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 September 30, 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 October 29, 2008, DDi Corp. had 19,799,094 shares of common stock, par value $0.001 per share, outstanding.
DDi CORP.
FORM 10-Q for the Quarterly Period Ended September 30, 2008
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
| Item 1. | Financial Statements |
DDi Corp.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
| | | | | | | | |
| | | September 30,
2008 | | | December 31,
2007 | |
| ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 17,061 | | | $ | 20,445 | |
Accounts receivable, net | | | 29,723 | | | | 26,411 | |
Inventories | | | 14,201 | | | | 13,696 | |
Prepaid expenses and other current assets | | | 1,028 | | | | 657 | |
| | | | | | | | |
Total current assets | | | 62,013 | | | | 61,209 | |
Property, plant and equipment, net | | | 28,323 | | | | 28,503 | |
Goodwill | | | 38,458 | | | | 39,006 | |
Intangible assets, net | | | 3,091 | | | | 7,109 | |
Other assets | | | 803 | | | | 950 | |
| | | | | | | | |
Total assets | | $ | 132,688 | | | $ | 136,777 | |
| | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Current maturities of long-term debt | | $ | 244 | | | $ | 244 | |
Accounts payable | | | 14,229 | | | | 11,024 | |
Accrued expenses and other current liabilities | | | 10,786 | | | | 8,594 | |
Income taxes payable | | | 1,179 | | | | 1,301 | |
| | | | | | | | |
Total current liabilities | | | 26,438 | | | | 21,163 | |
Long-term debt | | | 1,333 | | | | 1,516 | |
Other long-term liabilities | | | 2,558 | | | | 2,933 | |
Series A Preferred Stock | | | — | | | | — | |
| | | | | | | | |
Total liabilities | | | 30,329 | | | | 25,612 | |
| | | | | | | | |
Commitments and contingencies (Note 13) | | | | | | | | |
Stockholders’ equity: | | | | | | | | |
Common stock—$0.001 par value, 190,000 shares authorized, 22,746 shares issued and 19,799 shares outstanding at September 30, 2008 and 22,746 shares issued and 22,442 shares outstanding at December 31, 2007 | | | 23 | | | | 23 | |
Additional paid-in-capital | | | 244,892 | | | | 242,938 | |
Treasury stock, at cost — 2,947 shares and 304 shares held in treasury at September 30, 2008 and December 31, 2007, respectively | | | (16,323 | ) | | | (1,875 | ) |
Accumulated other comprehensive income | | | 347 | | | | 471 | |
Accumulated deficit | | | (126,580 | ) | | | (130,392 | ) |
| | | | | | | | |
Total stockholders’ equity | | | 102,359 | | | | 111,165 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 132,688 | | | $ | 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 data)
(Unaudited)
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30,
2008 | | | September 30,
2007 | | | September 30,
2008 | | | September 30,
2007 | |
Net sales | | $ | 49,285 | | | $ | 43,290 | | | $ | 147,825 | | | $ | 135,870 | |
Cost of goods sold | | | 39,058 | | | | 35,562 | | | | 117,482 | | | | 108,886 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 10,227 | | | | 7,728 | | | | 30,343 | | | | 26,984 | |
Operating expenses: | | | | | | | | | | | | | | | | |
Sales and marketing | | | 3,230 | | | | 2,976 | | | | 9,698 | | | | 9,428 | |
General and administrative | | | 3,508 | | | | 3,471 | | | | 10,678 | | | | 11,174 | |
Amortization of intangible assets | | | 1,339 | | | | 1,339 | | | | 4,018 | | | | 4,018 | |
Restructuring and other related charges | | | 8 | | | | 124 | | | | 275 | | | | 333 | |
| | | | | | | | | | | | | | | | |
Operating income (loss) | | | 2,142 | | | | (182 | ) | | | 5,674 | | | | 2,031 | |
Interest expense | | | 192 | | | | 210 | | | | 578 | | | | 910 | |
Interest income | | | (96 | ) | | | (189 | ) | | | (328 | ) | | | (438 | ) |
Other expense (income), net | | | (54 | ) | | | 59 | | | | (167 | ) | | | 174 | |
| | | | | | | | | | | | | | | | |
Income (loss) before income tax expense | | | 2,100 | | | | (262 | ) | | | 5,591 | | | | 1,385 | |
Income tax expense (benefit) | | | 513 | | | | (268 | ) | | | 1,779 | | | | 412 | |
| | | | | | | | | | | | | | | | |
Net income | | $ | 1,587 | | | $ | 6 | | | $ | 3,812 | | | $ | 973 | |
| | | | | | | | | | | | | | | | |
Net income per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.08 | | | $ | 0.00 | | | $ | 0.18 | | | $ | 0.04 | |
Diluted | | $ | 0.08 | | | $ | 0.00 | | | $ | 0.18 | | | $ | 0.04 | |
Weighted-average shares used in per share computations: | | | | | | | | | | | | | | | | |
Basic | | | 20,893 | | | | 22,571 | | | | 21,393 | | | | 22,593 | |
Diluted | | | 20,932 | | | | 22,624 | | | | 21,415 | | | | 22,641 | |
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)
| | | | | | | | |
| | | Nine Months Ended | |
| | | September 30,
2008 | | | September 30,
2007 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
Net income | | $ | 3,812 | | | $ | 973 | |
