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, 2011

 

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 x  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 13,353,639 as of August 2, 2011.

 

 

 



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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

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010

 

4

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010 (unaudited)

 

6

 

Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2011 (unaudited)

 

7

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 (unaudited)

 

8

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

10

 

 

 

 

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

 

21

 

 

 

Item 3 — Quantitative and Qualitative Disclosure about Market Risk

 

34

 

 

 

Item 4 — Controls and Procedures

 

34

 

 

 

PART II - OTHER INFORMATION

 

Item 1 — Legal Proceedings

 

35

 

 

 

Item 1A — Risk Factors

 

35

 

 

 

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

 

35

 

 

 

Item 3 — Defaults Upon Senior Securities

 

35

 

 

 

Item 4 — [Removed and Reserved]

 

35

 

 

 

Item 5 — Other Information

 

35

 

 

 

Item 6 — Exhibits

 

35

 

 

 

 

Signatures

 

37

 

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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,

 

 

 

 

 

2011

 

December 31,

 

 

 

(unaudited)

 

2010

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

7,613

 

$

4,572

 

Accounts receivable, net of allowance for doubtful accounts of $566 and $378, respectively

 

34,798

 

27,567

 

Inventories

 

48,903

 

35,880

 

Prepaid expenses and other

 

4,752

 

3,659

 

Current deferred tax assets

 

1,401

 

1,057

 

 

 

 

 

 

 

Total current assets

 

97,467

 

72,735

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

 

70,277

 

66,734

 

Less - accumulated depreciation

 

(29,445

)

(26,928

)

 

 

 

 

 

 

Property, plant and equipment, net

 

40,832

 

39,806

 

 

 

 

 

 

 

GOODWILL, net

 

42,020

 

39,173

 

 

 

 

 

 

 

PURCHASED INTANGIBLE ASSETS, net

 

49,260

 

48,490

 

 

 

 

 

 

 

DEFERRED TAX ASSETS

 

517

 

248

 

 

 

 

 

 

 

OTHER ASSETS, net

 

768

 

941

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

230,864

 

$

201,393

 

 

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 and Per Share Data)

 

 

 

June 30,

 

 

 

 

 

2011

 

December 31,

 

 

 

(unaudited)

 

2010

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

22,020

 

$

16,109

 

Accrued expenses

 

4,163

 

3,529

 

Dividend payable

 

533

 

529

 

Accrued income taxes

 

1,536

 

477

 

Accrued employee compensation and benefits

 

3,969

 

3,711

 

Customer advances

 

3,038

 

1,531

 

Lines of credit

 

8,724

 

2,621

 

Current maturities on long-term debt

 

9,216

 

9,596

 

Current portion of capital lease obligations

 

182

 

272

 

Current deferred tax liabilities

 

1

 

17

 

 

 

 

 

 

 

Total current liabilities

 

53,382

 

38,392

 

 

 

 

 

 

 

LONG-TERM DEBT

 

14,610

 

14,579

 

 

 

 

 

 

 

CAPITAL LEASE OBLIGATIONS

 

112

 

155

 

 

 

 

 

 

 

DEFERRED TAX LIABILITIES

 

11,848

 

12,083

 

 

 

 

 

 

 

OTHER LONG-TERM LIABILITIES

 

1,243

 

1,100

 

 

 

 

 

 

 

Total liabilities

 

81,195

 

66,309

 

 

 

 

 

 

 

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; 13,353,639 and 13,224,696 shares issued and outstanding, respectively

 

667

 

661

 

Additional paid-in capital

 

54,098

 

52,451

 

Retained earnings

 

91,762

 

88,210

 

Other cumulative comprehensive income (loss)

 

3,032

 

(6,398

)

 

 

 

 

 

 

Total Dynamic Materials Corporation’s stockholders’ equity

 

149,559

 

134,924

 

Noncontrolling interest

 

110

 

160

 

 

 

 

 

 

 

Total stockholders’ equity

 

149,669

 

135,084

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

230,864

 

$

201,393

 

 

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, 2011 AND 2010

(Dollars in Thousands, Except Share Data)

(unaudited)

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

NET SALES

 

$

54,165

 

$

38,258

 

$

99,740

 

$

68,615

 

 

 

 

 

 

 

 

 

 

 

COST OF PRODUCTS SOLD

 

38,692

 

29,000

 

73,964

 

52,373

 

Gross profit

 

15,473

 

9,258

 

25,776

 

16,242

 

 

 

 

 

 

 

 

 

 

 

COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

4,194

 

3,358

 

7,869

 

6,503

 

Selling and distribution expenses

 

3,911

 

2,550

 

7,638

 

4,871

 

Amortization of purchased intangible assets

 

1,471

 

1,264

 

2,876

 

2,537

 

Total costs and expenses

 

9,576

 

7,172

 

18,383

 

13,911

 

 

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

5,897

 

2,086

 

7,393

 

2,331

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Gain on step acquisition of joint ventures

 

 

2,117

 

 

2,117

 

Other income (expense), net

 

(136

)

(110

)

(339

)

31

 

Interest expense

 

(486

)

(662

)

(896

)

(1,806

)

Interest income

 

 

29

 

3

 

65

 

Equity in earnings of joint ventures

 

 

86

 

 

255

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

5,275

 

