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** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C.  20549**

 

**Form 10-Q**

 

**(Mark One)**

 

| **x** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934** |
|-------|------------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended June 30, 2008**

 

**OR**

 

| **o** | **TRANSITION REPORT UNDER  SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934** |
|-------|------------------------------------------------------------------------------------------|

** **

**FOR THE TRANSITION PERIODFROM                   TO                   .**

 

**Commissionfile number 001-14775**

 

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**DYNAMICMATERIALS CORPORATION**

(Exact name ofRegistrant as Specified in its Charter)

 

| **Delaware**                              | ** ** | **84-0608431**                        |
|-------------------------------------------|------------|---------------------------------------|
| (State  of Incorporation or Organization) |       | (I.R.S.  Employer Identification No.) |

 

**5405Spine Road, Boulder, Colorado 80301**

(Address of principalexecutive offices, including zip code)

 

**(303) 665-5700**

(Registrant’s telephonenumber, including area code)

 

Indicate by check markwhether the registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes  x     No   o

 

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

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 underthe Act).    Yes    o    No    x

 

The number of shares ofCommon Stock outstanding was 12,640,027 as of July 31, 2008.

 

 

 

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CAUTIONARY NOTE ABOUT FORWARD-LOOKINGSTATEMENTS

 

Thisquarterly report on Form 10-Q contains “forward-looking statements” withinthe meaning of section 27A of the Securities Act of 1933 and section 21E of theSecurities Exchange Act of 1934. In particular, we direct your attention to Part I,Item 1- Financial Statements, Item 2 - Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and Item 3 - Quantitative andQualitative Disclosures About Market Risk and Part II, Item 1A – RiskFactors. We intend the forward-looking statements throughout this quarterlyreport on Form 10-Q and the information incorporated by reference hereinto be covered by the safe harbor provisions for forward-looking statements.Statements contained in this report which are not historical facts areforward-looking statements that involve risks and uncertainties that couldcause actual results to differ materially from projected results. Allprojections and statements regarding our expected financial position andoperating results, our business strategy, our financing plans and the outcomeof any contingencies are forward-looking statements. These statements cansometimes be identified by our use of forward-looking words such as “may”, “believe”,“plan”, “anticipate”, “estimate”, “expect”, “intend” and other phrases ofsimilar meaning. The forward-looking information is based on informationavailable as of the date of this quarterly report and on numerous assumptionsand developments that are not within our control. Although we believe that ourexpectations as expressed in these forward-looking statements are reasonable,we cannot assure you that our expectations will turn out to be correct. Factorsthat could cause actual results to differ materially include, but are notlimited to, the following: the ability to obtain new contracts at attractiveprices; the size and timing of customer orders and shipment; fluctuations incustomer demand; fluctuations in foreign currencies; competitive factors; thetimely completion of contracts; the timing and size of expenditures; the timelyreceipt of government approvals and permits; the price and availability ofmetal and other raw material; the adequacy of local labor supplies at ourfacilities; current or future limits on manufacturing capacity at our variousoperations; the availability and cost of funds; and general economicconditions, both domestic and foreign, impacting our business and the businessof the end-market users we serve. Readers are cautioned not to place unduereliance on these forward-looking statements, which reflect management’sanalysis only as of the date hereof. We undertake no obligation to publiclyrelease the results of any revision to these forward-looking statements thatmay be made to reflect events or circumstances after the date hereof or toreflect the occurrence of unanticipated events.

 

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**INDEX**

 
| PART I -  FINANCIAL INFORMATION                                                                 |
|------------------------------------------------------------------------------------------------------|
|                                                                                                 |
| Item  1 - Condensed Consolidated Financial Statements                                           | 4 |
|                                                                                                 |   |
|                                                                                                 | Consolidated  Balance Sheets as of June 30, 2008 (unaudited) and December 31,  2007 | 5 |
|                                                                                                 |   |   |
|                                                                                                 | Consolidated  Statements of Operations for the three and six months ended June 30,  2008 and 2007 (unaudited) | 6 |
|                                                                                                 |   |   |
|                                                                                                 | Consolidated Statement of Stockholders’ Equity for the  six months ended June 30, 2008 (unaudited) | 7 |
|                                                                                                 |   |   |
|                                                                                                 | Consolidated Statements of Cash Flows for the six  months ended June 30, 2008 and 2007 (unaudited) | 8 |
|                                                                                                 |   |   |
|                                                                                                 | Notes to Condensed Consolidated Financial Statements  (unaudited) | 10 |
|                                                                                                 |   |   |
| Item 2 - Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 22 |
|                                                                                                 |   |
| Item 3 - Quantitative and Qualitative Disclosures  about Market Risk                                 | 35 |
|                                                                                                 |   |
| Item 4 - Controls and Procedures                                                                     | 35 |
|                                                                                                 |   |
| PART II  - OTHER INFORMATION                                                                    |
|                                                                                                 |
| Item  1 - Legal Proceedings                                                                          | 37 |
|                                                                                                 |   |
| Item  1A - Risk Factors                                                                              | 37 |
|                                                                                                 |   |
| Item 2 - Unregistered Sales of Equity Securities and  Use of Proceeds                                | 37 |
|                                                                                                 |   |
| Item 3 - Defaults Upon Senior Securities                                                             | 37 |
|                                                                                                 |   |
| Item 4 - Submission of Matters to a Vote of Security  Holders                                        | 37 |
|                                                                                                 |   |
| Item  5 - Other Information                                                                          | 38 |
|                                                                                                 |   |
| Item 6 -  Exhibits                                                                                   | 38 |
|                                                                                                 |   |
| Signatures                                                                                           | 40 |

 

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**Part I- FINANCIAL INFORMATION**

 

**ITEM 1.  Condensed ConsolidatedFinancial Statements**

 

DYNAMICMATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATEDBALANCE SHEETS

(Dollarsin Thousands)

 
| ** **                                                                                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                  | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                  | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| ** **                                                                                  | ** ** | ** **        | ** ** | ** **            | ** ** |
| ASSETS                                                                                      |       |              |       |                  |       |
| CURRENT ASSETS:                                                                             |       |              |       |                  |       |
| Cash and cash equivalents                                                                   |       | $                 | 28,384     |                  | $          | 9,045 |   |
| Restricted cash                                                                             |       | —            |       | 371                   |       |
| Accounts receivable, net of allowance for doubtful accounts of $662  and $534, respectively |       | 38,634            |       | 39,833                |       |
| Inventories                                                                                 |       | 38,864            |       | 41,628                |       |
| Prepaid expenses and other                                                                  |       | 2,973             |       | 2,022                 |       |
| Related party receivable and loan                                                           |       | 882               |       | 1,103                 |       |
| Current deferred tax assets                                                                 |       | 1,103             |       | 728                   |       |
|                                                                                        |       |              |       |                  |       |
| Total current assets                                                                        |       | 110,840           |       | 94,730                |       |
|                                                                                        |       |              |       |                  |       |
| PROPERTY, PLANT AND EQUIPMENT                                                               |       | 55,130            |       | 49,590                |       |
| Less - Accumulated depreciation                                                             |       | (16,799           | )          | (14,144               | )          |
|                                                                                        |       |              |       |                  |       |
| Property, plant and equipment, net                                                          |       | 38,331            |       | 35,446                |       |
|                                                                                        |       |              |       |                  |       |
| GOODWILL, net                                                                               |       | 49,092            |       | 45,862                |       |
|                                                                                        |       |              |       |                  |       |
| PURCHASED INTANGIBLE ASSETS, net                                                            |       | 61,431            |       | 61,914                |       |
|                                                                                        |       |              |       |                  |       |
| DEFERRED TAX ASSETS                                                                         |       | 182               |       | 42                    |       |
|                                                                                        |       |              |       |                  |       |
| OTHER ASSETS, net                                                                           |       | 1,563             |       | 1,544                 |       |
|                                                                                        |       |              |       |                  |       |
| INVESTMENT IN JOINT VENTURES                                                                |       | 1,645             |       | 1,361                 |       |
|                                                                                        |       |              |       |                  |       |
| TOTAL ASSETS                                                                                |       | $                 | 263,084    |                  | $          | 240,899 |   |

 

The accompanying notes arean integral part of these Condensed Consolidated Financial Statements.

 

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DYNAMICMATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollarsin Thousands, Except Share Data)

 
| ** **                                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                        | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                                                        | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
|                                                                                                                              |       |              |       |                  |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                        |       |              |       |                  |       |
| CURRENT LIABILITIES:                                                                                                              |       |              |       |                  |       |
| Accounts payable                                                                                                                  |       | $                 | 18,352     |                  | $          | 22,590 |   |
| Accrued expenses                                                                                                                  |       | 3,851             |       | 8,566                 |       |
| Dividend payable                                                                                                                  |       | 1,894             |       | —                |       |
| Accrued income taxes                                                                                                              |       | 4,019             |       | 1,212                 |       |
| Accrued employee compensation and benefits                                                                                        |       | 4,381             |       | 5,521                 |       |
| Customer advances                                                                                                                 |       | 1,836             |       | 4,593                 |       |
| Related party accounts payable and loans                                                                                          |       | 529               |       | 325                   |       |
| Lines of credit - current                                                                                                         |       | 8,602             |       | 7,587                 |       |
| Current maturities on long-term debt                                                                                              |       | 7,792             |       | 8,035                 |       |
| Current portion of capital lease obligations                                                                                      |       | 417               |       | 389                   |       |
|                                                                                                                              |       |              |       |                  |       |
| Total current liabilities                                                                                                         |       | 51,673            |       | 58,818                |       |
|                                                                                                                              |       |              |       |                  |       |
| LINES OF CREDIT                                                                                                                   |       | 10,427            |       | —                |       |
|                                                                                                                              |       |              |       |                  |       |
| LONG-TERM DEBT                                                                                                                    |       | 62,540            |       | 61,530                |       |
|                                                                                                                              |       |              |       |                  |       |
| CAPITAL LEASE OBLIGATIONS                                                                                                         |       | 336               |       | 521                   |       |
|                                                                                                                              |       |              |       |                  |       |
| DEFERRED TAX LIABILITIES                                                                                                          |       | 20,075            |       | 20,604                |       |
|                                                                                                                              |       |              |       |                  |       |
| OTHER LONG-TERM LIABILITIES                                                                                                       |       | 1,256             |       | 1,147                 |       |
|                                                                                                                              |       |              |       |                  |       |
| COMMITMENTS AND CONTINGENT LIABILITIES                                                                                            |       | —            |       | —                |       |
|                                                                                                                              |       |              |       |                  |       |
| Total liabilities                                                                                                                 |       | 146,307           |       | 142,620               |       |
|                                                                                                                              |       |              |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                                        |       |              |       |                  |       |
| Preferred stock, $.05 par value; 4,000,000 shares authorized; no  issued and outstanding shares                                   |       | —            |       | —                |       |
| Common stock, $.05 par value; 25,000,000 shares authorized;12,640,027  and 12,433,768 shares issued and outstanding, respectively |       | 632               |       | 622                   |       |
| Additional paid-in capital                                                                                                        |       | 40,151            |       | 38,246                |       |
| Retained earnings                                                                                                                 |       | 65,432            |       | 55,868                |       |
| Other cumulative comprehensive income                                                                                             |       | 10,562            |       | 3,543                 |       |
|                                                                                                                              |       |              |       |                  |       |
| Total stockholders’ equity                                                                                                   |       | 116,777           |       | 98,279                |       |
|                                                                                                                              |       |              |       |                  |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                   |       | $                 | 263,084    |                  | $          | 240,899 |   |

 

Theaccompanying notes are an integral part of these Condensed ConsolidatedFinancial Statements.

