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 June 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

(Registrant’s 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 July 30, 2010.

 

 

 



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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 - Management’s Discussion and Analysis of Financial Condition and Results of Operations; Item 3 - Quantitative and Qualitative Disclosures About Market Risk; and Part II, Item 1A — Risk Factors. We intend the forward-looking statements throughout this quarterly report on Form 10-Q and the information incorporated by reference herein to be covered by the safe harbor provisions for forward-looking statements. Statements contained in this report which are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from projected results. All projections, guidance and other statements regarding our expected financial position and operating results, our business strategy, our financing plans and the outcome of any contingencies are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as “may,” “believe,” “plan,” “anticipate,” “estimate,” “expect,” “intend,” and other phrases of similar meaning. The forward-looking information is based on information available as of the date of this quarterly report and on numerous assumptions and developments that are not within our control. Although we believe that our expectations as expressed in these forward-looking statements are reasonable, we cannot assure you that our expectations will turn out to be correct. Factors that could cause actual results to differ materially include, but are not limited to, the following: changes in global economic conditions; the ability to obtain new contracts at attractive prices; the size and timing of customer orders and shipment; our ability to realize sales from our backlog; fluctuations in customer demand; fluctuations in foreign currencies; competitive factors; the timely completion of contracts; the timing and size of expenditures; the timely receipt of government approvals and permits; the price and availability of metal and other raw material; the adequacy of local labor supplies at our facilities; current or future limits on manufacturing capacity at our various operations; our ability to successfully integrate acquired businesses; the availability and cost of funds; and general economic conditions, both domestic and foreign, impacting our business and the business of the end-market users we serve. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s 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.

 

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INDEX

 

PART I - FINANCIAL INFORMATION

 

 

 

Item 1 — Condensed Consolidated Financial Statements

 

4

 

 

 

Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009

 

4

Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009 (unaudited)

 

6

Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2010 (unaudited)

 

7

Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009 (unaudited)

 

8

Notes to Condensed Consolidated Financial Statements (unaudited)

 

10

 

 

 

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

 

 

 

Item 3 — Quantitative and Qualitative Disclosure about Market Risk

 

42

 

 

 

Item 4 — Controls and Procedures

 

42

 

 

 

PART II - OTHER INFORMATION

 

Item 1 — Legal Proceedings

 

43

 

 

 

Item 1A — Risk Factors

 

43

 

 

 

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

 

43

 

 

 

Item 3 — Defaults Upon Senior Securities

 

43

 

 

 

Item 4 — Removed and Reserved

 

43

 

 

 

Item 5 — Other Information

 

43

 

 

 

Item 6 — Exhibits

 

43

 

 

 

Signatures

 

44

 

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Part I - FINANCIAL INFORMATION

 

ITEM 1.  Condensed Consolidated Financial Statements

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

 

 

June 30,

 

 

 

 

 

2010

 

December 31,

 

 

 

(unaudited)

 

2009

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

9,794

 

$

22,411

 

Accounts receivable, net of allowance for doubtful accounts of $271 and $390, respectively

 

23,108

 

25,807

 

Inventories

 

37,850

 

32,501

 

Prepaid expenses and other

 

3,462

 

2,397

 

Related party receivables and loans

 

 

2,806

 

Current deferred tax assets

 

1,232

 

2,052

 

 

 

 

 

 

 

Total current assets

 

75,446

 

87,974

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

 

63,357

 

64,944

 

Less - accumulated depreciation

 

(24,091

)

(22,892

)

 

 

 

 

 

 

Property, plant and equipment, net

 

39,266

 

42,052

 

 

 

 

 

 

 

GOODWILL, net

 

36,517

 

43,164

 

 

 

 

 

 

 

PURCHASED INTANGIBLE ASSETS, net

 

47,768

 

49,079

 

 

 

 

 

 

 

DEFERRED TAX ASSETS

 

5,928

 

332

 

 

 

 

 

 

 

OTHER ASSETS, net

 

1,206

 

1,443

 

 

 

 

 

