SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
Commission file number 0-8328
--------------------
DYNAMIC MATERIALS CORPORATION
(Exact name of Registrant as Specified in its Charter)
Delaware 84-0608431
(State of Incorporation or Organization) (I.R.S. Employer Identification No.)
5405 Spine Road, Boulder, Colorado 80301
(Address of principal executive offices, including zip code)
(303) 665-5700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
The number of shares of Common Stock outstanding was 5,016,125 as of July
31, 2001.
1
ITEM 1. Financial Statements
DYNAMIC MATERIALS CORPORATION
CONDENSED BALANCE SHEETS
(unaudited)
June 30, December 31,
ASSETS 2001 2000
------ -------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ - $ 186,530
Accounts receivable, net of allowance for doubtful
accounts of $154,000 and $130,000, respectively 5,857,930 4,632,123
Inventories 4,964,072 3,881,155
Prepaid expenses and other 379,231 258,493
------------- -------------
Total current assets 11,201,233 8,958,301
------------- -------------
PROPERTY, PLANT AND EQUIPMENT 18,501,624 17,769,509
Less- Accumulated depreciation (5,166,443) (4,492,850)
------------- -------------
Property, plant and equipment-net 13,335,181 13,276,659
------------- -------------
RESTRICTED CASH AND INVESTMENTS 179,394 179,394
INTANGIBLE ASSETS, net of accumulated amortization
of $1,247,689 and $1,094,870, respectively 4,839,931 4,992,750
OTHER ASSETS-net 254,030 260,351
------------- -------------
TOTAL ASSETS $ 29,809,769 $ 27,667,455
============= =============
See Notes to Condensed Financial Statements.
2
DYNAMIC MATERIALS CORPORATION
CONDENSED BALANCE SHEETS
(unaudited)
-------------
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
- ------------------------------------ -------- ------------
CURRENT LIABILITIES:
Bank overdraft $ 158,141 $ -
Accounts payable 2,109,449 2,051,301
Accrued expenses 1,501,286 1,275,579
Current maturities on long-term debt 5,760,000 725,000
Capital lease obligation - 3,394
------------- -------------
Total current liabilities 9,528,876 4,055,274
LONG-TERM DEBT 6,090,000 10,230,000
DEFERRED GAIN 69,730 77,887
------------- -------------
Total liabilities 15,688,606 14,363,161
------------- -------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.05 par value;
4,000,000 shares authorized: no issued and
outstanding shares - -
Common stock, $.05 par value; 15,000,000 shares
authorized; 5,016,125 and 4,990,331 shares issued
and outstanding, respectively 250,807 249,517
Additional paid-in capital 12,283,870 12,262,109
Retained earnings 1,586,486 792,668
------------- -------------
14,121,163 13,304,294
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 29,809,769 $ 27,667,455
============= =============
See Notes to Condensed Financial Statements.
3
DYNAMIC MATERIALS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
-------------
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
---- ----- ---- ----
NET SALES $ 8,454,286 $ 8,320,483 $ 15,392,455 $ 14,707,107
COST OF PRODUCTS SOLD 6,215,213 7,256,318 11,759,672 12,808,108
-------------- -------------- -------------- --------------
Gross profit 2,239,073 1,064,165 3,632,783 1,898,999
-------------- -------------- -------------- --------------
COSTS AND EXPENSES:
General and administrative expenses 931,838 909,210 1,692,040 1,776,741
Selling expenses 457,462 422,401 816,689 789,430
-------------- -------------- -------------- --------------
1,389,300 1,331,611 2,508,729 2,566,171
-------------- -------------- -------------- --------------
INCOME (LOSS) FROM OPERATIONS 849,773 (267,446) 1,124,054 (667,172)
OTHER INCOME (EXPENSE):
Other income 1,824 1,857 2,276 187,417
Interest expense (172,542) (342,436) (340,421) (705,132)
Interest income 4,662 1,639 7,909 1,689
-------------- -------------- -------------- --------------
Income (loss) before income
taxes 683,717 (606,386) 793,818 (1,183,198)
INCOME TAX PROVISION - - - -
-------------- -------------- -------------- --------------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 683,717 (606,386) 793,818 (1,183,198)
EXTRAORDINARY ITEM - LOSS FROM
EXTINGUISHMENT OF DEBT - (80,111) - (80,111)
-------------- -------------- -------------- --------------
NET INCOME (LOSS) $ 683,717 $ (686,497) $ 793,818 $ (1,263,309)
============== ============== ============== ==============
NET INCOME (LOSS) PER SHARE - BASIC
AND DILUTED
Income (loss) before extraordinary item $ 0.14 $ (0.19) $ 0.16 $ (0.39)
Extraordinary item - (0.02) - (0.03)
-------------- -------------- -------------- --------------
Net income (loss) per share $ 0.14 $ (0.21) $ 0.16 $ (0.42)
============== ============== ============== ==============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC 4,990,592 3,213,258 4,990,462 3,027,844
============== ============== ============== ==============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - DILUTED 5,042,215 3,213,258 5,007,969 3,027,844
============== ============== ============== ==============
See Notes to Condensed Financial Statements.
