
|
|
8.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Percentage
|
|
2013
|
|
2012
|
|
Change
|
|
Change
|
Selling and distribution expenses
|
$
|
8,375
|
|
|
$
|
8,319
|
|
|
$
|
56
|
|
|
0.7
|
%
|
Percentage of net sales
|
8.0
|
%
|
|
8.4
|
%
|
|
|
|
|
|
|
Our selling and distribution expenses, which include sales commissions of $289 in the second quarter of 2013 and $353 in the second quarter of 2012, increased by 4.7% to $4,324 in the second quarter of 2013 from $4,128 in the second quarter of 2012. The increase in our selling and distribution expenses reflects decreased selling and distribution expenses of $139 at our U.S. divisions and increased selling and distribution expenses of $335 at our foreign divisions.
The $139 decrease in our second quarter U.S. selling and distribution expenses reflects a decrease in stock-based compensation of $156 and a net increase of $17 in all other expense categories. The $335 increase in our foreign divisions' selling and distribution expenses reflects an aggregate increase of $139 in salary and commission expense and a net increase of $196 in all other spending categories. As a percentage of net sales, selling and distribution expenses decreased to 7.5% in the second quarter of 2013 from 8.5% in the second quarter of 2012.
Our selling and distribution expenses, which include sales commissions of $597 in the first half of 2013 and $871 in the first half of 2012, increased by 0.7% to $8,375 in the first half of 2013 from $8,319 in the first half of 2012. The increase reflects decreased selling and distribution expenses of $186 at our U.S. divisions and increased selling and distribution expenses of $242 at our foreign divisions.
The $186 decrease in our U.S. selling and distribution expenses for the first half of 2013 reflects a decrease in stock-based compensation of $303 and a net increase of $117 in all other expense categories. The $242 increase in our foreign divisions' selling and distribution expenses reflects an aggregate increase of $40 in salary and commission expense and a net increase of $202 in all other spending categories. As a percentage of net sales, selling and distribution expenses decreased to 8.0% in the first half of 2013 from 8.4% in the first half of 2012.
Our consolidated selling and distribution expenses for the three months ended June 30, 2013 include $1,365 and $2,896, respectively, for our Explosive Metalworking and Oilfield Products business segments as compared to $1,675 and $2,247, respectively, for the second quarter of 2012. Our consolidated selling and distribution expenses for the six months ended June 30, 2013 include $2,969 and $5,284, respectively, for our Explosive Metalworking and Oilfield Products business segments as compared to $3,235 and $4,695, respectively, for the first half of 2012. The higher level of selling and distribution expenses for our Oilfield Products segment relative to its contribution to our consolidated net sales reflects the need, particularly in North America, to maintain a number of strategically located distribution centers that are in close proximity to areas which contain a large concentration of oilfields and enjoy a high volume of related oil and gas drilling activities.
Amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Percentage
|
|
2013
|
|
2012
|
|
Change
|
|
Change
|
Amortization of purchased intangible assets
|
$
|
1,568
|
|
|
$
|
1,520
|
|
|
$
|
48
|
|
|
3.2
|
%
|
Percentage of net sales
|
2.7
|
%
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Percentage
|
|
2013
|
|
2012
|
|
Change
|
|
Change
|
Amortization of purchased intangible assets
|
$
|
3,153
|
|
|
$
|
3,064
|
|
|
$
|
89
|
|
|
2.9
|
%
|
Percentage of net sales
|
3.0
|
%
|
|
3.1
|
%
|
|
|
|
|
|
|
Amortization expense relates to the amortization of values assigned to intangible assets in connection with our prior year acquisitions of DYNAenergetics, LRI, the two Russian joint ventures, Austin Explosives and our January 3, 2012 acquisition of TRX Industries. The $48 increase in second quarter 2013 amortization expenses reflects the impact of foreign currency translation effects. Amortization expense for the three months ended June 30, 2013 includes $1,242, $279, and $47 relating to values assigned to customer relationships, core technology, and trademarks/trade names, respectively. Amortization expense for the three months ended June 30, 2012 includes $1,199, $275 and $46 relating to values assigned to customer relationships, core technology, and trademarks/trade names, respectively.
Amortization expense for the six months ended June 30, 2013 includes $2,497, $562 and $94 relating to values assigned to customer relationships, core technology, and trademarks/trade names, respectively. Amortization expense for the six months ended June 30, 2012 includes $2,416, $555 and $93 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 and the acquisition of the two Russian joint ventures is expected to approximate €3,490 and €244, respectively, in 2013. Our 2013 amortization expense associated with the June 2010 Austin Explosives acquisition and the January 2012 acquisition of TRX Industries is expected to approximate $435 and $895, respectively, and our 2013 amortization expense (as measured in Canadian dollars) associated with the LRI acquisition is expected to approximate 80 CAD.
