ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our historical consolidated financial statements and notes, as well as the selected historical consolidated financial data included elsewhere in this annual report.
Unless stated otherwise, all dollar figures in this discussion are presented in thousands (000’s).
Executive Overview
Our business is organized into three segments: NobelClad, DynaEnergetics and AMK Technical Services. In 2013, NobelClad accounted for 56% of our net sales and 76% of our income from operations before consideration of unallocated corporate expenses and stock-based compensation expense, which are not allocated to our business segments. Our DynaEnergetics and AMK Technical Services segments accounted for 40% and 4%, respectively, of our 2013 net sales, and 22% and 2%, respectively, of our income from operations before unallocated corporate expenses and stock-based compensation expense. In 2012 and 2011, NobelClad accounted for 57% and 60% of our net sales, respectively, and 69% and 66%, respectively, of income from operations before unallocated corporate expenses and stock-based compensation expense.
Our 2013 net sales increased by $8,006, or 4%, compared to 2012 net sales. The year-to-year consolidated net sales increase reflects sales increases of $3,076 (2.7%) for our NobelClad segment and $6,247 (8.1%) for our DynaEnergetics segment. These sales increases were partially offset by a sales decrease of $1,317 (14.9%) for our AMK Technical Services segment. Largely as a result of an increase of $5,512 in operating expenses, our consolidated income from operations decreased to $11,697 in 2013 from $17,403 in 2012. This $5,706 decrease in operating income reflects decreases of $349, $2,198 and $549 in the operating income reported by our NobelClad, DynaEnergetics and AMK Technical Services business segments, respectively, and a net increase of $2,610 in aggregate unallocated corporate expenses and stock-based compensation expense which includes $2,965 of non-recurring expenses associated with executive management retirements. Reported consolidated operating income for 2013 and for 2012 includes amortization expense of
$6,348
and
$6,210
, respectively, relating to purchased intangible assets associated with several acquisitions executed between November 2007 and January 2012. We reported net income of
$7,495
in 2013 compared to
$11,696
in 2012.
The explosion-welded clad plate market is dependent upon sales of products for use by customers in a number of heavy industries, including oil and gas, chemicals and petrochemicals, aluminum production, power generation, shipbuilding, industrial refrigeration, alternative energy and hydrometallurgy. These industries tend to be cyclical in nature and the uneven worldwide economic recovery has affected many of these markets. While certain sectors continue to be slow, including alternative energy, hydrometallurgy and power generation, quoting activity in other end markets remains healthy, and we continue to track an extensive list of projects. While timing of new order inflow remains difficult to predict, we believe that our NobelClad segment is well-positioned to benefit as global economic conditions improve.
As a result of acquisitions made during 2009, 2010 and 2012 and strong organic sales growth in 2010 and 2011, our DynaEnergetics segment has grown into a second core business for us, generating 40%, 39% and 35% of our consolidated net sales in 2013, 2012 and 2011, respectively, as compared to only 13% of our consolidated net sales in 2009.
Our NobelClad backlog decreased to $36,930 at December 31, 2013 from $46,398 at December 31, 2012. Based upon the negative impact this backlog decrease is expected to have on NobelClad's 2014 sales and an expected year over year sales increase for our DynaEnergetics business segment, we believe that our 2014 consolidated net sales will be flat to up 4% versus the
$209,573
in consolidated net sales that we reported in 2013.
Net sales
NobelClad's revenues are generated principally from sales of clad metal plates and sales of transition joints, which are made from clad plates, to customers that fabricate industrial equipment for various industries, including oil and gas, petrochemicals, alternative energy, hydrometallurgy, aluminum production, shipbuilding, power generation, industrial refrigeration, and similar industries. While a large portion of the demand for our clad metal products is driven by new plant construction and large plant expansion projects, maintenance and retrofit projects at existing chemical processing, petrochemical processing, oil refining, and aluminum smelting facilities also account for a significant portion of total demand.
DynaEnergetics' revenues are generated principally from sales of shaped charges, detonators and detonating cord, and bidirectional boosters and perforating guns to customers who perform the perforation of oil and gas wells and from sales of seismic products to customers involved in oil and gas exploration activities.
AMK Technical Services' revenues are generated from welding, heat treatment, and inspection services that are provided with respect to customer-supplied parts for customers primarily involved in the power generation industry and aircraft engine markets.
A significant portion of our revenue is derived from a relatively small number of customers; therefore, the failure to complete existing contracts on a timely basis, to receive payment for such services in a timely manner, or to enter into future contracts at projected volumes and profitability levels could adversely affect our ability to meet cash requirements exclusively through operating activities. We attempt to minimize the risk of losing customers or specific contracts by continually improving product quality, delivering product on time and competing aggressively on the basis of price.
Gross profit and cost of products sold
Cost of of products sold for NobelClad includes the cost of metals and alloys used to manufacture clad metal plates, the cost of explosives, employee compensation and benefits, freight, outside processing costs, depreciation of manufacturing facilities and equipment, manufacturing supplies and other manufacturing overhead expenses.
Cost of products sold for DynaEnergetics includes the cost of metals, explosives and other raw materials used to manufacture shaped charges, detonating products and perforating guns as well as employee compensation and benefits, depreciation of manufacturing facilities and equipment, manufacturing supplies and other manufacturing overhead expenses.
AMK Technical Services' cost of products sold consists principally of employee compensation and benefits, welding supplies (wire and gas), depreciation of manufacturing facilities and equipment, outside services and other manufacturing overhead expenses.
Backlog
We use backlog as a primary means of measuring the immediate outlook for our NobelClad business. We define “backlog” at any given point in time as consisting of all firm, unfulfilled purchase orders and commitments at that time. Generally speaking, we expect to fill most backlog orders within the following 12 months. From experience, most firm purchase orders and commitments are realized.
Forward-Looking Statements
This annual report and the documents incorporated by reference into it contain certain forward-looking statements within the safe harbor provisions of the Private Securities Litigations Reform Act of 1995. These statements include information with respect to our anticipated future financial condition and results of operations and businesses. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will,” “continue,” “project,” “forecast,” and similar expressions, as well as statements in the future tense, identify forward-looking statements.
These forward-looking statements are not guarantees of our future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. These risks and uncertainties include:
•
The ability to obtain new contracts at attractive prices;
•
The size and timing of customer orders;
•
Fluctuations in customer demand;
•
General economic conditions, both domestically and abroad, and their effect on us and our customers;
•
Competitive factors;
•
The timely completion of contracts;
•
The timing and size of expenditures;
•
The timely receipt of government approvals and permits;
•
The adequacy of local labor supplies at our facilities;
|
|
•
|
The application of governmental regulation and oversight of our operations and products and the industries in which our customers operate;
|
•
The availability and cost of funds; and
•
Fluctuations in foreign currencies.