3,546

 

6,161

 

2,993

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX PROVISION

 

1,418

 

505

 

1,565

 

351

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

3,857

 

3,041

 

4,596

 

2,642

 

 

 

 

 

 

 

 

 

 

 

Less: Net income (loss) attributable to noncontrolling interest

 

(11

)

5

 

(23

)

17

 

 

 

 

 

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO DYNAMIC MATERIALS CORPORATION

 

$

3,868

 

$

3,036

 

$

4,619

 

$

2,625

 

 

 

 

 

 

 

 

 

 

 

INCOME PER SHARE:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.29

 

$

0.23

 

$

0.35

 

$

0.20

 

Diluted

 

$

0.29

 

$

0.23

 

$

0.35

 

$

0.20

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

Basic

 

13,060,456

 

12,774,316

 

13,059,782

 

12,742,589

 

Diluted

 

13,070,536

 

12,786,976

 

13,069,834

 

12,755,565

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER COMMON SHARE

 

$

0.04

 

$

0.04

 

$

0.08

 

$

0.08

 

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2011

(Amounts in Thousands)

 

 

 

Dynamic Materials Corporation Stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Cumulative

 

Non-

 

 

 

 

 

Common Stock

 

Paid-In

 

Retained

 

Comprehensive

 

Controlling

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income/(Loss)

 

Interest

 

Total

 

Balances, December 31, 2010

 

13,225

 

$

661

 

$

52,451

 

$

88,210

 

$

(6,398

)

$

160

 

$

135,084

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

4,619

 

 

(23

)

4,596

 

Change in cumulative foreign currency translation adjustment

 

 

 

 

 

9,430

 

(69

)

9,361

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

(92

)

13,957

 

Shares issued in connection with stock compensation plans

 

129

 

6

 

93

 

 

 

 

99

 

Tax impact of stock-based compensation

 

 

 

(109

)

 

 

 

(109

)

Stock-based compensation

 

 

 

1,663

 

 

 

 

1,663

 

Dividends

 

 

 

 

(1,067

)

 

 

(1,067

)

Contribution from noncontrolling stockholder

 

 

 

 

 

 

 

 

 

 

 

42

 

42

 

Balances, June 30, 2011

 

13,354

 

$

667

 

$

54,098

 

$

91,762

 

$

3,032

 

$

110

 

$

149,669

 

 

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, 2011 AND 2010

(Dollars in Thousands)

(unaudited)

 

 

 

2011

 

2010

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income including noncontrolling interest

 

$

4,596

 

$

2,642

 

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

 

 

 

 

 

Depreciation (including capital lease amortization)

 

2,628

 

2,404

 

Amortization of purchased intangible assets

 

2,876

 

2,537

 

Amortization of capitalized debt issuance costs

 

157

 

383

 

Stock-based compensation

 

1,663

 

1,702

 

Deferred income tax benefit

 

(1,367

)

(961

)

Equity in earnings of joint ventures

 

 

(255

)

Gain on step acquisition of joint ventures

 

 

(2,117

)

Loss on disposal of property, plant and equipment

 

101

 

 

Change in:

 

 

 

 

 

Accounts receivable, net

 

(6,763

)

8,142

 

Inventories

 

(11,114

)

(1,841

)

Prepaid expenses and other

 

(870

)

(880

)

Accounts payable

 

5,759

 

(1,494

)

Customer advances

 

1,396

 

1,565

 

Accrued expenses and other liabilities

 

1,693

 

(2,132

)

 

 

 

 

 

 

Net cash provided by operating activities

 

755

 

9,695

 

 

 

 

 

 

 

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

 

(2,286

)

(1,445

)

Change in other non-current assets

 

36

 

(125

)

 

 

 

 

 

 

Net cash used in investing activities

 

(2,250

)

(7,179

)

 

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, 2011 AND 2010

(Dollars in Thousands)

(unaudited)

 

 

 

2011

 

2010

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Payment on syndicated term loans

 

 

(15,374

)

Payment on Nord LB term loans

 

(421

)

(399

)

Borrowings on bank lines of credit, net

 

5,818

 

1,998

 

Payment on capital lease obligations

 

(156

)

(146

)

Payment of dividends

 

(1,062

)

(1,033

)

Contribution from noncontrolling stockholder

 

42

 

 

Net proceeds from issuance of common stock to employees and directors

 

99

 

70

 

Tax impact of stock-based compensation

 

(109

)

2

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

4,211

 

(14,882

)

 

 

 

 

 

 

EFFECTS OF EXCHANGE RATES ON CASH

 

325

 

(251

)

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

3,041

 

(12,617

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, beginning of the period

 

4,572

 

22,411

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, end of the period

 

$

7,613

 

$

9,794

 

 

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 our Annual Report filed on Form 10-K for the year ended December 31, 2010.

 

2.      SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The Condensed Consolidated Financial Statements include the accounts of Dynamic Materials Corporation (“DMC”) 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.  Currently, we have controlling interests in all of our subsidiaries.  All significant intercompany accounts, profits, and transactions have been eliminated in consolidation.