4
DYNAMIC MATERIALS CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(unaudited)
-------------
Common Stock Additional
--------------------- Paid-In Retained
Shares Amount Capital Earnings
------ ------ ------- --------
Balances, December 31, 2000 4,990,331 $ 249,517 $ 12,262,109 $ 792,668
Shares issued for stock option
exercises 1,250 63 2,125 -
Shares issued in connection
with the employee stock
purchase plan 24,544 1,227 19,636 -
Net income - - - 793,818
------------ ------------ --------------- --------------
Balances, June 30, 2001 5,016,125 $ 250,807 $ 12,283,870 $ 1,586,486
============ ============ =============== ==============
See Notes to Condensed Financial Statements.
5
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
-------------
For the six months
-------------------------------
ended June 30,
-------------------------------
2001 2000
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 793,818 $ (1,263,309)
Adjustments to reconcile net income (loss)
to net cash from operating activities-
Depreciation 674,707 634,219
Amortization 152,819 155,974
Amortization of deferred gain on swap termination (8,157) (46,650)
Amortization of deferred compensation - 8,438
Gain on sale of property, plant and equipment - (185,570)
Change in -
Accounts receivable, net (1,225,807) (851,808)
Inventories (1,082,917) (201,389)
Prepaid expenses and other (120,738) 117,237
Income tax receivable - 1,360,000
Accounts payable 58,148 (49,112)
Accrued expenses 225,667 (144,198)
------------- -------------
Net cash flows from operating activities (532,460) (466,168)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Release of restricted cash and investments - 255,008
Cash paid in connection with the construction
of the new facility - (297,073)
Acquisition of property, plant and equipment (733,187) (143,666)
Proceeds from repayment of loan to related party - 354,588
Change in other non-current assets 6,321 214,929
Proceeds from sale of property, plant and equipment - 940,036
------------ -------------
Net cash flows from investing activities (726,866) 1,323,822
------------- -------------
See Notes to Condensed Financial Statements.
6
DYNAMIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
-------------
For the six months
---------------------------
ended June 30,
----------------------------
2001 2000
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on bank line of credit, net $ - $ 155,000
Repayment on bank line of credit - (10,255,000)
Payment on industrial development revenue bonds (355,000) (335,000)
Proceeds from issuance of common stock to SNPE, Inc.,
net of issuance costs - 5,233,682
Borrowings on SNPE, Inc. line of credit 1,250,000 3,500,000
Borrowings on SNPE, Inc. convertible subordinated note - 1,200,000
Payment of deferred financing costs - (116,384)
Payments on capital lease obligation (3,394) (17,291)
Net proceeds from issuance of common stock to employees 23,049 27,186
Bank overdraft 158,141 -
Repayment of bank overdraft - (193,471)
-------------- ------------
Net cash flows from financing activities 1,072,796 (801,271)
-------------- ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (186,530) 56,376
CASH AND CASH EQUIVALENTS, beginning of the period 186,530 -
-------------- ------------
CASH AND CASH EQUIVALENTS, end of the period $ - $ 56,376
============== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest, net of amounts capitalized $ 301,004 $ 603,277
============== ============
Income taxes $ - $ -
============== ============
See Notes to Condensed Financial Statements.
7
DYNAMIC MATERIALS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The information included in the Condensed Financial Statements is unaudited
but includes all normal and recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the interim periods
presented. These Condensed Financial Statements should be read in conjunction
with the financial statements that are included in the Company's Annual Report
filed on Form 10-K for the year ended December 31, 2000.
2. NEW ACCOUNTING PRINCIPLES
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which requires that companies recognize
all derivatives as either assets or liabilities in the balance sheet at fair
value. Under SFAS 133, accounting for changes in fair value of a derivative
depends on its intended use and designation. SFAS 133 is effective for fiscal
years beginning after June 15, 2000. The Company has implemented SFAS 133
effective January 1, 2001 with no impact.
In June 2001, the FASB authorized the issuance of Statement of Financial
Accounting Standards ("SFAS") No. 141, Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 141 requires the use of the
purchase method of accounting for all business combinations initiated after June
30, 2001. SFAS No. 141 requires intangible assets to be recognized if they arise
from contractual or legal rights or are "separable", i.e., it is feasible that
they may be sold, transferred, licensed, rented, exchanged or pledged. As a
result, it is likely that more intangible assets will be recognized under SFAS
No. 141 than its predecessor, APB Opinion No.16 although in some instances
previously recognized intangibles will be subsumed into goodwill.