The effects of these factors are difficult to predict. New factors emerge from time to time and we cannot assess the potential impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date of this annual report, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of such statement or to reflect the occurrence of unanticipated events. In addition, see “Risk Factors” for a discussion of these and other factors.
Year ended December 31, 2013 compared to Year Ended December 31, 2012
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
Percentage
Change
|
Net sales
|
|
$
|
209,573
|
|
|
$
|
201,567
|
|
|
$
|
8,006
|
|
|
4.0
|
%
|
Net sales for 2013 increased
4.0%
to
$209,573
from
$201,567
in 2012. This $8,006 sales increase includes a favorable foreign exchange translation adjustment of $3,070 that relates principally to the strengthening of the Euro against the U.S. dollar during 2013. Excluding the impact of this foreign exchange adjustment, the increase in our 2013 consolidated net sales was 2.5%.
NobelClad sales increased 2.7% to $118,409 in 2013 (56% of total sales) from $115,333 in 2012 (57% of total sales). The $3,076 increase in year-to-year NobelClad reflects the change in our beginning of the year backlog, which increased to $46,398 at December 31, 2012 from $44,564 at December 31, 2011, a favorable foreign exchange translation adjustment of $1,595, and the impact of timing differences with respect to when orders enter our backlog and the subsequent shipment of these orders.
DynaEnergetics contributed $83,651 to sales in 2013 (40% of total sales) compared to $77,404 in 2012 (39% of total sales), which represents a sales increase of 8.1%. Since average North American rig count in the oil and gas industry was relatively flat during 2013 and 2012, the sales increase is largely attributable to geographical expansion initiatives, favorable changes in product/customer mix and a favorable foreign exchange translation adjustment of $1,475.
AMK Technical Services contributed $7,513 to 2013 sales (4% of total sales) versus sales of $8,830 in 2012 (4% of total sales), a decrease of 14.9%. AMK continued to experience a decline in ground power sales during 2013 that is attributable to a customer's decision to discontinue new production work on a ground turbine platform that accounted for a major portion of AMK's historical ground power revenues. While we believe that AMK can replace this lost revenue stream over time by developing new business opportunities with both existing and new customers in the aircraft engine, ground turbine, and oil and gas industries, we believe that 2014 will be another transition year for AMK.
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
Percentage
Change
|
Gross profit
|
|
$
|
59,514
|
|
|
$
|
59,708
|
|
|
$
|
(194
|
)
|
|
(0.3
|
)%
|
Consolidated gross profit margin rate
|
|
28.4
|
%
|
|
29.6
|
%
|
|
|
|
|
|
|
Gross profit decreased by
0.3%
to
$59,514
in 2013 from
$59,708
in 2012. Our 2013 consolidated gross profit margin rate decreased to
28.4%
from
29.6%
in 2012.
The gross profit margin for NobelClad decreased from 27.0% in 2012 to 25.4% in 2013. The decrease relates principally to changes in 2013 product mix as compared to 2012. As has been the case historically, we expect to see continued fluctuations in NobelClad's quarterly gross margin rates in the future that result from fluctuations in quarterly sales volume and changes in product/customer mix.
DynaEnergetics’ gross margin decreased to 34.0% in 2013 from 34.8% in 2012. After performing a comprehensive review of DynaEnergetics inventories during 2013 to identify potentially excess, slow moving and obsolete inventory items, we determined that a change in our estimate of reserve requirements was required and recorded a year-to-year increase of $1,800 (2.2% of sales) in our provision for excess, slow-moving and obsolete inventory. Excluding the negative impact of this increased inventory provision, the DynaEnergetics' gross margin would have improved to 36.2% in 2013 from 34.8% in 2012 as result of favorable changes in product/customer mix.
The gross profit margin for AMK Technical Services decreased to 16.9% in 2013 from 22.1% in 2012, with this decrease relating principally to the $1,317 decrease in AMK's 2013 sales and the fact that the majority of AMK's manufacturing costs are fixed in nature.
Based upon the expected contribution to 2014 consolidated net sales by each of our three business segments, we expect our consolidated full year 2014 gross margin to be in a range of 29% to 31% as compared to the
28.4%
gross margin that we reported for 2013.
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
Percentage
Change
|
General and administrative expenses
|
|
$
|
25,273
|
|
|
$
|
19,141
|
|
|
$
|
6,132
|
|
|
32.0
|
%
|
Percentage of net sales
|
|
12.1
|
%
|
|
9.5
|
%
|
|
|
|
|
|
|
General and administrative expenses increased by
$6,132
, or
32.0%
, to
$25,273
in 2013 from
$19,141
in 2012. Excluding the impacts of $2,965 in non-recurring expenses associated with management retirements and a $756 asset impairment charge related to an information system project in Russia, our general and administrative increased $2,411 or 12.6%. This increase includes an aggregate increase of $733 in salaries, benefits and payroll taxes, an increase of $1,215 in consulting/professional service expenses, including $439 for our re-branding project, an increase of $466 in business travel expenses, an increase of $342 in other personnel costs (principally recruiting and relocation), and a net decrease of $345 in all other expense categories. Excluding the impact of non-recurring management retirement and asset impairment expenses, general and administrative expenses, as a percentage of net sales, increased to 10.3% in 2013 from
9.5%
in 2012.
Selling and distribution expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
Percentage
Change
|
Selling and distribution expenses
|
|
$
|
16,196
|
|
|
$
|
16,954
|
|
|
$
|
(758
|
)
|
|
(4.5
|
)%
|
Percentage of net sales
|
|
7.7
|
%
|
|
8.4
|
%
|
|
|
|
|
|
|
Selling and distribution expenses decreased by
4.5%
to
$16,196
in 2013 from
$16,954
in 2012. This decrease in our selling and distribution expenses includes decreases in stock-based compensation and commissions of $917 and $175, respectively, which were offset by increases in salaries, benefits and payroll taxes of $222 and a net increase of $112 in all other expense categories. The large decrease in 2013 stock-based compensation expense relates principally to the December 31, 2012 retirement of a senior sales executive for whom $860 of stock-based compensation expense was recognized in 2012. As a percentage of net sales, selling and distribution expenses decreased to
7.7%
in 2013 compared to
8.4%
in 2012.
Our 2013 consolidated selling and distribution expenses include $5,574 and $10,377 for our NobelClad and DynaEnergetics business segments, respectively. Our 2012 consolidated selling and distribution expenses include $6,795 and $9,058 for our NobelClad and DynaEnergetics business segments, respectively. The higher level of selling and distribution expenses for our DynaEnergetics segment relative to its contribution to our consolidated net sales reflects the need, particularly in North America, to maintain a number of strategically located distribution centers that are in close proximity to areas which contain a large concentration of oilfields and enjoy a high volume of related oil and gas drilling activities.
