SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
October 31, 2001.
ITEM 1. Financial Statements
DYNAMIC MATERIALS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Restated - see Note 2)
(unaudited)
September 30, December 31
2001 2000
------------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,006,252 $ 300,530
Accounts receivable, net of allowance for doubtful
accounts of $157,000 and $130,000, respectively 8,332,642 7,453,123
Inventories 6,676,692 6,261,155
Prepaid expenses and other 754,038 536,493
Current deferred tax asset - 10,000
------------- -------------
Total current assets 16,769,624 14,561,301
------------- -------------
PROPERTY, PLANT AND EQUIPMENT 20,841,777 19,986,509
Less- Accumulated depreciation (5,498,528) (4,492,850)
------------- -------------
Property, plant and equipment, net 15,343,249 15,493,659
------------- -------------
RESTRICTED CASH AND INVESTMENTS 179,394 179,394
INTANGIBLE ASSETS, net of accumulated amortization
of $1,317,439 and $1,094,870, respectively 4,770,181 4,992,750
OTHER ASSETS, net 331,853 261,351
------------- -------------
TOTAL ASSETS $ 37,394,301 $ 35,488,455
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
DYNAMIC MATERIALS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Restated - see Note 2)
(unaudited)
September 30, December 31,
2001 2000
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Bank overdraft $ 80,000 $ -
Accounts payable 3,179,194 3,988,301
Accrued expenses 2,578,054 1,874,579
Current maturities on long-term debt 5,823,333 1,218,000
Capital lease obligation - 3,394
------------- -------------
Total current liabilities 11,660,581 7,084,274
LONG-TERM DEBT 10,874,667 10,230,000
OTHER LONG-TERM LIABILITIES 223,848 248,887
------------- -------------
Total liabilities 22,759,096 17,563,161
------------- -------------
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 2,532,528 5,551,668
Other cumulative comprehensive loss (432,000) (138,000)
------------- -------------
14,635,205 17,925,294
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,394,301 $ 35,488,455
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
DYNAMIC MATERIALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Restated - see Note 2)
-----------------------------------------------------------------------
(unaudited)
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
---- ----- ---- ----
NET SALES $12,257,533 $ 9,015,297 $32,739,866 $23,722,405
COST OF PRODUCTS SOLD 8,888,799 7,203,667 23,982,349 20,011,773
------------- -------------- -------------- --------------
Gross profit 3,368,734 1,811,630 8,757,517 3,710,632
------------- -------------- -------------- --------------
COSTS AND EXPENSES:
General and administrative expenses 1,124,436 1,331,367 3,390,137 3,108,108
Selling expenses 617,903 502,319 1,829,434 1,291,749
------------ -------------- -------------- -------------
1,742,339 1,833,686 5,219,571 4,399,857
------------ -------------- -------------- -------------
INCOME (LOSS) FROM OPERATIONS 1,626,395 (22,056) 3,537,946 (689,225)
OTHER INCOME (EXPENSE):
Other income (expense) 1,382 7,469 (75,342) 196,886
Interest expense (252,311) (195,455) (616,732) (902,589)
Interest income 5,079 11,661 12,988 13,350
------------ -------------- -------------- ------------
Income (loss) before income
taxes 1,380,545 (198,381) 2,858,860 (1,381,578)
INCOME TAX PROVISION (37,000) (66,000) (289,000) (66,000)
------------ ------------- -------------- ------------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 1,343,545 (264,381) 2,569,860 (1,447,578)
EXTRAORDINARY ITEM - LOSS FROM
EXTINGUISHMENT OF DEBT - - - (80,111)
------------- ------------- -------------- ------------
NET INCOME (LOSS) $ 1,343,545 $ (264,381) $ 2,569,860 $ (1,527,689)
=========== ============= =========== ==============
NET INCOME (LOSS) PER SHARE - BASIC
Income (loss) before extraordinary item $ 0.27 $ (0.05) $ 0.51 $ (0.39)
Extraordinary item - - - (0.03)
------------------------------ --------------- ---------------
Net income (loss) per share $ 0.27 $ (0.05) $ 0.51 $ (0.42)
=============== ================ =============== ================
NET INCOME (LOSS) PER SHARE - DILUTED
Income (loss) before extraordinary item $ 0.26 $ (0.05) $ 0.51 $ (0.39)
Extraordinary item - - - (0.03)
------------------------------ --------------- ---------------
Net income (loss) per share $ 0.26 $ (0.05) $ 0.51 $ (0.42)
============== ================ ============== ================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC 5,016,125 4,972,545 4,999,110 3,673,750
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - DILUTED 5,098,081 4,972,545 5,038,873 3,673,750
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements.