Under SFAS No. 142, goodwill will no longer be amortized on a straight-line
basis over its estimated useful life, but will be tested for impairment on an
annual basis and whenever indicators of impairment arise. The goodwill
impairment test, which is based on fair value, is to be performed on a reporting
unit level. A reporting unit is defined as a SFAS No. 131 operating segment or
one level lower. Goodwill will no longer be allocated to other long-lived assets
for impairment testing under SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. Additionally,
goodwill on equity method investments will no longer be amortized; however, it
will continue to be tested for impairment in accordance with Accounting
Principles Board Opinion No. 18, The Equity Method of Accounting for Investments
in Common Stock. Under SFAS No. 142 intangible assets with indefinite lives will
not be amortized. Instead they will be carried at the lower cost or market value
and tested for impairment at least annually. All other recognized intangible
assets will continue to be amortized over their estimated useful lives.
8
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001 although goodwill on business combinations consummated after July 1, 2001
will not be amortized. On adoption the company may need to record a cumulative
effect adjustment to reflect the impairment of previously recognized intangible
assets. In addition, goodwill on prior business combinations will cease to be
amortized. Had the Company adopted SFAS No. 142 at January 1, 2001 the Company
would not have recorded a goodwill amortization charge of $108,322 for the six
month period ended June 30, 2001. The Company has not determined the impact that
these Statements will have on intangible assets or whether a cumulative effect
adjustment will be required upon adoption.
3. INVENTORIES
This caption on the Condensed Balance Sheet includes the following:
June 30, December 31,
2001 2000
--------------- --------------
Raw Materials $ 900,809 $ 950,632
Work-in-Process 3,992,851 2,878,802
Supplies 70,412 51,721
------------- -------------
$ 4,964,072 $ 3,881,155
============= =============
4. LONG-TERM DEBT
Long-term debt consists of the following at June 30, 2001 and December 31,
2000:
June 30, December 31,
2001 2000
-------------- -------------
Line of credit, SNPE, Inc. $ 5,000,000 $ 3,750,000
Convertible subordinated note, SNPE, Inc. 1,200,000 1,200,000
Industrial development revenue bonds 5,650,000 6,005,000
----------- ------------
Total 11,850,000 10,955,000
Less current maturities (5,760,000) (725,000)
----------- ------------
Long-term portion $ 6,090,000 $ 10,230,000
=========== ============
As of August 31, 2001, the borrowing capacity on the line of credit with
SNPE, Inc. is reduced to $4,500,000 and the Company will make the required
principal payment in August to meet this requirement.
9
Loan Covenants and Restrictions
The Company's loan agreements include various covenants and restrictions,
certain of which relate to the payment of dividends or other distributions to
stockholders, redemption of capital stock, incurrence of additional
indebtedness, mortgaging, pledging or disposition of major assets and
maintenance of specified financial ratios. As of June 30, 2001, the Company is
in compliance with all financial covenants and other provisions of its debt
agreements.
5. INCOME TAXES
No income tax provision has been recorded for the six months ended June 30,
2001, as available net operating loss carry-forwards exceed pretax earnings
projected for the year ended December 31, 2001. If such carry-forwards are
utilized, the associated valuation allowance would be reversed when the Company
believes it is probable of realizing such tax loss carry-forwards. In addition,
any projected alternative minimum tax ("AMT") payable would be offset by the
recognition of deferred tax assets. The Company did not record tax benefits for
either the six months ended June 30, 2000 or the year ended December 31, 2000,
since it had utilized all of its tax loss carry-backs in 1999 and the Company's
financial position and near-term operations outlook made the future realization
of tax benefits associated with net operating loss carry-forwards uncertain.
6. BUSINESS SEGMENTS
The Company is organized in the following two segments: the Explosive
Metalworking Group and the Aerospace Group. The Explosive Metalworking Group
uses explosives to perform metal cladding and shock synthesis. The most
significant product of this group is clad metal which is used in the fabrication
of pressure vessels, heat exchangers and transition joints used in the
hydrocarbon processing, chemical processing, power generation, petrochemical,
pulp and paper, mining, shipbuilding and heat, ventilation and air conditioning
industries. The Aerospace Group machines, forms and welds parts for the
commercial aircraft, aerospace and defense industries.
