UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2008
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-30241
DDi Corp.
(Exact name of registrant as specified in its charter)
| | |
| Delaware | | 06-1576013 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1220 Simon Circle
Anaheim, California 92806
(Address of principal executive offices) (Zip code)
(714) 688-7200
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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 þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (check one):
Large accelerated filer ¨ Accelerated filer þ Non-accelerated filer ¨ Smaller reporting company ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No þ
Indicate by check mark whether the registrant has filed all documents and reports to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes þ No ¨
As of April 28, 2008, DDi Corp. had 21,471,575 shares of common stock, par value $0.001 per share, outstanding.
DDi Corp.
Form 10-Q for the Quarterly Period Ended March 31, 2008
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
DDi Corp.
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
(Unaudited)
| | | | | | | | |
| | | March 31,
2008 | | | December 31,
2007 | |
| ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 17,747 | | | $ | 20,445 | |
Accounts receivable, net | | | 30,264 | | | | 26,411 | |
Inventories | | | 15,892 | | | | 13,696 | |
Prepaid expenses and other assets | | | 868 | | | | 657 | |
| | | | | | | | |
Total current assets | | | 64,771 | | | | 61,209 | |
Property, plant and equipment, net | | | 28,601 | | | | 28,503 | |
Goodwill | | | 39,006 | | | | 39,006 | |
Intangible assets, net | | | 5,770 | | | | 7,109 | |
Other assets | | | 918 | | | | 950 | |
| | | | | | | | |
Total assets | | $ | 139,066 | | | $ | 136,777 | |
| | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Current maturities of long-term debt | | $ | 244 | | | $ | 244 | |
Accounts payable | | | 15,633 | | | | 11,024 | |
Accrued expenses and other current liabilities | | | 10,174 | | | | 8,594 | |
Income taxes payable | | | 1,399 | | | | 1,301 | |
| | | | | | | | |
Total current liabilities | | | 27,450 | | | | 21,163 | |
Long-term debt | | | 1,455 | | | | 1,516 | |
Other long-term liabilities | | | 2,731 | | | | 2,933 | |
Series A Preferred Stock | | | — | | | | — | |
| | | | | | | | |
Total liabilities | | | 31,636 | | | | 25,612 | |
| | | | | | | | |
Commitments and contingencies (Note 13) | | | | | | | | |
Stockholders’ equity: | | | | | | | | |
Common stock — $0.001 par value, 190,000 shares authorized, 22,746 shares issued and 21,471 shares outstanding at March 31, 2008 and 22,746 shares issued and 22,442 shares outstanding at December 31, 2007 | | | 23 | | | | 23 | |
Additional paid-in-capital | | | 243,588 | | | | 242,938 | |
Treasury stock, at cost — 1,275 and 304 shares held in treasury at March 31, 2008 and December 31, 2007, respectively | | | (6,907 | ) | | | (1,875 | ) |
Accumulated other comprehensive income | | | 400 | | | | 471 | |
Accumulated deficit | | | (129,674 | ) | | | (130,392 | ) |
| | | | | | | | |
Total stockholders’ equity | | | 107,430 | | | | 111,165 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 139,066 | | | $ | 136,777 | |
| | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements
1
DDi Corp.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
| | | | | | | | |
| | | Three Months Ended | |
| | | March 31,
2008 | | | March 31,
2007 | |
Net sales | | $ | 47,352 | | | $ | 43,447 | |
Cost of goods sold | | | 37,609 | | | | 35,457 | |
| | | | | | | | |
Gross profit | | | 9,743 | | | | 7,990 | |
Operating expenses: | | | | | | | | |
Sales and marketing | | | 3,276 | | | | 3,124 | |
General and administrative | | | 3,838 | | | | 3,811 | |
Amortization of intangible assets | | | 1,339 | | | | 1,340 | |
Restructuring and other related charges | | | 185 | | | | 77 | |
| | | | | | | | |
Operating income (loss) | | | 1,105 | | | | (362 | ) |
Interest expense | | | 195 | | | | 437 | |
Interest income | | | (156 | ) | | | (106 | ) |
Other (income) expense, net | | | (87 | ) | | | 2 | |
| | | | | | | | |
Income (loss) before income taxes | | | 1,153 | | | | (695 | ) |
Income tax expense | | | 435 | | | | 296 | |
| | | | | | | | |
Net income (loss) | | $ | 718 | | | $ | (991 | ) |
| | | | | | | | |
Net income (loss) per share: | | | | | | | | |
Basic | | $ | 0.03 | | | $ | (0.04 | ) |
Diluted | | $ | 0.03 | | | $ | (0.04 | ) |
Weighted-average shares used in per share computations: | | | | | | | | |
Basic | | | 21,988 | | | | 22,594 | |
Diluted | | | 21,993 | | | | 22,594 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
DDi Corp.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| | | | | | | | |
| | | Three Months Ended | |
| | | March 31,
2008 | | | March 31,
2007 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
Net income (loss) | | $ | 718 | | | $ | (991 | ) |
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | | | | | | | | |
Depreciation | | | 2,736 | | | | 2,362 | |
Amortization of intangible assets | | | 1,339 | | | | 1,340 | |
Amortization of debt issuance costs and discount | | | 25 | | | | 177 | |
Non-cash compensation | | | 650 | | | | 552 | |
Other | | | 38 | | | | — | |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | (4,091 | ) | | | (468 | ) |
Inventories | | | (2,309 | ) | | | (914 | ) |
Prepaid expenses and other assets | | | (224 | ) | | | (769 | ) |
Accounts payable | | | 4,717 | | | | (114 | ) |
Accrued expenses and other liabilities | | | 1,182 | | | | (1,419 | ) |
Income tax payable | | | 151 | | | | 133 | |
| | | | | | | | |
Net cash provided by (used in) operating activities | | | 4,932 | | | | (111 | ) |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Purchases of property and equipment | | | (2,763 | ) | | | (1,651 | ) |
| | | | | | | | |
Net cash used in investing activities | | | (2,763 | ) | | | (1,651 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Payments on long-term debt | | | (61 | ) | | | (94 | ) |
Repurchases of common stock including commissions | | | (5,032 | ) | | | — | |
Proceeds from exercise of stock options | | | — | | | | 215 | |
| | | | | | | | |
Net cash provided by (used in) financing activities | | | (5,093 | ) | | | 121 | |
| | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | 226 | | | | (41 | ) |
| | | | | | | | |
Net decrease in cash and cash equivalents | | | (2,698 | ) | | | (1,682 | ) |
Cash and cash equivalents, beginning of period | | | 20,445 | | | | 15,920 | |
| | | | | | | | |
Cash and cash equivalents, end of period | | $ | 17,747 | | | $ | 14,238 | |
| | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
DDi Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of DDi Corp. and its wholly-owned subsidiaries. DDi Corp. and its subsidiaries are referred to as the “Company” or “DDi.” All intercompany transactions have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements and notes thereto contain all adjustments necessary for a fair statement of the financial position of the Company as of March 31, 2008 and the results of its operations and cash flows for the three months ended March 31, 2008 and 2007, and such adjustments are of a normal recurring nature. The results of operations for the three months ended March 31, 2008 are not necessarily indicative of results of operations to be expected for the full year.