DYNAMIC MATERIALS CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY (Restated - see Note 2)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(unaudited)
------------
Additional Retained Equity of
Common Stock Paid-In Earnings of Nobelclad and
Shares Amount Capital Parent Nitro Metall
Balances, December 31, 2000 4,990,331 $ 249,517 $12,262,109 $ 792,668 $ 4,759,000
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 - -
Dividends paid by Nobelclad and
Nitro Metall to former parent
company - - - - (296,000)
Retroactive consolidation of
Nobelclad and Nitro Metall
effective June 30, 2000,
to reflect the July 2001
reorganization of entities
under common control - - - (830,000) (4,463,000)
Net income - - - 2,569,860 -
Currency translation adjustment - - - - -
---------- ---------- ------------ ------------ ------------
Balances, September 30, 2001 5,016,125 $ 250,807 $ 12,283,870 $ 2,532,528 $ -
========== ========== ============ ============ ============
Other
Cumulative
Comprehensive Comprehensive
Loss Total Income
Balances, December 31, 2000 $ (138,000) $17,925,294 $ -
Shares issued for stock option
exercises - 2,188 -
Shares issued in connection
with the employee stock
purchase plan - 20,863 -
Dividends paid by Nobelclad and
Nitro Metall to former parent
company - (296,000) -
Retroactive consolidation of
Nobelclad and Nitro Metall
effective June 30, 2000,
to reflect the July 2001
reorganization of entities
under common control - (5,293,000) -
Net income - 2,569,860 2,569,860
Currency translation adjustment (294,000) (294,000) (294,000)
------------ ------------- ------------
Balances, September 30, 2001 $ (432,000) $ 14,635,205 $ 2,275,860
============ ============= ============
See Notes to Condensed Consolidated Financial Statements.
DYNAMIC MATERIALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Restated - see Note 2)
----------------------------------------------------------------------
(unaudited)
For the nine months
---------------------------------
ended September 30,
---------------------------------
2001 2000
-------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $2,569,860 $ (1,527,689)
Adjustments to reconcile net income (loss)
to net cash from operating activities-
Depreciation 1,226,790 1,055,920
Amortization 222,569 232,384
Amortization of deferred gain on swap termination (12,039) (51,039)
Provision for deferred income taxes 6,000 -
Amortization of deferred compensation - 4,219
Unrealized foreign currency loss 25,000 -
Gain on sale of property, plant and equipment - (185,570)
Change in -
Accounts receivable, net (999,519) (561,894)
Inventories (509,537) (646,968)
Prepaid expenses and other (216,545) 590,213
Income tax receivable - 1,360,000
Accounts payable (763,107) 15,844
Accrued expenses 567,431 (51,811)
------------- -------------
Net cash flows from operating activities 2,116,903 233,609
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Release of restricted cash and investments - 255,008
Cash paid in connection with the construction
of the new facility - (319,302)
Acquisition of property, plant and equipment (1,155,834) (339,027)
Proceeds from repayment of loan to related party - 354,588
Change in other non-current assets (70,002) 231,374
Proceeds from sale of property, plant and equipment - 940,036
------------ -------------
Net cash flows from investing activities (1,225,836) 1,122,677
------------- -------------
See Notes to Condensed Consolidated Financial Statements.
