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, 2003
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934 FOR THE TRANSITION PERIOD FROM TO .
Commission file number 0-8328
--------------------
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
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 under the Act). Yes No X
----- -----
The number of shares of Common Stock outstanding was 5,072,943 as of July
31, 2003.
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- Financial Statements, Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations and Item 3 -
Quantitative and Qualitative Disclosures About Market Risk. We intend the
forward-looking statements throughout the quarterly report on Form 10-Q and the
information incorporated by reference to be covered by the safe harbor
provisions for forward-looking statements. Statements which are not historical
facts contained in this report are forward-looking statements that involve risks
and uncertainties that could cause actual results to differ materially from
projected results. All projections and 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", "will", "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 report on Form 10-Q and
on numerous assumptions and developments that are not within our control.
Although we believe that our expectations that are 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; fluctuations in customer demand; competitive factors; the
timely completion of contracts; any actions which may be taken by SNPE as the
controlling shareholder of the Company with respect to the Company and our
businesses; the timing and size of expenditures; the timely receipt of
government approvals and permits; the adequacy of local labor supplies at our
facilities; the availability and cost of funds; and general economic conditions,
both domestically and abroad. 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.
2
INDEX
PART 1 - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements....................................4
Consolidated Balance Sheets as of June 30, 2003 (unaudited)
and December 31, 2002...................................................4
Consolidated Statements of Operations for the three and six months ended
June 30, 2003 and 2002 (unaudited) .....................................6
Consolidated Statements of Stockholders' Equity for the six months ended
June 30, 2003 (unaudited) ..............................................7
Consolidated Statements of Cash Flows for six months ended
June 30, 2003 and 2002 (unaudited) .................................... 8
Notes to Consolidated Financial Statements (unaudited).....................10
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................17
Item 3 - Quantitative and Qualitative Disclosures about Market Risk..........28
Item 4 - Controls and Procedures.............................................29
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings...................................................30
Item 2 - Changes in Securities and use of Proceeds...........................30
Item 3 - Defaults Upon Senior Securities.....................................30
Item 4 - Submission of Matters to a Vote of Security Holders.................30
Item 5 - Other information...................................................30
Item 6 - Reports on Form 8-K and Exhibits....................................30
Signatures..........................................................31
Certifications......................................................32
3
Part I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
ASSETS 2003 2002
------
(unaudited)
----------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,253,070 $ 1,158,234
Accounts receivable, net of allowance for doubtful
accounts of $313,145 and $255,769, respectively 7,421,211 8,747,238
Inventories 7,985,918 5,863,261
Prepaid expense and other 1,103,395 798,236
Current deferred tax asset 315,500 315,500
------------ ------------
Total current assets 18,079,094 16,882,469
PROPERTY, PLANT AND EQUIPMENT 24,640,991 23,474,725
Less - Accumulated depreciation (9,007,752) (8,076,227)
------------ ------------
Property, plant and equipment 15,633,239 15,398,498
RESTRICTED CASH AND INVESTMENTS 191,202 191,202
GOODWILL, net of accumulated amortization of $234,299 847,076 847,076
INTANGIBLE ASSETS, net of accumulated amortization
of $683,354 and $672,354, respectively 78,168 89,168
OTHER ASSETS, net 261,222 289,579
------------ ------------
TOTAL ASSETS $ 35,090,001 $ 33,697,992
============ ============
The accompanying notes to Consolidated Financial Statements
are an integral part of these balance sheets.
4
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
------------------------------------
(unaudited)
----------- ------------
CURRENT LIABILITIES:
Bank overdraft $ -- $ 213,979
Accounts payable 3,606,907 2,404,662
Accrued expenses 2,841,873 3,340,071
Current maturities on long-term debt 2,133,666 2,423,699
----------- -----------
Total current liabilities 8,582,446 8,382,411
LONG-TERM DEBT 9,409,622 9,278,630
NET DEFERRED TAX LIABILITIES 441,991 334,179
DEFERRED GAIN ON SWAP TERMINATION 42,562 48,493
OTHER LONG-TERM LIABILITIES 97,676 89,539
----------- -----------
Total liabilities 18,574,297 18,133,252
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.05 par value; 4,000,000 shares authorized;
no issued and outstanding shares -- --
Common stock, $.05 par value; 15,000,000 share authorized;
5,072,943 and 5,061,390 shares issued and outstanding, respectively 253,648 253,071
Additional paid-in capital 12,395,588 12,373,568
Retained earnings 3,312,140 2,763,027
Other cumulative comprehensive income 554,328 175,074
----------- -----------
Total stockholders' equity 16,515,704 15,564,740
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $35,090,001 $33,697,992
=========== ===========
The accompanying notes to Consolidated Financial Statements
are an integral part of these balance sheets.
5
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
NET SALES $ 11,260,607 $ 9,628,835 $ 20,996,841 $ 21,603,046
COST OF PRODUCTS SOLD 8,673,521 7,335,884 16,283,738 16,184,585
------------ ----------- ------------ ------------
Gross Profit 2,587,086 2,292,951 4,713,103 5,418,461
------------ ----------- ------------ ------------
COSTS AND EXPENSES:
General and administrative expenses 1,029,273 1,050,440 2,033,813 2,079,429
Selling expenses 772,501 582,443 1,501,499 1,218,399
------------ ----------- ------------ ------------
Total costs and expenses 1,801,774 1,632,883 3,535,312 3,297,828
------------ ----------- ------------ ------------
INCOME FROM OPERATIONS 785,312 660,068 1,177,791 2,120,633
OTHER INCOME (EXPENSE):
Other expense, net (3,879) (46,629) 38 (39,568)
Interest expense (131,304) (173,353) (275,012) (357,891)
Interest income 287 162 1,628 520
------------ ----------- ------------ ------------
INCOME BEFORE INCOME
TAXES 650,416 440,248 904,445 1,723,694
INCOME TAX PROVISION 255,008 144,684 355,332 641,555
------------ ----------- ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE 395,408 295,564 549,113 1,082,139
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE, NET OF TAX
BENEFIT OF $1,482,000 -- -- -- (2,318,108)
------------ ----------- ------------ ------------
NET INCOME (LOSS) $ 395,408 $ 295,564 $ 549,113 $ (1,235,969)
============ =========== ============ ============
NET INCOME (LOSS) PER SHARE - BASIC:
Income before cumulative effect of a change in accounting
principle $ 0.08 $ 0.06 $ 0.11 $ 0.21
Cumulative effect of a change in accounting principle -- -- -- (0.46)
------------ ----------- ------------ ------------
Net Income (Loss) $ 0.08 $ 0.06 $ 0.11 $ (0.25)
============ =========== ============ ============
NET INCOME (LOSS) PER SHARE - DILUTED:
Income before cumulative effect of a change in accounting
principle $ 0.08 $ 0.06 $ 0.11 $ 0.21
Cumulative effect of a change in accounting principle -- -- -- (0.45)
------------ ----------- ------------ ------------
Net Income (Loss) $ 0.08 $ 0.06 $ 0.11 $ (0.24)
============ =========== ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING -
Basic 5,061,390 5,036,159 5,061,390 5,033,364
============ =========== ============ ============
Diluted 5,077,351 5,105,780 5,078,785 5,103,187
============ =========== ============ ============
The accompanying notes to Consolidated Financial Statements
are an integral part of these statements.