 

Foreign Operations and Foreign Exchange Rate Risk

 

The functional currency for our foreign operations is the applicable local currency for each affiliate company. Assets and liabilities of foreign subsidiaries for which the functional currency is the local currency are translated at exchange rates in effect at period-end, and the statements of operations are translated at the average exchange rates during the period.  Exchange rate fluctuations on translating foreign currency financial statements into U.S. dollars that result in unrealized gains or losses are referred to as translation adjustments. Cumulative translation adjustments are recorded as a separate component of stockholders’ equity and are included in other cumulative comprehensive income (loss). Transactions denominated in currencies other than the local currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses, which are reflected in income as unrealized (based on period-end translations) or realized upon settlement of the transactions. Cash flows from our operations in foreign countries are translated at actual exchange rates when known, or at the average rate for the period. As a result, amounts related to assets and liabilities reported in the consolidated statements of cash flows will not agree to changes in the corresponding balances in the consolidated balance sheets. The effects of exchange rate changes on cash balances held in foreign currencies are reported as a separate line item below cash flows from financing activities.

 

In September 2010, our German subsidiary, DYNAenergetics, entered into a currency swap agreement with its bank to economically hedge the currency risk associated with a large U.S. dollar order ($2,700) that was awarded to it.  Under the agreement, DYNAenergetics exchanged $2,700 for Euros at an exchange rate of 1.269 U.S. dollars per Euros between January 18, 2011 and April 30, 2011.  We did not designate this derivative as a cash flow hedge for accounting purposes and as such, gains and losses related to changes in its valuation were recorded in the

 

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statement of operations.  During the three and six months ended June 30, 2011, we recorded a gain on this currency swap agreement of $37 and $87, respectively.  The gain is classified as other income (expense), net in our statement of operations.

 

Revenue Recognition

 

Sales of clad metal products and welding services are generally based upon customer specifications set forth in customer purchase orders and require us to provide certifications relative to metals used, services performed, and the results of any non-destructive testing that the customer has requested be performed.  All issues of conformity of the product to specifications are resolved before the product is shipped and billed.  Products related to the oilfield products segment, which include detonating cords, detonators, bi-directional boosters, and shaped charges, as well as, seismic related explosives and accessories, are standard in nature.  In all cases, revenue is recognized only when all four of the following criteria have been satisfied: persuasive evidence of an arrangement exists; the price is fixed or determinable; delivery has occurred; and collection is reasonably assured.  For contracts that require multiple shipments, revenue is recorded only for the units included in each individual shipment.  If, as a contract proceeds toward completion, projected total cost on an individual contract indicates a probable loss, we 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.  We estimate that a hypothetical 100 basis point decrease in our LIBOR/EURIBOR basis borrowing spread would increase the fair value of our long-term debt at June 30, 2011 by less than 2%.  The majority of our debt was incurred in connection with the 2007 acquisition of DYNAenergetics.

 

Additionally, we had a foreign currency hedge agreement that we entered in September 2010 (see above), which was 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. We are 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.

 

Our foreign currency hedge agreement, which expired on April 30, 2011, was not exchange listed and was therefore valued with models that use Level 2 inputs.  At December 31, 2010, the fair value of the foreign currency hedge was $118 and was recorded in prepaid expenses and other on the balance sheet.

 

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Related Party Transactions

 

Prior to acquiring the remaining outstanding interests in our unconsolidated joint ventures on April 30, 2010 (See Note 3), we had related party transactions with these joint ventures.  A summary of related party transactions for the three and six months ended June 30, 2010 is summarized below:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 2010

 

June 30, 2010

 

 

 

 

 

Interest

 

 

 

Interest

 

 

 

Sales to

 

income from

 

Sales to

 

income from

 

DYNAenergetics RUS

 

$

161

 

$

 

$

        663

 

$

              —

 

Perfoline

 

 

3

 

19

 

13

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

        161

 

$

             3

 

$

        682

 

$

           13

 

 

Income Taxes

 

The effective tax rate for each of the periods reported differs from the U.S. statutory rate due primarily to favorable foreign permanent differences and differences between the U.S. and foreign tax rates (which range from 19% to 33%) on earnings that have been permanently reinvested.

 

Earnings Per Share

 

Unvested awards of share-based payments with rights to receive dividends or dividend equivalents, such as our restricted stock awards (“RSAs”), are considered participating securities for purposes of calculating earnings per share (“EPS”) and require the use of the two class method for calculating EPS.  Under this method, a portion of net income is allocated to these participating securities and therefore is excluded from the calculation of EPS allocated to common stock, as shown in the table below.

 

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

 

 

 

For the Three Months Ended

 

For the Three Months Ended

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

Income

 

Shares

 

EPS

 

Income

 

Shares

 

EPS

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to DMC

 

$

3,868

 

 

 

 

 

$

3,036

 

 

 

 

 

Less income allocated to RSAs

 

(83

)

 

 

 

 

(61

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income allocated to common stock for EPS calculation

 

$

3,785

 

13,060,456

 

$

0.29

 

$

2,975

 

12,774,316

 

$

0.23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjust shares for dilutives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation plans

 

 

 

10,080

 

 

 

 

 

12,660

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to DMC

 

$

3,868

 

 

 

 

 

$

3,036

 

 

 

 

 

Less income allocated to RSAs

 

(83

)

 

 

 

 

(61

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income allocated to common stock for EPS calculation

 

$

3,785

 

13,070,536

 

$

0.29

 

$

2,975

 

