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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 March 31, 2009

 

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)

 

 

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  (Do not check if smaller reporting company)   Smaller reporting company  o

 

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 12,851,377 as of April 30, 2009.

 

 

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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: 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; 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 March 31, 2009 (unaudited) and December 31, 2008	4
	Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008 (unaudited)	6
	Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2009 (unaudited)	7
	Consolidated Statements of Cash flows for the three months ended March 31, 2009 and 2008 (unaudited)	8
	Notes to Condensed Consolidated Financial Statements (unaudited)	10
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3 – Quantitative and Qualitative Disclosure about Market Risk		30
Item 4 – Controls and Procedures		30
PART II - OTHER INFORMATION
Item 1 – Legal Proceedings		31
Item 1A – Risk Factors		31
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		31
Item 3 – Defaults Upon Senior Securities		31
Item 4 – Submission of Matters to a Vote of Security Holders		31
Item 5 – Other Information		32
Item 6 – Exhibits		32
	Signatures	33

 

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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)

 

		March 31,			December 31,
		2009			2008
		(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	16,278		$	14,360
Accounts receivable, net of allowance for doubtful accounts of $493 and $614, respectively		36,545			34,719
Inventories		36,497			35,300
Prepaid expenses and other		2,289			2,956
Related party receivable and loan		2,370			2,611
Current deferred tax assets		1,012			1,103
Total current assets		94,991			91,049
PROPERTY, PLANT AND EQUIPMENT		58,194			58,454
Less - Accumulated depreciation		(18,938		)	(17,997		)
Property, plant and equipment, net		39,256			40,457
GOODWILL, net		40,176			43,066
PURCHASED INTANGIBLE ASSETS, net		47,773			52,264
DEFERRED TAX ASSETS		535			331
OTHER ASSETS, net		1,372			1,449
INVESTMENT IN JOINT VENTURES		744			970
TOTAL ASSETS		$	224,847		$	229,586

 

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)

 

		March 31,			December 31,
		2009			2008
		(unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	16,863		$	15,402
Accrued expenses		4,884			6,605
Accrued income taxes		2,026			846
Accrued employee compensation and benefits		3,866			5,579
Customer advances		1,620			2,685
Related party accounts payable		21			17
Lines of credit - current		1,429			—
Current maturities on long-term debt		10,316			14,450
Current portion of capital lease obligations		81			163
Total current liabilities		41,106			45,747
LINES OF CREDIT		2,800			—
LONG-TERM DEBT		44,935			46,178
CAPITAL LEASE OBLIGATIONS		315			336
DEFERRED TAX LIABILITIES		15,292			16,833
OTHER LONG-TERM LIABILITIES - RELATED PARTY		318			303
OTHER LONG-TERM LIABILITIES		1,452			1,687
COMMITMENTS AND CONTINGENT LIABILITIES		—			—
Total liabilities		106,218			111,084
STOCKHOLDERS’ EQUITY:
Preferred stock, $.05 par value; 4,000,000 shares authorized; no issued and outstanding shares		—			—
Common stock, $.05 par value; 25,000,000 shares authorized; 12,851,377 and 12,780,877 shares issued and outstanding, respectively		643			639
Additional paid-in capital		43,137			42,050
Retained earnings		82,958			78,042
Other cumulative comprehensive income (loss)		(8,109		)	(2,229		)
Total stockholders’ equity		118,629			118,502
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	224,847		$	229,586

 

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 MONTHS ENDED MARCH 31, 2009 AND 2008

(Dollars in Thousands, Except Share Data)

(unaudited)

 

		Three months ended
		March 31,
		2009			2008
NET SALES		$	49,759		$	58,393
COST OF PRODUCTS SOLD		34,431			40,682
Gross profit		15,328			17,711
COSTS AND EXPENSES:
General and administrative expenses		3,526			3,119
Selling expenses		2,324			2,841
Amortization expense of purchased intangible assets		1,183			2,361
Total costs and expenses		7,033			8,321
INCOME FROM OPERATIONS		8,295			9,390
OTHER INCOME (EXPENSE):
Other expense		(117		)	(149		)
Interest expense		(902		)	(1,279		)
Interest income		65			239
Equity in earnings (losses) of joint ventures		(49		)	16
INCOME BEFORE INCOME TAXES		7,292			8,217
INCOME TAX PROVISION		2,376			2,972
NET INCOME		$	4,916		$	5,245
INCOME PER SHARE:
Basic		$	0.38		$	0.42
Diluted		$	0.38		$	0.41
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING -
Basic		12,527,452			12,377,019
Diluted		12,569,879			12,521,736