Amortization expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
Percentage
Change
|
Amortization of purchased intangible assets
|
|
$
|
6,348
|
|
|
$
|
6,210
|
|
|
$
|
138
|
|
|
2.2
|
%
|
Percentage of net sales
|
|
3.0
|
%
|
|
3.1
|
%
|
|
|
|
|
|
|
Amortization expense relates to the amortization of values assigned to intangible assets in connection with our prior years acquisitions of DYNAenergetics, LRI, the two Russian joint ventures, Austin Explosives and our January 3, 2012 acquisition of TRX Industries, all part of our DynaEnergetics business segment. The
$138
increase in 2013 amortization expenses reflects the impact of foreign currency translation effects. Amortization expense for 2013 includes $5,021, $1,136, and $191 relating to values assigned to customer relationships, core technology, and trademarks/trade names, respectively. Amortization expense for 2012 includes $4,924, $1,101, and $185 relating to values assigned to customer relationships, core technology, and trademarks/trade names, respectively. Amortization expense (as measured in Euros) associated with the DYNAenergetics acquisition and the acquisition of the two Russian joint ventures is expected to approximate €3,333 and €225, respectively, in 2014. Our 2014 amortization expense associated with the Austin Explosives acquisition and the acquisition of TRX Industries is expected to approximate $435 and $895, respectively, and our 2014 amortization expense (as measured in Canadian dollars) associated with the LRI acquisition is expected to approximate 80 CAD.
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
Percentage
Change
|
Operating income
|
|
$
|
11,697
|
|
|
$
|
17,403
|
|
|
$
|
(5,706
|
)
|
|
(32.8
|
)%
|
Income from operations (“operating income”) decreased by
32.8%
to
$11,697
in 2013 from
$17,403
in 2012. The above consolidated operating income totals for 2013 and 2012 include $7,217 and $3,565, respectively, of unallocated corporate expenses and $3,401 and $4,443, respectively, of stock-based compensation expense. These expenses are not allocated to our business segments and thus are not included in the below 2013 and 2012 operating income totals for NobelClad, DynaEnergetics, and AMK Technical Services.
The
$5,706
decrease in our consolidated operating income for 2013 reflects a decrease of $3,096 in the aggregate operating income reported by our three business segments, an increase in unallocated corporate expenses of $3,652, and a decrease in stock-based compensation expense of $1,042. The aggregate net increase of $2,610 in unallocated corporate expenses and stock-based compensation expense includes $2,965 of non-recurring expenses associated with management retirements, the majority of which relates to the March 1, 2013 retirement of Yvon Cariou, our former President and Chief Executive Officer, who was succeeded in this position by Kevin Longe, our former Chief Operating Officer who joined the Company in July 2012.
NobelClad reported operating income of $17,090 in 2013 as compared to $17,439 in 2012. This $349 or 2.0% decrease in NobelClad's 2013 operating income reflects a small sales increase of 2.7% that was more than offset by a decline in the gross margin rate to 25.4% in 2013 from 27.0% in 2012. Operating results of NobelClad for 2013 and 2012 include $2,121 and $2,054, respectively, of amortization expense of purchased intangible assets.
DynaEnergetics reported operating income of $4,849 in 2013 compared to operating income of $7,047 in 2012. The $2,198 decrease in operating income for our DynaEnergetics segment reflects a $1,531 increase in gross profit that was more than offset by a $3,729, or 18.7%, increase in total operating expenses. While DynaEnergetics reported a 2013 sales increase of $6,247, or 8.1%, the gross profit increase was limited to $1,531 (an incremental gross margin rate of 24.5%) due principally to the $1,800 increase in the provision for excess, slow-moving and obsolete inventory that DynaEnergetics recorded in 2013 as further discussed above. Operating results of DynaEnergetics for 2013 and 2012 include $4,227 and $4,156, respectively, of amortization expense of purchased intangible assets.
AMK Technical Services reported operating income of $376 in 2013, a decrease of $549, or 59.4%, from the $925 in operating income that it reported in 2012. The decline in AMK’s operating income is largely attributable to the declines in sales and gross margin rate as discussed above.
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
Percentage
Change
|
Other income (expense), net
|
|
$
|
(528
|
)
|
|
$
|
(32
|
)
|
|
$
|
(496
|
)
|
|
1,550.0
|
%
|
We reported net other expense of
$528
in 2013 compared to net other expense of
$32
in 2012. Our 2013 net other income includes net realized and unrealized foreign exchange losses of $836 and net other income items aggregating $308. Our 2012 net other expense includes net realized and unrealized foreign exchange losses of $45 and net other income items aggregating $13.
Interest income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
Percentage
Change
|
Interest income (expense), net
|
|
$
|
(641
|
)
|
|
$
|
(819
|
)
|
|
$
|
178
|
|
|
(21.7
|
)%
|
We recorded net interest expense of
$641
in 2013 compared to net interest expense of
$819
in 2012. The decreases in 2013 net interest expense reflects relatively stable interest rates, decreases in average outstanding borrowings during the year and an increase in capitalized interest on our greenfield capital investment projects in Russia and North America.
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
Percentage
Change
|
Income tax provision
|
|
$
|
2,941
|
|
|
$
|
4,858
|
|
|
$
|
(1,917
|
)
|
|
(39.5
|
)%
|
Effective tax rate
|
|
27.9
|
%
|
|
29.3
|
%
|
|
|
|
|
|
|
We recorded an income tax provision of
$2,941
in 2013 compared to
$4,858
in 2012. Our 2013 effective tax rate decreased to
27.9%
from
29.3%
in 2012. Our consolidated income tax provision for 2013 and 2012 included $1,203 and $3,587, respectively, related to U.S. taxes, with the remainder relating to net foreign tax provisions of $1,738 in 2013 and $1,271 in 2012, respectively, associated with our foreign operations and holding companies.
Our statutory income tax rates range from 20% to 35% for our various U.S. and foreign operating entities and holding companies. In January 2013, the United States Congress authorized, and the President signed into law, changes to the U. S. income tax laws which were retroactive to January 1, 2012. However, since these changes were enacted in 2013, the financial statement benefit of such legislation could not be reflected until the first quarter of 2013. The $914 tax benefit that we recognized in 2013 had a significant favorable impact on full year effective tax rate. During 2013, we also recorded a one-time tax expense of $812 associated with a German tax audit settlement as further discussed below. This non-recurring adjustment had a significant unfavorable impact on full year effective tax rate. Excluding the effects of the $914 tax benefit and the $812 of additional German tax expense, our 2013 effective tax rate would have been 29%. Year-to-year fluctuations in our consolidated effective tax rate also reflect the different tax rates in our U.S. and foreign tax jurisdictions and the variation in contribution to consolidated pre-tax income from each jurisdiction for the respective year.
