Table of Contents

 

 

 

UNITED STATES

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, 2012

 

OR

 

o         TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM                   TO                   .

 

Commission file number 001-14775

 


 

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  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o
(Do not check if smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 under the Act).  Yes  o  No  x

 

The number of shares of Common Stock outstanding was 13,511,464 as of October 30, 2012.

 

 

 



Table of Contents

 

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. In particular, we direct your attention to Part I, Item 1- Condensed Consolidated Financial Statements; Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations; Item 3 - Quantitative and Qualitative Disclosures About Market Risk; and Part II, Item 1A — Risk Factors. We intend the forward-looking statements throughout this quarterly report on Form 10-Q and the information incorporated by reference herein to be covered by the safe harbor provisions for forward-looking statements. Statements contained in this report which are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from projected results. All projections, guidance and other statements regarding our expected financial position and operating results, our business strategy, our financing plans and the outcome of any contingencies are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as “may,” “believe,” “plan,” “anticipate,” “estimate,” “expect,” “intend,” and other phrases of similar meaning. The forward-looking information is based on information available as of the date of this quarterly report and on numerous assumptions and developments that are not within our control. Although we believe that our expectations as expressed in these forward-looking statements are reasonable, we cannot assure you that our expectations will turn out to be correct. Factors that could cause actual results to differ materially include, but are not limited to, the following: changes in global economic conditions; the ability to obtain new contracts at attractive prices; the size and timing of customer orders and shipment; our ability to realize sales from our backlog; fluctuations in customer demand; fluctuations in foreign currencies; competitive factors; the timely completion of contracts; the timing and size of expenditures; the timely receipt of government approvals and permits; the price and availability of metal and other raw material; the adequacy of local labor supplies at our facilities; current or future limits on manufacturing capacity at our various operations; our ability to successfully integrate acquired businesses; the availability and cost of funds; and general economic conditions, both domestic and foreign, impacting our business and the business of the end-market users we serve. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

2



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INDEX

 

 

 

Page

PART I - FINANCIAL INFORMATION

 

 

 

Item 1

Condensed Consolidated Financial Statements

4

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011

4

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011 (unaudited)

6

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011 (unaudited)

7

 

Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2012 (unaudited)

8

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (unaudited)

9

 

Notes to Condensed Consolidated Financial Statements (unaudited)

10

 

 

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

Item 3

Quantitative and Qualitative Disclosure about Market Risk

30

 

 

 

Item 4

Controls and Procedures

30

 

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1

Legal Proceedings

31

 

 

 

Item 1A

Risk Factors

31

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

31

 

 

 

Item 3

Defaults Upon Senior Securities

31

 

 

 

Item 4

Mine Safety Disclosures

31

 

 

 

Item 5

Other Information

31

 

 

 

Item 6

Exhibits

31

 

 

 

 

Signatures

33

 

3



Table of Contents

 

Part I - FINANCIAL INFORMATION

 

ITEM 1.  Condensed Consolidated Financial Statements

 

DYNAMIC MATERIALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

 

 

September 30,

 

 

 

 

 

2012

 

December 31,

 

 

 

(unaudited)

 

2011

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

11,381

 

$

5,276

 

Accounts receivable, net of allowance for doubtful accounts of $421 and $424, respectively

 

37,719

 

36,368

 

Inventories

 

49,961

 

43,218

 

Prepaid expenses and other

 

4,239

 

4,858

 

Current deferred tax assets

 

1,615

 

1,469

 

 

 

 

 

 

 

Total current assets

 

104,915

 

91,189

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

 

85,198

 

72,914

 

Less - accumulated depreciation

 

(35,205

)

(31,512

)

 

 

 

 

 

 

Property, plant and equipment, net

 

49,993

 

41,402

 

 

 

 

 

 

 

GOODWILL, net

 

36,637

 

37,507

 

 

 

 

 

 

 

PURCHASED INTANGIBLE ASSETS, net

 

42,701

 

42,054

 

 

 

 

 

 

 

DEFERRED TAX ASSETS

 

977

 

485

 

 

 

 

 

 

 

OTHER ASSETS, net

 

610

 

789

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

235,833

 

$

213,426

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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Table of Contents

 

DYNAMIC MATERIALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Share and Per Share Data)

 

 

 

September 30,

 

 

 

 

 

2012

 

December 31,

 

 

 

(unaudited)

 

2011

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

12,281

 

$

14,753

 

Accrued expenses

 

5,373

 

5,358

 

Dividend payable

 

540

 

535

 

Accrued income taxes

 

557

 

780

 

Accrued employee compensation and benefits

 

5,232

 

4,666

 

Customer advances

 

1,355

 

1,918

 

Current debt obligations

 

67

 

1,166

 

Current portion of capital lease obligations

 

44

 

66

 

Current deferred tax liabilities

 

107

 

68

 

 

 

 

 

 

 

Total current liabilities

 

25,556

 

29,310

 

 

 

 

 

 

 

LINES OF CREDIT

 

43,552

 

26,462

 

 

 

 

 

 

 

LONG-TERM DEBT

 

72

 

118

 

 

 

 

 

 

 

CAPITAL LEASE OBLIGATIONS

 

37

 

70

 

 

 

 

 

 

 

DEFERRED TAX LIABILITIES

 

9,410

 

10,185

 

 

 

 

 

 

 

OTHER LONG-TERM LIABILITIES

 

1,212

 

1,238

 

 

 

 

 

 

 

Total liabilities

 

79,839

 

67,383

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENT LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Preferred stock, $0.05 par value; 4,000,000 shares authorized; no issued and outstanding shares

 

 

 

Common stock, $0.05 par value; 25,000,000 shares authorized; 13,511,464 and 13,367,169 shares issued and outstanding, respectively

 

675

 

668

 

Additional paid-in capital

 

58,907

 

55,983

 

Retained earnings

 

105,779

 

98,565

 

Other cumulative comprehensive loss

 

(9,463

)

(9,256

)

 

 

 

 

 

 

Total Dynamic Materials Corporation’s stockholders’ equity

 

155,898

 

145,960

 

Non-controlling interest

 

96

 

83

 

 

 

 

 

 

 

Total stockholders’ equity

 

155,994

 

146,043

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

235,833

 

$

213,426

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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DYNAMIC MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(Dollars in Thousands, Except Share and Per Share Data)

(unaudited)

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

NET SALES

 

$

50,149

 