 

 

INVESTMENT IN JOINT VENTURES

 

 

1,132

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

206,131

 

$

225,176

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Share Data)

 

 

 

June 30,

 

 

 

 

 

2010

 

December 31,

 

 

 

(unaudited)

 

2009

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

13,281

 

$

9,183

 

Accrued expenses

 

4,034

 

4,808

 

Dividend payable

 

528

 

515

 

Accrued income taxes

 

211

 

1,485

 

Accrued employee compensation and benefits

 

2,756

 

4,048

 

Customer advances

 

7,817

 

6,528

 

Lines of credit

 

3,560

 

1,777

 

Current maturities on long-term debt

 

7,483

 

13,485

 

Current portion of capital lease obligations

 

283

 

306

 

Current deferred tax liabilities

 

23

 

 

Total current liabilities

 

39,976

 

42,135

 

 

 

 

 

 

 

LONG-TERM DEBT

 

23,701

 

34,120

 

 

 

 

 

 

 

CAPITAL LEASE OBLIGATIONS

 

269

 

436

 

 

 

 

 

 

 

DEFERRED TAX LIABILITIES

 

17,700

 

15,217

 

 

 

 

 

 

 

OTHER LONG-TERM LIABILITIES

 

1,051

 

1,157

 

Total liabilities

 

82,697

 

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; 13,199,177 and 12,870,363 shares issued and outstanding, respectively

 

660

 

643

 

Additional paid-in capital

 

51,138

 

46,080

 

Retained earnings

 

86,627

 

85,048

 

Other cumulative comprehensive income (loss)

 

(14,991

)

340

 

Total stockholders’ equity

 

123,434

 

132,111

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

206,131

 

$

225,176

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(Dollars in Thousands, Except Share Data)

(unaudited)

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

NET SALES

 

$

38,258

 

$

37,819

 

$

68,615

 

$

87,578

 

COST OF PRODUCTS SOLD

 

29,000

 

28,665

 

52,373

 

63,096

 

Gross profit

 

9,258

 

9,154

 

16,242

 

24,482

 

COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

3,358

 

3,043

 

6,503

 

6,569

 

Selling expenses

 

2,550

 

1,840

 

4,871

 

4,164

 

Amortization of purchased intangible assets

 

1,264

 

1,232

 

2,537

 

2,416

 

Total costs and expenses

 

7,172

 

6,115

 

13,911

 

13,149

 

INCOME FROM OPERATIONS

 

2,086

 

3,039

 

2,331

 

11,333

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Gain on step acquisition of joint ventures

 

2,117

 

 

2,117

 

 

Other income (expense), net

 

(115

)

191

 

14

 

74

 

Interest expense

 

(662

)

(867

)

(1,806

)

(1,769

)

Interest income

 

29

 

38

 

65

 

104

 

Equity in earnings of joint ventures

 

86

 

127

 

255

 

79

 

INCOME BEFORE INCOME TAXES

 

3,541

 

2,528

 

2,976

 

9,821

 

INCOME TAX PROVISION

 

505

 

1,013

 

351

 

3,389

 

NET INCOME

 

$

3,036

 

$

1,515

 

$

2,625

 

$

6,432

 

INCOME PER SHARE:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.23

 

$

0.12

 

$

0.20

 

$

0.50

 

Diluted

 

$

0.23

 

$

0.12

 

$

0.20

 

$

0.50

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

Basic

 

12,774,316

 

12,595,551

 

12,742,589

 

12,570,640

 

Diluted

 

12,786,976

 

12,611,430

 

12,755,565

 

12,601,160

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER COMMON SHARE

 

$

0.04

 

$

0.04

 

$

0.08

 

$

0.04

 

 

The accompanying notes are in integral part of these Condensed Consolidated Financial Statements.

