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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 September 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
October 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 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;
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 September 30, 2003 (unaudited)
and December 31, 2002............................................4
Consolidated Statements of Operations for the three and nine months
ended September 30, 2003 and 2002 (unaudited) ...................6
Consolidated Statements of Stockholders' Equity for the nine months
ended September 30, 2003 (unaudited) ............................7
Consolidated Statements of Cash Flows for the nine months ended
September 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 ...............................................18
Item 3 - Quantitative and Qualitative Disclosures about Market Risk...........30
Item 4 - Controls and Procedures..............................................31
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings....................................................32
Item 2 - Changes in Securities and Use of Proceeds............................32
Item 3 - Defaults Upon Senior Securities......................................32
Item 4 - Submission of Matters to a Vote of Security Holders..................32
Item 5 - Other Information....................................................32
Item 6 - Reports on Form 8-K and Exhibits.....................................32
Signatures ..........................................................33
Certifications................................................................34
3
Part I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 2003 2002
------
(unaudited)
----------------- -----------------
CURRENT ASSETS:
Cash and cash equivalents $ 498,080 $ 1,158,234
Accounts receivable, net of allowance for doubtful
accounts of $251,372 and $255,769, respectively 7,339,362 8,747,238
Inventories 6,899,799 5,557,063
Prepaid expense and other 1,039,487 798,236
Current deferred tax asset 248,800 315,500
----------------- -----------------
Total current assets 16,025,528 16,576,271
PROPERTY, PLANT AND EQUIPMENT 22,407,882 21,096,656
Less - Accumulated depreciation (8,327,115) (7,121,552)
----------------- -----------------
Property, plant and equipment 14,080,767 13,975,104
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 $688,354 and $672,354, respectively 73,168 89,168
OTHER ASSETS, net 219,098 289,579
NET ASSETS HELD FOR SALE 492,000 1,729,592
----------------- -----------------
TOTAL ASSETS $31,928,839 $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
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
------------------------------------
(unaudited)
----------------- -----------------
CURRENT LIABILITIES:
Bank overdraft $ 89,195 $ 213,979
Accounts payable 2,700,973 2,404,662
Accrued expenses 2,654,266 3,340,071
Current maturities on long-term debt 3,446,680 2,423,699
----------------- -----------------
Total current liabilities 8,891,114 8,382,411
LONG-TERM DEBT 6,829,621 9,278,630
NET DEFERRED TAX LIABILITIES 187,812 334,179
DEFERRED GAIN ON SWAP TERMINATION 39,671 48,493
OTHER LONG-TERM LIABILITIES 99,016 89,539
----------------- -----------------
Total liabilities 16,047,234 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 2,632,746 2,763,027
Other cumulative comprehensive income 599,623 175,074
----------------- -----------------
Total stockholders' equity 15,881,605 15,564,740
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $31,928,839 $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 NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(unaudited)
Three months ended Nine months ended
September 30, September 30,
-------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------- --------------
NET SALES $ 11,129,210 $ 10,267,254 $ 31,034,281 $ 30,987,927
COST OF PRODUCTS SOLD 8,885,435 7,686,775 23,809,147 22,657,293
------------ ------------ ------------- --------------
Gross profit 2,243,775 2,580,479 7,225,134 8,330,634
------------ ------------ ------------- --------------
COSTS AND EXPENSES:
General and administrative expenses 861,511 826,215 2,667,921 2,581,411
Selling expenses 684,194 631,870 2,185,755 1,847,769
------------ ------------ ------------- --------------
Total costs and expenses 1,545,705 1,458,085 4,853,676 4,429,180
------------ ------------ ------------- --------------
INCOME FROM OPERATIONS 698,070 1,122,394 2,371,458 3,901,454
OTHER INCOME (EXPENSE):
Other income (expense), net (16,268) 765 (16,230) (38,803)
Interest expense (121,880) (169,078) (396,893) (526,969)
Interest income 1,260 636 2,888 1,155
------------ ------------ ------------- --------------
INCOME BEFORE INCOME
TAXES 561,182 954,717 1,961,223 3,336,837
INCOME TAX PROVISION 334,943 406,758 883,275 1,305,313
------------ ------------ ------------- --------------
INCOME FROM CONTINUING OPERATIONS
BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE 226,239 547,959 1,077,948 2,031,524