$

54,890

 

$

149,048

 

$

154,630

 

 

 

 

 

 

 

 

 

 

 

COST OF PRODUCTS SOLD

 

34,800

 

40,058

 

105,383

 

114,023

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

15,349

 

14,832

 

43,665

 

40,607

 

 

 

 

 

 

 

 

 

 

 

COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

4,668

 

4,359

 

13,815

 

12,227

 

Selling and distribution expenses

 

4,011

 

3,359

 

12,330

 

10,997

 

Amortization of purchased intangible assets

 

1,520

 

1,448

 

4,584

 

4,324

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

10,199

 

9,166

 

30,729

 

27,548

 

 

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

5,150

 

5,666

 

12,936

 

13,059

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

180

 

(9

)

390

 

(348

)

Interest expense

 

(216

)

(326

)

(622

)

(1,222

)

Interest income

 

16

 

1

 

25

 

4

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

5,130

 

5,332

 

12,729

 

11,493

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX PROVISION

 

1,373

 

1,072

 

3,882

 

2,637

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

3,757

 

4,260

 

8,847

 

8,856

 

 

 

 

 

 

 

 

 

 

 

Less: Net income (loss) attributable to non-controlling interest

 

3

 

(13

)

13

 

(36

)

 

 

 

 

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO DYNAMIC MATERIALS CORPORATION

 

$

3,754

 

$

4,273

 

$

8,834

 

$

8,892

 

 

 

 

 

 

 

 

 

 

 

INCOME PER SHARE:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.28

 

$

0.32

 

$

0.65

 

$

0.67

 

Diluted

 

$

0.28

 

$

0.32

 

$

0.65

 

$

0.67

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

Basic

 

13,212,246

 

13,065,397

 

13,204,086

 

13,060,009

 

Diluted

 

13,216,229

 

13,072,076

 

13,208,259

 

13,069,765

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER COMMON SHARE

 

$

0.04

 

$

0.04

 

$

0.12

 

$

0.12

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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Table of Contents

 

DYNAMIC MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(Dollars in Thousands)

(unaudited)

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net income including non-controlling interest

 

$

3,757

 

$

4,260

 

$

8,847

 

$

8,856

 

 

 

 

 

 

 

 

 

 

 

Change in cumulative foreign currency translation adjustment

 

3,049

 

(7,241

)

(207

)

2,120

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

6,806

 

(2,981

)

8,640

 

10,976

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to non-controlling interest

 

6

 

(10

)

13

 

(102

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to Dynamic Materials Corporation

 

$

6,800

 

$

(2,971

)

$

8,627

 

$

11,078

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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Table of Contents

 

DYNAMIC MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012

(Amounts in Thousands)

(unaudited)

 

 

 

 

Dynamic Materials Corporation Stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Cumulative

 

Non-

 

 

 

 

 

Common Stock

 

Paid-In

 

Retained

 

Comprehensive

 

Controlling

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Loss

 

Interest

 

Total

 

Balances, December 31, 2011

 

13,367

 

$

668

 

$

55,983

 

$

98,565

 

$

(9,256

)

$

83

 

$

146,043

 

Net income

 

 

 

 

8,834

 

 

13

 

8,847

 

Change in cumulative foreign currency translation adjustment

 

 

 

 

 

(207

)

 

(207

)

Shares issued in connection with stock compensation plans

 

144

 

7

 

91

 

 

 

 

98

 

Tax impact of stock-based compensation

 

 

 

(5

)

 

 

 

(5

)

Stock-based compensation

 

 

 

2,838

 

 

 

 

2,838

 

Dividends declared

 

 

 

 

(1,620

)

 

 

(1,620

)

Balances, September 30, 2012

 

13,511

 

$

675

 

$

58,907

 

$

105,779

 

$

(9,463

)

$

96

 

$

155,994

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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DYNAMIC MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(Dollars in Thousands)

(unaudited)

 

 

 

2012

 

2011

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

8,847

 

$

8,856

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation (including capital lease amortization)

 

4,121

 

4,183

 

Amortization of purchased intangible assets

 

4,584

 

4,324

 

Amortization of deferred debt issuance costs

 

96

 

261

 

Stock-based compensation

 

2,838

 

2,535

 

Deferred income tax benefit

 

(763

)

(1,904

)

(Gain) loss on disposal of property, plant and equipment

 

(32

)

69

 

Change in:

 

 

 

 

 

Accounts receivable, net

 

(588

)

(7,311

)

Inventories

 

(4,565

)

(11,267

)

Prepaid expenses and other

 

635

 

(1,210

)

Accounts payable

 

(2,458

)

680

 

Customer advances

 

(554

)

1,278

 

Accrued expenses and other liabilities

 

316

 

1,764

 

 

 

 

 

 

 

Net cash provided by operating activities

 

12,477

 

2,258

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Acquisition of property, plant and equipment

 

(10,526

)

(4,364

)

Acquisition of TRX Industries

 

(10,294

)

 

Change in other non-current assets

 

152

 

20

 

 

 

 

 

 

 

Net cash used in investing activities

 

(20,668

)

(4,344

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Borrowings on bank lines of credit, net

 

17,087

 

3,999

 

Payment on loans with former owners of LRI

 

(1,157

)

 

Payment on Nord LB term loans

 

 

(633

)

Payment on capital lease obligations

 

(53

)

(233

)

Payment of dividends

 

(1,614

)

(1,596

)

Contribution from non-controlling stockholder

 

 

42

 

Net proceeds from issuance of common stock to employees and directors

 

98

 

99

 

Tax impact of stock-based compensation

 

(5

)

(109

)

 

 

 

 

 

 

Net cash provided by financing activities

 

14,356

 

1,569

 

 

 

 

 

 

 

EFFECTS OF EXCHANGE RATES ON CASH

 

(60

)

61

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

6,105

 

(456

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, beginning of the period

 

5,276

 

4,572

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, end of the period

 

$

11,381

 

$

4,116

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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Table of Contents

 

DYNAMIC MATERIALS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Currency Amounts in Thousands, Except Share and Per Share Data)

(unaudited)

 

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 consolidated financial statements should be read in conjunction with the financial statements that are included in our Annual Report filed on Form 10-K for the year ended December 31, 2011.

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of Dynamic Materials Corporation (“DMC”) and its controlled subsidiaries.  Only subsidiaries in which controlling interests are maintained are consolidated.  All significant intercompany accounts, profits, and transactions have been eliminated in consolidation.