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Percentage
|
|
2013
|
|
2012
|
|
Change
|
|
Change
|
Operating income
|
$
|
6,013
|
|
|
$
|
3,650
|
|
|
$
|
2,363
|
|
|
64.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Percentage
|
|
2013
|
|
2012
|
|
Change
|
|
Change
|
Operating income
|
$
|
4,958
|
|
|
$
|
7,787
|
|
|
$
|
(2,829
|
)
|
|
(36.3
|
)%
|
Our consolidated operating income increased by $2,363 to $6,013 in the second quarter of 2013 from $3,650 in the second quarter of 2012. These operating income totals for the second quarters of 2013 and 2012 include $1,158 and $839, respectively, of unallocated corporate expenses and $635 and $966, respectively, of stock-based compensation expense. Our consolidated income from operations decreased by $2,829 to $4,958 for the first half of 2013 from $7,787 for the first half of 2012. These operating income totals for 2013 and 2012 include $4,664 and $1,790, respectively, of unallocated corporate expenses and $2,057 and $1,935, respectively, of stock-based compensation expense. These expenses are not allocated to our business segments and thus are not included in the below 2013 and 2012 operating income totals for Explosive Metalworking, Oilfield Products, and AMK Welding.
The large decrease in our consolidated operating income for the first half of 2013 reflects a modest increase of $167 in the aggregate operating income reported by our three business segments that was offset by increases in unallocated corporate expenses and stock-based compensation expense of $2,874 and $122, respectively. The aggregate increase of $2,996 in unallocated corporate expenses and stock-based compensation expense includes $2,965 of non-recurring expenses associated with management retirements, the majority of which relates to the March 1, 2013 retirement of Yvon Cariou, our former President and Chief Executive Officer, who was succeeded in this position by Kevin Longe, our former Chief Operating Officer who joined the Company in July 2012.
Explosive Metalworking reported operating income of $5,245 in the second quarter of 2013 compared to $3,589 in the second quarter of 2012. This $1,656 or 46.1% increase is largely attributable to the 18.3% sales increase discussed above. Operating results of Explosive Metalworking for the three months ended June 30, 2013 and 2012 include $521 and $513, respectively, of amortization expense of purchased intangible assets. Explosive Metalworking reported operating income of $7,689 in the first half of 2013 compared to $7,688 in the first half of 2012. Operating results of Explosive Metalworking for the six months ended June 30, 2013 and 2012 include $1,049 and $1,036, respectively, of amortization expense of purchased intangible assets.
Oilfield Products reported operating income of $2,157 in the second quarter of 2013 compared to $1,701 in the second quarter of 2012. Operating results of Oilfield Products for the three months ended June 30, 2013 and 2012 include $1,047 and $1,007, respectively, of amortization expense of purchased intangible assets. Oilfield Products reported operating income of $3,880 in the first half of 2013 compared to $3,747 in the first half of 2012. Operating results of Oilfield Products for the three months ended June 30, 2013 and 2012 include $2,104 and $2,028, respectively, of amortization expense of purchased intangible assets.
AMK Welding reported operating income of $404 in the second quarter of 2013, an increase of $239 from the operating income of $165 that it reported in the second quarter of 2012. The increase in AMK's operating income for the three months ended June 30, 2013 compared to the same period of 2012 is principally attributable to the increase in gross profit as discussed above. AMK Welding reported operating income of $110 in the first half of 2013 compared to operating income of $77 that it reported in the same period of 2012.
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Percentage
|
|
2013
|
|
2012
|
|
Change
|
|
Change
|
Other income (expense), net
|
$
|
(420
|
)
|
|
$
|
409
|
|
|
$
|
(829
|
)
|
|
(202.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Percentage
|
|
2013
|
|
2012
|
|
Change
|
|
Change
|
Other income (expense), net
|
$
|
(124
|
)
|
|
$
|
209
|
|
|
$
|
(333
|
)
|
|
(159.3
|
)%
|
We reported net other expense of
$420
in the second quarter of 2013 compared to net other income of
$409
in the second quarter of 2012. Our reported second quarter 2013 net other expense of
$420
includes net realized and unrealized foreign exchange losses of $456. Our second quarter 2012 net other income of
$409
includes net realized and unrealized foreign exchange gains of $403.