The Company's reportable segments are strategic business units that offer
different products and services and are separately managed. Each segment is
marketed to different customer types and requires different manufacturing
processes and technologies. Segment information is presented for the three and
six months ended June 30, 2001 and 2000 as follows:
Explosive
Manufacturing Aerospace Total
------------- ----------- -----------
For the three months
ended June 30, 2001:
Net sales $ 5,244,442 $ 3,209,844 $ 8,454,286
=========== ============ ===========
Depreciation and amortization $ 207,115 $ 203,171 $ 410,286
=========== ============ ===========
Income (loss) from operations $ 878,091 $ (28,318) $ 849,773
Unallocated amounts:
Other income 1,824
10
(table cont)
Interest expense, net (167,880)
-----------
Consolidated income
before income taxes
and extraordinary items $ 683,717
===========
Explosive
Manufacturing Aerospace Total
------------- ----------- -----------
For the three months
ended June 30, 2000:
Net sales $ 5,377,273 $ 2,943,210 $ 8,320,483
=========== ============ ===========
Depreciation and amortization $ 204,861 $ 208,762 $ 413,623
=========== ============ ===========
Loss from operations $ (67,063) $ (200,383) $ (267,446)
Unallocated amounts:
Other income 1,857
Interest expense, net (340,797)
-----------
Consolidated loss
before income taxes
and extraordinary items $ (606,386)
===========
Explosive
Manufacturing Aerospace Total
------------- ----------- -----------
For the six months ended
June 30, 2001:
Net sales $ 9,413,279 $ 5,979,176 $15,392,455
=========== ============ ===========
Depreciation and amortization $ 416,851 $ 410,675 $ 827,526
=========== ============ ===========
Income (loss) from operations $1,183,393 $ (59,339) $ 1,124,054
Unallocated amounts:
Other income 2,276
Interest expense, net (332,512)
===========
Consolidated income
before income taxes
and extraordinary items $ 793,818
===========
Explosive
Manufacturing Aerospace Total
------------- ----------- -----------
For the six months ended
June 30, 2000:
Net sales $ 8,682,619 $ 6,024,488 $14,707,107
=========== ============ ===========
Depreciation and amortization $ 369,400 $ 420,793 $ 790,193
=========== ============ ===========
Loss from operations $ (455,501) $ (211,671) $ (667,172)
Unallocated amounts:
Other income 187,417
Interest expense, net (703,443)
-----------
Consolidated loss before income taxes
and extraordinary items $(1,183,198)
===========
11
All of the Company's sales are shipped from domestic locations and all of
the Company's assets are located within the United States. The following
represents the Company's net sales based on the geographic location of the
customer:
For the three months
ended June 30,
-------------------------------
2001 2000
-------------- -------------
United States $7,561,056 $7,177,855
Canada 652,661 298,225
Australia 98,100 -
South Korea 39,868 572,041
Other foreign countries 102,601 272,362
----------- -----------
Total consolidated net sales $8,454,286 $8,320,483
=========== ===========
For the six months
ended June 30,
-------------------------------
2001 2000
-------------- -------------
United States $13,849,229 $12,802,090
Canada 978,228 512,886
Australia 302,312 -
South Korea 50,007 952,285
Other foreign countries 212,679 439,846
----------- -----------
Total consolidated net sales $15,392,455 $14,707,107
=========== ===========
During the three months and six months ended June 30, 2001 sales to no one
customer accounted for more than 10% of total net sales. During the three months
ended June 30, 2000, sales to one customer represented approximately $1,101,000
(13%) of total net sales and during the six months ended June 30, 2000, no one
customer accounted for more than 10% of total net sales.
7. SUBSEQUENT EVENT
On July 3, 2001, the Company completed its acquisition of more than 99.9%
of the stock of Nobelclad Europe S.A. ("Nobelclad") from Nobel Explosifs France
12
("NEF"). Nobelclad and its wholly-owned subsidiary, Nitro Metall operate
cladding businesses located in Rivesaltes, France and Likenas, Sweden,
respectively, which generated combined unaudited revenues of approximately $10.7
million in calendar year 2000. NEF is wholly owned by Groupe SNPE and is a
sister company to SNPE, Inc., which owns 55% of the Company's common stock. The
purchase price of $4 million was financed by a note agreement between the
Company and SNPE, Inc. Third party bank debt held by Nobelclad in the amount of
9.5 million French Francs (approximately $1.2 million as of July 3, 2001) also
was assumed in the transaction.