 

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF OPERATIONS

FOR THE THREE AND SIXMONTHS ENDED JUNE 30, 2008 AND 2007

(Dollars in Thousands, ExceptShare Data)

(unaudited)

 
| ** **                                          | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                          | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                          | ** ** | **2008**               | ** ** | **2007**             | ** ** | **2008** | ** ** | **2007** | ** ** |
| NET SALES                                           |       | $                      | 63,183     |                 | $          | 34,454 |   | $ | 121,576 |   | $ | 67,548 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| COST OF PRODUCTS SOLD                               |       | 44,134                 |       | 22,375               |       | 84,816 |   | 44,618 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Gross profit                                        |       | 19,049                 |       | 12,079               |       | 36,760 |   | 22,930 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| COSTS AND EXPENSES:                                 |       |                   |       |                 |       |   |   |   |   |
| General and administrative expenses                 |       | 3,815                  |       | 1,854                |       | 6,933 |   | 3,516 |   |
| Selling expenses                                    |       | 2,633                  |       | 1,455                |       | 5,474 |   | 3,101 |   |
| Amortization expense of purchased intangible assets |       | 2,464                  |       | —               |       | 4,825 |   | — |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Total costs and expenses                            |       | 8,912                  |       | 3,309                |       | 17,232 |   | 6,617 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| INCOME FROM OPERATIONS                              |       | 10,137                 |       | 8,770                |       | 19,528 |   | 16,313 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| OTHER INCOME (EXPENSE):                             |       |                   |       |                 |       |   |   |   |   |
| Other income (expense)                              |       | 189                    |       | (13                  | )          | 41 |   | (20 | ) |
| Interest expense                                    |       | (1,471                 | )          | —               |       | (2,734 | ) | — |   |
| Interest income                                     |       | 99                     |       | 177                  |       | 323 |   | 365 |   |
| Equity in earnings of joint ventures                |       | 273                    |       | —               |       | 289 |   | — |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| INCOME BEFORE INCOME TAXES                          |       | 9,227                  |       | 8,934                |       | 17,447 |   | 16,658 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| INCOME TAX PROVISION                                |       | 3,017                  |       | 3,275                |       | 5,989 |   | 6,116 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| NET INCOME                                          |       | $                      | 6,210      |                 | $          | 5,659 |   | $ | 11,458 |   | $ | 10,542 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| INCOME PER SHARE:                                   |       |                   |       |                 |       |   |   |   |   |
| Basic                                               |       | $                      | 0.50       |                 | $          | 0.47 |   | $ | 0.92 |   | $ | 0.88 |   |
| Diluted                                             |       | $                      | 0.49       |                 | $          | 0.46 |   | $ | 0.91 |   | $ | 0.86 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:      |       |                   |       |                 |       |   |   |   |   |
| Basic                                               |       | 12,416,900             |       | 12,048,969           |       | 12,406,210 |   | 12,029,382 |   |
| Diluted                                             |       | 12,566,726             |       | 12,239,256           |       | 12,569,983 |   | 12,232,569 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| ANNUAL DIVIDENDS DECLARED PER COMMON SHARE          |       | $                      | 0.15       |                 | $          | 0.15 |   | $ | 0.15 |   | $ | 0.15 |   |

 

The accompanying notes arean integral part of these Condensed Consolidated Financial Statements.

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DYNAMICMATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FORTHE SIX MONTHS ENDED JUNE 30, 2008

(Amountsin Thousands)

(unaudited)

 
| ** **                                                        | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Other**      | ** ** | ** ** | ** ** | ** **         | ** ** |
|-------------------------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|-------------------|------------|----------------|------------|------------|------------|--------------------|------------|
| ** **                                                        | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Cumulative** | ** ** | ** ** | ** ** | **Comprehensive**  | ** ** |
| ** **                                                        | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | ** **     | ** ** | **Income** | ** ** |
| ** **                                                        | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Income**     | ** ** | **Total**  | ** ** | **for the Period** | ** ** |
| Balances, December 31, 2007                                  |       | 12,434           |       | $           | 622        |           | $          | 38,246            |       | $              | 55,868     |       | $          | 3,543              |       | $ | 98,279 |   |   |   |
|                                                              |       |             |       |        |       |           |       |              |       |           |       |       |       |               |       |
| Shares issued for stock option  exercises                    |       | 49               |       | 2           |       | 133            |       | —            |       | —         |       | 135        |       |               |       |
| Restricted stock awards                                           |       | 153              |       | 8           |       | (8             | )          | —            |       | —         |       | —     |       |               |       |
| Shares issued in connection with the employee stock purchase plan |       | 4                |       | —      |       | 105            |       | —            |       | —         |       | 105        |       |               |       |
| Excess tax benefit related to stock options                       |       | —           |       | —      |       | 132            |       | —            |       | —         |       | 132        |       |               |       |
| Stock-based compensation                                          |       | —           |       | —      |       | 1,543          |       | —            |       | —         |       | 1,543      |       |               |       |
| Dividends declared                                                |       | —           |       | —      |       | —         |       | (1,894            | )          | —         |       | (1,894     | )          |               |       |
| Net income                                                        |       | —           |       | —      |       | —         |       | 11,458            |       | —         |       | 11,458     |       | 11,458             |       |
| Derivative valuation, net of tax of $55                           |       | —           |       | —      |       | —         |       | —            |       | (90            | )          | (90        | )          | (90                | )          |
| Change in cumulative foreign currency translation adjustment      |       | —           |       | —      |       | —         |       | —            |       | 7,109          |       | 7,109      |       | 7,109              |       |
| Balances, June 30, 2008                                      |       | 12,640           |       | $           | 632        |           | $          | 40,151            |       | $              | 65,432     |       | $          | 10,562             |       | $ | 116,777 |   | $ | 18,477 |   |
|                                                                   |            |                  |            |             |            |                |            |                   |            |                |            |            |            |                    |            |  |  |  |  |  |  |

 

The accompanying notes arean integral part of these Condensed Consolidated Financial Statements.

** **

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DYNAMICMATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FORTHE SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(Dollarsin Thousands)

(unaudited)

 
| ** **                                                                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                         |       |     |       |     |       |
| Net income                                                                                    |       | $        | 11,458     |     | $          | 10,542 |   |
| Adjustments to reconcile net income to net cash provided by (used in)  operating activities - |       |     |       |     |       |
| Depreciation (including capital lease amortization)                                           |       | 2,354    |       | 910      |       |
| Amortization of purchased intangible assets                                                   |       | 4,825    |       | —   |       |
| Amortization of capitalized debt issuance costs                                               |       | 114      |       | —   |       |
| Stock-based compensation                                                                      |       | 1,543    |       | 519      |       |
| Deferred income tax benefit                                                                   |       | (2,410   | )          | (80      | )          |
| Equity in earnings of joint ventures                                                          |       | (289     | )          | —   |       |
| Change in -                                                                                   |       |     |       |     |       |
| Restricted cash                                                                               |       | 386      |       | 3,059    |       |
| Accounts receivable, net                                                                      |       | 1,237    |       | (4,337   | )          |
| Inventories                                                                                   |       | 4,731    |       | (10,943  | )          |
| Prepaid expenses and other                                                                    |       | (844     | )          | (636     | )          |
| Accounts payable                                                                              |       | (5,086   | )          | 1,276    |       |
| Customer advances                                                                             |       | (2,859   | )          | 327      |       |
| Accrued expenses and other liabilities                                                        |       | (3,347   | )          | (3,249   | )          |
|                                                                                          |       |     |       |     |       |
| Net cash provided by (used in) operating activities                                           |       | 11,813   |       | (2,612   | )          |
|                                                                                          |       |     |       |     |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                         |       |     |       |     |       |
| Acquisition of property, plant and equipment                                                  |       | (4,203   | )          | (4,977   | )          |
| Change in other non-current assets                                                            |       | 31       |       | (13      | )          |
|                                                                                          |       |     |       |     |       |
| Net cash used in investing activities                                                         |       | (4,172   | )          | (4,990   | )          |
|                                                                                               |            |          |            |          |            |  |  |

 

Theaccompanying notes are an integral part of these Condensed ConsolidatedFinancial Statements.

 

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DYNAMICMATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FORTHE SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(Dollarsin Thousands)

(unaudited)

 
| ** **                                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM FINANCING ACTIVITIES:                                 |       |     |       |     |       |
| Borrowings on bank lines of credit, net                               |       | 12,081   |       | —   |       |
| Payment on term loan with French bank                                 |       | (443     | )          | (385     | )          |
| Payment on Nord LB term loans                                         |       | (542     | )          | —   |       |
| Payment of capital lease obligations                                  |       | (216     | )          | —   |       |
| Payment of deferred debt issuance costs                               |       | (140     | )          | —   |       |
| Change in other long-tem liabilities                                  |       | 33       |       | 10       |       |
| Net proceeds from issuance of common stock to employees and directors |       | 240      |       | 382      |       |
| Excess tax benefit related to exercise of stock options               |       | 132      |       | —   |       |
|                                                                  |       |     |       |     |       |
| Net cash provided by financing activities                             |       | 11,145   |       | 7        |       |
|                                                                  |       |     |       |     |       |
| EFFECTS OF EXCHANGE RATES ON CASH                                     |       | 553      |       | 83       |       |
|                                                                  |       |     |       |     |       |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                  |       | 19,339   |       | (7,512   | )          |
|                                                                  |       |     |       |     |       |
| CASH AND CASH EQUIVALENTS, beginning of the period                    |       | 9,045    |       | 17,886   |       |
|                                                                  |       |     |       |     |       |
| CASH AND CASH EQUIVALENTS, end of the period                          |       | $        | 28,384     |     | $          | 10,374 |   |
|                                                                       |            |          |            |          |            |  |  |

 

Theaccompanying notes are an integral part of these Condensed ConsolidatedFinancial Statements.

** **

**9**

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##### **Tableof Contents**

 

##### **DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES**

##### ** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**(Dollars in Thousands, Except Share and Per Share Data)**

 

**(unaudited)**

 

**1.      BASIS OF PRESENTATION**

 

Theinformation included in the Condensed Consolidated Financial Statements isunaudited but includes all normal and recurring adjustments which, in theopinion of management, are necessary for a fair presentation of the interimperiods presented. These Condensed Consolidated Financial Statements should beread in conjunction with the financial statements that are included in theCompany’s Annual Report filed on Form 10-K for the year ended December 31,2007.

 

**2.      SIGNIFICANT ACCOUNTING POLICIES**

 

Principles ofConsolidation

** **

**The Condensed Consolidated FinancialStatements include the accounts of the Company and its subsidiaries.  Only subsidiaries in which controllinginterests are maintained are consolidated. The equity method is used to account for our ownership in subsidiarieswhere we do not have controlling interest. All significant intercompany accounts, profits and transactions havebeen eliminated in consolidation.**

** **

Foreign Operations andForeign Exchange Rate Risk

** **

**The**functional currency for theCompany’s foreign operations is the applicable local currency for eachaffiliate company. Assets and liabilities of foreign subsidiaries for which thefunctional currency is the local currency are translated at exchange rates ineffect at period-end, and the statements of operations are translated at theaverage exchange rates during the period. Exchange rate fluctuations on translating foreign currency financialstatements into U.S. dollars that result in unrealized gains or losses arereferred to as translation adjustments. Cumulative translation adjustments arerecorded as a separate component of stockholders’ equity and are included inother cumulative comprehensive income. Transactions denominated in currenciesother than the local currency are recorded based on exchange rates at the timesuch transactions arise. Subsequent changes in exchange rates result intransaction gains and losses which are reflected in income as unrealized (basedon period-end translations) or realized upon settlement of the transactions.Cash flows from the Company’s operations in foreign countries are translated atactual exchange rates when known, or at the average rate for the period. As aresult, amounts related to assets and liabilities reported in the consolidatedstatements of cash flows will not conform with changes in the correspondingbalances in the Consolidated Balance Sheets. The effects of exchange ratechanges on cash balances held in foreign currencies are reported as a separateline item below cash flows from financing activities.

