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| DDIC > SEC Filings for DDIC > Form 10-Q on 29-Oct-2008 | All Recent SEC Filings |
29-Oct-2008
Quarterly Report
The following is a discussion of the financial condition and results of operations for our fiscal quarter and year to date period ended September 30, 2008. 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, 2007.
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 Item 1A in our most recently filed 10-K 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; 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 printed circuit board engineering and manufacturing services. We specialize in engineering and fabricating complex multi-layer printed circuit boards ("PCBs" or "boards") on a quick-turn basis, with lead times as short as 24 hours. We have approximately 1,000 customers in various market segments including communications and networking, military and aerospace, medical, test and industrial instruments, high-end computing, and high-durability commercial markets. With such a broad customer base and approximately 50 new designs tooled per day, we have accumulated significant process and engineering expertise. Our strength is developing innovative, high-performance solutions for customers during the engineering, test and launch phases of their new electronic product development. Our entire organization is focused on rapidly and reliably filling complex customer orders and building long-term customer relationships. Our engineering capabilities and manufacturing facilities in the United States and Canada 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. The level of board complexity is determined by several characteristics, including size, layer count, density, materials, functionality and design features. High-end commercial equipment manufacturers require complex PCBs fabricated with higher layer counts, greater density, and advanced materials, and demand highly complex and sophisticated manufacturing capabilities. We see several significant trends within the industry, including:
• Increasing customer demand for quick-turn production. Rapid advances in technology are significantly shortening product life-cycles and placing increased pressure on original equipment manufacturers ("OEMs") to develop new products in shorter periods of time. In response to these pressures, OEMs look to printed circuit board manufacturers that can offer design and engineering support and quick-turn manufacturing to reduce time-to-market.
• Shifting of high volume production to Asia. Asian-based manufacturers of PCBs are capitalizing on their lower labor costs and are increasing their production and market share, for example, in high-volume consumer electronics applications, such as personal computers and cell phones. Asian-based manufacturers have generally been unable to meet the lead time requirements for the production of complex boards on a quick-turn basis.
Results of Operations for the Three Months Ended September 30, 2008 Compared to the Three Months Ended September 30, 2007
The following tables set forth select data from our Condensed Consolidated Statements of Operations (in thousands):
Three Months Ended
September 30, September 30,
2008 2007 $ Change % Change
Net sales $ 49,285 $ 43,290 $ 5,995 13.8 %
Cost of goods sold 39,058 35,562 3,496 9.8 %
Gross profit 10,227 7,728 2,499 32.3 %
Gross profit as a percentage of net sales 20.8 % 17.9 %
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Net Sales
Net sales increased $6.0 million, or 13.8%, to $49.3 million for the third quarter of 2008, from $43.3 million for the same period in 2007. The increase in net sales was primarily a result of strengthening and extending our sales team and geographic coverage, particularly in the military/aerospace market segment, as well as higher average pricing related to the mix of products shipped.
Gross Profit
Gross profit for the third quarter of 2008 was $10.2 million, or 20.8% of net sales, compared to $7.7 million, or 17.9% of net sales, for the same period in 2007. The increase from the prior year was primarily a function of the higher sales volume and improved unit pricing relative to the product mix shift towards higher technology products, coupled with improved cost management.
Non-cash Compensation
Three Months Ended
September 30, September 30,
2008 2007
Non-cash compensation:
Cost of goods sold $ 127 $ 92
Sales and marketing expenses 70 45
General and administrative expenses 456 411
Total non-cash compensation $ 653 $ 548
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Non-cash compensation expense related to stock awards was recorded in accordance with the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123R, Share-Based Payment ("SFAS 123R").
Sales and Marketing Expenses
Three Months Ended
September 30, September 30,
2008 2007 $ Change % Change
Sales and marketing expenses $ 3,230 $ 2,976 $ 254 8.5 %
Percentage of net sales 6.6 % 6.9 %
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Sales and marketing expenses increased on an absolute dollar basis by $254,000, or 8.5%, to $3.2 million, or 6.6% of net sales, for the third quarter of 2008, from $3.0 million, or 6.9% of net sales, for the third quarter of 2007. The dollar increase is primarily due to higher compensation costs. The reduction in sales and marketing expenses as a percentage of net sales is due to the operating leverage that results from higher sales levels and to a more efficient sales strategy related to the mix of direct and indirect sales resources impacting commissions expense implemented during 2007.