6
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(unaudited)
Other
Additional Cumulative
Common Stock Paid-In Retained Comprehensive
Shares Amount Capital Earnings Loss Total
------ ------ ------- -------- ---- -----
Balances, December 31, 2002 .................. 5,061,390 $ 253,071 $ 12,373,568 $ 2,763,027 $ 175,074 $ 15,564,740
Shares issued in connection with the
the employee stock purchase plan 11,553 577 22,020 -- -- 22,597
Net income -- -- -- 549,113 -- 549,113
Change in cumulative translation adjustment -- -- -- -- 379,254 379,254
--------- --------- ------------ ----------- --------- ------------
Balances, June 30, 2003 5,072,943 $ 253,648 $ 12,395,588 $ 3,312,140 $ 554,328 $ 16,515,704
========= ========= ============ =========== ========= ============
Comprehensive
Income for
the Period
----------
Balances, December 31, 2002 ..................
Shares issued in connection with the
the employee stock purchase plan
Net income 549,113
Change in cumulative translation adjustment 379,254
----------
Balances, June 30, 2003 ...................... $ 928,367
==========
The accompanying notes to Consolidated Financial Statements
are an integral part of these statements.
7
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 549,113 $(1,235,969)
Adjustments to reconcile net income (loss) to net cash
flows provided by (used in) operating activities -
Depreciation 851,911 876,372
Amortization 11,000 55,999
Amortization of deferred gain on swap termination (5,931) (7,086)
Impairment of goodwill, net of tax -- 2,318,108
Provision for deferred income taxes 95,415 334,714
Change in -
Accounts receivable, net 1,534,067 (1,831,842)
Inventories (1,873,787) 200,151
Prepaid expenses and other (269,167) (340,459)
Income tax receivable -- (4,594)
Accounts payable 1,038,869 (841,649)
Accrued expenses (599,768) 337,063
----------- -----------
Net cash flows provided by (used in) operating 1,331,722 (139,192)
operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (852,842) (884,360)
Change in other non-current assets 28,357 (29,559)
----------- -----------
Net cash flows used in investing activities (824,485) (913,919)
----------- -----------
The accompanying notes to Consolidated Financial Statements
are an integral part of these statements.
8
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(unaudited)
2003 2002
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings / (repayments) on bank lines of credit, net 1,114,639 (725,032)
Borrowings / (repayments) on related party lines of credit, net 307,034 566,970
Payment on SNPE, Inc term loan (1,333,332) --
Payment on industrial development revenue bond (415,000) (390,000)
Change in other long-tem liabilities -- 34,626
Net proceeds from issuance of common stock to employees 22,597 33,907
Bank overdraft -- 406,007
Repayment of bank overdraft (213,979) --
----------- -----------
Net cash flows provided by (used in) financing
operating activities (518,041) (73,522)
----------- -----------
EFFECTS OF EXCHANGE RATES ON CASH 105,640 130,848
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 94,836 (995,785)
CASH AND CASH EQUIVALENTS, beginning of the period 1,158,234 1,811,618
----------- -----------
CASH AND CASH EQUIVALENTS, end of the period $ 1,253,070 $ 815,833
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for -
Interest $ 345,850 $ 336,371
=========== ===========
Income taxes $ 475,501 $ 286,710
=========== ===========
The accompanying notes to Consolidated Financial Statements
are an integral part of these statements.
9
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS
(unaudited)
1. BASIS OF PRESENTATION
The information included in the 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 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, 2002.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of DMC and any
subsidiary in which it has a greater than a 50% interest. 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.
Revenue Recognition
10
DMC's contracts with its customers generally require the production and
delivery of multiple units or products. The Company records revenue from the
contracts using the completed contract method as products are completed and
shipped to the customer. If, as a contract proceeds toward completion, projected
total cost on an individual contract indicates a potential loss, we provide
currently for such anticipated loss.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25"), and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options is generally
equal to the market price of the underlying stock on the date of the grant, no
compensation expense is recognized. Statement of Financial Accounting Standards
No. 123, Accounting and Disclosure of Stock-Based Compensation ("SFAS 123"),
establishes an alternative method of expense recognition for stock-based
compensation awards to employees that is based on fair values. The Company
elected not to adopt SFAS 123 for expense recognition purposes.
Pro-forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options and employees stock purchase plan under the fair
value method of SFAS 123. The fair value of the options granted was estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
Three Months Ended Six Months Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
Risk-free interest rate N/A 4.3% 2.5% 4.3%
Expected lives N/A 4.0 years 4.0 years 4.0
Expected volatility N/A 101.2% 101.0% 101.2%
Expected dividend yield N/A 0.0% 0.0% 0.0%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including expected stock price
characteristics significantly different from those of traded options. Because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
No options were granted for the three months ended June 30, 2003. The
weighted average fair value of options granted for the three months ended June
30, 2002 was $2.39. For the six months ended June 30, 2003 and 2002, the
weighted average fair value of options granted was $1.66 and $2.39,
respectively. For purposes of pro-forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting periods. The
Company's pro-forma net income (loss) and pro-forma net income (loss) per share,
as if the Company had used the fair value accounting provisions of SFAS 123, are
shown below.
