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, 2013
.
Unless stated otherwise, all currency amounts in this discussion are presented in thousands (000’s).
Executive Overview
Our business is organized into two segments: NobelClad and Oilfield Products. Prior to 2014, we were organized into three segments. At the beginning of 2014 management approved a change in operating structure whereby AMK Technical Services ("AMK") will operate within and be managed as part of the Oilfield Products business segment. Consequently, we combined AMK and DynaEnergetics into one reportable business segment, Oilfield Products. AMK represented 3% of segment assets, 4% of consolidated sales and 2% of segment operating income as of and for the year then ended December 31, 2013. All prior periods segment disclosures have been restated to conform to the 2014 presentation.
For the
six months ended June 30, 2014
, NobelClad accounted for
50%
of our net sales and
39%
of our income from operations before consideration of unallocated corporate expenses and stock-based compensation expense, which are not allocated to our business segments. Oilfield Products accounted for
50%
and
61%
of our first half 2014 sales and income from operations, respectively.
Our consolidated net sales for the
six months ended June 30, 2014
decreased
by
$2,472
, or
2.4%
, compared to the same period in 2013. Sales increased $5,305 (11.6%) in our Oilfield Products segment and decreased $7,777 (13.3%) in our NobelClad segment. Our consolidated income from operations
increased
to
$6,755
for the first half of 2014 compared to
$4,958
in the same period of 2013. The
$1,797
improvement
in consolidated income from operations was due to a $2,975 increase in Oilfield Products operating income and a $2,011 decrease in aggregate unallocated corporate expenses and stock-based compensation, partially offset by a $3,189 decline in NobelClad's operating income. The decrease in corporate expenses was driven by $2,965 of non-recurring expenses in the first quarter of 2013 associated with management retirements. Consolidated operating income for the
six months ended June 30, 2014
and
2013
includes amortization expense of
$3,232
and
$3,153
, respectively. Net income was
$4,525
for the first half of 2014 compared to net income of
$3,655
for the same period of 2013.
Based upon the
June 30, 2014
NobelClad backlog, recent quoting activity for this segment and sales trends in our Oilfield Products segment, we expect our full year 2014 consolidated net sales will be flat to up 4% from the $209,573 reported in 2013.
Net sales
NobelClad'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. These industries tend to be cyclical in nature and timing of new order inflow remains difficult to predict; however, we believe that our NobelClad segment is well-positioned in the marketplace.
Oilfield Products' revenues are generated principally from the DynaEnergetics and AMK Technical Services' product lines. Dynaenergetics markets and sells 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 Technical Services' 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 NobelClad 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, welding wire and gas supplies as well as employee compensation and benefits, depreciation of manufacturing facilities and equipment, manufacturing supplies and other manufacturing overhead expenses.
NobelClad Backlog
We use backlog as a primary means to measure the immediate outlook for our NobelClad business. We define “backlog” at any given point in time as 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 NobelClad backlog
increased
to
$40,056
at
June 30, 2014
from
$36,930
at
December 31, 2013
.
Three and Six Months Ended
June 30, 2014
Compared to the
Three and Six Months Ended
June 30, 2013
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Percentage
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
Net sales
|
$
|
53,618
|
|
|
$
|
57,859
|
|
|
$
|
(4,241
|
)
|
|
(7.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Percentage
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
Net sales
|
$
|
101,657
|
|
|
$
|
104,129
|
|
|
$
|
(2,472
|
)
|
|
(2.4
|
)%
|
Our consolidated net sales for the
second quarter
of
2014
decreased
7.3%
to
$53,618
from
$57,859
for the
second quarter
of
2013
. NobelClad sales
decreased
19.0%
to
$26,231
(
49%
of total sales) for the
three months ended June 30, 2014
from
$32,390
(
56%
of total sales) for the same period of 2013. Since our NobelClad backlog of $35,868 as of March 31, 2014 was significantly lower than the March 31, 2013 backlog of $47,558, the $6,159 decrease in second quarter 2014 sales relates to timing differences with respect to when orders enter our backlog and the subsequent shipment of these orders. Oilfield Products contributed
$27,387
(
51%
of total sales) to
second quarter
2014
sales, an increase of
7.5%
from sales of
$25,469
(
44%
of total sales) in the
second quarter
of
2013
. The record quarter was due to improved product/customer mix including strong sales of DynaSelect, our fully integrated switch-detonator system introduced in the third quarter of 2013.