General and Administrative Expenses
Three Months Ended
September 30, September 30,
2008 2007 $ Change % Change
General and administrative expenses $ 3,508 $ 3,471 $ 37 1.1 %
Percentage of net sales 7.1 % 8.0 %
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Total general and administrative expenses were essentially flat at $3.5 million in the third quarter of 2008 and 2007. There were cost reductions in Sarbanes-Oxley costs, consultants, and communications expense, offset somewhat by increased management incentives, non-cash compensation, and depreciation expense. However, as a percentage of net sales, general and administrative expenses decreased to 7.1% in the third quarter of 2008 from 8.0% for the same period in 2007. This decrease was primarily attributable to the improved operating leverage of our fixed costs across higher net sales.
Amortization of Intangible Assets
Amortization of intangible assets relates to customer relationships identified during the allocation of the reorganized value of the Company subsequent to our emergence from bankruptcy in 2003 and to customer relationships identified in connection with the Sovereign acquisition in October 2006. These intangible assets are being amortized using the straight-line method over an estimated useful life of five years resulting in $1.3 million of amortization expense per quarter through November 2008, when the customer relationships identified in the bankruptcy become fully amortized, and thereafter $190,000 per quarter through October 2011.
Restructuring and Other Related Charges
The restructuring and other related charges in the third quarter of 2008 and 2007 are a result of ongoing fees and expenses related to litigation with the landlord of two buildings in connection with the closing of our Arizona facility in 2005. We completed remediation of the Arizona facility (encompassing three separate buildings) and exited the last building in the third quarter of 2006. A ruling was issued on July 1, 2008 awarding the landlord $52,000 and this amount was accrued for in the second quarter of 2008. We do not expect to incur any significant future costs related to the Arizona facility closure or associated litigation.
Interest Expense
Interest expense consists of amortization of debt issuance costs, fees related to our revolving credit facility, interest on our note payable on our Ohio facility, and interest expense associated with long-term leases. Interest expense decreased by $18,000 to $192,000 for the third quarter of 2008 from $210,000 for the same period in 2007. The decrease is primarily related to a reduction in interest associated with long-term leases resulting from an expired lease and a reduction in interest on our note payable as a result of a declining principal balance.
Interest Income
Interest income consists of interest earned on our cash balances and decreased by $93,000 to $96,000 for the third quarter of 2008 from $189,000 for the third quarter of 2007. Although the Company's average cash balances during both the third quarter of 2008 and 2007 were relatively consistent, reduced interest rates resulted in an overall reduction in interest income.
Other Expense (Income), Net
Net other expense (income) consists of foreign exchange transaction gains or losses related to our Canadian operations and other miscellaneous non-operating items. For the third quarter of 2008, net other income was $54,000 compared to net other expense of $59,000 in the third quarter of 2007 and was primarily due to the change in currency exchange rates between the U.S. and Canadian dollar.
Income Tax Expense
For the third quarter of 2008, income tax expense was $513,000 compared to an income tax benefit of $268,000 in the prior year comparable period. The increase in tax expense is primarily due to an increase in U.S. and Canadian taxable income for the three months ended September 30, 2008 compared to the same period in 2007.
Under the fresh-start accounting rules related to our emergence from bankruptcy in 2003, any reduction of a U.S. valuation allowance that is related to net deferred tax assets that were in existence as of applying fresh-start accounting will be recognized as a credit to goodwill. As a result, there is no U.S. tax benefit for book purposes even though the net operating loss carryforwards result in a reduction of cash taxes paid by us.
