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, 2002
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
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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 5,053,616 as of
October 31, 2002.
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- Financial Statements, Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations and Item 3 -
Quantitative and Qualitative Disclosures About Market Risk. We intend the
forward-looking statements throughout the quarterly report on Form 10-Q and the
information incorporated by reference to be covered by the safe harbor
provisions for 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. All projections and 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", "will", "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 report on Form 10-Q and
on numerous assumptions and developments that are not within our control.
Although we believe that our expectations that are 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: 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.
2
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements.................................... 4
Consolidated Balance Sheets as of September 30, 2002 (unaudited)
and December 31, 2001.................................................. 4
Consolidated Statements of Operations for the three and nine months ended
September 30, 2002 and 2001 (unaudited) ............................. 6
Consolidated Statements of Stockholders' Equity for the nine months ended
September 30, 2002 (unaudited) ...................................... 7
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 (unaudited) ............................. 8
Notes to Consolidated Financial Statements (unaudited)....................10
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................16
Item 3 - Quantitative and Qualitative Disclosures about Market Risk...........24
Item 4 - Controls and Procedures..............................................25
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings....................................................26
Item 2 - Changes in Securities and use of Proceeds............................26
Item 3 - Defaults Upon Senior Securities......................................26
Item 4 - Submission of Matters to a Vote of Security Holders..................26
Item 5 - Other information....................................................26
Item 6 - Reports on Form 8-K and Exhibits.....................................27
Signatures ..........................................................28
Certifications ......................................................29
3
Part I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 2002 2001
(unaudited)
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 824,788 $ 1,811,618
Accounts receivable, net of allowance for doubtful
accounts of $269,000 and $234,000, respectively 7,062,421 6,486,171
Inventories 7,776,162 6,708,422
Prepaid expenses and other 715,194 1,143,356
Current deferred tax asset 261,400 261,400
------------- -------------
Total current assets 16,639,965 16,410,967
------------- -------------
PROPERTY, PLANT AND EQUIPMENT 22,957,927 21,353,725
Less- Accumulated depreciation (7,616,800) (6,144,251)
------------- -------------
Property, plant and equipment, net 15,341,127 15,209,474
------------- -------------
RESTRICTED CASH AND INVESTMENTS 189,128 189,128
GOODWILL, net of accumulated amortization
of $768,913 4,647,185 4,647,185
INTANGIBLE ASSETS, net of accumulated amortization
of $657,687 and $614,938, respectively 73,835 56,584
OTHER ASSETS, net 316,611 400,007
------------- -------------
TOTAL ASSETS $ 37,207,851 $ 36,913,345
============= =============
The accompanying notes to Consolidated Financial Statements
are an integral part of these balance sheets.
4
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
(unaudited)
----------- -----------
CURRENT LIABILITIES:
Bank overdraft $ 539,871 $ -
Accounts payable 3,665,080 3,153,391
Accrued expenses 2,857,440 3,085,766
Current maturities on long-term debt 2,414,054 1,821,666
------------- -------------
Total current liabilities 9,476,445 8,060,823
LONG-TERM DEBT 9,922,048 13,675,431
NET DEFERRED TAX LIABILITIES 1,119,983 469,000
DEFERRED GAIN ON SWAP TERMINATION 51,679 62,097
OTHER LONG-TERM LIABILITIES 38,024 -
------------- -------------
Total liabilities 20,608,179 22,267,351
------------- -------------
STOCKHOLDERS' EQUITY:
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;
5,053,616 and 5,029,983 shares issued and
outstanding, respectively 252,682 251,500
Additional paid-in capital 12,358,295 12,315,596
Retained earnings 4,059,011 2,592,898
Other cumulative comprehensive income (loss) (70,316) (514,000)
------------- -------------
Total stockholders' equity 16,599,672 14,645,994
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,207,851 $ 36,913,345
============= =============
The accompanying notes to Consolidated Financial Statements
are an integral part of these balance sheets.
5
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Restated - See Note 2)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
NET SALES $ 10,695,195 $ 12,257,533 $ 32,298,243 $ 33,027,180
COST OF PRODUCTS SOLD 8,211,278 8,888,799 24,395,863 24,270,663
------------ ------------ ------------ ------------
GROSS PROFIT 2,483,917 3,368,734 7,902,380 8,756,517
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
General and administrative expenses 980,690 1,125,537 3,060,120 3,390,613
Selling expenses 649,818 616,906 1,868,217 1,828,985
------------ ------------ ------------ ------------
1,630,508 1,742,443 4,928,337 5,219,598
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 853,409 1,626,291 2,974,043 3,536,919
OTHER INCOME (EXPENSE):
Other income (expense) 765 1,406 (38,803) (74,495)
Interest expense (169,078) (252,491) (526,969) (616,152)
Interest income 636 5,079 1,155 12,988
------------ ------------ ------------ ------------
INCOME BEFORE INCOME
TAXES 685,732 1,380,285 2,409,426 2,859,260
INCOME TAX PROVISION 301,758 36,740 943,313 289,400
------------ ------------ ------------ ------------
NET INCOME $ 383,974 $ 1,343,545 $ 1,466,113 $ 2,569,860
============ ============ ============ ============
NET INCOME PER SHARE
Basic $ 0.08 $ 0.27 $ 0.29 $ 0.51
============ ============ ============ ============
Diluted $ 0.08 $ 0.26 $ 0.29 $ 0.51
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING -
Basic 5,048,888 5,016,125 5,038,596 4,999,110
Diluted 5,073,508 5,098,081 5,092,379 5,038,873
The accompanying notes to Consolidated Financial Statements
are an integral part of these statements.