As a result of the Company and Nobelclad both being majority owned by
Groupe SNPE, the acquisition will be accounted for as a reorganization of
entities under common control. The acquisition was reported by the Company on a
Form 8-K, filed July 16, 2001 and financial statements will be reported by the
Company on a Form 8-K/A prior to September 14, 2001, which will include audited
historical financial statements of Nobelclad and Nitro Metall and pro forma
financial statements of the Company. The historical operating results of the
Company will be restated to reflect the addition of the Nobelclad and Nitro
Metall historical financial results back to June 2000, the period that Groupe
SNPE acquired its majority ownership in the Company. In addition, the Company's
prospective operating results will be reported and compared to the Company's
restated operating results for the periods subsequent to June 2000. The purchase
price of the acquisition will not be allocated to the net assets of Nobelclad
and the net assets will be accounted for at historical net book value due to the
entities being under common control. This will result in a deemed dividend being
recorded in July 2001 to reflect the issuance of the debt to Groupe SNPE for the
purchase of Nobelclad.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Dynamic Materials Corporation ("DMC" or the "Company") is a worldwide
leader in explosive metalworking and, through its Aerospace Group, is involved
in a variety of metal forming, machining, welding, and assembly activities. The
explosive metalworking business includes the use of explosives to perform
metallurgical bonding, or "metal cladding" and shock synthesis of synthetic
diamonds. We perform metal cladding using our proprietary technologies. Our
revenues from our explosive metalworking businesses, as a proportion of our
total revenues, have declined in the past two years as a result of a significant
slowdown in global market demand for explosion bonded clad metal products and
the 1998 acquisitions of AMK Welding ("AMK"), Spin Forge and Precision Machined
Products ("PMP"). Our Aerospace Group was formed from these three acquisitions
and accounted for 22%, 42% and 39% of the Company's 1998, 1999 and 2000
revenues, respectively.
Explosive Metalworking. Clad metal products are used in manufacturing
processes or environments that involve highly corrosive chemicals, high
temperatures and/or high pressure conditions. For example, we fabricate clad
metal tube sheets for heat exchangers. Heat exchangers are used in a variety of
high temperature, high pressure, highly corrosive chemical processes, such as
processing crude oil in the petrochemical industry and processing chemicals used
13
in the manufacture of synthetic fibers. In addition, we have produced titanium
clad plates used in the fabrication of metal autoclaves to replace autoclaves
made of brick and lead for two customers in the mining industry. We believe that
our clad metal products are an economical, high-performance alternative to the
use of solid corrosion-resistant alloys. In addition to clad metal products, the
explosive metalworking business includes shock synthesis of synthetic diamonds.
On July 3, 2001, we completed our acquisition of more than 99.9% of the
stock of Nobelclad Europe S.A. ("Nobelclad") from Nobel Explosifs France
("NEF"). Nobelclad and its wholly-owned subsidiary, Nitro Metall operate
cladding businesses located in Rivesaltes, France and Likenas, Sweden,
respectively, which generated combined unaudited revenues of approximately $10.7
million in calendar year 2000. NEF is wholly owned by Groupe SNPE and is a
sister company to SNPE, Inc., which owns 55% of our common stock. The purchase
price of $4 million was financed by a note agreement between the Company and
SNPE, Inc. We also assumed third party bank debt held by Nobelclad in the amount
of 9.5 million French Francs (approximately $1.2 million as of July 3, 2001) in
the transaction.
Aerospace Manufacturing. Products manufactured by the Aerospace Group are
typically made from sheet metal and forgings that are subsequently machined or
formed into precise, three-dimensional shapes that are held to tight tolerances.
Metal machining and forming is accomplished through traditional technologies,
including spinning, machining, rolling and hydraulic expansion. We also perform
welding services utilizing a variety of manual and automatic welding techniques
that include electron beam and gas tungsten arc welding processes. Our forming
and welding operations are often performed to support the manufacture of
completed assemblies and sub-assemblies required by its customers. Fabrication
and assembly services are performed utilizing our close-tolerance machining,
forming, welding, inspection and other special service capabilities. Our
forming, machining, welding and assembly operations serve a variety of product
applications in the commercial aircraft, aerospace, defense and power generation
industries. Product applications include tactical missile motor cases, titanium
pressure tanks for launch vehicles, and complex, high precision component parts
for satellites.
In 2000, we experienced significant operating losses as a result of a
significant decline in sales revenue and gross margin levels within our
Aerospace Group. Our Explosive Metalworking Group generated a small operating
income in 2000 after incurring significant operating losses in 1999. We also
experienced, and we expect to continue to experience, quarterly fluctuations in
operating results caused by various factors, including the timing and size of
orders from major customers, customer inventory levels, shifts in product mix,
the occurrence of acquisition and divestiture-related costs, and general
economic conditions. We typically do not obtain long-term volume purchase
contracts from our customers. Quarterly sales and operating results therefore
depend on the volume and timing of backlog as well as bookings received during
the quarter. A significant portion of our operating expenses is fixed, and
planned expenditures are based primarily on sales forecasts and product
development programs. If sales do not meet our expectations in any given period,
the adverse impact on operating results may be magnified by our inability to
adjust operating expenses sufficiently or quickly enough to compensate for such
a shortfall. In addition, we use numerous suppliers of alloys, steels and other
materials for our operations. We typically bear a short-term risk of alloy,
steel and other component price increases, which could adversely affect our
gross profit margins. Although we will work with customers and suppliers to
14
minimize the impact of any component shortages, component shortages have had,
and are expected from time to time to have, short-term adverse effects on our
business. Results of operations in any period should not be considered
indicative of the results to be expected for any future period. Fluctuations in
operating results may also result in fluctuations in the price of our common
stock.