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 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

 

107

 

6

 

64

 

 

 

70

 

 

 

Excess tax benefit related to stock options

 

 

 

2

 

 

 

2

 

 

 

Stock-based compensation

 

 

 

1,702

 

 

 

1,702

 

 

 

Dividends

 

 

 

 

(1,046

)

 

(1,046

)

 

 

Net income

 

 

 

 

2,625

 

 

2,625

 

2,625

 

Derivative valuation, net of tax of $177

 

 

 

 

 

242

 

242

 

242

 

Change in cumulative foreign currency translation adjustment

 

 

 

 

 

(15,573

)

(15,573

)

(15,573

)

Balances, June 30, 2010

 

13,199

 

$

660

 

$

51,138

 

$

86,627

 

$

(14,991

)

$

123,434

 

$

(12,706

)

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(Dollars in Thousands)

(unaudited)

 

 

 

2010

 

2009

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

2,625

 

$

6,432

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation (including capital lease amortization)

 

2,404

 

2,441

 

Amortization of purchased intangible assets

 

2,537

 

2,416

 

Amortization of capitalized debt issuance costs

 

383

 

141

 

Stock-based compensation

 

1,702

 

1,760

 

Deferred income tax benefit

 

(961

)

(954

)

Equity in earnings of joint ventures

 

(255

)

(79

)

Gain on step acquisition of joint ventures

 

(2,117

)

 

Change in (excluding assets acquired):

 

 

 

 

 

Accounts receivable, net

 

8,142

 

4,374

 

Inventories

 

(1,841

)

2,475

 

Prepaid expenses and other

 

(880

)

1,540

 

Accounts payable

 

(1,494

)

(4,407

)

Customer advances

 

1,565

 

1,029

 

Accrued expenses and other liabilities

 

(2,115

)

(4,797

)

Net cash provided by operating activities

 

9,695

 

12,371

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Acquisition of Austin Explosives Company

 

(3,544

)

 

Step acquisition of joint ventures, net of cash acquired

 

(2,065

)

 

Acquisition of property, plant and equipment

 

(1,445

)

(2,231

)

Change in other non-current assets

 

(125

)

23

 

Net cash used in investing activities

 

(7,179

)

(2,208

)

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(Dollars in Thousands)

(unaudited)

 

 

 

2010

 

2009

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Payment on syndicated term loans

 

(15,374

)

(3,885

)

Payment on Nord LB term loans

 

(399

)

(438

)

Borrowings on bank lines of credit, net

 

1,998

 

143

 

Payment on capital lease obligations

 

(146

)

(102

)

Payment of dividends

 

(1,033

)

 

Payment of deferred debt issuance costs

 

 

(19

)

Net proceeds from issuance of common stock to employees and directors

 

70

 

373

 

Excess tax benefit related to exercise of stock options

 

2

 

93

 

Net cash used in financing activities

 

(14,882

)

(3,835

)

EFFECTS OF EXCHANGE RATES ON CASH

 

(251

)

106

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

(12,617

)

6,434

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, beginning of the period

 

22,411

 

14,360

 

CASH AND CASH EQUIVALENTS, end of the period

 

$

9,794

 

$

20,794

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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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 Company’s 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 Company’s 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 Company’s 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.

 

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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 June 30, 2010.  The majority of the Company’s debt was incurred in connection with the acquisition of DYNAenergetics.

 

Additionally, the Company has an interest rate swap agreement (see Note 9), which is recorded at fair value.  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company is required to use an established hierarchy for fair value measurements based upon the inputs to the valuation and the degree to which they are observable or not observable in the market. The three levels in the hierarchy are as follows:

 

·                       Level 1 — Inputs to the valuation based upon quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date.

 

·                       Level 2 — Inputs to the valuation include quoted prices in either markets that are not active, or in active markets for similar assets or liabilities, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data.

 

·                       Level 3 — Inputs to the valuation that are unobservable inputs for the asset or liability.

 

The highest priority is assigned to Level 1 inputs and the lowest priority to Level 3 inputs.

 

The Company’s interest rate swap agreement is not exchange listed and is therefore valued with models that use Level 2 inputs.  The degree to which the Company’s credit worthiness impacts the value requires management judgment but as of June 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 Company’s valuation of the agreement is classified within Level 2 of the hierarchy.