6
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(unaudited)
Other
Common Stock Additional Cumulative Comprehensive
---------------------- Paid-In Retained Comprehensive Income for
Shares Amount Capital Earnings Loss Total the period
--------- --------- ------------ ----------- ------------- ------------ -------------
Balances, December 31, 2001 5,029,983 $ 251,500 $ 12,315,596 $ 2,592,898 $ (514,000) $ 14,645,994
Shares issued for stock option
exercises 17,252 863 24,577 - - 25,440
Shared issued in connection with the
employee stock purchase plan 6,381 319 18,122 - - 18,441
Net income - - - 1,466,113 - 1,466,113 $ 1,466,113
Change in cumulative translation
adjustment - - - - 443,684 443,684 443,684
---------- --------- ------------ ----------- ------------ ------------ ------------
Balances, September 30, 2002 5,053,616 $ 252,682 $ 12,358,295 $ 4,059,011 $ (70,316) $ 16,599,672 $ 1,909,797
========== ========= ============ =========== ============ ============ ============
The accompanying notes to Consolidated Financial Statements
are an integral part of these statements.
7
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (Restated - See Note 2)
(unaudited)
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,466,113 $ 2,569,860
Adjustments to reconcile net income
to net cash flows from operating activities-
Depreciation 1,302,579 1,198,790
Amortization 42,749 222,569
Amortization of deferred gain on swap termination (10,418) (12,039)
Provision for deferred income taxes 632,027 (1,000)
Change in -
Accounts receivable, net (351,794) (1,390,153)
Inventories (757,986) (509,537)
Prepaid expenses and other 210,348 (1,545)
Accounts payable 304,736 (391,473)
Accrued expenses (82,907) 535,431
------------- -------------
Net cash flows from operating activities 2,755,447 2,220,903
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (1,174,677) (1,174,834)
Change in other non-current assets 23,396 (71,502)
Proceeds from sale of property, plant and equipment - 500
------------- -------------
Net cash flows used in investing activities (1,151,281) (1,245,836)
------------- -------------
The accompanying notes to Consolidated Financial Statements
are an integral part of these statements.
8
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (Restated - See Note 2)
(unaudited)
2002 2001
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings / (repayments) on bank lines of credit, net (2,275,374) -
Borrowings / (repayments) on related party lines of credit (148,035) 579,000
Payment on industrial development revenue bonds (590,000) (540,000)
Repayments on the SNPE Term Loan (333,333) -
Borrowings for the purchase of Nitro Metall - 1,271,000
Borrowings for the purchase of Nobleclad 4,000,000
Dividends paid by Nobelclad / Nitro Metall to former
parent company - (296,000)
Distribution to former parent on Nobelclad's
June 2001 acquisition of Nitro Metall - (1,293,000)
Distribution to former parent on acquisition
of Nobleclad (4,000,000)
Payments on capital lease obligation - (3,394)
Change in other long-term liabilities 35,727 -
Net proceeds from issuance of common stock to employees 43,882 23,049
Bank overdraft 539,871 79,000
------------- -------------
Net cash flows used in financing activities (2,727,262) (180,345)
------------- -------------
EFFECTS OF EXCHANGE RATES ON CASH 136,266 (87,000)
------------- -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (986,830) 707,722
CASH AND CASH EQUIVALENTS, beginning of the period 1,811,618 298,530
------------- -------------
CASH AND CASH EQUIVALENTS, end of the period $ 824,788 $ 1,006,252
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest $ 484,436 $ 461,135
============= =============
Income taxes $ 227,046 $ 183,616
============= =============
The accompanying notes to Consolidated Financial Statements
are an integral part of these statements.
9
DYNAMIC MATERIALS CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The information included in the 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 Consolidated 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, 2001.
2. ACQUISITION OF NOBELCLAD EUROPE S.A.
On July 3, 2001, DMC 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") are the primary manufacturers of explosion clad products in
Europe and operate cladding businesses located in Rivesaltes, France and
Likenas, Sweden, respectively, along with sales offices in each country.
Products manufactured by Nobelclad and Nitro Metall are similar to those
produced by DMC's domestic factory in Mount Braddock, Pennsylvania. 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 approximately $5.3
million was financed through a $4.0 million intercompany note agreement between
the Company and SNPE, Inc. and the assumption of approximately $1.23 million in
third party bank debt associated with Nobelclad's acquisition of Nitro Metall
from NEF prior to DMC's purchase of Nobelclad stock.
As a result of DMC 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 DMC 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 DMC.
3. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of DMC and any
subsidiary in which it has a greater than a 50% interest. All significant
intercompany accounts, profits and transactions have been eliminated in
consolidation.
10
Foreign Operations and Foreign Exchange Rate Risk
The functional currency for our foreign operations is the applicable local
currency for each affiliate company. Assets and liabilities of foreign
subsidiaries for which the functional currency is the local currency are
translated at exchange rates in effect at period-end, and the statements of
operations are translated at the average exchange rates during the period.
Exchange rate fluctuations on translating foreign currency financial statements
into U.S. Dollars that result in unrealized gains or losses are referred to as
translation adjustments. Cumulative translation adjustments are recorded as a
separate component of stockholders' equity and are included in other cumulative
comprehensive income (loss). Transactions denominated in currencies other than
the local currency are recorded based on exchange rates at the time such
transactions arise. Subsequent changes in exchange rates result in transaction
gains and losses, which are reflected in income as unrealized (based on
period-end translations) or realized upon settlement of the transactions. Cash
flows from our operations in foreign countries are translated at actual exchange
rates when known, or at the average rate for the period. As a result, amounts
related to assets and liabilities reported in the consolidated statements of
cash flows will not agree to changes in the corresponding balances in the
consolidated balance sheets. The effects of exchange rate changes on cash
balances held in foreign currencies are reported as a separate line item below
cash flows from financing activities.
Revenue Recognition
DMC's contracts with its customers generally require the production and
delivery of multiple units or products. The Company records revenue from the
contracts using the completed contract method as products are completed and
shipped to the customer. If, as a contract proceeds toward completion, projected
total cost on an individual contract indicates a potential loss, we provide
currently for such anticipated loss.
New accounting pronouncements
In June 2001, the Financial Accounting Standards Board ("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. Under SFAS No.
142, intangible assets with indefinite
11
lives will not be amortized. Instead they will be carried at the lower of 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.
DMC adopted the provisions of SFAS No. 142 effective January 1, 2002;
however, we are still in the process of completing the transitional impairment
test of goodwill that must be completed within the first year of adoption. For
the nine months ended September 30, 2002, the adoption of SFAS No. 142 reduced
DMC's goodwill amortization expense to zero from approximately $162,500 for the
first nine months of 2001. Under SFAS No. 142, the carrying value of goodwill is
to be evaluated based upon its current fair value as if the purchase price
allocation occurred on January 1, 2002. Fair value for goodwill and intangible
assets is determined based upon discounted cash flows and appraised values. DMC
believes that the results of the goodwill impairment test could be a pre-tax
charge against earnings associated with a cumulative effect from a change in
accounting principle of up to 3.8 million, the full amount of goodwill recorded
in connection with the December 1998 acquisition of Precision Machined Products.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, 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. DMC 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 FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, 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. DMC has implemented
SFAS 144 effective January 1, 2002 with no impact.
4. INVENTORY
The components of inventory are as follows at September 30, 2002 and
December 31, 2001:
September 30, December 31,
2002 2001
(unaudited)
-------------- ------------
Raw Materials $ 3,371,389 $ 2,414,394
Work-in-Process 4,202,425 4,230,671
Supplies 202,348 63,357
------------ ------------
$ 7,776,162 $ 6,708,422
============ ============
12
5. LONG-TERM DEBT
Long-term debt consists of the following at September 30, 2002 and December
31, 2001:
September 30, December 31,
2002 2001
(unaudited)
---------------- ----------------
Line of credit - SNPE S.A. $ 245,722 $ 360,000
Convertible subordinated note, SNPE, Inc. 1,200,000 1,200,000
Term loan, SNPE, Inc. (related to
acquisition of Nobelclad) 3,666,667 4,000,000
Bank lines of credit 2,533,713 4,657,097
Industrial development revenue bonds 4,690,000 5,280,000
-------------- -------------
Total 12,336,102 15,497,097
Less current maturities (2,414,054) (1,821,666)
-------------- -------------
Long-term portion $ 9,922,048 $ 13,675,431
============== =============
Loan Covenants and Restrictions
Our 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. The principal financial covenants relate to minimum debt service
coverage, minimum net income and minimum net worth as measured at the end of
each calendar quarter. As of September 30, 2002, we are in compliance with all
financial covenants and other provisions of our debt agreements.
6. BUSINESS SEGMENTS
DMC 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.