DYNAMIC MATERIALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Restated - see Note 2)
-----------------------------------------------------------------------
(unaudited)
-----------
For the nine months
ended September 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 (540,000) (505,000)
Proceeds from issuance of common stock to SNPE, Inc.,
net of issuance costs - 5,236,252
Borrowings on SNPE, Inc. line of credit 350,000 3,750,000
Borrowings on SNPE, Inc. convertible subordinated note - 1,200,000
Reorganization of entities under common control-
Borrowed from parent under note payable 4,000,000 -
Borrowed from bank and distributed to parent 1,293,000 -
Distributions to parent for July 2001 reorganization (5,293,000) -
Borrowing on debt to related party 318,000 -
Payment on debt to related party - (230,000)
Payment of deferred financing costs - (116,384)
Payments on capital lease obligation (3,394) (26,028)
Net proceeds from issuance of common stock to employees 23,049 27,184
Bank overdraft 79,000 -
Repayment of bank overdraft - (193,471)
Dividends paid by Nobelclad/Nitro Metall to former
parent company (296,000) (329,000)
-------------- -------------
Net cash flows from financing activities (69,345) (1,286,447)
EFFECTS OF EXCHANGE RATES ON CASH (116,000) (23,000)
-------------- -------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 705,722 46,839
CASH AND CASH EQUIVALENTS, beginning of the period 300,530 382,000
-------------- -------------
CASH AND CASH EQUIVALENTS, end of the period $ 1,006,252 $ 428,839
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest, net of amounts capitalized $ 494,988 $ 603,277
=========== ===========
Income taxes $ 66,000 $ -
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
DYNAMIC MATERIALS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The information included in the Condensed Consolidated Financial Statements
is unaudited but includes all normal and recurring adjustments which, in the
opinion of management, are necessary for a fair presentation of the interim
periods presented. These 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; however,
it should be noted that, due to the reorganization described in Note 2, the
Company has restated operating results for all periods subsequent to June 14,
2000.
2. ACQUISITION OF NOBELCLAD EUROPE S.A. AND NITRO METALL AB FROM RELATED PARTY
On July 3, 2001, the Company completed its acquisition of substantially all
of the outstanding stock of Nobelclad Europe S.A. ("Nobelclad") from Nobel
Explosifs France ("NEF"). Nobelclad and its wholly-owned subsidiary, Nitro
Metall AB ("Nitro Metall") operate cladding businesses located in Rivesaltes,
France and Likenas, Sweden, respectively. 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. Proceeds from this bank debt were used to
finance Nobelclad's June, 2001 acquisition of 100% of the stock of Nitro Metall
from NEF.
As a result of the Company and Nobelclad both being majority owned by
Groupe SNPE, the acquisition of Nobelclad has been accounted for as a
reorganization of entities under common control. The historical financial
position and operating results of the Company have been restated to reflect the
addition of the Nobelclad and Nitro Metall historical financial results as if
the companies had been consolidated from June 2000, the date on which Groupe
SNPE acquired its majority ownership in the Company. The purchase price that the
Company paid for the acquisition of Nobelclad and Nitro Metall has been
reflected in the Company's consolidated financial statements at historical net
book values due to the companies being under the common control of Groupe SNPE.
In addition, there is a reduction to stockholders' equity of $5,293,000 upon the
issuance of the debt to finance the transaction in July 2001.
3. 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.
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 $162,483 for the
nine-month period ended September 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.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations ("SFAS 143"), which is effective for financial statements issued for
fiscal years beginning after June 15, 2002. This Statement addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
Company is currently evaluating the potential impact, if any, the adoption of
SFAS 143 will have on its financial position and results of operations.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS 144"), which is effective for fiscal
periods beginning after December 15, 2001 and interim periods within those
fiscal years. SFAS 144 supercedes SFAS 121, and establishes an accounting model
for impairment or disposal of long-lived assets to be disposed of by sale. The
Company is currently evaluating the potential impact, if any, the adoption of
SFAS 144 will have on its financial position and results of operation.