The Company has prepared these financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such regulations, although the Company believes the disclosures provided are adequate to prevent the information presented from being misleading. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. This report on Form 10-Q for the quarter ended March 31, 2008 should be read in conjunction with the audited financial statements presented in DDi’s Annual Report on Form 10-K for the year ended December 31, 2007.
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,Goodwill and Other Intangible Assets (“SFAS 142”), goodwill and other intangible assets with indefinite lives are no longer subject to amortization but are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. During the first quarter of 2008 and continuing into April, the Company’s stock price declined along with that of its competitors in the PCB industry as well as in the general stock market. This resulted in the company’s market capitalization periodically falling below its book value. While the Company considers this decline temporary and based on general economic conditions, and not based on any events or conditions specific to DDi, the Company may be required to record a goodwill impairment in the future if its stock price decreases further, which could have a material impact on the Company’s results of operations.
Description of Business
DDi is a leading provider of time-critical, technologically-advanced printed circuit board (“PCB”) engineering and manufacturing services. The Company specializes in engineering and fabricating complex multi-layer printed circuit boards on a quick-turn basis, with lead times as short as 24 hours. DDi has approximately 1,000 customers in various market segments including communications and networking, medical, test and industrial instruments, high-end computing, military and aerospace, and high-durability commercial markets. The Company operates primarily in one geographical area, North America.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157,Fair Value Measurements (“SFAS 157”), which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. This statement applies under other accounting pronouncements that require or permit fair value measurements. The statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. SFAS 157 defines fair value based upon an exit price model. Relative to SFAS 157, the FASB issued FASB Staff Positions (“FSP”) 157-1, 157-2, and proposed 157-c. FSP 157-1 amends SFAS 157 to exclude SFAS No. 13,Accounting for Leases, and its related interpretive accounting pronouncements that address leasing transactions, while FSP 157-2 delays for one year the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP 157-c clarifies the principles in SFAS 157 on the fair value measurement of liabilities. The adoption of the provisions of SFAS 157 for financial assets and financial liabilities as of January 1, 2008 did not have any impact on the Company’s consolidated financial statements. The Company is still assessing the impact of SFAS 157 for nonfinancial assets and nonfinancial liabilities on its consolidated financial position, results of operations and cash flows. See Note 12 for additional fair value disclosures.
4
DDi Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115 (“SFAS 159”), which is effective for fiscal years beginning after November 15, 2007. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. Unrealized gains and losses on items for which the fair value option is elected would be reported in earnings. The Company adopted the provisions of SFAS 159 as of January 1, 2008 and did not elect the fair value option to measure certain financial instruments.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R establishes the requirements for how an acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements for business combinations. SFAS 141R is effective for annual periods beginning after December 31, 2008 and should be applied prospectively for all business combinations entered into after the date of adoption. SFAS 141R will have an impact on the Company’s accounting for business combinations completed after January 1, 2009.
In December 2007, the FASB approved the issuance of SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 will change the accounting and reporting for minority interests, which will now be termed “noncontrolling interests.” SFAS 160 requires noncontrolling interests to be presented as a separate component of equity and requires the amount of net income attributable to the parent and to the noncontrolling interest to be separately identified on the consolidated statement of operations. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The Company currently does not expect adoption of SFAS 160 to have any impact on its consolidated financial position, results of operations or cash flows.
In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities(“SFAS 161”), which requires certain disclosures related to derivative instruments. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the requirements of SFAS 161 and the impact, if any, that the adoption of this statement will have on the Company’s consolidated financial position, results of operations and cash flows.
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in, first-out or average cost basis) or market and consisted of the following (in thousands):
| | | | | | |
| | | March 31,
2008 | | December 31,
2007 |
Raw materials | | $ | 7,124 | | $ | 7,063 |
Work-in-process | | | 5,423 | | | 3,484 |
Finished goods | | | 3,345 | | | 3,149 |
| | | | | | |
Total | | $ | 15,892 | | $ | 13,696 |
| | | | | | |
5
DDi Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 3. REVOLVING CREDIT FACILITY
On March 30, 2007, the Company amended its revolving credit facility (as amended, the “Credit Facility”) with General Electric Capital Corporation acting as agent, to extend the maturity date to March 30, 2010 and change the maximum revolving credit line to $25 million. Availability under the Credit Facility is based on various liquidity and borrowing base tests including the Company’s eligible accounts receivable and inventories. The Company’s wholly-owned operating subsidiaries are the borrowers under the Credit Facility. The Credit Facility is guaranteed by DDi Corp. and all of its subsidiaries that are not borrowers under the Credit Facility. The Credit Facility is collateralized by the accounts receivable, inventories and other tangible and intangible personal property (other than property, plant and equipment) of the borrowers, and by a pledge of the stock of the Company’s subsidiaries. Revolving credit advances under the Credit Facility bear interest at the prime rate (5.25% at March 31, 2008). The Company can elect to have any new revolving credit advances, or convert any outstanding revolving credit advances, in excess of $1.0 million and in increments of $500,000, made as a LIBOR-based loan with a term of one, two, or three months at a rate of LIBOR plus 1.5%. The Credit Facility contains customary covenants including financial covenants regarding the Company’s fixed charge ratios and capital expenditures if Liquidity, as defined in the agreement, falls below a certain threshold. During the quarter ended March 31, 2008, Liquidity was above the financial covenant measurement threshold. There are also negative covenants regarding incurrence of additional debt, liquidation, merger or asset sales or changes in the Company’s business. The Credit Facility restricts the Company’s ability to pay cash dividends on its common stock and restricts its subsidiaries’ ability to pay dividends to the Company without the lender’s consent. As of March 31, 2008, the Company was in compliance with all required covenants.