Three Months and Six Months Ended June 30, 2001 Compared to Three Months and Six
Months Ended June 30, 2000
The following table sets forth for the periods indicated the percentage
relationship to net sales of certain income statement data:
Percentage of Net Sales
Three Months Ended June 30, Six Months Ended June 30,
2001 2000 2001 2000
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 73.5% 87.2% 76.4% 87.1%
----- ----- ----- -----
Gross margin 26.5% 12.8% 23.6% 12.9%
General & administrative 11.0% 10.9% 11.0% 12.1%
Selling expenses 5.4% 5.1% 5.3% 5.4%
Income (loss) from operations 10.0% (3.2%) 7.3% (4.5%)
Interest expense 2.0% 5.1% 2.2% 5.3%
Income tax provision - - - -
Net income (loss) 8.1% (8.3%) 5.2% (8.6%)
Net Sales. Net sales for the quarter ended June 30, 2001 increased by 1.6% to
$8,454,286 from $8,320,483 in the second quarter of 2000. Our Aerospace Group
contributed $3,209,844 (38.0% of total sales) to second quarter 2001 sales
versus sales of $2,943,210 (35.4% of total sales) in the second quarter of 2000.
Sales by the Explosive Metalworking Group, which includes explosion bonding of
clad metal and shock synthesis of synthetic diamonds, decreased by 2.5% from
$5,377,273 in the second quarter of 2000 to $5,244,442 in the second quarter of
2001. For the six months ended June 30, 2001, net sales increased by 4.7% to
$15,392,455 from $14,707,107 for the comparable period of 2000. Aerospace Group
sales for the six months ended June 30, 2001 totaled $5,979,176 (38.8% of total
sales), a decrease of 0.8% from sales of $6,024,488 (41.0% of total sales)
reported for the comparable period of 2000. Sales by the Explosive Metalworking
Group for the comparable six-month period increased by 8.4% from $8,682,619 in
2000 to $9,413,279 in 2001.
Gross Profit. Our gross profit for the quarter ended June 30, 2001 increased by
110.4% to $2,239,073 from $1,064,165 in the second quarter of 2000. For the six
months ended June 30, 2001, gross profit increased 91.3% to $3,632,783 from
$1,898,999 in the comparable period in 2000. The gross profit margin for the six
months ended June 30, 2001 was 23.6%, representing a 83.0% increase from the
gross profit margin of 12.9% for the first six months of 2000. The gross profit
margin for the Explosive Metalworking Group increased from 12.0% in the second
quarter of 2000 to 33.6% in the second quarter of 2001. For the comparable
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six-month periods, Explosive Metalworking gross margins increased from 10.4% in
2000 to 28.9% in 2001. The increase in gross profit margins for the Explosive
Metalworking Group is attributable to improved market conditions, favorable
changes in product mix and continual improvements in operating efficiencies at
our new production facility in Mount Braddock, Pennsylvania. The gross profit
margin for the Aerospace Group was 14.8% for the quarter ended June 30, 2001 as
compared to 14.2% in the second quarter of 2000. For the comparable six-month
periods, Aerospace Group gross margins decreased from 16.6% in 2000 to 15.2% in
2001. This decrease relates principally to product mix differences between the
comparable periods and increases in manufacturing expenses at our PMP division.
General and Administrative. General and administrative expenses for the quarter
ended June 30, 2001 increased by 2.5% to $931,838 from $909,210 in the second
quarter of 2000. For the six months ended June 30, 2001, general and
administrative expenses decreased by 4.8% to $1,692,040 from $1,776,741 in the
comparable period of 2000. As a percentage of net sales, general and
administrative expenses increased from 10.9% in the second quarter of 2000 to
11.0% for the quarter ended June 30, 2001 and decreased from 12.1% to 11.0% for
the comparable six-month periods.