** **

**10**

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**Tableof Contents**

** **

RevenueRecognition

** **

**Sales of clad metal products andwelding services are generally based upon customer specifications set forth incustomer purchase orders and require the Company to provide certificationsrelative to metals used, services performed and the results of anynon-destructive testing that the customer has requested be performed.  All issues of conformity of the product tospecifications are resolved before the product is shipped and billed.  Products related to the oilfield productssegment, which include detonating cords, detonators, bi-directional boostersand shaped charges, as well as, seismic related explosives and accessories, arestandard in nature.  In all cases,revenue is recognized only when all four of the following criteria have beensatisfied: persuasive evidence of an arrangement exists; the price is fixed ordeterminable; delivery has occurred; and collection is reasonably assured.  For contracts that require multipleshipments, revenue is recorded only for the units included in each individualshipment.  If, as a contract proceeds towardcompletion, projected total cost on an individual contract indicates apotential loss, the Company will account for such anticipated loss.**

** **

Related PartyTransactions

** **

**The Company has related party transactionswith its unconsolidated joint ventures, as well as with the minority partner ofone of its consolidated joint ventures. A summary of those transactions for the three and six months ended June 30,2008 is presented below:**

** **
| ** **                | ** ** | **3 months ended**     | ** ** | **6 months ended**     | ** ** |
|---------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                | ** ** | **June 30, 2008** | ** ** | **June 30, 2008** | ** ** |
| ** **                | ** ** | ** **             | ** ** | **Interest**           | ** ** | ** ** | ** ** | **Interest** | ** ** |
| ** **                | ** ** | **Sales to**           | ** ** | **income from**        | ** ** | **Sales to** | ** ** | **income from** | ** ** |
| Perfoline                 |       | $                      | 14         |                   | $          | 13 |   | $ | 47 |   | $ | 26 |   |
| DYNAenergetics RUS        |       | 1,137                  |       | —                 |       | 1,137 |   | — |   |
| Minority Interest Partner |       | 460                    |       | —                 |       | 984 |   | — |   |
|                      |       |                   |       |                   |       |   |   |   |   |
| Total                     |       | $                      | 1,612      |                   | $          | 13 |   | $ | 2,169 |   | $ | 26 |   |

** **

**A summary of related partybalances as of June 30, 2008 and December 31, 2007 is presentedbelow:**

** **
| ** **                | ** ** | **As of June 30, 2008** | ** ** | **As of December 31, 2007** | ** ** |
|---------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **Accounts**                 | ** ** | **Accounts**                     | ** ** | **Accounts** | ** ** | **Accounts** | ** ** |
| ** **                | ** ** | **receivable**               | ** ** | **payable**                      | ** ** | **receivable** | ** ** | **payable** | ** ** |
| ** **                | ** ** | **and loan to**              | ** ** | **and loan from**                | ** ** | **and loan to** | ** ** | **and loan from** | ** ** |
| Perfoline                 |       | $                            | 474        |                             | $          | 130 |   | $ | 523 |   | $ | 120 |   |
| DYNAenergetics RUS        |       | 147                          |       | —                           |       | 449 |   | — |   |
| KazDYNAenergetics         |       | —                       |       | —                           |       | 131 |   | — |   |
| Minority Interest Partner |       | 261                          |       | 399                              |       | — |   | 205 |   |
|                      |       |                         |       |                             |       |   |   |   |   |
| Total                     |       | $                            | 882        |                             | $          | 529 |   | $ | 1,103 |   | $ | 325 |   |

** **

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** **

Earnings Per Share

** **

**Basic earnings per share (“EPS”)is computed by dividing net income by the weighted average number of shares ofcommon stock outstanding during the period. Diluted EPS recognizes the potential dilutive effects of dilutivesecurities.  The following represents areconciliation of the numerator and denominator used in the calculation ofbasic and diluted EPS:**

** **
| ** **                                          | ** ** | **For the three months ended June 30, 2008** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                          | ** ** | **Income**                                        | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings per share:                           |       |                                              |       |   |   |   |   |
| Net income                                          |       | $                                                 | 6,210      |   | 12,416,900 |   | $ | 0.50 |   |
|                                                |       |                                              |       |   |   |   |   |
| Dilutive effect of options to purchase common stock |       | —                                            |       | 121,462 |   |   |   |
| Dilutive effect of restricted stock awards          |       | —                                            |       | 28,364 |   |   |   |
|                                                |       |                                              |       |   |   |   |   |
| Diluted earnings per share:                         |       |                                              |       |   |   |   |   |
| Net income                                          |       | $                                                 | 6,210      |   | 12,566,726 |   | $ | 0.49 |   |

 
|                                                | ** ** | **For the  three months ended June 30, 2007** |       |
|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | **Per  share** |   |
| ** **                                          | ** ** | **Income**                                         | ** ** | **Shares** | ** ** | **Amount** |   |
| Basic earnings per share:                           |       |                                               |       |   |   |   |   |
| Net income                                          |       | $                                                  | 5,659      |   | 12,048,969 |   | $ | 0.47 |   |
|                                                |       |                                               |       |   |   |   |   |
| Dilutive effect of options to purchase common stock |       | —                                             |       | 177,934 |   |   |   |
| Dilutive effect of restricted stock awards          |       | —                                             |       | 12,353 |   |   |   |
|                                                |       |                                               |       |   |   |   |   |
| Diluted earnings per share:                         |       |                                               |       |   |   |   |   |
| Net income                                          |       | $                                                  | 5,659      |   | 12,239,256 |   | $ | 0.46 |   |

 
| *** ***                                        | ** ** | **For the  six months ended June 30, 2008** |       |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                          | ** ** | ** **                                       | ** ** | ** ** | ** ** | **Per  share** |   |
| ** **                                          | ** ** | **Income**                                       | ** ** | **Shares** | ** ** | **Amount** |   |
| Basic earnings per share:                           |       |                                             |       |   |   |   |   |
| Net income                                          |       | $                                                | 11,458     |   | 12,406,210 |   | $ |  0.92 |   |
|                                                |       |                                             |       |   |   |   |   |
| Dilutive effect of options to purchase common stock |       | —                                           |       | 133,370 |   |   |   |
| Dilutive effect of restricted stock awards          |       | —                                           |       | 30,403 |   |   |   |
|                                                |       |                                             |       |   |   |   |   |
| Diluted earnings per share:                         |       |                                             |       |   |   |   |   |
| Net income                                          |       | $                                                | 11,458     |   | 12,569,983 |   | $ | 0.91 |   |
|                                                     |            |                                                  |            |  |  |  |  |  |  |  |

 

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|                                                | ** ** | **For the  six months ended June 30, 2007** |       |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                          | ** ** | ** **                                       | ** ** | ** ** | ** ** | **Per  share** |   |
| ** **                                          | ** ** | **Income**                                       | ** ** | **Shares** | ** ** | **Amount** |   |
| Basic earnings per share:                           |       |                                             |       |   |   |   |   |
| Net income                                          |       | $                                                | 10,542     |   | 12,029,382 |   | $ | 0.88 |   |
|                                                |       |                                             |       |   |   |   |   |
| Dilutive effect of options to purchase common stock |       | —                                           |       | 194,728 |   |   |   |
| Dilutive effect of restricted stock awards          |       | —                                           |       | 8,459 |   |   |   |
|                                                |       |                                             |       |   |   |   |   |
| Diluted earnings per share:                         |       |                                             |       |   |   |   |   |
| Net income                                          |       | $                                                | 10,542     |   | 12,232,569 |   | $ | 0.86 |   |

** **

Recent AccountingPronouncements

** **

**In September 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 157, *Fair Value Measurements*(“SFAS 157”). SFAS 157 defines fair value, establishes a framework formeasuring fair value in accordance with accounting principles generallyaccepted in the United States, and expands disclosures about fair valuemeasurements. SFAS No. 157 was initially effective for financialstatements issued for fiscal years beginning after November 15, 2007.  The FASB issued a staff position statement (“FSP”)in February 2008 that deferred the required implementation date of SFAS157 for certain assets and liabilities. The adoption of SFAS 157 in the six months ended June 30, 2008 didnot have a material impact on the Company’s results of operations or financialposition.**

** **

**In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities – Including an Amendment of FASB Statement No. 115.”This Statement permits entities to measure many financial instruments andcertain other items at fair value. This election is made on aninstrument-by-instrument basis and is irrevocable. Unrealized gains and losseson items for which the fair value option has been elected are reported inearnings. This statement is effective for fiscal years beginning after November 15,2007. The Company did not elect the fair value option for any of its existingfinancial assets and liabilities during the six months ended June 30,2008.**

** **

In December 2007, the FASB issued SFAS No. 141(R),*Business Combinations* and SFAS No. 160,*Accounting and Reporting of Noncontrolling Interestin Consolidated Financial Statements*, an amendment of ARB No. 51.These new standards will significantly change the accounting for and reportingof business combination transactions and noncontrolling (minority) interests inconsolidated financial statements. SFAS Nos. 141(R) and 160 arerequired to be adopted simultaneously and are effective for the first annualreporting period beginning on or after December 15, 2008. Thus, we arerequired to adopt these Standards on January 1, 2009. Earlier adoption isprohibited. The Company is in the process of determining the effect, if any,the adoption of SFAS Nos. 141(R) and 160 will have on its results ofoperations or financial position.

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments and HedgingActivities*.  SFAS 161 requires additional disclosures relatedto the use of derivative instruments, the accounting for derivatives and howderivatives impact financial statements.  SFAS No. 161 is effectivefor fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the impact of adopting SFAS No. 161 onour consolidated financial statements.

 

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**3.     ACQUISITION**

 

OnNovember 15, 2007, the Company and a newly-formed subsidiary,DYNAenergetics Holding GmbH (the “Purchaser”), entered into a Purchase, Saleand Assignment Agreement (the “Purchase Agreement”) with Rolf Rospek, PatrickXylander, Uwe Gessel, and Oag Beteiligungs-GmbH, a German limited liabilitycompany (collectively the “Sellers”). Pursuant to the terms of the Purchase Agreement, on November 15,2007 the Purchaser acquired 100% of the issued and outstanding shares ofDYNAenergetics Beteiligungs-GmbH and all of the interests in DYNAenergeticsGmbH and Co. KG (collectively, “DYNAenergetics”) from the Sellers.

 

DYNAenergeticsmanufactures clad metal plates and various explosives-related oilfield productsand operates under two business segments: Explosive Metalworking and OilfieldProducts.  The acquisition enhances theCompany’s ability to address growing worldwide demand for clad metal plates andexpands the Company’s position in the global explosion welding market.  The addition of the Oilfield Productsbusiness segment will augment the Company’s involvement in specializedexplosive manufacturing processes and position the Company within the growinginternational oil and gas services industry.

 

Aspart of the Oilfield Products business segment, the Company has several jointventures, some of which are unconsolidated and accounted for under the equitymethod (see Note 4).

 

Theacquisition was valued at $112,635 and was financed by (i) the payment of$81,715 in cash, net of cash acquired of $1,870 and transaction related taxesof $3,708 (2,530 Euros) due from one of the sellers and withheld by thePurchaser, (ii) the issuance of 251,041 shares of common stock of theCompany (valued at $13,509), and (iii) the assumption of approximately$11,833 (8,074 Euros) of DYNAenergetics debt. The cash portion of the purchase price was financed using proceeds fromthe new syndicated credit agreement and existing available cash.

 

The purchase price of the acquisition was allocated to the Company’stangible and identifiable intangible assets based on their estimated fairvalues as set forth below.  Property,plant and equipment were recorded at fair values based on appraisals performedas of the acquisition date. The preliminary allocation to identifiableintangible assets was based on preliminary valuation data and the estimates andassumptions are subject to change.  Theexcess of the purchase price over the tangible and identifiable intangibleassets was recorded as goodwill.  TheCompany is still in the process of analyzing other potential purchaseaccounting adjustments including compiling remaining acquisition relatedexpenses.