Adjustments to reconcile net income to cash provided by operating activities: | | | | | | | | |
Depreciation | | | 8,554 | | | | 7,275 | |
Amortization of intangible assets | | | 4,018 | | | | 4,018 | |
Amortization of debt issuance costs and discount | | | 77 | | | | 228 | |
Non-cash compensation | | | 1,954 | | | | 1,698 | |
Other | | | 422 | | | | 44 | |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | (3,639 | ) | | | (143 | ) |
Inventories | | | (656 | ) | | | 1,022 | |
Prepaid expenses and other assets | | | (328 | ) | | | (356 | ) |
Accounts payable | | | 3,345 | | | | (2,456 | ) |
Accrued expenses and other liabilities | | | 1,628 | | | | (833 | ) |
Income tax payable | | | 554 | | | | (1,320 | ) |
| | | | | | | | |
Net cash provided by operating activities | | | 19,741 | | | | 10,150 | |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Purchases of property and equipment | | | (8,777 | ) | | | (5,415 | ) |
| | | | | | | | |
Net cash used in investing activities | | | (8,777 | ) | | | (5,415 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Principal payments on long-term debt | | | (183 | ) | | | (223 | ) |
Payment of debt issuance costs | | | — | | | | (287 | ) |
Proceeds from exercise of stock options | | | — | | | | 262 | |
Repurchases of common stock including commissions | | | (14,448 | ) | | | (747 | ) |
| | | | | | | | |
Net cash used in financing activities | | | (14,631 | ) | | | (995 | ) |
| | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | 283 | | | | (767 | ) |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (3,384 | ) | | | 2,973 | |
Cash and cash equivalents, beginning of period | | | 20,445 | | | | 15,920 | |
| | | | | | | | |
Cash and cash equivalents, end of period | | $ | 17,061 | | | $ | 18,893 | |
| | | | | | | | |
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 September 30, 2008 and the results of its operations for the three and nine months ended September 30, 2008 and 2007 and its cash flows for the nine months ended September 30, 2008 and 2007, and such adjustments are of a normal recurring nature. The results of operations for the nine months ended September 30, 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 September 30, 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 not subject to amortization but are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. In late September and continuing into October, 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 falling below its book value after the quarter ended. The Company considers this decline temporary and based on general economic conditions, and not based on any events or conditions specific to DDi. As such, no goodwill impairment is required at this time, but will be considered in the future if the Company’s stock price does not rebound in the near term, an action 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, military and aerospace, medical, test and industrial instruments, high-end computing, and high-durability commercial markets. The Company operates primarily in one geographical area, North America.
4
DDi CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 Staff Positions (“FSP”) 157-1 and 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.
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 a material 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.
In April 2008, the FASB issued FSP 142-3,Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142.FSP 142-3 is effective for fiscal years beginning after December 15, 2008. FSP 142-3 will have an impact on the Company’s accounting for business combinations completed after January 1, 2009.
5
DDi CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles(“SFAS 162”). This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission of the Public Company Accounting Oversight Board’s amendments to AU Section 411,The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company does not expect SFAS 162 to have a material impact on the preparation of its consolidated financial statements.
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):
| | | | | | |
| | | September 30,
2008 | | December 31,
2007 |
Raw materials | | $ | 6,346 | | $ | 7,063 |
Work-in-process | | | 4,550 | | | 3,484 |
Finished goods | | | 3,305 | | | 3,149 |
| | | | | | |
Total | | $ | 14,201 | | $ | 13,696 |
| | | | | | |
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 (5.0% at September 30, 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. Through September 30, 2008, Liquidity has been consistently 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 September 30, 2008, the Company was in compliance with all required covenants.
As of September 30, 2008, the borrowing capacity under the credit facility was approximately $20.2 million; however, no amounts were outstanding.