As of March 31, 2008, the borrowing capacity under the credit facility was approximately $20.0 million; however, no amounts were outstanding.
In connection with this transaction, the Company allowed both the Sovereign Circuits Revolving Credit Facility of $1.1 million and the Sovereign Circuits Capital Expenditures Credit Facility of $1.2 million to expire on March 31, 2007.
NOTE 4. LONG-TERM DEBT
In April 2007, the Company consolidated two outstanding term loans assumed in the Sovereign acquisition with an aggregate outstanding balance totaling $1.9 million into one term loan collateralized by Sovereign’s real property. The note matures in April 2015, bears interest at LIBOR plus 1.5%, and has monthly payments of approximately $20,000 plus accrued interest. In connection with this transaction, the lender released its liens on all assets of Sovereign other than the real property. At March 31, 2008, the effective interest rate of the term loan was 4.62% and the remaining outstanding balance was $1.7 million.
NOTE 5. PRODUCT WARRANTY
The Company records warranty expense at the time revenue is recognized and maintains a warranty accrual for the estimated future warranty obligation based upon the relationship between historical sales volumes and anticipated costs. Factors that affect the warranty liability include the number of units sold, historical and anticipated rates of warranty claims and the estimated cost of repair. The Company assesses the adequacy of the warranty accrual each quarter. To date, actual warranty claims and costs have been consistent with the Company’s estimates. The changes in the Company’s warranty accrual were as follows (in thousands):
| | | | | | | | |
| | | Three Months Ended | |
| | | March 31,
2008 | | | March 31,
2007 | |
Beginning balance | | $ | 750 | | | $ | 592 | |
Warranties issued during the period | | | 782 | | | | 928 | |
Warranty expenditures | | | (786 | ) | | | (927 | ) |
| | | | | | | | |
Ending balance | | $ | 746 | | | $ | 593 | |
| | | | | | | | |
6
DDi Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 6. INCOME TAXES
The Company adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109(“FIN 48”), on January 1, 2007. As a result of the implementation, the Company had no increases or decreases to reserves for uncertain tax positions. There was no effect on the Company’s consolidated financial condition, results of operations or cash flows as a result of implementing FIN 48. The Company had approximately $1.4 million of total gross unrecognized tax benefits at December 31, 2007. If recognized in future periods there would be a favorable affect to the effective tax rate of $705,000 and a reduction to goodwill of $693,000. No material changes have occurred in the quarter ended March 31, 2008. The Company anticipates a decrease in the tax contingency reserve during the remainder of 2008 of approximately $400,000. This anticipated decrease has two components: (i) approximately $250,000 due to statue expirations, with the decrease expected to be primarily an offset to goodwill; and (ii) approximately $150,000 associated with settlements.
The Company files income tax returns in the U.S. federal jurisdiction, various states and Canada. The Company has substantially concluded all U.S. federal income tax matters for years through 2003. Canadian income tax matters have been examined through 2004. State jurisdictions that remain subject to examination range from 2002 to 2007.
NOTE 7. STOCK-BASED COMPENSATION
Stock Options
There were no grants of stock option awards during the three months ended March 31, 2008. At March 31, 2008, the total compensation cost related to non-vested stock options not yet recognized was $3.1 million, net of estimated forfeitures. This cost will be amortized on a straight-line basis over the remaining weighted-average period of approximately 1.6 years.
Restricted Stock
There were no grants of restricted stock during the three months ended March 31, 2008. At March 31, 2008, the total compensation cost related to non-vested restricted stock awards not yet recognized was $634,000, net of estimated forfeitures. This cost will be amortized on a straight-line basis over the remaining weighted-average period of approximately 2.7 years.
Stock Compensation Expense
The following table sets forth expense related to stock-based compensation (in thousands):
| | | | | | | |
| | | Three Months Ended | |
| | | March 31,
2008 | | March 31,
2007 | |
Non-cash compensation expense: | | | | | | | |
Cost of goods sold | | $ | 128 | | $ | 84 | |
Sales and marketing expenses | | | 70 | | | (37 | ) |
General and administrative expenses | | | 452 | | | 505 | |
| | | | | | | |
Total non-cash compensation expense | | $ | 650 | | $ | 552 | |
| | | | | | | |
NOTE 8. STOCK REPURCHASE PROGRAM
In August 2007, the Company’s Board of Directors authorized the repurchase of up to 1.1 million shares of the Company’s common stock in the open market at prevailing market prices. In February 2008, the number of shares authorized to be repurchased was increased by 400,000 shares to 1.5 million shares. The Company repurchased 970,052 shares during the quarter ended March 31, 2008 for a total cost of $5.0 million. All such shares and related costs are held as treasury stock and accounted for using the cost method. As of March 31, 2008, the Company had repurchased a total of 1,274,505 shares, leaving 225,495 shares authorized to be repurchased under the program.
7
DDi Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 9. SEGMENT REPORTING
Based on evaluation of the Company’s financial information, management believes that the Company operates in one reportable segment related to the design, development, manufacture and test of complex printed circuit boards. Since early 2005, the Company has operated primarily in one geographical area, North America. Revenues are attributed to the country in which the customer buying the product is located.
The following table summarizes net sales by geographic area (in thousands):
| | | | | | |
| | | Three Months Ended |
| | | March 31,
2008 | | March 31,
2007 |
Net sales: | | | | | | |
North America (1) | | $ | 43,706 | | $ | 40,760 |
Asia | | | 3,256 | | | 2,287 |
Other | | | 390 | | | 400 |
| | | | | | |
Total | | $ | 47,352 | | $ | 43,447 |
| | | | | | |
| (1) | The majority of sales in North America are to customers located in the United States. |
NOTE 10. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted-average number of common and common equivalent shares outstanding during the period, if dilutive. The dilutive effect of outstanding options and restricted stock is reflected in diluted earnings per share by application of the treasury stock method, which includes consideration of share-based compensation required under SFAS No. 123R,Share-Based Payment.