Tax returns of our German subsidiaries have been under routine examination by the German tax authorities for most of 2013. During 2013, German tax authorities proposed and we agreed to a settlement. The key provisions of the settlement resulted in a net reduction of the subsidiaries' loss carryforwards, which reduced the non-current deferred tax assets associated with these carryforwards that were recorded on our books. Thus, we recorded an additional $812 in income tax expense to reflect these reductions. The settlement also resulted in an increase in the tax basis of our amortizable, intangible assets; however, under U.S. GAAP, this increase is not reflected in the financial statements. The tax savings from the increase in these assets will be realized by the Company over the next nine years as a reduction in the taxes payable.
We expect our blended effective tax rate for the full year 2014 to range from 29% to 30% based on projected pre-tax income.
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
Percentage
Change
|
Adjusted EBITDA
|
|
$
|
27,901
|
|
|
$
|
33,595
|
|
|
$
|
(5,694
|
)
|
|
(16.9
|
)%
|
Adjusted EBITDA is a non-GAAP measure that we believe provides an important indicator of our ongoing operating performance. Our aggregate non-cash depreciation, amortization of purchased intangible assets and stock-based compensation expense for 2013 and 2012 was
$16,296
and
$16,190
, respectively. These aggregate non-cash charges represent a significant percentage of the consolidated operating income that we reported for these periods. We use non-GAAP EBITDA and Adjusted EBITDA in our operational and financial decision-making and believe that these non-GAAP measures facilitate a more meaningful and accurate comparison of the operating performance of our three business segments than do certain GAAP measures. Research analysts, investment bankers and lenders also use EBITDA and Adjusted EBITDA to assess operating performance. In addition, during 2013 and 2014, our management incentive awards will be based, in part, upon the amount of EBITDA achieved during the year. A portion of the equity incentive awards granted in 2014 to our named executive officers will be earned based on the amount of Adjusted EBITDA achieved in 2014 and 2015. The following is a reconciliation of the most directly comparable GAAP measure to Adjusted EBIDTA.
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
Net income attributable to DMC
|
|
7,495
|
|
|
11,696
|
|
Interest expense
|
|
648
|
|
|
832
|
|
Interest income
|
|
(7
|
)
|
|
(13
|
)
|
Provision for income taxes
|
|
2,941
|
|
|
4,858
|
|
Depreciation
|
|
6,547
|
|
|
5,537
|
|
Amortization of purchased intangible assets
|
|
6,348
|
|
|
6,210
|
|
EBITDA
|
|
23,972
|
|
|
29,120
|
|
Stock-based compensation
|
|
3,401
|
|
|
4,443
|
|
Other (income) expense, net
|
|
528
|
|
|
32
|
|
Adjusted EBITDA
|
|
27,901
|
|
|
33,595
|
|
Adjusted EBITDA decreased
16.9%
to
$27,901
in 2013 from
$33,595
in 2012 primarily due to the decrease in operating income of $5,706 as discussed above.
Year ended December 31, 2012 compared to Year Ended December 31, 2011
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Change
|
|
Percentage
Change
|
Net sales
|
|
$
|
201,567
|
|
|
$
|
208,891
|
|
|
$
|
(7,324
|
)
|
|
(3.5
|
)%
|
Net sales for 2012 decreased 3.5% to $201,567 from $208,891 in 2011. This $7,324 sales decline includes an unfavorable foreign exchange translation adjustment of $6,464 that relates principally to the strengthening of the U.S, dollar against the Euro during 2012. Excluding the impact of this foreign exchange adjustment, the decrease in our 2012 consolidated net sales was only 0.4%.
NobelClad sales decreased 8.6% to $115,333 in 2012 (57.2% of total sales) from $126,199 in 2011 (60.4% of total sales). Our beginning of the year NobelClad backlog decreased to $44,564 at the beginning of 2012 from $56,539 at the beginning of 2011. The $10,866 decrease in year-to-year 2012 sales follows this $11,975 decrease in beginning of the year backlog. The backlog at the beginning of 2011 was favorably impacted by two large orders that we booked in December of 2010. We did not see similar large order activity near the end of either 2011 or 2012 when our year-end backlog stood at $44,564 and $46,398, respectively.
DynaEnergetics contributed $77,404 to sales in 2012 (38.4% of total sales) compared to $72,782 in 2011 (34.8% of total sales), which represents a sales increase of 6.4%. Excluding incremental sales of $5,458 from our 2012 acquisition of TRX, 2012
DynaEnergetics sales decreased $836, or 1.1%. This decrease is principally attributable to a decline in rig count in both the United States and Canada during last the first six months of 2012 which negatively affected our North America sales for this same period.
AMK Technical Services contributed $8,830 to 2012 sales (4.4% of total sales) versus sales of $9,910 in 2011 (4.7% of total sales), a decrease of 10.9%. This decrease reflects a $1,769, or 24.2%, decline in ground power sales that is attributable to a customer’s decision to discontinue new production work on a ground turbine platform that has accounted for a major portion of AMK’s historical ground power revenues.
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Change
|
|
Percentage
Change
|
Gross profit
|
|
$
|
59,708
|
|
|
$
|
55,446
|
|
|
$
|
4,262
|
|
|
7.7
|
%
|
Consolidated gross profit margin rate
|
|
29.6
|
%
|
|
26.5
|
%
|
|
|
|
|
|
|
Gross profit increased by 7.7% to $59,708 in 2012 from $55,446 in 2011, including the negative impact of $1,555 in unfavorable foreign exchange translation adjustments relating principally to the strengthening of the U.S. dollar against the Euro. Our 2012 consolidated gross profit margin rate increased to 29.6% from 26.5% in 2011. The gross profit margin for NobelClad increased from 22.4% in 2011 to 27.0% in 2012. DynaEnergetics’ gross margin increased to 34.8% in 2012 from 33.4% in 2011. The gross profit margin for AMK Technical Services decreased to 22.1% in 2012 from 31.1% in 2011.
The significant improvement in the 2012 gross profit margin rate for our NobelClad segment relates to favorable changes in product mix as compared to 2011 combined with an improved pricing environment.
The modest increase in DynaEnergetics gross margin rate in 2012 relates principally to favorable changes in product/customer mix.
The decrease in AMK Technical Services’ reported gross margin relates principally to differences in the rate at which AMK Technical Services absorbed its fixed manufacturing overhead costs based on the sales decrease discussed above.