NOTE 4. LONG-TERM DEBT
In April 2007, the Company consolidated two outstanding term loans assumed in the acquisition of Sovereign Circuits, Inc. (“Sovereign”) 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 September 30, 2008, the effective interest rate of the term loan was 3.99% and the remaining outstanding balance was $1.6 million.
6
DDi CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 in relation to revenue have been consistent with the Company’s estimates. The changes in the Company’s warranty accrual were as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30,
2008 | | | September 30,
2007 | | | September 30,
2008 | | | September 30,
2007 | |
Beginning balance | | $ | 840 | | | $ | 693 | | | $ | 750 | | | $ | 592 | |
Current period warranty charges | | | 1,286 | | | | 823 | | | | 3,345 | | | | 2,589 | |
Actual warranty costs incurred | | | (1,224 | ) | | | (808 | ) | | | (3,193 | ) | | | (2,473 | ) |
| | | | | | | | | | | | | | | | |
Ending balance | | $ | 902 | | | $ | 708 | | | $ | 902 | | | $ | 708 | |
| | | | | | | | | | | | | | | | |
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 $925,000 and $1.4 million of total gross unrecognized tax benefits at September 30, 2008 and December 31, 2007, respectively. If recognized in future periods there would be a reduction to goodwill of $518,000 and a favorable affect to the tax rate for the remaining amounts. The Company anticipates a decrease in the tax contingency reserve during the remainder of 2008 of approximately $85,000 due to statute expirations.
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 September 30, 2008 and 13,000 grants of stock option awards during the nine months ended September 30, 2008. As of this date, the total compensation cost related to non-vested stock options not yet recognized was $2.0 million, net of estimated forfeitures. This cost will be amortized on a straight-line basis over the remaining weighted-average period of approximately 1.2 years.
Restricted Stock
There were no grants of restricted stock during the three or nine months ended September 30, 2008. As of this date, the total compensation cost related to non-vested restricted stock awards not yet recognized was $511,000, net of estimated forfeitures. This cost will be amortized on a straight-line basis over the remaining weighted-average period of approximately 2.2 years.
7
DDi CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Stock Compensation Expense
The following table sets forth expense related to stock-based compensation (in thousands):
| | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30,
2008 | | September 30,
2007 | | September 30,
2008 | | September 30,
2007 |
Non-cash compensation expense: | | | | | | | | | | | | |
Cost of goods sold | | $ | 127 | | $ | 92 | | $ | 368 | | $ | 261 |
Sales and marketing expenses | | | 70 | | | 45 | | | 210 | | | 51 |
General and administrative expenses | | | 456 | | | 411 | | | 1,376 | | | 1,386 |
| | | | | | | | | | | | |
Total non-cash compensation expense | | $ | 653 | | $ | 548 | | $ | 1,954 | | $ | 1,698 |
| | | | | | | | | | | | |
NOTE 8. STOCK REPURCHASE PROGRAM
In August 2007, the Company’s Board of Directors (the “Board”) authorized a common stock repurchase program, initially authorizing the repurchase of up to 1,100,000 shares of the Company’s common stock in the open market at prevailing market prices or in privately-negotiated transactions. The repurchase program does not have an expiration date. Subsequent to its initial authorization, the Board increased the number of shares authorized to be repurchased in February, May and August 2008, by 400,000, 500,000 and 1,000,000 shares, respectively, bringing the total number of shares currently authorized to 3,000,000 shares. The Company repurchased 1,550,000 shares during the quarter ended September 30, 2008 for a total cost of $8.7 million. All such shares and related costs are held as treasury stock and accounted for using the cost method. As of September 30, 2008, the Company repurchased a total of 2,946,986 shares since the inception of the program in August 2007 for a total cost of $16.3 million, leaving 53,014 shares authorized to be repurchased.
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 | | Nine Months Ended |
| | | September 30,
2008 | | September 30,
2007 | | September 30,
2008 | | September 30,
2007 |
Net sales: | | | | | | | | | | | | |
North America (a) | | $ | 45,230 | | $ | 39,713 | | $ | 135,099 | | $ | 125,517 |
Asia | | | 3,398 | | | 3,074 | | | 11,236 | | | 9,103 |
Other | | | 657 | | | 503 | | | 1,490 | | | 1,250 |
| | | | | | | | | | | | |
Total | | $ | 49,285 | | $ | 43,290 | | $ | 147,825 | | $ | 135,870 |
| | | | | | | | | | | | |
| (a) | The majority of sales in North America are to customers located in the United States. |
NOTE 10. NET INCOME PER SHARE
Basic net income per share is computed by dividing the net income for the period by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income 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.