 

2.      SIGNIFICANT ACCOUNTING POLICIES

 

Income Taxes

 

The effective tax rate for each of the periods reported differs from the U.S. statutory rate due primarily to favorable foreign permanent differences, variation in contribution to consolidated pre-tax income from each jurisdiction for the respective periods and differences between the U.S. and foreign tax rates (which range from 19% to 33%) on earnings that have been permanently reinvested.

 

Earnings Per Share

 

Unvested awards of share-based payments with rights to receive dividends or dividend equivalents, such as our restricted stock awards (“RSAs”), are considered participating securities for purposes of calculating earnings per share (“EPS”) and require the use of the two class method for calculating EPS.  Under this method, a portion of net income is allocated to these participating securities and therefore is excluded from the calculation of EPS allocated to common stock, as shown in the table below.

 

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Table of Contents

 

Computation and reconciliation of earnings per common share are as follows:

 

 

 

For the Three Months Ended

 

For the Three Months Ended

 

 

 

September 30, 2012

 

September 30, 2011

 

 

 

Income

 

Shares

 

EPS

 

Income

 

Shares

 

EPS

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to DMC

 

$

3,754

 

 

 

 

 

$

4,273

 

 

 

 

 

Less income allocated to RSAs

 

(83

)

 

 

 

 

(92

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income allocated to common stock for EPS calculation

 

$

3,671

 

13,212,246

 

$

0.28

 

$

4,181

 

13,065,397

 

$

0.32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjust shares for dilutives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation plans

 

 

 

3,983

 

 

 

 

 

6,679

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to DMC

 

$

3,754

 

 

 

 

 

$

4,273

 

 

 

 

 

Less income allocated to RSAs

 

(83

)

 

 

 

 

(92

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income allocated to common stock for EPS calculation

 

$

3,671

 

13,216,229

 

$

0.28

 

$

4,181

 

13,072,076

 

$

0.32

 

 

 

 

For the Nine Months Ended

 

For the Nine Months Ended

 

 

 

September 30, 2012

 

September 30, 2011

 

 

 

Income

 

Shares

 

EPS

 

Income

 

Shares

 

EPS

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to DMC

 

$

8,834

 

 

 

 

 

$

8,892

 

 

 

 

 

Less income allocated to RSAs

 

(196

)

 

 

 

 

(192

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income allocated to common stock for EPS calculation

 

$

8,638

 

13,204,086

 

$

0.65

 

$

8,700

 

13,060,009

 

$

0.67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjust shares for dilutives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation plans

 

 

 

4,173

 

 

 

 

 

9,756

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to DMC

 

$

8,834

 

 

 

 

 

$

8,892

 

 

 

 

 

Less income allocated to RSAs

 

(196

)

 

 

 

 

(192

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income allocated to common stock for EPS calculation

 

$

8,638

 

13,208,259

 

$

0.65

 

$

8,700

 

13,069,765

 

$

0.67

 

 

Recent Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standard which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The amendment is to be applied retrospectively and is effective for fiscal years, and interim periods

 

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within those years, beginning after December 15, 2011.  Other than revised disclosures, this update did not have a material impact on our financial statements.

 

3.      ACQUISITIONS

 

TRX Industries

 

On January 3, 2012, we acquired the assets and operating business of Texas-based TRX Industries, Inc. (“TRX”), a manufacturer of perforating guns, for a purchase price of $10,294.  TRX, which now operates as a division of DYNAenergetics US, has been a long-term supplier to DYNAenergetics US and, in recent years, accounted for a rapidly growing percentage of its perforating gun purchases.

 

The acquisition of TRX was structured as an asset purchase in an all-cash transaction.  The purchase price was allocated to tangible and identifiable intangible assets based on their fair values as determined by appraisals performed as of the acquisition date.  The allocation of the preliminary purchase price to the assets of TRX was as follows:

 

Current assets

 

$

2,702

 

Property, plant and equipment

 

2,227

 

Intangible assets

 

5,365

 

Deferred tax assets

 

40

 

 

 

 

 

Total assets acquired

 

10,334

 

 

 

 

 

Current liabilities

 

40

 

 

 

 

 

Total liabilities assumed

 

40

 

 

 

 

 

Net assets acquired

 

$

10,294

 

 

We acquired identifiable finite-lived intangible assets as a result of the acquisition of TRX.  The finite-lived intangible assets acquired were classified as customer relationships, totaling $5,365, and are being amortized over 6 years.  These amounts are included in Purchased Intangible Assets and are further discussed in Note 6.

 

4.      INVENTORY

 

The components of inventory are as follows at September 30, 2012 and December 31, 2011:

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

Raw materials

 

$

15,152

 

$

15,526

 

Work-in-process

 

14,811

 

10,511

 

Finished goods

 

18,627

 

15,947

 

Supplies

 

1,371

 

1,234

 

 

 

$

49,961

 

$

43,218

 

 

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5.      GOODWILL

 

The changes to the carrying amount of goodwill during the period are summarized below:

 

 

 

Explosive

 

Oilfield

 

 

 

 

 

Metalworking

 

Products

 

Total

 

Goodwill balance at December 31, 2011

 

$

21,637

 

$

15,870

 

$

37,507

 

Adjustment due to recognition of tax benefit of tax amortization of certain goodwill

 

(240

)

(362

)

(602

)

Adjustment due to exchange rate differences

 

(151

)

(117

)

(268

)

 

 

 

 

 

 

 

 

Goodwill balance at September 30, 2012

 

$

21,246

 

$

15,391

 

$

36,637

 

 

6.      PURCHASED INTANGIBLE ASSETS

 

The following table presents details of our purchased intangible assets, other than goodwill, as of September 30, 2012:

 

 

 

 

 

Accumulated

 

 

 

 

 

Gross

 

Amortization

 

Net

 

Core technology

 

$

21,897

 

$

(5,321

)

$

16,576

 

Customer relationships

 

43,450

 

(18,271

)

25,179

 

Trademarks / Trade names

 

2,343

 

(1,397

)

946

 

 

 

 

 

 

 

 

 

Total intangible assets

 

$

67,690

 

$

(24,989

)

$

42,701

 

 

The following table presents details of our purchased intangible assets, other than goodwill, as of December 31, 2011:

 

 

 

 

 

Accumulated

 

 

 

 

 

Gross

 

Amortization

 

Net

 

Core technology

 

$

22,041

 

$

(4,525

)

$

17,516

 

Customer relationships

 

38,165

 

(14,720

)

23,445

 

Trademarks / Trade names

 

2,361

 

(1,268

)

1,093

 

 

 

 

 

 

 

 

 

Total intangible assets

 

$

62,567

 

$

(20,513

)

$

42,054

 

 

The change in the gross value of our purchased intangible assets from December 31, 2011 to September 30, 2012 reflects the additional intangible assets associated with the acquisition of TRX and the impact of foreign currency translation adjustments.