DISCONTINUED OPERATIONS:
Loss from operations of discontinued operations,
net of tax benefit (195,323) (163,985) (497,920) (565,411)
Loss on impairment of assets associated with
discontinued operations, net of tax benefit (710,309) - (710,309) -
------------ ------------ ------------- --------------
Loss from discontinued operations (905,632) (163,985) (1,208,229) (565,411)
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE, NET OF TAX
BENEFIT OF $1,482,000 - - - (2,318,108)
------------ ------------ ------------- --------------
NET INCOME (LOSS) $ (679,393) $ 383,974 $ (130,281) $ (851,995)
============ ============ ============= ==============
NET INCOME (LOSS) PER SHARE - BASIC
AND DILUTED:
Continuing operations $ 0.04 $ 0.11 $ 0.21 $ 0.40
Discontinued operations (0.17) (0.03) (0.24) (0.11)
Cumulative effect of a change in accounting principle - - - (0.46)
------------ ------------ ------------- --------------
Net Income (Loss) $ (0.13) $ 0.08 $ (0.03) $ (0.17)
============ ============ ============= ==============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING -
Basic 5,072,943 5,048,888 5,065,283 5,038,596
============ ============ ============= ==============
Diluted 5,139,144 5,073,508 5,093,010 5,092,379
============ ============ ============= ==============
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 NINE MONTHS ENDED SEPTEMBER 30, 2003
(unaudited)
Other
Additional Cumulative
Common Stock Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income
------------ ------------- --------------- --------------- ----------------
Balances, December 31, 2002 5,061,390 $253,071 $ 12,373,568 $ 2,763,027 $ 175,074
Shares sold in connection with the
employee stock purchase plan 11,553 577 22,020 - -
Net loss - - - (130,281) -
Change in cumulative translation adjustment - - - - 424,549
------------ ------------- --------------- --------------- ----------------
Balances, September 30, 2003 5,072,943 $253,648 $ 12,395,588 $ 2,632,746 $ 599,623
============ ============= =============== =============== ================
Comprehensive
Income for
Total the Period
-------------- ----------------
Balances, December 31, 2002 $ 15,564,740
Shares sold in connection with the
employee stock purchase plan 22,597
Net loss (130,281) $ (130,281)
Change in cumulative translation adjustment 424,549 424,549
-------------- ----------------
Balances, September 30, 2003 $ 15,881,605 $ 294,268
============== ================
The accompanying notes to Consolidated Financial Statements
are an integral part of these statements.
7
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(unaudited)
2003 2002
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 1,077,948 $ 2,031,524
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities -
Depreciation 1,100,222 1,110,450
Amortization 16,000 24,000
Amortization of deferred gain on swap termination (8,822) (10,418)
Provision for deferred income taxes 355,569 632,027
Change in -
Accounts receivable, net 1,715,111 (458,972)
Inventories (1,072,378) (749,806)
Prepaid expenses and other (171,627) 223,260
Accounts payable 125,837 312,075
Accrued expenses (792,671) (52,996)
----------------- -----------------
Net cash flows provided by
operating activities 2,345,189 3,061,144
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (920,145) (1,154,830)
Change in other non-current assets 70,481 23,396
----------------- -----------------
Net cash flows used in investing activities (849,664) (1,131,434)
----------------- -----------------
The accompanying notes to Consolidated Financial Statements
are an integral part of these statements.
8
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(unaudited)
2003 2002
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings / (repayments) on bank lines of credit, net (464,346) (2,275,374)
Borrowings / (repayments) on related party lines of credit, net 751,422 (148,035)
Payment on SNPE, Inc. term loan (1,333,332) (333,333)
Payment on industrial development revenue bond (630,000) (590,000)
Change in other long-tem liabilities - 35,727
Net proceeds from sale of common stock to employees 22,597 43,882
Bank overdraft - 546,975
Repayment of bank overdraft (120,475) -
----------------- -----------------
Net cash flows used in financing activities (1,774,134) (2,720,158)
----------------- -----------------
EFFECTS OF EXCHANGE RATES ON CASH 86,666 136,266
CASH FLOWS USED IN DISCONTINUED OPERATIONS (468,211) (332,648)
----------------- -----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (660,154) (986,830)
CASH AND CASH EQUIVALENTS, beginning of the period 1,158,234 1,811,618
----------------- -----------------
CASH AND CASH EQUIVALENTS, end of the period $ 498,080 $ 824,788
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for -
Interest $ 456,988 $ 484,436
================= =================
Income taxes $ 856,336 $ 227,046
================= =================
The accompanying notes to Consolidated Financial Statements
are an integral part of these statements.