12,786,976

 

$

0.23

 

 

 

 

For the Six Months Ended

 

For the Six Months Ended

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

Income

 

Shares

 

EPS

 

Income

 

Shares

 

EPS

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to DMC

 

$

4,619

 

 

 

 

 

$

2,625

 

 

 

 

 

Less income allocated to RSAs

 

(100

)

 

 

 

 

(54

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income allocated to common stock for EPS calculation

 

$

4,519

 

13,059,782

 

$

0.35

 

$

2,571

 

12,742,589

 

$

0.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjust shares for dilutives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation plans

 

 

 

10,052

 

 

 

 

 

12,976

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to DMC

 

$

4,619

 

 

 

 

 

$

2,625

 

 

 

 

 

Less income allocated to RSAs

 

(100

)

 

 

 

 

(54

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income allocated to common stock for EPS calculation

 

$

4,519

 

13,069,834

 

$

0.35

 

$

2,571

 

12,755,565

 

$

0.20

 

 

Recent Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-5, Presentation of Comprehensive Income, which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The amendment should be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  We do not anticipate a material impact from this update.

 

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3.      ACQUISITIONS

 

Austin Explosives

 

On June 4, 2010, we completed our acquisition of Austin Explosives Company (“AECO”), which is now operating under the name DYNAenergetics US, Inc.  This business is part of our Oilfield Products business segment.  AECO had been a long-time distributor of DYNAenergetics shaped charges.  This acquisition, along with the acquisition of the outstanding interests in our Russian joint ventures (discussed below), further expands our Oilfield Products business, and positions the segment to capitalize on the long-term demand from the oil and gas industry.

 

The acquisition was structured as an asset purchase valued at $6,921 which was financed by (i) the payment of $3,620 (of which $3,544 was paid during the six months ended June 30, 2010) in cash and (ii) the issuance of 222,445 shares of DMC common stock (valued at $3,301).

 

The purchase price of the acquisition was allocated to tangible and identifiable intangible assets based on their fair values as determined by appraisals performed as of the acquisition date.  The allocation of the purchase price to the assets of AECO was as follows:

 

Current assets

 

$

5,792

 

Property, plant and equipment

 

368

 

Intangible assets

 

4,773

 

Deferred tax assets

 

7

 

Other assets

 

81

 

 

 

 

 

Total assets acquired

 

11,021

 

 

 

 

 

Current liabilities

 

4,100

 

 

 

 

 

Total liabilities assumed

 

4,100

 

 

 

 

 

Net assets acquired

 

$

6,921

 

 

We 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, were valued at $4,773, and are being amortized over 11 years.  These amounts are included in Purchased Intangible Assets and are further discussed in Note 7.

 

Russian Joint Ventures

 

On April 30, 2010, we purchased the outstanding non-controlling interests in our two Russian joint ventures that were previously majority-owned by our Oilfield Products business segment.  These joint ventures include DYNAenergetics RUS, which is a Russian trading company that sells our oilfield products, and Perfoline, which is a Russian manufacturer of perforating gun systems.  We paid a combined $2,065 for the respective 45% and 34.81% outstanding stakes in DYNAenergetics RUS and Perfoline.              Prior to the acquisition date, we accounted for our 55% and 65.19% interest in DYNAenergetics RUS and Perfoline, respectively, as equity-method investments (see Note 4).

 

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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 our 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

 

 

 

 

 

Net assets acquired

 

$

5,598

 

 

We 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, were valued at $3,669, and are being amortized over 11 years.  These amounts are included in Purchased Intangible Assets and are further discussed in Note 7.

 

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 assuming (i) the acquisitions of AECO and the Russian joint ventures had occurred on January 1, 2010; (ii) pro-forma amortization expense of the purchased intangible assets; (iii) pro-forma depreciation expense of the fair value of purchased property, plant and equipment; (iv) elimination of intercompany sales; and (v) increase in interest expense for borrowing 1,500 Euros ($2,155 based on the January 1, 2010 exchange rate) to fund the acquisition of the Russian joint ventures:

 

 

 

Three Months

 

Six Months

 

 

 

Ended

 

Ended

 

 

 

June 30, 2010

 

Net sales

 

$

41,713

 

$

75,904

 

Income from operations

 

$

2,357

 

$

2,678

 

Net income attributable to DMC

 

$

2,947

 

$

2,527

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

Basic

 

$

0.22

 

$

0.19

 

Diluted

 

$

0.22

 

$

0.19

 

 

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.

 

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4.                   INVESTMENT IN JOINT VENTURES

 

As discussed in Note 3, on April 30, 2010 we acquired the remaining non-controlling interests in two joint ventures that were previously majority-owned by our Oilfield Products business segment.  Prior to the April 30, 2010 step acquisition, these investments, which include DYNAenergetics RUS and Perfoline, were accounted for under the equity method due to certain non-controlling interest veto rights that allowed the non-controlling interest shareholders to participate in the ordinary course of business decisions. Operating results from January 1, 2010 through April 30, 2010 include our proportionate share of income from these unconsolidated joint ventures and for the three and six months ended June 30, 2010 our results include equity in earnings of joint ventures of $86 and $255, respectively.  As a result of the step acquisition, we now consolidate the financial statements of these entities.