Our consolidated net sales for the first half of 2014
decreased
2.4%
to
$101,657
from
$104,129
in the first half of 2013. NobelClad sales
decreased
13.3%
to
$50,795
for the six months ended June 30, 2014 (
50%
of total sales) from
$58,572
(
56%
of total sales) for the same period of 2013. The decrease in year-to-date Nobelclad sales relates primarily to the lower backlog and timing of shipments out of backlog. Oilfield Products contributed
$50,862
to first half 2014 sales (
50%
of total sales), which represents an increase of
11.6%
from sales of
$45,557
for the first half of 2013 (
44%
of total sales). The increase in Oilfield products sales was driven by product/customer mix including the DynaSelect system.
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Percentage
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
Gross profit
|
$
|
16,313
|
|
|
$
|
17,063
|
|
|
$
|
(750
|
)
|
|
(4.4
|
)%
|
Consolidated gross profit margin rate
|
30.4
|
%
|
|
29.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Percentage
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
Gross profit
|
$
|
30,642
|
|
|
$
|
29,782
|
|
|
$
|
860
|
|
|
2.9
|
%
|
Consolidated gross profit margin rate
|
30.1
|
%
|
|
28.6
|
%
|
|
|
|
|
|
|
Our consolidated
second quarter
2014
gross profit
decreased
by
4.4%
to
$16,313
from
$17,063
for the three months ended
June 30, 2013
. Our
second quarter
2014
consolidated gross profit margin rate
increased
to
30.4%
from
29.5%
in the
second quarter
of
2013
.
For the six months ended June 30, 2014
, consolidated gross profit
increased
by
2.9%
to
$30,642
from
$29,782
for the same period of
2013
. Our year-to-date consolidated gross profit margin rate
increased
to
30.1%
in
2014
from
28.6%
in
2013
.
NobelClad's gross profit margin
decreased
from
26.3%
in the
second quarter
of 2013 to
25.0%
in the
second quarter
of
2014
. For the six-month period, our gross profit margin for this segment
decreased
to
22.2%
in 2014 from
24.6%
in
2013
. The decrease in both our second quarter and year-to-date gross margin rate relates principally to lower sales volume and higher manufacturing overhead expenses compared to the same periods in 2013. The increase in manufacturing overhead expenses primarily was attributable to lower fixed cost absorption from lower sales volume. As has been the case historically, we expect to see continued fluctuations in NobelClad's quarterly gross margin rates in the future that result from fluctuations in quarterly sales volume and product/customer mix.
Oilfield Products' gross profit margin
increased
to
35.9%
in the
second quarter
of
2014
from
33.9%
in the
second quarter
of
2013
. Oilfield Products reported a gross profit margin of
38.3%
for the first half of 2014 compared to a gross profit margin of
34.0%
for the first half of 2013. The improved gross margin performance relates principally to favorable product/customer mix including sales of our higher margin DynaSelect system.
Based upon the expected contribution to
2014
consolidated net sales by each of our two business segments, we expect our consolidated full year
2014
gross margin to be in a range of 29% to 30%.
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Percentage
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
General and administrative expenses
|
$
|
5,935
|
|
|
$
|
5,158
|
|
|
$
|
777
|
|
|
15.1
|
%
|
Percentage of net sales
|
11.1
|
%
|
|
8.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Percentage
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
General and administrative expenses
|
$
|
11,637
|
|
|
$
|
13,296
|
|
|
$
|
(1,659
|
)
|
|
(12.5
|
)%
|
Percentage of net sales
|
11.4
|
%
|
|
12.8
|
%
|
|
|
|
|
|
|
General and administrative expenses
increased
by
$777
, or
15.1%
, to
$5,935
for the three months ended
June 30, 2014
from
$5,158
for the same period of
2013
. This increase was driven by an increase of $356 in stock-based compensation expense and a $259 aggregate increase in salaries, benefits and payroll taxes. As a percentage of net sales, general and administrative expenses increased to
11.1%
in the
second quarter
of
2014
from
8.9%
in the
second quarter
of
2013
.