DMC'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 months and the nine
months ended September 30, 2002 and 2001 as follows:
13
Explosive
Manufacturing Aerospace Total
-------------- -------------- -------------
For the three months ended September 30, 2002:
Net sales $ 8,144,835 $ 2,550,360 $ 10,695,195
============ =========== ============
Depreciation and amortization $ 255,122 $ 187,838 $ 442,960
============ =========== ============
Income (loss) from operations $ 1,183,179 $ (329,770) $ 853,409
Unallocated amounts:
Other income (expense) 765
Interest expense, net (168,442)
------------
Consolidated income before income taxes $ 685,732
============
Explosive
Manufacturing Aerospace Total
-------------- -------------- -------------
For the three months ended September 30, 2001
(Restated - See Note 2):
Net sales $ 8,739,949 $ 3,517,584 $ 12,257,533
============ =========== ============
Depreciation and amortization $ 261,611 $ 212,222 $ 473,833
============ =========== ============
Income (loss) from operations $ 1,607,870 $ 18,421 $ 1,626,291
Unallocated amounts:
Other income (expense) 1,406
Interest expense, net (247,412)
------------
Consolidated income before income taxes $ 1,380,285
Explosive
Manufacturing Aerospace Total
-------------- -------------- -------------
For the nine months ended September 30, 2002:
Net sales $ 25,245,221 $ 7,053,022 $ 32,298,243
============ =========== ============
Depreciation and amortization $ 778,845 $ 566,483 $ 1,345,328
============ =========== ============
Income (loss) from operations $ 4,124,018 $ (1,149,975) $ 2,974,043
Unallocated amounts:
Other income (expense) (38,803)
Interest expense, net (525,814)
------------
Consolidated income before income taxes $ 2,409,426
============
14
Explosive
Manufacturing Aerospace Total
-------------- -------------- -------------
For the nine months ended September 30, 2001
(Restated - See Note 2):
Net sales $ 23,530,420 $ 9,496,760 $ 33,027,180
============ =========== ============
Depreciation and amortization $ 798,462 $ 622,897 $ 1,421,359
============ =========== ============
Income (loss) from operations $ 3,577,838 $ (40,919) $ 3,536,919
Unallocated amounts:
Other income (expense) (74,495)
Interest expense, net (603,164)
-----------
Consolidated income before income taxes $ 2,859,260
============
7. COMPREHENSIVE INCOME
DMC's comprehensive income for the three and nine months ended September
30, 2002 and 2001 was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
2002 2001 2002 2001
---------- ----------- ----------- ------------
Net income for the period $ 383,974 $ 1,343,545 $ 1,466,113 $ 2,569,439
Foreign currency translation (54,394) 417,704 443,684 (221,372)
adjustment ---------- ----------- ----------- ------------
Comprehensive income $ 329,580 $ 1,761,249 $ 1,909,797 $ 2,348,067
========== =========== =========== ============
15
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Dynamic Materials Corporation ("DMC") 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, DMC 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. We believe that
our clad metal products are an economical, high-performance alternative to the
use of solid corrosion-resistant alloys. In addition to clad metal products, the
explosive metalworking business includes shock synthesis of synthetic diamonds.
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. DMC 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. Our
forming, machining, welding and assembly operations serve a variety of product
applications in the commercial aircraft, aerospace, defense and power generation
industries. Product applications include tactical missile motor cases, titanium
pressure tanks for launch vehicles, and complex, high precision component parts
for satellites.
Restatement of 2001 for Reorganization. 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 approximately
$5.3 million was financed through a $4.0 million intercompany note agreement
between DMC and SNPE, Inc. and the assumption of approximately $1.23 million in
third party bank debt associated with Nobelclad's acquisition of Nitro Metall
from NEF prior to the DMC's purchase of Nobelclad stock. As a result of DMC 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. Our
historical financial position and operating results 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 DMC.
16
Historically, DMC has 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. We typically do not obtain long-term
volume purchase contracts from our customers. Quarterly sales and operating
results therefore depend on the volume and timing of backlog as well as bookings
received during the quarter. A significant portion of 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. We typically bear a
short-term risk of alloy, steel and other component price increases, which could
adversely affect our 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, 2002 compared to three months
and nine months ended September 30, 2001
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 Nine months ended
September 30, September 30,
------------------- -----------------
2002 2001 2002 2001
(Restated) (Restated)
------ ---------- ------ ----------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 76.8% 72.5% 75.6% 73.5%
------ ------ ------ ------
Gross margin 23.2% 27.5% 24.4% 26.5%
General & administrative 9.2% 9.2% 9.5% 10.3%
Selling expenses 6.1% 5.0% 5.8% 5.5%
------ ------ ------ ------
Income from operations 7.9% 13.3% 9.1% 10.7%
Other expense, net 0.0% 0.0% 0.1% 0.2%
Interest expense, net 1.6% 2.0% 1.6% 1.8%
Income tax provision 2.8% 0.3% 2.9% 0.9%
------ ------ ------ ------
Net income 3.5% 11.0% 4.5% 7.8 %
====== ====== ====== ======
Net Sales. Net sales for the quarter ended September 30, 2002 decreased by 12.7%
to $10,695,195 from $12,257,533 in the third quarter of 2001. Sales by the
Explosive Metalworking Group, which includes explosion bonding of clad metal and
shock synthesis of synthetic
17
diamonds, decreased by 6.8% to $8,144,835 in the third quarter of 2002 from
$8,739,949 in the third quarter of 2001. Results for the third quarter of 2002
and 2001 include net sales of Nobelclad and its wholly-owned subsidiary, Nitro
Metall, in the amounts of $1,925,595 and $2,836,809 for the respective quarterly
periods. The Aerospace Group contributed sales of $2,550,360 (23.8% of total
sales) in the third quarter of 2002 versus $3,517,584 (28.7% of total sales) in
the third quarter of 2001. The 27.5% quarter-to-quarter decline in Aerospace
Group sales reflects sales declines of 66% and 42% at the Precision Machined
Products and Spin Forge divisions, respectively, that were partially offset by
an 83% sales increase at AMK Welding.