 

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7.      CUSTOMER ADVANCES

 

On occasion, we require customers to make advance payments prior to the shipment of their orders in order to help finance our inventory investment on large orders or to keep customers’ credit limits at acceptable levels.  As of September 30, 2012 and December 31, 2011, customer advances totaled $1,355 and $1,918, respectively, and originated from several customers.

 

8.      DEBT

 

Lines of credit consisted of the following at September 30, 2012 and December 31, 2011:

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

Syndicated credit agreement:

 

 

 

 

 

U.S. Dollar revolving loan

 

$

32,900

 

$

20,247

 

Euro revolving loan

 

9,127

 

6,215

 

Canadian Dollar revolving loan

 

1,525

 

 

Commerzbank line of credit

 

2

 

 

Nord LB line of credit

 

 

13

 

 

 

 

 

 

 

 

 

43,554

 

26,475

 

Less current portion

 

(2

)

(13

)

 

 

 

 

 

 

Long-term lines of credit

 

$

43,552

 

$

26,462

 

 

Long-term debt consisted of the following at September 30, 2012 and December 31, 2011:

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

Loans with former owners of LRI

 

$

137

 

$

1,271

 

Less current maturities

 

(65

)

(1,153

)

 

 

 

 

 

 

Long-term debt

 

$

72

 

$

118

 

 

Loan Covenants and Restrictions

 

Our existing 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, 2012, we were in compliance with all financial covenants and other provisions of our debt agreements.

 

9.      BUSINESS SEGMENTS

 

Our business is organized in the following three segments:  Explosive Metalworking, Oilfield Products, and AMK Welding. The Explosive Metalworking segment uses explosives to perform metal cladding and shock synthesis of industrial diamonds. The most significant product of this group is clad metal which is used in the fabrication of pressure vessels, heat exchangers, and transition joints for various industries, including upstream oil and gas, oil refinery, petrochemicals, hydrometallurgy, aluminum production, shipbuilding, power generation, industrial refrigeration,

 

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and similar industries.  The Oilfield Products segment manufactures, markets and sells oilfield perforating equipment and explosives, including detonating cords, detonators, bi-directional boosters and shaped charges, and seismic related explosives and accessories.  AMK Welding utilizes a number of welding technologies to weld components for manufacturers of jet engine and ground-based turbines.

 

The accounting policies of all the segments are the same as those described in the summary of significant accounting policies included herein and in our Annual Report on Form 10-K for the year ended December 31, 2011.  Our reportable segments are separately managed strategic business units that offer different products and services. Each segment’s products are marketed to different customer types and require different manufacturing processes and technologies.

 

Segment information is presented for the three and nine months ended September 30, 2012 and 2011 as follows:

 

 

 

Explosive

 

Oilfield

 

AMK

 

 

 

 

 

Metalworking

 

Products

 

Welding

 

Total

 

For the three months ended September 30, 2012:

 

 

 

 

 

 

 

 

 

Net sales

 

$

29,771

 

$

18,044

 

$

2,334

 

$

50,149

 

Depreciation and amortization

 

$

1,357

 

$

1,417

 

$

138

 

$

2,912

 

Income from operations

 

$

5,451

 

$

1,139

 

$

386

 

$

6,976

 

Unallocated amounts:

 

 

 

 

 

 

 

 

 

Corporate expenses

 

 

 

 

 

 

 

(923

)

Stock-based compensation

 

 

 

 

 

 

 

(903

)

Other income

 

 

 

 

 

 

 

180

 

Interest expense

 

 

 

 

 

 

 

(216

)

Interest income

 

 

 

 

 

 

 

16

 

 

 

 

 

 

 

 

 

 

 

Consolidated income before income taxes

 

 

 

 

 

 

 

$

5,130

 

 

 

 

Explosive

 

Oilfield

 

AMK

 

 

 

 

 

Metalworking

 

Products

 

Welding

 

Total

 

For the three months ended September 30, 2011:

 

 

 

 

 

 

 

 

 

Net sales

 

$

33,396

 

$

18,790

 

$

2,704

 

$

54,890

 

Depreciation and amortization

 

$

1,466

 

$

1,399

 

$

138

 

$

3,003

 

Income from operations

 

$

4,599

 

$

1,881

 

$

572

 

$

7,052

 

Unallocated amounts:

 

 

 

 

 

 

 

 

 

Corporate expenses

 

 

 

 

 

 

 

(514

)

Stock-based compensation

 

 

 

 

 

 

 

(872

)

Other expense

 

 

 

 

 

 

 

(9

)

Interest expense

 

 

 

 

 

 

 

(326

)

Interest income

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

Consolidated income before income taxes

 

 

 

 

 

 

 

$

5,332

 

 

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Explosive

 

Oilfield

 

AMK

 

 

 

 

 

Metalworking

 

Products

 

Welding

 

Total

 

For the nine months ended September 30, 2012:

 

 

 

 

 

 

 

 

 

Net sales

 

$

84,680

 

$

57,941

 

$

6,427

 

$

149,048

 

Depreciation and amortization

 

$

4,137

 

$

4,181

 

$

387

 

$

8,705

 

Income from operations

 

$

13,138

 

$

4,886

 

$

463

 

$

18,487

 

Unallocated amounts:

 

 

 

 

 

 

 

 

 

Corporate expenses

 

 

 

 

 

 

 

(2,713

)

Stock-based compensation

 

 

 

 

 

 

 

(2,838

)

Other income

 

 

 

 

 

 

 

390

 

Interest expense

 

 

 

 

 

 

 

(622

)

Interest income

 

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

 

 

Consolidated income before income taxes

 

 

 

 

 

 

 

$

12,729

 

 

 

 

Explosive

 

Oilfield

 

AMK

 

 

 

 

 

Metalworking

 

Products

 

Welding

 

Total

 

For the nine months ended September 30, 2011:

 

 