 

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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 June 30, 2009 with LRI who, at the time, was the non-controlling interest partner in  one of the Company’s consolidated joint ventures.  A summary of related party balances as of June 30, 2010 and December 31, 2009 is summarized below:

 

 

 

As of

 

As of

 

 

 

June 30, 2010

 

December 31, 2009

 

 

 

Accounts receivable from

 

 

 

and loan to

 

DYNAenergetics RUS

 

$

 

$

2,265

 

Perfoline

 

 

466

 

Former owners of LRI

 

 

75

 

Total

 

$

 

$

2,806

 

 

A summary of related party transactions for the three and six months ended June 30, 2010 and 2009 is summarized below:

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

June 30, 2010

 

June 30, 2009

 

 

 

 

 

Interest

 

 

 

Interest

 

 

 

Sales to

 

income from

 

Sales to

 

income from

 

DYNAenergetics RUS

 

$

161

 

$

 

$

692

 

$

 

Perfoline

 

 

3

 

17

 

10

 

Minority Interest Partner

 

 

 

146

 

 

Total

 

$

161

 

$

3

 

$

855

 

$

10

 

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

June 30,2010

 

June 30,2009

 

 

 

 

 

Interest

 

 

 

Interest

 

 

 

Sales to

 

income from

 

Sales to

 

income from

 

DYNAenergetics RUS

 

$

663

 

$

 

$

734

 

$

 

Perfoline

 

19

 

13

 

57

 

20

 

Minority Interest Partner

 

 

 

444

 

 

Total

 

$

682

 

$

13

 

$

1,235

 

$

20

 

 

Earnings Per Share

 

Unvested awards of share-based payments with rights to receive dividends or dividend equivalents, such as the Company’s restricted stock awards (“RSAs”), are considered participating securities for purposes of calculating earnings per share (“EPS”) and require the use of the two

 

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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.

 

Computation and reconciliation of earnings per common share are as follows:

 

 

 

For the Three Months Ended

 

For the Three Months Ended

 

 

 

June 30, 2010

 

June 30, 2009

 

 

 

Income

 

Shares

 

EPS

 

Income

 

Shares

 

EPS

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,036

 

 

 

 

 

$

1,515

 

 

 

 

 

Less income allocated to RSAs

 

(61

)

 

 

 

 

(31

)

 

 

 

 

Net income allocated to common stock for EPS calculation

 

$

2,975

 

12,774,316

 

$

0.23

 

$

1,484

 

12,595,551

 

$

0.12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjust shares for Dilutives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation plans

 

 

 

12,660

 

 

 

 

 

15,879

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,036

 

 

 

 

 

$

1,515

 

 

 

 

 

Less income allocated to RSAs

 

(61

)

 

 

 

 

(31

)

 

 

 

 

Net income allocated to common stock for EPS calculation

 

$

2,975

 

12,786,976

 

$

0.23

 

$

1,484

 

12,611,430

 

$

0.12

 

 

 

 

For the Six Months Ended

 

For the Six Months Ended

 

 

 

June 30, 2010

 

June 30, 2009

 

 

 

Income

 

Shares

 

EPS

 

Income

 

Shares

 

EPS

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,625

 

 

 

 

 

$

6,432

 

 

 

 

 

Less income allocated to RSAs

 

(54

)

 

 

 

 

(132

)

 

 

 

 

Net income allocated to common stock for EPS calculation

 

$

2,571

 

12,742,589

 

$

0.20

 

$

6,300

 

12,570,640

 

$

0.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjust shares for Dilutives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation plans

 

 

 

12,976

 

 

 

 

 

30,520

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,625

 

 

 

 

 

$

6,432

 

 

 

 

 

Less income allocated to RSAs

 

(54

)

 

 

 

 

(132

)

 

 

 

 

Net income allocated to common stock for EPS calculation

 

$

2,571

 

12,755,565

 

$

0.20

 

$

6,300

 

12,601,160

 

$

0.50

 

 

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 Company’s Oilfield Products business segment.  AECO has been a long-time distributor of DYNAenergetics shaped charges.  This acquisition, along with the

 

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acquisition of the outstanding interests in our Russian joint ventures (discussed below), further expands our 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 June 30, 2010, DYNAenergetics US, Inc. contributed net sales of $1,376 and a net loss of $20.