For the nine months ended September 30, 2002, net sales decreased by 2.1% to
$32,329,583 from $33,027,180 for the comparable period of 2001. Sales by the
Explosive Metalworking Group for the comparable nine-month periods increased by
7.3% to $25,245,221 in 2002 from $23,530,420 in 2001. Results for the nine
months ended September 30, 2002 and 2001 include net sales of Nobelclad and
Nitro Metall in the amounts of $8,133,547 and $8,213,998, respectively.
Aerospace Group sales for the nine-month period ended September 30, 2002 totaled
$7,053,022 (21.8% of total sales), a decrease of 25.7% from sales of $9,496,760
(28.8% of sales) reported for the comparable period of 2001. This sales decrease
is attributable to sales decreases of 63% and 22% at Precision Machined Products
and Spin Forge, respectively, that were partially offset by a 68% sales increase
at AMK Welding.
Gross Profit. Gross profit for the quarter ended September 30, 2002 decreased by
26.3% to $2,483,917 from $3,368,734 in the third quarter of 2001. The gross
profit margin for the third quarter of 2002 was 23.2%, a 15.6% decrease from the
gross profit margin of 27.5% for the third quarter of 2001. This decrease is
attributable to lower sales volumes during the third quarter of 2002 compared to
2001 and the resultant less favorable absorption of fixed manufacturing overhead
expenses. For the nine months ended September 30, 2002, gross profit decreased
by 9.8% to $7,902,380 from $8,756,517 in the comparable period of 2001. The
gross profit margin for the nine months ended September 30, 2002 was 24.4%
compared to 26.5% for the first nine months of 2001.
The gross profit margin for the Explosive Metalworking Group decreased to 22.8%
in the third quarter of 2002 from 23.8% in the third quarter of 2001. For the
nine months ended September 30, 2002, the gross profit margin for the Explosive
Metalworking Group increased to 24.4% from 22.3% for the nine months ended
September 30, 2001. Improved Explosive Metalworking Group gross profit margins
are principally attributable to favorable changes in product mix. The gross
profit margin for the Aerospace Group decreased to 0.4% for the third quarter of
2002 from 3.9% for the same period in 2001. For the nine months ended September
30, 2002, the Aerospace Group gross profit margin was 0.1% as compared to 4.2%
in the comparable period of 2001. The decline in the Aerospace Group gross
margin is principally due to the poor sales performance of the Precision
Machined Products and Spin Forge divisions where negative gross margins were
reported for both the third quarter of 2002 and the nine-month period then
ended.
General and Administrative. General and administrative expenses for the quarter
ended September 30, 2002 were $980,690 as compared to $1,125,537 in the third
quarter of 2001. For the nine months ended September 30, 2002, general and
administrative expenses decreased by 9.7% to $3,060,120 from $3,390,613 in the
comparable period of 2001. As a percentage of net sales, general and
administrative expenses remained constant at 9.2% for the third quarters of 2002
and 2001 and decreased from 10.3% to 9.5% for the comparable nine-month periods.
For both the
18
third quarter of 2002 and the nine-month period then ended, the decline of
general and administrative expenses reflects significant staffing reduction in
the administration of the Aerospace Group and reduction of Corporate general and
administrative expenses, including the discontinuance of the amortization of
goodwill.
Selling Expense. Selling expenses increased by 5.3% to $649,818 for the quarter
ended September 30, 2002 from $616,906 in the third quarter of 2001. For the
nine months ended September 30, 2002, selling expenses increased by 2.1% to
$1,868,217 from $1,828,985 in the comparable period of 2001. The small increase
in expenses for the nine-month period relates to the accrual of bonus expense
associated with the Explosive Metalworking Group's strong 2002 financial
performance and annual salary adjustments that were effective as of the
beginning of 2002 that were largely offset by reductions in other spending
categories. The increase for the third quarter reflects these factors as well as
legal costs associated with a review of the Explosive Metalworking Group's
international trade compliance program. As a percentage of net sales, selling
expenses increased from 5.0% in the third quarter 2001 to 6.1% in the third
quarter of 2002 and increased from 5.5% for the nine months ended September 30,
2001 to 5.8% for the comparable period of 2002.
Income from Operations. For the quarter ended September 30, 2002, we reported
income from operations of $853,409, a decrease of 47.5% from the $1,626,291 of
operating income reported for the third quarter of 2001. For the nine months
ended September 30, 2002, we reported operating income of $2,974,043, which
represented a 15.9% decrease from the $3,536,919 in operating income that we
reported for the first nine months of 2001.