9
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 Dynamic
Materials Corporation ("DMC") and its 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. 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
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 currently
provide for such anticipated loss.
10
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
("SFAS") 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 Nine Months Ended
September 30, September 30,
-------------------------------------- --------------------------------------
2003 2002 2003 2002
------------------ ------------------ ----------------- ------------------
Risk-free interest rate N/A 2.6% 2.5% 3.9%
Expected lives N/A 4.0 years 4.0 years 4.0 years
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 September 30, 2003. The
weighted average fair value of options granted for the three months ended
September 30, 2002 was $1.71. For the nine months ended September 30, 2003 and
2002, the weighted average fair value of options granted was $1.66 and $2.23,
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 Nine Months Ended
September 30, September 30,
------------------------------------- ------------------------------------
2003 2002 2003 2002
----------------- ----------------- ----------------- -----------------
Net income (loss):
As reported $ (679,393) $ 383,974 $ (130,281) $ (851,995)
Expense calculated
under SFAS 123 (51,368) (53,151) (164,607) (145,384)
----------------- ----------------- ----------------- -----------------
Pro forma $ (730,761) $ 330,823 $ (294,888) $ (997,379)
================= ================= ================= =================
Basic net income (loss)
per common share:
As reported $ (0.13) $ 0.08 $ (0.03) $ (0.17)
================= ================= ================= =================
Pro forma $ (0.14) $ 0.07 $ (0.06) $ (0.20)
================= ================= ================= =================
Diluted net income (loss)
per common share:
As reported $ (0.13) $ 0.08 $ (0.03) $ (0.17)
================= ================= ================= =================
Pro forma $ (0.14) $ 0.07 $ (0.06) $ (0.20)
================= ================= ================= =================
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
nine months ended September 30, 2003 and 2002, respectively.
Impact of SFAS 142
The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, on
January 1, 2002 and completed its determination of the goodwill impairment of
the Precision Machined Products ("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 nine months ended September 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.
In December 2002, the Financial Accounting Standards Board ("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
12
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 September 30, 2003 and
December 31, 2002:
September 30, December 31,
2003 2002
(unaudited)
-------------------- --------------------
Raw Materials $ 2,171,232 $ 1,846,038
Work-in-Process 4,489,050 3,528,978
Supplies 239,517 182,047
-------------------- --------------------
$ 6,899,799 $ 5,557,063
==================== ====================
4. LONG-TERM DEBT
Long-term debt consists of the following at September 30, 2003 and December
31, 2002:
September 30, December 31,
2003 2002
(unaudited)
-------------------- --------------------
Line of credit - SNPE S.A. $ 1,043,730 $ 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 2,177,569 2,448,628
Industrial development revenue bonds 3,855,000 4,485,000
-------------------- --------------------
Total 10,276,301 11,702,329
Less current maturities (3,446,680) (2,423,699)
-------------------- --------------------
Long-term portion $ 6,829,621 $ 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 September 30, 2003, we are in compliance with all
financial covenants and other provisions of our debt agreements.
5. INCOME TAXES
The income tax provision for the three months and nine months ended
September 30, 2003 reflects an adjustment in the amount of $81,000 recorded in
the third quarter of 2003 to adjust our tax provision for changes to prior year
estimated net operating loss carryforwards.