 

The acquisition was structured as an asset purchase valued at $6,845 which was financed by (i) the payment of $3,544 in cash and 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 Company’s 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

 

4,698

 

Deferred tax assets

 

7

 

Other assets

 

80

 

Total assets acquired

 

10,945

 

 

 

 

 

Current liabilities

 

4,100

 

Total liabilities assumed

 

4,100

 

Net assets acquired

 

$

6,845

 

 

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 $4,698 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 Company’s Oilfield Products business segment.  These joint ventures include DYNAenergetics RUS, which is a Russian trading company that sells the Company’s 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 June 30, 2010, DYNAenergetics RUS and Perfoline contributed net sales of $1,323 and net income of $447.

 

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.

 

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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 Company’s 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 Company’s Oilfield Products segment and had served for several years as its sole Canadian distributor.  From January 1, 2010 through June 30, 2010, LRI contributed net sales of $4,241 and net income of $247.

 

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 LRI’s 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.

 

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The purchase price of the acquisition was allocated to the Company’s 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.

 

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Pro Forma Statement of Operations

 

The following table presents the pro-forma combined results of operations for the three and six months ended June 30, 2010 and June 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 appraised value of the property, plant and equipment; (iv) reduction of interest expense assuming the Company paid down LRI’s 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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net sales

 

$

41,713

 

$

41,371

 

$

75,904

 

$

95,831

 

Income from operations

 

$

2,357

 

$

2,726

 

$

2,678

 

$

10,616

 

Net income

 

$

2,947

 

$

1,134

 

$

2,527

 

$

5,597

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.22

 

$

0.09

 

$

0.19

 

$

0.43

 

Diluted

 

$

0.22

 

$

0.09

 

$

0.19

 

$

0.43

 

 

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 Company’s Oilfield Product’s 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 Company’s 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.

 

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Summarized unaudited financial information for the joint ventures accounted for under the equity method as of December 31, 2009 and for the three and six months ended June 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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010 (a)

 

2009

 

2010 (a)

 

2009

 

Net sales

 

$

841

 

$

1,676

 

$

2,575

 

$

2,782

 

Gross Profit

 

$

240

 

$

546

 

$

656

 

$

816

 

Operating income

 

$

132

 

$

284

 

$

302

 

$

363

 

Net income

 

$

158

 

$

232

 

$

468

 

$

142

 

Equity in earnings of joint ventures

 

$

86

 

$

127

 

$

255

 

$

79

 

 


(a) Through April 30, 2010

 

5.                   INVENTORY

 

The components of inventory are as follows at June 30, 2010 and December 31, 2009:

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

Raw materials

 

$

10,416

 

$

10,321

 

Work-in-process

 

17,507

 

15,963

 

Finished goods

 

9,135

 

5,526

 

Supplies

 

792

 

691

 

 

 

$

37,850

 

$

32,501

 

 

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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

 

(155

)

(219

)

(374

)

Adjustment due to exchange rate differences

 

(3,518

)

(2,755

)

(6,273

)

Goodwill balance at June 30, 2010

 

$

20,904

 

$

15,613

 

$

36,517

 

 

7.                   PURCHASED INTANGIBLE ASSETS

 

The following table presents details of our purchased intangible assets, other than goodwill, as of June 30, 2010:

 

 

 

 

 

Accumulated

 

 

 

 

 

Gross

 

Amortization

 

Net

 

Core technology

 

$

20,790

 

$

(2,700

)

$

18,090

 

Customer relationships

 

36,496

 

(8,170

)

28,326

 

Trademarks / Trade names

 

2,226

 

(874

)

1,352

 

Total intangible assets

 

$

59,512

 

$

(11,744

)

$

47,768

 

 

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 June 30, 2010 reflects the additional intangible assets associated with the acquisitions of AECO and the two Russian joint ventures (see Note 3), which was more than offset 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 Company’s inventory investment on large orders or to keep credit limits at acceptable levels.  As of June 30, 2010 and December 31, 2009, customer advances totaled $7,817

 

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and $6,528 respectively, with $5,758 of the June 30, 2010 balance relating to one large order which is scheduled to ship during the remaining half of 2010.