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Change
|
|
Percentage
Change
|
General and administrative expenses
|
|
$
|
19,141
|
|
|
$
|
16,711
|
|
|
$
|
2,430
|
|
|
14.5
|
%
|
Percentage of net sales
|
|
9.5
|
%
|
|
8.0
|
%
|
|
|
|
|
|
|
General and administrative expenses increased by $2,430, or 14.5%, to $19,141 in 2012 from $16,711 in 2011. This increase includes increases of $1,438 in salaries and accrued incentive compensation due principally to the addition of Kevin Longe, Chief Operating Officer, in July 2012 and the hiring of other administrative personnel during the year, an increase in stock-based compensation of $586 and a net increase of $406 in all other expense categories. The increase in our 2012 general and administrative expenses reflects the positive impact of $556 in favorable foreign exchange adjustments associated with the strengthening of the U.S. dollar against the Euro. As a percentage of net sales, general and administrative expenses increased to 9.5% in 2012 from 8.0% in 2011.
Selling and distribution expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Change
|
|
Percentage
Change
|
Selling and distribution expenses
|
|
$
|
16,954
|
|
|
$
|
14,809
|
|
|
$
|
2,145
|
|
|
14.5
|
%
|
Percentage of net sales
|
|
8.4
|
%
|
|
7.1
|
%
|
|
|
|
|
|
|
Selling and distribution expenses, which include sales commissions of $1,592 in 2012 and $1,751 in 2011, increased by 14.5% to $16,954 in 2012 from $14,809 in 2011, with this increase reflecting the positive impact of $361 in favorable foreign exchange translation adjustments. This increase in our selling and distribution expenses includes increased selling and distribution expenses of $1,159 at our U.S. divisions and $986 at our foreign divisions. The $1,159 increase in our U.S. selling and distribution expenses reflects a decrease in commission expense of $314 that was offset by an increase in salaries and accrued incentive compensation of $151, an increase of $396 in stock-based compensation, an increase of $170 for legal expenses and a net increase
of $756 in all other spending categories. The $986 increase in our foreign divisions’ selling and distribution expenses reflects increases of $556 and $155 for salary expense and sales commissions, respectively, and a net increase of $275 in all other spending categories. As a percentage of net sales, selling and distribution expenses increased to 8.4% in 2012 compared to 7.1% in 2011.
Our 2012 consolidated selling and distribution expenses include $6,795 and $9,058 for our NobelClad and DynaEnergetics business segments, respectively. Our 2011 consolidated selling and distribution expenses include $6,043 and $8,061 for our NobelClad and DynaEnergetics business segments, respectively. The higher level of selling and distribution expenses for our DynaEnergetics segment relative to its contribution to our consolidated net sales reflects the need, particularly in North America, to maintain a number of strategically located distribution centers that are in close proximity to areas which contain a large concentration of oilfields and enjoy a high volume of related oil and gas drilling activities.
Amortization expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Change
|
|
Percentage
Change
|
Amortization of purchased intangible assets
|
|
$
|
6,210
|
|
|
$
|
5,707
|
|
|
$
|
503
|
|
|
8.8
|
%
|
Percentage of net sales
|
|
3.1
|
%
|
|
2.7
|
%
|
|
|
|
|
|
|
Amortization expense relates to the amortization of values assigned to intangible assets in connection with our prior year acquisitions of DYNAenergetics, LRI, the two Russian joint ventures, Austin Explosives and our January 3, 2012 acquisition of TRX Industries. The $503 increase in 2012 amortization expenses reflects $894 in new amortization expense associated with the TRX acquisition that was partially offset by favorable foreign currency translation effects. Amortization expense for 2012 includes $4,924, $1,101, and $185 relating to values assigned to customer relationships, core technology, and trademarks/trade names, respectively. Amortization expense for 2011 includes $4,316, $1,191, $200 relating to values assigned to customer relationships, core technology, and trademarks/trade names, respectively.
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Change
|
|
Percentage
Change
|
Operating income
|
|
$
|
17,403
|
|
|
$
|
18,219
|
|
|
$
|
(816
|
)
|
|
(4.5
|
)%
|
Income from operations (“operating income”) decreased by 4.5% to $17,403 in 2012 from $18,219 in 2011. The above consolidated operating income totals for 2012 and 2011 include $3,565 and $2,686, respectively, of unallocated corporate expenses and $4,443 and $3,397, respectively, of stock-based compensation expense. These expenses are not allocated to our business segments and thus are not included in the below 2012 and 2011 operating income totals for NobelClad, DynaEnergetics, and AMK Technical Services.
The $816 decrease in our consolidated operating income reflects an increase of $1,109 in the aggregate operating income reported by our three business segments that was offset by increases in unallocated corporate expenses and stock-based compensation expense of $879 and $1,046, respectively. The increase in unallocated corporate expenses relates principally to expenses associated with the addition of Kevin Longe, our current Chief Operating Officer, who joined the company in July 2012 and will succeed Yvon Cariou as President and Chief Executive Officer on March 1, 2013 upon Mr. Cariou’s retirement. The increase in stock-based compensation includes $672 relating to the accelerated recognition of stock-based compensation expense resulting from accelerated vesting of restricted stock awards associated with Mr. Cariou’s planned retirement on March 1, 2013 and the December 31, 2012 retirement of another senior executive.
NobelClad reported operating income of $17,439 in 2012 as compared to $16,058 in 2011. This $1,381 or 8.6% increase is largely attributable to the 20.3% increase in the 2012 gross margin rate as discussed above. Operating results of NobelClad for 2012 and 2011 include $2,054 and $2,224, respectively, of amortization expense of purchased intangible assets.
DynaEnergetics reported operating income of $7,047 in 2012 as compared to operating income of $6,188 in 2011. The $859 increase in operating income for our DynaEnergetics segment is principally attributable to the sales increase of $4,622, or 6.4%, as discussed above and the corresponding $2,633 increase in gross profit. This gross profit increase was partially offset by an increase of $1,774, or 9.8%, in total operating expenses. Operating results of DynaEnergetics for 2012 and 2011 include $4,156 and $3,483, respectively, of amortization expense of purchased intangible assets.
AMK Technical Services reported operating income of $925 in 2012, a decrease of $1,131 or 55.0% from the $2,056 in operating income that it reported in 2011. The decline in AMK’s operating income is largely attributable to the declines in sales and gross margin rate as discussed above.
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Change
|
|
Percentage
Change
|
Other income (expense), net
|
|
$
|
(32
|
)
|
|
$
|
528
|
|
|
$
|
(560
|
)
|
|
(106.1
|
)%
|
We reported net other expense of $32 in 2012 compared to net other income of $528 in 2011. Our 2012 net other income includes net realized and unrealized foreign exchange losses of $45 and net other income items aggregating $13. Our 2011 net other income includes net realized and unrealized foreign exchange gains of $372, including a gain of $87 on our currency swap agreement, and net other income items aggregating $156.