 

 

 

 

 

 

 

Net sales

 

$

95,221

 

$

51,563

 

$

7,846

 

$

154,630

 

Depreciation and amortization

 

$

4,419

 

$

3,709

 

$

379

 

$

8,507

 

Income from operations

 

$

11,758

 

$

3,964

 

$

1,742

 

$

17,464

 

Unallocated amounts:

 

 

 

 

 

 

 

 

 

Corporate expenses

 

 

 

 

 

 

 

(1,870

)

Stock-based compensation

 

 

 

 

 

 

 

(2,535

)

Other expense

 

 

 

 

 

 

 

(348

)

Interest expense

 

 

 

 

 

 

 

(1,222

)

Interest income

 

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

Consolidated income before income taxes

 

 

 

 

 

 

 

$

11,493

 

 

During the three and nine months ended September 30, 2012, no one customer accounted for more than 10% of total net sales.  During the three and nine months ended September 30, 2011, no one customer accounted for more than 10% of total net sales.

 

10.    SUBSEQUENT EVENT

 

On October 8, 2012, the Board of Directors appointed Kevin T. Longe as President and Chief Executive Officer of DMC effective March 1, 2013.  Mr. Longe will succeed Yvon Cariou, who will retire after serving as DMC’s President and Chief Executive Officer since 2000.  As result of Mr. Cariou’s planned retirement on March 1, 2013 and in accordance with the terms of underlying restricted stock award agreements, vesting will be accelerated to his retirement date on 33,666 shares of restricted stock awards granted in 2011 and 2012 that were scheduled to vest between January 2014 and January 2016.  This accelerated vesting will result in the accelerated recognition of $618 in stock-based compensation expense over the next five months, with $364 and $254 of this expense being recognized in the fourth quarter of 2012 and first quarter of 2013, respectively.

 

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ITEM 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with our historical consolidated financial statements and notes, as well as the selected historical consolidated financial data that are included in our Annual Report filed on Form 10-K for the year ended December 31, 2011.

 

Unless stated otherwise, all currency amounts in this discussion are presented in thousands (000’s).

 

Executive Overview

 

Our business is organized into three segments:  Explosive Metalworking (which we also refer to as DMC Nobelclad), Oilfield Products and AMK Welding.  For the nine months ended September 30, 2012, Explosive Metalworking accounted for 57% of our net sales and 71% of our income from operations before consideration of unallocated corporate expenses and stock-based compensation expense, which are not allocated to our business segments.  Our Oilfield Products segment accounted for 39% and of 26% of our year-to-date 2012 net sales and income from operations, respectively, while the AMK Welding segment accounted for 4% of net sales and 3% of our income from operations for year-to-date 2012.

 

Our consolidated net sales for the nine months ended September 30, 2012 decreased by $5,582, or 3.6%, compared to the same period of 2011.  The year-to-year consolidated net sales decrease reflects sales decreases of $10,541 (11.1%) for our Explosive Metalworking segment and $1,419 (18.1%) for our AMK Welding segment, which were partially offset by a sales increase in our Oilfield Products segment of $6,378 (12.4%).  As a result of an improvement in our consolidated gross margin rate to 29.3% in 2012 from 26.3% in 2011, our year-to-date consolidated gross profit increased by $3,058, or 7.5%, despite the 3.6% drop in our consolidated net sales.  This increase in gross profit was offset by a $3,181, or 11.6%, increase in our total operating expenses, resulting in a slight decrease in our consolidated income from operations to $12,936 for the nine months ended September 30, 2012 from $13,059 in the same period of 2011.  This $123 decrease reflects increases of $1,380 and $922 in the operating income reported by our Explosive Metalworking and Oilfield Products segments, respectively, which were partially offset by a decrease in AMK Welding’s operating income of $1,279 and a net increase in aggregate unallocated corporate expenses and stock-based compensation expense of $1,146.  Reported consolidated operating income for the nine month periods ended September 30, 2012 and 2011 includes amortization expense of $4,584 and $4,324, respectively, relating to purchased intangible assets associated with several acquisitions executed between November of 2007 and January of 2012.  We reported net income of $8,834 for year-to-date 2012 compared to $8,892 for the same period of 2011.

 

Impact of Current Economic Situation on the Company

 

We were only minimally impacted in 2008 by the global economic slowdown.  However, during 2009 and 2010, we experienced a significant slowdown in Explosive Metalworking sales to some of the markets we serve.  The explosion-welded clad plate market is dependent upon sales of products for use by customers in a number of heavy industries, including oil and gas, chemicals and petrochemicals, aluminum production, power generation, shipbuilding, industrial refrigeration, alternative energy and hydrometallurgy.  These industries tend to be cyclical in nature and the current worldwide economic downturn has affected many of these markets.  While certain sectors continue to be slow, including alternative energy, hydrometallurgy and power generation, quoting

 

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activity in other end markets remains healthy, and we continue to track an extensive list of projects. While timing of new order inflow remains difficult to predict, our Explosive Metalworking segment benefited from the modest improvement in 2011 and early 2012 of some of the industries it supplies and we believe that it is well-positioned to further benefit as global economic conditions improve.

 

As a result of acquisitions made during 2009 and 2010 and strong organic sales growth beginning in the third quarter of 2010, our Oilfield Products segment has grown into a second core business for us, generating 35% of our consolidated net sales in 2011 and 39% of our year-to-date 2012 consolidated net sales as compared to only 13% of our consolidated net sales in 2009.

 

Our Explosive Metalworking backlog increased from $44,564 at December 31, 2011 to $56,625 at June 30, 2012 and then decreased to $48,360 at September 30, 2012.  While third quarter 2012 Explosive Metalworking sales met our expectations, we had anticipated somewhat stronger third quarter bookings than we realized.  As a result, we now expect full year 2012 Explosive Metalworking sales to be down by 9% to 10% from the $126,199 in net sales that this segment reported in 2011.  We also experienced a slowdown in Oilfield Products sales during the third quarter of 2012, particularly in North America where the near-term outlook remains uncertain.  Based upon the September 30, 2012 Explosive Metalworking backlog and lower than previously expected third quarter 2012 and fourth quarter 2012 projected sales for our Oilfield Products business segment, we currently expect that our 2012 consolidated net sales will be 3% to 4% lower than the $208,891 in consolidated net sales that we reported in 2011.