4. INVENTORIES
This caption on the Condensed Consolidated Balance Sheets include the
following:
September 30, December 31,
2001 2000
-------------------- ------------------
Raw Materials $ 2,064,334 $ 2,300,632
Work-in-Process 4,492,787 3,730,802
Supplies 119,571 229,721
----------------- ----------------
$ 6,676,692 $ 6,261,155
============= ==============
5. LONG-TERM DEBT
Long-term debt consists of the following at September 30, 2001 and December
31, 2000:
September 30, December 31,
2001 2000
-------------------- -------------------
Line of credit, SNPE, Inc. $ 4,100,000 $ 3,750,000
Convertible subordinated note, SNPE, Inc. 1,200,000 1,200,000
Term loan, SNPE, Inc. (related to acquisition of
Nobelclad) 4,000,000 -
Bank line of credit (related to acquisition
of
Nitro Metall by Nobelclad) 1,318,000 -
Line of credit, Groupe SNPE 615,000 -
Line of credit, former parent of Nobelclad - 493,000
Industrial development revenue bonds 5,465,000 6,005,000
------------- --------------
Total 16,698,000 11,448,000
Less current maturities (5,823,333) (1,218,000)
------------- --------------
Long-term portion $10,874,667 $ 10,230,000
============= ==============
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 September 30, 2001, the Company
is in compliance with all financial covenants and other provisions of its debt
agreements.
6. INCOME TAXES
No income tax provision has been recorded for the nine months ended
September 30, 2001 with respect to the Company's U.S. operations, 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 on its U.S.
operations for either the nine months ended September 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. Income tax provisions on the earnings of Nobelclad and
its subsidiary, Nitro Metall, have been provided based upon the respective
French and Swedish statutory tax rates.
7. 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
nine months ended September 30, 2001 and 2000 as follows:
Explosive
Manufacturing Aerospace Total
-------------- ----------- -----------
For the three months ended September 30, 2001:
Net sales $8,739,949 $3,517,584 $12,257,533
========= ========= ==========
Depreciation and amortization $ 261,948 $ 212,222 $ 474,170
========= ========= ==========
Income from operations $ 1,607,974 $ 18,421 $ 1,626,395
Unallocated amounts:
Other income 1,382
Interest expense, net (247,232)
-----------
Consolidated income before income taxes
and extraordinary items $ 1,380,545
===========
Explosive
Manufacturing Aerospace Total
-------------- ----------- -----------
For the three months ended September 30, 2000:
Net sales $6,523,601 $2,491,696 $9,015,297
========= ========= =========
Depreciation and amortization $ 286,752 $ 211,359 $ 498,111
========== ========== =========
Income (loss) from operations $ 339,538 $ (361,594) $ (22,056)
Unallocated amounts:
Other income 7,469
Interest expense, net (183,794)
----------
Consolidated loss before income taxes
and extraordinary items $ (198,381)
===========
Explosive
Manufacturing Aerospace Total
-------------- ----------- -----------
For the nine months ended September 30, 2001:
Net sales $23,243,106 $9,496,760 $32,739,866
========== ========= ==========
Depreciation and amortization $ 826,462 $ 622,897 $ 1,449,359
========== ========= ==========
Income (loss) from operations $ 3,578,865 $ (40,919) $ 3,537,946
Unallocated amounts:
Other income (expense) (75,342)
Interest expense, net (603,744)
-----------
Consolidated income before income taxes
and extraordinary items $ 2,858,860
===========
Explosive
Manufacturing Aerospace Total
-------------- ----------- -----------
For the nine months ended September 30, 2000:
Net sales $15,206,219 $8,516,186 $23,722,405
========== ========= ==========
Depreciation and amortization $ 655,152 $ 633,152 $ 1,288,304
========== ========= ==========
Loss from operations $ (115,961) $ (573,264) $ (689,225)
Unallocated amounts:
Other income 196,886
Interest expense, net (889,239)
----------
Consolidated loss before income taxes
and extraordinary items $(1,381,578)
============
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.