 

Summarized unaudited financial information for the joint ventures accounted for under the equity method for the three months and six months ended June 30, 2010 is as follows:

 

 

 

Three Months

 

Six Months

 

 

 

Ended

 

Ended

 

 

 

June 30, 2010 (a)

 

Net sales

 

$

841

 

$

2,575

 

Gross Profit

 

$

240

 

$

656

 

Operating income

 

$

132

 

$

302

 

Net income

 

$

158

 

$

468

 

 


(a)  Represents operating results through April 30, 2010

 

5.                   INVENTORY

 

The components of inventory are as follows at June 30, 2011 and December 31, 2010:

 

 

 

June 30,

 

December 31,

 

 

 

2011

 

2010

 

Raw materials

 

$

13,877

 

$

12,001

 

Work-in-process

 

16,514

 

11,387

 

Finished goods

 

17,458

 

11,870

 

Supplies

 

1,054

 

622

 

 

 

 

 

 

 

 

 

$

48,903

 

$

35,880

 

 

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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, 2010

 

$

22,458

 

$

16,715

 

$

39,173

 

Adjustment due to recognition of tax benefit of tax amortization of certain goodwill

 

(176

)

(254

)

(430

)

Adjustment due to exchange rate differences

 

1,849

 

1,428

 

3,277

 

 

 

 

 

 

 

 

 

Goodwill balance at June 30, 2011

 

$

24,131

 

$

17,889

 

$

42,020

 

 

7.                   PURCHASED INTANGIBLE ASSETS

 

The following table presents details of our purchased intangible assets, other than goodwill, as of June 30, 2011:

 

 

 

 

 

Accumulated

 

 

 

 

 

Gross

 

Amortization

 

Net

 

Core technology

 

$

24,469

 

$

(4,410

)

$

20,059

 

Customer relationships

 

41,952

 

(14,068

)

27,884

 

Trademarks / Trade names

 

2,623

 

(1,306

)

1,317

 

 

 

 

 

 

 

 

 

Total intangible assets

 

$

69,044

 

$

(19,784

)

$

49,260

 

 

The following table presents details of our purchased intangible assets, other than goodwill, as of December 31, 2010:

 

 

 

 

 

Accumulated

 

 

 

 

 

Gross

 

Amortization

 

Net

 

Core technology

 

$

22,557

 

$

(3,497

)

$

19,060

 

Customer relationships

 

39,052

 

(10,930

)

28,122

 

Trademarks / Trade names

 

2,416

 

(1,108

)

1,308

 

 

 

 

 

 

 

 

 

Total intangible assets

 

$

64,025

 

$

(15,535

)

$

48,490

 

 

The change in the gross value of our purchased intangible assets from December 31, 2010 to June 30, 2011 is due solely to the impact of foreign currency translation adjustments.

 

8.                   CUSTOMER ADVANCES

 

On occasion, we require customers to make advance payments prior to the shipment of their orders in order to help finance our inventory investment on large orders or to keep customers’ credit limits at acceptable levels.  As of June 30, 2011 and December 31, 2010, customer advances totaled $3,038 and $1,531 respectively, and originated from several customers.

 

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Table of Contents

 

9.                   DEBT

 

Lines of credit consisted of the following at June 30, 2011 and December 31, 2010:

 

 

 

June 30,

 

December 31,

 

 

 

2011

 

2010

 

Syndicated credit agreement revolving loan

 

$

6,234

 

$

1,060

 

Commerzbank line of credit

 

1,072

 

 

Nord LB line of credit

 

1,418

 

1,561

 

 

 

 

 

 

 

 

 

$

8,724

 

$

2,621

 

 

Long-term debt consisted of the following at June 30, 2011 and December 31, 2010:

 

 

 

June 30,

 

December 31,

 

 

 

2011

 

2010

 

Syndicated credit agreement term loan

 

$

22,247

 

$

22,247

 

Nord LB 3,000 Euro term loan

 

216

 

596

 

Loans with former owners of LRI

 

1,363

 

1,332

 

 

 

 

 

 

 

 

 

23,826

 

24,175

 

Less current maturities

 

(9,216

)

(9,596

)

 

 

 

 

 

 

Long-term debt

 

$

14,610

 

$

14,579

 

 

Loan Covenants and Restrictions

 

Our 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.  On February 2, 2011, our credit facility was amended, retroactive to December 31, 2010, to revise the leverage ratios and fixed charge coverage ratios that we are required to satisfy on a quarterly basis throughout the remaining term of the credit facility.  These revised ratios will ease our ability to comply with certain covenants of the credit agreement.  As of June 30, 2011, we were in compliance with all financial covenants and other provisions of our debt agreements.

 

10.            BUSINESS SEGMENTS

 

Our business 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 included herein and in our Annual Report on Form 10-K for the year ended December 31, 2010.  Our reportable segments are separately managed strategic

 

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Table of Contents

 

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.

 

Beginning in 2011, we changed our methodology of allocating corporate overhead to our business segments.  In connection with this change we no longer allocate certain corporate expenses that do not directly benefit our business segments.  The business segment disclosure for the three months and six ended June 30, 2010 presented below reflects our new allocation methodology.