Results of Operations for the Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007
The following tables set forth select data from our Condensed Consolidated Statements of Operations (in thousands):
Nine Months Ended
September 30, September 30,
2008 2007 $ Change % Change
Net sales $ 147,825 $ 135,870 $ 11,955 8.8 %
Cost of goods sold 117,482 108,886 8,596 7.9 %
Gross profit 30,343 26,984 3,359 12.4 %
Gross profit as a percentage of net sales 20.5 % 19.9 %
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Net Sales
Net sales increased $12.0 million, or 8.8%, to $147.8 million for the nine months ended September 30, 2008, compared to $135.9 million for the same period in 2007. The increase in net sales was primarily due to strengthening our sales efforts as well as to improved average pricing relative to the product mix shift towards higher technology products.
Gross Profit
Gross profit for the nine months ended September 30, 2008 was $30.3 million, or 20.5% of net sales, compared to $27.0 million, or 19.9% of net sales, for the same period in 2007. The increase in the gross profit percentage from the prior year was primarily a function of higher sales volume, improved average pricing related to the mix of product shipped, and improved operational performance and cost reduction initiatives.
Non-cash Compensation
Nine Months Ended
September 30, September 30,
2008 2007
Non-cash compensation:
Cost of goods sold $ 368 $ 261
Sales and marketing expenses 210 51
General and administrative expenses 1,376 1,386
Total non-cash compensation $ 1,954 $ 1,698
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Non-cash compensation expense related to stock awards was recorded in accordance with the fair value recognition provisions of SFAS 123R.
Sales and Marketing Expenses
Nine Months Ended
September 30, September 30,
2008 2007 $ Change % Change
Sales and marketing expenses $ 9,698 $ 9,428 $ 270 2.9 %
Percentage of net sales 6.6 % 6.9 %
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Total sales and marketing expenses increased on an absolute dollar basis by $270,000 to $9.7 million for the nine months ended September 30, 2008 from $9.4 million for the same period in 2007, primarily due to higher wage and non-cash compensation expense. However, as a percentage of net sales, sales and marketing expenses decreased to 6.6% for the first nine months of 2008 from 6.9% for the same period in 2007, primarily due to our more efficient sales distribution strategy implemented during 2007 resulting in lower commissions expense as a percentage of sales.
General and Administrative Expenses
Nine Months Ended
September 30, September 30,
2008 2007 $ Change % Change
General and administrative expenses $ 10,678 $ 11,174 $ (496 ) (4.4 %)
Percentage of net sales 7.2 % 8.2 %
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Total general and administrative expenses decreased 4.4% to $10.7 million, or 7.2% of net sales, for the nine months ended September 30, 2008, from $11.2 million, or 8.2% of net sales, for the same period in 2007. The decrease in general and administrative expenses was primarily attributable to reductions in several cost categories including compensation costs, Sarbanes-Oxley consulting fees, communications expense, corporate insurance, consulting, and bad debt expense, offset by higher depreciation and management incentives expense.
Amortization of Intangible Assets
Amortization of intangible assets relates to customer relationships identified during the allocation of the reorganized value of the Company subsequent to our emergence from bankruptcy in 2003 and to customer relationships identified in connection with the Sovereign acquisition in October 2006. These intangible assets are being amortized using the straight-line method over an estimated useful life of five years resulting in $1.3 million of amortization expense per quarter through November 2008, when the customer relationships identified in the bankruptcy become fully amortized, and thereafter $190,000 per quarter through October 2011.
Restructuring and Other Related Charges
The restructuring and other related charges in the first nine months of 2008 and 2007 are a result of the ongoing fees and expenses related to litigation with the landlord of two buildings in connection with the closing of our Arizona facility in 2005. We completed remediation of the Arizona facility (encompassing three separate buildings) and exited the last building in the third quarter of 2006. A ruling was issued on July 1, 2008 awarding the landlord $52,000 and this amount was accrued for in the second quarter of 2008. We do not expect to incur any significant future costs related to the Arizona facility closure or associated litigation.
Interest Expense
Interest expense consists of amortization of debt issuance costs, fees related to our Credit Facility, interest on the note payable on our Ohio facility, and interest expense associated with long-term leases. Interest expense decreased to $578,000 for the nine months ended September 30, 2008 from $910,000 for the same period in 2007. The decrease is primarily related to a reduction in debt issuance costs amortization related to the renewal of the revolving credit facility in March 2007, a decrease in interest associated with long-term leases resulting from an expired lease, and a reduction in interest on our note payable as a result of a declining principal balance.