The following table sets forth the calculation of basic and diluted net income (loss) per share of common stock (in thousands, except per share data):
| | | | | | | |
| | | Three Months Ended | |
| | | March 31,
2008 | | March 31,
2007 | |
Weighted average shares of common stock outstanding – basic | | | 21,988 | | | 22,594 | |
Weighted common stock equivalents | | | 5 | | | — | |
| | | | | | | |
Weighted average shares of common stock outstanding – diluted | | | 21,993 | | | 22,594 | |
| | | | | | | |
Net income (loss) | | $ | 718 | | $ | (991 | ) |
| | | | | | | |
Net income (loss) per share – basic and diluted | | $ | 0.03 | | $ | (0.04 | ) |
| | | | | | | |
For the three months ended March 31, 2008, common shares issuable upon exercise of outstanding stock options and the vesting of restricted stock of 2.4 million were excluded from the diluted net income per common share calculation as their impact would have been anti-dilutive.
As a result of the net loss incurred during the three months ended March 31, 2007, common shares issuable upon exercise of outstanding stock options of 2.1 million were excluded from the diluted net loss per common share calculation as their impact would have been anti-dilutive.
8
DDi Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 11. COMPREHENSIVE INCOME (LOSS)
SFAS No. 130,Reporting Comprehensive Income, establishes requirements for reporting and disclosure of comprehensive income (loss) and its components. Comprehensive income (loss) includes unrealized holding gains and losses and other items that have previously been excluded from net income (loss) and reflected instead in stockholders’ equity. The following table summarizes the Company’s comprehensive income (loss) (in thousands):
| | | | | | | | |
| | | Three Months Ended | |
| | | March 31,
2008 | | | March 31,
2007 | |
Net income (loss) | | $ | 718 | | | $ | (991 | ) |
Other comprehensive income (loss): | | | | | | | | |
Foreign currency translation adjustments | | | (71 | ) | | | 11 | |
| | | | | | | | |
Comprehensive income (loss) | | $ | 647 | | | $ | (980 | ) |
| | | | | | | | |
NOTE 12. FAIR VALUE MEASUREMENTS
The Company adopted SFAS 157 as of January 1, 2008, with the exception of the application of the statement to non-recurring nonfinancial assets and nonfinancial liabilities. Non-recurring nonfinancial assets and nonfinancial liabilities for which the Company has not applied the provisions of SFAS 157 include those measured at fair value in goodwill impairment testing, indefinite lived intangible assets measured at fair value for impairment testing, and those initially measured at fair value in a business combination.
SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The fair value of the Company’s cash and cash equivalents is based on quoted prices in active markets for identical assets.
As of March 31, 2008, the Company’s financial assets and financial liabilities that are measured at fair value on a recurring basis are comprised of cash depository accounts and money market fund investments. The Company invests excess cash from its operating cash depository accounts in highly liquid money market funds and reflects these amounts within cash and cash equivalents on the consolidated balance sheet at a net value of 1:1 for each dollar invested.
NOTE 13. COMMITMENTS AND CONTINGENCIES
On May 2, 2006, SMDI Company filed a lawsuit against the Company’s Laminate Technology Corp. subsidiary in Arizona Superior Court for Maricopa County (Case No. CV2006-006541). SMDI Company was the landlord for two buildings that constituted a portion of the Company’s now-closed Arizona facility. The pending complaint alleges that the Company breached the leases for the two buildings by failing to adequately maintain the buildings, failing to pay rent timely and failing to adequately repair the buildings at the termination of the lease. The complaint seeks an unspecified amount of damages. The Company believes the plaintiff’s claims lack merit and is vigorously defending the action. A bench trial was conducted from February 26, 2008 to March 12, 2008 regarding the plaintiffs’ breach of contract claims and the Company’s counter-claims asserting the landlord breached the lease and the implied covenant of good faith and fair dealing. On April 14, 2008, the parties submitted written closing arguments, and the Court took the case under advisement.
In addition to the above, the Company is involved from time to time in other litigation concerning claims arising out of the Company’s operations in the normal course of business.
The Company does not believe any of the above noted legal claims or any other litigation will have a material adverse effect on the Company’s financial condition, results of operations or cash flows and the Company has not recorded any loss contingencies, as an unfavorable outcome in these matters is not probable at March 31, 2008.
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following is a discussion of the financial condition and results of operations for our fiscal quarter and year to date period ended March 31, 2008. As used herein, the “Company,” “we,” “us,” or “our” means DDi Corp. and its wholly-owned subsidiaries. This discussion and analysis should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in DDi Corp.’s Annual Report on Form 10-K for the year ended December 31, 2007.
Some of the statements in this section contain forward-looking statements regarding our assumptions, projections, expectations, targets, intentions or beliefs about future events, which involve risks and uncertainties. All statements other than statements of historical facts included in this section relating to expectation of future financial performance, continued growth, changes in economic conditions or capital markets and changes in customer usage patterns and preferences, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as may, will, should, expect, plan, intend, forecast, anticipate, believe, estimate, predict, potential, continue or the negative of these terms or other comparable terminology. The forward-looking statements contained in this section involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements may include the matters listed under “Risk Factors” in Item 1A in our most recently filed 10-K including, but not limited to, changes in general economic conditions in the markets in which we may compete and fluctuations in demand in the electronics industry; increased competition; increased costs; our ability to retain key members of management; our ability to address changes to environmental laws and regulations; risks associated with acquisitions; adverse state, federal or foreign legislation or regulation or adverse determinations by regulators; and other factors identified from time to time in our filings with the Securities and Exchange Commission.
Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all such factors.
Our Company
We are a leading provider of time-critical, technologically-advanced printed circuit board (“PCB”) engineering and manufacturing services. We specialize in engineering and fabricating complex multi-layer printed circuit boards on a quick-turn basis, with lead times as short as 24 hours. We have approximately 1,000 customers in various market segments including communications and networking, medical, test and industrial instruments, high-end computing, military and aerospace, and high-durability commercial markets. With such a broad customer base and approximately 50 new printed circuit board designs tooled per day, we have accumulated significant process and engineering expertise. Our strength is developing innovative, high-performance solutions for customers during the engineering, test and launch phases of their new electronic product development. Our entire organization is focused on rapidly and reliably filling complex customer orders and building long-term customer relationships. Our engineering capabilities and manufacturing facilities in the United States and Canada enable us to respond to time-critical orders and technology challenges for our customers.