 

Segment information is presented for the three months and six ended June 30, 2011 and 2010 as follows:

 

 

 

Explosive

 

 

 

 

 

 

 

 

 

Metalworking

 

Oilfield

 

AMK

 

 

 

 

 

Group

 

Products

 

Welding

 

Total

 

For the three months ended June 30, 2011:

 

 

 

 

 

 

 

 

 

Net sales

 

$

35,751

 

$

15,717

 

$

2,697

 

$

54,165

 

Depreciation and amortization

 

$

1,495

 

$

1,129

 

$

119

 

$

2,743

 

Income from operations

 

$

5,605

 

$

1,159

 

$

702

 

$

7,466

 

Unallocated amounts:

 

 

 

 

 

 

 

 

 

Corporate expenses

 

 

 

 

 

 

 

(698

)

Stock-based compensation

 

 

 

 

 

 

 

(871

)

Other expense

 

 

 

 

 

 

 

(136

)

Interest expense

 

 

 

 

 

 

 

(486

)

 

 

 

 

 

 

 

 

 

 

Consolidated income before income taxes

 

 

 

 

 

 

 

$

           5,275

 

 

 

 

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

 

$

2,486

 

$

134

 

$

865

 

$

3,485

 

Equity in earnings of joint ventures

 

$

 

$

86

 

$

 

86

 

Unallocated amounts:

 

 

 

 

 

 

 

 

 

Corporate expenses

 

 

 

 

 

 

 

(489

)

Stock-based compensation

 

 

 

 

 

 

 

(910

)

Other income

 

 

 

 

 

 

 

2,007

 

Interest expense

 

 

 

 

 

 

 

(662

)

Interest income

 

 

 

 

 

 

 

29

 

 

 

 

 

 

 

 

 

 

 

Consolidated income before income taxes

 

 

 

 

 

 

 

$

3,546

 

 

 

 

Explosive

 

 

 

 

 

 

 

 

 

Metalworking

 

Oilfield

 

AMK

 

 

 

 

 

Group

 

Products

 

Welding

 

Total

 

For the six months ended June 30, 2011:

 

 

 

 

 

 

 

 

 

Net sales

 

$

61,826

 

$

32,773

 

$

5,141

 

$

99,740

 

Depreciation and amortization

 

$

2,954

 

$

2,309

 

$

241

 

$

5,504

 

Income from operations

 

$

7,159

 

$

2,083

 

$

1,170

 

$

10,412

 

Unallocated amounts:

 

 

 

 

 

 

 

 

 

Corporate expenses

 

 

 

 

 

 

 

(1,356

)

Stock-based compensation

 

 

 

 

 

 

 

(1,663

)

Other expense

 

 

 

 

 

 

 

(339

)

Interest expense

 

 

 

 

 

 

 

(896

)

Interest income

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

Consolidated income before income taxes

 

 

 

 

 

 

 

$

6,161

 

 

19



Table of Contents

 

 

 

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

 

$

4,324

 

$

(326

)

$

1,125

 

$

5,123

 

Equity in earnings of joint ventures

 

$

 

$

255

 

$

 

255

 

Unallocated amounts:

 

 

 

 

 

 

 

 

 

Corporate expenses

 

 

 

 

 

 

 

(1,090

)

Stock-based compensation

 

 

 

 

 

 

 

(1,702

)

Other income

 

 

 

 

 

 

 

2,148

 

Interest expense

 

 

 

 

 

 

 

(1,806

)

Interest income

 

 

 

 

 

 

 

65

 

 

 

 

 

 

 

 

 

 

 

Consolidated income before income taxes

 

 

 

 

 

 

 

$

2,993

 

 

During the three months ended June 30, 2011, sales to one customer represented $12,354 (22.8%) of total net sales.  During the six months ended June 30, 2011, sales to one customer represented $13,585 (13.6%) of total net sales.  During the three months ended June 30, 2010, sales to one customer represented $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.

 

11.            COMPREHENSIVE INCOME (LOSS)

 

Our comprehensive income (loss) for the three and six months ended June 30, 2011 and 2010 was as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Net income including noncontrolling interest

 

$

3,857

 

$

3,041

 

$

4,596

 

$

2,642

 

Derivative valuation, net of tax

 

 

137

 

 

242

 

Change in cumulative foreign currency translation adjustment

 

2,269

 

(9,950

)

9,361

 

(15,602

)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

6,126

 

(6,772

)

13,957

 

(12,718

)

Comprehensive loss attributable to noncontrolling interest

 

(9

)

(12

)

(92

)

(12

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to DMC

 

$

6,135

 

$

(6,760

)

$

14,049

 

$

(12,706

)

 

Other cumulative comprehensive income (loss) as of June 30, 2011 and December 31, 2010 consisted entirely of currency translation adjustment.

 

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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, 2010.

 

Unless stated otherwise, all currency amounts in this discussion are presented in thousands (000’s).

 

Executive Overview

 

Our business is organized into three segments:  Explosive Metalworking (which we also refer to as DMC Clad), Oilfield Products and AMK Welding.  For the six months ended June 30, 2011, Explosive Metalworking accounted for 62% of our net sales and 69% of our income from operations before consideration of unallocated corporate expenses and stock-based compensation expense, which is not allocated to our business segments.  Our Oilfield Products and AMK Welding segments accounted for 33% and 5%, respectively, of our first half 2011 net sales, and 20% and 11%, respectively, of our income from operations before unallocated corporate expenses and stock-based compensation expense.