We reported net other expense of
124
for the six months ended June 30, 2013 compared to net other income of
$209
for the six months ended June 30, 2012. Our reported first half 2013 net other expense of
$124
includes net realized and unrealized foreign exchange losses of $136. Our reported first half 2012 net other income of $209 includes net realized and unrealized foreign exchange gains of $202.
Interest income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Percentage
|
|
2013
|
|
2012
|
|
Change
|
|
Change
|
Interest income (expense), net
|
$
|
(182
|
)
|
|
$
|
(193
|
)
|
|
$
|
11
|
|
|
(5.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Percentage
|
|
2013
|
|
2012
|
|
Change
|
|
Change
|
Interest income (expense), net
|
$
|
(351
|
)
|
|
$
|
(399
|
)
|
|
$
|
48
|
|
|
(12.0
|
)%
|
We recorded net interest expense of
$182
in the second quarter of 2013 compared to net interest expense of
$193
in the second quarter of 2012. We recorded net interest expense of $351 for the first half of 2013 compared to net interest expense of $399 for the first half of 2012. The decreases in second quarter and year-to-date net interest expense reflects relatively stable interest rates and decreases in average outstanding borrowings during the respective periods.
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Percentage
|
|
2013
|
|
2012
|
|
Change
|
|
Change
|
Income tax provision
|
$
|
1,956
|
|
|
$
|
1,167
|
|
|
$
|
789
|
|
|
67.6
|
%
|
Effective tax rate
|
36.1
|
%
|
|
30.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Percentage
|
|
2013
|
|
2012
|
|
Change
|
|
Change
|
Income tax provision
|
$
|
785
|
|
|
$
|
2,509
|
|
|
$
|
(1,724
|
)
|
|
(68.7
|
)%
|
Effective tax rate
|
17.5
|
%
|
|
33.0
|
%
|
|
|
|
|
|
|
We recorded an income tax provision of $1,956 in the second quarter of 2013 compared to an income tax provision of $1,167 in the second quarter of 2012. Our consolidated income tax provision for the three months ended June 30, 2013 and 2012 included $1,240 and $784, respectively, related to U.S. taxes, with the remainder relating to net foreign tax provisions of $716 and $383, respectively, associated with our foreign operations and holding companies. The effective tax rate increased to 36.1% for the second quarter of 2013 compared to 30.2% for the second quarter of 2012.
For the six months ended June 30, 2013, we recorded an income tax provision of $785 compared to an income tax provision of $2,509 for the same period of 2012. Our consolidated income tax provision for the six months ended June 30, 2013 and 2012 included a U.S. tax benefit of $766 in 2013 and a U.S. tax provision of $1,572 in 2012, with the remainder relating to net foreign tax provisions of $1,551 and $937, respectively, associated with our foreign operations and holding companies. The effective tax rate decreased to 17.5% for the first half of 2013 compared to 33.0% for the first half of 2012.
Our statutory income tax rates range from 20% to 35% for our various U.S. and foreign operating entities and holding companies. In January 2013, the United States Congress authorized, and the President signed into law, changes to the U. S. income tax laws which were retroactive to January 1, 2012. However, since these changes were enacted in 2013, the financial statement benefit of such legislation could not be reflected until the first quarter of 2013. The $908 tax benefit that we recognized in the first quarter of 2013 had a significant favorable impact on our first quarter and first half effective tax rate. During the second quarter of 2013, we recorded a one-time tax expense of $404 associated with a German tax audit settlement as further discussed below. This non-recurring adjustment had a significant unfavorable impact on our second quarter and first half effective tax rate. Excluding the effects of the $908 tax benefit we recorded in the first quarter and $404 of additional tax expense we recorded in the second quarter, our first half 2013 effective tax rate would have been 28.8%. Year-to-year fluctuations in our consolidated effective tax rate also reflect the different tax rates in our U.S. and foreign tax jurisdictions and the variation in contribution to consolidated pre-tax income from each jurisdiction for the respective year.
Tax returns of our German subsidiaries have been under routine examination by the German tax authorities for the past several months. During the second quarter of 2013, German tax authorities proposed and we agreed to a settlement. The key provisions of the settlement resulted in a net reduction of the subsidiaries' loss carryforwards, which reduced the non-current deferred tax assets associated with these carryforwards that were recorded on our books. Thus, we recorded an additional $404 in income tax expense for the second quarter to reflect this reduction. The settlement also resulted in an increase in the tax basis of our amortizable, intangible assets; however, under U.S. GAAP, this increase is not reflected in the financial statements. The tax savings from the increase in these assets will be realized by the Company over the next nine years as an income tax deduction.