6. 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 nine
months ended September 30, 2003 and 2002 as follows:
Explosive
Manufacturing Aerospace Total
----------------- ----------------- -----------------
For the three months ended September 30, 2003:
Net sales $ 9,068,486 $ 2,060,724 $11,129,210
=========== =========== ==========
Depreciation and amortization $ 264,630 $ 113,690 $ 378,320
=========== ============ ==========
Income (loss) from operations $ 820,852 $ (122,782) $ 698,070
Unallocated amounts:
Other income (expense), net (16,268)
Interest expense, net (120,620)
-----------
Consolidated income before income taxes $ 561,182
===========
14
Explosive
Manufacturing Aerospace Total
----------------- ----------------- -----------------
For the three months ended September 30, 2002:
Net sales $ 8,144,835 $ 2,122,419 $10,267,254
=========== =========== ==========
Depreciation and amortization $ 255,122 $ 118,079 $ 373,201
=========== =========== ==========
Income (loss) from operations $ 1,183,179 $ (60,785) $ 1,122,394
Unallocated amounts:
Other income (expense), net 765
Interest expense, net (168,442)
-----------
Consolidated income before income taxes $ 954,717
===========
Explosive
Manufacturing Aerospace Total
----------------- ----------------- -----------------
For the nine months ended September 30, 2003:
Net sales $ 24,820,283 $ 6,213,998 $ 31,034,281
=========== =========== ===========
Depreciation and amortization $ 778,459 $ 337,763 $ 1,116,222
=========== =========== ===========
Income (loss) from operations $ 2,397,995 $ (26,537) $ 2,371,458
Unallocated amounts:
Other income (expense), net (16,230)
Interest expense, net (394,005)
------------
Consolidated income before income taxes $ 1,961,223
===========
Explosive
Manufacturing Aerospace Total
----------------- ----------------- -----------------
For the nine months ended September 30, 2002:
Net sales $ 25,245,221 $ 5,742,706 $ 30,987,927
=========== =========== ===========
Depreciation and amortization $ 778,845 $ 355,605 $ 1,134,450
=========== =========== ===========
Income (loss) from operations $ 4,124,018 $ (222,564) $ 3,901,454
Unallocated amounts:
Other income (expense), net (38,803)
Interest expense, net (525,814)
-----------
Consolidated income before income taxes $ 3,336,837
===========
During the three months ended September 30, 2003, sales to one customer
represented approximately $1,123,000 (10%) of total net sales and during the
nine months ended September 30, 2003, sales to one customer represented
approximately $3,417,800 (11%) of total net sales.
15
During the three and nine months ended September 30, 2002, sales to no one
customer accounted for more than 10% of total net sales.
7. COMPREHENSIVE INCOME
DMC's comprehensive income (loss) for the three and nine months ended
September 30, 2003 and 2002 was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- ----------------
Net income (loss) for the period $(679,393) $383,974 $(130,281) $(851,995)
Foreign currency translation
adjustment 45,295 (54,394) 424,549 443,684
---------------- ---------------- ---------------- ----------------
Comprehensive income (loss) $(634,098) $329,580 $294,268 $(408,311)
================ ================ ================ ================
8. DISCONTINUED OPERATIONS
On October 7, 2003, DMC completed the sale of its PMP division. The sale
price was $580,000 and is being financed through the issuance of a promissory
note payable over a 2 1/2 year period. The sale included the inventory and
property, plant and equipment of PMP. The final decision to sell the division
was reached during the third quarter of 2003 and as such we recorded a before
tax impairment of $1,164,309 on the assets sold. The assets held for sale at
September 30, 2003 of $492,000 represented the PMP inventory and property, plant
and equipment carried at the sales price of $580,000 less estimated selling
costs of $88,000. The December 31, 2002 PMP inventory and property, plant and
equipment totaling $1,729,592 have been reclassified on the December 31, 2002
balance sheet to net assets held for sale.
The Company expects to incur additional pretax costs in the fourth quarter
of 2003 of approximately $150,000 associated with its discontinued operations.
These costs include operating losses through October 7, 2003, lease termination
costs and other contractual obligations.
Operating results of the discontinued operations (formerly included in the
Aerospace Group) are summarized as follows:
16
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- -------------------------------------
2003 2002 2003 2002
------------------ ----------------- ----------------- -----------------
Net Sales $ 395,416 $ 427,941 $1,487,187 $1,310,316
================== ================= ================= =================
Loss from discontinued
operations $ (321,323) $ (268,985) $ (816,920) $ (927,411)
Tax benefit 126,000 105,000 319,000 362,000
------------------ ----------------- ----------------- -----------------
Loss from discontinued
operations, net of tax $ (195,323) $ (163,985) $ (497,920) $ (565,411)
================== ================= ================= =================
Loss on impairment of
assets associated with
discontinued operations $ (1,164,309) $ - $ (1,164,309) $ -
Tax benefit 454,000 - 454,000 -
------------------ ----------------- ----------------- -----------------
Loss on impairment of
assets associated with
discontined operations,
net of tax benefit $ (710,309) $ - $ (710,309) $ -
================== ================= ================= =================
17
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.
