Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - DDI CORPFinancial_Report.xls
XML - IDEA: XBRL DOCUMENT - DDI CORPR6.htm
XML - IDEA: XBRL DOCUMENT - DDI CORPR8.htm
XML - IDEA: XBRL DOCUMENT - DDI CORPR1.htm
XML - IDEA: XBRL DOCUMENT - DDI CORPR5.htm
XML - IDEA: XBRL DOCUMENT - DDI CORPR2.htm
XML - IDEA: XBRL DOCUMENT - DDI CORPR3.htm
XML - IDEA: XBRL DOCUMENT - DDI CORPR7.htm
XML - IDEA: XBRL DOCUMENT - DDI CORPR9.htm
XML - IDEA: XBRL DOCUMENT - DDI CORPR4.htm
XML - IDEA: XBRL DOCUMENT - DDI CORPR15.htm
XML - IDEA: XBRL DOCUMENT - DDI CORPR11.htm
XML - IDEA: XBRL DOCUMENT - DDI CORPR13.htm
XML - IDEA: XBRL DOCUMENT - DDI CORPR18.htm
XML - IDEA: XBRL DOCUMENT - DDI CORPR10.htm
XML - IDEA: XBRL DOCUMENT - DDI CORPR16.htm
XML - IDEA: XBRL DOCUMENT - DDI CORPR12.htm
XML - IDEA: XBRL DOCUMENT - DDI CORPR14.htm
XML - IDEA: XBRL DOCUMENT - DDI CORPR17.htm
EX-32.1 - SECTION 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF DDI CORP. - DDI CORPd237304dex321.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF DDI CORP. - DDI CORPd237304dex311.htm
EX-32.2 - SECTION 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER OF DDI CORP. - DDI CORPd237304dex322.htm
EX-31.2 - SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER OF DDI CORP. - DDI CORPd237304dex312.htm
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 EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 000-30241

 

 

DDi Corp.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   06-1576013

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1220 N. Simon Circle

Anaheim, California 92806

(Address of principal executive offices) (Zip code)

(714) 688-7200

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer  ¨        Accelerated filer                     x
Non-accelerated filer    ¨    (Do not check if a smaller reporting company)     Smaller reporting company    ¨

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

As of October 28, 2011, DDi Corp. had 20,329,532 shares of common stock, par value $0.001 per share, outstanding.

 

 

 


Table of Contents

DDi CORP.

Form 10-Q for the Quarterly Period Ended September 30, 2011

TABLE OF CONTENTS

 

          Page
No.
 

PART I — FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements:

  
  

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010

     1   
  

Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2011 and 2010

     2   
  

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010

     3   
  

Notes to Unaudited Condensed Consolidated Financial Statements

     4   

Item 2.

  

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

     11   

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     19   

Item 4.

  

Controls and Procedures

     19   

PART II — OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     20   

Item 1A.

  

Risk Factors

     20   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     20   

Item 3.

  

Defaults Upon Senior Securities

     20   

Item 4.

  

Removed and Reserved

     20   

Item 5.

  

Other Information

     20   

Item 6.

  

Exhibits

     20   

Signatures

     22   


Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

DDi CORP.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

     September 30,
2011
    December 31,
2010
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 28,436      $ 28,347   

Accounts receivable, net of allowance for bad debts of $588 and $571 as of September 30, 2011 and December 31, 2010, respectively

     40,799        40,821   

Inventories, net

     23,854        20,970   

Prepaid expenses and other assets

     2,778        1,889   
  

 

 

   

 

 

 

Total current assets

     95,867        92,027   

Property, plant and equipment, net

     43,089        42,605   

Intangible assets, net

     44        614   

Goodwill

     3,664        3,664   

Other assets

     888        954   
  

 

 

   

 

 

 

Total assets

   $ 143,552      $ 139,864   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 22,663      $ 25,137   

Accrued expenses and other current liabilities

     11,956        13,802   

Current portion of long-term debt

     1,209        1,751   

Income taxes payable

     269        311   
  

 

 

   

 

 

 

Total current liabilities

     36,097        41,001   

Long-term debt

     8,783        9,704   

Other long-term liabilities

     416        527   
  

 

 

   

 

 

 

Total liabilities

     45,296        51,232   
  

 

 

   

 

 

 

Commitments and contingencies (Note 13)

    

Stockholders’ equity:

    

Common stock — $0.001 par value, 190,000 shares authorized, 23,264 shares issued and 20,317 shares outstanding at September 30, 2011 and 23,129 shares issued and 20,182 shares outstanding at December 31, 2010

     23        23   

Additional paid-in-capital

     240,500        245,181   

Treasury stock, at cost — 2,947 shares held in treasury at September 30, 2011 and December 31, 2010

     (16,323     (16,323

Accumulated other comprehensive income

     261        1,063   

Accumulated deficit

     (126,205     (141,312
  

 

 

   

 

 

 

Total stockholders’ equity

     98,256        88,632   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 143,552      $ 139,864   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

1


Table of Contents

DDi CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In thousands, except per share data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Net sales

   $ 66,175      $ 68,988      $ 198,858      $ 202,035   

Cost of goods sold

     52,267        53,450        156,355        157,196   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     13,908        15,538        42,503        44,839   

Operating expenses:

        

Sales and marketing

     4,142        4,330        13,064        13,131   

General and administrative

     3,968        4,250        11,773        12,463   

Amortization of intangible assets

     190        190        570        570   

Restructuring and other related charges

     392        48        1,015        338   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     5,216        6,720        16,081        18,337   

Interest expense

     384        303        1,162        1,063   

Interest income

     (2     (7     (9     (31

Other expense (income), net

     (272     (144     (298     220   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     5,106        6,568        15,226        17,085   

Income tax (benefit) expense

     (46     69        119        790   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 5,152      $ 6,499      $ 15,107      $ 16,295   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

        

Basic

   $ 0.25      $ 0.33      $ 0.74      $ 0.82   

Diluted

   $ 0.25      $ 0.31      $ 0.72      $ 0.80   

Dividend declared per share

   $ 0.10      $ 0.06      $ 0.30      $ 0.12   

Weighted-average shares used in per share computations:

        

Basic

     20,317        19,916        20,282        19,868   

Diluted

     20,845        20,671        21,013        20,396   

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011     2010      2011     2010  

Comprehensive income:

         

Net income

   $ 5,152      $ 6,499       $ 15,107      $ 16,295   

Foreign currency translation adjustments

     (1,145     310         (802     507   
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 4,007      $ 6,809       $ 14,305      $ 16,802   
  

 

 

   

 

 

    

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

2


Table of Contents

DDi CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Nine Months Ended
September 30,
 
     2011     2010  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 15,107      $ 16,295   

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

    

Depreciation

     7,021        6,501   

Amortization of intangible assets

     570        570   

Amortization of debt issuance costs

     183        —     

Amortization of deferred lease liability

     (330     (338

Stock-based compensation

     931        1,041   

Other

     2        203   

Changes in operating assets and liabilities:

    

Accounts receivable

     (353     (11,923

Inventories

     (3,081     (1,928

Prepaid expenses and other assets

     (1,102     (994

Accounts payable

     (2,305     5,437   

Accrued expenses and other liabilities

     (1,411     (3,551

Income taxes payable

     (115     (1,352
  

 