Industry Overview
Printed circuit boards are a fundamental component of virtually all electronic equipment. The level of printed circuit board complexity is determined by several characteristics, including size, layer count, density, materials, functionality and design features. High-end commercial equipment manufacturers require complex printed circuit boards fabricated with higher layer counts, greater density, and advanced materials, and demand highly complex and sophisticated manufacturing capabilities. We see several significant trends within the printed circuit board manufacturing industry, including:
| | • | | Increasing customer demand for quick-turn production. Rapid advances in technology are significantly shortening product life-cycles and placing increased pressure on original equipment manufacturers (“OEMs”) to develop new products in shorter periods of time. In response to these pressures, OEMs look to printed circuit board manufacturers that can offer design and engineering support and quick-turn manufacturing to reduce time-to-market. |
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| | • | | Increasing complexity of electronic equipment. OEMs are continually designing more complex and higher performance electronic equipment, which requires sophisticated printed circuit boards that accommodate higher speeds and frequencies and increased component densities and operating temperatures. In turn, OEMs rely on printed circuit board manufacturers that can provide advanced engineering and manufacturing services early in the new product development cycle. OEMs are also requiring more lead-free materials and other “green” products which add to the complexity of the materials utilized in the manufacturing of printed circuit boards. |
| | • | | Shifting of high volume production to Asia. Asian-based manufacturers of printed circuit boards are capitalizing on their lower labor costs and are increasing their production and market share of printed circuit boards used, for example, in high-volume consumer electronics applications, such as personal computers and cell phones. Asian-based manufacturers have generally been unable to meet the lead time requirements for the production of complex printed circuit boards on a quick-turn basis. |
Results of Operations
The following tables set forth select data from our Condensed Consolidated Statements of Operations (in thousands):
| | | | | | | | | | | | | | |
| | | Three Months Ended | | | | | | |
| | | March 31,
2008 | | | March 31,
2007 | | | $ Change | | % Change | |
Net sales | | $ | 47,352 | | | $ | 43,447 | | | $ | 3,905 | | 9.0 | % |
Cost of goods sold | | | 37,609 | | | | 35,457 | | | | 2,152 | | 6.1 | % |
Gross profit | | | 9,743 | | | | 7,990 | | | | 1,753 | | 21.9 | % |
Gross profit as a percentage of net sales | | | 20.6 | % | | | 18.4 | % | | | | | | |
Net Sales
Net sales are derived from the engineering and manufacture of complex, technologically-advanced, multi-layer PCBs.
Net sales increased $3.9 million, or 9.0%, to $47.4 million for the first quarter of 2008, from $43.4 million for the same period in 2007. The increase in net sales was primarily due to an increase in volume of shipments and an improvement in average pricing attributed to a shift in mix towards higher technology-based products.
Gross Profit
Gross profit for the first quarter of 2008 was $9.7 million, or 20.6% of net sales, compared to $8.0 million, or 18.4% of net sales, for the same period in 2007. The increase in gross profit was primarily due to an increase in volume of shipments, an improvement in average pricing attributed to a shift in mix to higher technology-based products, and better absorption of fixed costs, partially offset by an increase in management and factory performance incentives accrued in the first quarter of 2008 compared to the first quarter of 2007.
Non-Cash Compensation
| | | | | | | |
| | | Three Months Ended | |
| | | March 31,
2008 | | March 31,
2007 | |
Non-cash compensation: | | | | | | | |
Cost of goods sold | | $ | 128 | | $ | 84 | |
Sales and marketing expenses | | | 70 | | | (37 | ) |
General and administrative expenses | | | 452 | | | 505 | |
| | | | | | | |
Total non-cash compensation | | $ | 650 | | $ | 552 | |
| | | | | | | |
Non-cash compensation expense related to stock awards was recorded in accordance with the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R,Share-Based Payment (“SFAS 123R”).
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Sales and Marketing Expenses
| | | | | | | | | | | | | | |
| | | Three Months Ended | | | | | | |
| | | March 31,
2008 | | | March 31,
2007 | | | $ Change | | % Change | |
Sales and marketing expenses | | $ | 3,276 | | | $ | 3,124 | | | $ | 152 | | 4.9 | % |
Percentage of net sales | | | 6.9 | % | | | 7.2 | % | | | | | | |
Sales and marketing expenses increased on an absolute dollar basis by $152,000, or 4.9%, to $3.3 million, or 6.9% of net sales, for the first quarter of 2008, from $3.1 million, or 7.2% of net sales, for the first quarter of 2007. The dollar increase is primarily due to higher non-cash compensation expense and higher management incentives accruals. The reduction in sales and marketing expenses as a percentage of net sales is due to the operating leverage that results from higher sales levels and to a more efficient sales strategy related to the mix of direct and indirect sales resources impacting commissions expense implemented during 2007.
General and Administrative Expenses
| | | | | | | | | | | | | | |
| | | Three Months Ended | | | | | | |
| | | March 31,
2008 | | | March 31,
2007 | | | $ Change | | % Change | |
General and administrative expenses | | $ | 3,838 | | | $ | 3,811 | | | $ | 27 | | 0.7 | % |
Percentage of net sales | | | 8.1 | % | | | 8.8 | % | | | | | | |
General and administrative expenses were essentially flat at $3.8 million in the first quarter of 2008 and the first quarter of 2007. While certain administrative costs were reduced in the first quarter of 2008 compared to 2007, particularly Sarbanes-Oxley compliance fees, corporate insurance, and travel, these decreases were offset by an increase in management incentives accruals. The reduction in general and administration expenses as a percentage of net sales is due to the improved operating leverage of our fixed costs across higher net sales.
Amortization of Intangibles
Amortization of intangible assets relates to customer relationships identified during the allocation of the reorganized value of the Company subsequent to our emergence from bankruptcy in 2003 and to customer relationships identified in connection with the Sovereign acquisition in October 2006. These intangible assets are being amortized using the straight-line method over an estimated useful life of five years resulting in $1.3 million of amortization expense per quarter through November 2008, when the customer relationships identified in the bankruptcy become fully amortized, and thereafter $190,000 per quarter through October 2011.