 

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The preliminary allocation of the purchase price to the assets andliabilities of DYNAenergetics is as follows:

 
| Current assets                |   | $       | 30,222  |   |
|-------------------------------|--------|---------|---------|--------|
| Property, plant and equipment |   | 7,845   |    |
| Intangible assets             |   | 62,794  |    |
| Goodwill                      |   | 45,919  |    |
| Investment in joint ventures  |   | 1,324   |    |
| Other assets                  |   | 11      |    |
|                          |   |    |    |
| Total assets acquired         |   | 148,115 |    |
|                          |   |    |    |
| Current liabilities           |   | 14,524  |    |
| Long term debt                |   | 11,833  |    |
| Deferred tax liabilities      |   | 19,850  |    |
| Other long term liabilities   |   | 1,096   |    |
| Minority interest             |   | 10      |    |
|                          |   |    |    |
| Total liabilities acquired    |   | 47,313  |    |
|                          |   |    |    |
| Net assets acquired           |   | $       | 100,802 |   |

 

The Company acquired identifiable finite-lived intangible assets as aresult of the acquisition of DYNAenergetics. The finite-lived intangible assets acquired are preliminarily classifiedand valued as follows:

 
| *** ***             | *** *** | ** ** | ** ** | **Weighted Average** | *** *** |
|--------------------------|--------------|------------|------------|----------------------|--------------|
| *** ***             | *** *** | ** ** | ** ** | **Amortization**     | *** *** |
| *** ***             | *** *** | **Value**  | ** ** | **Period**           | *** *** |
| Core technology          |         | $          | 24,531     |                 | 20  years    | *** *** |
| Customer relationships   |         | 33,099     |       | 9  years             | *** *** |
| Trademarks / Trade names |         | 2,672      |       | 9  years             | *** *** |
| Order backlog DYNAplat   |         | 2,492      |       | Within  1 year       | *** *** |
|                     |         |       |       |                 | *** *** |
| Total intangible assets  |         | $          | 62,794     |                 |         | *** *** |

 

The Company acquired Goodwill in the amount of $45,919 as a result ofthe acquisition of DYNAenergetics.  Theamount of goodwill assigned to each reportable segment is as follows:

 
| ** **             | ** ** | **Value** | ** ** |
|------------------------|------------|-----------|------------|
| Explosive Metalworking |       | $         | 25,222     |   |
| Oilfield Products      |       | 20,697    |       |
|                   |       |      |       |
| Total goodwill         |       | $         | 45,919     |   |

 

Goodwill as of June 30, 2008 amounts to $49,092 and the changefrom December 31, 2007 reflects the impact of foreign currency translationand subsequent purchase price adjustments resulting from the compilation ofadditional acquisition related expenses.

 

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Thefollowing table presents the unaudited, pro-forma combined results ofoperations for the three and six months ended June 30, 2007 assuming (i) theacquisition had occurred on January 1, 2007; (ii) pro-formaamortization expense of the purchased intangible assets and (iii) pro-formainterest expense assuming the Company utilized its syndicated credit agreementto finance the acquisition:

 

| ** **             | ** ** | **Three months**  | ** ** | **Six months**    | ** ** |
|------------------------|------------|-------------------|------------|-------------------|------------|
| ** **             | ** ** | **ended**         | ** ** | **ended**         | ** ** |
| ** **             | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|                   |       | **2007**          | ** ** | **2007**          |       |
| Net sales              |       | $                 | 47,634     |              | $          | 93,698 |   |
| Income from operations |       | $                 | 8,781      |              | $          | 15,832 |   |
| Net income             |       | $                 | 4,756      |              | $          | 8,446 |   |
|                   |       |              |       |              |       |
| Net income per share:  |       |              |       |              |       |
| Basic                  |       | $                 | 0.39       |              | $          | 0.69 |   |
| Diluted                |       | $                 | 0.38       |              | $          | 0.68 |   |

 

The pro-forma results above are not necessarily indicative of theoperating results that would have actually occurred if the acquisition had beenin effect on the dates indicated, nor are they necessarily indicative of futureresults of the combined companies.

 

**4.      INVESTMENT IN JOINT VENTURES**

 

Operatingresults include the Company’s proportionate share of income from jointventures, which consist of unconsolidated joint ventures accounted for underthe equity method.  These investments(all of which resulted from the acquisition of DYNAenergetics and pertain tothe Company’s Oilfield Products business segment) include the following: (1) 53.5%interest in Perfoline, which is a Russian manufacturer of perforating gunsystems and (2) 55% interest in DYNAenergetics RUS which is a Russiantrading company that sells the Company’s oilfield products.  Due to certain minority interest veto rightsthat effectively require the minority interest shareholders to participate inordinary course of business decisions, these joint ventures have been accountedfor under the equity method instead of being consolidated in these financialstatements.  Investments in these jointventures totaled $1,645 and $1,361 as of June 30, 2008 and December 31,2007, respectively.

** **

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Summarizedunaudited financial information for the joint ventures accounted for under theequity method as of June 30, 2008 and December 31, 2007 and for thethree and six months ended June 30, 2008 is as follows:

 
| ** **                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Current assets               |       | $                 | 3,828      |                  | $          | 4,148 |   |
| Noncurrent assets            |       | 923               |       | 666                   |       |
| Total assets                 |       | $                 | 4,751      |                  | $          | 4,814 |   |
|                         |       |              |       |                  |       |
| Current liabilities          |       | $                 | 673        |                  | $          | 1,400 |   |
| Noncurrent liabilities       |       | 1,051             |       | 1,048                 |       |
| Equity                       |       | 3,027             |       | 2,366                 |       |
| Total liabilities and equity |       | $                 | 4,751      |                  | $          | 4,814 |   |

 
| ** **                           | ** ** | **Three months**  | ** ** | **Six months**    | ** ** |
|--------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                           | ** ** | **ended**         | ** ** | **ended**         | ** ** |
| ** **                           | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                           | ** ** | **2008**          | ** ** | **2008**          | ** ** |
| Net sales                            |       | $                 | 2,522      |              | $          | 4,725 |   |
| Gross profit                         |       | $                 | 820        |              | $          | 1,233 |   |
| Operating income                     |       | $                 | 617        |              | $          | 788 |   |
| Net income                           |       | $                 | 549        |              | $          | 535 |   |
| Equity in earnings of joint ventures |       | $                 | 273        |              | $          | 289 |   |

 

**5.      INVENTORY**

 

**The components of inventory areas follows at June 30, 2008 and December 31, 2007:**

** **
| ** **      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|-------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **      | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| Raw materials   |       | $                 | 13,117     |                  | $          | 13,744 |   |
| Work-in-process |       | 20,763            |       | 23,699                |       |
| Finished goods  |       | 4,406             |       | 3,564                 |       |
| Supplies        |       | 578               |       | 621                   |       |
|            |       |              |       |                  |       |
|            |       | $                 | 38,864     |                  | $          | 41,628 |   |

 

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**6.     PURCHASED INTANGIBLE ASSETS**

 

The following tablepresents details of our purchased intangible assets, other than goodwill, as ofJune 30, 2008:

 
| ** **               | ** ** | ** ** | ** **   | **Accumulated**  | ** ** | ** **  | ** ** |
|--------------------------|------------|------------|--------------|------------------|------------|-------------|------------|
| ** **               | ** ** | **Gross**  | ** **   | **Amortization** | ** ** | **Net**     | ** ** |
| Core technology          |       | $          |  26,444 |             | $          |  (826) |       | $ |  25,618 | ** ** |
| Customer relationships   |       | 35,680     |         | (2,478           | )          | 33,202      |       |
| Trademarks / Trade names |       | 2,880      |         | (269             | )          | 2,611       |       |
| Order backlog DYNAplat   |       | 2,686      |         | (2,686           | )          | —      |       |
|                     |       |       |         |             |       |        |       |
| Total intangible assets  |       | $          | 67,690       |             | $          | (6,259      | )          | $ | 61,431 |   |

 

The following tablepresents details of our purchased intangible assets, other than goodwill, as ofDecember 31, 2007:

 
| ** **               | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|--------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **               | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
| Core technology          |       | $          | 24,653     |             | $          | (154       | )          | $ | 24,499 |   |
| Customer relationships   |       | 33,263     |       | (461             | )          | 32,802     |       |
| Trademarks / Trade names |       | 2,685      |       | (50              | )          | 2,635      |       |
| Order backlog DYNAplat   |       | 2,504      |       | (526             | )          | 1,978      |       |
|                     |       |       |       |             |       |       |       |
| Total intangible assets  |       | $          | 63,105     |             | $          | (1,191     | )          | $ | 61,914 |   |

 

Theincrease in the gross value of our purchased intangible assets from December 31,2007 to June 30, 2008 is due to the impact of foreign currencytranslation.

 

**7.      DEBT**

 

**Lines of credit consist of thefollowing at June 30, 2008 and December 31, 2007:**

** **
| ** **                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                 | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| Syndicated credit agreement revolving loan |       | $                 | 10,427     |                  | $          | — |   |
| Commerzbank revolving line of credit       |       | 397               |       | 3,225                 |       |
| Commerzbank line of credit                 |       | 3,950             |       | 1,473                 |       |
| Deutsche Bank revolving line of credit     |       | 784               |       | 680                   |       |
| Nord LB line of credit                     |       | 3,471             |       | 2,209                 |       |
|                                       |       |              |       |                  |       |
|                                       |       | 19,029            |       | 7,587                 |       |
| Less current portion                       |       | (8,602            | )          | (7,587                | )          |
|                                       |       |              |       |                  |       |
| Long-term lines of credit                  |       | $                 | 10,427     |                  | $          | — |   |

** **

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** **

**Long-term debt consists of thefollowing at June 30, 2008 and December 31, 2007:**

** **
| ** **                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                 | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| Syndicated credit agreement term loan      |       | $                 | 45,000     |                  | $          | 45,000 |   |
| Syndicated credit agreement Euro term loan |       | 22,119            |       | 20,621                |       |
| Euro term loan - French bank               |       | —            |       | 427                   |       |
| Nord LB 3,000 Euro term loan               |       | 3,081             |       | 3,314                 |       |
| Nord LB 500 Euro term loan                 |       | 132               |       | 203                   |       |
|                                       |       |              |       |                  |       |
|                                       |       | 70,332            |       | 69,565                |       |
| Less current maturities                    |       | (7,792            | )          | (8,035                | )          |
|                                       |       |              |       |                  |       |
| Long-term debt                             |       | $                 | 62,540     |                  | $          | 61,530 |   |

** **

Loan Covenants andRestrictions

 

TheCompany’s existing loan agreements include various covenants and restrictions,certain of which relate to the incurrence of additional indebtedness,mortgaging, pledging or disposition of major assets, limits on capitalexpenditures and maintenance of specified financial ratios.  As of June 30, 2008, the Company was incompliance with all financial covenants and other provisions of its debtagreements.

 

Swap Agreement

 

OnNovember 15, 2007, the Company entered into an interest swap agreementthat effectively converted the LIBOR based variable rate borrowings under the$45,000 term loan to a fixed rate of 6.34%. The company has designated the swap agreement as an effective cash flowhedge with matched terms in accordance with SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities,*andas a result, changes in the fair value of the swap agreement are recorded inother comprehensive income with the offset as a swap asset or liability.  As of June 30, 2008, the fair value ofthe swap agreement was a liability of $382. The swap agreement expires on November 16, 2008.

 

**8.      BUSINESS SEGMENTS**

 

TheCompany is organized in the following three segments:  Explosive Metalworking, Oilfield Products andAMK Welding. The Explosive Metalworking segment uses explosives to performmetal cladding and shock synthesis of industrial diamonds. The most significantproduct of this group is clad metal which is used in the fabrication ofpressure vessels, heat exchangers and transition joints for various industries,including upstream oil and gas, oil refinery, petrochemicals, hydrometallurgy,aluminum production, shipbuilding, power generation, industrial refrigerationand similar industries. The Oilfield Products segment manufactures, markets andsells oilfield perforating equipment and explosives, including detonatingcords, detonators, bi-directional boosters and shaped charges, and seismicrelated explosives and accessories.  AMKWelding utilizes a number of welding technologies to weld components formanufacturers of jet engines and ground-based turbines.