 

Our net sales for the six months ended June 30, 2011 increased by $31,125, or 45.4%, compared to the same period of 2010.  The year-to-year consolidated net sales increase reflects a sales increase of $13,830 (28.8%) for our Explosive Metalworking segment and sales increases of $17,113 (109.3%) for our Oilfield Products segment and $182 (3.7%) for AMK Welding.  Excluding incremental sales of $5,743 from the acquisition of Austin Explosives on June 4, 2010 and the step acquisition of two Russian joint ventures that was completed on April 30, 2010, our Oilfield Products segment reported an increase of $11,370 or 72.6% from its first half 2010 net sales.  Our consolidated income from operations increased to $7,393 for the six months ended June 30, 2011 from $2,331 in the same period of 2010.  This $5,062 increase reflects increases of $2,835, $2,409 and $45 in the operating income reported by our Explosive Metalworking, Oilfield Products and AMK Welding segments, respectively, and a decrease in stock-based compensation of $39 which were partially offset by an increase in unallocated corporate expenses of $266.  Reported consolidated operating income for the six month periods ended June 30, 2011 and 2010 includes amortization expense of $2,876 and $2,537, respectively, relating to purchased intangible assets associated with our acquisitions of DYNAenergetics, DYNAenergetics Canada, DYNAenergetics US, and the Russian joint ventures.  We reported net income of $4,619 for the six months ended June 30, 2011 compared to $2,625 for the same period of 2010.

 

Impact of Current Economic Situation on the Company

 

We were only minimally impacted in 2008 by the global economic slowdown.  However, during 2009 and 2010, we experienced a significant slowdown in Explosive Metalworking sales to some of the markets we serve.  The explosion-welded clad plate market is dependent upon sales of products for use by customers in a number of heavy industries, including oil and gas, 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 seen in certain sectors, including chemical, petrochemical and hydrometallurgy, quoting activity in other end markets remains healthy, and we continue to track an extensive list of 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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Our Explosive Metalworking backlog, which totaled $97,247 at the end of 2008 before this business segment began to see a significant decline in booking activity, decreased to $41,154 at September 30, 2010 before rebounding to $56,539 at December 31, 2010 on strong fourth quarter 2010 booking activity and then decreasing slightly to $54,026 at June 30, 2011.  Based upon our June 30, 2011 Explosive Metalworking backlog and expected year over year increases in 2011 sales for both our Oilfield and AMK Welding business segments, we believe that our 2011 consolidated net sales could increase by 28% to 30% from the $154,739 in consolidated net sales that we reported in 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 boosters and perforating guns to customers who perform the perforation of oil and gas wells and from sales of seismic products to customers involved in oil and gas exploration activities.

 

AMK Welding’s revenues are generated from welding, heat treatment, and inspection services that are provided with respect to customer-supplied parts for customers primarily involved in the power generation industry and aircraft engine markets.

 

A significant portion of our revenue is derived from a relatively small number of customers; therefore, the failure to complete existing contracts on a timely basis, to receive payment for such services in a timely manner, or to enter into future contracts at projected volumes and profitability levels could adversely affect our ability to meet cash requirements exclusively through operating activities. We attempt to minimize the risk of losing customers or specific contracts by continually improving product quality, delivering product on time and competing aggressively on the basis of price.

 

Gross profit and cost of products sold

 

Cost of 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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Income taxes

 

Our effective income tax rate increased to 25.4% for the first half of 2011 from 11.7% for first half of 2010 and 17.7% for the full year 2010.  Income tax provisions on the earnings of Nobelclad, Nitro Metall, Dynaplat, DYNAenergetics, DYNAenergetics Canada, DYNAenergetics RUS, Perfoline, and our German and Luxembourg holding companies have been provided based upon the respective French, Swedish, German, Canadian, Russian and Luxembourg statutory tax rates for the applicable years.  Going forward, based upon existing tax regulations and current federal, state and foreign statutory tax rates, we expect our blended effective tax rate on our projected consolidated pre-tax income to range between 26% and 28% in 2011 before returning to normalized level of 28% to 30% in subsequent years.

 

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 $54,026 at June 30, 2011 from $56,539 at December 31, 2010 and $58,530 at March 31, 2011. This backlog decrease reflects an increase in Explosive Metalworking sales to $35,751 in the second quarter of 2011 from $26,074 in this year’s first quarter.

 

Three and Six Months Ended June 30, 2011 Compared to the Three and Six Months Ended June 30, 2010

 

Net sales

 

 

 

Three Months Ended
June 30,

 

 

 

Percentage

 

 

 

2011

 

2010

 

Change

 

Change

 

Net sales

 

$

54,165

 

$

38,258

 

$

15,907

 

41.6

%

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

Percentage

 

 

 

2011

 

2010

 

Change

 

Change

 

Net sales

 

$

99,740

 

$

68,615

 

$

31,125

 

45.4

%

 

Net sales for the second quarter of 2011 increased 41.6% to $54,165 from $38,258 for the second quarter of 2010.  Explosive Metalworking sales increased 33.9% to $35,751 for the three months ended June 30, 2011 (66% of total sales) from $26,690 for the same period of 2010 (70% of total sales).  This $9,061 sales increase follows an increase in the Explosive Metalworking backlog from $51,417 at March 31, 2010 to $58,530 at March 31, 2011 and reflects more than $11 million in second quarter export shipments from our U.S. facility on two large orders that were booked in December of 2010.  The decrease in Explosive Metalworking’s proportionate contribution to consolidated net sales is principally attributable to incremental 2011 sales for our Oilfield Products segment that resulted from 2010 acquisitions as further discussed below.