 

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 THREE MONTHS ENDED MARCH 31, 2009

(Amounts in Thousands)

(unaudited)

 

													Other
							Additional						Cumulative						Comprehensive
		Common Stock					Paid-In			Retained			Comprehensive						Loss
		Shares		Amount			Capital			Earnings			Loss			Total			for the Period
Balances, December 31, 2008		12,781		$	639		$	42,050		$	78,042		$	(2,229	)	$	118,502
Shares issued for stock option  exercises		70		4			232			—			—			236
Excess tax benefit related to stock options		—		—			57			—			—			57
Stock-based compensation		—		—			798			—			—			798
Net income		—		—			—			4,916			—			4,916			4,916
Derivative valuation adjustment, net of tax of $22		—		—			—			—			38			38			38
Change in cumulative foreign currency translation adjustment		—		—			—			—			(5,918		)	(5,918		)	(5,918		)
Balances, March 31, 2009		12,851		$	643		$	43,137		$	82,958		$	(8,109	)	$	118,629		$	(964	)

 

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 THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(Dollars in Thousands)

(unaudited)

 

		2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	4,916		$	5,245
Adjustments to reconcile net income to net cash provided by operating activities -
Depreciation (including capital lease amortization)		1,267			1,113
Amortization of purchased intangible assets		1,183			2,361
Amortization of capitalized debt issuance costs		69			60
Stock-based compensation		798			664
Deferred income tax benefit		(605		)	(1,174		)
Equity in (earnings) losses of joint ventures		49			(16		)
Change in -
Restricted cash		—			377
Accounts receivable, net		(2,702		)	5,968
Inventories		(2,721		)	(670		)
Prepaid expenses and other		460			(580		)
Accounts payable		2,388			(3,837		)
Customer advances		(961		)	(2,144		)
Accrued expenses and other liabilities		(904		)	(118		)
Net cash provided by operating activities		3,237			7,249
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment		(1,170		)	(2,361		)
Change in other non-current assets		8			15
Net cash used in investing activities		(1,162		)	(2,346		)

 

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 THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(Dollars in Thousands)

 

		2009			2008
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on syndicated term loans		(3,862		)	—
Payment on Nord LB term loans		(233		)	(265		)
Borrowings on bank lines of credit, net		4,215			3,665
Payment of capital lease obligations		(71		)	(105		)
Payment of deferred debt issuance costs		(19		)	(125		)
Change in other long-tem liabilities		—			16
Net proceeds from issuance of common stock to employees and directors		236			93
Excess tax benefit related to exercise of stock options		57			—
Net cash provided by financing activities		323			3,279
EFFECTS OF EXCHANGE RATES ON CASH		(480		)	383
NET INCREASE IN CASH AND CASH EQUIVALENTS		1,918			8,565
CASH AND CASH EQUIVALENTS, beginning of the period		14,360			9,045
CASH AND CASH EQUIVALENTS, end of the period		$	16,278		$	17,610

 

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

 

(Dollars 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, 2008.  Certain prior year balances in the consolidated financial statements and notes have been reclassified to conform to the 2009 presentation.

 

2.      SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The 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 entities 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 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 the Company 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

 

In September 2006, the Financial Accounting Standards Boards (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”). Although this statement does not require any new fair value measurements, in certain cases its application has changed previous practice in determining fair value. SFAS 157 became effective for the Company beginning January 1, 2008 as it relates to fair value measurements of financial assets and liabilities and non-financial assets and liabilities that are recognized at fair value in its financial statements on a recurring basis (at least annually).

 

On January 1, 2009, the Company adopted the deferred provisions of SFAS 157 as defined by FASB Staff Position (“FSP”) No. 157-2, Effective Date of FASB Statement No. 157, (“FSP No. 157-2”). FSP No. 157-2 deferred the adoption date for certain non-financial assets and liabilities that are recognized or disclosed at fair value on a non-recurring basis.  The adoption in 2009 of SFAS 157 for certain non-financial assets and liabilities did not have any impact on the Company’s results of operations or financial position.

 

SFAS 157 defines fair value 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. It establishes a 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.

 

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SFAS 157 assigns the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs.

 

As discussed in Note 6, the Company uses an interest rate swap agreement to mitigate interest rate risk on portions of its variable rate term loan debt.   The 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 does require some management judgment but as of March 31, 2009 and December 31, 2008, 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.