Selling Expense. Selling expenses increased by 8.3% to $457,462 for the quarter
ended June 30, 2001 from $422,401 in the second quarter of 2000. For the six
months ended June 30, 2001, selling expenses increased by 3.5% to $816,689 from
$789,430 in the comparable period of 2000. Selling expenses for the three and
six months ended June 30, 2001 include approximately $86,500 of accrued bonus
expense associated with the Explosive Metalworking Group's strong second quarter
financial performance. Selling expenses for the three and six months ended June
30, 2000 included $80,284 of non-recurring expenses associated with severance
pay and other employee separation costs. Selling expenses as a percentage of net
sales increased from 5.1% in the second quarter of 2000 to 5.4% for the quarter
ended June 30, 2001 and increased from 5.3% for the six months ended June 30,
2000 to 5.4% for the comparable period of 2001.
Income (Loss ) from Operations. For the second quarter ended June 30, 2001, we
reported $849,773 in income from operations compared to a $267,446 loss from
operations for the second quarter of 2000. This improvement is a result of the
110.4% increase in gross profit discussed above. For the six months ended June
30, 2001, we reported operating income of $1,124,054 compared to an operating
loss of $667,172 in the comparable period of 2000. This improvement is the
result of the $1,733,784 increase in gross profit for the six months ended June
30, 2001 versus the comparable period of 2000.
For the quarter and six months ended June 30, 2001, our Explosive Metalworking
Group reported income from operations of $878,091 and $1,183,393, respectively,
as compared to operating losses of $67,063 and $455,501 for the respective
comparable periods of 2000. For the quarter and six months ended June 30, 2001,
our Aerospace Group reported a loss from operations of $28,318 and $59,339,
respectively, as compared to a loss from operations of $200,383 and $211,671 for
the comparable periods of 2000.
Interest Expense. Interest expense decreased to $172,542 for the quarter ended
June 30, 2001 from $342,436 in the second quarter of 2000. For the six months
ended June 30, 2001, interest expense decreased to $340,421 from $705,132 in the
comparable period of 2000. These decreases resulted from the reduction in
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revolving credit debt that was made possible by the equity invested in us by
SNPE, Inc. on June 14, 2000.
Income Tax Benefit (Expense). No income tax provision has been recorded for
the six months ended June 30, 2001, as available net operating loss
carry-forwards exceed pretax earnings projected for the year ended December 31,
2001. If such carry-forwards are utilized, the associated valuation allowance
would be reversed when the Company believes it is probable of realizing such tax
loss carry-forwards. In addition, any projected alternative minimum tax ("AMT")
payable would be offset by the recognition of deferred tax assets. The Company
did not record tax benefits for either the six months ended June 30, 2000 or the
year ended December 31, 2000, since it had utilized all of its tax loss
carry-backs in 1999 and the Company's financial position and near-term
operations outlook made the future realization of tax benefits associated with
net operating loss carry-forwards uncertain.
Liquidity and Capital Resources
Historically, we have obtained most of our operational financing from a
combination of operating activities and an asset-backed revolving credit
facility. Due primarily to the operating losses we incurred during 1999 and the
first quarter of 2000, we violated certain financial covenants under both the
revolving credit facility that was then in effect and the reimbursement
agreement related to the letter of credit supporting payment of principal and
interest under our industrial revenue development bonds (the "Bonds") used to
finance the construction of our manufacturing facilities in Pennsylvania. On
June 14, 2000 our stockholders approved a Stock Purchase Agreement (the
"Agreement") between the Company and SNPE, Inc ("SNPE"). The closing of the
transaction, which was held immediately following stockholder approval, resulted
in a payment from SNPE of $5,800,000 to the Company in exchange for 2,109,091
shares of our common stock at a price of $2.75 per share thereby causing SNPE to
become a 50.8% stockholder of the Company on the closing date. An additional
$1,200,000 cash payment was made by SNPE to us to purchase a five-year, 5%
Convertible Subordinated Note that is convertible in whole or in part into
common stock by SNPE at a conversion price of $6 per share. We also borrowed
$3,500,000 on June 14, 2000 under a new credit facility with SNPE that bears
interest at the Federal Funds Rate plus 1.5% and may be increased to maximum
borrowings of $5,500,000 until August 31, 2001, and $4,500,000 thereafter,
subject to certain approvals by SNPE (as of June 30, 2001, $5,000,000 was drawn
and outstanding under this facility but the Company intends to repay $500,000 in
order to meet the reduced capacity requirement as of August 31, 2001). Proceeds
from the SNPE equity investment, convertible subordinated note issuance and
credit facility borrowings aggregated $10,500,000 and enabled us to repay all
outstanding borrowings under our bank revolving credit facility on which we had
been in default since September 30, 1999. The bank revolving credit facility was
terminated on June 14, 2000. As a result of the SNPE debt and equity infusion,
we were also able to restructure financial covenants under the reimbursement
agreement with our bank relating to the industrial development revenue bonds and
we are currently in full compliance with all provisions of our debt agreements.