We expect our blended effective tax rate for the full year 2013 to range from 24% to 26% based on projected pre-tax income, the financial statement benefit of $908 in certain tax benefits that we recognized in the first quarter of 2013 relating to the tax law changes enacted in January 2013, and the $404 non-recurring charge we recorded in the second quarter in connection with the German tax settlement. Excluding the impact of the first quarter tax benefit and the second quarter non-recurring charge, the blended effective tax rate for 2013 is projected to be in a range of 28% to 30%.
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Percentage
|
|
2013
|
|
2012
|
|
Change
|
|
Change
|
Adjusted EBITDA
|
$
|
9,658
|
|
|
$
|
7,452
|
|
|
$
|
2,206
|
|
|
29.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Percentage
|
|
2013
|
|
2012
|
|
Change
|
|
Change
|
Adjusted EBITDA
|
$
|
12,999
|
|
|
$
|
15,506
|
|
|
$
|
(2,507
|
)
|
|
(16.2
|
)%
|
Adjusted EBITDA is a non-GAAP measure that we believe provides an important indicator of our ongoing operating performance. Our aggregate non-cash depreciation, amortization of purchased intangible assets and stock-based compensation expense for the
three months ended June 30, 2013
and 2012 was $3,660 and $3,848, respectively, and for the six months ended June 30, 2013 and 2012 was $8,084 and $7,728, respectively. These aggregate non-cash charges represent a significant percentage of the consolidated operating income that we reported for these periods. We use non-GAAP EBITDA and Adjusted EBITDA in our operational and financial decision-making and believe that these non-GAAP measures are a reliable indicator of our ability to generate cash flow from operations and facilitate a more meaningful comparison of the operating performance of our three business segments than do certain GAAP measures. Research analysts, investment bankers and lenders also use EBITDA and Adjusted EBITDA to assess operating performance. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBIDTA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Net income attributable to DMC
|
$
|
3,440
|
|
|
$
|
2,653
|
|
|
$
|
3,655
|
|
|
$
|
5,079
|
|
Interest expense
|
183
|
|
|
196
|
|
|
355
|
|
|
407
|
|
Interest income
|
(1
|
)
|
|
(3
|
)
|
|
(4
|
)
|
|
(8
|
)
|
Provision (benefit) for income taxes
|
1,956
|
|
|
1,167
|
|
|
785
|
|
|
2,509
|
|
Depreciation
|
1,457
|
|
|
1,362
|
|
|
2,874
|
|
|
2,729
|
|
Amortization of purchased intangible assets
|
1,568
|
|
|
1,520
|
|
|
3,153
|
|
|
3,064
|
|
EBITDA
|
8,603
|
|
|
6,895
|
|
|
10,818
|
|
|
13,780
|
|
Stock-based compensation
|
635
|
|
|
966
|
|
|
2,057
|
|
|
1,935
|
|
Other (income) expense, net
|
420
|
|
|
(409
|
)
|
|
124
|
|
|
(209
|
)
|
Adjusted EBITDA
|
$
|
9,658
|
|
|
$
|
7,452
|
|
|
$
|
12,999
|
|
|
$
|
15,506
|
|
Adjusted EBITDA increased by
29.6%
to
$9,658
in the second quarter of 2013 from
$7,452
in the second quarter of 2012 primarily due to the $2,363 increase in second quarter 2013 operating income. Adjusted EBITDA decreased by 16.2% to $12,999 for the first half of 2013 from $15,506 for the first half of 2012 primarily due to the $2,829 decrease in the operating income for the first half of 2013.
Liquidity and Capital Resources
We have historically financed our operations from a combination of internally generated cash flow, revolving credit borrowings, various long-term debt arrangements, and the issuance of common stock. We believe that cash flow from operations and funds available under our current credit facilities and any future replacement thereof will be sufficient to fund the working capital, debt service, and capital expenditure requirements of our current business operations for the foreseeable future. Nevertheless, our ability to generate sufficient cash flows from operations will depend upon our success in executing our strategies. 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 facilities
On December 21, 2011, we entered into a five-year syndicated credit agreement, which provides revolving loan availability of $36,000, 16,000 Euros and 1,500 Canadian Dollars through a syndicate of four banks, and amends and restates in its entirety our prior syndicated credit agreement entered into on November 16, 2007.
As of
June 30, 2013
, U.S. dollar revolving loans of
$23,900
and Euro revolving loans of
$4,943
were outstanding under our syndicated credit agreement and
$83
was outstanding under loan agreements with the former owners of LRI. While we had approximately $33,431 of unutilized revolving credit loan capacity as of
June 30, 2013
under our various credit facilities, future borrowings are subject to compliance with financial covenants that could significantly limit availability.