8
DDi CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table sets forth the calculation of basic and diluted net income per share of common stock (in thousands, except per share data):
| | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30,
2008 | | September 30,
2007 | | September 30,
2008 | | September 30,
2007 |
Weighted-average shares of common stock outstanding—basic | | | 20,893 | | | 22,571 | | | 21,393 | | | 22,593 |
Weighted common stock equivalents | | | 39 | | | 53 | | | 22 | | | 48 |
| | | | | | | | | | | | |
Weighted-average shares of common stock outstanding—diluted | | | 20,932 | | | 22,624 | | | 21,415 | | | 22,641 |
| | | | | | | | | | | | |
Net income | | $ | 1,587 | | $ | 6 | | $ | 3,812 | | $ | 973 |
| | | | | | | | | | | | |
Net income per share—basic and diluted | | $ | 0.08 | | $ | 0.00 | | $ | 0.18 | | $ | 0.04 |
| | | | | | | | | | | | |
For the three and nine months ended September 30, 2008, common shares issuable upon exercise of outstanding stock options and the vesting of restricted stock of 2,243,184 and 2,259,927, respectively, were excluded from the diluted net income per common share calculation as their impact would have been anti-dilutive. For the three and nine months ended September 30, 2007, common shares issuable upon exercise of outstanding stock options of 2,000,178 and 2,004,563, respectively, were excluded from the diluted net income per common share calculation as their impact would have been anti-dilutive.
NOTE 11. COMPREHENSIVE INCOME
SFAS No. 130,Reporting Comprehensive Income, establishes requirements for the reporting and disclosure of comprehensive income and its components. Comprehensive income includes unrealized holding gains and losses and other items that have previously been excluded from net income and reflected instead in stockholders’ equity. The following table summarizes the Company’s comprehensive income (in thousands):
| | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30,
2008 | | | September 30,
2007 | | September 30,
2008 | | | September 30,
2007 |
Net income | | $ | 1,587 | | | $ | 6 | | $ | 3,812 | | | $ | 973 |
Other comprehensive income: | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | (82 | ) | | | 138 | | | (124 | ) | | | 227 |
| | | | | | | | | | | | | | |
Comprehensive income | | $ | 1,505 | | | $ | 144 | | $ | 3,688 | | | $ | 1,200 |
| | | | | | | | | | | | | | |
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.
9
DDi CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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. As of September 30, 2008, the Company’s financial assets and financial liabilities that were measured at fair value on a recurring basis were comprised solely of money market deposits. The Company invests excess cash from its cash depository accounts in highly liquid money market accounts 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.
The fair value of the Company’s cash equivalents was $13.9 million as of September 30, 2008 and was based on quoted prices in active markets for identical assets.
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 complaint alleged 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 sought an unspecified amount of damages. 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. On July 1, 2008, the Court issued a ruling awarding the plaintiffs a total of $52,000 in damages. On July 9, 2008, the Company filed a motion for reconsideration requesting that the Court award the Company attorneys fees. The motion is currently pending. The Court has not entered a final judgment in the case. The accrual of the aforementioned award was recorded in the second quarter of 2008.
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, except for the accrual of the award noted above, the Company has not recorded any loss contingencies, as an unfavorable outcome in these matters is not probable at September 30, 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 September 30, 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 U.S. Securities and Exchange Commission (“SEC”).
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 engineering and manufacturing services. We specialize in engineering and fabricating complex multi-layer printed circuit boards (“PCBs” or “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, military and aerospace, medical, test and industrial instruments, high-end computing, and high-durability commercial markets. With such a broad customer base and approximately 50 new 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
PCBs are a fundamental component of virtually all electronic equipment. The level of board complexity is determined by several characteristics, including size, layer count, density, materials, functionality and design features. High-end commercial equipment manufacturers require complex PCBs 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 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 boards that accommodate higher speeds and frequencies and increased component densities and operating temperatures. In turn, OEMs rely on 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 PCBs. |
| | • | | Shifting of high volume production to Asia. Asian-based manufacturers of PCBs are capitalizing on their lower labor costs and are increasing their production and market share, 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 boards on a quick-turn basis. |
Results of Operations for the Three Months Ended September 30, 2008 Compared to the Three Months Ended September 30, 2007
The following tables set forth select data from our Condensed Consolidated Statements of Operations (in thousands):
| | | | | | | | | | | | | | |
| | | Three Months Ended | | | $ Change | | % Change | |
| | | September 30,
2008 | | | September 30,
2007 | | | |
Net sales | | $ | 49,285 | | | $ | 43,290 | | | $ | 5,995 | | 13.8 | % |
Cost of goods sold | | | 39,058 | | | | 35,562 | | | | 3,496 | | 9.8 | % |
Gross profit | | | 10,227 | | | | 7,728 | | | | 2,499 | | 32.3 | % |
Gross profit as a percentage of net sales | | | 20.8 | % | | | 17.9 | % | | | | | | |
Net Sales
Net sales increased $6.0 million, or 13.8%, to $49.3 million for the third quarter of 2008, from $43.3 million for the same period in 2007. The increase in net sales was primarily a result of strengthening and extending our sales team and geographic coverage, particularly in the military/aerospace market segment, as well as higher average pricing related to the mix of products shipped.