Restructuring and Other Related Charges
The restructuring and other related charges in the first quarter of 2008 and 2007 are a result of the ongoing fees and expenses related to pending litigation with the landlord of two buildings in connection with the closing of our Arizona facility in 2005. We completed remediation of the Arizona facility (encompassing three separate buildings) and exited the last building in the third quarter of 2006.
Interest Expense, Net
Net interest expense consists of amortization of debt issuance costs, fees related to our revolving credit facility, interest on our note payable on our Ohio facility, and expense associated with long-term leases, offset by interest income. Net interest expense decreased by $292,000 to $39,000 for the first quarter of 2008 from $331,000 for the first quarter of 2007. The decrease is primarily related to a decrease in debt issuance costs amortization due to the renewal of the revolving credit facility in March 2007, a decrease in deferred lease expense resulting from an expired lease, and an increase in interest income from higher average cash balances during the first quarter of 2008 compared to the first quarter of 2007.
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Other Expense (Income), Net
Net other expense (income) consists of foreign exchange transaction gains or losses related to our Canadian operations and other miscellaneous non-operating items. For the first quarter of 2008, net other income was $87,000 compared to net other expense of $2,000 in the first quarter of 2007.
Income Tax Expense
For the first quarter of 2008, income tax expense was $435,000 compared to $296,000 in the prior year comparable period. Our income tax expense consists of both U.S. and Canadian jurisdictional taxes. The increase was primarily related to an increase in Canadian income tax expense for the quarter. There was a U.S. book loss for the three months ended March 31, 2008, resulting in minimal U.S. income tax expense recorded in the first quarter of 2008.
Under the fresh-start accounting rules related to our emergence from bankruptcy in 2003, any reduction of a U.S. valuation allowance that is related to net deferred tax assets that were in existence as of applying fresh-start accounting will be recognized as a credit to goodwill and not as a U.S. tax benefit for book purposes even though the net operating loss carryforwards result in a reduction of cash taxes paid by us.
Liquidity and Capital Resources
| | | | | | |
| | | March 31,
2008 | | December 31,
2007 |
| | | (Dollars in thousands) |
Working capital | | $ | 37,321 | | $ | 40,046 |
Current ratio (current assets to current liabilities) | | | 2.4 : 1.0 | | | 2.9 : 1.0 |
Cash and cash equivalents | | $ | 17,747 | | $ | 20,445 |
Short term borrowings | | $ | — | | $ | — |
Long term debt, including current portion | | $ | 1,699 | | $ | 1,760 |
As of March 31, 2008, we had total cash and cash equivalents of $17.7 million and no amounts outstanding on our revolving credit facility. The decrease in our working capital, current ratio, and cash and cash equivalents from December 31, 2007 was primarily due to repurchases of our common stock totaling $5.0 million during the quarter.
In August 2007, our Board of Directors authorized the repurchase of up to 1.1 million shares of common stock in the open market at prevailing market prices. In February 2008, the number of shares authorized to be repurchased was increased by 400,000 shares to 1.5 million shares. We repurchased 970,052 shares during the quarter ended March 31, 2008 at an average price per share of $5.16 excluding commissions.
Our principal sources of liquidity to fund ongoing operations have been existing cash on hand, cash generated from operations and, if needed, our asset-based revolving Credit Facility, along with proceeds from various equity offerings and asset sales. We believe that our current cash balance, in combination with net cash expected to be generated from operations and the availability of our Credit Facility, will fund ongoing operations for at least the next twelve months. In the event that we require additional funding during the next twelve months, we will attempt to raise capital through either debt or equity arrangements. We cannot provide assurance that the required capital would be available on acceptable terms, if at all, or that any financing activity would not be dilutive to our current stockholders.
Revolving Credit Facility
In March 30, 2007, we amended our revolving credit facility (as amended, the “Credit Facility”) with General Electric Capital Corporation acting as agent, to extend the maturity date to March 30, 2010 and change the maximum revolving credit line to $25.0 million. Availability under the Credit Facility is based on various liquidity and borrowing base tests including our eligible accounts receivable and inventories. Our wholly-owned operating subsidiaries are the borrowers under the Credit Facility. The Credit Facility is guaranteed by DDi Corp. and all of its subsidiaries that are not borrowers under the Credit Facility. The Credit Facility is secured by the accounts receivable, inventories and other tangible and intangible personal property (other than property, plant and
13
equipment) of the borrowers, and by a pledge of the stock of our subsidiaries. Revolving credit advances under the Credit Facility bear interest at the prime rate (5.25% at March 31, 2008). We can elect to have any new revolving credit advances, or convert any outstanding revolving credit advances, in excess of $1.0 million and in increments of $500,000, made as a LIBOR-based loan with a term of one, two, or three months at a rate of LIBOR plus 1.5%. The Credit Facility contains customary covenants including financial covenants regarding our fixed charge ratios and capital expenditures if Liquidity, as defined in the agreement, falls below a certain threshold. During the quarter ended March 31, 2008, Liquidity was above the financial covenant measurement threshold. There are also negative covenants regarding incurrence of additional debt, liquidation, merger or asset sales or changes in our business. The Credit Facility restricts our ability to pay cash dividends on our common stock and restricts our subsidiaries’ ability to pay dividends to us without the lender’s consent. At March 31, 2008, we were in compliance with all required covenants. In connection with this transaction, we allowed both the Sovereign Circuits Revolving Credit Facility of $1.1 million and the Sovereign Circuits Capital Expenditures Credit Facility of $1.2 million to expire on March 31, 2007.
As of March 31, 2008, the borrowing capacity under the Credit Facility was approximately $20.0 million and there were no amounts outstanding.
Consolidated Cash Flows
The following table summarizes our statements of cash flows for the three months ended March 31, 2008 and 2007 (in thousands):
| | | | | | | | |
| | | Three Months Ended | |
| | | March 31,
2008 | | | March 31,
2007 | |
Net cash provided by (used in): | | | | | | | | |
Operating activities | | $ | 4,932 | | | $ | (111 | ) |
Investing activities | | | (2,763 | ) | | | (1,651 | ) |
Financing activities | | | (5,093 | ) | | | 121 | |
Effect of exchange rates on cash | | | 226 | | | | (41 | ) |
| | | | | | | | |
Net decrease in cash and cash equivalents | | $ | (2,698 | ) | | $ | (1,682 | ) |
| | | | | | | | |
Net cash provided by (used in) operating activities represents net income adjusted for non-cash charges and working capital changes. The $5.0 million change in net cash provided by operating activities for the three months ended March 31, 2008 compared to net cash used in operating activities in the same period in 2007 was primarily due to an increase in operating income and an increase in accounts payable, offset partially by increases in accounts receivable and inventories.