 

The accounting policies of all the segments are the same as thosedescribed in the summary of significant accounting policies.  The Company’s reportable segments areseparately managed strategic business units that offer different products andservices. Each segment’s products are 

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marketed to different customer types andrequires different manufacturing processes and technologies.  Segment information is presented for thethree and six months ended June 30, 2008 and 2007 as follows:

 
| ** **                                     | ** ** | **Explosive**    | ** ** | ** **   | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|------------------|------------|--------------|------------|-------------|------------|------------|------------|
| ** **                                     | ** ** | **Metalworking** | ** ** | **Oilfield** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Group**        | ** ** | **Products** | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the three months ended June 30, 2008: |       |             |       |         |       |        |       |       |       |
| Net sales                                      |       | $                | 52,996     |         | $          | 7,922       |       | $          | 2,265      |   | $ | 63,183 |   |
| Depreciation and amortization                  |       | $                | 2,660      |         | $          | 937         |       | $          | 108        |   | $ | 3,705 |   |
| Income from operations                         |       | $                | 9,815      |         | $          | 616         |       | $          | 585        |   | $ | 11,016 |   |
| Equity in earnings of joint ventures           |       | $                | —     |         | $          | 273         |       | $          | —     |   | 273 |   |
| Unallocated amounts:                           |       |             |       |         |       |        |       |       |       |
| Stock-based compensation                       |       |             |       |         |       |        |       | (879       | )          |
| Other income                                   |       |             |       |         |       |        |       | 189        |       |
| Interest expense                               |       |             |       |         |       |        |       | (1,471     | )          |
| Interest income                                |       |             |       |         |       |        |       | 99         |       |
|                                           |       |             |       |         |       |        |       |       |       |
| Consolidated income before income taxes        |       |             |       |         |       |        |       | $          | 9,227      |   |

 
| ** **                                     | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| ** **                                     | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the three months ended June 30, 2007: |       |             |       |        |       |       |       |
| Net sales                                      |       | $                | 33,119     |        | $          | 1,335      |       | $ | 34,454 |   |
| Depreciation                                   |       | $                | 452        |        | $          | 63         |       | $ | 515 |   |
| Income from operations                         |       | $                | 9,047      |        | $          | 18         |       | $ | 9,065 |   |
| Unallocated amounts:                           |       |             |       |        |       |       |       |
| Stock-based compensation                       |       |             |       |        |       | (295       | )          |
| Other expense                                  |       |             |       |        |       | (13        | )          |
| Interest income                                |       |             |       |        |       | 177        |       |
|                                           |       |             |       |        |       |       |       |
| Consolidated income before income taxes        |       |             |       |        |       | $          | 8,934      |   |

 
| ** **                                   | ** ** | **Explosive**    | ** ** | ** **   | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------------|------------|--------------|------------|-------------|------------|------------|------------|
| ** **                                   | ** ** | **Metalworking** | ** ** | **Oilfield** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | **Group**        | ** ** | **Products** | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the six months ended June 30, 2008: |       |             |       |         |       |        |       |       |       |
| Net sales                                    |       | $                | 104,638    |         | $          | 12,373      |       | $          | 4,565      |   | $ | 121,576 |   |
| Depreciation and amortization                |       | $                | 5,044      |         | $          | 1,919       |       | $          | 216        |   | $ | 7,179 |   |
| Income from operations                       |       | $                | 19,799     |         | $          | 50          |       | $          | 1,222      |   | $ | 21,071 |   |
| Equity in earnings of joint ventures         |       | $                | —     |         | $          | 289         |       | $          | —     |   | 289 |   |
| Unallocated amounts:                         |       |             |       |         |       |        |       |       |       |
| Stock-based compensation                     |       |             |       |         |       |        |       | (1,543     | )          |
| Other income                                 |       |             |       |         |       |        |       | 41         |       |
| Interest expense                             |       |             |       |         |       |        |       | (2,734     | )          |
| Interest income                              |       |             |       |         |       |        |       | 323        |       |
|                                         |       |             |       |         |       |        |       |       |       |
| Consolidated income before income taxes      |       |             |       |         |       |        |       | $          | 17,447     |   |

 

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| ** **                                   | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| ** **                                   | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the six months ended June 30, 2007: |       |             |       |        |       |       |       |
| Net sales                                    |       | $                | 64,614     |        | $          | 2,934      |       | $ | 67,548 |   |
| Depreciation                                 |       | $                | 787        |        | $          | 123        |       | $ | 910 |   |
| Income from operations                       |       | $                | 16,550     |        | $          | 282        |       | $ | 16,832 |   |
| Unallocated amounts:                         |       |             |       |        |       |       |       |
| Stock-based compensation                     |       |             |       |        |       | (519       | )          |
| Other expense                                |       |             |       |        |       | (20        | )          |
| Interest income                              |       |             |       |        |       | 365        |       |
|                                         |       |             |       |        |       |       |       |
| Consolidated income before income taxes      |       |             |       |        |       | $          | 16,658     |   |

 

**During the three and six monthsended June 30, 2008 and 2007, no sales to any one customer accounted formore than 10% of total net sales.**

 

**9.         COMPREHENSIVEINCOME**

 

**The Company**’s comprehensive income for the three and six months ended June 30,2008 and 2007 was as follows:

** **
| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                          | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                          | ** ** | **2008**               | ** ** | **2007**             | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income for the period                           |       | $                      | 6,210      |                 | $          | 5,659 |   | $ | 11,458 |   | $ | 10,542 |   |
| Interest rate swap valuation adjustment, net of tax |       | 195                    |       | —               |       | (90 | ) | — |   |
| Foreign currency translation adjustment             |       | (148                   | )          | 200                  |       | 7,109 |   | 260 |   |
|                                                |       |                   |       |                 |       |   |   |   |   |
| Comprehensive income                                |       | $                      | 6,257      |                 | $          | 5,859 |   | $ | 18,477 |   | $ | 10,802 |   |

** **

Accumulatedother cumulative comprehensive income as of June 30, 2008 and December 31,2007 consisted of the following:

 
| ** **                                                                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| Currency translation adjustment                                                    |       | $                 | 10,799     |                  | $          | 3,690 |   |
| Interest rate swap valuation adjustment, net of tax of $145 and $90,  respectively |       | (237              | )          | (147                  | )          |
|                                                                               |       |              |       |                  |       |
|                                                                               |       | $                 | 10,562     |                  | $          | 3,543 |   |

** **

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**ITEM 2.     Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

The following discussion should be read in conjunction with our historicalconsolidated financial statements and notes, as well as the selected historicalconsolidated financial data that are included in the Company’s Annual Reportfiled on Form 10-K for the year ended December 31, 2007.

 

Unless statedotherwise, all dollar figures in this discussion are presented in thousands(000’s).

 

**Executive Overview**

 

Historically, ourbusiness has been organized into two segments: Explosive Metalworking (which we also refer to as DMC Clad) and AMKWelding.  On November 15, 2007, we acquired100% ownership of a German company, DYNAenergetics.  DYNAenergetics operates two distinctbusinesses which have historically been known as DYNAplat and DYNAwell.  DYNAplat is a manufacturer of explosion cladproducts similar to those manufactured by DMC Clad and its operating resultsfrom the date of acquisition are included in our Explosive Metalworkingsegment.  DYNAwell manufactures a numberof products for the perforation of oil and gas wells and also distributes aline of seismic products for oil and gas exploration activities.  DYNAwell’s operating results from the date ofacquisition are reported under a new segment that we have named “OilfieldProducts”.

 

For the six months endedJune 30, 2008, Explosive Metalworking accounted for 86% of our net salesand 94% of our income from operations before consideration of stock-basedcompensation expense, which is not allocated to our business segments.  Our AMK Welding and Oilfield Productssegments accounted for 4% and 10%, respectively, of our first half 2008 netsales.

 

Our net sales for thesix months ended June 30, 2008, which include $31,722 of sales from ourrecently acquired DYNAenergetics’ businesses, increased by $54,028 (80.0%)compared to the first six months of 2007, reflecting year-to-year net salesincreases of $40,024 (61.9%) and $1,631 (55.6%) for our Explosive Metalworkingand AMK Welding segments, respectively, and a sales contribution of $12,373from our new Oilfield Products segment. Income from operations increased by 19.7% to $19,528 in the first sixmonths of 2008 from $16,313 in the first six months of 2007, reflectingimprovements in Explosive Metalworking’s and AMK Welding’s operating income of$3,249 and $940, respectively, that were partially offset by a $1,024 increasein stock-based compensation expense.  OurOilfield Products segment reported operating income of $50.  Our net income increased by 8.7% to $11,458for the six months ended June 30, 2008 from $10,542 in the same period of2007.

 

*Net sales*

 

ExplosiveMetalworking’s net sales are generated principally from sales of clad metalplates and sales of transition joints, which are made from clad plates, tocustomers that fabricate industrial equipment for various industries, includingoil and gas, petrochemicals, alternative energy, hydrometallurgy, aluminumproduction, shipbuilding, power generation, industrial refrigeration andsimilar industries.  While demand for ourclad metal products in the United States is largely driven by new plantconstruction and large plant expansion projects, maintenance and retrofitprojects at existing chemical processing, petrochemical processing and oilrefining facilities also account for a significant portion of total demand. Incontrast to the U.S. market, 

 

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demand for our cladproducts in Europe and Asia is more dependent on new construction projects,such as the building of new Purified Terephthalic Acid (“PTA”) plants indifferent parts of the world, including China, and on sales of electricaltransition joints that are used in the aluminum production industry.

 

OilfieldProducts’ net sales are generated principally from sales of shaped charges,detonators and detonating cord, boosters and perforating guns to customers whoperform the perforation of oil and gas wells and from sales of seismic productsto customers involved in oil and gas exploration activities.

 

AMKWelding’s net sales are generated from welding, heat treatment and inspectionservices that are provided with respect to customer-supplied parts forcustomers primarily involved in the power generation industry and aircraftengine markets.

 

Asignificant portion of our net sales is derived from a relatively small numberof customers; therefore, the failure to complete existing contracts on a timelybasis, and to receive payment for such services in a timely manner, or to enterinto future contracts at projected volumes and profitability levels couldadversely affect our ability to meet cash requirements exclusively throughoperating activities. We attempt to minimize the risk of losing customers orspecific contracts by continually improving product quality, delivering producton time and competing favorably on the basis of price.

 

DMCClad’s business is cyclical since it is linked to its customers’ end-marketactivity.  For example, the constructioncycle for new manufacturing capacity in the chemical industry has historicallybeen one characterized by significant amplitude.  It is driven both by global economic demandgrowth and capacity utilization.  Ascapacity starts to become tight for various chemicals and prices begin to rise,new manufacturing capacity is added in relatively large incremental amounts.

 

*Gross profit and cost of productssold*

 

Costof products sold for Explosive Metalworking include the cost of metals andalloys used to manufacture clad metal plates, the cost of explosives, employeecompensation and benefits, freight, outside processing costs, depreciation ofmanufacturing facilities and equipment, manufacturing supplies and othermanufacturing overhead expenses.

 

Costof products sold for Oilfield Products include the cost of metals, explosivesand other raw materials used to manufacture shaped charges, detonating productsand perforating guns as well as employee compensation and benefits,depreciation of manufacturing facilities and equipment, manufacturing suppliesand other manufacturing overhead expenses.

 

AMKWelding’s cost of products sold consists principally of employee compensationand benefits, welding supplies (wire and gas), depreciation of manufacturingfacilities and equipment, outside services and other manufacturing overheadexpenses.

 

*Income taxes*

 

Our effective income tax rate decreased to 34.3% for the first half of2008 from 36.7% for the first half of 2007. Income tax provisions on the earnings of Nobelclad, Nitro Metall,DYNAenergetics and our German and Luxembourg holding companies have beenprovided based upon the respective French, Swedish, German and Luxembourgstatutory tax rates.  Based upon existingtax regulations and current federal, state and foreign statutory tax rates, weexpect our full 

 

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year 2008 blended effective tax rate on our consolidated pre-tax incometo range between 32% to 33%.