 

   

 

 

 

Net cash provided by operating activities

     15,117        9,961   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of property and equipment

     (8,191     (5,765
  

 

 

   

 

 

 

Net cash used in investing activities

     (8,191     (5,765
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Principal payments on long-term debt

     (1,304     (1,358

Payments of debt issuance costs

     (2     (665

Repayment of revolving credit facility

     —          (4,290

Proceeds from exercise of stock options

     511        526   

Cash dividend payments to common shareholders

     (6,092     (2,394
  

 

 

   

 

 

 

Net cash used in financing activities

     (6,887     (8,181
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     50        68   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     89        (3,917

Cash and cash equivalents, beginning of period

     28,347        19,392   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 28,436      $ 15,475   
  

 

 

   

 

 

 

Supplemental disclosures of non-cash operating and financing activities:

 

     Nine Months Ended
September 30,
 
     2011      2010  

Adjustment of inventory balance to goodwill relating to acquisition of Coretec

   $ —         $ 402   

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3


Table of Contents

DDi CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

Description of Business

DDi is a leading provider of time-critical, technologically-advanced electronic interconnect design, engineering and manufacturing services. We specialize in engineering and fabricating complex multi-layer printed circuit boards (“PCBs”) on a quick-turn basis, with lead times as short as 24 hours. DDi has over 1,000 customers in various market segments including communications, computing, military/aerospace, industrial electronics, instrumentation and medical and high-durability commercial markets. Our engineering capabilities and seven manufacturing facilities located in the United States and Canada, together with our suppliers in Asia, enable us to respond to time-critical orders and technology challenges for our customers. DDi operates primarily in one geographical area, North America.

On December 31, 2009, DDi completed the acquisition of Coretec Inc. (“Coretec”), a Canadian-based PCB manufacturer whose shares, prior to the acquisition, were publicly traded on the Toronto Stock Exchange.

Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of DDi Corp. and its wholly-owned subsidiaries (referred to herein as the “Company”, “DDi”, “we”, “our” or “us”). All intercompany transactions have been eliminated in consolidation.

The accompanying condensed consolidated financial statements have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) which, in the opinion of, management are necessary to present fairly the financial position, the results of operations and cash flows for the periods presented. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our most recent Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

All financial data are presented in US Dollars. Certain data from 2010 was reclassified to conform to the current year presentation.

Use of Estimates

The preparation of our unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of net revenue and expenses in the reporting periods. The accounting estimates that require management’s most significant and subjective judgments include revenue recognition, inventory valuation, the valuation of stock-based compensation, and the valuation of long-lived assets and goodwill. In addition, we have other accounting policies that involve estimates such as warranty reserves, accruals for restructuring and valuation allowance for deferred tax assets. Actual results may differ from these estimates under different assumptions or conditions and such differences could be material.

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08 pertaining to the goodwill impairment test required under Accounting Standards Codification (ASC) Topic 350, “Intangibles — Goodwill and Other”. Under the amendments in this ASU, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing with the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds its fair

 

4


Table of Contents

value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any. Under the amendments in this ASU, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. ASU 2011-08 is effective for accounting periods beginning after December 15, 2011, with early adoption permitted. We expect to adopt the provisions of ASU 2011-08 for our annual impairment test in the fourth quarter of 2011. We do not believe the adoption of this guidance will have a material impact on our financial statements.

In June 2011, the FASB issued ASU No. 2011-05, which amended its guidance on the presentation of comprehensive income required under ASC Topic 220, “Presentation of Comprehensive Income”, in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The provisions of this new guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. We have applied provisions of this guidance beginning in the second quarter of 2011 and continuing in the three and nine month periods by presenting comprehensive income within a single consolidates statement of income and comprehensive income.

There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying unaudited condensed consolidated financial statements.

NOTE 2. INVENTORIES

Inventories are stated at the lower of cost (determined on a first-in, first-out or average cost basis) or market and consist of the following (in thousands):

 

     September 30,
2011
     December 31,
2010
 

Raw materials

   $ 10,998       $ 9,216   

Work-in process

     7,723         7,093   

Finished goods

     5,133         4,661   
  

 

 

    

 

 

 

Total

   $ 23,854       $ 20,970   
  

 

 

    

 

 

 

NOTE 3. REVOLVING CREDIT FACILITY

On September 23, 2010, we entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as Administrative Agent and U.S. Lender, and JPMorgan Chase Bank, N.A., Toronto Branch, as Canadian Administrative Agent and Canadian Lender. On March 14, 2011, we entered into an amendment (the “March 2011 Credit Amendment”) to the Credit Agreement dated September 23, 2010. The Credit Agreement provides for a revolving credit facility in an aggregate principal amount of $25.0 million, with a Canadian sub-limit of $10.0 million. Pursuant to its terms and subject to the conditions set forth therein, the aggregate principal amount of the facility may be increased from $25.0 to $40.0 million. The maturity date of the facility is September 23, 2013.

The March 2011 Credit Amendment amended the Credit Agreement to (i) reduce the margin from 3.25% to 2.50% that is added to published interest rates to determine the applicable interest rates for borrowing and (ii) increase the amount of dividends that we can pay without obtaining the consent of the Lender from $8.0 million in a rolling twelve-month period (and $25.0 million over the term of the Credit Agreement) to $12.0 million ($40.0 million over the term of the Credit Agreement).

Availability under the Credit Agreement is based on various borrowing base tests, including our eligible accounts receivable and inventories. As of September 30, 2011, we had no borrowings outstanding under the Credit Agreement and availability under the facility was above the applicable measurement levels.

 

5


Table of Contents

NOTE 4. LONG-TERM DEBT

Key Bank

We have a term loan with Key Bank secured by our building located in North Jackson, Ohio. The loan has a principal balance of approximately $0.8 million at September 30, 2011, requires monthly payments of approximately $20,000 plus accrued interest, and bears interest at LIBOR plus 1.5% (1.72% at September 30, 2011). The note matures in April 2015.

Business Development Bank of Canada

There are four existing loans with Business Development Bank of Canada (the “BDC”) — a term loan, an infrastructure loan, an equipment loan and a building loan. The BDC loans are secured by the land and building of our Sheppard Avenue facility located in Toronto, Ontario, and the loan balance is guaranteed by us, a requirement of the BDC. The BDC loans require us to maintain an available funds coverage ratio of 1.5. As of September 30, 2011, we are in compliance with all required covenants.

The outstanding BDC term loan has a principal balance of approximately $0.1 million as of September 30, 2011. The loan requires monthly principal payments of approximately $50,000 over the loan term and bears interest, payable monthly, at BDC’s floating base rate less 1.5% (3.50% at September 30, 2011). The loan matures in December 2011.

The infrastructure loan was provided to finance the completion of our Sheppard Avenue facility. The infrastructure loan has a principal balance of approximately $4.4 million as of September 30, 2011, requires monthly principal payments of approximately $20,000, and accrues interest at BDC’s floating base rate (4.25% at September 30, 2011). The loan matures in October 2028.

The equipment loan has a principal balance of approximately $1.8 million as of September 30, 2011, requires monthly principal payments of approximately $40,000, and accrues interest at the 1-month floating base rate plus 0.6% (3.3% at September 30, 2011). The loan matures in October 2015.