Interest Income
Interest income consists of interest earned on our cash balances and decreased to $328,000 during the first nine months of 2008 from $438,000 during the same period in 2007. Although the Company maintained higher average cash balances during the first nine months of 2008 compared to the same period in 2007, reduced interest rates resulted in an overall reduction in interest income.
Other Expense (Income), Net
Net other expense (income) consists of foreign exchange transaction gains or losses related to our Canadian operations and other miscellaneous non-operating items. For the nine months ended September 30, 2008, net other income was $167,000 compared to net other expense of $174,000 for the same period in 2007 and was primarily due to the change in currency exchange rates between the U.S. and Canadian dollar.
Income Tax Expense
For the nine months ended September 30, 2008, income tax expense was $1.8 million compared to $412,000 in the prior year comparable period. This year to date increase was primarily related to an increase in U.S. and Canadian taxable income for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.
Liquidity and Capital Resources
September 30, December 31,
2008 2007
(Dollars in thousands)
Working capital $ 35,575 $ 40,046
Current ratio (current assets to current liabilities) 2.3 : 1.0 2.9 : 1.0
Cash and cash equivalents $ 17,061 $ 20,445
Short term borrowings $ - $ -
Long term debt, including current portion $ 1,577 $ 1,760
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As of September 30, 2008, we had total cash and cash equivalents of $17.1 million and no amounts outstanding on our revolving credit facility. 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. The decrease in our current ratio and cash and cash equivalents from December 31, 2007 was primarily due to repurchases of our common stock totaling $14.4 million during the nine months ended September 30, 2008, partially offset by cash generated from operations.
In August 2007, our Board of Directors (the "Board") authorized a common stock repurchase program of up to 1,100,000 shares of our common stock in the open market at prevailing market prices or in privately-negotiated transactions. Subsequent to its initial authorization, the Board increased the number of shares authorized to be repurchased in February, May and August 2008, by 400,000, 500,000 and 1,000,000 shares, respectively, bringing the total number of shares currently authorized to 3,000,000 shares. We repurchased 2,642,533 shares during the nine months ended September 30, 2008 at an average price per share of $5.45 excluding commissions. As of September 30, 2008, we had repurchased a total of 2,946,986 shares since the inception of the program in August 2007, leaving 53,014 shares authorized to be repurchased. We will continue to review the value in repurchasing shares after considering our cash levels and operating needs as well as other avenues for our cash that could create greater shareholder value.
Our principal sources of liquidity to fund ongoing operations have been existing cash on hand, cash generated from operations, and our asset-based revolving Credit Facility, along with proceeds from various equity offerings and asset sales. We believe that our current cash balance, in combination with net cash expected to be generated from operations and the availability of our Credit Facility, will fund ongoing operations for at least the next twelve months. In the event that we require additional funding during the next twelve months, we will attempt to raise capital through either debt or equity arrangements. We cannot provide assurance that the required capital would be available on acceptable terms, if at all, or that any financing activity would not be dilutive to our current stockholders.
Revolving Credit Facility
On March 30, 2007, we amended our revolving credit facility (as amended, the "Credit Facility") with General Electric Capital Corporation acting as agent, to extend the maturity date to March 30, 2010 and change the maximum revolving credit line to $25.0 million. Availability under the Credit Facility is based on various liquidity and borrowing base tests including our eligible accounts receivable and inventories. Our wholly-owned operating subsidiaries are the borrowers under the Credit Facility. The Credit Facility is guaranteed by DDi Corp. and all of its subsidiaries that are not borrowers under the Credit Facility. The Credit Facility is secured by the accounts receivable, inventories and other tangible and intangible personal property (other than property, plant and equipment) of the borrowers, and by a pledge of the stock of our subsidiaries. Revolving credit advances under the Credit Facility bear interest at the prime rate (5.0% at September 30, 2008). We can elect to have any new revolving credit advances, or convert any outstanding revolving credit advances, in excess of $1.0 million and in increments of $500,000, made as a LIBOR-based loan with a term of one, two, or three months at a rate of LIBOR plus 1.5%. The Credit Facility contains customary covenants including financial covenants . . .
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