 

*Backlog*

 

We use backlogas a primary means of measuring the immediate outlook for our business.  We define “backlog” at any given point intime to consist of all firm, unfulfilled purchase orders and commitments atthat time.  Generally speaking, we expectto fill most backlog orders within the following 12 months.  Fromexperience, most firm purchase orders and commitments are realized.  However, since orders may be rescheduled orcanceled, and a significant portion of our net sales is derived from a smallnumber of customers, backlog is not necessarily indicative of future saleslevels.  Moreover, we cannot be sure ofwhen during the future 12-month period we will be able to recognize revenuecorresponding to our backlog nor can we be sure that revenues corresponding toour backlog will not fall into periods beyond the 12-month horizon.

 

Our backlog with respectto the Explosive Metalworking segment increased to approximately $104,871 at June 30,2008 from approximately $102,106 at March 31, 2008 and approximately$100,000 at December 31, 2007.

 

**Three and Six Months Ended June 30, 2008 Comparedto Three and Six Months Ended June 30, 2007**

 

*Net sales*

 
| ** ** | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2008**               | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                      | 63,183     |       | $          | 34,454         |       | $ | 28,729 |   | 83.4 | % |
|            |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** ** | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2008**             | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                    | 121,576    |       | $          | 67,548         |       | $ | 54,028 |   | 80.0 | % |
|            |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Net sales for the secondquarter of 2008 increased 83.4% to $63,183 from $34,454 in the second quarterof 2007.  Explosive Metalworking salesincreased 60.0% to $52,996 in the three months ended June 30, 2008 (84% oftotal sales) from $33,119 in the same period of 2007 (96% of total sales).  The significant increase in ExplosiveMetalworking sales reflects a sales contribution of $8,605 from the DYNAplatdivision of DYNAenergetics and increased sales of $11,272 from our other DMCClad divisions which reflect the continued strong economic condition of theindustries this business segment serves.

 

Oilfield Productscontributed $7,922 to second quarter 2008 sales (12% of total sales).

 

AMK Welding contributed $2,265 to second quarter 2008 sales (4% oftotal sales), which represents a 69.7% increase from sales of $1,335 in thesecond quarter of 2007 (4% of total sales). The increases in AMK’s sales relates principally to increased revenuesfrom ground-based gas turbine work.

 

Net sales for the firsthalf of 2008 increased 80.0% to $121,576 from $67,548 in the first half of2007.  Explosive Metalworking salesincreased 61.9% to $104,638 in the six months ended June 30, 2008 (86% oftotal sales) from $64,614 in the same period of 2007 (96% of total sales).

 

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The significant increase in ExplosiveMetalworking sales reflects a sales contribution of $19,349 from the DYNAplatdivision of DYNAenergetics and increased sales of $20,675 from our other DMCClad divisions which reflect the continued strong economic condition of theindustries this business segment serves. Due to longer lead times on carbon steel supply in the United States,sales for the second half of 2008 are expected to be up to 8% lower than thosereported for the first half of the year, with third quarter 2008 sales expectedto be up to 20% less than the $52,996 in sales that we reported in the secondquarter.

 

Oilfield Productscontributed $12,373 to first half 2008 sales (10% of total sales).  Sales during the second half of 2008 areexpected to be 20% to 30% higher than those of the first half with most of thisincrease coming in the fourth quarter.

 

AMK Welding contributed $4,565 to first half 2008 sales (4% of totalsales), which represented a 55.6% increase from sales of $2,934 in the firsthalf of 2007 (4% of total sales).  Theincreases in AMK’s sales relates principally to increased revenues fromground-based gas turbine work.  Secondhalf 2008 sales at AMK Welding are expected to be comparable to or slightlyhigher than those for the first half of the year.

 

*Gross profit*

* *
| ** **                            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2008**               | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit                          |       | $                      | 19,049     |       | $          | 12,079         |       | $ | 6,970 |   | 57.7 | % |
| Consolidated gross profit margin rate |       | 30.1                   | %          | 35.1       | %          |           |       |   |   |
|                                       |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** **                            | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2008**             | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit                          |       | $                    | 36,760     |       | $          | 22,930         |       | $ | 13,830 |   | 60.3 | % |
| Consolidated gross profit margin rate |       | 30.2                 | %          | 33.9       | %          |           |       |   |   |
|                                       |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Grossprofit increased by 57.7% to $19,049 for the three months ended June 30,2008 from $12,079 for the three months ended June 30, 2007. Our secondquarter 2008 consolidated gross profit margin rate decreased to 30.1% from35.1% in the second quarter of 2007. The gross profit margin rate for ExplosiveMetalworking decreased from 35.7% in the second quarter of 2007 to 29.7% in thesecond quarter of 2008, for the reasons discussed below.  The gross profit margin rate for AMK Weldingincreased to 34.3% in the second quarter of 2008 from 21.9% in the secondquarter of 2007, with this improvement being largely attributable to the 69.7%increase in AMK’s sales volume as discussed above.  Oilfield Products reported a gross profitmargin rate of 33.6% on its second quarter 2008 sales of $7,922, which washigher than the normal gross margin level for this business due to a favorablesecond quarter product and customer mix.

 

Forthe six months ended June 30, 2008, gross profit increased to $36,760 from$22,930 for the same period of 2007, a 60.3% increase.  Our year to date consolidated gross profitmargin grate decreased to 30.2% from 33.9% for the first six months of2007.  The gross profit margin rate forExplosive Metalworking decreased to 30.2% from 34.4%.  For the six months ended June 30, 2007,the gross profit margin rate for AMK Welding increased to 35.3% from 25.7% forthe same

 

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period of2007.  Oilfield Products reported grossprofit margin rate of 30.6% for the first half of 2008, which is consideredsomewhat higher than the normal gross margin range for this business.

 

Thedecreased second quarter and first half 2008 gross profit margin rates forExplosive Metalworking relates primarily to a higher proportion of sales by ourEuropean divisions in the first half of 2008 than in the first half of 2007 asa result of the DYNAenergetics acquisition. As mentioned above, the DYNAplat division of DYNAenergetics reportedfirst half 2008 sales of $19,349.  Historically,gross margins for our European explosion welding divisions, including those ofthe DYNAplat division, have generally been lower than those reported by ourU.S. divisions.

 

Dueto an expected decline in consolidated third quarter 2008 sales compared tosales reported in first and second quarter of 2008, we expect our third quartergross margin rate on consolidated sales to decline to 28% and 29% of sales as aresult spreading fixed manufacturing overhead expenses over a reduced salesbase.  Based upon our expectation thatfourth quarter  consolidated sales willapproximate or exceed those of the second quarter, we expect our fourthconsolidated gross margin to be comparable to the gross margin rates that wereported in the first and second quarters.

 

 *General and administrative expenses*

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                                 | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                 | ** ** | **2008**               | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General & administrative expenses |       | $                      | 3,815      |       | $          | 1,854          |       | $ | 1,961 |   | 105.8 | % |
| Percentage of net sales                    |       | 6.0                    | %          | 5.4        | %          |           |       |   |   |
|                                            |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** **                                 | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                                 | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                 | ** ** | **2008**             | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General & administrative expenses |       | $                    | 6,933      |       | $          | 3,516          |       | $ | 3,417 |   | 97.2 | % |
| Percentage of net sales                    |       | 5.7                  | %          | 5.2        | %          |           |       |   |   |
|                                            |            |                      |            |            |            |                |            |  |  |  |  |  |

 

General andadministrative expenses increased by $1,961, or 105.8%, to $3,815 in the secondquarter of 2008 from $1,854 in the second quarter of 2007.  Excluding $1,447 of incremental general andadministrative expenses that resulted from the DYNAenergetics acquisition, ourgeneral and administrative expenses increased by $514 or 27.7%.  This increase reflects a $378 increase instock-based compensation and an impact of $32 from annual salary adjustmentsand staffing changes.  As a percentage ofnet sales, general and administrative expenses increased to 6.0% in the secondquarter of 2008 from 5.4% in the second quarter of 2007.

 

General andadministrative expenses for the six months ended June 30, 2008 totaled$6,933 compared to $3,516 for the same period of 2007.  This reflects an increase of 97.2%.  Excluding $2,339 of incremental general andadministrative expenses for DYNAenergetics for the first half of 2008, ourgeneral and administrative expenses increased by $1,078 or 30.7%.  This increase reflects a $651 increase instock-based compensation, an impact of $159 from annual salary adjustments andstaffing changes, and a $118 increase in legal and consulting expenses.  As a percentage of net sales, general andadministrative expenses increased to 5.7% in the first half of 2008 from 5.2%in the first half of 2007.

 

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*Sellingexpenses*

 
| ** **              | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **              | ** ** | **2008**               | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses        |       | $                      | 2,633      |       | $          | 1,455          |       | $ | 1,178 |   | 81.0 | % |
| Percentage of net sales |       | 4.2                    | %          | 4.2        | %          |           |       |   |   |
|                         |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** **              | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **              | ** ** | **2008**             | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses        |       | $                    | 5,474      |       | $          | 3,101          |       | $ | 2,373 |   | 76.5 | % |
| Percentage of net sales |       | 4.5                  | %          | 4.6        | %          |           |       |   |   |
|                         |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Sellingexpenses, which include sales commissions of $309 in 2008 and $291 in 2007,increased by 81.0% to $2,633 in the second quarter of 2008 from $1,455 in thesecond quarter of 2007.  Excluding $809of incremental selling expenses that resulted from the DYNAenergeticsacquisition, our selling expenses increased by $369 or 25.4%.  This increase reflects an increase instock-based compensation expense of $142 and an impact of $128 from annualsalary adjustments and staffing changes. As a percentage of net sales, selling expenses remained at 4.2% in thesecond quarter of 2008 and 2007.

 

Selling expenses increasedby 76.5% to $5,474 in the first half of 2008 from $3,101 in the same period of2007.  These expenses include salescommission of $622 and $714 for 2008 and 2007 respectively.  Excluding $1,664 of incremental sellingexpenses from DYNAenergetics, our selling expenses increased by $709 or22.8%.  This increase reflects anincrease in stock-based compensation expense of $266, an impact of $238 fromannual salary adjustments and staffing changes, and a $155 increase in travelexpenses.  As a percentage of net sales,selling expenses decreased to 4.5% in the first half of 2008 from 4.6% in thefirst half of 2007.

 

*Amortization expenses*

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------------------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                                           | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                           | ** ** | **2008**               | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Amortization expense of purchased intangible  assets |       | $                      | 2,464      |       | $          | —         |       | $ | 2,464 |   | NA |   |
| Percentage of net sales                              |       | 3.9                    | %          | 0.0        | %          |           |       |   |   |
|                                                      |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** **                                           | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------------------------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                                           | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                           | ** ** | **2008**             | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Amortization expense of purchased intangible  assets |       | $                    | 4,825      |       | $          | —         |       | $ | 4,825 |   | NA |   |
| Percentage of net sales                              |       | 4.0                  | %          | 0.0        | %          |           |       |   |   |
|                                                      |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Amortization expense relates entirely to the amortization of valuesassigned to intangible assets in connection with the November 15, 2007acquisition of DYNAenergetics. Amortization

 

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expense for the three months ended June 30,2008 includes $1,050, $981, $327 and $107 relating to values assigned to orderbacklog, customer relationships, core technology and trademarks/trade names,respectively.  Amortization expense forthe six months ended June 30, 2008 includes $2,055, $1,921, $640 and $209relating to values assigned to order backlog, customer relationships, coretechnology and trademarks/trade names, respectively.  Based upon the preliminary purchase priceallocation and current foreign exchange rates, we expect amortization expensefor 2008 to approximate $7,700.

 

*Income from operations*

 
| ** **             | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **             | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **             | ** ** | **2008**               | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from operations |       | $                      | 10,137     |       | $          | 8,770          |       | $ | 1,367 |   | 15.6 | % |
|                        |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** **             | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **             | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **             | ** ** | **2008**             | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from operations |       | $                    | 19,528     |       | $          | 16,313         |       | $ | 3,215 |   | 19.7 | % |
|                        |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Income from operationsincreased by 15.6% to $10,137 in the second quarter of 2008 from $8,770 in thesecond quarter of 2007.  ExplosiveMetalworking reported income from operations of $9,815 in the second quarter of2008 as compared to $9,047 in the second quarter of 2007.  This 8.5% increase is largely attributable tothe 60.0% sales increase as discussed above. Oilfield Products reported income from operations of $616 for the secondquarter of 2008.  AMK Welding reportedincome from operations of $585 for the three months ended June 30, 2008 ascompared to $18 for the same period of 2007. This significant increase is attributable to the $930, or 69.7%,increase in sales as discussed above.