There are two significant financial covenants under our syndicated credit agreement, the leverage ratio and fixed charge coverage ratio requirements. The leverage ratio is defined in the credit agreement 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
six months ended June 30, 2013
and the year ended
December 31, 2012
, Consolidated EBITDA approximated the “Adjusted EBITDA” that we reported for the respective periods. As of
June 30, 2013
, the maximum leverage ratio permitted by our credit facility was 2.25 to 1.0. The actual leverage ratio as of
June 30, 2013
was 0.88 to 1.0. The maximum leverage ratio permitted as of September 30 and December 31, 2013 is also 2.25 to 1.0.
The fixed charge ratio, as defined in the credit agreement, means, for any period, the ratio of Consolidated EBITDA to Fixed Charges. Consolidated EBITDA is defined above and Fixed Charges equals the sum of cash interest expense, cash dividends, cash income taxes and an amount equal to 75% of depreciation expense. As of
June 30, 2013
, the minimum fixed charge ratio permitted by our credit facility was 2.0 to 1.0. The actual fixed charge ratio as of
June 30, 2013
was 2.84 to 1.0. The minimum fixed charge coverage ratio permitted for the twelve month periods ending September 30 and December 31, 2013 is 2.0 to 1.0.
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
June 30, 2013
, we were in compliance with all financial covenants and other provisions of our debt agreements.
Our principal cash flows related to debt obligations and other contractual obligations and commitments have not materially changed since
December 31, 2012
.
Cash flows from operating activities
Net cash flows provided by operating activities increased to $15,398 in the first half of 2013 from $8,075 in the first half 2012, reflecting a $1,390 decrease in net income that was offset by positive changes in net working capital of $7,694 and positive changes in non-cash adjustments aggregating $1,019. We experienced net positive changes in working capital of $3,348 in the first half of 2013 compared to net negative changes in working capital of $4,346 in the same period of 2012. Positive changes in our 2013 working capital included a decrease in inventories of $1,889 and increases of $3,103, $3,427 and $484 in accounts payable, customer advances, and accrued expenses and other liabilities, respectively. These positive changes were partly offset by an increase of $5,012 in accounts receivable and an increase of $543 in prepaid expenses and other. All of foregoing changes in working capital relate to typical fluctuations in our business flow and the related timing of cash payments and receipts.
Net cash flows provided by operating activities for the first half of 2012 totaled
$8,075
. Significant sources of operating cash flow included net income of $5,088, non-cash depreciation and amortization expense of $5,859 and stock-based compensation of $1,935. Operating cash flow for the first half of 2012 was reduced by a deferred income tax benefit of $459 and net negative changes in working capital of $4,346. Negative cash flows from changes in working capital included a $4,401 increase in inventory and a $1,706 decrease in accrued expenses and other liabilities. These were partially offset by decreases in accounts receivable and prepaid expenses of $1,212 and $300, respectively, and increases in customer advances and accounts payable of $169 and $80, respectively. All of foregoing changes in working capital relate to typical fluctuations in our business flow and the related timing of cash payments and receipts.
Cash flows from investing activities
Net cash flows used in investing activities for the first half of 2013 totaled
$9,534
and consisted almost entirely of capital expenditures. Our capital expenditures included $5,626 for our greenfield projects in Russia and North America.
Net cash flows used by investing activities for the first half of 2012 totaled
$15,763
which included our $10,294 cash purchase of TRX Industries and
$5,595
in capital expenditures.
Cash flows from financing activities
Net cash flows used in financing activities for the first half of 2013 totaled
$11,629
, which included net repayments on bank lines of credit of $9,811 and payment of quarterly dividends of $1,088.
Net cash flows provided by financing activities for the first half of 2012 totaled
$7,759
, which included net borrowings on bank lines of credit of $9,924. These sources of cash flow were partially offset by uses of cash flows in financing activities which included payment on our loan with the former owners of LRI of $1,138 and payment of quarterly dividends of $1,074.
Payment of Dividends
On May 22, 2013, our board of directors declared a quarterly cash dividend of $.04 per share which was paid on July 14, 2013. The dividend totaled
$549
and was payable to shareholders of record as of June 30, 2013. We also paid a quarterly cash dividend of $.04 per share in the first quarter of 2013 and the first and second quarters of 2012.
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 critical accounting policies have not changed from those reported in our Annual Report filed on Form 10-K for the year ended
December 31, 2012
.