| DYNAMIC MATERIALS CORP ITEM 1A Risk Factors Risk Factors Related to Our Industry Despite substantial growth in recent years in our existing markets, growth in such markets may not continue at the same rate indefinitely |
| However, the explosion-weld cladding market is dependent upon sales of products for use by customers in a limited number of heavy industries, including upstream oil and gas, oil refinery, petrochemicals, hydrometallurgy, aluminum production, shipbuilding, power generation and industrial refrigeration |
| These industries tend to be cyclical in nature, and there can be no assurance that the construction and other needs of those industries for our products will continue to grow at current rates |
| An economic slowdown in one or all of these industries, whether due to cyclicality or other factors, could impact capital expenditures within the industry |
| If demand from such industries were to decline or even grow less quickly, our sales would be expected to be affected proportionately, which may have a material adverse effect on our business, financial condition and results of operations |
| There is a limited availability of sites suitable for cladding operations |
| Our cladding process involves the detonation of large amounts of explosives |
| As a result, the sites where we perform cladding must meet certain criteria, including lack of proximity to a densely populated area, the specific geological characteristics of the site, and the ability to comply with local noise and vibration abatement regulations in conducting the process |
| The process of identifying suitable sites and obtaining permits for using the sites from local government agencies can be time-consuming and may not be successful |
| In addition, we could experience difficulty in obtaining or renewing permits because of resistance from residents in the vicinity of proposed sites |
| The failure to obtain required governmental approvals or permits could limit our ability to expand our cladding business in the future, and the failure to maintain such permits would have a material adverse effect on our business, financial condition and results of operations |
| Certain raw materials we use are subject to supply shortages due to general economic conditions |
| Although we generally use standard metals and other materials in manufacturing our products, certain materials such as specific grades of carbon steel, titanium, zirconium and nickel can be subject to supply shortages due to general economic conditions or problems with individual suppliers |
| While we seek to maintain sufficient alternative supply sources for these materials, there can be no assurance that we will always be able to obtain sufficient supplies or obtain supplies at acceptable prices without production delays, additional costs or a loss of product quality |
| If we were to fail to obtain sufficient supplies on a timely basis or at acceptable prices, such loss or failure could have a material adverse effect on our business, financial condition and results of operations |
| Certain raw materials we use are subject to price increases due to general economic conditions |
| The markets for certain metals and other raw materials used in our business are highly variable and are characterized by periods of increasing prices |
| We generally do not hedge commodity prices or enter into forward supply contracts, and instead we endeavor to pass along price variations to our customers |
| We may see a general downturn in business if the price of raw materials increases enough for our customers to delay planned projects or use alternative materials to complete their projects |
| 11 ______________________________________________________________________ We are subject to extensive government regulation and failure to comply could subject us to future liabilities and could adversely affect our ability to conduct or to expand our business |
| We are subject to extensive government regulation in the United States, France and Sweden, including guidelines and regulations for the safe manufacture, handling, transport and storage of explosives provided by the US Bureau of Alcohol, Tobacco and Firearms, the Federal Motor Carrier Safety Regulations set forth by the US Department of Transportation and the Safety Library Publications of the Institute of Makers of Explosive and similar guidelines of their European counterparts |
| In Sweden, the purchase, transport, storage and use of explosives is governed by a permit issued by the Police Authority of the County of Varmland |
| (In France, the manufacture and transportation of explosives is subcontracted to Nobel Explosifs France, an affiliate of SNPE, which is responsible for compliance with regulations established by various State and local governmental agencies concerning the handling and transportation of explosives |
| ) We must comply with licensing and regulations for the purchase, transport, storage, manufacture, handling and use of explosives |
| In addition, while our shooting facilities in France and Sweden are located outdoors, our shooting facility in Pennsylvania is located in a mine, which subjects us to certain regulations and oversight of governmental agencies that oversee mines |
| We are also subject to extensive environmental and occupational safety regulation, as described below under “ – Liabilities under environmental and safety laws could result in restrictions or prohibitions on our facilities, substantial civil or criminal liabilities, as well as the assessment of strict liability and/or joint and several liability” and “ – The use of explosives subjects us to additional regulation, and any accidents or injuries could subject us to significant liabilities |
| ” The export of certain products from the United States is restricted by US export regulations |