General and administrative expenses
decreased
by
12.5%
to
$11,637
for the
six months ended June 30, 2014
from
$13,296
for the same period of
2013
. Excluding the $2,965 impact in 2013 from non-recurring expenses associated with management retirements, our general and administrative expenses increased $1,306 or 12.6% from a $424 aggregate increase in salaries, benefits and payroll taxes, an increase of $381 in stock-based compensation expense and a $319 increase in professional services. The increases were driven by year-over-year headcount additions to support business development initiatives, corporate branding and recruiting expenses. Excluding the impact of non-recurring executive management retirement expenses in 2013, general and administrative expenses, as a percentage of net sales, increased to
11.4%
for the first half
2014
from 9.9% for the first half of 2013.
Selling and distribution expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Percentage
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
Selling and distribution expenses
|
$
|
4,770
|
|
|
$
|
4,324
|
|
|
$
|
446
|
|
|
10.3
|
%
|
Percentage of net sales
|
8.9
|
%
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Percentage
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
Selling and distribution expenses
|
$
|
9,018
|
|
|
$
|
8,375
|
|
|
$
|
643
|
|
|
7.7
|
%
|
Percentage of net sales
|
8.9
|
%
|
|
8.0
|
%
|
|
|
|
|
|
|
Our selling and distribution expenses
increased
by
10.3%
to
$4,770
in the
second quarter
of
2014
from
$4,324
in the
second quarter
of
2013
. The increase was primarily due to higher commission expense of $175, a $66 aggregate increase in salaries, benefits and payroll taxes and an increase of $40 in stock-based compensation expense. As a percentage of net sales, selling and distribution expenses increased to
8.9%
in the
second quarter
of
2014
from
7.5%
in the
second quarter
of 2013.
Our selling and distribution expenses
increased
by
7.7%
to
$9,018
for the first half of 2014 from
$8,375
for the first half of 2013. The increase was primarily due to higher commission expense of $260, a $136 aggregate increase in salaries, benefits and payroll taxes and an increase of $51 in stock-based compensation expense. As a percentage of net sales, selling and distribution expense increased to
8.9%
for the first half of 2014 from
8.0%
for the first half of 2013.
Our consolidated selling and distribution expenses for the three months ended
June 30, 2014
include
$1,620
and
$3,060
, respectively, for our NobelClad and Oilfield Products business segments as compared to
$1,365
and
$2,910
, respectively, for the second quarter of 2013. Our consolidated selling and distribution expenses for the six months ended
June 30, 2014
include
$3,269
and
$5,612
, respectively, for our NobelClad and Oilfield Products business segments as compared to
$2,969
and
$5,319
, respectively, for the first half of 2013. 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
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
Amortization of purchased intangible assets
|
$
|
1,617
|
|
|
$
|
1,568
|
|
|
$
|
49
|
|
|
3.1
|
%
|
Percentage of net sales
|
3.0
|
%
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Percentage
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
Amortization of purchased intangible assets
|
$
|
3,232
|
|
|
$
|
3,153
|
|
|
$
|
79
|
|
|
2.5
|
%
|
Percentage of net sales
|
3.2
|
%
|
|
3.0
|
%
|
|
|
|
|
|
|
Amortization expense relates to intangible assets in connection with acquisitions in our Oilfield Products segment. The
$49
increase in
second quarter
2014
amortization expenses reflects the impact of foreign currency translation. Amortization expense for the three months ended
June 30, 2014
includes
$1,275
,
$293
, and
$49
relating to values assigned to customer relationships, core technology, and trademarks/trade names, respectively. 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
six months ended June 30, 2014
includes
$2,549
,
$585
, and
$98
relating to values assigned to customer relationships, core technology, and trademarks/trade names, respectively. Amortization 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 (as measured in Euros) associated with the DYNAenergetics acquisition and the acquisition of the two Russian joint ventures is expected to approximate €3,333 and €225, respectively, in 2014. Our 2014 amortization expense associated with the Austin Explosives and TRX Industries acquisitions is expected to approximate $435 and $895, respectively, and our 2014 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
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
Operating income
|
$
|
3,991
|
|
|
$
|
6,013
|
|
|
$
|
(2,022
|
)
|
|
(33.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Percentage
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
Operating income
|
$
|
6,755
|
|
|
$
|
4,958
|
|
|
$
|
1,797
|
|
|
36.2
|
%
|
Our consolidated operating income
decreased
by
$2,022
to
$3,991
in the
second quarter
of
2014
from
$6,013
in the
second quarter
of
2013
. These operating income totals for the second quarters of 2014 and 2013 include
$1,490
and
$1,158
, respectively, of unallocated corporate expenses and
$1,036
and
$635
, respectively, of stock-based compensation expense. Our consolidated operating income
increased
by
$1,797
to
$6,755
for the first half of 2014 from
$4,958
for the fist half of 2013. These operating income totals for 2014 and 2013 include
$3,119
and
$4,664
, respectively, of unallocated corporate expenses and
$1,591
and
$2,057
, respectively, of stock-based compensation expense. These expenses are not allocated to our business segments and thus are not included in the below 2014 and 2013 operating income totals for NobelClad and Oilfield Products.