Explosive Metalworking. Clad metal products are used in manufacturing
processes or environments that involve highly corrosive chemicals, high
temperatures and/or high pressure conditions. For example, we fabricate clad
metal tube sheets for heat exchangers. Heat exchangers are used in a variety of
high temperature, high pressure, highly corrosive chemical processes, such as
processing crude oil in the petrochemical industry and processing chemicals used
in the manufacture of synthetic fibers. In addition, the Company has 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. DMC
believes that its 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, DMC completed the acquisition of substantially all of the
outstanding stock of Nobelclad Europe S.A. ("Nobelclad") from Nobel Explosifs
France ("NEF"). Nobelclad and its wholly-owned subsidiary, Nitro Metall AB
("Nitro Metall") operate cladding businesses located in Rivesaltes, France and
Likenas, Sweden, respectively, which generated combined revenues of
approximately $10.5 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. DMC 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. Proceeds from this bank debt were used to
finance Nobelclad's June, 2001 acquisition of 100% of the stock of Nitro Metall
stock from NEF.
As a result of the Company and Nobelclad both being majority owned by
Groupe SNPE, the acquisition of Nobelclad has been accounted for as a
reorganization of entities under common control. The historical financial
position and operating results of the Company have been restated to reflect the
addition of the Nobelclad and Nitro Metall historical financial results as if
the companies had been consolidated from June 2000, the date on which Groupe
SNPE acquired its majority ownership in the Company. The purchase price that the
Company paid for the acquisition of Nobelclad and Nitro Metall has been
reflected in the Company's consolidated financial statements at historical net
book values due to the companies being under the common control of Groupe SNPE.
In addition, there is a reduction to stockholders' equity of $5,293,000 upon the
issuance of the debt to finance the transaction in July 2001.
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. The Company also performs welding
services utilizing a variety of manual and automatic welding techniques that
include electron beam and gas tungsten arc welding processes. Forming and
welding operations are often performed to support the manufacture of completed
assemblies and sub-assemblies required by its customers. Fabrication and
assembly services are performed utilizing close-tolerance machining, forming,
welding, inspection and other special service capabilities. The Company's
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, the Company experienced significant operating losses as a result
of a significant decline in sales revenue and gross margin levels within our
Aerospace Group. The Explosive Metalworking Group generated a small operating
income in 2000 after incurring significant operating losses in 1999. DMC also
experienced, and expects to continue to experience, quarterly fluctuations in
operating results caused by various factors, including the timing and size of
orders from major customers, customer inventory levels, shifts in product mix,
the occurrence of acquisition and divestiture-related costs, and general
economic conditions. The Company typically does not obtain long-term volume
purchase contracts from its 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 DMC's 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 the
Company's inability to adjust operating expenses sufficiently or quickly enough
to compensate for such a shortfall. In addition, DMC uses numerous suppliers of
alloys, steels and other materials for its operations. The Company typically
bears a short-term risk of alloy, steel and other component price increases,
which could adversely affect its gross profit margins. Although DMC will work
with customers and suppliers to minimize the impact of any component shortages,
component shortages have had, and are expected from time to time to have,
short-term adverse effects on our business. Results of operations in any period
should not be considered indicative of the results to be expected for any future
period. Fluctuations in operating results may also result in fluctuations in the
price of our common stock.