11
Three Months Ended Six Months Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
Net income (loss):
As reported $ 395,408 $ 295,564 $ 549,113 $(1,235,969)
Expense calculated
under SFAS 123 (63,571) (50,966) (113,239) (92,233)
----------- ----------- ----------- -----------
Pro forma $ 331,837 $ 244,598 $ 435,874 $(1,328,202)
=========== =========== =========== ===========
Basic net income (loss)
per common share:
As reported $ 0.08 $ 0.06 $ 0.11 $ (0.25)
=========== =========== =========== ===========
Pro forma $ 0.07 $ 0.05 $ 0.09 $ (0.26)
=========== =========== =========== ===========
Diluted net income (loss)
per common share:
As reported $ 0.08 $ 0.06 $ 0.11 $ (0.24)
=========== =========== =========== ===========
Pro forma $ 0.07 $ 0.05 $ 0.09 $ (0.26)
=========== =========== =========== ===========
The pro forma net income calculation above reflects $9,639 and $7,185 in
compensation expense associated with the Employee Stock Purchase Plan for the
three and six months ended June 30, 2003 and 2002, respectively.
Impact of SFAS 142
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 142, Goodwill and Other Intangible Assets, on January 1, 2002 and completed
its determination of the goodwill impairment of the PMP division in the fourth
quarter of 2002. The transitional impairment of $2,318,108, net of taxes of
$1,482,000, was recorded as the cumulative effect of a change in accounting
principle as of January 1, 2002 and required the restatement of net income in
the consolidated statement of operations for the six months ended June 30, 2002.
Recent Accounting Pronouncements
On January 1, 2003, the Company adopted SFAS No. 143, Accounting for Asset
Retirement Obligations, which establishes accounting standards for recognition
and measurement of a liability for an asset retirement obligation and the
associated asset retirement cost. The adoption of this pronouncement did not
have a material impact on the Company.
On January 1, 2003, the Company adopted SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which specifies that a liability
for a cost associated with an exit or disposal activity be recognized at the
date of an entity's commitment to an exit plan. The adoption of this
pronouncement did not have a material impact on the Company.
12
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also requires
that disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more prominently
and in a tabular format. The Company has implemented all required disclosures of
SFAS 148. Additionally, SFAS No. 148 requires disclosure of the pro forma effect
in interim financial statements. The transition requirements of SFAS No. 148 are
effective for the Company's fiscal year 2003. The Company does not plan to
transition to a fair value method of accounting for stock-based employee
compensation.
3. INVENTORY
The components of inventory are as follows at June 30, 2003 and December
31, 2002:
June 30, December 31,
2003 2002
(unaudited)
----------- -----------
Raw Materials $ 2,396,639 $ 1,846,038
Work-in-Process 5,351,814 3,835,176
Supplies 237,465 182,047
----------- -----------
$ 7,985,918 $ 5,863,261
=========== ===========
4. LONG-TERM DEBT
Long-term debt consists of the following at June 30, 2003 and December 31,
2002:
June 30, December 31,
2003 2002
(unaudited)
----------- ------------
Line of credit - SNPE S.A. $ 572,000 $ 235,367
Convertible subordinated note, SNPE, Inc. 1,200,000 1,200,000
Term loan, SNPE, Inc. 2,000,002 3,333,334
Bank lines of credit 3,701,286 2,448,628
Industrial development revenue bonds 4,070,000 4,485,000
------------ -----------
Total 11,543,288 11,702,329
Less current maturities
(2,133,666) (2,423,699)
------------ -----------
Long-term portion $ 9,409,622 $ 9,278,630
============ ===========
13
Loan Covenants and Restrictions
Our loan agreements include various covenants and restrictions, certain of
which relate to the payment of dividends or other distributions to stockholders,
redemption of capital stock, incurrence of additional indebtedness, mortgaging,
pledging or disposition of major assets and maintenance of specified financial
ratios. The principal financial covenants relate to minimum debt service
coverage, minimum net income and minimum net worth as measured at the end of
each calendar quarter. As of June 30, 2003, we are in compliance with all
financial covenants and other provisions of our debt agreements.
5. BUSINESS SEGMENTS
DMC is organized in the following two segments: the Explosive Metalworking
Group and the Aerospace Group. The Explosive Metalworking Group uses explosives
to perform metal cladding and shock synthesis. The most significant product of
this group is clad metal which is used in the fabrication of pressure vessels,
heat exchangers and transition joints used in the hydrocarbon processing,
chemical processing, power generation, petrochemical, pulp and paper, mining,
shipbuilding and heat, ventilation and air conditioning industries. The
Aerospace Group machines, forms and welds parts for the commercial aircraft,
aerospace and defense industries.