| These regulations generally prevent the export of products that could be used by certain end-users, such as those in the nuclear or biochemical industries |
| In addition, the use and handling of explosives may be subject to increased regulation due to heightened concerns about security and terrorism |
| Such regulations could restrict our ability to access and use explosives and increase costs associated with the use of such explosives, which could have a material adverse effect on our business, financial condition and results of operations |
| Any failure to comply with current and future regulations in the US and Europe could subject us to future liabilities |
| In addition, such regulations could restrict our ability to expand our facilities, construct new facilities, compete in certain markets or could require us to incur other significant expenses in order to maintain compliance |
| Accordingly, our business, results of operations or financial condition could be adversely affected by our non-compliance with applicable regulations, by any significant limitations on our business as a result of our inability to comply with applicable regulations, or by any requirement that we spend substantial amounts of capital to comply with such regulations |
| Liabilities under environmental and safety laws could result in restrictions or prohibitions on our facilities, substantial civil or criminal liabilities, as well as the assessment of strict liability and/or joint and several liability |
| We are subject to extensive environmental and safety regulation in the United States and Europe |
| Any failure to comply with current and future environmental and safety regulations could subject us to significant liabilities |
| In particular, any failure to control the discharge of hazardous materials and wastes could subject us to significant liabilities, which could adversely affect our business, results of operations or financial condition |
| We and all our activities in the United States are subject to federal, state and local environmental and safety laws and regulations, including but not limited to, noise abatement and air emissions regulations, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, regulations issued and laws enforced by the labor and employment departments of the US and the states in which we conduct business, the US Department of Commerce, the US Environmental Protection Agency and by state and county health and safety agencies |
| In France, we and all our activities are subject to state environmental and safety regulations established by various departments of the French Government, including the Ministry of Labor, the Ministry of Ecology and the Ministry of Industry, and to local environmental and safety regulations and administrative procedures established by DRIRE (Direction Regionale de l’Industrie, de la Recherche et de l’Environnement) and the Prefecture des Pyrenees Orientales |
| In Sweden, we and all our activities are subject to various safety and environmental regulations, including those established by the Work Environment Authority of Sweden in its Work Environment Act |
| In addition, our shooting operations in France and Sweden may be particularly vulnerable to noise abatement regulations because these operations are primarily conducted outdoors |
| Changes in, or compliance with, environmental and safety regulations could inhibit or interrupt our operations, or require modifications to our facilities |
| Any actual or alleged violations of environmental and safety laws could result in restrictions or prohibitions on our facilities, substantial civil or criminal sanctions, as well as the assessment of strict liability and/or joint and several liability under applicable law |
| Under certain environmental laws, we could be held responsible for all of the costs relating to any contamination at our or our predecessor’s past or present facilities and at third party waste disposal sites |
| We could also be held liable for any and all consequences arising out of human exposure to hazardous substances or other environmental damage |
| Accordingly, environmental, health or safety matters may result in significant unanticipated costs or liabilities |
| The use of explosives subjects us to additional regulation, and any accidents or injuries could subject us to significant liabilities |
| Our operations involve the detonation of large amounts of explosives |
| As a result, we are required to use specific safety precautions under US Occupational Safety and Health Administration guidelines and guidelines of similar entities in France and Sweden |
| These include precautions which must be taken to protect employees from exposure to sound and ground vibration or falling debris associated with the detonation of explosives |
| There is a risk that an accident or death could occur in one of our facilities |
| Any accident could result in significant manufacturing delays, disruption of operations or claims for damages resulting from death or injuries, which could result in decreased sales and increased expenses |
| To date, we have not incurred any significant delays, disruptions or claims resulting from accidents at our facilities |
| The potential liability resulting from any accident or death, to the extent not covered by insurance, may require us to use other funds to satisfy our obligations and could cause our business to suffer |
| See “ – Our use of explosives is an inherently dangerous activity that could lead to temporary or permanent closure of our shooting sites” below |
| 12 ______________________________________________________________________ Our use of explosives is an inherently dangerous activity that could lead to temporary or permanent closure of our shooting sites |