Gross Profit
Gross profit for the third quarter of 2008 was $10.2 million, or 20.8% of net sales, compared to $7.7 million, or 17.9% of net sales, for the same period in 2007. The increase from the prior year was primarily a function of the higher sales volume and improved unit pricing relative to the product mix shift towards higher technology products, coupled with improved cost management.
Non-cash Compensation
| | | | | | |
| | | Three Months Ended |
| | | September 30,
2008 | | September 30,
2007 |
Non-cash compensation: | | | | | | |
Cost of goods sold | | $ | 127 | | $ | 92 |
Sales and marketing expenses | | | 70 | | | 45 |
General and administrative expenses | | | 456 | | | 411 |
| | | | | | |
Total non-cash compensation | | $ | 653 | | $ | 548 |
| | | | | | |
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 | | | $ Change | | % Change | |
| | | September 30,
2008 | | | September 30,
2007 | | | |
Sales and marketing expenses | | $ | 3,230 | | | $ | 2,976 | | | $ | 254 | | 8.5 | % |
Percentage of net sales | | | 6.6 | % | | | 6.9 | % | | | | | | |
Sales and marketing expenses increased on an absolute dollar basis by $254,000, or 8.5%, to $3.2 million, or 6.6% of net sales, for the third quarter of 2008, from $3.0 million, or 6.9% of net sales, for the third quarter of 2007. The dollar increase is primarily due to higher compensation costs. 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 | | | $ Change | | % Change | |
| | | September 30,
2008 | | | September 30,
2007 | | | |
General and administrative expenses | | $ | 3,508 | | | $ | 3,471 | | | $ | 37 | | 1.1 | % |
Percentage of net sales | | | 7.1 | % | | | 8.0 | % | | | | | | |
Total general and administrative expenses were essentially flat at $3.5 million in the third quarter of 2008 and 2007. There were cost reductions in Sarbanes-Oxley costs, consultants, and communications expense, offset somewhat by increased management incentives, non-cash compensation, and depreciation expense. However, as a percentage of net sales, general and administrative expenses decreased to 7.1% in the third quarter of 2008 from 8.0% for the same period in 2007. This decrease was primarily attributable to the improved operating leverage of our fixed costs across higher net sales.
Amortization of Intangible Assets
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 third quarter of 2008 and 2007 are a result of ongoing fees and expenses related to 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. A ruling was issued on July 1, 2008 awarding the landlord $52,000 and this amount was accrued for in the second quarter of 2008. We do not expect to incur any significant future costs related to the Arizona facility closure or associated litigation.
Interest Expense
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 interest expense associated with long-term leases. Interest expense decreased by $18,000 to $192,000 for the third quarter of 2008 from $210,000 for the same period in 2007. The decrease is primarily related to a reduction in interest associated with long-term leases resulting from an expired lease and a reduction in interest on our note payable as a result of a declining principal balance.
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Interest Income
Interest income consists of interest earned on our cash balances and decreased by $93,000 to $96,000 for the third quarter of 2008 from $189,000 for the third quarter of 2007. Although the Company’s average cash balances during both the third quarter of 2008 and 2007 were relatively consistent, reduced interest rates resulted in an overall reduction in interest income.
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 third quarter of 2008, net other income was $54,000 compared to net other expense of $59,000 in the third quarter of 2007 and was primarily due to the change in currency exchange rates between the U.S. and Canadian dollar.
Income Tax Expense
For the third quarter of 2008, income tax expense was $513,000 compared to an income tax benefit of $268,000 in the prior year comparable period. The increase in tax expense is primarily due to an increase in U.S. and Canadian taxable income for the three months ended September 30, 2008 compared to the same period in 2007.