 

Income from operationsincreased by 19.7% to $19,528 in the first six months of 2008 from $16,313 inthe first six months of 2007.  ExplosiveMetalworking reported income from operations of $19,799 in the first half of2008 as compared to $16,550 in the first half of 2007.  This 19.6% increase is largely attributableto the 61.9% sales increase discussed above. Oilfield Products reported income from operations of $50 for the firsthalf of 2008.  AMK Welding reportedincome from operations of $1,222 for the first six months of 2008 as comparedto $282 for the first six months of 2007.

 

Income from operationsfor the three and six months ended June 30, 2008 includes $879 and $1,543,respectively, of stock-based compensation expense compared to the stock-basedcompensation expense for the three and six months ended June 30, 2007 of$295 and $519, respectively.  Thisexpense is not allocated to our business segments and thus is not included inthe above second quarter and year to date operating income totals for ExplosiveMetalworking, Oilfield Products and AMK Welding.

 

*Interest income (expense), net*
| *** ***                   | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                     | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                     | ** ** | **2008**               | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income (expense), net |       | $                      | (1,372     | )          | $          | 177            |       | $ | (1,549 | ) | NM |   |
|                                |            |                        |            |            |            |                |            |  |  |  |  |  |

 

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| ** **                     | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                     | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                     | ** ** | **2008**             | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income (expense), net |       | $                    | (2,411     | )          | $          | 365            |       | $ | (2,776 | ) | NM |   |
|                                |            |                      |            |            |            |                |            |  |  |  |  |  |

 

We recordednet interest expense of $1,372 in the three months ended June 30, 2008compared to net interest income of $177 in the same time period of 2007.   We recorded net interest expense of $2,411in the first half of 2008 compared to net interest income of $365 in the firsthalf of 2007.  During the first sixmonths of 2007, we were in a positive net cash position and earned interest oninvestment of excess cash balances.  Inconnection with the acquisition of DYNAenergetics, we borrowed approximately$65,000 under our new $100,000 five-year credit facility, assumed approximately$12,000 of DYNAenergetics’ debt outstanding as of the acquisition date, andused approximately $16,000 of our existing cash balances to finance theacquisition. As a result of this new indebtedness and a decrease in our cashposition, we reported a significant amount of interest expense during the firstthree and six months of 2008.

 

*Income tax provision*

 
| ** **           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **           | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **           | ** ** | **2008**               | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax provision |       | $                      | 3,017      |       | $          | 3,275          |       | $ | (258 | ) | (7.9 | )% |
| Effective tax rate   |       | 32.7                   | %          | 36.7       | %          |           |       |   |   |
|                      |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** **           | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **           | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **           | ** ** | **2008**             | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax provision |       | $                    | 5,989      |       | $          | 6,116          |       | $ | (127 | ) | (2.1 | )% |
| Effective tax rate   |       | 34.3                 | %          | 36.7       | %          |           |       |   |   |
|                      |            |                      |            |            |            |                |            |  |  |  |  |  |

 

We recorded an income tax provision of $3,017 in the second quarter of2008 compared to $3,275 in the second quarter of 2007.  The effective tax rate decreased to 32.7% inthe second quarter of 2008 from 36.7% in the second quarter of 2007.  The income tax provisions for the threemonths ended June 30, 2008 and 2007 include $2,609 and $2,941,respectively, related to U.S. taxes, with the remainder relating to foreigntaxes and foreign tax benefits associated with the operations of Nobelclad andits Swedish subsidiary, Nitro Metall, as well as the newly acquiredDYNAenergetics division and related holding companies in Germany andLuxembourg.  During the second quarter,we refined our estimates of pre-tax earnings and permanent differences betweenbook and taxable income for the full year 2008. Based upon our current estimate of full year earnings and the impact of certainsignificant permanent differences, we currently expect our full year 2008blended effective tax rate on our consolidated pre-tax income to range between32% to 33%.

 

Forthe six months ended June 30, 2008, we recorded an income tax provision of$5,989 compared to $6,116 for the same period of 2007.  The effective tax rate decreased to 34.3% forthe first six months of 2008 from 36.7% for the first six months of 2007.  The income tax provisions for the six monthsended June 30, 2008 and 2007 include $5,560 and $5,043, respectively,related to U.S. taxes, with the remainder relating to foreign taxes and foreigntax benefits associated with

 

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the operations of Nobelclad, Nitro Metall, DYNAenergetics and our holdingcompanies in Germany and Luxembourg.

 

# **Liquidity and Capital Resources**

# ** **

Wehave historically financed our operations from a combination of internallygenerated cash flow, revolving credit borrowings, various long-term debtarrangements and the issuance of common stock. Prior to the November 15, 2007 acquisition of DYNAenergetics, wehad no outstanding borrowings under our $10,000 revolving credit facility witha U.S. bank and term debt outstanding of 290 Euros (approximately $458) under aterm loan with a French bank.   Inconnection with the acquisition of DYNAenergetics, we terminated our $10,000revolving credit facility and entered into a five-year syndicated creditagreement.  The credit agreement, whichprovides for term loans of $45,000 and 14,000 Euros and revolving loans of$25,000 and 7,000 Euros, is through a syndicate of seven banks.  The credit facility in the approximate amountof $100,000 expires on November 16, 2012. As of June 30, 2008, term loans of $45,000 and 14,000 Euros($22,119) and revolving loans of 6,600 Euros ($10,427) were outstanding underthe new credit facility. Additionally, we have assumed outstanding debtobligations of DYNAenergetics, including lines of credit loans and term loanswith outstanding amounts of $8,602 and $3,213, respectively, as of June 30,2008.

 

Webelieve that cash flow from operations and funds available under our currentcredit facilities and any future replacement thereof will be sufficient to fundthe working capital, debt service and capital expenditure requirements of ourcurrent business operations for the foreseeable future.  Nevertheless, our ability to generatesufficient cash flows from operations will depend upon our success in executingour strategies. If we are unable to (i) realize sales from our backlog; (ii) securenew customer orders at attractive prices; (iii) successfully integrate therecently-acquired DYNAenergetics businesses; and (iv) continue toimplement cost-effective internal processes, our ability to meet cashrequirements through operating activities could be impacted.  Furthermore, any restriction on theavailability of borrowings under our credit facilities could negatively affectour ability to meet future cash requirements.

 

*Debtand other contractual obligations and commitments*

 

**Our existingloan agreements include various covenants and restrictions, certain of whichrelate 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 financialratios.  As of June 30, 2008, wewere in compliance with all financial covenants and other provisions of ourdebt agreements.**

 

The Company’s principal cash flows related to debt obligations and othercontractual obligations and commitments have not materially changed since December 31,2007.

 

***Cash flowsfrom operating activities***

** **

Net cash flows providedby operating activities for the first half of 2008 totaled $11,813.  Significant sources of operating cash flowincluded net income of $11,458, non-cash depreciation and amortization expenseof $7,293 and stock-based compensation of $1,543.  These sources of operating cash flow werepartially offset by a deferred income tax benefit of $2,410, $289 for equity inearnings of joint ventures and net negative changes in various components ofworking capital in the amount of $5,782. Net negative changes in working capital included increases in prepaidexpenses of $844 and decreases in accounts payable, customer advances andaccrued expenses and other liabilities of $5,086, $2,859 and $3,347,respectively.  These negative changes

 

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in working capital were partially offset bydecreases in restricted cash, accounts receivable and inventories of $386,$1,237 and $4,731, respectively.

 

Net cash flows used inoperating activities for the six months ended June 30, 2007 totaled$2,612.  Significant sources of operatingcash flow included net income of $10,542, non-cash depreciation expense of $910and stock-based compensation of $519.  Thesesources of operating cash flow were offset by net negative changes in variouscomponents of working capital in the amount of $14,503.  Net negative changes in working capitalincluded increases in accounts receivable, inventories and prepaid expenses of$4,337, $10,943 and $636, respectively, and decreases in accrued expenses andother liabilities of $3,249.  Thesenegative changes in working capital were partially offset by a decrease inrestricted cash of $3,059 and increases in accounts payable and customer advancesof $1,276 and $327, respectively.  Thenet negative changes in working capital are reflective of the growth in ourbusiness from 2006 to 2007.

 

*Cashflows from investing activities*

 

Net cash flows used byinvesting activities for the first six months of 2008 totaled $4,172 andconsisted almost entirely of capital expenditures.

 

Net cash flows used ininvesting activities for the first six months of 2007 totaled $4,990 andconsisted primarily of capital expenditures.

 

*Cash flows from financingactivities*

 

Net cash flows providedby financing activities for the first six months of 2008 were $11,145, whichconsisted primarily of net borrowings on bank lines of credit of $12,081 and$240 in net proceeds from the issuance of common stock relating to the exerciseof stock options.  These sources of cashflow were partially offset by a final principal payment on a term loan withFrench bank of $443, a $542 principal payment on a Nord LB term loan, paymentsof deferred debt issuance costs of $140 and payment on capital leaseobligations of $216.

 

Net cash flows providedby financing activities for the first six months of 2007 were $7, whichconsisted primarily of net proceeds from the issuance of common stock relatingto the exercise of stock options of $382 that was offset by a $385 principalpayment on a term loan with French bank.

 

*Payment of Dividends*

 

On June 13, 2008,our board of directors declared a $.15 per share cash dividend which was paidon July 11, 2008.  The dividendtotaled $1,894 and was payable to shareholders of record as of June 27, 2008.

 

We may continue to payannual dividends in the future subject to capital availability and periodicdeterminations that cash dividends are in the best interests of ourstockholders, but we cannot assure you that such payments will continue.  Future dividends may be affected by, amongother items, our views on potential future capital requirements, futurebusiness prospects, changes in federal income tax law and any other factorsthat our board of directors deems relevant. Any decision to pay cash dividends is and will continue to be at thediscretion of board of directors.

 

**Critical Accounting Policies**

 

Ourhistorical consolidated financial statements and notes to our historicalconsolidated financial statements contain information that is pertinent to ourmanagement’s discussion and

 

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analysis of financialcondition and results of operations. Preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires that our management make estimates, judgments and assumptions thataffect the reported amounts of assets, liabilities, revenues and expenses, and thedisclosure of contingent assets and liabilities. However, the accountingprinciples used by us generally do not change our reported cash flows orliquidity. Interpretation of the existing rules must be done and judgmentsmade on how the specifics of a given rule apply to us.

 

Inmanagement’s opinion, the more significant reporting areas impacted bymanagement’s judgments and estimates are revenue recognition, assetimpairments, business combinations, goodwill, intangible assets subject toamortization, impact of foreign currency exchange rate risks, income taxes andstock-based compensation expense. Management’s judgments and estimates in theseareas are based on information available from both internal and externalsources, and actual results could differ from the estimates, as additionalinformation becomes known.  We believethe following to be our most critical accounting policies.

 

*Revenuerecognition*

 

**Sales of clad metal products andwelding services are generally based upon customer specifications set forth incustomer purchase orders and require us to provide certifications relative tometals used, services performed and the results of any non-destructive testingthat the customer has requested be performed. All issues of conformity of the product to specifications are resolvedbefore the product is shipped and billed. Products related to the oilfield products segment, which includedetonating cords, detonators, bi-directional boosters and shaped charges, as wellas, seismic related explosives and accessories, are standard in nature.  In all cases, revenue is recognized only whenall four of the following criteria have been satisfied: persuasive evidence ofan arrangement exists; the price is fixed or determinable; delivery hasoccurred; and collection is reasonably assured. For contracts that require multiple shipments, revenue is recorded onlyfor the units included in each individual shipment.  If, as a contract proceeds toward completion,projected total cost on an individual contract indicates a potential loss, theCompany will account for such anticipated loss.**

** **

*Assetimpairments*

 

Wereview our long-lived assets and held and used by us for impairment wheneverevents or changes in circumstances indicate their carrying amount may not berecoverable. In so doing, we estimate the future net cash flows expected toresult from the use of the asset and its eventual disposition. If the sum ofthe expected future net cash flows (undiscounted and without interest charges)is less than the carrying amount of the asset, an impairment loss is recognizedto reduce the asset to its estimated fair value. Otherwise, an impairment lossis not recognized.  Long-lived assets tobe disposed of, if any, are reported at the lower of carrying amount or fairvalue less cost to sell.