 

Related Party Transactions

 

The Company has related party transactions with its unconsolidated joint ventures, as well as with the minority shareholder of one of its consolidated joint ventures.  A summary of related party balances as of March 31, 2009 and December 31, 2008 is summarized below:

 

		As of March 31, 2009									As of December 31, 2008
		Accounts			Accounts			Other			Accounts			Accounts			Other
		receivable from			payable to			long-term			receivable from			payable to			long-term
		and loan to			and loan from			loan from			and loan to			and loan from			loan from
Perfoline		$	461		$	16		$	—		$	449		$	17		$	—
DYNAenergetics RUS		1,419			—			—			1,582			—			—
Minority Interest Partner		490			5			318			580			—			303
Total		$	2,370		$	21		$	318		$	2,611		$	17		$	303

 

A summary of those transactions for the three months ended March 31, 2009 and 2008 is summarized below:

 

		3 months ended						3 months ended
		March 31, 2009						March 31, 2008
					Interest						Interest
		Sales to			income from			Sales to			income from
Perfoline		$	40		$	10		$	33		$	13
DYNAenergetics RUS		42			—			—			—
Minority Interest Partner		298			—			524			—
Total		$	380		$	10		$	557		$	13

 

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Earnings Per Share

 

In 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, and it became effective for the Company beginning January 1, 2009.  Under this standard, 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”).  Under the two-class method required by EITF 03-6-1, 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.  This FSP requires retrospective applications for periods prior to the effective date and as a result, all prior period earnings per share data presented herein have been adjusted to conform to these provisions.  The Company’s adoption of this FSP resulted in a $.01 per share reduction to the previously reported basic EPS and diluted EPS for the three months ended March 31, 2008.

 

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

 

		For the Three Months Ended								For the Three Months Ended
		March 31, 2009								March 31, 2008
		Income			Shares		EPS			Income			Shares		EPS
Basic earnings per share:
Net income		$	4,916							$	5,245
Less income allocated to RSAs		103								89
Net income allocated to common stock for EPS calculation		$	4,813		12,527,452		$	0.38		$	5,156		12,377,019		$	0.42
Adjust shares for Dilutives: Stock-based compensation plans					42,427								144,717
Diluted earnings per share:
Net income		$	4,916							$	5,245
Less income allocated to RSAs		103								88
Net income allocated to common stock for EPS calculation		$	4,813		12,569,879		$	0.38		$	5,157		12,521,736		$	0.41

 

Recent Accounting Pronouncements

 

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations and SFAS No. 160, Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51. These new standards will significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests in consolidated financial statements. SFAS Nos. 141(R) and 160 are required to be adopted simultaneously and are effective for the first annual reporting period beginning on or after December 15, 2008.  The adoption of these standards in 2009 did not have any impact on the Company’s results of operations or financial position.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities.  SFAS 161 requires additional disclosures related to the use of derivative instruments, the accounting for derivatives and how derivatives impact financial statements.  SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008.  The

 

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adoption of SFAS No. 161 in the first quarter of 2009 did not have any impact on the Company’s results of operations or financial position.

 

3.      INVESTMENT IN JOINT VENTURES

 

Operating results include the Company’s proportionate share of income from unconsolidated joint ventures, which are accounted for under the equity method.  These investments (all of which resulted from the acquisition of DYNAenergetics and pertain to the Company’s Oilfield Products business segment) include the following: (1) 65.19% interest in Perfoline, which is a Russian manufacturer of perforating gun systems and (2) 55% interest in DYNAenergetics RUS which is a Russian trading company that sells the Company’s oilfield products.  Due to certain minority interest veto rights that allow the minority interest shareholders to participate in ordinary course of business decisions, these joint ventures have been accounted for under the equity method instead of being consolidated in these financial statements.  Investments in these joint ventures totaled $744 and $970 as of March 31, 2009 and December 31, 2008, respectively.