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. As a result, there is no U.S. tax benefit for book purposes even though the net operating loss carryforwards result in a reduction of cash taxes paid by us.
Results of Operations for the Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007
The following tables set forth select data from our Condensed Consolidated Statements of Operations (in thousands):
| | | | | | | | | | | | | | |
| | | Nine Months Ended | | | $ Change | | % Change | |
| | | September 30,
2008 | | | September 30,
2007 | | | |
Net sales | | $ | 147,825 | | | $ | 135,870 | | | $ | 11,955 | | 8.8 | % |
Cost of goods sold | | | 117,482 | | | | 108,886 | | | | 8,596 | | 7.9 | % |
Gross profit | | | 30,343 | | | | 26,984 | | | | 3,359 | | 12.4 | % |
Gross profit as a percentage of net sales | | | 20.5 | % | | | 19.9 | % | | | | | | |
Net Sales
Net sales increased $12.0 million, or 8.8%, to $147.8 million for the nine months ended September 30, 2008, compared to $135.9 million for the same period in 2007. The increase in net sales was primarily due to strengthening our sales efforts as well as to improved average pricing relative to the product mix shift towards higher technology products.
Gross Profit
Gross profit for the nine months ended September 30, 2008 was $30.3 million, or 20.5% of net sales, compared to $27.0 million, or 19.9% of net sales, for the same period in 2007. The increase in the gross profit percentage from the prior year was primarily a function of higher sales volume, improved average pricing related to the mix of product shipped, and improved operational performance and cost reduction initiatives.
Non-cash Compensation
| | | | | | |
| | | Nine Months Ended |
| | | September 30,
2008 | | September 30,
2007 |
Non-cash compensation: | | | | | | |
Cost of goods sold | | $ | 368 | | $ | 261 |
Sales and marketing expenses | | | 210 | | | 51 |
General and administrative expenses | | | 1,376 | | | 1,386 |
| | | | | | |
Total non-cash compensation | | $ | 1,954 | | $ | 1,698 |
| | | | | | |
14
Non-cash compensation expense related to stock awards was recorded in accordance with the fair value recognition provisions of SFAS 123R.
Sales and Marketing Expenses
| | | | | | | | | | | | | | |
| | | Nine Months Ended | | | $ Change | | % Change | |
| | | September 30,
2008 | | | September 30,
2007 | | | |
Sales and marketing expenses | | $ | 9,698 | | | $ | 9,428 | | | $ | 270 | | 2.9 | % |
Percentage of net sales | | | 6.6 | % | | | 6.9 | % | | | | | | |
Total sales and marketing expenses increased on an absolute dollar basis by $270,000 to $9.7 million for the nine months ended September 30, 2008 from $9.4 million for the same period in 2007, primarily due to higher wage and non-cash compensation expense. However, as a percentage of net sales, sales and marketing expenses decreased to 6.6% for the first nine months of 2008 from 6.9% for the same period in 2007, primarily due to our more efficient sales distribution strategy implemented during 2007 resulting in lower commissions expense as a percentage of sales.
General and Administrative Expenses
| | | | | | | | | | | | | | | |
| | | Nine Months Ended | | | $ Change | | | % Change | |
| | | September 30,
2008 | | | September 30,
2007 | | | |
General and administrative expenses | | $ | 10,678 | | | $ | 11,174 | | | $ | (496 | ) | | (4.4 | %) |
Percentage of net sales | | | 7.2 | % | | | 8.2 | % | | | | | | | |
Total general and administrative expenses decreased 4.4% to $10.7 million, or 7.2% of net sales, for the nine months ended September 30, 2008, from $11.2 million, or 8.2% of net sales, for the same period in 2007. The decrease in general and administrative expenses was primarily attributable to reductions in several cost categories including compensation costs, Sarbanes-Oxley consulting fees, communications expense, corporate insurance, consulting, and bad debt expense, offset by higher depreciation and management incentives expense.
Amortization of Intangible Assets
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 nine months of 2008 and 2007 are a result of the ongoing fees and expenses related to 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. A ruling was issued on July 1, 2008 awarding the landlord $52,000 and this amount was accrued for in the second quarter of 2008. We do not expect to incur any significant future costs related to the Arizona facility closure or associated litigation.
Interest Expense
Interest expense consists of amortization of debt issuance costs, fees related to our Credit Facility, interest on the note payable on our Ohio facility, and interest expense associated with long-term leases. Interest expense decreased to $578,000 for the nine months ended September 30, 2008 from $910,000 for the same period in 2007. The decrease is primarily related to a reduction in debt issuance costs amortization related to the renewal of the revolving credit facility in March 2007, a decrease in interest associated with long-term leases resulting from an expired lease, and a reduction in interest on our note payable as a result of a declining principal balance.