| We use a large amount of explosives in connection with the creation of clad metals and the shock synthesis of diamonds |
| The use of explosives is an inherently dangerous activity |
| Explosions, even if occurring as intended, can lead to damage to the shooting facility or to equipment used at the facility or injury to persons at the facility |
| If a person were injured or killed in connection with such explosives, or if equipment at the mine or either of the outdoor locations were damaged or destroyed, we might be required to suspend our operations for a period of time while an investigation is undertaken or repairs are made |
| In addition, if the mine were seriously damaged, we might not be able to locate a suitable replacement site to continue our operations |
| The manufacture of industrial grade diamonds utilizing explosive shock synthesis requires the use of a large quantity of explosives |
| Although this activity only represents approximately 1prca of revenues, we are required to provide this service pursuant to a contractual relationship with the landlord of our shooting site in Dunbar, Pennsylvania |
| While the production of diamonds increases the risk of damage to the mine, we are required to continue this activity, despite its low contribution to revenues |
| Risk Factors Related to Dynamic Materials Corporation Our operating results fluctuate from quarter to quarter |
| We have experienced, and expect to continue to experience, fluctuations in annual and quarterly operating results caused by various factors, including the timing and size of orders by major customers, customer inventory levels, shifts in product mix, acquisitions and divestitures, and general economic conditions |
| The upstream oil and gas, oil refinery, petrochemicals, hydrometallurgy, aluminum production, shipbuilding, power generation, industrial refrigeration and other diversified industries to which we sell our products are, to varying degrees, cyclical and tend to decline in response to overall declines in industrial production |
| As a result, our business is also cyclical, and the demand for our products by these customers depends, in part, on overall levels of industrial production |
| Any future material weakness in demand in any of these industries could materially reduce our revenues and profitability |
| In addition, the threat of terrorism and other geopolitical uncertainty could have a negative impact on the global economy, the industries we serve and our operating results |
| We typically do not obtain long-term volume purchase contracts from our customers |
| Quarterly sales and operating results, therefore, depend on the volume and timing of backlogs as well as bookings received during the quarter |
| Significant portions of our operating expenses are fixed, and planned expenditures are based primarily on sales forecasts and product development programs |
| If sales do not meet our expectations in any given period, the adverse impact on operating results may be magnified by our inability to adjust operating expenses sufficiently or quickly enough to compensate for such a shortfall |
| Results of operations in any period should not be considered indicative of the results to be expected for any future period |
| Fluctuations in operating results may also result in fluctuations in the price of our common stock |
| See “Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| ” Customers have the right to change orders until products are completed |
| Customers have the right to change orders after they have been placed |
| If orders are changed, the extra expenses associated with the change will be passed on to the customer |
| However, because a change in an order may delay completion of the project, recognition of income for the project may also be delayed |
| There is no assurance that we will continue to compete successfully against other clad and welding companies |
| Our explosion-welded clad products compete with explosion-welded clad products made by other manufacturers in the clad metal business located throughout the world and with clad products manufactured using other technologies |
| Our combined North American and European operations typically supply explosion-welded clad to the worldwide market |
| There are currently no other significant North American based explosion-welded clad suppliers |
| We focus strongly on reliability, product quality, on-time delivery performance, and low cost manufacturing to minimize the potential of future competitive threats |
| However, there is no guarantee we will be able to maintain our competitive position |
| Explosion-welded clad products also compete with those manufactured by rollbond and weld overlay cladding processes |
| In rollbond technology, the clad and base metal are bonded together during a hot rolling process in which slab is converted to plate |
| In weld overlay, which is typically performed by our fabricator customers, the cladding layer is deposited on the base metal through a fusion welding process |
| The technical and commercial niches of each cladding 13 ______________________________________________________________________ process are well understood within the industry and vary from one world market location to another |
| Our products compete with weld overlay clad products manufactured by a significant number of our fabricator customers |
| AMK Welding competes principally with other domestic companies that provide welding services to the aircraft engine and power generation industries |
| Some of these competitors have established positions in the market and long standing relationships with customers |