Three Months and Nine Months Ended September 30, 2001 Compared to Three Months
and Nine Months Ended September 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 72.5% 79.9% 73.3% 84.4%
----- ----- ----- -----
Gross margin 27.5% 20.1% 26.7% 15.6%
General & administrative 9.2% 14.8% 10.4% 13.1%
Selling expenses 5.0% 5.6% 5.6% 5.4%
Income (loss) from operations 13.3% (0.2%) 10.8% (2.9%)
Interest expense 2.1% 2.2% 1.9% 3.8%
Income tax provision 0.3% 0.7% 0.9 % 0.3%
Net income (loss) 11.0% (2.9%) 7.8% (6.4%)
Net Sales. Net sales for the quarter ended September 30, 2001 increased by 36.0%
to $12,257,533 from $9,015,297 in the third quarter of 2000. Sales by the
Explosive Metalworking Group, which includes explosion bonding of clad metal and
shock synthesis of synthetic diamonds, increased 34.0% to $8,739,949 in the
third quarter of 2001 from $6,523,601 in the third quarter of 2000. Results for
both the third quarter of 2001 and 2000 include net sales of Nobelclad in the
amounts of $3,044,000 and $2,756,000 for the respective quarterly periods. The
Aerospace Group contributed $3,517,584 (28.7% of total sales) to third quarter
2001 sales versus sales of $2,491,696 (27.6% of total sales) in the third
quarter of 2000. For the nine months ended September 30, 2001, net sales
increased by 38.0% to $32,739,866 from $23,722,405 for the comparable period of
2000. For the comparable nine-month periods, Explosive Metalworking Group sales
increased by 52.9% to $23,243,106 in 2001 from $15,206,219 in 2000. Nobelclad
contributed sales of $8,422,000 and $2,756,000 for the nine months ended
September 30, 2001 and 2000, respectively. Aerospace Group sales for the nine
months ended September 30, 2001 totaled $9,496,760 (29.0% of total sales), an
increase of 11.5% from sales of $8,516,186 (35.9% of total sales) reported for
the comparable period of 2000.
Gross Profit. Gross profit for the quarter ended September 30, 2001 increased by
86.0% to $3,368,734 from $1,811,630 in the third quarter of 2000. For the nine
months ended September 30, 2001, gross profit increased 136.0% to $8,757,517
from $3,710,632 for the comparable period of 2000. The gross profit margin for
the nine months ended September 30, 2001 was 26.7%, representing a 71.2%
increase from the gross profit margin of 15.6% for the first nine months of
2000. The gross profit margin for the Explosive Metalworking Group increased to
33.0% in the third quarter of 2001 from 24.0% in the third quarter of 2000. For
the comparable nine-month periods, Explosive Metalworking gross margins
increased to 31.7% in 2001 from 16.2% in 2000. The increase in gross profit
margins for the Explosive Metalworking Group is attributable to improved market
conditions and favorable changes in product mix. The gross
profit margin for the Aerospace Group was 13.7% for the quarter ended September
30, 2001 as compared to 9.9% in the third quarter of 2000. For the comparable
nine-month periods, Aerospace Group gross margins increased to 14.7% in 2001
from 14.6% in 2000. The Group's third quarter margin improvement relates to
increased sales volume and profit margins at the Group's Spin Forge and AMK
Welding Divisions, the positive effects of which were largely offset by the poor
margin performance of the Group's Precision Machined Products Division that is
expected to continue through at least the end of the year.
General and Administrative. General and administrative expenses for the quarter
ended September 30, 2001 decreased by 15.5% to $1,124,436 from $1,331,367 in the
third quarter of 2000. For the nine months ended September 30, 2001, general and
administrative expenses increased by 9.1% to $3,390,137 from $3,108,108 in the
comparable period of 2000. If the general and administrative expenses of
Nobelclad were excluded from the nine-month totals, general and administrative
expenses would have decreased by 5.1% to $2,548,505 in 2001 from $2,686,108 in
2000. As a percentage of net sales, general and administrative expenses
decreased from 14.8% in the third quarter of 2000 to 9.2% for the quarter ended
September 30, 2001 and decreased from 13.1% to 10.4% for the comparable
nine-month periods.
Selling Expense. Selling expenses increased by 23.0% to $617,903 for the quarter
ended September 30, 2001 from $502,319 in the third quarter of 2000. For the
nine months ended September 30, 2001, selling expenses increased by 41.6% to
$1,829,434 from $1,291,749 in the comparable period of 2000. If the selling
expenses of Nobelclad were excluded from the nine-month totals, selling expenses
would have increased by only 8.4% to $1,214,066 in 2001 from $1,119,749 in 2000.
The increase for the quarter and nine months ended September 30, 2001, excluding
the effects of Nobelclad, relates principally to the accrual of bonus expense
associated with the Explosive Metalworking Group's strong 2001 financial
performance. Selling expenses as a percentage of net sales decreased from 5.6%
in the third quarter of 2000 to 5.0% for the quarter ended September 30, 2001
and increased from 5.4% for the nine months ended September 30, 2000 to 5.6% for
the comparable period of 2001.