18
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 Financial Accounting Standards
Board ("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 September 30, 2002 financial statements have been
restated to reflect the cumulative effect of this accounting principle change.
Discontinued Operations. In August of 2003, DMC announced that PMP was
continuing to incur significant operating losses and that management would be
considering alternatives with respect to PMP, including the potential sale or
closure of the business. On October 8, 2003, DMC announced that it had completed
the sale of PMP for a sales price of $580,000 that is being financed through the
issuance of a promissory note payable over a 2 1/2 year period. Since the
decision to sell PMP was made during the third quarter of 2003, PMP's 2003 and
2002 operating losses and the asset impairment loss associated with selling the
assets of PMP at substantially less than book value are presented as
discontinued operations in the Company's September 30, 2003 consolidated
financial statements. An asset impairment loss of $1,164,309, less related tax
benefits of $454,000, was recorded in the third quarter of 2003 and reflects the
difference between the carrying value of the PMP assets sold and the sales price
net of related selling expenses. Net assets held for sale in the amount of
$492,000, as reported in our September 30, 2003 consolidated balance sheet,
represent the PMP assets sold (principally
19
inventory and property, plant and equipment used in the business) valued at the
sales price of $580,000 less estimated selling costs of $88,000.
***
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 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 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.
20
Three and Nine Months Ended September 30, 2003 Compared to Three and Nine Months
Ended September 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 September 30, Nine months ended
September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 79.8% 74.9% 76.7% 73.1%
-------- -------- -------- --------
Gross margin 20.2% 25.1% 23.3% 26.9%
General & administrative 7.7% 8.0% 8.6% 8.3%
Selling expenses 6.2% 6.2% 7.1% 6.0%
-------- -------- -------- --------
Income from operations 6.3% 10.9% 7.6% 12.6%
Other expense, net 0.2% 0.0% 0.1% 0.1%
Interest expense, net 1.1% 1.6% 1.2% 1.7%
Income tax provision 3.0% 4.0% 2.8% 4.2%
-------- -------- -------- --------
Income from continuing operations 2.0% 5.3% 3.5% 6.6%
Loss from discontinued operations 8.1% 1.6% 3.9% 1.9%
Cumulative effect of a change in
accounting principle - - - 7.4%
-------- -------- -------- --------
Net income (6.1)% 3.7% (0.4)% (2.7) %
====== ==== ====== =======
Net Sales. Net sales for the quarter ended September 30, 2003 increased 8.4% to
$11,129,210 from $10,267,254 in the third quarter of 2002. Sales by the
Explosive Metalworking Group, which includes explosion bonding of clad metal and
shock synthesis of synthetic diamonds, increased by 11.3% to $9,068,486 in the
third quarter of 2003 from $8,144,835 in the third quarter of 2002. The
quarterly increase in Explosive Metalworking sales relates principally to
increased sales by Noblelclad Europe and includes a favorable foreign exchange
translation effect of approximately $280,000 due to the strengthening of the
Euro against the U.S. dollar. The Aerospace Group contributed sales of
$2,060,724 (18.5% of total sales) in the third quarter of 2003 versus $2,122,419
(20.7% of total sales) in the third quarter of 2002.
For the nine months ended September 30, 2003, net sales increased by 0.1% to
$31,034,281 from $30,987,927 for the comparable period of 2002. Sales by the
Explosive Metalworking Group for the comparable nine-month periods decreased by
1.7% to $24,820,283 in 2003 from $25,245,221 in 2002. The Explosive Metalworking
sales decrease reflects a 10.8% decrease in U.S. clad sales that was partially
offset by a 17.4% U.S. dollar sales increase at Nobleclad Europe. The Noblelclad
Europe sales increase of approximately $1.4 million includes a sales volume
decrease of
21
approximately $300,000 that was entirely offset by a favorable foreign exchange
translation adjustment of approximately $1.7 million. Aerospace Group sales for
the nine-month period ended September 30, 2003 totaled $6,213,998 (20.0% of
total sales), an increase of 8.2% from sales of $5,742,706 (18.5% of total
sales) reported for the comparable period of 2002. This sales increase is
attributable to a year-to-date sales increase of 23.2% at Spin Forge that was
partially offset by a 12.5% sales decrease at AMK Welding.