DMC's reportable segments are strategic business units that offer different
products and services and are separately managed. Each segment is marketed to
different customer types and requires different manufacturing processes and
technologies. Segment information is presented for the three months and the six
months ended June 30, 2003 and 2002 as follows:
Explosive
Manufacturing Aerospace Total
------------- --------- -----
For the three months ended June 30, 2003:
Net sales $ 8,478,766 $ 2,781,841 $11,260,607
=========== =========== ===========
Depreciation and amortization $ 259,370 $ 173,554 $ 432,924
=========== =========== ===========
Income (loss) from operations $ 900,509 $ (115,197) $ 785,312
Unallocated amounts:
Other income (3,879)
Interest expense, net (131,017)
-----------
Consolidated income before income $ 650,416
taxes ===========
14
Explosive
Manufacturing Aerospace Total
------------- --------- -----
For the three months ended June 30, 2002:
Net sales $ 7,479,219 $ 2,149,616 $ 9,628,835
=========== =========== ===========
Depreciation and amortization $ 298,106 $ 198,827 $ 496,933
=========== =========== ===========
Income (loss) from operations $ 990,178 $ (330,110) $ 660,068
Unallocated amounts:
Other income (46,629)
Interest expense, net (173,191)
--------
Consolidated income before income $ 440,248
taxes
Explosive
Manufacturing Aerospace Total
------------- --------- -----
For the six months ended June 30, 2003:
Net sales $ 15,751,797 $ 5,245,044 $ 20,996,841
============ =========== ============
Depreciation and amortization $ 513,829 $ 349,082 $ 862,911
============ =========== ============
Income (loss) from operations $ 1,577,141 $ (399,350) $ 1,177,791
Unallocated amounts:
Other income 38
Interest expense, net (273,384)
------------
Consolidated income before income $ 904,445
taxes ============
Explosive
Manufacturing Aerospace Total
------------- --------- -----
For the six months ended June 30, 2002:
Net sales $ 17,099,612 $ 4,503,434 $ 21,603,046
Depreciation and amortization $ 553,726 $ 378,645 $ 932,371
============ =========== ============
Income (loss) from operations $ 2,940,475 $ (819,842) $ 2,120,633
Unallocated amounts:
Other income (39,568)
Interest expense, net (357,371)
-------------
Consolidated income before income $ 1,723,694
taxes =============
15
6. COMPREHENSIVE INCOME
DMC's comprehensive income (loss) for the three and six months ended June
30, 2003 and 2002 was as follows:
Three Months Ended Six Months Ended
June 30 June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) for the
period $ 395,408 $ 295,564 $ 549,113 $(1,235,969)
Foreign currency translation 260,277 492,756 379,254 498,078
--------- --------- --------- -----------
Comprehensive income (loss) $ 655,685 $ 788,320 $ 928,367 $ (737,891)
========= ========= ========= ===========
7. POTENTIAL ASSET DISPOSAL
At a meeting held on July 1, 2003, the Company's Board of Directors
requested management to evaluate strategic alternatives relating to its
Precision Machined Products Division ("PMP") and report its recommendations to
the Board before the end of August. PMP has continued to incur significant
operating losses during 2003 in an extremely challenging business environment
that shows few signs of near-term improvement. At June 30, 2003, management
believes that no impairment of these assets has occurred under SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. However, if the
Company's Board of Directors, after reviewing management's recommendations,
should authorize a plan of disposal or liquidation, the assets would be required
to be written down to fair value, which in all likelihood would be significantly
less than the current carrying value of $1,430,000.
16
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
DMC is a worldwide leader in explosive metalworking and, through its
Aerospace Group, is involved in a variety of metal forming, machining, welding,
and assembly activities. The explosive metalworking business includes the use of
explosives to perform metallurgical bonding (or "metal cladding") and shock
synthesis of synthetic diamonds. DMC performs metal cladding using its
proprietary technologies.
Explosive Metalworking. Clad metal products are used in manufacturing
processes or environments that involve highly corrosive chemicals, high
temperatures and/or high pressure conditions. For example, we fabricate clad
metal tube sheets for heat exchangers. Heat exchangers are used in a variety of
high temperature, high pressure, highly corrosive chemical processes, such as
processing crude oil in the petrochemical industry and processing chemicals used
in the manufacture of synthetic fibers. In addition, DMC has produced titanium
clad plates used in the fabrication of metal autoclaves to replace autoclaves
made of brick and lead for customers in the nickel mining industry. We believe
that our clad metal products are an economical, high-performance alternative to
the use of solid corrosion-resistant alloys. In addition to clad metal products,
the explosive metalworking business includes shock synthesis of synthetic
diamonds.
On July 3, 2001, the Company completed its acquisition of substantially all
of the outstanding stock of Nobelclad Europe S.A. ("Nobelclad") from Nobel
Explosifs France ("NEF"). Nobelclad and its wholly-owned subsidiary, Nitro
Metall AB ("Nitro Metall") are the primary manufacturers of explosion clad
products in Europe and operate cladding businesses located in Rivesaltes, France
and Likenas, Sweden, respectively, along with sales offices in each country.
Products manufactured by Nobelclad and Nitro Metall are similar to those
produced by DMC's domestic factory in Mount Braddock, Pennsylvania. NEF is
wholly owned by Groupe SNPE and is a sister company to SNPE, Inc., which owns
approximately 55% of the Company's common stock.
Aerospace Manufacturing. Products manufactured by our Aerospace Group are
typically made from sheet metal and forgings that are subsequently machined or
formed into precise, three-dimensional shapes that are held to tight tolerances.
Metal machining and forming is accomplished through traditional technologies,
including spinning, machining, rolling and hydraulic expansion. DMC also
performs welding services utilizing a variety of manual and automatic welding
techniques that include electron beam and gas tungsten arc welding processes.
Forming and welding operations are often performed to support the manufacture of
completed assemblies and sub-assemblies required by our customers. Fabrication
and assembly services are performed utilizing close-tolerance machining,
forming, welding, inspection and other special service capabilities. Our
forming, machining, welding and assembly operations serve a variety of product
applications in the commercial aircraft, aerospace, defense and power generation
industries. Product applications include tactical missile motor cases,
commercial and military aircraft engines, ground-based turbines and complex,
high precision component parts for satellites.
17
In January 1998, the Company completed its acquisition of the assets of AMK
Welding ("AMK"), a supplier of commercial aircraft engine, ground-based turbine
and aerospace-related welding services that include the use of automatic and
manual gas tungsten, electron beam and arc welding techniques. The Company
completed its acquisition of the assets of Spin Forge, LLC ("Spin Forge"), a
manufacturer of tactical missile motor cases and titanium pressure vessels for
commercial aerospace and defense industries, in March 1998. In December 1998,
the Company completed its acquisition of the assets of Precision Machined
Products, Inc. ("PMP"), a contract machining shop specializing in high
precision, high quality, complex machined parts used in the aerospace,
satellite, medical equipment and high technology industries.