The building loan has a principal balance of approximately $0.1 million as of September 30, 2011, requires monthly principal payments of approximately $20,000, and accrues interest at BDC’s floating base rate plus 0.25% (5.25% at September 30, 2011). The loan matures in March 2012.

Zions Bank Mortgage

We have a mortgage with Zions Bank with a principal balance of approximately $1.5 million as of September 30, 2011, secured by the land and building of our Cuyahoga Falls, Ohio facility. The mortgage requires monthly fixed principal and interest payments of approximately $11,000, accrues interest at the Federal Home Loan Bank rate plus 2% (7.07% at September 30, 2011), and matures during 2032.

GE Real Estate Mortgage

We have a mortgage with GE Real Estate, with a principal balance of $1.3 million as of September 30, 2011, secured by the land and building of our Littleton, Colorado facility. The mortgage requires monthly fixed principal and interest payments of approximately $11,000, accrues interest at a fixed rate of 7.55% per annum, and matures during 2032.

 

6


Table of Contents

NOTE 5. PRODUCT WARRANTY

We accrue warranty expense, which is included in cost of goods sold, at the time revenue is recognized for estimated future warranty obligations related to defective PCBs at the time of shipment, based upon the relationship between historical sales volumes and anticipated costs. Factors that affect the warranty liability include the number of units sold, historical and anticipated rates of warranty claims and the estimated cost of repair. We assess the adequacy of the warranty accrual each quarter. To date, actual warranty claims and costs have been in line with our estimates. The warranty accrual is included in accrued expenses and other current liabilities.

Our warranty accrual and cost activity is as follows (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Beginning balance

   $ 1,187      $ 1,250      $ 1,167      $ 1,100   

Warranties issued during the period

     1,833        1,773        5,891        5,007   

Warranty expenditures

     (1,827     (1,814     (5,865     (4,898
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 1,193      $ 1,209      $ 1,193      $ 1,209   
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 6. INCOME TAXES

We apply the provisions of FASB ASC Topic 740, “Income Taxes”, which established standards of financial accounting and reporting for income taxes that result from an entity’s activities during the current and preceding years. We have $0.3 million and $0.4 million of total gross unrecognized tax benefits as of September 30, 2011 and December 31, 2010. If recognized in future periods there would be a favorable effect of $0.2 million to the effective tax rate. The tax contingency reserve decreased approximately $60,000 due to statute expirations in the third quarter of fiscal 2011. Management anticipates no additional decreases in the tax contingency reserve during the remainder of 2011. We file income tax returns in the U.S. federal jurisdiction, various state jurisdictions and Canada. We have substantially concluded all U.S. federal income tax matters for years through 2004. Canadian income tax matters have been examined through 2008. State jurisdictions that remain subject to examination range from 2003 to 2010.

Our effective income tax rate differs from the U.S. federal statutory tax rate of 35% primarily as a result of the mix of earnings between tax jurisdictions, research and development credits, state income taxes and our continuous evaluation of the realization of our deferred tax assets and uncertain tax positions. The reduced income tax rate in 2011 was primarily the result of reserved net operating loss carryforwards and tax credits available to offset profitable operating results.

NOTE 7. STOCK-BASED COMPENSATION

Stock Options

In May 2011, our stockholders approved the DDi Corp. 2011 Stock Incentive Plan (the “2011 Plan”). Awards under the 2011 Plan may be made to key employees and directors of DDi whose participation in the 2011 Plan is determined to be in the best interests of DDi by the Compensation Committee of the Board of Directors (the “Compensation Committee”). The 2011 Plan permits the granting of options (both incentive and nonqualified stock options), share appreciation rights, restricted common stock, deferred share units and performance awards. The Plan reserves 1,750,000 shares for future awards to eligible persons. The number of shares available for awards, as well as the terms of outstanding awards, will be adjusted as provided in the 2011 Plan for share splits, share dividends, reclassifications, recapitalizations, and other similar events. Any shares reserved for awards will again be available for future awards if the shares for any reason will never be issued to a participant or beneficiary pursuant to an award due to the award’s forfeiture, cancellation, expiration, or net settlement without the issuance of shares. In addition, all shares that are available for future grant under the 2005 Stock Incentive Plan and awards granted under the 2005 Stock Incentive Plan that expire, terminate or are otherwise forfeited will become available for subsequent award under the 2011 Plan. Generally, options that have been granted to employees under the 2011 Plan have a ten year term and vest over three years from the date of grant in equal annual installments. Certain of the grants may vest on an accelerated basis.

In order to determine the fair value of stock options, we use the Black-Scholes option pricing model and apply the single-option valuation approach to the stock option valuation. In order to determine the fair value of restricted stock awards and restricted stock units we use the closing market price of DDi common stock on the date of grant. We recognize stock-based compensation expense on a straight-line basis over the requisite service period for time-based vesting awards of stock options, restricted stock awards and restricted stock units.

 

7


Table of Contents

The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model requires the input of highly subjective assumptions, including the expected stock price volatility, risk-free interest rates, dividend rate, and expected term.

There were 18,500 and 725,100 grants of stock options during the three and nine months ended September 30, 2011, respectively. There were 10,000 and 575,800 grants of stock options during the three and nine months ended September 30, 2010, respectively. As of September 30, 2011, the total compensation cost related to non-vested stock options not yet recognized was $1.8 million, net of estimated forfeitures. This cost will be amortized on a straight-line basis over the remaining weighted-average period of approximately 2.0 years.

The following table summarizes our stock option activity under all the plans for the nine months ended September 30, 2011:

 

    Options
Outstanding
(in thousands)
    Weighted
Average
Exercise Price
Per Option
    Weighted
Average
Remaining
Contractual Life
in Years
    Aggregate
Intrinsic Value
(in thousands)
 

Balance as of December 31, 2010

    2,466      $ 7.87        6.43      $ 12,483   

Granted

    725      $ 8.86       

Exercised

    (204   $ 6.30        $ 807   

Forfeited

    (61   $ 8.63       
 

 

 

       

Balance as of September 30, 2011

    2,926      $ 8.21        6.6      $ 2,369   
 

 

 

       

Options exercisable as of September 30, 2011

    1,907      $ 8.48        5.2      $ 1,601   
 

 

 

       

The aggregate intrinsic value represents the difference between the exercise price of the underlying awards and the quoted price of DDi’s common stock for those awards that have an exercise price below the quoted price at September 30, 2011.

Restricted Stock

During the three and nine months ended September 30, 2011, there were 1,913 and 4,657 of increases, respectively, to shares subject to outstanding Restricted Stock Units (“RSUs”) as the result of required adjustments due to quarterly dividend payments, and there were no other issuances of restricted stock awards. During the three and nine months ended September 30, 2010, there was an increase of 3,874 shares subject to outstanding RSUs as the result of required adjustments due to quarterly dividend payments, and zero and 25,000 grants of restricted stock awards. As of September 30, 2011, the total compensation cost related to non-vested restricted stock awards not yet recognized was $78,000, net of estimated forfeitures. This cost will be amortized on a straight-line basis over the remaining weighted-average period of approximately 0.2 years.