 

Summarized unaudited financial information for the joint ventures accounted for under the equity method as of March 31, 2009 and December 31, 2008 and for the three months ended March 31, 2009 and 2008 is as follows:

 

		March 31,			December 31,
		2009			2008
Current assets		$	3,756		$	4,667
Noncurrent assets		622			714
Total assets		$	4,378		$	5,381
Current liabilities		$	1,730		$	2,064
Noncurrent liabilities		748			830
Equity		1,900			2,487
Total liabilities and equity		$	4,378		$	5,381

 

		Three Months Ended
		March 31,
		2009			2008
Net sales		$	1,106		$	2,203
Operating income		$	79		$	171
Net loss		$	(90	)	$	(14	)
Equity in earnings (losses) of joint ventures		$	(49	)	$	16

 

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4.      INVENTORY

 

The components of inventory are as follows at March 31, 2009 and December 31, 2008:

 

		March 31,			December 31,
		2009			2008
Raw materials		$	12,862		$	11,610
Work-in-process		18,536			18,950
Finished goods		4,372			3,903
Supplies		727			837
		$	36,497		$	35,300

 

5.      PURCHASED INTANGIBLE ASSETS

 

The following table presents details of our purchased intangible assets, other than goodwill, as of March 31, 2009:

 

					Accumulated
		Gross			Amortization			Net
Core technology		$	22,108		$	(1,520	)	$	20,588
Customer relationships		29,830			(4,558		)	25,272
Trademarks / Trade names		2,408			(495		)	1,913
Total intangible assets		$	54,346		$	(6,573	)	$	47,773

 

The following table presents details of our purchased intangible assets, other than goodwill, as of December 31, 2008:

 

					Accumulated
		Gross			Amortization			Net
Core technology		$	23,596		$	(1,327	)	$	22,269
Customer relationships		31,837			(3,980		)	27,857
Trademarks / Trade names		2,570			(432		)	2,138
Total intangible assets		$	58,003		$	(5,739	)	$	52,264

 

The decrease in the gross value of our purchased intangible assets from December 31, 2008 to March 31, 2009 is due to the impact of foreign currency translation.  The decrease in goodwill from $43,066 at December 31, 2008 to $40,176 at March 31, 2009 is also due to the impact of foreign currency translation.

 

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6.      DEBT

 

Lines of credit consist of the following at March 31, 2009 and December 31, 2008:

 

		March 31,			December 31,
		2009			2008
Syndicated credit agreement revolving loan		$	2,800		$	—
Commerzbank line of credit		428			—
Nord LB line of credit		1,001			—
		4,229			—
Less current portion		(1,429		)	—
Long-term lines of credit		$	2,800		$	—

 

Long-term debt consists of the following at March 31, 2009 and December 31, 2008:

 

		March 31,			December 31,
		2009			2008
Syndicated credit agreement term loan		$	37,756		$	40,500
Syndicated credit agreement Euro term loan		15,514			17,763
Nord LB 3,000 Euro term loan		1,981			2,326
Nord LB 500 Euro term loan		—			39
		55,251			60,628
Less current maturities		(10,316		)	(14,450		)
Long-term debt		$	44,935		$	46,178

 

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 March 31, 2009, 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 that effectively converted the LIBOR based variable rate US borrowings under the $45,000 term loan to a fixed rate of 4.87% (4.62% effective April 1, 2009 due to an improvement in the Company’s leverage ratio).  The Company has designated the swap agreement as an effective cash flow hedge with matched terms in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and as a result, changes in the fair value of the swap agreement are recorded in other comprehensive income with the offset as a swap agreement asset or liability.

 

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

 

		March 31, 2009					December 31, 2008
Interest rate swap liability		Balance sheet location		Fair value			Balance sheet location		Fair value
Current portion		Accrued expenses		$	874		Accrued expenses		$	759
Long-term portion		Other long-term liabilities		472			Other long-term liabilities		647
				$	1,346				$	1,406

 

7.      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 products of this group are clad metal plates which are used by customers in the fabrication of pressure vessels, heat exchangers and other equipment for various industries, including upstream oil and gas, oil refinery, petrochemicals, alternative energy, hydrometallurgy, power generation, industrial refrigeration, and similar industries and internally to produce transition joints for use in the aluminum production and shipbuilding 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.

 

Segment information is presented for the three months ended March 31, 2009 and 2008 as follows:

 

		Explosive
		Metalworking			Oilfield			AMK
		Group			Products			Welding			Total
For the three months ended March 31, 2009:
Net sales		$	43,472		$	4,034		$	2,253		$	49,759
Depreciation and amortization		$	1,488		$	848		$	114		$	2,450
Income from operations		$	9,412		$	(694	)	$	375		$	9,093
Equity in losses of joint ventures		$	—		$	(49	)	$	—		(49		)
Unallocated amounts:
Stock-based compensation											(798		)
Other expense											(117		)
Interest expense											(902		)
Interest income											65
Consolidated income before income taxes											$	7,292

 

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