Gross Profit. Gross profit for the quarter ended September 30, 2003 decreased by
13.0% to $2,243,775 from $2,580,479 in the third quarter of 2002. The gross
profit margin for the third quarter of 2003 was 20.2%, a 19.5% decrease from the
gross profit margin of 25.1% for the third quarter of 2002. The decrease in the
third 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 gross profit margin for the Explosive Metalworking Group decreased to 23.3%
in the third quarter of 2003 from 30.0% in the third quarter of 2002. For the
nine months ended September 30, 2003, the gross profit margin for the Explosive
Metalworking Group decreased to 26.3% from 31.2% for the nine months ended
September 30, 2002. 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 decreased to 6.2% for the
quarter ended September 30, 2003 from 6.6% for third quarter of 2002. For the
nine months ended September 30, 2003, the gross profit margin was 11.2% as
compared to a gross margin of 7.9% in the comparable period of 2002. The
increase in the Group's gross margin rate for the nine-month period is
attributable to Spin Forge improving its gross margin from a negative 13.3% in
2002 to slightly better than break-even in 2003. AMK Welding's year-to-date
gross margin decreased from 37.2% in 2002 to 30.2% in 2003 as a result of the
sales decrease discussed above.
General and Administrative Expenses. General and administrative expenses for the
quarter ended September 30, 2003 increased by 4.3% to $861,511 from $826,215 in
the third quarter of 2002. For the nine months ended September 30, 2003, general
and administrative expenses increased by 3.4% to $2,667,921 from $2,581,411 in
the comparable period of 2002. As a percentage of net sales, general and
administrative expenses decreased from 8.0% in the third quarter of 2002 to 7.7%
in the third quarter of 2003 and increased slightly from 8.3% to 8.6% for the
comparable nine-month periods.
Selling Expenses. Selling expenses increased by 8.3% to $684,194 for the quarter
ended September 30, 2003 from $631,870 in the third quarter of 2002. For the
nine months ended September 30, 2003, selling expenses increased by 18.3% to
$2,185,755 from $1,847,769 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 three quarters of 2003. For the
comparable third quarter and nine-month periods of 2002 and 2003, Nobleclad
Europe selling expenses increased from $184,615 to $322,222 and from $534,531 to
$1,057,203, respectively, as a result of the aforementioned outside sales
commissions. Selling expenses for our U.S. operations decreased from $447,255 to
$361,972 for the comparable quarterly periods of 2002 and 2003 and from
22
$1,313,238 to $1,128,552 for the comparable nine-month periods of 2002 and 2003.
The decreases relate principally to lower bonuses and bad debt expense in the
2003 periods. As a percentage of net sales, selling expenses remained constant
at 6.2% in both the third quarter of 2003 and increased from 6.0% for the nine
months ended September 30, 2002 to 7.1% for the comparable period of 2003.
Income from Operations. For the quarter ended September 30, 2003, we reported
income from operations of $698,070, a decrease of 37.8% from the $1,122,394 of
operating income reported for the third quarter of 2002. For the nine months
ended September 30, 2003, we reported operating income of $2,371,458, which
represented a 39.2% decrease from the $3,901,454 in operating income that we
reported for the first nine months of 2002.
Our Explosive Metalworking Group reported income from operations of $820,852 in
the third quarter of 2003 as compared to operating income of $1,183,179 for the
comparable period of 2002. This lower third quarter income from operations
reflects a decrease in the Group's gross margin rate from 30.0% in 2002 to 23.3%
in 2003 that relates principally to unfavorable product mix changes. For the
nine months ended September 30, 2003, our Explosive Metalworking Group reported
income from operations of $2,397,995 as compared to operating income of
$4,124,018 for the comparable period of 2002. This significant reduction in
operating income reflects local currency sales decreases of 11% in the U.S. and
2% in Europe and a decrease in the consolidated Explosive Metalworking Group
gross margin rate to 26.3% in 2003 from 31.2% in 2002.