Our Explosive Metalworking Group reported income from operations of $1,183,179
in the third quarter of 2002 as compared to operating income of $1,607,870 for
the comparable period of 2001. This lower third quarter income from operations
reflects a sales decrease of $595,114 and a decrease in the Group's gross margin
rate from 23.6% in 2001 to 22.8% in 2002. For the nine months ended September
30, 2002, our Explosive Metalworking Group reported income from operations of
$4,124,018 as compared to operating income of $3,577,838 for the comparable
period of 2001. This significant improvement reflects a sales increase of
$2,309,141 and an improvement in gross margin to 24.4% in 2002 from 22.3% in
2001. The Explosive Metalworking Group has received several large orders
aggregating approximately $5 million relating to the supply of titanium clad for
Inco's Goro Nickel Project in New Caledonia. The majority of these orders are
scheduled to ship in the fourth quarter of 2002 and should enable the Group to
report full year 2002 operating income that is significantly higher than that
reported for 2001.
Our Aerospace Group reported an operating loss of $329,770 in the third quarter
of 2002 as compared to operating income of $18,421 in the prior year third
quarter. For the nine months ended September 30, 2002, our Aerospace Group
reported an operating loss of $1,149,975 as compared to an operating loss of
$40,919 for the comparable period of 2001. The Aerospace Group's increased
operating loss is attributable to the significant decline in sales and gross
profit at the Group's Precision Machined Products and Spin Forge divisions that
was only partially offset by the strong performance of AMK Welding. Our
Aerospace Group continues to suffer from the negative effects of September 11 on
the commercial aircraft market, as well as the decreased demand for satellite
and launch vehicle component parts that has resulted from the depressed state of
the telecommunications industry. We have reorganized management teams at PMP and
Spin Forge and taken other steps to reduce operating costs at these two
divisions.
19
Modest improvements in the Group's operating results are expected in the fourth
quarter of 2002 and the Group is expected to return to profitability by the end
of 2003.
Interest Expense. Interest expense decreased by 31.9% to $168,442 for the
quarter ended September 30, 2002 from $247,412 in the third quarter of 2001. For
the nine months ended September 30, 2002, interest expenses decreased by 12.8%
to $525,814 from $603,164 for the comparable period in 2001. These decreases
result from lower average interest rates in 2002 that more than offset higher
2002 borrowing levels associated with the term loan and revolving credit debt
that was incurred in connection with the July 3, 2001 acquisition of Nobelclad
and its Nitro Metall subsidiary.
Income Tax Provision. We recorded a consolidated income tax provision of
$301,758 in the third quarter of 2002 versus $36,740 in the third quarter of
2001 of which $297,000 and zero, respectively, related to U.S. income taxes,
with the remainder relating to the foreign taxes associated with the acquired
operations of Nobelclad. For the nine-month period, we recorded a consolidated
income tax provision of $943,313 in 2002 versus $289,400 in 2001 of which
$651,000 and zero, respectively, related to U.S. income taxes, with the
remainder relating to the foreign taxes associated with the acquired operations
of Nobelclad. This increased tax provision for the nine-month period reflects an
increase in the effective tax rate from 10.1% in 2001 to 39.2% in 2002 that more
than offset the decrease in income before income taxes. The increase in the
effective tax rate reflects the fact that no U.S. tax provision was recorded
during the first nine months of 2001 due to the recognition of the tax benefits
associated with loss carry-forwards from 2000.
Liquidity and Capital Resources
Historically, we have obtained most of our operational financing from a
combination of operating activities and an asset-backed revolving credit
facility. In December 2001, we obtained a $6,000,000 revolving line of credit
with a U.S. bank that replaced the $4,500,000 credit facility between DMC and
SNPE, Inc. This bank line of credit will be used to finance ongoing working
capital requirements of our U.S. operations. Initial proceeds from the bank line
were used to repay $3,650,000 of borrowings that were outstanding under the
credit facility with SNPE, Inc. The bank line, which expires on December 4,
2004, carries an interest rate equal to the bank's prime rate plus 1.0% through
February 28, 2002 and the bank's prime rate plus 0.5% thereafter. Borrowings
under the line of credit are limited to a calculated borrowing base that is a
function of inventory and accounts receivable balances and are secured by
accounts receivable and inventory of our U.S. operations and by new investments
in property, plant and equipment that are made during the term of the agreement.
As of September 30, 2002, borrowing availability under the line of credit was
approximately $4,600,000 greater than the $1,105,723 in outstanding borrowings
as of that date and the interest rate on outstanding borrowings was 5.25%.