The three-year bank letter of credit that supports our industrial development
revenue bonds expires in September 2001. We have obtained a verbal commitment
for a replacement letter of credit arrangement on terms we believe to be more
favorable than those of the existing letter of credit and underlying
reimbursement agreement, and we are in the process of formalizing agreements
with the bank.
17
We believe that our cash flow from operations and funds available under our
credit facility with SNPE, or a replacement credit facility with a third party
financial institution, will be sufficient to fund working capital, debt service
obligations and capital expenditure requirements of our current business
operations for the foreseeable future. SNPE has agreed to extend its credit
facility, which was originally callable upon 90 days' notice and had an original
maturity date of June 30, 2001, to March 31, 2002. Management of the Company
intends to replace the SNPE credit facility with a new third party credit
facility during the last half of 2001 and believes that our strengthened balance
sheet and improving operating results will enable us to secure such third party
financing on reasonable terms. Until we are able to secure such third party
financing on reasonable terms, we will continue to rely on the financial support
of SNPE. A significant portion of our sales is derived from a relatively small
number of customers; therefore, the failure to perform existing contracts on a
timely basis, and to receive payment for such services in a timely manner, or to
enter into future contracts at projected volumes and profitability levels could
adversely affect our ability to meet our cash requirements exclusively through
operating activities. Consequently, any restriction on the availability of
borrowing under the SNPE credit facility or a replacement facility could
negatively affect our ability to meet our future cash requirements.
Highlights from the Statement of Cash Flows for the Six Months Ended June 30,
2001
Net cash used in operations for the six months ended June 30, 2001 was
$532,460. Significant sources included net income of $793,818 and depreciation
and amortization of $827,526. These sources were more than offset by negative
changes in working capital totaling $2,145,647.
Cash used in investing activities totaled $726,866 and was comprised
primarily of acquisitions of property, plant and equipment aggregating $733,187.
Net cash flows from financing activities totaled $1,072,796. The primary
sources of cash were borrowings on the SNPE line of credit of $1,250,000 and a
bank overdraft of $158,141. Uses of cash for financing activities included
payments on the industrial development revenue bonds totaling $355,000.
Highlights from the Statement of Cash Flows for the Six Months Ended June 30,
2000
Net cash used in operating activities for the six months ended June 30,
2000 was $466,168. Significant uses included a net loss of $1,263,309, a gain on
the sale of property, plant and equipment of $185,570 and a negative change in
working capital totaling $1,129,270. These uses were partly offset by the
receipt of a $1,360,000 income tax refund and depreciation and amortization
totaling $790,193.
Net cash flows from investing activities totaled $1,323,822 for the six
months ended June 30, 2000. Sources of cash included $940,036 in proceeds from
the sale of property, plant and equipment, $354,588 in proceeds from the receipt
of payment on a loan to a related party, $214,929 related to an increase in
other non-current assets and $255,008 from the release of restricted cash and
investments. Significant uses, partly offsetting the sources, included $297,073
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paid in connection with the construction of our Pennsylvania facility and
$143,666 of property, plant and equipment acquisitions.
Net cash flows used in financing activities totaled $801,271. The primary
uses were $10,255,000 for the repayment of the bank line of credit, $335,000 in
repayments on the industrial development revenue bonds, $116,384 in payment of
deferred financing costs and a $193,471 repayment of bank overdraft. The primary
sources of cash include the proceeds from the issuance of common stock to SNPE
(net of issuance costs) totaling $5,233,682, and borrowings on the SNPE line of
credit and convertible subordinated note of $3,500,000 and $1,200,000,
respectively.
Forward-Looking Statements
Statements which are not historical facts contained in this report are
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially from projected results. Factors that could
cause actual results to differ materially include, but are not limited to the
following: the ability to obtain new contracts at attractive prices; the size
and timing of customer orders; fluctuations in customer demand; competitive
factors; the timely completion of contracts; any actions which may be taken by
SNPE as the controlling shareholder of the Company with respect to the Company
and our businesses; the timing and size of expenditures; the timely receipt of
government approvals and permits; the adequacy of local labor supplies at our
facilities; the availability and cost of funds; and general economic conditions,
both domestically and abroad. Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect management's analysis only as
of the date hereof. We undertake no obligation to publicly release the results
of any revision to these forward-looking statements which, may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
There have been no events that materially effect our quantitative and
qualitative disclosure about market risk as reported in our Annual Report on
Form 10-K for the year ended December 31, 2000.
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Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6.
(a) Reports on Form 8-K
None.
(b) Exhibits
None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
DYNAMIC MATERIALS CORPORATION
(Registrant)
Date: August 14, 2001 /s/ Richard A. Santa
----------------------------------------
Richard A. Santa, Vice President and
Chief Financial Officer (Duly Authorized
Officer and Principal Financial and
Accounting Officer)
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