 

9.                   DEBT

 

Lines of credit consisted of the following at June 30, 2010 and December 31, 2009:

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

HSBC line of credit

 

$

554

 

$

1,774

 

Syndicated credit agreement revolving loan

 

1,830

 

 

Stoicredit line of credit

 

23

 

 

Commerzbank line of credit

 

 

3

 

Nord LB line of credit

 

1,153

 

 

 

 

$

3,560

 

$

1,777

 

 

Long-term debt consists of the following at June 30, 2010 and December 31, 2009:

 

 

 

June 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

 

916

 

1,505

 

Loans with former owners of LRI

 

1,271

 

1,269

 

 

 

31,184

 

47,605

 

Less current maturities

 

(7,483

)

(13,485

)

Long-term debt

 

$

23,701

 

$

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 Company’s 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 June 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 US 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

 

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Company’s syndicated credit facility and the Company’s 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 2010, the Company made repayments of $2,744 and $2,007, respectively, on its variable rate US 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 Company’s 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 Company’s statement of operations.   The Company recorded an immaterial loss of less than $100 during 2009 and an immaterial gain of approximately $10 during the first half of 2010.

 

The Company has recorded the fair value of its interest rate swap agreement as follows:

 

 

 

June 30, 2010

 

December 31, 2009

 

 

 

Balance sheet location

 

Fair value

 

Balance sheet location

 

Fair value

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap liability

 

Accrued expenses

 

$

388

 

Accrued expenses

 

$

820

 

 

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 Company’s reportable segments are separately managed strategic business units that offer different products and services. Each segment’s products are marketed to different customer types and require different manufacturing processes and technologies.

 

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Segment information is presented for the three and six months ended June 30, 2010 and 2009 as follows:

 

 

 

Explosive

 

 

 

 

 

 

 

 

 

Metalworking

 

Oilfield

 

AMK

 

 

 

 

 

Group

 

Products

 

Welding

 

Total

 

For the three months ended June 30, 2010:

 

 

 

 

 

 

 

 

 

Net sales

 

$

26,690

 

$

8,654

 

$

2,914

 

$

38,258

 

Depreciation and amortization

 

$

1,365

 

$

1,034

 

$

115

 

$

2,514

 

Income from operations

 

$

1,967

 

$

203

 

$

826

 

$

2,996

 

Equity in earnings of joint ventures

 

$

 

$

86

 

$

 

86

 

Unallocated amounts:

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

(910

)

Other income

 

 

 

 

 

 

 

2,002

 

Interest expense

 

 

 

 

 

 

 

(662

)

Interest income

 

 

 

 

 

 

 

29

 

Consolidated income before income taxes

 

 

 

 

 

 

 

$

3,541

 

 

 

 

Explosive

 

 

 

 

 

 

 

 

 

Metalworking

 

Oilfield

 

AMK

 

 

 

 

 

Group

 

Products

 

Welding

 

Total

 

For the three months ended June 30, 2009:

 

 

 

 

 

 

 

 

 

Net sales

 

$

31,604

 

$

4,014

 

$

2,201

 

$

37,819

 

Depreciation and amortization

 

$

1,435

 

$

857

 

$

115

 

$

2,407

 

Income (loss) from operations

 

$

4,601

 

$

(906

)

$

306

 

$

4,001

 

Equity in earnings of joint ventures

 

$

 

$

127

 

$

 

127

 

Unallocated amounts:

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

(962

)

Other income

 

 

 

 

 

 

 