Our Aerospace Group reported an operating loss of $122,782 in the third quarter
of 2003 as compared to an operating loss of $60,785 in the prior year third
quarter. For the nine months ended September 30, 2003, our Aerospace Group
reported an operating loss of $26,537 as compared to an operating loss of
$222,564 for the comparable period of 2002. The Group's decreased third quarter
and year-to-date 2003 operating losses are attributable to decreased operating
losses at the Spin Forge division. AMK Welding reported operating income for
both the third quarter and first nine months of 2003 that was well below the
record levels reported for the comparable 2002 reporting periods.
Interest Expense, net. Interest expense decreased by 28.4% to $120,620 for the
quarter ended September 30, 2003 from $168,442 in the third quarter of 2002. For
the nine months ended September 30, 2003, interest expenses decreased by 25.1%
to $394,005 from $525,814 for the comparable period in 2002. These decreases
reflect a combination of lower outstanding borrowings and lower average interest
rates in 2003.
Income Tax Provision. For the third quarter ended September 30, 2003, we
recorded a consolidated income tax provision of $334,943 on income before income
taxes as compared to a consolidated income tax provision of $406,758 for the
second quarter of 2002. For the nine months ended September 30, 2003, we
recorded a consolidated income tax provision of $883,275 on income before income
taxes as compared to a consolidated income tax provision of $1,305,313 for the
comparable period of 2002. The effective tax rate increased to 59.7% and 45.0%
for the three and nine months ended September 30, 2003, respectively, from 42.6%
and 39.1% for the respective 2002 periods. The large increase in the 2003
effective tax rates reflects an adjustment in the amount of $81,000 recorded in
the third quarter of 2003 to adjust our tax provision for changes in prior year
estimated net operating loss carryforwards.
23
Loss from Discontinued Operations. Loss from discontinued operations include the
2003 and 2002 operating losses of PMP and the impairment loss associated with
the sale of PMP assets on October 7, 2003. For the quarters ended September 30,
2003 and 2002, PMP reported operating losses, net of related tax benefits, of
$195,323 and $163,985, respectively. For the nine months ended September 30,
2003 and 2002, PMP reported operating losses, net of related tax benefits, of
$497,920 and $565,411, respectively. An asset impairment loss of $1,164,309,
less related tax benefits of $454,000, was recorded in the third quarter of 2003
and reflects the difference between the carrying value of the PMP assets sold
and the $580,000 sales price net of $88,000 in estimated selling expenses. We
expect to report an additional loss from discontinued operations in the fourth
quarter of 2003 of approximately $150,000 before tax that will reflect PMP's
operating losses incurred from October 1 through the October 7 sales date and
expenses associated with the termination of real estate leases, operating leases
and other contractual obligations that were not assumed by the buyer.
Cumulative Effect of a Change in Accounting Principle. On January 1, 2002, DMC
adopted SFAS 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 nine months ended September 30, 2002 have been restated to
reflect the cumulative effect of this change in accounting principle.
Net Income. We recorded a net loss $679,393 in the third quarter of 2003
compared to net income of $383,974 in the third quarter of 2002. For the nine
months ended September 30, 2003, we recorded a net loss of $130,281 versus a net
loss of $851,995 for the same period of 2002. The net loss for the third quarter
and the nine months ended September 30, 2003 is entirely attributable to
operating and asset impairment losses associated with the discontinued
operations of PMP, which was sold in on October 7, 2003, as further discussed
above. The net loss for the first nine 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
24
property, plant and equipment that are made during the term of the agreement. As
of September 30, 2003, borrowing availability under the line of credit was
approximately $5.4 million greater than the $10,064 in outstanding borrowings as
of that date.
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 ($1,679,554 based upon the September 30, 2003 exchange rate). This bank
line of credit, which had outstanding borrowings of $1,679,554 on September 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 ($2,319,400
based upon the September 30, 2003 exchange rate) intercompany working capital
line with Groupe SNPE. The outstanding borrowings as of September 30, 2003 were
900,000 Euros ($1,043,730 based upon the September 30, 2003 exchange rate). This
intercompany line bears interest at EURIBOR plus 1.5%. Additionally, the Company
maintains a 4,000,000 Swedish Krona line of credit with a Swedish bank for its
Nitro Metall operations. As of September 30, 2003, there was 3,752,683 Swedish
Krona in outstanding borrowings under this line of credit ($487,951 based upon
the September 30, 2003 exchange rate) and the line has a variable interest rate,
which was 6.9% at September 30, 2003.