The $1.1 million increase in net cash used in investing activities for the three months ended March 31, 2008 compared to the same period in 2007 was primarily due to an increase in capital equipment investments to increase our technological compatibilities as well as expand capacity in certain manufacturing process areas.
The $5.2 million change in net cash used in financing activities for the three months ended March 31, 2008 compared to net cash provided by financing activities in the same period in 2007 was primarily due to repurchases of our common stock totaling $5.0 million during the first quarter of 2008.
Critical Accounting Policies and Use of Estimates
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained on pages 23 to 25 in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. We believe that at March 31, 2008 there had been no material changes to this information.
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In accordance with SFAS No. 142,Goodwill and Other Intangible Assets (“SFAS 142”), goodwill and other intangible assets with indefinite lives are no longer subject to amortization but are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. During the first quarter of 2008 and continuing into April, our stock price declined along with that of our competitors in the PCB industry as well as in the general stock market. This resulted in our market capitalization periodically falling below our book value. While we consider this decline temporary and based on general economic conditions, and not based on any events or conditions specific to the Company, we may be required to record a goodwill impairment in the future if our stock price decreases further, which could have a material impact on our results of operations.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157,Fair Value Measurements (“SFAS 157”), which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. This statement applies under other accounting pronouncements that require or permit fair value measurements. The statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. SFAS 157 defines fair value based upon an exit price model. Relative to SFAS 157, the FASB issued FASB Staff Positions (“FSP”) 157-1, 157-2, and proposed 157-c. FSP 157-1 amends SFAS 157 to exclude SFAS No. 13,Accounting for Leases, and its related interpretive accounting pronouncements that address leasing transactions, while FSP 157-2 delays for one year the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP 157-c clarifies the principles in SFAS 157 on the fair value measurement of liabilities. The adoption of the provisions of SFAS 157 for financial assets and financial liabilities as of January 1, 2008 did not have any impact on our consolidated financial statements. We are still assessing the impact of SFAS 157 for nonfinancial assets and nonfinancial liabilities on our consolidated financial statements. See Note 12 in the Notes to Condensed Consolidated Financial Statements for additional fair value disclosures.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115 (“SFAS 159”), which is effective for fiscal years beginning after November 15, 2007. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. Unrealized gains and losses on items for which the fair value option is elected would be reported in earnings. We adopted the provisions of SFAS 159 as of January 1, 2008 and did not elect the fair value option to measure certain financial instruments.
In December 2007, the FASB approved the issuance of SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 will change the accounting and reporting for minority interests, which will now be termed “noncontrolling interests.” SFAS 160 requires noncontrolling interests to be presented as a separate component of equity and requires the amount of net income attributable to the parent and to the noncontrolling interest to be separately identified on the consolidated statement of operations. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. We currently do not expect adoption of SFAS 160 to have any impact on our consolidated financial position, results of operations or cash flows.
In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities(“SFAS 161”), which requires certain disclosures related to derivative instruments. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the requirements of SFAS 161 and the impact, if any, that the adoption of this statement will have on our consolidated financial position, results of operations and cash flows.
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| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Interest Rate Risk
Advances under our Credit Facility bear interest at the prime rate (5.25% at March 31, 2008) or can be converted to LIBOR-based loans at a rate of LIBOR plus 1.5%. If the prime rate, or LIBOR rate for LIBOR-based loans, increased, thereby increasing our effective borrowing rate by the same amount, cash interest expense related to the Credit Facility would increase dependent on any outstanding borrowings. There were no borrowings on the Credit Facility during the quarter ended March 31, 2008.
Foreign Currency Exchange Risk
A portion of the sales and expenses of our Canadian operations are denominated in Canadian dollars, which is deemed to be the functional currency for our Canadian entity. Thus, assets and liabilities are translated to U.S. dollars at period end exchange rates in effect. Sales and expenses are translated to U.S. dollars using an average monthly exchange rate. Translation adjustments are included in accumulated other comprehensive income (loss) in stockholders’ equity, except for translation adjustments related to an intercompany note denominated in Canadian Dollars between our U.S. entity and our Canadian entity. Settlement of the note is planned in the foreseeable future; therefore, currency adjustments are included in determining net income (loss) for the period in accordance with SFAS No. 52,Foreign Currency Translation, and could have a material impact on results of operations and cash flows in the event of currency fluctuations.
Gains and losses on foreign currency transactions are included in operations. We have foreign currency translation risk equal to our net investment in those operations. We do not use forward exchange contracts to hedge exposures to foreign currency denominated transactions and do not utilize any other derivative financial instruments for trading or speculative purposes.
| Item 4. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are effective to ensure that all information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission (the “SEC”), and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, and allow timely decisions regarding required disclosure.
Changes in Internal Controls
No change in our internal control over financial reporting occurred during the quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| Item 4T. | Controls and Procedures. |
None.
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PART II — OTHER INFORMATION
Reference is made to our Annual Report on Form 10-K for the period ended December 31, 2007 for a summary of our previously reported legal proceedings. Since the date of the Annual Report on Form 10-K for the period ended December 31, 2007, there have been no material developments in previously reported legal proceedings, except as set forth below.
From February 26 to March 12, 2008, a bench trial was conducted in SMDI v. Laminate Technologies Corp. in the Arizona Superior Court for Maricopa County (Case No. CV2006-006541) regarding the plaintiffs’ breach of contract claims and our counter-claims asserting the landlord breached the lease and the implied covenant of good faith and fair dealing. On April 14, 2008, the parties submitted written closing arguments in the case, and the Court took the case under advisement.