15
Interest Income
Interest income consists of interest earned on our cash balances and decreased to $328,000 during the first nine months of 2008 from $438,000 during the same period in 2007. Although the Company maintained higher average cash balances during the first nine months of 2008 compared to the same period in 2007, reduced interest rates resulted in an overall reduction in interest income.
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 nine months ended September 30, 2008, net other income was $167,000 compared to net other expense of $174,000 for the same period in 2007 and was primarily due to the change in currency exchange rates between the U.S. and Canadian dollar.
Income Tax Expense
For the nine months ended September 30, 2008, income tax expense was $1.8 million compared to $412,000 in the prior year comparable period. This year to date increase was primarily related to an increase in U.S. and Canadian taxable income for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.
Liquidity and Capital Resources
| | | | | | |
| | | September 30,
2008 | | December 31,
2007 |
| | | (Dollars in thousands) |
Working capital | | $ | 35,575 | | $ | 40,046 |
Current ratio (current assets to current liabilities) | | | 2.3 : 1.0 | | | 2.9 : 1.0 |
Cash and cash equivalents | | $ | 17,061 | | $ | 20,445 |
Short term borrowings | | $ | — | | $ | — |
Long term debt, including current portion | | $ | 1,577 | | $ | 1,760 |
As of September 30, 2008, we had total cash and cash equivalents of $17.1 million and no amounts outstanding on our revolving credit facility. We frequently monitor the third-party depository institutions that hold our cash and cash equivalents. Our emphasis is primarily on safety of principal and secondarily on maximizing yield on those funds. The decrease in our current ratio and cash and cash equivalents from December 31, 2007 was primarily due to repurchases of our common stock totaling $14.4 million during the nine months ended September 30, 2008, partially offset by cash generated from operations.
In August 2007, our Board of Directors (the “Board”) authorized a common stock repurchase program of up to 1,100,000 shares of our common stock in the open market at prevailing market prices or in privately-negotiated transactions. Subsequent to its initial authorization, the Board increased the number of shares authorized to be repurchased in February, May and August 2008, by 400,000, 500,000 and 1,000,000 shares, respectively, bringing the total number of shares currently authorized to 3,000,000 shares. We repurchased 2,642,533 shares during the nine months ended September 30, 2008 at an average price per share of $5.45 excluding commissions. As of September 30, 2008, we had repurchased a total of 2,946,986 shares since the inception of the program in August 2007, leaving 53,014 shares authorized to be repurchased. We will continue to review the value in repurchasing shares after considering our cash levels and operating needs as well as other avenues for our cash that could create greater shareholder value.
Our principal sources of liquidity to fund ongoing operations have been existing cash on hand, cash generated from operations, and 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.
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Revolving Credit Facility
On 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 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 (5.0% at September 30, 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. Through September 30, 2008, Liquidity has been consistently 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 September 30, 2008, we were in compliance with all required covenants.
As of September 30, 2008, the borrowing capacity under the Credit Facility was approximately $20.2 million; however, there were no amounts outstanding.
Consolidated Cash Flows
The following table summarizes our statements of cash flows for the nine months ended September 30, 2008 and 2007 (in thousands):
| | | | | | | | |
| | | Nine Months Ended | |
| | | September 30,
2008 | | | September 30,
2007 | |
Net cash provided by (used in): | | | | | | | | |
Operating activities | | $ | 19,741 | | | $ | 10,150 | |
Investing activities | | | (8,777 | ) | | | (5,415 | ) |
Financing activities | | | (14,631 | ) | | | (995 | ) |
Effect of exchange rates on cash | | | 283 | | | | (767 | ) |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | $ | (3,384 | ) | | $ | 2,973 | |
| | | | | | | | |
Net cash provided by operating activities represents net income adjusted for non-cash charges and working capital changes. The $9.6 million increase in net cash provided by operating activities for the nine months ended September 30, 2008 compared to the same period in 2007 was primarily attributable to an increase in operating income and in accounts payable and accrued expenses due primarily to the timing of scheduled payments, offset partially by increases in accounts receivable and inventories as a result of increased sales.
The $3.4 million increase in net cash used in investing activities for the nine months ended September 30, 2008 compared to the same period in 2007 was primarily due to an increase in capital equipment investments to increase our technological capabilities as well as expand capacity in certain manufacturing process areas.