In connection with its July 3, 2001 acquisition of Nobelclad, the Company
entered into a $4,000,000 term loan agreement with SNPE. The term loan bears
interest at the Federal Funds Rate plus 3.0%, payable quarterly. Commencing
September 30, 2002 and on the last day of each calendar quarter thereafter,
principal payments of $333,333 are due, with a final principal payment of
$333,337 being due on June 30, 2005. The term loan is secured by a pledge of 65%
of the capital stock of Nobelclad held by the Company. In anticipation of its
acquisition by the Company, Nobelclad acquired the stock of Nitro Metall and
financed this acquisition with
20
proceeds obtained from a revolving credit facility with a French bank that
provides for maximum borrowings of 1,488,266 Euros ($1,427,990 based upon the
September 30, 2002 exchange rate). This bank line of credit, which had
outstanding borrowings of $1,427,990 on September 30, 2002, carries interest at
the Euro Interbank Offered Rate ("EURIBOR") plus 0.4%. Beginning on June 21,
2004 and on each anniversary date thereafter until final maturity on June 21,
2008, maximum borrowings available under the line become permanently reduced by
289,653 Euros ($285,598 based upon the September 30, 2002 exchange rate). The
bank has the option of demanding early repayment of any outstanding loans if
Groupe SNPE's indirect ownership of Nobelclad falls below 50%. Nobelclad also
maintains a 2 million Euro ($1,972,000 based upon the September 30, 2002
exchange rate) intercompany working capital line with Groupe SNPE under which
borrowings of $245,722 were outstanding as of September 30, 2002. This
intercompany line bears interest at EURIBOR plus 1.5%.
The Company believes that its cash flow from operations and funds available
under its credit facilities will be sufficient to fund working capital, debt
service obligations and capital expenditure requirements of its current business
operations for the foreseeable future. However, 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 Company's credit facilities could negatively affect the
Company's ability to meet its future cash requirements. DMC attempts to minimize
its risk of losing customers or specific contracts by continually improving
product quality, delivering product on time and competing favorably on the basis
of price. Borrowing from multiple lenders minimizes risks associated with the
availability of funds. The nature of DMC's business is largely insulated from
the negative effects of inflation on sales and operating income because the
pricing on custom orders reflects current raw material and other manufacturing
costs.
Highlights from the Statement of Cash Flows for the nine months ended September
30, 2002
Net cash flows from operating activities for the nine months ended
September 30, 2002 were $2,755,447. Significant sources of operating cash flow
included net income of $1,466,113, depreciation and amortization of $1,345,328
and deferred taxes of $632,027. These sources of operating cash flow were
partially offset by negative changes in working capital that totaled $677,603,
including a $351,794 and $757,986 increase in accounts receivable and inventory,
respectively.
Cash used in investing activities totaled $1,151,281 and was comprised
primarily of capital expenditures in the amount of $1,174,677.
Net cash flows used in financing activities for the nine months ended
September 30, 2002 totaled $2,727,262. The primary uses of cash flow from
financing activities were repayments on the bank lines of credit of $2,275,374,
repayments on related party lines of credit of $148,035, principal payments on
industrial development revenue bonds in the amount of $590,000 and a repayment
on the term loan with SNPE, Inc. of $333,333. The foregoing debt reductions were
partially offset by a $539,871 bank overdraft.
21
Highlights from the Statement of Cash Flows for the nine months ended September
30, 2001 (Restated)
Net cash from operations for the nine months ended September 30, 2001 was
$2,220,903. Significant sources included net income of $2,569,860 and
depreciation and amortization of $1,421,359. These sources were partially offset
by negative changes in working capital that totaled $1,757,277, including a
$1,390,153 increase in accounts receivable and a $509,537 increase in
inventories.
Cash used in investing activities totaled $1,245,836 and was comprised
primarily of capital expenditures in the amount of $1,174,834.
Net cash flows used in financing activities totaled $180,345. Significant
sources included borrowings on related party lines of credit for $579,000 and
borrowings for the purchase of Nitro Metall and Nobleclad of $1,271,000 and
$4,000,000 respectively. These sources were more than offset by a distribution
to NEF, the former parent of Nitro Metall, in the amount of $1,293,000 relating
to Nobelclad's acquisition of Nitro Metall, a distribution to NEF, the former
parent of Nobleclad, of $4,000,000 related to the acquisition of Nobleclad,
dividend payments of $296,000 by Nobelclad and Nitro Metall to NEF and $540,000
in principal payments on our industrial development revenue bonds.
Future Capital Needs and Resources
We anticipate that, for the foreseeable future, significant amounts of
available cash flows will be utilized for:
- operating expenses to support our domestic and foreign manufacturing
operations;
- capital expenditures;
- debt service requirements; and
- other general corporate expenditures.
We expect cash inflows from operating activities to exceed outflows for the
full year 2002. However, our success depends on the execution of our strategies,
including our ability to:
- secure an adequate level of new customer orders at all operating
divisions and
- continue to implement the most cost-effective internal processes.
Based on available cash resources, anticipated capital expenditures and
projected operating cash flow, we believe that we will be able to fully fund our
operations through the last quarter of 2002 and during 2003. In making this
assessment, we have considered:
- presently scheduled debt service requirements during the last quarter
of 2002 and in 2003, as well as the availability of funding related to
our line of credit with SNPE and our bank lines of credit;
- the anticipated level of capital expenditures during the last quarter
of 2002 and in 2003;
- our expectation of realizing positive cash flow from operations in
2002 and 2003.
22
If our business plans change, or if economic conditions change materially,
our cash flow, profitability and anticipated cash needs could change
significantly. In particular, any acquisition or new business opportunity could
involve significant additional funding needs in excess of the identified
currently available sources, and could require us to raise additional equity or
debt funding to meet those needs.