Interest income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Change
|
|
Percentage
Change
|
Interest income (expense), net
|
|
$
|
(819
|
)
|
|
$
|
(1,937
|
)
|
|
$
|
1,118
|
|
|
(57.7
|
)%
|
We recorded net interest expense of $819 in 2012 compared to net interest expense of $1,937 in 2011. Since our average borrowings were approximately $6,900 on average higher during 2012 than during 2011, the significant decrease in 2012 interest expense is entirely attributable to lower average interest rates on our 2012 outstanding borrowings, including a 150 basis point interest rate reduction on revolving credit borrowings under our five-year credit facility that we entered into on December 21, 2011.
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Change
|
|
Percentage
Change
|
Income tax provision
|
|
$
|
4,858
|
|
|
$
|
4,369
|
|
|
$
|
489
|
|
|
11.2
|
%
|
Effective tax rate
|
|
29.3
|
%
|
|
26.0
|
%
|
|
|
|
|
|
|
We recorded an income tax provision of $4,858 in 2012 compared to $4,369 in 2011. Our 2012 effective tax rate increased to 29.3% from 26.0% in 2011. Our consolidated income tax provision for 2012 and 2011 included $3,587 and $4,078, respectively, related to U.S. taxes, with the remainder relating to net foreign tax provision of $1,271 in 2012 and a net foreign tax benefit of $291 in 2011 associated with our foreign operations and holding companies.
Our statutory income tax rates range from 19% to 35% for our various U.S. and foreign operating subsidiaries and holding companies. The increase in our 2012 consolidated effective tax rate relates principally to a change in U.S. income tax laws for 2012 related to the earnings of foreign subsidiaries. In January 2013, the United States Congress authorized, and the President signed into law, changes to the U. S. income tax laws which were retroactive to January 1, 2012; however, since these changes were enacted in 2013, the financial statement benefit of such credits cannot be reflected until the first quarter of 2013. Had these changes been enacted before the end of 2012, our 2012 effective tax rate of 29.3% would have been reduced to approximately 23.8%. Year-to-year fluctuations in our consolidated effective tax rate also reflect the different tax rates in our U.S. and foreign tax jurisdictions and the variation in contribution to consolidated pre-tax income from each jurisdiction for the respective year.
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Change
|
|
Percentage
Change
|
Adjusted EBITDA
|
|
$
|
33,595
|
|
|
$
|
32,865
|
|
|
$
|
730
|
|
|
2.2
|
%
|
Adjusted EBITDA is a non-GAAP measure that we believe provides an important indicator of our ongoing operating performance. Our aggregate non-cash depreciation, amortization of purchased intangible assets and stock-based compensation expense for 2012 and 2011 was $16,190 and $14,596, respectively. These aggregate non-cash charges represent a significant percentage of the consolidated operating income that we reported for these periods.
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Net income attributable to DMC
|
|
11,696
|
|
|
12,491
|
|
Interest expense
|
|
832
|
|
|
1,945
|
|
Interest income
|
|
(13
|
)
|
|
(8
|
)
|
Provision for income taxes
|
|
4,858
|
|
|
4,369
|
|
Depreciation
|
|
5,537
|
|
|
5,492
|
|
Amortization of purchased intangible assets
|
|
6,210
|
|
|
5,707
|
|
EBITDA
|
|
29,120
|
|
|
29,996
|
|
Stock-based compensation
|
|
4,443
|
|
|
3,397
|
|
Other (income) expense, net
|
|
32
|
|
|
(528
|
)
|
Adjusted EBITDA
|
|
33,595
|
|
|
32,865
|
|
Adjusted EBITDA increased 2.2% to $33,595 in 2012 from $32,865 in 2011 primarily due to a $1,594 increase in 2012 aggregate increase in non-cash depreciation, amortization of purchased intangible assets and stock-based compensation expense. This increase was partially offset by a decrease in operating income of $816.
Liquidity and Capital Resources
We have historically financed our operations from a combination of internally generated cash flow, revolving credit borrowings, various long-term debt arrangements, and the issuance of common stock. We believe that cash flow from operations and funds available under our current credit facilities and any future replacement thereof will be sufficient to fund the working capital, debt service, and capital expenditure requirements of our current business operations for the foreseeable future. Nevertheless, our ability to generate sufficient cash flows from operations will depend upon our success in executing our strategies. If we are unable to (i) realize sales from our backlog; (ii) secure new customer orders; (iii) continue selling products at attractive margins; and (iv) continue to implement cost-effective internal processes, our ability to meet cash requirements through operating activities could be impacted. Furthermore, any restriction on the availability of borrowings under our credit facilities could negatively affect our ability to meet future cash requirements.
Debt facilities
On December 21, 2011, we entered into a five-year syndicated credit agreement, which provides revolving loan availability of $36,000, 16,000 Euros and 1,500 Canadian dollars through a syndicate of four banks, and amends and restates in its entirety our prior syndicated credit agreement entered into on November 16, 2007.
As of December 31, 2013, U.S. dollar revolving loans of $26,400 were outstanding under our syndicated credit agreement, $2,856 was outstanding under our separate DYNAenergetics’ line of credit agreement, and $51 was outstanding under loan agreements with the former owners of LRI. While we had approximately $33,956 of unutilized revolving credit loan capacity as of December 31, 2013 under our various credit facilities, future borrowings are subject to compliance with financial covenants that could significantly limit availability.
There are two significant financial covenants under our syndicated credit agreement, the leverage ratio and fixed charge coverage ratio requirements. The leverage ratio is defined in the credit agreement as Consolidated Funded Indebtedness at the balance sheet date as compared to Consolidated EBITDA, which is defined as earnings before provisions for income taxes, interest expense, depreciation and amortization, extraordinary non-recurring charges, and other non-cash charges for the previous twelve months. For the years ended December 31, 2013 and 2012, Consolidated EBITDA approximated the “Adjusted EBITDA” that we reported for the respective periods. As of December 31, 2013, the maximum leverage ratio permitted by our credit facility was 2.25 to 1.0. The actual leverage ratio as of December 31, 2013 was 1.0 to 1.0. The maximum leverage ratio permitted as of March 31, June 30, September 30 and December 31, 2014 is 2.0 to 1.0.
The fixed charge ratio, as defined in the credit agreement, means, for any period, the ratio of Consolidated EBITDA to Fixed Charges. Consolidated EBITDA is defined above and Fixed Charges equals the sum of cash interest expense, cash dividends, cash income taxes and an amount equal to 75% of depreciation expense. As of December 31, 2013, the minimum fixed charge ratio permitted by our credit facility was 2.0 to 1.0. The actual fixed charge ratio as of December 31, 2013 was 3.05 to 1.0. The minimum fixed charge coverage ratio permitted for the twelve month periods ending March 31, June 30, September 30 and December 31, 2014 is 2.0 to 1.0.