| To remain competitive, we must continue to develop and provide technologically advanced welding, heat-treat and inspection services, maintain quality levels, offer flexible delivery schedules, and compete favorably on the basis of price |
| We compete against other welding companies on the basis of quality, performance and cost |
| There can be no assurance that we will continue to compete successfully against these companies |
| We are dependent on a relatively small number of customers for a significant portion of our net sales |
| A significant portion of our net sales is derived from a relatively small number of customers |
| We expect to continue to depend upon our principal customers for a significant portion of our sales, although there can be no assurance that our principal customers will continue to purchase products and services from us at current levels, if at all |
| The loss of one or more major customers or a change in their buying patterns could have a material adverse effect on our business, financial condition and results of operations |
| In past years, the majority of DMC Clad’s revenues have been derived from customers in the upstream oil and gas, oil refinery, petrochemicals, hydrometallurgy, aluminum production, shipbuilding, power generation and industrial refrigeration industries and the majority of AMK Welding’s revenues have been derived from customers in the aircraft engine and power generation industries |
| Economic downturns in these industries could have a material adverse effect on our business, financial condition and results of operations |
| AMK Welding, which contributes approximately 5prca to our total sales, continues to rely primarily on one customer for the majority of its sales |
| This customer and AMK Welding have entered into a long-term supply agreement for certain of the services provided to this customer |
| Any termination of or significant reduction in AMK Welding’s business relationship with this customer could have a material adverse effect on AMK Welding’s business and financial condition |
| Failure to attract and retain key personnel could adversely affect our current operations |
| Our continued success depends to a large extent upon the efforts and abilities of key managerial and technical employees |
| The loss of services of certain of these key personnel could have a material adverse effect on our business, results of operations and financial condition |
| There can be no assurance that we will be able to attract and retain such individuals on acceptable terms, if at all, and the failure to do so could have a material adverse effect on our business, financial condition and results of operations |
| Work stoppages and other labor relations matters may make it substantially more difficult or expensive for us to produce our products, which could result in decreased sales or increased costs, either of which would negatively impact our financial condition and results of operations |
| We are subject to the risk of work stoppages and other labor relations matters, particularly in France and Sweden, where some of our employees are unionized |
| The employees at our US facility, where the majority of products are manufactured, are not unionized |
| While we believe our relations with employees are satisfactory, any prolonged work stoppage or strike at any one of our principal facilities could have a negative impact on our business, financial condition or results of operations |
| We most recently experienced a one-week work stoppage in 2005 at our facility in France |
| This strike did not materially impact operations, but we cannot assure you that a work stoppage at one or more of our facilities will not materially impair our ability to operate our business in the future |
| The unsuccessful integration of a business we acquire could have a material adverse effect on operating results |
| We continue to consider possible acquisitions as part of our growth strategy |
| Any potential acquisition may require additional debt or equity financing, resulting in additional leverage and dilution to existing stockholders |
| We 14 ______________________________________________________________________ cannot assure you that any future acquisition will be consummated, or that if consummated that we will be able to integrate such acquisition successfully without a material adverse effect on our financial condition or results of operations |
| SNPE has a significant influence on our company and could take actions that may not be consistent with the desires of other stockholders |
| As of December 31, 2005, SNPE, Inc, an affiliate of Groupe SNPE of France, controlled more than 50prca of our outstanding common stock |
| SNPE has significant influence over our management and affairs and matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions |
| This concentration of power may have the effect of actions being taken or not taken according to the desires of SNPE SNPE has indicated that it is exploring the sale of our common stock |
| On February 28, 2006, SNPE filed a Schedule 13D/A with the Securities and Exchange Commission in which it stated that it was exploring the sale of up to all of its shares of our common stock in an underwritten secondary offering, and that it was evaluating the opportunity and has engaged in discussions with us and potential underwriters in connection with such a sale |
| SNPE further disclosed that it intended to relinquish control over us and fully liquidate its equity interest in connection with such an offering |
| While there can be no assurance that such a sale will occur, sales of substantial amounts of our common stock in the open market, or the perception that those sales could occur, could adversely affect prevailing market prices for our common stock and could impair our ability to raise capital in the future through the sale of our equity securities |