A summary of the status of our non-vested restricted shares as of September 30, 2011 and changes during the nine months ended September 30, 2011 is presented below:

 

     Non-vested
Shares
Outstanding
(in thousands)
    Weighted
Average
Grant-Date
Fair Value
 

Non-vested at December 31, 2010

     144      $ 3.96   

Granted

     5 (a)    $ 3.92   

Vested

     (9   $ 4.48   

Forfeited

     —          —     
  

 

 

   

Non-vested at September 30, 2011

     140      $ 3.92   
  

 

 

   

 

(a) Under the terms of the DDi 2005 Stock Incentive Plan, the number of shares subject to outstanding RSUs are adjusted upon the payments of cash dividends. As a result of the quarterly dividend payments during the nine months ended September 30, 2011, the number of shares subject to outstanding RSUs increased by 4,657 shares.

 

8


Table of Contents

Stock-Based Compensation Expense

The following table sets forth expense related to stock-based compensation (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
         2011              2010              2011              2010      

Stock-based compensation expense:

           

Cost of goods sold

   $ 119       $ 115       $ 298       $ 355   

Sales and marketing expenses

     53         56         137         200   

General and administrative expenses

     183         181         496         486   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 355       $ 352       $ 931       $ 1,041   
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 8. SEGMENT REPORTING

Based on evaluation of our financial information, management believes that DDi operates in one reportable segment related to the design, development, manufacture and test of complex PCBs. Net sales are attributed to the country in which the customer buying the product is located.

The following table summarizes net sales by geographic area (in thousands):

 

     Three Months Ended
September 30
     Nine Months Ended
September 30
 
     2011      2010      2011      2010  

Net sales:

           

North America (1)

   $ 60,504       $ 61,340       $ 181,428       $ 179,075   

Asia

     4,392         6,696         14,164         19,586   

Other

     1,279         952         3,266         3,374   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 66,175       $ 68,988       $ 198,858       $ 202,035   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The majority of net sales in North America are to customers located in the United States.

NOTE 9. NET INCOME PER SHARE

Basic net income per share is computed by dividing the net income for the period by the weighted-average number of common shares outstanding during the period, net of shares of common stock held in treasury. Diluted net income per share is computed by dividing the net income for the period by the weighted-average number of common and common equivalent shares outstanding during the period, if dilutive. The dilutive effect of outstanding options and restricted stock is reflected in diluted earnings per share by application of the treasury stock method, which includes consideration of share-based compensation.

The following table sets forth the calculation of basic and diluted net income per share of common stock (in thousands, except per share amounts):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Weighted-average shares of common stock outstanding — basic

     20,317         19,916         20,282         19,868   

Weighted-average common stock equivalents

     528         755         731         528   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares of common stock outstanding — diluted

     20,845         20,671         21,013         20,396   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 5,152       $ 6,499       $ 15,107       $ 16,295   

Net income per share — basic

   $ 0.25       $ 0.33       $ 0.74       $ 0.82   

Net income per share — diluted

   $ 0.25       $ 0.31       $ 0.72       $ 0.80   

For the three and nine months ended September 30, 2011, common shares issuable upon exercise of outstanding stock options and vesting of restricted stock of 2,538,455 and 2,334,661 respectively, were excluded from the diluted net income per common share calculation as their impact would have been anti-dilutive. For the three and nine months ended September 30, 2010, common shares issuable upon exercise of outstanding stock options and vesting of restricted stock of 2,148,339 and 2,376,187 respectively, were excluded from the diluted net income per common share calculation.

 

9


Table of Contents

NOTE 10. RESTRUCTURING AND OTHER RELATED CHARGES

The acquisition of Coretec on December 31, 2009 prompted us to integrate the operations of DDi’s legacy facility in Toronto (McNicoll) with Coretec’s Toronto facility (Sheppard Avenue) during 2010, which reduced fixed overhead costs, rationalized capacity, and allowed for taking full advantage of the modern Sheppard Avenue manufacturing facility. During the second quarter of 2011, we incurred $0.6 million of severance costs related to the final phase of the Toronto integration plan. In September 2011, our management approved, committed to and initiated plans to restructure and improve efficiencies in our operations. During the three months ended September 30, 2011, we incurred $0.4 million of severance costs that are related to a reduction in workforce. During the three and nine months ended September 30, 2010, we incurred $48,000 and $0.3 million of integration costs which were composed of estimated site remediation, asset disposals, severance, and other typical integration expenses.

As of September 30, 2011, accrued restructuring and other related charges totaled $0.7 million, consisting of $0.3 million related to the Toronto site integration and $0.4 million related to a reduction in workforce. These amounts are included in other current liabilities on the condensed consolidated balance sheet. We do not anticipate any further charges related to these restructuring activities, however we continue to seek opportunities to drive efficiencies in the business.

NOTE 11. DIVIDENDS

We have paid quarterly cash dividends since the third quarter of 2010. The following table sets forth the dividends declared during the three and nine months ended September 30, 2011 and 2010 (in thousands except per share data):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Dividend per share

   $ 0.10       $ 0.06       $ 0.30       $ 0.12   

Total declared

   $ 2,032       $ 1,197       $ 6,092       $ 2,394   

DDi Corp. is a Delaware corporation. Delaware law allows a corporation to declare and pay dividends out of the corporations “surplus”, which is defined as total assets minus total liabilities minus par value of issued stock. DDi had a surplus as defined by Delaware code of $98.0 million and $85.0 million as of September 30, 2011 and September 30, 2010, respectively. When we record a dividend, the charge is recorded to additional paid-in capital as opposed to retained earnings since we have an accumulated deficit.

NOTE 12. FAIR VALUE MEASUREMENTS

Effective January 1, 2008, we began applying fair value measurements to assets and liabilities reported in our financial statements at fair value on a recurring basis as required by FASB ASC Topic 820, “Fair Value Measurements and Disclosures”. This topic establishes a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

 

Level 1:   Quoted market prices in active markets for identical assets or liabilities.
Level 2:   Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3:   Unobservable inputs that are not corroborated by market data.

A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The estimated fair values of our financial instruments, which include cash and cash equivalents, accounts receivable, revolving credit facility, accounts payable, accrued liabilities and income taxes payable, approximate their carrying values due to their short maturities. These items are classified as either Level 1 or Level 2 inputs.

Cash equivalents consist of our excess cash invested in highly liquid money market accounts. These amounts are reflected within cash and cash equivalents on the unaudited condensed consolidated balance sheet at a net value of 1:1 for each dollar invested. The cost and fair value of our cash equivalents was $28.4 million as of September 30, 2011 and was based on quoted market prices in active markets for identical assets, a Level 1 input.

To calculate the estimated fair value of our variable and fixed rate notes payable and mortgage debt as of September 30, 2011, we estimated that in the current market our cost of borrowing on similar debt would, on average, be approximately 5.2% based on our current debt rating and an analysis of current market rates. Using this estimated interest rate and a discount rate of 8.0% (Level 2 and 3 inputs), we estimated the fair value of our debt to be approximately $49,000 higher than its carrying value of $10.0 million.