The $13.6 million increase in net cash used in financing activities for the nine months ended September 30, 2008 compared to the same period in 2007 was primarily due to repurchases of our common stock totaling $14.4 million during the first nine months of 2008.
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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 September 30, 2008 there had been no material changes to this information.
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 Staff Positions (“FSP”) 157-1 and 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 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 our 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. We currently do not expect adoption of SFAS 160 to have a material impact on our consolidated financial position, results of operations or cash flows.
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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.
In April 2008, the FASB issued FSP 142-3,Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,Goodwill and Other Intangible Assets. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. FSP 142-3 will have an impact on our accounting for business combinations completed after January 1, 2009.
In May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles(“SFAS 162”). This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission of the Public Company Accounting Oversight Board’s amendments to AU Section 411,The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We do not expect SFAS 162 to have a material impact on the preparation of our consolidated financial statements.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Interest Rate Risk
Advances under our Credit Facility bear interest at the prime rate (5.0% at September 30, 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 have been no borrowings on the Credit Facility during the nine months ended September 30, 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 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 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 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.
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Changes in Internal Controls Over Financial Reporting
No change in our internal control over financial reporting occurred during the quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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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 and our Quarterly Report on Form 10-Q for the periods ended March 31, 2008 and June 30, 2008 (the “Q2 10-Q”) for a summary of our previously reported legal proceedings. Since the date of the filing of the Q2 10-Q there have been no material developments in previously reported legal proceedings.
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, except as set forth below.
Significant decreases in our stock price could result in our having to record an impairment charge related to our goodwill.
Applicable accounting standards require that goodwill be tested for impairment at least annually or whenever evidence of potential impairment exists. If our stock price decreases to the point where the fair value of our Company, as determined by our market capitalization, is less than our book value, this could indicate a potential impairment and we may be required to record an impairment charge in that period. In late September and continuing into October, 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 falling below its book value after the quarter ended. We consider this decline temporary and based on general economic conditions, and not based on any events or conditions specific to our Company. As such, we may be required to record a goodwill impairment in the future if our stock price does not rebound, which could have a material impact on our results of operations.
Current levels of market volatility are unprecedented.
The capital and credit markets have been experiencing volatility and disruption for more than 12 months. In recent weeks, the volatility and disruption has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit capacity for certain issuers without regard to those issuers’ underlying financial strength. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table contains information for shares repurchased during the third 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 (2) | | Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs (3) |
July 1 – July 31, 2008 | | — | | $ | — | | — | | — |
Aug 1 – Aug 31, 2008 | | 350,000 | | | 5.51 | | 350,000 | | 1,253,014 |
Sept 1 – Sept 30, 2008 | | 1,200,000 | | | 5.60 | | 1,200,000 | | 53,014 |
| | | | | | | | | |
TOTAL | | 1,550,000 | | $ | 5.58 | | 1,550,000 | | 53,014 |
| (1) | Average price per share excludes commissions. |
| (2) | Of the shares purchased during the third quarter of 2008, 350,000 shares were purchased in open-market transactions and 1,200,000 shares were purchased in privately-negotiated transactions, in each case pursuant to the repurchase program. |
| (3) | In August 2007, our Board of Directors authorized a common stock repurchase program initially authorizing the repurchase of up to 1,100,000 shares of the Company’s common stock in the open market at prevailing market prices or in privately-negotiated transactions. The Company announced the authorization of the repurchase program on August 9, 2007. The repurchase program does not have an expiration date. Subsequent to its initial authorization, the Board increased the number of shares authorized to be repurchased in February, May and August 2008, by 400,000, 500,000 and 1,000,000 shares, respectively, bringing the total number of shares of the Company’s common stock authorized to be repurchased to 3,000,000 shares. |
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| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | Submission of Matters to a Vote of Security Holders |
None.
None.
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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 of 1933, as amended, 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 |
Index | | 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 | | 4/7/2004 |
| | | | | | |
| 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 | | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of DDi Corp. | | | | 8-K | | | | 3.1 | | 2/8/2006 |
| | | | | | |
| 3.6 | | Amended and Restated Bylaws of DDi Corp. | | | | 10-Q | | 6/30/2005 | | 3.4 | | 8/9/2005 |
| | | | | | |
| 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: October 29, 2008 | | | | /s/ MIKEL H. WILLIAMS |
| | | | Mikel H. Williams |
| | | | President and Chief Executive Officer |
| | |
| Date: October 29, 2008 | | | | /s/ SALLY L. EDWARDS |
| | | | Sally L. Edwards |
| | | | Chief Financial Officer |
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