 

Net sales

 

Explosive Metalworking’s revenues are generated principally from sales of clad metal plates and sales of transition joints, which are made from clad plates, to customers that fabricate industrial equipment for various industries, including oil and gas, petrochemicals, alternative energy, hydrometallurgy, aluminum production, shipbuilding, power generation, industrial refrigeration, and similar industries.  While a large portion of the demand for our clad metal products is driven by new plant construction and large plant expansion projects, maintenance and retrofit projects at existing chemical processing, petrochemical processing, oil refining, and aluminum smelting facilities also account for a significant portion of total demand.

 

Oilfield Products’ revenues are generated principally from sales of shaped charges, detonators and detonating cord, and bidirectional boosters and perforating guns to customers who perform the perforation of oil and gas wells and from sales of seismic products to customers involved in oil and gas exploration activities.

 

AMK Welding’s revenues are generated from welding, heat treatment, and inspection services that are provided with respect to customer-supplied parts for customers primarily involved in the power generation industry and aircraft engine markets.

 

A significant portion of our revenue is derived from a relatively small number of customers; therefore, the failure to complete existing contracts on a timely basis, 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 cash requirements exclusively through operating activities. We attempt to minimize the risk of losing customers or specific contracts by continually improving product quality, delivering product on time and competing aggressively on the basis of price.

 

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Gross profit and cost of products sold

 

Cost of products sold for Explosive Metalworking includes the cost of metals and alloys used to manufacture clad metal plates, the cost of explosives, employee compensation and benefits, freight, outside processing costs, depreciation of manufacturing facilities and equipment, manufacturing supplies and other manufacturing overhead expenses.

 

Cost of products sold for Oilfield Products includes the cost of metals, explosives and other raw materials used to manufacture shaped charges, detonating products and perforating guns as well as employee compensation and benefits, depreciation of manufacturing facilities and equipment, manufacturing supplies and other manufacturing overhead expenses.

 

AMK Welding’s cost of products sold consists principally of employee compensation and benefits, welding supplies (wire and gas), depreciation of manufacturing facilities and equipment, outside services and other manufacturing overhead expenses.

 

Backlog

 

We use backlog as a primary means of measuring the immediate outlook for our Explosive Metalworking business.  We define “backlog” at any given point in time as consisting of all firm, unfulfilled purchase orders and commitments at that time.  Generally speaking, we expect to fill most backlog orders within the following 12 months.  From experience, most firm purchase orders and commitments are realized.

 

Our backlog with respect to the Explosive Metalworking segment increased to $48,360 at September 30, 2012 from $44,564 at December 31, 2011. Our September 30, 2011 backlog was $47,123.

 

Three and Nine Months Ended September 30, 2012 Compared to the Three and Nine Months Ended September 30, 2011

 

Net sales

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

 

 

Percentage

 

 

 

2012

 

2011

 

Change

 

Change

 

Net sales

 

$

50,149

 

$

54,890

 

$

(4,741

)

(8.6

)%

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

 

 

Percentage

 

 

 

2012

 

2011

 

Change

 

Change

 

Net sales

 

$

149,048

 

$

154,630

 

$

(5,582

)

(3.6

)%

 

Net sales for the third quarter of 2012 decreased 8.6% to $50,149 from $54,890 for the third quarter of 2011.  Explosive Metalworking sales decreased 10.9% to $29,771 for the three months ended September 30, 2012 (59% of total sales) from $33,396 for the same period of 2011 (61% of total sales).  Since our Explosive Metalworking backlog of $56,625 as of June 30, 2012 was slightly higher than the June 30, 2011 backlog of $54,026, the $3,625 decrease in third quarter 2012 sales relates principally to timing differences with respect to when orders enter our backlog and the subsequent shipment of these orders.

 

Oilfield Products contributed $18,044 to third quarter 2012 sales (36% of total sales), which represents a 4.0% decline from sales of $18,790 for the third quarter of 2011 (34% of total sales).

 

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After adjusting for incremental sales of $1,007 from the January 3, 2012 acquisition of TRX Industries, third quarter sales decreased by $1,753 or 9.3%. This decrease is principally attributable to a decline in rig count in both the United States and Canada since the end of the second quarter which negatively affected our North American sales.

 

AMK Welding contributed $2,334 to third quarter 2012 sales (5% of total sales), compared to sales of $2,704 for the third quarter of 2011 (5% of total sales), a sales decrease of $370 or 13.7%.  This decrease reflects a $457, or 24.2%, decline in ground power sales that is attributable to a customer’s decision to discontinue new production work on a ground turbine platform that has accounted for a major portion of AMK’s historical ground power revenues. We believe that AMK can replace this lost revenue stream over time by developing new business opportunities with both existing and new customers in the aircraft engine, ground turbine, and oil and gas industries.

 

Net sales for the nine months ended September 30, 2012 decreased to $149,048 compared to $154,630 for the same period of 2011.  Explosive Metalworking sales decreased 11.1% to $84,680 for the nine months ended September 30, 2012 (57% of total sales) from $95,221 for the same period of 2011 (62% of total sales).  Our beginning of the year Explosive Metalworking backlog decreased to $44,564 at the beginning of 2012 from $56,539 at the beginning of 2011.  The $10,541 decrease in year-to-date 2012 sales follows this $11,975 decrease in beginning of the year backlogs.

 

Oilfield Products contributed $57,941 to year-to-date 2012 sales (39% of total sales), which represents a 12.4% increase from sales of $51,563 for year-to-date 2011 (33% of total sales). This sales increase reflects incremental sales of $4,763 from the January 3, 2012 acquisition of TRX Industries and generally strong demand for our perforating products, particularly in the United States during the first six months of 2012, before North American demand weakened in the third quarter as further described above.

 

AMK Welding contributed $6,427 to year-to-date 2012 sales (4% of total sales), compared to sales of $7,846 for the same period of 2011 (5% of total sales), a sales decrease of $1,419 or 18.1%.  This decrease reflects a $1,783, or 30.6%, decline in ground power sales that is attributable to a customer’s decision to discontinue new production work on a ground turbine platform as discussed above.