 

10


Table of Contents

NOTE 13. COMMITMENTS AND CONTINGENCIES

Litigation

From time to time we are involved in litigation and government proceedings incidental to our business. These proceedings are in various procedural stages. We believe as of the date of this Report that provisions or accruals made for any potential losses, to the extent estimable, are adequate and that any liabilities or costs arising out of these proceedings are not likely to have a materially adverse effect on our unaudited condensed consolidated financial statements. The outcome of any of these proceedings, however, is inherently uncertain, and if unfavorable outcomes were to occur, there is a possibility that they would, individually or in the aggregate, have a materially adverse effect on our unaudited condensed consolidated financial statements.

 

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

The following is a discussion of the financial condition and results of operations for our three and nine months ended September 30, 2011. As used herein, the “Company,” “we,” “us,” or “our” means DDi Corp. and its wholly-owned subsidiaries. This discussion and analysis should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in DDi Corp.’s Annual Report on Form 10-K for the year ended December 31, 2010 (the “Form 10-K”).

Some of the statements in this section contain forward-looking statements regarding our assumptions, projections, expectations, targets, intentions or beliefs about future events, which involve risks and uncertainties. All statements other than statements of historical facts included in this section relating to expectation of future financial performance, continued growth, changes in economic conditions or capital markets and changes in customer usage patterns and preferences, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as may, will, should, expect, plan, intend, forecast, anticipate, believe, estimate, predict, potential, continue or the negative of these terms or other comparable terminology. The forward-looking statements contained in this section involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements may include the matters listed under “Risk Factors” in Part I, Item 1A in our Form 10-K and Part II, Item 1A of this Quarterly Report on Form 10-Q, including, but not limited to, changes in general economic conditions in the markets in which we may compete and fluctuations in demand in the electronics industry; increased competition; increased costs; our ability to retain key members of management; our ability to address changes to environmental laws and regulations; potential impacts of natural disasters on the electronics industry and the company’s supply chain; risks associated with acquisitions; adverse state, federal or foreign legislation or regulation or adverse determinations by regulators; and other factors identified from time to time in our filings with the U. S. Securities and Exchange Commission (“SEC”).

Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all such factors.

Our Company

We are a leading provider of time-critical, technologically-advanced electronic interconnect design, engineering and manufacturing services. We specialize in engineering and fabricating complex multi-layer printed circuit boards (“PCBs”) on a quick-turn basis, with lead times as short as 24 hours, and manufacturing products with high levels of complexity and reliability with low-to-moderate production volumes. We have over 1,000 PCB customers in various market segments including communications, computing, military/aerospace, industrial electronics, instrumentation, medical and high-durability commercial markets. Our customers include both original equipment manufacturers (“OEMs”) and electronic manufacturing services (“EMS”) providers. With such a broad customer base and approximately 60 new PCB designs tooled per day, we have accumulated significant process and engineering expertise. Our core strength is developing

 

11


Table of Contents

innovative, high-performance solutions for customers during the engineering, test and launch phases of new electronic product development and supporting long-term requirements for low-to-moderate production volumes, such as those required by the military/aerospace market. Our entire organization is focused on rapidly and reliably filling complex customer orders and building long-term customer relationships. Our engineering capabilities and seven manufacturing facilities located in the United States and Canada, together with our suppliers in Asia, enable us to respond to time-critical orders and technology challenges for our customers.

Industry Overview

PCBs are a fundamental component of virtually all electronic equipment. A PCB is comprised of layers of laminate and copper and contains patterns of electrical circuitry to connect electronic components. The level of PCB complexity is determined by several characteristics, including interconnect and circuit density, size, layer count, material type and functionality. High-end commercial and military/aerospace equipment manufacturers require complex PCBs fabricated with higher layer counts, greater interconnect and circuit density and advanced materials, and demand highly complex and sophisticated manufacturing capabilities. By contrast, other PCBs, such as those used in non-wireless consumer electronic products, are generally less complex and have less sophisticated manufacturing requirements.

Critical Accounting Policies and Use of Estimates

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited condensed consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained on pages 24 to 26 in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s Annual Report on Form 10-K. We believe that as of September 30, 2011 there had been no material changes to this information.

Results of Operations — Summary

During the third quarter ended September 30, 2011, we experienced a slightly reduced level of demand from the second quarter ended June 30, 2011, as customer orders fell sequentially by 1.6% to $65.2 million reflecting a 0.98 book to bill ratio. This sequential decrease during the third quarter of 2011 followed an 8% reduced level of demand during the second quarter of 2011 and a 18% sequential increase in customer orders to a record level of $72.2 million during the first quarter ended March 31, 2011. During the fourth quarter ended December 31, 2010 we experienced a 15% sequential decrease in customer orders from the third quarter ended September 30, 2010. These four consecutive quarters of inconsistent trends in customer demand follows five consecutive quarters of increasing customer orders starting in the third quarter of 2009.

For the nine months ended September 30, 2011, total customer orders were $203.5 million which reflects a decrease of 4.5% compared to the nine months ended September 30, 2010 total customer orders of $213.1 million. This decrease is primarily comprised of lower demand in the consumer electronics, communications, instrumentation and medical and industrial electronics segments offset by increases in the computer and military/aerospace segments. Likewise, the net sales were $198.9 million for the nine months ended September 30, 2011 which are lower compared to the net sales for the nine months ended September 30, 2010 of $202.0 million.

Looking forward to the remainder of 2011, we remain cautious regarding the uncertainties relating to the global economy and continue to monitor the impact on the demand for PCBs in the sector that we serve. In particular, we have observed forecasts of softer demand in the military/aerospace market sector as a result of anticipated budget pressures on the U.S. Department of Defense and our customers in this market segment. Notwithstanding these economic uncertainties, we remain intensely focused on operational and financial discipline, gaining market share in our core markets, and technological innovation to continue to improve DDi’s overall business platform.

Results of Operations for the Three Months Ended September 30, 2011 Compared to the Three Months Ended September 30, 2010

The following tables set forth select data from our Unaudited Condensed Consolidated Statements of Income and Comprehensive Income (in thousands):

 

12


Table of Contents
     Three Months Ended
September 30,
             
     2011     2010     $ Change     % Change  

Net sales

   $ 66,175      $ 68,988      $ (2,813     (4.1 %) 

Cost of goods sold

     52,267        53,450        (1,183     (2.2 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

   $ 13,908      $ 15,538      $ (1,630     (10.5 %) 

Gross profit as a percentage of net sales

     21.0     22.5    

Net Sales

Net sales are derived from the engineering and manufacture of complex, technologically-advanced multi-layer PCBs.

Net sales decreased $2.8 million, or 4.1%, to $66.2 million for the three months ended September 30, 2011, compared to $69.0 million for the three months ended September 30, 2010. The decrease in net sales was primarily due to lower sales volumes in our industrial electronics, communications and consumer electronics segments, offset by higher sales in our computer, military/aerospace and instrumentation and medical segments.

Gross Profit

Gross profit decreased $1.6 million, or 10.5%, to $13.9 million for the three months ended September 30, 2011, compared to $15.5 million for the three months ended September 30, 2010. The decrease in gross profit was primarily due to lower net sales, higher material costs driven by higher commodity prices and depreciation, partially offset by lower labor and overhead costs. Lower overhead costs during the third quarter of 2011 primarily represent the benefits realized from our Toronto facilities integration.

