-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OzR17ql8f9DrrTTs16FkSn17GWmnXKlDIbi4YFGSZUKcrb4Kso9YJdexY17YgSYe x3dGzYAqy4crZHWbYKfL5Q== 0000898080-03-000551.txt : 20031114 0000898080-03-000551.hdr.sgml : 20031114 20031114124146 ACCESSION NUMBER: 0000898080-03-000551 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DYNAMIC MATERIALS CORP CENTRAL INDEX KEY: 0000034067 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PRIMARY METAL PRODUCTS [3390] IRS NUMBER: 840608431 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14775 FILM NUMBER: 031002196 BUSINESS ADDRESS: STREET 1: 5405 SPINE ROAD CITY: BOULDER STATE: CO ZIP: 80301 BUSINESS PHONE: 3036655700 MAIL ADDRESS: STREET 1: 5405 SPINE ROAD CITY: BOULDER STATE: CO ZIP: 80301 FORMER COMPANY: FORMER CONFORMED NAME: EXPLOSIVE FABRICATORS INC DATE OF NAME CHANGE: 19920703 10-Q 1 form10q.txt FORM 10-Q 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 EX-31.1 3 ex311.txt CERTIFICATION OF YVON PIERRE CARIOU Exhibit 31.1 CERTIFICATIONS I, Yvon Pierre Cariou, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Dynamic Materials Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: November 14, 2003 /s/ Yvon Pierre Cariou ------------------------------------- Yvon Pierre Cariou President and Chief Executive Officer of Dynamic Materials Corporation EX-31.2 4 ex312.txt CERTIFICATION OF RICHARD SANTA Exhibit 31.2 CERTIFICATIONS I, Richard A. Santa, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Dynamic Materials Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: November 14, 2003 /s/ Richard A. Santa ------------------------------------------ Richard A. Santa Vice President and Chief Financial Officer of Dynamic Materials Corporation EX-32.1 5 ex321.txt CERTIFICATION OF YVON PIERRE CARIOU Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Dynamic Materials Corporation (the "Company") on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Yvon Pierre Cariou, President and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (i) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Yvon Pierre Cariou ------------------------------------- Yvon Pierre Cariou President and Chief Executive Officer of Dynamic Materials Corporation November 14, 2003 A signed original of this written statement required by Section 906 has been provided to Dynamic Materials Corporation and will be retained by Dynamic Materials Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 6 ex322.txt CERTIFICATION OF RICHARD SANTA Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Dynamic Materials Corporation (the "Company") on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard A. Santa, Vice President and Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (i) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Richard A. Santa ------------------------------------------ Richard A. Santa Vice President and Chief Financial Officer of Dynamic Materials Corporation November 14, 2003 A signed original of this written statement required by Section 906 has been provided to Dynamic Materials Corporation and will be retained by Dynamic Materials Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----