 

Gross profit

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

 

 

Percentage

 

 

 

2012

 

2011

 

Change

 

Change

 

Gross profit

 

$

15,349

 

$

14,832

 

$

517

 

3.5

%

Consolidated gross profit margin rate

 

30.6

%

27.0

%

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

 

 

Percentage

 

 

 

2012

 

2011

 

Change

 

Change

 

Gross profit

 

$

43,665

 

$

40,607

 

$

3,058

 

7.5

%

Consolidated gross profit margin rate

 

29.3

%

26.3

%

 

 

 

 

 

Despite the 8.6% decrease in third quarter 2012 sales as discussed above, our third quarter 2012 gross profit increased by 3.5% to $15,349 from $14,832 for the three months ended September 30, 2011. Our third quarter 2012 consolidated gross profit margin rate increased by 13.3% to 30.6% from 27.0% for the third quarter of 2011.  For the nine months ended September 30, 2012, gross profit increased by 7.5% to $43,665 from $40,607 for the same period of 2011.

 

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Our year-to-date consolidated gross profit margin rate increased by 11.4% to 29.3% in 2012 from 26.3% for the nine months ended September 30, 2011.

 

The gross profit margin for Explosive Metalworking increased from 22.6% in the third quarter of 2011 to 29.7% in the third quarter of 2012, an increase of 31.5%.  For the nine-month period, our gross profit margin for this segment increased by 23.2% to 27.2% in 2012 from 22.1% in 2011.  The significant improvement in our year-to-date 2012 gross profit margin rate relates to favorable changes in product mix as compared to the first nine months of 2011 combined with an improved pricing environment.  As has been the case historically, we expect to see continued fluctuations in Explosive Metalworking’s quarterly gross margin rates in the future that result from fluctuations in quarterly sales volume and changes in product mix.

 

Oilfield Products gross profit margin decreased slightly to 33.0% in the third quarter of 2012 from 34.5% in the third quarter of 2011.  Oilfield Products reported a gross profit margin of 33.9% for the nine months ended September 30, 2012 compared to a gross profit margin of 33.4% for the same period of 2011.  The decline in the third quarter gross margin rate reflects a combination of unfavorable changes in product/customer mix and a more competitive pricing environment in North America associated with the declining in drilling activity discussed above.  The modest increase in Oilfield Products’ gross margin for the nine-month period of 2012 relates principally to favorable changes in product/customer mix.

 

The gross profit margin for AMK Welding decreased to 26.5% in the third quarter of 2012 from 31.5% in the third quarter of 2011.  The gross profit margin for AMK Welding decreased to 18.9% for the nine-month period of 2012 from 31.9% for the same period of 2011.  Since the majority of AMK’s manufacturing costs are fixed in nature, the decreases in AMK’s third quarter and year-to-date sales had a significant, depressing effect on 2012 gross margin performance.

 

Based upon the expected contribution to 2012 consolidated net sales by each of our three business segments, we expect our consolidated full year 2012 gross margin to be in a range of 29% to 30%.

 

General and administrative expenses

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

 

 

Percentage

 

 

 

2012

 

2011

 

Change

 

Change

 

General and administrative expenses

 

$

4,668

 

$

4,359

 

$

309

 

7.1

%

Percentage of net sales

 

9.3

%

7.9

%

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

 

 

Percentage

 

 

 

2012

 

2011

 

Change

 

Change

 

General and administrative expenses

 

$

13,815

 

$

12,227

 

$

1,588

 

13.0

%

Percentage of net sales

 

9.3

%

7.9

%

 

 

 

 

 

General and administrative expenses increased by $309, or 7.1%, to $4,668 for the three months ended September 30, 2012 from $4,359 for the same period of 2011.  This increase includes increases of $178 in salaries and accrued incentive compensation and a net increase of $131 in all other expense categories.  As a percentage of net sales, general and administrative expenses increased to 9.3% in the third quarter of 2012 from 7.9% in the third quarter of 2011.

 

General and administrative expenses increased by $1,588, or 13.0%, to $13,815 for the nine months ended September 30, 2012 from $12,227 for the same period of 2011.  This increase includes increases of $921 in salaries and accrued incentive compensation, an increase in outside

 

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professional service fees of $119, an increase of $215 in stock-based compensation, and a net increase of $333 in all other expense categories.  As a percentage of net sales, general and administrative expenses increased to 9.3% for the nine months ended September 30, 2012 from 7.9% in the same period of 2011.

 

Selling and distribution expenses

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

 

 

Percentage

 

 

 

2012

 

2011

 

Change

 

Change

 

Selling and distribution expenses

 

$

4,011

 

$

3,359

 

$

652

 

19.4

%

Percentage of net sales

 

8.0

%

6.1

%

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

 

 

Percentage

 

 

 

2012

 

2011

 

Change

 

Change

 

Selling and distribution expenses

 

$

12,330

 

$

10,997

 

$

1,333

 

12.1

%

Percentage of net sales

 

8.3

%

7.1

%

 

 

 

 

 

Our selling and distribution expenses, which include sales commissions of $281 in the third quarter of 2012 and $222 in the third quarter of 2011, increased by 19.4% to $4,011 in the third quarter of 2012 from $3,359 in the third quarter of 2011.  The increase in our selling and distribution expenses includes increased selling and distribution expenses of $422 and $230 at our U.S. divisions and foreign divisions, respectively.

 

The $422 increase in our U.S. selling and distribution expenses reflects an aggregate increase of $148 in salaries, accrued incentive compensation and commission expense and a net increase of $274 in all other expense categories.  The $230 increase in our foreign divisions’ selling and distribution expenses reflects an increase of $80 in salary and commission expense and a net increase of $150 in all other spending categories.  As a percentage of net sales, selling and distribution expenses increased to 8.0% in the third quarter of 2012 from 6.1% in the third quarter of 2011.

 

Our selling and distribution expenses, which include sales commissions of $1,151 and $1,343 for the nine months ended September 30, 2012 and 2011, respectively increased by 12.1% to $12,330 for the first nine months of 2012 from $10,997 in the same period of 2011.  The increase in our selling and distribution expenses includes increased selling and distribution expenses of $459 at our U.S. divisions and $874 at our foreign divisions.

 

The $459 increase in our U.S. selling and distribution expenses reflects a decrease in commission expense of $348 that was offset by an increase in salaries and accrued incentive compensation of $255 and a net increase in all other spending categories of $552.  The $874 increase in our foreign divisions’ selling and distribution expenses reflects increases of $402 in salary expense and $155 in commission expense along with a net increase of $317 in all other spending categories.  As a percentage of net sales, selling and distribution expenses increased to 8.3% for the nine months ended September 30, 2012 from 7.1% for the nine months ended September 30, 2011.