Sales and Marketing Expenses

 

     Three Months Ended
September 30,
             
         2011             2010         $ Change     % Change  

Sales and marketing expenses

   $ 4,142      $ 4,330      $ (188     (4.3 %) 

Percentage of net sales

     6.3     6.3    

Sales and marketing expenses decreased $0.2 million, or 4.3%, to $4.1 million for the three months ended September 30, 2011, compared to $4.3 million for the three months ended September 30, 2010. The slight decrease in sales and marketing expenses was primarily due to lower variable compensation.

General and Administrative Expenses

 

     Three Months Ended
September 30,
             
         2011             2010         $ Change     % Change  

General and administrative expenses

   $ 3,968      $ 4,250      $ (282     (6.6 %) 

Percentage of net sales

     6.0     6.2    

General and administrative expenses decreased $0.3 million, or 6.6%, to $4.0 million for the three months ended September 30, 2011, compared to $4.3 million for the three months ended September 30, 2010. The decrease in general and administrative expenses was primarily due to lower professional fees (primarily legal) and variable compensation, partially offset by higher administrative expenses and depreciation.

Amortization of Intangibles

 

     Three Months Ended
September 30,
               
         2011              2010          $ Change      % Change  

Amortization of intangible assets

   $ 190       $ 190       $ —           0.0

Amortization of intangible assets relates to customer relationships identified in connection with the purchase of Sovereign Circuits Inc. in the fourth quarter of 2006. These intangible assets are being amortized using the straight-line method over an estimated useful life of five years, resulting in $0.2 million of amortization expense for the three months ended September 30, 2011 and 2010.

 

13


Table of Contents

Restructuring and Other Related Charges

 

     Three Months Ended
September 30,
               
         2011              2010          $ Change      % Change  

Restructuring and other related charges

   $ 392       $ 48       $ 344         716.7

The acquisition of Coretec on December 31, 2009 prompted us to integrate the operations of DDi’s legacy facility in Toronto (McNicoll) with Coretec’s Toronto facilities (primarily Sheppard Avenue) during 2010, which reduced fixed overhead costs, rationalized capacity, and allowed improved utilization of the more modern Sheppard Avenue manufacturing facility. During the three months ended September 30, 2010, we incurred $48,000 of integration costs which were composed of estimated site remediation, asset disposals, severance, and other related expenses incurred in connection with the integration of our Toronto operations.

In September 2011, our management approved, committed to and initiated plans to restructure and improve efficiencies in our business. Related to this effort, during the three months ended September 30, 2011, we incurred $0.4 million of severance costs that are related to a reduction in workforce.

Interest Expense

 

     Three Months Ended
September 30,
              
         2011             2010         $ Change      % Change  

Interest Expense

   $ 384      $ 303      $ 81         26.7

Interest Income

     (2     (7   $ 5         (71.4 %) 
  

 

 

   

 

 

   

 

 

    

 

 

 

Net Interest Expense

   $ 382      $ 296      $ 86         29.1

Interest expense consists of amortization of debt issuance costs, interest expense associated with long-term deferred leases, and interest on seven asset-backed term loans. Interest expense increased $81,000, or 26.7%, to $0.4 million for the three months ended September 30, 2011 compared to $0.3 million for the three months ended September 30, 2010. The increase in interest expense was primarily due to the amortization of fees associated with our credit facility with JPMorgan Chase Bank, N.A., which was executed in September 2010.

Net Other Expense (Income)

 

     Three Months Ended
September 30,
             
         2011             2010         $ Change     % Change  

Other expense (income)

   $ (272   $ (144   $ (128     88.9

Net other expense (income) consists of foreign exchange transaction gains or losses related to our Canadian operations and other miscellaneous non-operating items. Net other expense (income) increased $0.1 million or 88.9% to $0.3 million for the three months ended September 30, 2011 compared to $0.1 million for the three months ended September 30, 2010. The increase in net other income is primarily due to a foreign currency gain as a result of the change in the value of the Canadian dollar in relation to the United States dollar.

Income Tax (Benefit) Expense

 

     Three Months Ended
September 30,
              
         2011             2010          $ Change     % Change  

Income tax (benefit) expense

   $ (46   $ 69       $ (115     (166.7 %) 

 

14


Table of Contents

We recorded an income tax benefit for the three months ended September 30, 2011 of $46,000 or 0.9% of pre-tax income, compared to an income tax expense of $0.1 million, or 1% of pre-tax income, for the three months ended September 30, 2010. The decrease in the income tax effective tax rate during the three months ended September 30, 2011 was primarily due to uncertain tax positions and the federal allowance of expensing of capital expenditures in 2011. Our effective income tax rate differs from the U.S. federal statutory tax rate of 35% primarily as a result of the mix of earnings between tax jurisdictions, research and development credits and the impact of the recognition of the tax benefit of net operating loss carryforwards to the extent of current earnings.

Results of Operations for the Nine Months Ended September 30, 2011 Compared to the Nine Months Ended September 30, 2010

The following tables set forth select data from our Unaudited Condensed Consolidated Statements of Income and Comprehensive Income (in thousands):

 

     Nine Months Ended
September 30,
             
     2011     2010     $ Change     % Change  

Net sales

   $ 198,858      $ 202,035      $ (3,177     (1.6 %) 

Cost of goods sold

     156,355        157,196        (841     (0.5 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

   $ 42,503      $ 44,839      $ (2,336     (5.2 %) 

Gross profit as a percentage of net sales

     21.4     22.2    

Net Sales

Net sales decreased $3.2 million, or 1.6%, to $198.9 million for the nine months ended September 30, 2011, compared to $202.0 million for the nine months ended September 30, 2010. The decrease in net sales is primarily due to lower sales volume in our consumer electronics, communications, instrumentation and medical and industrial electronics segments, partially offset by higher sales in our computer and military/aerospace segments.

Gross Profit

Gross profit decreased $2.3 million, or 5.2%, to $42.5 million for the nine months ended September 30, 2011, compared to $44.8 million for the nine months ended September 30, 2010. The decrease in gross profit is primarily due to lower net sales, higher material costs driven by higher commodity prices and depreciation, partially offset by lower labor and overhead costs. Lower overhead costs during the third quarter of 2011 primarily represent the benefits realized from our Toronto facilities integration.

Sales and Marketing Expenses

 

     Nine Months Ended
September 30,
             
     2011     2010     $ Change     % Change  

Sales and marketing expenses

   $ 13,064      $ 13,131      $ (67     (0.5 %) 

Percentage of net sales

     6.6     6.5    

Sales and marketing expenses decreased $67,000, or 0.5%, to $13.1 million for the nine months ended September 30, 2011, compared to $13.1 million for the nine months ended September 30, 2010. The slight decrease in sales and marketing expenses was primarily due to a decrease in variable compensation.

 

15


Table of Contents

General and Administrative Expenses

 

     Nine Months Ended
September 30,
             
     2011     2010     $ Change     % Change  

General and administrative expenses

   $ 11,773      $ 12,463      $ (690     (5.5 %) 

Percentage of net sales

     5.9     6.2    

General and administrative expenses decreased $0.7 million, or 5.5%, to $11.8 million for the nine months ended September 30, 2011, compared to $12.5 million for the nine months ended September 30, 2010. The decrease in general and administrative expenses was primarily due to lower professional fees (primarily legal), administrative expenses and variable compensation.