Debt and other contractual obligations and commitments
Our existing loan agreements include various covenants and restrictions, certain of which relate to the payment of dividends or other distributions to stockholders, redemption of capital stock, incurrence of additional indebtedness, mortgaging, pledging or disposition of major assets, and maintenance of specified financial ratios. As of December 31, 2013, we were in compliance with all financial covenants and other provisions of our debt agreements.
The table below presents principal cash flows by expected maturity dates for our debt obligations and other contractual obligations and commitments as of December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
As of December 31, 2013
|
|
|
Less than
|
|
|
|
|
|
More than
|
|
|
Contractual Obligations
|
|
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
5 Years
|
|
Total
|
Total long-term debt and interest obligations (1)
|
|
$
|
52
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
52
|
|
Capital lease obligations (2)
|
|
25
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
33
|
|
Operating lease obligations (3)
|
|
2,196
|
|
|
2,663
|
|
|
1,552
|
|
|
1,126
|
|
|
7,537
|
|
License agreements obligations (4)
|
|
398
|
|
|
796
|
|
|
796
|
|
|
—
|
|
|
1,990
|
|
Purchase obligations (5)
|
|
16,664
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,664
|
|
Total
|
|
$
|
19,335
|
|
|
$
|
3,467
|
|
|
$
|
2,348
|
|
|
$
|
1,126
|
|
|
$
|
26,276
|
|
(1) Amounts represent future cash payments on our long-term debt and interest expense obligations and are reflected in accompanying Consolidated Balance Sheets.
(2) The present value of these capital lease obligations are included in our Consolidated Balance Sheets. See
Note 8
of the Notes to Consolidated Financial Statements for additional information.
(3) The operating lease obligations presented reflect future minimum lease payments due under non-cancelable portions of our leases as of December 31, 2013. Our operating lease obligations are described in
Note 8
of the Notes to Consolidated Financial Statements.
(4) The license agreements obligations presented reflect future minimum payments due under non-cancelable portions of our agreements as of December 31, 2013. Our license agreements obligations are described in
Note 8
of the Notes to Consolidated Financial Statements.
(5) Amounts represent commitments to purchase goods or services to be utilized in the normal course of business. These amounts are not reflected in accompanying Consolidated Balance Sheets.
As of December 31, 2013, we have $26,400 of outstanding borrowings under our U.S. dollar revolving line of credit at then current interest rates of 1.42% respectively. The credit agreement has a five-year term ending December 21, 2016. For more information about our debt obligations, see
Note 4
to our consolidated financial statements elsewhere in this annual report.
Cash flows from operating activities
Net cash flows provided by operating activities increased to
$32,052
in 2013 from
$20,580
in 2012 reflecting a $4,107 decrease in net income that was offset by positive changes in net working capital of $15,189, and positive changes in non-cash adjustments aggregating $390. We experienced net positive changes in working capital of $9,028 in 2013 compared to net negative changes in working capital of $6,161 in 2012. Positive changes in our 2013 working capital included a decrease in inventories and prepaid expenses of $6,693 and $93, respectively, and increases of $2,235 and $1,754 in accounts payable and accrued expenses and other liabilities, respectively. These positive changes were partly offset by an increase of $1,382 in accounts receivable and a decrease in customer advances of $365. The large decrease in inventories reflects our focused efforts during 2013 to reduce overall inventory levels in our DynaEnergetics business, particularly within the North American distribution system. All other changes in working capital relate to typical fluctuations in our business flow and the related timing of cash payments and receipts.
Net cash flows provided by operating activities increased to $20,580 in 2012 from $9,726 in 2011, with the majority of this $10,854 increase resulting from changes in our working capital. While we experienced net negative changes to working capital in both 2012 and 2011, the net negative change in working capital was reduced to $6,161 in 2012 from $16,408 in 2011. Negative changes in our 2012 working capital included an increase in inventories of $2,342 and decreases in accounts payable, customer advances and accrued expenses and other liabilities of $3,618, $578 and $644, respectively. These were partly offset by decreases in accounts receivable and prepaid expenses of $560 and $461, respectively. All of foregoing changes in working capital relate to typical fluctuations in our business flow and the related timing of cash payments and receipts.
Net cash flows provided by operating activities decreased to $9,726 in 2011 from $16,693 in 2010. This $6,967 decrease reflects a $7,186 increase in net income that was more than offset by net negative changes in working capital that totaled $16,408. Negative changes in our 2011 working capital included increases in accounts receivable, inventories and prepaid expenses and a decrease in accounts payable of $9,551, $8,392, $1,346 and $1,035, respectively. These were partly offset by increases in accrued expenses and other liabilities of $3,451 and customer advances of $465. The $9,551 increase in accounts receivables follows the $9,436 increase in fourth quarter 2011 consolidated sales compared to those in the fourth quarter of 2010. The $8,392 increase in inventories relates principally to our DynaEnergetics segment, which made a deliberate effort to build up its finished goods inventories to better meet the strong increase in business activity that the segment has experienced in 2011 and the expected sales demand in 2012. The $3,342 increase in accrued expenses and other liabilities relates to both timing issues and a significant increase in accrued incentive compensation.
Cash flows from investing activities
Net cash flows used in investing activities for 2013 totaled
$18,239
and consisted almost entirely of capital expenditures. Our capital expenditures included $9,159 for our greenfield projects in Russia and North America.
Net cash flows used in investing activities for 2012 totaled $26,165 which included our $10,294 cash investment in TRX Industries and $15,647 in capital expenditures. Our capital expenditures in 2012 included $6,830 for our greenfield projects in Russia and North America and $2,300 on implementing a new ERP system for our NobelClad U.S. entity.
Net cash flows used in investing activities for 2011 totaled $7,731 which consisted almost entirely of capital expenditures.
Cash flows from financing activities
Net cash flows used in financing activities for 2013 totaled
$11,587
, which included net repayments on bank lines of credit of $9,592 and payment of quarterly dividends of $2,187.
Net cash flows provided by financing activities for 2012 totaled $8,517 and included net borrowings on bank lines of credit of $12,174. These sources of cash flow were partially offset by uses of cash for financing activities, including $1,176 in loan payments to former owners of LRI and quarterly dividend payments of $2,155.
Net cash flows used in financing activities for 2011 totaled $1,395. Significant uses of cash for financing activities included term loan payments of $22,247, including a prepayment of $13,247, under our prior syndicated credit agreement that was replaced on December 21, 2011 by a new five-year syndicated credit facility, payment of annual dividends of $2,130, $627 in final principal payments on our Nord LB term loans, $435 payment of debt issuance costs related to the new syndicated credit agreement and $295 payment on capital lease obligations. Sources of cash flow from financing activities included net borrowings on bank lines of credit of $24,191, including net borrowings of $25,402 under our new syndicated credit facility, and $177 in net proceeds from the issuance of common stock relating to the exercise of stock options.