Impact of SFAS No. 142. In June 2001, the FASB authorized the issuance of
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. Under SFAS No. 142, goodwill will no longer be amortized on a
straight-line basis over its estimated useful life, but will be tested for
impairment on an annual basis and whenever indicators of impairment arise. The
goodwill impairment test, which is based on fair value, is to be performed on a
reporting unit level. A reporting unit is defined as a SFAS No. 131 operating
segment or one level lower. Goodwill will no longer be allocated to other
long-lived assets for impairment testing under SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of.
Under SFAS No. 142, intangible assets with indefinite lives will not be
amortized. Instead they will be carried at the lower cost or market value and
tested for impairment at least annually. All other recognized intangible assets
will continue to be amortized over their estimated useful lives.
SFAS No. 142 was effective for fiscal years beginning after December 15,
2001. DMC adopted SFAS No. 142 as of January 1, 2002 and in early 2002 disclosed
that up to the full amount of the remaining goodwill associated with the
Company's 1998 acquisition of PMP could be impaired. In the fourth quarter of
2002, DMC completed its evaluation of goodwill impairment at PMP and determined
that the remaining goodwill in the amount of $3,800,108 was impaired.
Accordingly, we wrote off all of the remaining PMP goodwill, less associated tax
benefits of $1,482,000, and reported the resultant after tax loss of $2,318,108,
or $.46 per diluted share, as a cumulative effect of a change in accounting
principle. The accompanying June 30, 2002 financial statements have been
restated to reflect the cumulative effect of this accounting principle change.
Potential Asset Disposal. At a meeting held on July 1, 2003, the Company's
Board of Directors requested management to evaluate strategic alternatives
relating to PMP and report its recommendations to the Board before the end of
August. PMP has continued to incur significant operating losses during 2003 in
an extremely challenging business environment that shows few signs of near-term
improvement. At June 30, 2003, management believes that no impairment of these
assets has occurred under SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. However, if the Company's Board of Directors,
after reviewing management's recommendations, should authorize a plan of
disposal or liquidation, the assets would be required to be written down to fair
value, which in all likelihood would be significantly less than the current
carrying value of $1,430,000.
***
DMC generated significant operating income in 2001 and 2002 due to the
strong financial performance of its Explosive Metalworking Group, which had
earned a small
18
operating profit in 2000 after incurring significant operating losses in 1999.
DMC has also experienced, and expects to continue to experience, quarterly
fluctuations in operating results caused by various factors, including the
timing and size of orders from major customers, customer inventory levels,
shifts in product mix, the occurrence of acquisition and divestiture-related
costs, and general economic conditions. Additionally, the aftermath of the Iraqi
war, the threat of terrorism and other geopolitical uncertainty could have a
negative impact on the global economy, the industries served by DMC and DMC's
operating results. We typically do not obtain long-term volume purchase
contracts from our customers. Quarterly sales and operating results therefore
depend on the volume and timing of backlog as well as bookings received during
the quarter. A significant portion of our operating expenses is fixed, and
planned expenditures are based primarily on sales forecasts and product
development programs. If sales do not meet our expectations in any given period,
the adverse impact on operating results may be magnified by our inability to
adjust operating expenses sufficiently or quickly enough to compensate for such
a shortfall. In addition, DMC uses numerous suppliers of alloys, steels and
other materials for its operations. We typically bear the short-term risk of
alloy, steel and other component price increases, which could adversely affect
our gross profit margins. Although DMC will work with customers and suppliers to
minimize the impact of any component shortages, component shortages have had,
and are expected from time to time to have, short-term adverse effects on the
our business. Results of operations in any period should not be considered
indicative of the results to be expected for any future period. Fluctuations in
operating results may also result in fluctuations in the price of our common
stock.
Three and Six Months Ended June 30, 2003 Compared to Three and Six Months Ended
June 30, 2002
The following table sets forth for the periods indicated the percentage
relationship to net sales of certain income statement data:
Percentage of net sales
-----------------------
Three months ended June 30, Six months ended June 30,
--------------------------- ------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 77.0% 76.2% 77.6% 74.9%
----- ----- ----- -----
Gross margin 23.0% 23.8% 22.4% 25.1%
General & administrative 9.1% 10.9% 9.7% 9.6%
Selling expenses 6.9% 6.0% 7.1% 5.7%
----- ----- ----- -----
Income from operations 7.0% 6.9% 5.6% 9.8%
Other expense, net 0.0% 0.5% 0.0% 0.2%
Interest expense, net 1.2% 1.8% 1.3% 1.6%
Income tax provision 2.3% 1.5% 1.7% 3.0%
Cumulative effect of a
change in accounting
principle -- -- -- 10.7%
----- ----- ----- -----
Net income 3.5% 3.1% 2.6% (5.7)%
===== ===== ===== =====
19
Net Sales. Net sales for the quarter ended June 30, 2003 increased 16.9% to
$11,260,607 from $9,628,835 in the second quarter of 2002. Sales by the
Explosive Metalworking Group, which includes explosion bonding of clad metal and
shock synthesis of synthetic diamonds, increased by 13.4% to $8,478,766 in the
second quarter of 2003 from $7,479,219 in the second quarter of 2002. The
Aerospace Group contributed sales of $2,781,841 (24.7% of total sales) in the
second quarter of 2003 versus $2,149,616 (22.3% of total sales) in the second
quarter of 2002. The 29.4% quarter-to-quarter improvement in Aerospace Group
sales is principally due to a 58% sales increase at the Group's Spin Forge
Division.
For the six months ended June 30, 2003, net sales decreased by 2.8% to
$20,996,841 from $21,603,046 for the comparable period of 2002. Sales by the
Explosive Metalworking Group for the comparable six-month periods decreased by
7.9% to $15,751,797 in 2003 from $17,099,612 in 2002. Aerospace Group sales for
the six-month period ended June 30, 2003 totaled $5,245,044 (25.0% of total
sales), an increase of 16.5% from sales of $4,503,434 (20.8% of total sales)
reported for the comparable period of 2002. This sales increase is largely
attributable to a year-to-date sales increase of 27% at Spin Forge.
Gross Profit. Gross profit for the quarter ended June 30, 2003 increased by
12.8% to $2,587,086 from $2,292,951 in the second quarter of 2002. The gross
profit margin for the second quarter of 2003 was 23.0%, a 3.4% decrease from the
gross profit margin of 23.8% for the second quarter of 2002. This slight
decrease in the gross margin rate relates principally to product mix changes
within the Explosive Metalworking Group.