 

Oilfield Products contributed $15,717 to second quarter 2011 sales (29% of total sales), which represents an 81.6% increase from sales of $8,654 for the second quarter of 2010 (23% of total sales). Excluding incremental sales of $2,234 from our acquisition of Austin Explosives and step acquisition of two Russian joint ventures, the second quarter 2011 sales increase for Oilfield

 

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Table of Contents

 

Products was $4,829 or 55.8%.  This significant increase in sales reflects a substantial increase in global oil and gas drilling activities, particularly in North America.

 

AMK Welding contributed $2,697 to second quarter 2011 sales (5% of total sales), compared to sales of $2,914 for the second quarter of 2010 (7% of total sales), a decrease of 7.4%.

 

Our consolidated net sales for the first half of 2011 increased 45.4% to $99,740 from $68,615 in the first half of 2010.  Explosive Metalworking sales increased 28.8% to $61,826 for the six months ended June 30, 2011 (62% of total sales) from $47,996 for the same period of 2010 (70% of total sales).  This sales increase reflects a modest strengthening of demand in our Explosive Metalworking business and more than $11 million in second quarter shipments on two large orders as discussed above.

 

Oilfield Products contributed $32,773 to first half 2011 sales (33% of total sales), which represents a 109.3% increase from sales of $15,660 for the first half of 2010 (23% of total sales). Excluding incremental sales of $5,743 from our acquisition of Austin Explosives and step acquisition of two Russian joint ventures, the first half 2011 sales increase for Oilfield Products was $11,370 or 72.6%.  As discussed above, this significant sales increase reflects a substantial increase in global oil and gas drilling activities, particularly in North America.

 

AMK Welding contributed $5,141 to first half 2011 sales (5% of total sales), which represents a 3.7% increase from sales of $4,959 in the first half of 2010 (7% of total sales).

 

Gross profit

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

Percentage

 

 

 

2011

 

2010

 

Change

 

Change

 

Gross profit

 

$

15,473

 

$

9,258

 

$

6,215

 

67.1

%

Consolidated gross profit margin rate

 

28.6

%

24.2

%

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

Percentage

 

 

 

2011

 

2010

 

Change

 

Change

 

Gross profit

 

$

25,776

 

$

16,242

 

$

9,534

 

58.7

%

Consolidated gross profit margin rate

 

25.8

%

23.7

%

 

 

 

 

 

Gross profit increased by 67.1% to $15,473 for the three months ended June 30, 2011 from $9,258 for the three months ended June 30, 2010. Our second quarter 2011 consolidated gross profit margin rate increased to 28.6% from the 24.2% gross margin that we reported for the second quarter of 2010. For the six months ended June 30, 2011, gross profit increased by 58.7% to $25,776 from $16,242 for the same period of 2010.  Our year to date consolidated gross profit margin rate increased to 25.8% from 23.7% for the first six months of 2010.

 

The gross profit margin for Explosive Metalworking increased from 19.7% in the second quarter of 2010 to 25.2% in the second quarter of 2011.  The increase in the second quarter 2011 gross profit margin rate for our Explosive Metalworking segment relates principally to favorable changes in product mix as compared to the second quarter of 2010 and a somewhat improved pricing environment compared to the extremely competitive pricing environment that existed throughout 2010.  Our gross profit margin for the Explosive Metalworking segment increased to 21.8% for the first six months of 2011 from 20.7% for the same period in 2010.  As has been the case historically, we expect to see continued fluctuations in Explosive Metalworking’s quarterly gross margin rates in the future that result from fluctuations in quarterly sales volume and change in product mix.

 

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Table of Contents

 

Oilfield Products reported a gross profit margin of 35.7% in the second quarter of 2011 compared to a gross profit margin of 34.7% in the second quarter of 2010.  Oilfield Products reported a gross profit margin of 32.8% for the first half of 2011 compared to a gross profit margin of 31.5% for the first half of 2010.  The increase in Oilfield Products’ gross margin for the second quarter and first six months of 2011 relates principally to the significant sales increase discussed above and the additional margin resulting from sales of former distributors in the U.S. and Russia that were acquired during the second quarter of 2010 as these acquired entities sold products through to the end customers.

 

The gross profit margin for AMK Welding decreased to 34.4% in the second quarter of 2011 from 37.4% in the second quarter of 2010.  The gross profit margin for AMK Welding increased to 32.2% in the first six months of 2011 from 31.3% in the first six months of 2010.  The second quarter decrease and year-to-date increase in AMK Welding’s reported gross margins relates principally to differences in the rate at which AMK Welding absorbed its fixed manufacturing overhead costs based on the sales fluctuations discussed above.

 

Based upon the expected contribution to 2011 consolidated net sales by each of our three business segments, we expect our consolidated full year 2011 gross margin to be in a range of 26% to 28%.

 

General and administrative expenses

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

Percentage

</