The increase in our consolidated operating income for the first half of 2014 reflects decreases in stock-based compensation expense and unallocated corporate expenses of $466 and $1,545, respectively and a decrease of $214 in the aggregate operating income reported by our two business segments. The aggregate net decrease of $2,011 in unallocated corporate expenses and stock-based compensation expense primarily relates to the $2,965 of non-recurring expenses in the first quarter 2013 associated with management retirements.
NobelClad's operating income of $3,122 in the second quarter of 2014 decreased 40.5% from $5,245 in the second quarter of 2013. Operating results of NobelClad for the three months ended June 30, 2014 and 2013 include $548 and $521, respectively, of amortization expense of purchased intangible assets. NobelClad reported operating income of $4,500 in the first half of 2014 compared to $7,689 in the first half of 2013. Operating results of NobelClad for the six months ended June 30, 2014 and 2013 include $1,095 and $1,049, respectively, of amortization expense of purchased intangible assets. The decrease in operating income for the quarter and year-to-date periods was attributable to lower sales combined with the higher manufacturing overhead expenses discussed above.
Oilfield Products' operating income of $3,395 in the second quarter of 2014 increased 32.6% from $2,561 in the second quarter of 2013. Oilfield Products' operating results for the three months ended June 30, 2014 and 2013 include $1,069 and $1,047, respectively, of amortization expense of purchased intangible assets. Oilfield Products reported operating income of $6,965 in the first half of 2014 compared to $3,990 in the first half of 2013. Operating results of Oilfield Products for the six months ended June 30, 2014 and 2013 include $2,137 and $2,104, respectively, of amortization expense of purchased intangible assets. The increase in operating income for the quarter and year-to-date periods was largely attributable to the improved sales volumes and gross margin percentages as discussed above.
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Percentage
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
Other income (expense), net
|
$
|
332
|
|
|
$
|
(420
|
)
|
|
$
|
752
|
|
|
(179.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Percentage
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
Other income (expense), net
|
$
|
(103
|
)
|
|
$
|
(124
|
)
|
|
$
|
21
|
|
|
(16.9
|
)%
|
Net other
income
was
$332
in the
second quarter
of
2014
compared to net other
expense
of
$420
in the
second quarter
of
2013
. Our
second quarter
2014
net other
income
of
$332
included net realized and unrealized foreign exchange gains of $270. Our
second quarter
2013
net other
expense
of
$420
included net realized and unrealized foreign exchange losses of $456.
Net other
expense
was
$103
for the six month ended
June 30, 2014
compared to net other
expense
of
$124
for the same period of 2013. Our first half 2014 net other
expense
of
$103
included net realized and unrealized foreign exchange losses of $178. Our first half 2013 net other
expense
of
$124
includes net realized and unrealized foreign exchange losses of $136.