The gross profit margin for the Explosive Metalworking Group decreased to 27.7%
in the second quarter of 2003 from 30.1% in the second quarter of 2002. For the
six months ended June 30, 2003, the gross profit margin for the Explosive
Metalworking Group decreased to 28.0% from 31.8% for the six months ended June
30, 2002. The decrease in the second quarter gross profit margin for the
Explosive Metalworking Group is principally attributable to unfavorable changes
in product mix at the Group's European locations. The decrease in the
year-to-date gross profit margin for the Group relates to a combination of
unfavorable changes in product mix and lower sales volume which led to a less
favorable absorption of fixed manufacturing overhead expenses.
The gross profit margin for the Aerospace Group increased to 8.6% for the
quarter ended June 30, 2003 from 2.1% for second quarter of 2002. For the six
months ended June 30, 2003, the gross profit margin was 5.7% as compared to a
negative gross margin of 0.4% in the comparable period of 2002. The increase in
Aerospace Group gross margins for the quarter and six months ended June 30, 2003
reflects improvements in sales and gross margins at the Spin Forge and Precision
Machined Products divisions. However, Precision Machined Products continued to
deflate the overall gross margins of the Aerospace Group by reporting negative
gross margins of 15.1% and 24.6% for the quarter and six months ended June 30,
2003, respectively, as compared to a negative gross margins of 22.4% and 37.6%
for the respective comparable periods of 2002. PMP's sales volume during the
2002 and 2003 reporting periods has been insufficient to cover direct cost of
sales and fixed manufacturing expenses.
20
General and Administrative. General and administrative expenses for the quarter
ended June 30, 2003 were $1,029,273 as compared to $1,050,440 in the second
quarter of 2002. For the six months ended June 30, 2003, general and
administrative expenses decreased to $2,033,813 from $2,079,429 in the
comparable period of 2002. As a percentage of net sales, general and
administrative expenses decreased from 10.9% in the second quarter of 2002 to
9.1% in the second quarter of 2003 and increased slightly from 9.6% to 9.7% for
the comparable six-month periods.
Selling Expense. Selling expenses increased by 32.6% to $772,501 for the quarter
ended June 30, 2003 from $582,443 in the second quarter of 2002. For the six
months ended June 30, 2003, selling expenses increased by 23.2% to $1,501,499
from $1,218,399 in the comparable period of 2002. This increase in selling
expenses for both periods is attributable to an increase in outside selling
commissions expenses associated with a large Russian order that Nobelclad Europe
shipped during the first two quarters of 2003. As a percentage of net sales,
selling expenses increased from 6.0% in the second quarter 2002 to 6.9% in the
second quarter of 2003 and increased from 5.7% for the six months ended June 30,
2002 to 7.1% for the comparable period of 2002 as a result of the increase in
outside sales commissions and, with respect to the six-month period, the
decrease in 2003 sales.
Income from Operations. For the quarter ended June 30, 2003, we reported income
from operations of $785,312, an increase of 19.0% from the $660,068 of operating
income reported for the second quarter of 2002. For the six months ended June
30, 2003, we reported operating income of $1,177,791, which represented a 44.5%
decrease from the $2,120,633 in operating income that we reported for the first
six months of 2002.
Our Explosive Metalworking Group reported income from operations of $900,509 in
the second quarter of 2003 as compared to operating income of $990,178 for the
comparable period of 2002. This lower second quarter income from operations
reflects a decrease in the Group's gross margin rate from 30.1% in 2002 to 27.7%
in 2003 that relates principally to unfavorable product mix changes. For the six
months ended June 30, 2003, our Explosive Metalworking Group reported income
from operations of $1,577,141 as compared to operating income of $2,940,475 for
the comparable period of 2002. This significant reduction in operating income
reflects a sales decrease of $1,347,815 and a decrease in the gross margin rate
to 28.0% in 2003 from 31.8% in 2002.
Our Aerospace Group reported an operating loss of $115,197 in the second quarter
of 2003 as compared to an operating loss of $330,110 in the prior year second
quarter. For the six months ended June 30, 2003, our Aerospace Group reported an
operating loss of $399,350 as compared to an operating loss of $819,842 for the
comparable period of 2002. The Group's decreased second quarter and year-to-date
2003 operating losses are attributable to decreased operating losses at both the
Precision Machined Products and Spin Forge divisions. AMK Welding reported
second quarter and first half 2003 operating income that was slightly below the
levels reported for the comparable 2002 reporting periods.
Interest Expense, net. Interest expense decreased by 24.3% to $131,017 for the
quarter ended June 30, 2003 from $173,191 in the second quarter of 2002. For the
six months ended June 30, 2003, interest expenses decreased by 23.5% to $273,384
from $357,371 for the comparable
21
period in 2002. These decreases reflect a combination of lower outstanding
borrowings and lower average interest rates in 2003.
Income Tax Provision. For the second quarter ended June 30, 2003, we recorded a
consolidated income tax provision of $255,008 on income before income taxes and
cumulative effect of a change in accounting principle as compared to a
consolidated income tax provision of $144,684 for the second quarter of 2002.
For the six months ended June 30, 2003, we recorded a consolidated income tax
provision of $355,332 on income before income taxes and cumulative effect of a
change in accounting principle as compared to a consolidated income tax
provision of $641,555 for the comparable period of 2002. The effective tax rate
increased to 39.2% and 39.3% for the three and six months ended June 30, 2003,
respectively, from 32.9% and 37.2% for the respective 2002 periods.
Cumulative Effect of a Change in Accounting Principle. On January 1, 2002, DMC
adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, and in early 2002 disclosed that up to the full amount of the
remaining goodwill associated with the Company's 1998 acquisition of PMP could
be impaired. In the fourth quarter of 2002, we completed our evaluation of
goodwill impairment at PMP and determined that the remaining goodwill in the
amount of $3,800,108 was impaired. Accordingly, we wrote off all of the
remaining PMP goodwill, less associated tax benefits of $1,482,000, and reported
the resultant after tax loss of $2,318,108 as a cumulative effect of a change in
accounting principle. The financial statements for the six months ended June 30,
2002 have been restated to reflect the cumulative effect of this change in
accounting principle.