Critical Accounting Policies and Estimates
Our historical consolidated financial statements and notes to our historical consolidated financial statements contain information that is pertinent to our management’s discussion and analysis of financial condition and results of operations. Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that our management make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. However, the accounting principles used by us generally do not change our reported cash flows or liquidity. Existing rules must be interpreted and judgments made on how the specifics of a given rule apply to us.
In management’s opinion, the more significant reporting areas impacted by management’s judgments and estimates are revenue recognition, asset impairments, goodwill and other intangible assets, and income taxes. Management’s judgments and
estimates in these areas are based on information available from both internal and external sources, and actual results could differ from the estimates, as additional information becomes known. We believe the following to be our most critical accounting policies.
Revenue recognition
Sales of clad metal products and welding services are generally based upon customer specifications set forth in customer purchase orders and require us to provide certifications relative to metals used, services performed and the results of any non-destructive testing that the customer has requested be performed. All issues of conformity of the product to specifications are resolved before the product is shipped and billed. Products related to the oilfield products segment, which include detonating cords, detonators, bi-directional boosters and shaped charges, as well as, seismic related explosives and accessories, are standard in nature. In all cases, revenue is recognized only when all four of the following criteria have been satisfied: persuasive evidence of an arrangement exists; the price is fixed or determinable; delivery has occurred; and collection is reasonably assured. For contracts that require multiple shipments, revenue is recorded only for the units included in each individual shipment. If, as a contract proceeds toward completion, projected total cost on an individual contract indicates a probable loss, we will account for such anticipated loss.
Asset impairments
We review our long-lived assets to be held and used by us for impairment whenever events or changes in circumstances indicate their carrying amount may not be recoverable. In so doing, we estimate the future net cash flows expected to result from the use of these assets and their eventual disposition. If the sum of the expected future net cash flows (undiscounted and without interest charges) is less than the carrying amount of these assets, an impairment loss is recognized to reduce the asset to its estimated fair value. Otherwise, an impairment loss is not recognized. Long-lived assets to be disposed of, if any, are reported at the lower of carrying amount or fair value less costs to sell.
Business Combinations
We account for our business acquisitions using the purchase method of accounting. We allocate the total cost of the acquisition to the underlying net assets based on their respective estimated fair values. As part of this allocation process, we identify and attribute values and estimated lives to the intangible assets acquired. These determinations involve significant estimates and assumptions regarding multiple, highly subjective variables, including those with respect to future cash flows, discount rates, asset lives, and the use of different valuation models and therefore require considerable judgment. Our estimates and assumptions are based, in part, on the availability of listed market prices or other transparent market data. These determinations affect the amount of amortization expense recognized in future periods. We base our fair value estimates on assumptions we believe to be reasonable but are inherently uncertain.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets acquired. The carrying value of goodwill is periodically reviewed for impairment (at a minimum annually) and whenever events or changes in circumstances indicate that the carrying amount of this asset may not be recoverable. Examples of such events or changes in circumstances, many of which are subjective in nature, include significant negative industry or economic trends, significant changes in the manner of our use of the acquired assets or our strategy, a significant decrease in the market value of the asset, and a significant change in legal factors or in the business climate that could affect the value of the asset.
We test goodwill for impairment by first performing a qualitative evaluation. The qualitative evaluation is an assessment of factors, including reporting unit specific operating results as well as industry, market and general economic conditions, to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We may elect to bypass this qualitative assessment for certain of our reporting units and perform a two-step quantitative test.
Our reporting units for goodwill impairment testing are currently the same as our operating divisions and reportable business segments: NobelClad, DynaEnergetics and AMK Technical Services. Each of these three business segments represent separately managed strategic business units and our chief operating decision maker reviews financial results and evaluates operating performance at this level.
Our annual goodwill impairment testing for 2013 was completed as of December 31, 2013 for our NobelClad and DynaEnergetics reporting units (AMK Technical Services has no recorded goodwill). For NobelClad, which has been our core business segment for more than 40 years, we performed a qualitative assessment to test this reporting unit’s goodwill for impairment. The results of this qualitative assessment indicated that the fair market value of this reporting unit substantially exceeded its
carrying value. For our DynaEnergetics reporting unit, which was initially established through a 2007 acquisition and has grown through subsequent acquisitions completed in 2009, 2010 and 2012, we elected to perform quantitative testing. Our quantitative testing utilized both an income approach (discounted cash flows) and a market approach consisting of a comparable public company earnings multiples methodology to estimate the fair value of this reporting unit. To determine the reasonableness of the estimated fair values, we carefully reviewed our assumptions to ensure that neither the income approach nor the market approach provided a significantly different valuation. The results of the foregoing quantitative assessment for our DynaEnergetics reporting unit indicated that its fair market value substantially exceeded its carrying value.
If the carrying value were to exceed the fair value for any reporting unit, we would then calculate and compare the estimated implied fair value of goodwill to the carrying amount of goodwill and record an impairment charge for any excess of carrying value over implied fair value. Our most recent impairment testing has resulted in a determination that the carrying value of goodwill did not exceed fair value and, consequently, that our goodwill was not impaired. A future impairment is possible and could occur if (i) operating results underperform what we have estimated or (ii) additional volatility of the capital markets or other factors should cause us to raise the discount rate percentage utilized in our discounted cash flow analysis or decrease the multiples utilized in our market-based analysis. While we believe our most recent estimates were appropriate based on our view of then current business trends, no assurance can be provided that impairment charges will not be required in the future.
Finite-lived intangible assets are tested for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. We compare the expected undiscounted future operating cash flows associated with these finite-lived assets to their respective carrying values to determine if they are fully recoverable. If the expected future operating cash flows of an asset are not sufficient to recover the carrying value, we estimate the fair value of the asset. Impairment is recognized when the carrying amount of the asset is not recoverable and when the carrying value exceeds fair value. The projected cash flows require several assumptions related to, among other things, relevant market factors, revenue growth, if any, and operating margins.
Income taxes
We are required to recognize deferred tax assets and deferred tax liabilities for the expected future income tax consequences of transactions that have been included in our financial statements but not our tax returns. Deferred tax assets and liabilities are determined based on income tax credits and on the temporary differences between the Consolidated Financial Statement basis and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We routinely evaluate deferred tax assets to determine if they will, more likely than not, be recovered from future projected taxable income; if not, we record an appropriate valuation allowance.
Off Balance Sheet Arrangements
We have no obligations, assets or liabilities other than those appearing or disclosed in our financial statements forming part of this annual report; no trading activities involving non-exchange traded contracts accounted for at fair value; and no relationships and transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties.
Recent Accounting Pronouncements
Please refer to
Note 2
to our Consolidated Financial Statements in this annual report for a discussion of recent accounting pronouncements and their anticipated effect on our business.