There have been no significant changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table contains information for shares repurchased during the first quarter of 2008.
| | | | | | | | | |
Period | | Total Number of
Shares Purchased | | Average Price
Paid per Share (1) | | Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs | | Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs (2) |
January 1 – January 31, 2008 | | — | | $ | — | | — | | — |
February 1 – February 29, 2008 | | 970,052 | | | 5.157 | | 970,052 | | 225,495 |
March 1 – March 31, 2008 | | — | | | — | | — | | — |
| | | | | | | | | |
TOTAL | | 970,052 | | $ | 5.157 | | 970,052 | | 225,495 |
| (1) | Average price per share excludes commissions. |
| (2) | In August 2007, the Board of Directors authorized the repurchase of 1,100,000 shares of Company common stock in the open market at prevailing market prices. The Company announced the authorization of the repurchase program on August 9, 2007. This repurchase program does not have an expiration date. In February 2008, the Board of Directors approved an increase in the authorized number of shares of the Company’s common stock to be repurchased to 1,500,000 shares from 1,100,000 shares. |
| Item 3. | Defaults Upon Senior Securities |
None
| Item 4. | Submission of Matters to a Vote of Security Holders |
None.
On March 28, 2008, consistent with the terms of the Dynamic Details, Incorporated Senior Management Bonus Program for the fiscal year ended December 31, 2007 (the “2007 Bonus Program”), the Compensation Committee of the Company’s Board of Directors awarded discretionary bonuses to certain participants after considering the individual’s contributions in fiscal 2007. Mikel Williams, the Company’s Chief Executive Officer, received a
17
discretionary bonus in the amount of $22,500, and Sally Edwards, the Company’s Chief Financial Officer, Michael Mathews, the Company’s Senior Vice President – Manufacturing Operations, and Gerald Barnes, the Company’s Senior Vice President – Sales, each received a discretionary bonus in the amount of $10,000 in recognition of their contributions in fiscal 2007. These discretionary bonuses were well below the target bonuses the named executive officers would have received under the 2007 Bonus Program had the Company met its Net Adjusted EBITDA target.
In April 2008, the Company’s Chief Financial Officer changed her name from Sally Goff to Sally Edwards.
The exhibits listed below are hereby filed with the SEC as part of this Quarterly Report on Form 10-Q. Certain of the following exhibits have been previously filed with the SEC pursuant to the requirements of the Securities Act or the Exchange Act. Such exhibits are identified in the chart to the right of the Exhibit and are incorporated herein by reference.
| | | | | | | | | | | | |
| | | | | | | Incorporated by Reference |
Exhibit | | Description | | Filed
Herewith | | Form | | Period
Ending | | Exhibit | | Filing
Date |
| 3.1 | | Amended and Restated Certificate of Incorporation of DDi Corp. | | | | 8-K | | | | 3.1 | | 12/13/2003 |
| | | | | | |
| 3.2 | | Certificate of Designation of DDi Corp. | | | | 8-K | | | | 3.2 | | 12/13/2003 |
| | | | | | |
| 3.3 | | Certificate of Designation of Series B Preferred Stock of DDi Corp. | | | | 8-K | | | | 10.2 | | 4/07/2004 |
| | | | | | |
| 3.4 | | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of DDi Corp. | | | | 8-K | | | | 3.1 | | 8/10/2005 |
| | | | | | |
| 3.5 | | Amended and Restated Bylaws of DDi Corp. | | | | 10-Q | | 6/30/2005 | | 3.4 | | 8/09/2005 |
| | | | | | |
| 10.1 | | Dynamic Details Incorporated 2007 Senior Management Bonus Program | | | | 10-K | | 12/31/2006 | | 10.1 | | 3/12/2007 |
| | | | | | |
| 10.2 | | Dynamic Details Incorporated 2008 Senior Management Bonus Program | | | | 10-K | | 12/31/2007 | | 10.2 | | 2/29/2008 |
| | | | | | |
| 10.3 | | Employment Agreement dated April 7, 2008 between DDi Corp. and Mikel H. Williams | | | | 8-K | | | | 99.1 | | 4/11/2008 |
| | | | | | |
| 10.4 | | Employment Agreement dated April 7, 2008 between DDi Corp. and Michael R. Mathews | | | | 8-K | | | | 99.2 | | 4/11/2008 |
| | | | | | |
| 10.5 | | Employment Agreement dated April 7, 2008 between DDi Corp. and Gerald Barnes | | | | 8-K | | | | 99.3 | | 4/11/2008 |
| | | | | | |
| 10.6 | | Amendment No. 4 to Real Property Master Lease Agreement dated March 20, 2008 between the Swenson Family Limited Partnership an Dynamic Details Incorporated | | | | 8-K | | | | 99.1 | | 3/24/2008 |
| | | | | | |
| 10.7 | | First Amendment to Lease Agreement dated March 20, 2008 between EMC Associates L.P. and Dynamic Details, Incorporated | | | | 8-K | | | | 99.2 | | 3/24/2008 |
| | | | | | |
| 10.8 | | First Amendment to Lease Agreement dated March 20, 2008 between EMC Associates L.P. and Dynamic Details, Incorporated | | | | 8-K | | | | 99.3 | | 3/24/2008 |
| | | | | | |
| 10.9 | | First Amendment to Lease Agreement dated March 20, 2008 between EMC Associates L.P. and Dynamic Details, Incorporated | | | | 8-K | | | | 99.4 | | 3/24/2008 |
| | | | | | |
| 31.1 | | Certification of Chief Executive Officer of DDi Corp., Pursuant to Rule 13a-14 of the Securities Exchange Act | | X | | | | | | | | |
| | | | | | |
| 31.2 | | Certification of Chief Financial Officer of DDi Corp., Pursuant to Rule 13a-14 of the Securities Exchange Act | | X | | | | | | | | |
| | | | | | |
| 32.1 | | Certification of Chief Executive Officer of DDi Corp., Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | X | | | | | | | | |
| | | | | | |
| 32.2 | | Certification of Chief Financial Officer of DDi Corp., Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | X | | | | | | | | |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, DDi Corp. has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
| | | | |
| | | | DDi CORP. |
| | |
| Date: April 30, 2008 | | | | /s/ MIKEL H. WILLIAMS |
| | | | Mikel H. Williams |
| | | | President and Chief Executive Officer |
| | | | |
| | |
| Date: April 30, 2008 | | | | /s/ SALLY EDWARDS |
| | | | Sally Edwards |
| | | | Chief Financial Officer |
19