Critical Accounting Policies
In response to the SEC's Release No. 33-8040, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies, we identified the most critical
accounting principles upon which our financial status depends. We determined the
critical principles by considering accounting policies that involve the most
complex or subjective decisions or assessments. We identified our most critical
accounting policies to be those related to revenue recognition, inventory
valuation and impact of foreign currency exchange rate risks. We state these
accounting policies in the notes to the consolidated financial statements and at
relevant sections in this discussion and analysis. This discussion and analysis
should be read in conjunction with our consolidated financial statements and
related notes included elsewhere in this report.
Impact of SFAS No. 142
In June 2001, the FASB authorized the issuance of SFAS No. 142, Goodwill
and Other Intangible Assets. 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. Under SFAS No. 142, intangible assets with indefinite lives will not be
amortized. Instead they will be carried at the lower of 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.
DMC adopted the provisions of SFAS No. 142 effective January 1, 2002;
however, we are still in the process of completing the transitional impairment
test of goodwill that must be completed within the first year of adoption. For
the nine months ended September 30, 2002, the adoption of SFAS No. 142 reduced
DMC's goodwill amortization expense to zero from approximately $162,500 for the
first nine months of 2001. Under SFAS No. 142, the carrying value of goodwill is
to be evaluated based upon its current fair value as if the purchase price
allocation occurred on January 1, 2002. Fair value for goodwill and intangible
assets is determined based upon discounted cash flows and appraised values. DMC
believes that the results of the goodwill impairment test could be a pre-tax
charge against earnings associated with a cumulative effect from a change in
accounting principle of up to $3.8 million, the full amount of goodwill recorded
in connection with the December 1998 acquisition of Precision Machined Products.
23
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
There have been no events that materially affect our quantitative and
qualitative disclosure about market risk as reported in our Annual Report on
Form 10-K for the year ended December 31, 2001.
24
ITEM 4. Controls and Procedures
As of September 30, 2002, an evaluation was performed under the supervision
and with the participation of the Company's management, including the CEO and
CFO, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were effective as of September 30, 2002. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect internal controls subsequent to September 30,
2002.
25
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 12,
2002. At the Annual Meeting, the stockholders of the Company (i) elected the
persons listed below to serve as directors of the Company until the 2005 Annual
Meeting of Shareholders or until their respective successors are elected and
(ii) ratified the selection of Ernst & Young LLP as independent accountants of
the Company for its fiscal year ending December 31, 2002.
The Company had 5,046,116 shares of Common Stock outstanding as of July 30,
2002, the record date for the Annual Meeting. At the Annual Meeting, holders of
a total of 4,888,683 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
-------- ------------------ ---------------
Yves Charvin 4,814,520 74,163
Dean K. Allen 4,865,595 23,088
Michel Philippe 4,861,595 27,088
Proposal 2: Ratification of Selection of Independent Accountants
Shares Voted Shares Voted Shares Shares
"FOR" "AGAINST" "ABSTAINING" not voted
4,872,207 6,389 10,087 0
Item 5. Other Information
None.
26
Item 6.
(a) Reports on Form 8-K
Report on Form 8-K, filed July 18, 2002, reporting the dismissal of Arthur
Andersen LLP as independent public accountant of the Company and appointment of
Ernst & Young LLP to serve as independent public accountants for the fiscal year
ending December 31, 2002.
Amendment to Report on Form 8-K filed July 25, 2002 including revised
second Item 4 with respect to the audit opinion issued by Arthur Andersen to
include the last two years, not only the year ended December 31, 2001, as
required by Item 304 (a)(1)(ii) of Regulation S-K.
(b) Exhibits
99.1 - Certification of the President and Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 - Certification of the Vice President and Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
27
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 13, 2002 /s/ Richard A. Santa
-------------------------------------
Richard A. Santa, Vice President and Chief
Financial Officer (Duly Authorized Officer and
Principal Financial and Accounting Officer)
28
CERTIFICATIONS
I, Yvon Pierre Cariou, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dynamic
Materials Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
29
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 13, 2002
/s/ Yvon Pierre Cariou
Yvon Pierre Cariou
President and Chief Executive Officer
of Dynamic Materials Corporation
30
CERTIFICATIONS
I, Richard A. Santa, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dynamic Materials
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
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6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 13, 2002
/s/ Richard A. Santa
Richard A. Santa
Vice President and Chief Financial
Officer of Dynamic Materials Corporation
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Dynamic Materials Corporation (the
"Company") on Form 10-Q for the period ending September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Yvon Pierre Cariou, President and Chief Executive Officer of the Company,
certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(i) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(ii) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Yvon Pierre Cariou
Yvon Pierre Cariou
President and Chief Executive Officer
of Dynamic Materials Corporation
November 13, 2002
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Dynamic Materials Corporation (the
"Company") on Form 10-Q for the period ending September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Richard A. Santa, Vice President and Chief Financial Officer of the Company,
certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(i) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(ii) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Richard A. Santa
Richard A. Santa
Vice President and Chief Financial Officer
of Dynamic Materials Corporation
November 13, 2002
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