Net Income. We recorded net income of $395,408 in the second quarter of 2003
compared to net income of $295,564 in the second quarter of 2002. For the six
months ended June 30, 2003, we recorded net income of $549,113 versus a net loss
of $1,235,969 for the same period of 2002. The net loss for the first six months
of 2002 is entirely attributable to the $2,318,108 goodwill impairment charge
discussed above.
Liquidity and Capital Resources
Historically, we have obtained most of our operational financing from a
combination of operating activities and an asset-backed revolving credit
facility. In December 2001, we obtained a $6,000,000 revolving line of credit
with an U.S. bank that replaced the $4,500,000 credit facility between DMC and
SNPE, Inc. This bank line of credit is being used to finance ongoing working
capital requirements of our U.S. operations. Initial proceeds from the bank line
were used to repay $3,650,000 of borrowings that were outstanding under the
credit facility with SNPE, Inc. The bank line, which expires on December 4,
2004, carried an interest rate equal to the bank's prime rate plus 1.0% through
February 28, 2002, which was reduced to the bank's prime rate plus 0.5%
thereafter. Borrowings under the line of credit are limited to a calculated
borrowing base that is a function of inventory and accounts receivable balances
and are secured by accounts receivable and inventory of our U.S. operations and
by new investments in property, plant and equipment that are made during the
term of the agreement. As of June 30, 2003, borrowing availability under the
line of credit was approximately $3.2 million greater than the $2,044,470 in
outstanding borrowings as of that date.
22
In connection with its July 3, 2001 acquisition of Nobelclad, the Company
entered into a $4,000,000 term loan agreement with SNPE. The term loan bears
interest at the Federal Funds Rate plus 3.0%, payable quarterly. Commencing
September 30, 2002 and on the last day of each calendar quarter thereafter,
principal payments of $333,333 are due, with a final principal payment of
$333,337 being due on June 30, 2005. The term loan is secured by a pledge of 65%
of the capital stock of Nobelclad held by the Company. In anticipation of its
acquisition by the Company, Nobelclad acquired the stock of Nitro Metall and
financed this acquisition with proceeds obtained from a revolving credit
facility with a French bank that provides for maximum borrowings of 1,448,266
Euros ($1,656,816 based upon the June 30, 2003 exchange rate). This bank line of
credit, which had outstanding borrowings of $1,656,816 on June 30, 2003, carries
interest at the Euro Interbank Offered Rate ("EURIBOR") plus 0.4%. Beginning on
June 21, 2004 and on each anniversary date thereafter until final maturity on
June 21, 2008, maximum borrowings available under the line become permanently
reduced by 289,653 Euros. The bank has the option of demanding early repayment
of any outstanding loans if Groupe SNPE's indirect ownership of Nobelclad falls
below 50%. Nobelclad also maintains a 2 million Euro ($2,288,000 based upon the
June 30, 2003 exchange rate) intercompany working capital line with Groupe SNPE.
The outstanding borrowings as of June 30, 2003 were 500,000 Euros ($572,000
based upon the June 30, 2003 exchange rate). This intercompany line bears
interest at EURIBOR plus 1.5%.
The Company believes that its cash flow from operations and funds available
under its credit facilities will be sufficient to fund working capital, debt
service obligations and capital expenditure requirements of its current business
operations for the foreseeable future. However, a significant portion of the
Company's sales is derived from a relatively small number of customers;
therefore, the failure to perform existing contracts on a timely basis, and 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
the Company's ability to meet its cash requirements exclusively through
operating activities. Consequently, any restriction on the availability of
borrowing under the Company's credit facilities could negatively affect the
Company's ability to meet its future cash requirements. DMC attempts to minimize
its risk of losing customers or specific contracts by continually improving
product quality, delivering product on time and competing favorably on the basis
of price. Risks associated with the availability of funds are minimized by
borrowing from multiple lenders. The nature of DMC's business is largely
insulated from the negative effects of inflation on sales and operating income
because the pricing on custom orders reflects current raw material and other
manufacturing costs.
23
The table below presents principal cash flows and related weighted-average
interest rates by contractual maturity dates for the Company's debt obligations.
As of June 30, 2003
-------------------------------------------------------------
Year 1 Year 2 Year 3 Year 4 Year 5 Total
and
Thereafter
-------------------------------------------------------------
Bank lines of credit - $2,375,833 $331,363 $331,363 $662,727 $3,701,286
Weighted average interest rate 3.63% 3.63% 3.63% 3.63% 3.63% 3.63%
Line of Credit - SNPE S.A. $572,000 - - - - $572,000
Interest rate 3.65% - - - - 3.65%
Subordinated note with SNPE, Inc. - $1,200,000 - - - $1,200,000
Interest rate 5.00% 5.00% - - - 5.00%
Term Loan with SNPE, Inc. $666,666 $1,333,336 - - - $2,000,002
Weighted average interest rate 4.45% 4.45% - - - 4.45%
Industrial development
revenue bonds $895,000 $965,000 $390,000 $195,000 $1,625,000 $4,070,000
Interest rate 1.20% 1.20% 1.20% 1.20% 1.20% 1.20%
Operating leases $853,941 $702,720 $531,450 $414,920 $1,673,422 $4,176,453
Highlights from the Statement of Cash Flows for the Six Months Ended June 30,
2003
Net cash flows provided by operating activities for the six months ended
June 30, 2003 totaled $1,331,722. Significant sources of operating cash flow
included net income of $549,113 and depreciation and amortization of $862,911.
These increases in operating cash flows were partially offset by a negative net
change of $169,786 in various components of working capital. Net negative
changes in working capital included increases in inventories and prepaid
expenses of $1,873,787 of $269,167, respectively, that were partially offset by
a decrease in accounts receivable of $1,534,067 and a net increase in accounts
payable and accrued expenses of $439,101.
Cash used in investing activities totaled $824,485 and was comprised
primarily of capital expenditures in the amount of $852,842.