Amortization of Intangible Assets

 

     Nine Months Ended
September 30,
               
     2011      2010      $ Change      % Change  

Amortization of intangible assets

   $ 570       $ 570       $ —           0.0

Amortization of intangible assets relates to customer relationships identified in connection with the purchase of Sovereign Circuits in the fourth quarter of 2006. These intangible assets are being amortized using the straight-line method over an estimated useful life of five years resulting in $0.6 million of amortization expense for the nine months ended September 30, 2011 and 2010.

Restructuring and Other Related Charges

 

     Nine Months Ended
September 30,
               
     2011      2010      $ Change      % Change  

Restructuring and other related charges

   $ 1,015       $ 338       $ 677         200.3

The acquisition of Coretec on December 31, 2009 prompted us to integrate the operations of DDi’s legacy facility in Toronto (McNicoll) with Coretec’s Toronto facilities (primarily Sheppard Avenue) during 2010, which reduced fixed overhead costs, rationalized capacity, and allowed improved utilization of the more modern Sheppard Avenue manufacturing facility. During the second quarter of 2011, we incurred $0.6 million of severance costs related to the final phase of the Toronto integration plan. During the nine months ended September 30, 2010, we incurred $0.3 million of integration costs which were composed of estimated site remediation, asset disposals, severance, and other related expenses incurred in connection with the integration of our Toronto operations.

In September 2011, our management approved, committed to and initiated plans to restructure and improve efficiencies in our business. During the three months ended September 30, 2011, we incurred $0.4 million of severance costs that are related to a reduction in workforce.

Interest Expense

 

     Nine Months Ended
September 30,
              
     2011     2010     $ Change      % Change  

Interest expense

   $ 1,162      $ 1,063      $ 99         9.3

Interest income

     (9     (31     22         (71.0 %) 
  

 

 

   

 

 

   

 

 

    

 

 

 

Net interest expense

   $ 1,153      $ 1,032      $ 121         11.7

Interest expense consists of amortization of debt issuance costs, interest expense associated with long-term deferred leases, and interest on seven asset-backed term loans. Interest expense increased $0.1 million, or 9.3%, to $1.2 million for the nine months ended September 30, 2011, compared to $1.1 million for the nine months ended September 30, 2010. The increase in interest expense was primarily due to the amortization of fees associated with our credit facility with JPMorgan Chase Bank, N.A., which was executed in September 2010.

 

16


Table of Contents

Other Expense (Income), Net

 

     Nine Months Ended
September 30,
              
     2011     2010      $ Change     % Change  

Other expense (income)

   $ (298   $ 220       $ (518     (235.5 %) 

Net other expense (income) consists of foreign exchange transaction gains or losses related to our Canadian operations and other miscellaneous non-operating items. Net other expense (income) decreased $0.5 million to $(0.3 million) for the nine months ended September 30, 2011, compared to $0.2 million for the nine months ended September 30, 2010. The decrease in net other expense is primarily due to a foreign currency gain as a result of the change in the value of the Canadian dollar in relation to the United States dollar.

Income Tax Expense

 

     Nine Months Ended
September 30,
              
     2011      2010      $ Change     % Change  

Income tax expense

   $ 119       $ 790       $ (671     (84.9 %) 

The Company recorded an income tax expense for the nine months ended September 30, 2011 of $0.1 million, or 0.8% of pre-tax income, as compared to an income tax expense of $0.8 million, or 4.6% of pre-tax income, for the nine months ended September 30, 2010. The decrease in income tax effective tax rate was primarily due to federal allowance of expensing of capital expenditures in 2011. Our effective income tax rate differs from the U.S. federal statutory tax rate of 35% primarily as a result of the mix of earnings between tax jurisdictions, research and development credits and the impact of the recognition of the tax benefit of net operating loss carryforwards to the extent of current earnings.

Liquidity and Capital Resources

 

     September 30,
2011
     December 31,
2010
 
     (Dollars in thousands)  

Working capital

   $ 59,770       $ 51,026   

Current ratio (current assets to current liabilities)

     2.7 : 1.0         2.2 : 1.0   

Cash and cash equivalents

   $ 28,436       $ 28,347   

Long-term debt, including current portion

   $ 9,992       $ 11,455   

The primary drivers affecting cash and liquidity are net income, working capital requirements, capital expenditures, dividend payments to our shareholders and principal payments on our debt. Historically, the payment terms we have had to offer our customers have been relatively similar to the terms received from our creditors and suppliers. We typically bill customers on an open account basis subject to our standard credit quality and payment terms ranging from net 30 to net 60 days. If our net sales increase, it is likely that our accounts receivable balance will also increase. Conversely, if our net sales decrease, it is likely that our accounts receivable will also decrease. Our accounts receivable could increase if customers, such as our large EMS customers, delay their payments or if we grant them extended payment terms.

As of September 30, 2011, we had $28.4 million of cash and cash equivalents and $59.8 million of working capital compared to $28.3 million of cash and cash equivalents and $51.0 million of working capital as of December 31, 2010. The increase in cash and cash equivalents is further described below.

 

17


Table of Contents

Consolidated Cash Flows

The following table summarizes our statements of cash flows for the nine months ended September 30, 2011 and 2010 (in thousands):

 

     Nine Months Ended
September 30,
 
     2011     2010  

Net cash provided by (used in):

    

Operating activities

   $ 15,117      $ 9,961   

Investing activities

     (8,191     (5,765

Financing activities

     (6,887     (8,181

Effect of exchange rates on cash

     50        68   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 89      $ (3,917
  

 

 

   

 

 

 

Management defines cash and cash equivalents as highly liquid deposits with original maturities of 90 days or less when purchased. We maintain cash and cash equivalents at certain financial institutions in excess of amounts insured by federal agencies. However, management does not believe this concentration subjects the Company to any unusual financial risk beyond the normal risk associated with commercial banking relationships. We frequently monitor the third-party depository institutions that hold our cash and cash equivalents. Our emphasis is primarily on safety of principal and secondarily on maximizing yield on those funds.

Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2011 was $15.1 million compared to $10.0 million of cash provided by operating activities for the nine months ended September 30, 2010. The operating activities that affected cash consisted primarily of net income, which totaled $15.1 million for the nine months ended September 30, 2011 compared to $16.3 million for the nine months ended September 30, 2010. The decrease in our net income was primarily attributable to lower net sales and gross profit partially offset by lower operating expenses.

The adjustments to reconcile net income to net cash provided by operating activities for the nine months ended September 30, 2011 that did not affect cash consisted of depreciation of $7.0 million, stock-based compensation of $0.9 million, amortization of intangible assets of $0.6 million and amortization of debt issuance costs of $0.2 million offset by the amortization of a deferred lease liability of ($0.3) million.