Income (Loss ) from Operations. For the third quarter ended September 30, 2001,
the Company reported income from operations of $1,626,395 compared to an
operating loss of $22,056 for the third quarter of 2000. The Company reported
operating income of $3,537,946 for the nine months ended September 30, 2001
compared to an operating loss of $689,225 for the comparable period of 2000.
This improvement is attributable to an increase in gross profits of $1,557,104
and $5,046,885 for the three and nine months, respectively, ended September 30,
2001 versus the comparable periods of 2000.
For the quarter and nine months ended September 30, 2001, our Explosive
Metalworking Group reported income from operations of $1,607,974 and $3,578,865,
respectively, as compared to operating income of $339,538 and an operating loss
of $115,961 for the respective comparable periods of 2000. For the quarter and
nine months ended September 30, 2001, our Aerospace Group reported operating
income of $18,421 and an operating loss of $40,919, respectively, as compared to
losses from operations of $361,594 and $573,264 for the comparable periods of
2000.
Interest Expense. Interest expense increased to $252,311 for the quarter ended
September 30, 2001 from $195,455 in the third quarter of 2000. This increase
relates to interest on new debt that was incurred in connection with the
acquisition of Nobelclad and its Swedish subsidiary, Nitro Metall. For the nine
months ended September 30, 2001, interest expense decreased to $616,732 from
$902,589 in the comparable period of 2000. This decrease resulted from the
reduction in revolving credit debt that was made possible by SNPE, Inc.'s June
14, 2000 equity investment in the Company.
Income Tax Benefit (Expense). No U.S. income tax provision has been recorded for
the nine months ended September 30, 2001, as available net operating loss
carry-forwards exceed pretax earnings projected for the year ended December 31,
2001. If such carry-forwards were utilized, the associated valuation allowance
would be reversed when the Company believes it is probable that such tax loss
carry-forwards will be realized. 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 nine months ended
September 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. Income tax
provisions on the earnings of Nobelclad and Nitro Metall, have been provided
based upon the respective French and Swedish statutory tax rates.
Liquidity and Capital Resources
Historically, the Company has obtained most of its operational financing
from a combination of operating activities and an asset-backed revolving credit
facility. Due primarily to the operating losses incurred during 1999 and the
first quarter of 2000, the Company 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 the Company's industrial revenue development bonds used to
finance the construction of new manufacturing facilities in Pennsylvania. On
June 14, 2000, DMC's stockholders approved a Stock Purchase Agreement between
the Company and SNPE, Inc.. 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 DMC 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 the Company 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. The Company 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 currently provides for maximum borrowings of
$4,500,000 until March 31, 2002. Proceeds from the SNPE equity investment,
convertible subordinated note issuance and credit facility borrowings aggregated
$10,500,000 and enabled DMC to repay all outstanding borrowings under the bank
revolving credit facility on which it had been in default since September 30,
1999. The bank revolving credit facility was terminated on September 14, 2000.
As a result of the SNPE debt and equity infusion, the Company was also able to
restructure financial covenants under the reimbursement agreement with its bank
relating to the industrial development revenue bonds. The original three-year
bank letter of credit that supported the Company's industrial development
revenue bonds
expired in September 2001 and was replaced by a new five-year letter of credit
issued by a different bank. The Company is currently in full compliance with all
provisions of its debt agreements.
The Company believes that its cash flow from operations and funds available
under its 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 before the end of 2001 and believes that the Company's
strengthened balance sheet and improving operating results will enable it to
secure such third party financing on reasonable terms. Until the Company is able
to secure such third party financing on reasonable terms, it will continue to
rely on the financial support of SNPE. A significant portion of the Company's
sales is derived from a relatively small number of customers; therefore, the
failure to perform existing contracts on a timely basis and to receive payment
for such services in a timely manner, or to enter into future contracts at
projected volumes and profitability levels could adversely affect the Company's
ability to meet its cash requirements exclusively through operating activities.