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.
25
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 September 30, 2003
------------- --------------- ------------- -------------- -------------- --------------
Year 1 Year 2 Year 3 Year 4 Year 5 and Total
Thereafter
------------- --------------- ------------- -------------- -------------- --------------
Bank lines of credit $487,951 $345,975 $335,911 $335,911 $671,821 $2,177,569
Weighted average interest rate 2.56% 2.56% 2.56% 2.56% 2.56% 2.56%
Line of Credit - SNPE S.A. $1,043,730 - - - - $1,043,730
Interest rate 3.59% - - - - 3.59%
Subordinated note with SNPE, Inc. - $1,200,000 - - - $1,200,000
Interest rate 5.00% 5.00% - - - 5.00%
Term Loan with SNPE, Inc. $999,999 $1,000,003 - - - $2,000,002
Weighted average interest rate 4.17% 4.17% - - - 4.17%
Industrial development
revenue bonds $915,000 $985,000 $180,000 $200,000 $1,575,000 $3,855,000
Interest rate 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%
Operating leases $819,976 $693,360 $504,817 $414,920 $1,569,692 $4,002,765
Highlights from the Statement of Cash Flows for the Nine Months Ended September
30, 2003
Net cash flows provided by operating activities for the nine months ended
September 30, 2003 totaled $2,345,189. Significant sources of operating cash
flow included net income from continuing operations of $1,077,948, depreciation
and amortization of $1,107,400 and deferred taxes of $355,569. These sources of
operating cash flows were partially offset by a negative net change of $195,728
in various components of working capital. Net negative changes in working
capital included increases in inventories and prepaid expenses of $1,072,378 and
$171,627, respectively, and a net decrease in accounts payable and accrued
expenses of $666,834. These negative changes in working capital were largely
offset by a decrease in accounts receivable of $1,715,511.
Cash used in investing activities totaled $849,664 and was comprised of
capital expenditures in the amount of $920,145.
Net cash flows used in financing activities totaled $1,774,134. 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 $630,000, net repayments of $464,346 on the bank lines of credit,
and the repayment of a $120,475 bank overdraft. These payments were partially
offset by related party borrowings of $751,422.
26
Highlights from the Statement of Cash Flows for the Nine Months Ended September
30, 2002
Net cash flows from operating activities for the nine months ended
September 30, 2002 were $3,061,144. Significant sources of operating cash flow
included net income from continuing operations of $2,031,524, depreciation and
amortization of $1,124,032 and deferred taxes of $632,027. These sources of
operating cash flows were partially offset by a negative net change of $726,439
in various components of working capital. Net negative changes in working
capital included increases in accounts receivable and inventories of $458,972
and $749,806, respectively. These negative changes in working capital were
largely offset by a net increase in accounts payable and accrued expenses of
$259,079 and a decrease in prepaid expenses of $223,260.
Cash used in investing activities totaled $1,131,434 and was comprised
primarily of capital expenditures in the amount of $1,154,830.
Net cash flows used in financing activities for the nine months ended
September 30, 2002 totaled $2,720,158. The primary uses of cash flow from
financing activities were repayments on the bank lines of credit of $2,275,374,
repayments on related party lines of credit of $148,035, principal payments on
industrial development revenue bonds in the amount of $590,000 and a repayment
on the term loan with SNPE, Inc. of $333,333. The foregoing debt reductions were
partially offset by a $546,975 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 the last quarter of 2003 and during 2004. In making this
assessment, we have considered:
- presently scheduled debt service requirements during the remainder of
2003 and in 2004, 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 last quarter
of 2003 and in 2004;
- our expectation of realizing positive cash flow from operations in
2003 and 2004.
27
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.
Critical 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.
28
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.
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.
29
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.
30
ITEM 4. Controls and Procedures
As of September 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 September 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 September 30,
2003.
31
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.
32
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: November 14, 2003 /s/ Richard A. Santa
-------------------------------------------
Richard A. Santa, Vice President and Chief
Financial Officer (Duly Authorized Officer and
Principal Financial and Accounting Officer)
33