Net cash flows used in financing activities totaled $518,041. Significant
uses of cash for financing activities included $1,333,332 in principal payments
on the SNPE, Inc. term loan, industrial development revenue bond principal
payments of $415,000 and the repayment of a $213,979 bank overdraft. These
payments were partially offset by borrowings on bank lines of credit in the
amount of $1,114,639 and related party borrowings of $307,034.
Highlights from the Statement of Cash Flows for the Six Months Ended June 30,
2002
Net cash flows used in operating activities for the six months ended June
30, 2002 were $139,192. Significant uses of operating cash included a net loss
of $1,235,969 and net negative changes in various components of working capital
in the amount of $2,481,330. These uses of operating cash were partially offset
by non-cash depreciation and amortization of $932,371, a
24
non-cash goodwill impairment charge of $2,318,108 (net of related deferred tax
benefits) and a $334,714 provision for deferred income taxes. Net negative
changes in working capital included a $1,831,842 increase in accounts receivable
and a $504,586 decrease in accounts payable and accrued expenses.
Cash used in investing activities totaled $913,919 and was comprised
primarily of capital expenditures in the amount of $884,360.
Net cash flows used in financing activities for the six months ended June
30, 2002 totaled $73,522. The primary uses of cash flow from financing
activities were repayments on the bank line of credit of $725,032 and principal
payments on industrial development revenue bonds in the amount of $390,000 that
were partially offset by borrowings on related party line of credit for $566,970
and a $406,007 bank overdraft.
Future Capital Needs and Resources
We anticipate that, for the foreseeable future, significant amounts of
available cash flows will be utilized for:
- operating expenses to support our domestic and foreign manufacturing
operations;
- capital expenditures;
- debt service requirements; and
- other general corporate expenditures.
We expect cash inflows from operating activities to exceed outflows for the
full year 2003. However, our success depends on the execution of our strategies,
including our ability to:
- secure an adequate level of new customer orders at all operating
divisions; and
- continue to implement the most cost-effective internal processes.
Based on available cash resources, anticipated capital expenditures and
projected operating cash flow, we believe that we will be able to fully fund our
operations through 2003. In making this assessment, we have considered:
- presently scheduled debt service requirements during the remainder of
2003 as well as the availability of funding related to our line of
credit with SNPE and our bank lines of credit;
- the anticipated level of capital expenditures during the remainder of
2003;
- our expectation of realizing positive cash flow from operations during
the three reminding quarters of 2003.
If our business plans change, or if economic conditions change materially,
our cash flow, profitability and anticipated cash needs could change
significantly. In particular, any acquisition or new business opportunity could
involve significant additional funding needs in excess of the identified
currently available sources, and could require us to raise additional equity or
debt funding to meet those needs.
25
Significant Accounting Policies
In response to the SEC's Release No. 33-8040, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies, we identified the most critical
accounting principles upon which our financial status depends. We determined the
critical principles by considering accounting policies that involve the most
complex or subjective decisions or assessments. We identified our most critical
accounting policies to be those related to revenue recognition, inventory
valuation and impact of foreign currency exchange rate risks.
Revenue Recognition. The Company's contracts with its customers generally
require the production and delivery of multiple units or products. The Company
records revenue from its contracts using the completed contract method as
products are completed and shipped to the customer. If, as a contract proceeds
toward completion, projected total cost on an individual contract indicates a
potential loss, the Company provides currently for such anticipated loss.
Inventory Valuation. Inventories are stated at the lower-of-cost (first-in,
first-out) or market value. Cost elements included in inventory are material,
labor, subcontract costs and factory overhead.
Impact of Foreign Currency Exchange Rate Risks. The functional currency for
the Company's foreign operations is the applicable local currency for each
affiliate company. Assets and liabilities of foreign subsidiaries for which the
functional currency is the local currency are translated at exchange rates in
effect at period-end, and the statements of operations are translated at the
average exchange rates during the period. Exchange rate fluctuations on
translating foreign currency financial statements into U.S. dollars that result
in unrealized gains or losses are referred to as translation adjustments.
Cumulative translation adjustments are recorded as a separate component of
stockholders' equity and are included in other cumulative comprehensive income.
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.
Recent Accounting Pronouncements. On January 1, 2003, the Company adopted
SFAS No. 143, Accounting for Asset Retirement Obligations, which establishes
accounting standards for recognition and measurement of a liability for an asset
retirement obligation and the associated asset retirement cost. The adoption of
this pronouncement did not have a material impact on the Company.
On January 1, 2003, the Company adopted SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which specifies that a liability
for a cost associated with an exit or disposal activity be recognized at the
date of an entity's commitment to an exit plan. The adoption of this
pronouncement did not have a material impact on the Company.
26
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also requires
that disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more prominently
and in a tabular format. The Company has implemented all required disclosures of
SFAS 148. Additionally, SFAS No. 148 requires disclosure of the pro forma effect
in interim financial statements. The transition requirements of SFAS No. 148 are
effective for the Company's fiscal year 2003. The Company does not plan to
transition to a fair value method of accounting for stock-based employee
compensation.
27
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
There have been no events that materially affect our quantitative and
qualitative disclosure about market risk as reported in our Annual Report on
Form 10-K for the year ended December 31, 2002.
28
ITEM 4. Controls and Procedures
As of June 30, 2003, an evaluation was performed under the supervision and
with the participation of the Company's management, including the CEO and CFO,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on that evaluation, the Company's management,
including the CEO and CFO, concluded that the Company's disclosure controls and
procedures were effective as of June 30, 2003. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to June 30, 2003.
29
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6.
(a) Exhibits
31.1 - Certification of the President and Chief Executive Officer pursuant
to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 - Certification of the Vice President and Chief Financial Officer
pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 - Certification of the President and Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 - Certification of the Vice President and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
DYNAMIC MATERIALS CORPORATION
(Registrant)
Date: August 12, 2003 /s/ Richard A. Santa
----------------------------
Richard A. Santa, Vice President and
Chief Financial Officer (Duly Authorized
Officer and Principal Financial and
Accounting Officer)