Interest income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Percentage
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
Interest income (expense), net
|
$
|
(173
|
)
|
|
$
|
(182
|
)
|
|
$
|
9
|
|
|
(4.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Percentage
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
Interest income (expense), net
|
$
|
(278
|
)
|
|
$
|
(351
|
)
|
|
$
|
73
|
|
|
(20.8
|
)%
|
Net interest expense was
$173
in the
second quarter
of
2014
compared to net interest expense of
$182
in the
second quarter
of
2013
. Net interest expense was
$278
for the first half of
2014
compared to net interest expense of
$351
for the first half of 2013. The small decrease reflects lower average outstanding borrowings in the first quarter of 2014 as interest rates remained relatively stable.
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Percentage
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
Income tax provision
|
$
|
1,263
|
|
|
$
|
1,956
|
|
|
$
|
(693
|
)
|
|
(35.4
|
)%
|
Effective tax rate
|
30.4
|
%
|
|
36.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Percentage
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
Income tax provision
|
$
|
1,849
|
|
|
$
|
785
|
|
|
$
|
1,064
|
|
|
135.5
|
%
|
Effective tax rate
|
29.0
|
%
|
|
17.5
|
%
|
|
|
|
|
|
|
The effective tax rate
decreased
to
30.4%
for the
second quarter
of
2014
compared to
36.1%
for the
second quarter
of
2013
. We recorded an income tax provision of
$1,263
in the
second quarter
of 2014 compared to an income tax provision of
$1,956
in the
second quarter
of
2013
. Our consolidated income tax provision for the three months ended
June 30, 2014
and
2013
included a U.S. tax benefit of $48 in 2014 and a U.S. tax provision of $1,240 in 2013, with the remainder relating to net foreign tax provisions of $1,311 and $716, respectively, associated with our foreign operations and holding companies.
The effective tax rate
increased
to
29.0%
for the first half of 2014 compared to
17.5%
for the first half of 2013. Excluding the effects of the $914 tax benefit we recorded in the first quarter 2013 and $404 of additional tax expense we recorded in the second quarter 2013, our first half 2013 effective tax rate would have been 28.8%. For the
six months ended June 30, 2014
, we recorded an income tax provision of
$1,849
compared to an income tax provision of
$785
for the same period of 2013. Our
consolidated income tax provision for the
six months ended June 30, 2014
and
2013
included $776 and $766, respectively, related to U.S. tax benefit, with the remainder relating to net foreign tax provisions of $2,625 and $1,551, respectively.
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 $914 tax benefit that we recognized in the first quarter of 2013 had a significant favorable impact on our first quarter and first half of 2013 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. This non-recurring adjustment had a significant unfavorable impact on our second quarter and first half 2013 effective tax rate.
Our statutory income tax rates range from 20% to 35% for our various U.S. and foreign operating entities and holding companies. 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.
We expect our blended effective tax rate for the full year 2014 to range from 29% to 30% based on projected pre-tax income.
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Percentage
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
Adjusted EBITDA
|
$
|
8,571
|
|
|
$
|
9,658
|
|
|
$
|
(1,087
|
)
|
|
(11.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Percentage
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
Adjusted EBITDA
|
$
|
15,500
|
|
|
$
|
12,999
|
|
|
$
|
2,501
|
|
|
19.2
|
%
|
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, 2014
and
2013
was
$4,580
and
$3,660
, respectively, and for the
six months ended June 30, 2014
and
2013
was
$8,745
and
$8,084
, 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 facilitate a more meaningful and accurate comparison of the operating performance of our two business segments than do certain GAAP measures. Research analysts, investment bankers and lenders also use EBITDA and Adjusted EBITDA to assess operating performance. In addition, during 2014, our management incentive awards will be based, in part, upon the amount of EBITDA achieved during the year. A portion of the equity incentive awards granted in 2014 to our named executive officers will be earned based on the amount of Adjusted EBITDA achieved in 2014 and 2015. 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,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Net income attributable to DMC
|
$
|
2,887
|
|
|
$
|
3,440
|
|
|
$
|
4,525
|
|
|
$
|
3,655
|
|
Interest expense
|
174
|
|
|
183
|
|
|
283
|
|
|
355
|
|
Interest income
|
(1
|
)
|
|
(1
|
)
|
|
(5
|
)
|
|
(4
|
)
|
Provision for income taxes
|
1,263
|
|
|
1,956
|
|
|
1,849
|
|
|
785
|
|
Depreciation
|
1,927
|
|
|
1,457
|
|
|
3,922
|
|
|
2,874
|
|
Amortization of purchased intangible assets
|
1,617
|
|
|
1,568
|
|
|
3,232
|
|
|
3,153
|
|
EBITDA
|
7,867
|
|
|
8,603
|
|
|
13,806
|
|
|
10,818
|
|
Stock-based compensation
|
1,036
|
|
|
635
|
|
|
1,591
|
|
|
2,057
|
|
Other (income) expense, net
|
(332
|
)
|
|
420
|
|
|
103
|
|
|
124
|
|
Adjusted EBITDA
|
$
|
8,571
|
|
|
$
|
9,658
|
|
|
$
|
15,500
|
|
|
$
|
12,999
|
|
Adjusted EBITDA
decreased
by
11.3%
to
$8,571
in the
second quarter
of
2014
from
$9,658
in the
second quarter
of
2013
primarily due to the $2,022 decrease in second quarter 2014 operating income. Adjusted EBITDA
increased
by
19.2%
to
$15,500
for the first half of 2014 from
$12,999
for the first half of 2013 primarily due to the increase in operating income.