 

Our consolidated selling and distribution expenses for the three months ended September 30, 2012 include $1,736 and $2,078, respectively, for our Explosive Metalworking and Oilfield Products business segments. For the nine months ended September 30, 2012 our consolidated selling and distribution expenses include $4,972 and $6,772, respectively, for our Explosive Metalworking and Oilfield Products business segments.  The higher level of selling and distribution expenses for our Oilfield Products segment relative to its contribution to our

 

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Table of Contents

 

consolidated net sales reflects the need, particularly in North America, to maintain a number of strategically located distribution centers that are in close proximity to areas which contain a large concentration of oilfields and enjoy a high volume of related oil and gas drilling activities.

 

Amortization expense

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

 

 

Percentage

 

 

 

2012

 

2011

 

Change

 

Change

 

Amortization of purchased intangible assets

 

$

1,520

 

$

1,448

 

$

72

 

5.0

%

Percentage of net sales

 

3.0

%

2.6

%

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

 

 

Percentage

 

 

 

2012

 

2011

 

Change

 

Change

 

Amortization of purchased intangible assets

 

$

4,584

 

$

4,324

 

$

260

 

6.0

%

Percentage of net sales

 

3.1

%

2.8

%

 

 

 

 

 

Amortization expense relates to the amortization of values assigned to intangible assets in connection with our prior year acquisitions of DYNAenergetics, LRI, the two Russian joint ventures, Austin Explosives and our January 3, 2012 acquisition of TRX Industries.  The $72 increase in third quarter 2012 amortization expenses reflects $224 in new amortization expense associated with the TRX acquisition that was partially offset by favorable foreign currency translation effects.  Amortization expense for the three months ended September 30, 2012 includes $1,207, $268, and $45 relating to values assigned to customer relationships, core technology, and trademarks/trade names, respectively.  Amortization expense for the three months ended September 30, 2011 includes $1,094, $303 and $51 relating to values assigned to customer relationships, core technology, and trademarks/trade names, respectively.

 

Amortization expense for the nine months ended September 30, 2012 includes $3,623, $823, and $138 relating to values assigned to customer relationships, core technology, and trademarks/trade names, respectively.  Amortization expense for the nine months ended September 30, 2011 includes $3,270, $902 and $152 relating to values assigned to customer relationships, core technology, and trademarks/trade names, respectively.

 

Amortization expense (as measured in Euros) associated with the DYNAenergetics acquisition and the acquisition of the two Russian joint ventures is expected to approximate €3,490 and €232, respectively, in 2012.  Our 2012 amortization expense associated with the June 2010 Austin Explosives acquisition and the January 2012 acquisition of TRX Industries is expected to approximate $435 and $895, respectively, and our 2012 amortization expense (as measured in Canadian dollars) associated with the LRI acquisition is expected to approximate 80 CAD.

 

Operating income

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

 

 

Percentage

 

 

 

2012

 

2011

 

Change

 

Change

 

Operating income

 

$

5,150

 

$

5,666

 

$

(516

)

(9.1

)%

 

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Table of Contents

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

 

 

Percentage

 

 

 

2012

 

2011

 

Change

 

Change

 

Operating income

 

$

12,936

 

$

13,059

 

$

(123

)

(0.9

)%

 

Income from operations (“operating income”) decreased by 9.1% to $5,150 in the third quarter of 2012 from $5,666 in the third quarter of 2011.  For the nine months ended September 30, 2012, operating income decreased by 0.9% to $12,936 from $13,059 for the same period of 2011.

 

Explosive Metalworking reported operating income of $5,451 in the third quarter of 2012 compared to $4,599 in the third quarter of 2011.  This 18.5% increase is largely attributable to the 31.5% increase in the gross margin rate discussed above. Operating results of Explosive Metalworking for the three months ended September 30, 2012 and 2011 include $500 and $565, respectively, of amortization expense of purchased intangible assets.  Explosive Metalworking reported operating income of $13,138 for the nine months ended September 30, 2012 as compared to $11,758 for the nine months ended September 30, 2011.  This 11.7% increase is largely attributable to the 23.2% increase in the gross margin rate as discussed above.  Operating results of Explosive Metalworking for the nine months ended September 30, 2012 and 2011 include $1,536 and $1,685, respectively, of amortization expense of purchased intangible assets.

 

Oilfield Products reported operating income of $1,139 in the third quarter of 2012 compared to $1,881 in the third quarter of 2011.  The decrease in third quarter operating income reflects a $533 decrease in gross profit, which is attributable to a 4.0% sales decline and a 4.4% decrease in gross margin rate, and a $209, or 4.5%, increase in total operating expenses.  For the nine-month period of 2012, Oilfield Products reported operating income of $4,886 compared to $3,964 for the same period of 2011.  The increase in year-to-date operating income for our Oilfield Products segment is principally attributable to the sales increase of $6,378, or 12.4%, as discussed above and a corresponding $2,374 increase in gross profit.  This gross profit increase was partially offset by an increase of $1,452, or 10.9%, in total operating expenses.  Operating results of Oilfield Products for the three months ended September 30, 2012 and 2011 include $1,020 and $883, respectively, of amortization expense of purchased intangible assets.  Operating results of Oilfield Products for the nine months ended September 30, 2012 and 2011 include $3,048 and $2,639, respectively, of amortization expense of purchased intangible assets.

 

AMK Welding reported operating income of $386 in the third quarter of 2012, a decrease of $186 from the $572 of operating income that it reported in the third quarter of 2011.  AMK Welding reported operating income of $463 for the nine months ended September 30, 2012 compared to $1,742 for the same period of 2011.  The decline in AMK’s operating income for the three and nine months ended September 30, 2012 is principally attributable to the $370 and $1,419 sales decline and resultant decrease in gross profit as discussed above.

 

Our consolidated operating income for the three months ended September 30, 2012 and 2011 includes $923 and $514, respectively, of unallocated corporate expenses and $903 and $872, respectively, of stock-based compensation expense.  For the nine months ended September 30, 2012 and 2011, consolidated operating income includes $2,713 and $1,870, respectively, of unallocated corporate expenses and $2,838 and $2,535, respectively, of stock-based compensation expense.  These expenses are not allocated to our business segments and thus are not included in the above third quarter and year-to-date operating income totals for our Explosive Metalworking, Oilfield Products, and AMK Welding business segments.

 

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Table of Contents

 

Other income (expense), net

 

 

 

Three Months Ended