Consequently, any restriction on the availability of borrowing under the SNPE
credit facility or a replacement facility could negatively affect the Company's
ability to meet its future cash requirements.
Highlights from the Statement of Cash Flows for the Nine Months Ended September
30, 2001
Net cash flows from operations for the nine months ended September 30, 2001
were $2,116,903. Significant sources of operating cash flow included net income
of $2,569,860 and depreciation and amortization of $1,437,320. These sources
were partially offset by negative changes in working capital totaling
$1,921,277.
Cash used in investing activities totaled $1,225,836 and was comprised
primarily of acquisitions of property, plant and equipment.
Net cash flows used in financing activities totaled $69,345. The primary
sources and uses of cash from financing activities were term loan and revolving
credit borrowings of $4,000,000 and $1,283,000, respectively, used to finance
the transaction with Nobelclad and Nitro Metall.
Highlights from the Statement of Cash Flows for the Nine Months Ended September
30, 2000
Net cash flows from operating activities for the nine months ended
September 30, 2000 were $233,609. Significant uses included a net loss of
$1,527,689 and a gain on the sale of property, plant and equipment of $185,570.
These uses were more than offset by depreciation and amortization totaling
$1,237,265 and a positive change in working capital totaling $705,384.
Net cash flows from investing activities totaled $1,122,677 for the nine
months ended September 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, $231,374 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 $319,302
paid in connection with the construction of the Company's Pennsylvania
manufacturing facility and $339,027 of property, plant and equipment
acquisitions.
Net cash flows used in financing activities totaled $1,286,447. The primary
uses were $10,255,000 for the repayment of the bank line of credit, $505,000 in
principal payments on the industrial development revenue bonds, $230,000 of
payments on related party debt, $116,384 in payment of deferred financing costs,
a $193,471 repayment of bank overdraft and $329,000 in dividends paid by
Nobelclad and Nitro Metall to their former parent company. The primary sources
of cash included net borrowings of $155,000 on the bank line of credit prior to
its being repaid in full, proceeds from the issuance of common stock to SNPE
(net of issuance costs) totaling $5,236,252, and borrowings on the SNPE line of
credit and convertible subordinated note of $3,750,000 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 that 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.
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
The Company's Annual Meeting of Stockholders was held on September 13,
2001. At the Annual Meeting, the stockholders of the Company (i) elected the
persons listed below to serve as directors of the Company until the 2003 Annual
Meeting of Shareholders or until their respective successors are elected and
(ii) ratified the selection of Arthur Andersen LLP as independent accountants of
the Company for its fiscal year ending December 31, 2001.
The Company had 5,019,875 shares of Common Stock outstanding as of July 31,
2001, the record date for the Annual Meeting. At the Annual Meeting, holders of
a total of 4,837,579 shares of Common Stock were present in person or
represented by proxy. The following sets forth information regarding the results
of the voting at the Annual Meeting:
Proposal 1: Election of Directors
DIRECTOR Shares Voted "FOR" Shares Withheld
GeorgeW Morgenthaler 4,805,707 31,872
Bernard Fontana 4,773,028 64,551
Proposal 3: Ratification of Selection of Independent Accountants
Shares Voted Shares Voted Shares Shares
"FOR" "AGAINST" "ABSTAINING" not voted
4,823,659 3,300 10,620 0
Item 5. Other Information
None
Item 6.
(a) Exhibits
None.
(b) Reports on Form 8-K
Report on Form 8-K, filed July 16, 2001, reporting DMC acquisition of
Nobelclad and Nitro Metall.
Amendment to Report on Form 8-K filed September 14, 2001 with financial
statements and pro forma financial information required by Item 7 of Form 8-K.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
DYNAMIC MATERIALS CORPORATION
(Registrant)
Date: November 14, 2001
--------------------------------------------
Richard A. Santa, Vice President and
Chief Financial Officer (Duly Authorized Officer
and Principal Financial and Accounting Officer)