191

 

Interest expense

 

 

 

 

 

 

 

(867

)

Interest income

 

 

 

 

 

 

 

38

 

Consolidated income before income taxes

 

 

 

 

 

 

 

$

2,528

 

 

 

 

Explosive

 

 

 

 

 

 

 

 

 

Metalworking

 

Oilfield

 

AMK

 

 

 

 

 

Group

 

Products

 

Welding

 

Total

 

For the six months ended June 30, 2010:

 

 

 

 

 

 

 

 

 

Net sales

 

$

47,996

 

$

15,660

 

$

4,959

 

$

68,615

 

Depreciation and amortization

 

$

2,732

 

$

1,979

 

$

230

 

$

4,941

 

Income (loss) from operations

 

$

3,184

 

$

(201

)

$

1,050

 

$

4,033

 

Equity in earnings of joint ventures

 

$

 

$

255

 

$

 

255

 

Unallocated amounts:

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

(1,702

)

Other income

 

 

 

 

 

 

 

2,131

 

Interest expense

 

 

 

 

 

 

 

(1,806

)

Interest income

 

 

 

 

 

 

 

65

 

Consolidated income before income taxes

 

 

 

 

 

 

 

$

2,976

 

 

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Table of Contents

 

 

 

Explosive

 

 

 

 

 

 

 

 

 

Metalworking

 

Oilfield

 

AMK

 

 

 

 

 

Group

 

Products

 

Welding

 

Total

 

For the six months ended June 30, 2009:

 

 

 

 

 

 

 

 

 

Net sales

 

$

75,076

 

$

8,048

 

$

4,454

 

$

87,578

 

Depreciation and amortization

 

$

2,925

 

$

1,704

 

$

228

 

$

4,857

 

Income (loss) from operations

 

$

14,012

 

$

(1,600

)

$

681

 

$

13,093

 

Equity in earnings of joint ventures

 

$

 

$

79

 

$

 

79

 

Unallocated amounts:

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

(1,760

)

Other income

 

 

 

 

 

 

 

74

 

Interest expense

 

 

 

 

 

 

 

(1,769

)

Interest income

 

 

 

 

 

 

 

104

 

Consolidated income before income taxes

 

 

 

 

 

 

 

$

9,821

 

 

During the three months ended June 30, 2010, sales to one customer represented approximately $7,813 (20.4%) of total net sales and sales to another customer represented $3,901 (10.2%) of total net sales.  During the six months ended June 30, 2010, sales to one customer represented $8,024 (11.7%) of total net sales.  During the three months ended June 30, 2009, sales to one customer represented approximately $3,912 (10.3%) of total net sales.  During the six months ended June 30, 2009, no sales to any one customer accounted for more than 10% of total sales.

 

11.            COMPREHENSIVE LOSS

 

The Company’s comprehensive income (loss) for the three and six months ended June 30, 2010 and 2009 was as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net income for the period

 

$

3,036

 

$

1,515

 

$

2,625

 

$

6,432

 

Interest rate swap valuation adjustment, net of tax

 

137

 

160

 

242

 

197

 

Foreign currency translation adjustment

 

(9,933

)

5,722

 

(15,573

)

(196

)

Comprehensive income (loss)

 

$

(6,760

)

$

7,397

 

$

(12,706

)

$

6,433

 

 

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Other cumulative comprehensive income (loss) as of June 30, 2010 and December 31, 2009 consisted of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

Currency translation adjustment

 

$

(14,779

)

$

794

 

Interest rate swap valuation adjustment, net of tax of $122 and $299, respectively

 

(212

)

(454

)

 

 

$

(14,991

)

$

340

 

 

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Table of Contents

 

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 the Company’s 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 (000’s).

 

Executive Overview

 

Our business is organized into three segments:  Explosive Metalworking, Oilfield Products, and AMK Welding.  For the six months ended June 30, 2010, Explosive Metalworking accounted for 70% of our net sales and 79% 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 23% and 7%, respectively, of our first half 2010 net sales.