Liquidity and Capital Resources
We have historically financed our operations and business acquisitions 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; (iii) continue selling products at attractive margins; and (iv) 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. We also maintain a line of credit with a German bank for certain DYNAenergetics operations. This line of credit provides a borrowing capacity of 4,000 Euros.
As of
June 30, 2014
, U.S. dollar revolving loans of
$31,800
were outstanding under our syndicated credit agreement and
$20
was outstanding under loan agreements with the former owners of LRI. While we had approximately $31,525 of unutilized revolving credit loan capacity as of
June 30, 2014
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, 2014
and the year ended
December 31, 2013
, Consolidated EBITDA approximated the “Adjusted EBITDA” that we reported for the respective periods. As of
June 30, 2014
, the maximum leverage ratio permitted by our credit facility was 2.0 to 1.0. The actual leverage ratio as of
June 30, 2014
was 1.06 to 1.0. The maximum leverage ratio permitted as of September 30 and December 31, 2014 is 2.0 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. For the trailing twelve months ended
June 30, 2014
, the minimum fixed charge ratio permitted by our credit facility was 2.0 to 1.0. The actual fixed charge ratio for the trailing twelve months ended
June 30, 2014
was 2.35 to 1.0. The minimum fixed charge coverage ratio permitted for the twelve month periods ending September 30 and December 31, 2014 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, 2014
, 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, 2013
.
Cash flows from operating activities
Net cash provided by operating activities was
$691
for the
six months ended June 30, 2014
compared with
$15,398
for the same period in 2013. The year-over-year decline of $14,707 was driven by a $15,914 net increase in working capital, which more than offset higher net income of $827. We experienced negative net working capital changes of $12,566 in the first first half of
2014 compared to net positive changes in working capital of $3,348 in the same period of 2013. Negative changes in our 2014 working capital included an increase in inventories and prepaid expenses of $5,089 and $2,876, respectively, and a decrease of $4,820 in accounts payable. The increases in working capital were driven by a short-term inventory build in DynaEnergetics related to customer order patterns and ramp up of the new DynaSelect system introduction, timing of accounts payable and prepayment for raw materials with long lead times but favorable pricing. These negative changes were partly offset by a $1,612 increase in customer advances.
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 related 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
six months ended June 30, 2014
totaled
$4,267
and consisted almost entirely of capital expenditures, which included $2,552 for our green field investment in Russia to expand capacity in DynaEnergetics.
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.
Cash flows from financing activities
Net cash flows provided by financing activities for the first half of 2014 totaled
$1,740
, which included net borrowinngs on bank lines of credit of $2,555 which was partially offset by payment of quarterly dividends of $1,108.
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.
Payment of Dividends
On May 14, 2014, our board of directors declared a quarterly cash dividend of $0.04 per share which was paid on July 15, 2014. The dividend totaled
$559
and was payable to shareholders of record as of June 30, 2014. We also paid a quarterly cash dividend of $0.04 per share in the first quarter of 2014 and the first and second quarters of 2013.
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, 2013
.