Cash flows from operations include uses of cash of $3.1 million related to an increase in inventory, which was primarily due to an increase in the value of raw materials (specifically the value of gold), as well as an increase in work in process and finished goods to support our customer orders. Cash flows from operations also included a $2.3 million decrease in accounts payable which was primarily related to the timing of inventory purchases and payments to our suppliers. In addition, we used $1.4 million of cash from operations for accrued expenses and other liabilities primarily resulting from a reduction in accrued compensation and professional fees. Prepaid expenses and other assets used $1.1 million of cash primarily related to the timing of the amortization of various prepaid expenses.

Investing Activities

Cash used in investing activities for the nine months ended September 30, 2011 was approximately $8.2 million compared to $5.8 million for the nine months ended September 30, 2010. Cash used in investing activities for the nine months ended September 30, 2011 was due to purchases of capital equipment to extend our technical capabilities. Cash used in investing activities for the nine months ended September 30, 2010 was primarily due to the purchase of equipment for our facilities as well as building improvements to some of our facilities.

Financing Activities

Cash used in financing activities for the nine months ended September 30, 2011 was approximately $6.9 million compared to cash used in financing activities of $8.2 million for the nine months ended September 30, 2010. Cash used in financing activities for the nine months ended September 30, 2011 was primarily due to cash dividends paid to common shareholders of $6.1 million and principal payments on long-term debt of $1.3 million partially offset by proceeds from the

 

18


Table of Contents

exercise of stock options of $0.5 million. Cash used in financing activities for the nine months ended September 30, 2010 is attributable to the repayment of our revolving credit facility of $4.3 million, cash dividend payments to common shareholders of $2.4 million, principal payment on long-term debt of $1.4 million and payments of debt issuance costs of $0.7 million partially offset by proceeds from the exercise of stock options of $0.5 million.

Based on current macro-economic conditions and conditions in the state of the printed circuit board business, our own organizational structure and our current outlook, we presently expect our cash and cash equivalents will be sufficient to fund our operations, working capital and capital requirements for at least the next 12 months.

Revolving Credit Facilities

JPMorgan Chase Credit Agreement. On September 23, 2010, the Company entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as Administrative Agent and U.S. Lender, and JPMorgan Chase Bank, N.A., Toronto Branch, as Canadian Administrative Agent and Canadian Lender (the “Lender”). On March 14, 2011, the Company entered into an amendment (the “March 2011 Credit Amendment”) to the Credit Agreement dated September 23, 2010.

The Credit Agreement provides for a revolving credit facility in an aggregate principal amount of $25.0 million, with a Canadian sub-limit of $10.0 million. Pursuant to its terms and subject to the conditions set forth therein, the aggregate principal amount of the facility may be increased from $25.0 to $40.0 million.

The March 2011 Credit Amendment amends the Credit Agreement to (i) reduce the margin from 3.25% to 2.50% that is added to published interest rates to determine the applicable interest rates for borrowing and (ii) increase the amount of dividends that the Company can pay without obtaining the consent of the Lender from $8 million in a rolling twelve-month period (and $25.0 million over the term of the Credit Agreement) to $12.0 million ($40.0 million over the term of the Credit Agreement).

As of September 30, 2011, we had no borrowings outstanding under the Credit Agreement.

As of September 30, 2011 there had been no material changes in the Company’s significant contractual obligations and commitments as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2010.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

For quantitative and qualitative disclosures about market risk affecting the Company, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of our Annual Report on Form 10-K for the year ended December 31, 2010 (the “Form 10-K”) which is incorporated herein by reference. Our exposure to market risk has not changed materially since December 31, 2010.

 

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company’s management, including our Chief Executive Officer and the Interim Chief Financial Officer of the Company, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2011. Based on their evaluation, the Chief Executive Officer and the Interim Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are effective to ensure that all information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission (the “SEC”), and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Controls

No change in our internal control over financial reporting occurred during the quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

19


Table of Contents

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

Reference is made to the Form 10-K for a summary of our previously reported legal proceedings. Since the date of the Form 10-K, there have been no material developments in previously reported legal proceedings.

 

Item 1A. Risk Factors

Other than the risk factors enumerated below, as of the date of this filing, there have been no material changes to the Risk Factors included in the Form 10-K.

A significant portion of our business is derived from products and services sold to customers in the defense industry. Changes in export control or other federal regulations could result in increased competition from offshore competitors which could have a material adverse effect on our business.

A significant portion of our net sales are derived from products and services ultimately sold to customers in the defense industry. Many of these products are currently subject to export controls and other regulatory requirements that limit the ability of overseas competitors to manufacture such products. The federal government is currently in the process of reviewing and revising the United States Munitions List. Such changes could reduce or eliminate restrictions that currently apply to some of the products we produce. If these regulations or others are changed in a manner that reduces restrictions on their being manufactured overseas, we would likely face increased competition from overseas manufacturers. Such increased competition could have a material adverse effect on our business.

Natural disasters in certain regions could adversely affect the global electronics supply chain which, in turn, could have a negative impact on our business, the cost of and demand for our products and our results of operations.

The occurrence of natural disasters in certain regions, such as the recent earthquake and tsunami in Japan, could have a negative impact on our supply chain, our ability to deliver products to our customers and on the cost of and demand for our products. We may also encounter reduced demand for our printed circuit boards in the event customers are unable to obtain adequate supplies of other components due to the events in Japan. We are rigorously assessing our potential exposure but uncertainties exist such that the extent and duration of these supply constraints cannot be currently determined. As a result, our business, results of operations or financial condition could be materially adversely affected by these events.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Removed and Reserved

 

Item 5. Other Information

 

Item 6. Exhibits

The exhibits listed below are hereby filed with the SEC as part of this Quarterly Report on Form 10-Q. Certain of the following exhibits have been previously filed with the SEC pursuant to the requirements of the Securities Act or the Exchange Act. Such exhibits are identified in the chart to the right of the Exhibit and are incorporated herein by reference.

 

20


Table of Contents
                 Incorporated by Reference  
Exhibit   

Description

   Filed
Herewith
     Form      Period
Ending
     Exhibit      Filing
Date
 
    3.1    Amended and Restated Certificate of Incorporation of DDi Corp.         8-K            3.1         12/13/2003   
    3.2    Amended and Restated Bylaws of DDi Corp.         8-K         3/10/2011         3.2         3/15/2011   
  31.1    Certification of Chief Executive Officer of DDi Corp., Pursuant to Rule 13a-14 of the Securities Exchange Act      X               
  31.2    Certification of Chief Financial Officer of DDi Corp., Pursuant to Rule 13a-14 of the Securities Exchange Act      X               
  32.1    Certification of Chief Executive Officer of DDi Corp., Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002      X               
  32.2    Certification of Chief Financial Officer of DDi Corp., Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002      X               
101.INS    XBRL Instance Document      X               
101.SCH    XBRL Taxonomy Extension Schema Document      X               
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document      X               
101.LAB    XBRL Taxonomy Extension Label Linkbase Document      X               
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document      X               

 

21


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, DDi Corp. has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

 

    DDi CORP.
Date: October 28, 2011    

/s/    MIKEL H. WILLIAMS

   

Mikel H. Williams

President and Chief Executive Officer

(Principal Executive Officer)

 

Date: October 28, 2011    

/s/    WAYNE T. SLOMSKY

   

Wayne T. Slomsky

Interim Chief Financial Officer and Chief Accounting Officer

(Principal Finance Officer and Principal Accounting Officer)

 

22