 

Our net sales for the six months ended June 30, 2010 decreased by $18,963 (21.7%) compared to the same period of 2009, reflecting a year-to-year net sales decrease of $27,080 (36.1%) for our Explosive Metalworking segment, which was partially offset by sales increases of $7,612 (94.6%) and $505 (11.3%) for our Oilfield Products and AMK Welding segments, respectively.  Excluding incremental sales of $6,940 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 a net sales increase of $672 or 8.3% for the first half of 2010.  Our consolidated income from operations decreased to $2,331 for the six months ended June 30, 2010 from $11,333 for the same period of 2009.  This $9,002 decrease reflects a decline in Explosive Metalworking’s operating income of $10,828 which was partially offset by a $1,399 decrease in the operating loss reported by our Oilfield Products segment, an increase in operating income for AMK Welding of $369, and a $58 decrease in stock-based compensation expense.  We recorded net income of $2,625 for the six months ended June 30, 2010 compared to net income of $6,432 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 half 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.

 

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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 half of 2010 which further reduced our backlog amount to $39,913 at June 30, 2010, we currently expect that our 2010 consolidated net sales will decline by approximately 5% 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 half of 2010, we generated cash flow from operations of $9,695 and expect to generate positive cash flow from operations for the full year 2010.

 

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 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 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 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.

 

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Table of Contents

 

Income taxes

 

Our effective income tax rate decreased to 11.8% for the six months ended June 30, 2010 from 34.5% 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 six months of 2010 was 34.0%.  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 expect our blended effective tax rate for 2010 to range between 25% and 28%.  Our full year 2009 effective tax rate was 33.9% and, for future periods which include the third and fourth quarters of 2010, 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 $39,913 at June 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 5% lower than the consolidated net sales that we reported in 2009.

 

Three and Six Months Ended June 30, 2010 Compared to Three and Six Months Ended June 30, 2009

 

Net sales

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

Percentage

 

 

 

2010

 

2009

 

Change

 

Change

 

Net sales

 

$

38,258

 

$

37,819

 

$

439

 

1.2

%

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

Percentage

 

 

 

2010

 

2009

 

Change

 

Change

 

Net sales

 

$

68,615

 

$

87,578

 

$

(18,963

)

(21.7

)%

 

Net sales for the second quarter of 2010 increased 1.2% to $38,258 from $37,819 for the second quarter of 2009.  Explosive Metalworking sales decreased 15.5% to $26,690 for the three months ended June 30, 2010 (70% of total sales) from $31,604 for the same period of 2009 (84% 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 $8,654 to second quarter 2010 sales (23% of total sales), which represents a 115.6% increase from sales of $4,014 for the second quarter of 2009 (10% of

 

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total sales). Excluding incremental sales of $4,124 from our acquisitions of LRI and Austin Explosives and step acquisition of two Russian joint ventures, the second quarter 2010 sales increase for Oilfield Products was $516 or 12.9%.

 

AMK Welding contributed $2,914 to second quarter 2010 sales (7% of total sales), which represents a 32.4% increase from sales of $2,201 for the second quarter of 2009 (6% of total sales).

 

Our consolidated net sales for the first half of 2010 decreased 21.7% to $68,615 from $87,578 in the first half of 2009.  Explosive Metalworking sales decreased 36.1% to $47,996 for the six months ended June 30, 2010 (70% of total sales) from $75,076 for the same period of 2009 (86% of total sales).

 

Oilfield Products contributed $15,660 to first half 2010 sales (23% of total sales), which represents a 94.6% increase from sales of $8,048 for the first half of 2009 (9% of total sales).  Excluding incremental sales of $6,940 from our acquisitions of LRI and Austin Explosives and  step acquisition of two Russian joint ventures, the first half 2010 sales increase for Oilfield Products was $672 or 8.3%.

 

AMK Welding contributed $4,959 to first half 2010 sales (7% of total sales), which represents an 11.3% increase from sales of $4,454 in the first half of 2009 (5% of total sales).

 

Gross profit