 

*BusinessCombinations*

 

Weaccounted for our business acquisition in accordance with the provisions ofSFAS No. 141, Business Combinations, using the purchase method ofaccounting. We allocated the total cost of the acquisition to the underlyingnet assets based on their respective estimated fair values. As part of thisallocation process, we identified and attributed values and estimated lives tothe intangible assets acquired. These determinations involved significantestimates 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 considerablejudgment. Our estimates and assumptions were based, in part, on theavailability of

 

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listed market pricesor other transparent market data. These determinations affect the amount ofamortization expense recognized in future periods. We based our fair valueestimates on assumptions we believe to be reasonable but are inherentlyuncertain.

 

*Goodwill*

 

In accordance with SFAS No. 142, we test goodwill for impairment ona “reporting unit” level as defined by reference to SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information on at leastan annual basis. A reporting unit is a group of businesses (i) for whichdiscrete financial information is available and (ii) that have similareconomic characteristics. We test goodwill for impairment using the followingtwo-step approach:

 

We first determine the fair value of each reporting unit. If the fairvalue of a reporting unit is less than its carrying value, this is an indicatorthat the goodwill assigned to that reporting unit might be impaired, whichrequires performance of the second step. We determine the fair value of ourreporting units based on projected future discounted cash flows, which, in turn,are based on our views of uncertain variables such as growth rates, anticipatedfuture economic conditions and the appropriate discount rates relative to riskand estimates of residual values.

 

In the second step, if required, we allocate the fair value of thereporting unit to the assets and liabilities of the reporting unit as if it hadjust been acquired in a business combination and as if the purchase price wasequivalent to the fair value of the reporting unit.  The excess of the fair value of the reportingunit over the amounts assigned to its assets and liabilities is referred to asthe implied fair value of goodwill. We then compare that implied fair value ofthe reporting unit’s goodwill to the carrying value of that goodwill. If theimplied fair value is less than the carrying value we recognize an impairmentloss for the excess.

 

The use of different estimates or assumptions within our discountedcash flow model when determining the fair value of our reporting units or usinga methodology other than a discounted cash flow model could result in differentvalues for reporting units and could result in an impairment charge.

 

*Intangible assets subject to amortization*

 

An intangible asset that is subject to amortization is reviewed whenimpairment indicators are present in accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. We compare theexpected undiscounted future operating cash flows associated with finite-livedassets to their respective carrying values to determine if the asset is fullyrecoverable. If the expected future operating cash flows are not sufficient torecover the carrying value, we estimate the fair value of the asset. Impairmentis recognized when the carrying amount of the asset is not recoverable and whenthe carrying value exceeds fair value. The projected cash flows require severalassumptions related to, among other things, relevant market factors, revenuegrowth, if any, and operating margins. While we believe our assumptions are reasonable,changes in these assumptions may have a material impact on our financialresults.

 

*Impactof foreign currency exchange rate risks*

 

Thefunctional currency for our foreign operations is the applicable local currencyfor each affiliate company. Assets and liabilities of foreign subsidiaries forwhich the functional currency is the local currency are translated at exchangerates in effect at period-end, and the statements of operations are translatedat the average exchange rates during the period.  Exchange rate fluctuations on translatingforeign currency financial statements into U.S. dollars that result in

 

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unrealized gains orlosses are referred to as translation adjustments. Cumulative translationadjustments are recorded as a separate component of stockholders’ equity andare included in other cumulative comprehensive income (loss). Transactionsdenominated in currencies other than the local currency are recorded based onexchange rates at the time such transactions arise. Subsequent changes inexchange rates result in transaction gains and losses, which are reflected inincome as unrealized (based on period-end translations) or realized uponsettlement of the transactions. Cash flows from our operations in foreigncountries are translated at actual exchange rates when known, or at the averagerate for the period. As a result, amounts related to assets and liabilitiesreported in the consolidated statements of cash flows will not agree to changesin the corresponding balances in the consolidated balance sheets. The effectsof exchange rate changes on cash balances held in foreign currencies arereported as a separate line item below cash flows from financing activities.

 

*Incometaxes*

 

Weaccount for income taxes in accordance with Statement of Financial AccountingStandards No.  109, Accounting for Income Taxes (“SFAS 109”), whichrequires the recognition of deferred tax assets and deferred tax liabilitiesfor the expected future income tax consequences of transactions that have beenincluded in our financial statements but not our tax returns.  Deferred tax assets and liabilities aredetermined based on the temporary differences between the ConsolidatedFinancial Statement basis and the tax basis of assets and liabilities usingenacted tax rates in effect for the year in which the differences are expectedto reverse.  We routinely evaluatedeferred tax assets to determine if they will, more likely than not, berecovered from future projected taxable income; if not, we record anappropriate valuation allowance.

 

During 2005, we completed an analysis of prior year tax credits andrelated items.  As a result of theanalysis, we filed amended federal and state income tax returns.  The amended state returns reported additionalnet operating losses and credits above the amounts we had previously recordedin our books and records.  In assessingthese additional losses and credits, we determined that the utilization of aportion of these did not meet the more likely than not criteria, due topotential changes in the states in which we have income tax nexus.  Thus, we recorded a net valuation allowanceof approximately $177 against the deferred tax assets during 2005.  As of June 30, 2008, the balance of thisallowance is $111.

 

*Stock-Based Compensation Expense*

 

Weaccount for stock-based compensation in accordance with the provisions ofStatement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment (“SFAS 123R”).  Underthe fair value recognition provisions of SFAS 123R, stock-based compensationcost is estimated at the grant date based on the value of the award and isrecognized as expense ratably over the requisite service period of theaward.  The fair value of restrictedstock awards is based on the fair value of the Company’s stock on the date ofgrant.  Determining the appropriate fairvalue model and calculating the fair value of stock options at the grant daterequires judgment, including estimating stock price volatility, forfeiturerates and expected option life.

 

**Recent Accounting Pronouncements**

 

**In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurements*(“SFAS 157”). SFAS 157 defines fair value, establishes a framework formeasuring fair value in accordance with accounting principles generallyaccepted in the United States, and expands disclosures about fair valuemeasurements. SFAS No. 157 was initially effective for financialstatements issued for fiscal years beginning after November 15, 2007.  The FASB issued a staff position statement (“FSP”)in February 2008 that deferred the required implementation date of**

 

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**SFAS 157 forcertain assets and liabilities.  Theadoption of SFAS 157 in the six months ended June 30, 2008 did not have amaterial impact on the Company’s results of operations or financial position.**

** **

**In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities – Including an Amendment of FASB Statement No. 115.”This Statement permits entities to measure many financial instruments andcertain other items at fair value. This election is made on aninstrument-by-instrument basis and is irrevocable. Unrealized gains and losseson items for which the fair value option has been elected are reported inearnings. This statement is effective for fiscal years beginning after November 15,2007. The Company did not elect the fair value option for any of its existingfinancial assets and liabilities during the six months ended June 30,2008.**

** **

**In December 2007,the FASB issued SFAS No. 141(R), Business Combinations and SFAS No. 160,Accounting and Reporting of Noncontrolling Interest in Consolidated FinancialStatements, an amendment of ARB No. 51. These new standards willsignificantly change the accounting for and reporting of business combinationtransactions and noncontrolling (minority) interests in consolidated financialstatements. SFAS Nos. 141(R) and 160 are required to be adoptedsimultaneously and are effective for the first annual reporting periodbeginning on or after December 15, 2008. Thus, we are required to adoptthese Standards on January 1, 2009. Earlier adoption is prohibited. TheCompany is in the process of determining the effect, if any, the adoption SFASNos. 141(R) and 160 will have on its results of operations orfinancial position.**

** **

**In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments and HedgingActivities*.  SFAS 161 requires additional disclosures relatedto the use of derivative instruments, the accounting for derivatives and howderivatives impact financial statements.  SFAS No. 161 is effectivefor fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the impact of adopting SFAS No. 161 onour consolidated financial statements.**

** **

**ITEM 3.     Quantitative and Qualitative Disclosureabout Market Risk**

** **

There have been no events that materially affect our quantitative andqualitative disclosure about market risk from that reported in our AnnualReport on Form 10-K for the year ended December 31, 2007.

 

**ITEM 4.     Controls and Procedures**

 

The Company maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in the Company’s Exchange Act reports is accurately recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicatedto the Company’s management, including its Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.  In designing and evaluatingthe disclosure controls and procedures, management recognized that any controlsand procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily applied its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

As of June 30, 2008, the Company carried out anevaluation, under the supervision and with the participation of the Company’smanagement, including the Company’s Chief Executive

 

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Officer and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in Exchange Act Rule 13a-15(e)).  Based on that evaluation, the Company’s ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective.  There have been no changes in the Company’sinternal controls during the quarter ended June 30, 2008 or in otherfactors that could materially affect the Company’s internal controls overfinancial reporting.

 

The Company’s management, including the Company’sChief Executive Officer and Chief Financial Officer, does not expect that theCompany’s disclosure controls or its internal controls will prevent all errorsand all fraud.  Further, the design of acontrol system must reflect the fact that there are resource constraints, andthe benefits of controls must be considered relative to their costs.  As a result of the inherent limitations inall control systems, no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within the Company havebeen detected.  These inherentlimitations include the realities that judgments in decision-making can befaulty, and that breakdowns can occur because of simple error or mistake.  As a result of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.  Accordingly, theCompany’s disclosure controls and procedures are designed to providereasonable, not absolute, assurance that the disclosure controls and proceduresare met.

 

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**Part II - OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

None.

 

**Item 1A. RiskFactors**

 

Our 2007 Annual Report on Form 10-Kincludes a detailed discussion of our risk factors.  The information presented below updates andshould be read in conjunction with the risk factors and information disclosedin our Form 10-K.

 

**Our backlog figures may not accurately predict future sales.**

 

We define “backlog” at any givenpoint in time to consist of all firm, unfulfilled purchase orders andcommitments at that time.  Generallyspeaking, we expect to fill most items of backlog within the following 12months.  However, since orders may berescheduled or canceled, and a significant portion of our net sales is derivedfrom a small number of customers, backlog is not necessarily indicative offuture sales levels.  Moreover, we cannotbe sure of when during the future 12-month period we will be able to recognizerevenue corresponding to our backlog; nor can we be sure that revenuescorresponding to our backlog will not fall into periods beyond the 12-monthhorizon.

 

**Item 2. Unregistered Sales of EquitySecurities and Use of Proceeds**

 

None.

 

**Item 3. Defaults Upon Senior Securities**

 

None.

 

**Item 4. Submission of Matters to a Vote ofSecurity Holders**

 

The Company’s Annual Meeting of Stockholders was held on June 5, 2008.  At the Annual Meeting, the stockholders ofthe Company (i) elected the persons listed below to serve as directors ofthe Company until the 2009 Annual Meeting of Stockholders (ii) approvedthe Company’s Short Term Incentive Plan and (iii) ratified the appointmentof Ernst & Young LLP as the Company’s independent registered publicaccounting firm for the fiscal year ending December 31, 2008.

 

The Companyhad 12,604,269 shares of Common Stock outstanding as of April 18, 2008,the record date for the Annual Meeting. At the Annual Meeting, holders of a total of 11,508,685 shares of CommonStock were present in person or represented by proxy.  The following sets forth informationregarding the results of the voting at the Annual Meeting:

 

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Proposal1

 
| ** **                | ** ** | **Shares Voted**    | ** ** | **Shares**   | ** ** |
|---------------------------|------------|---------------------|------------|--------------|------------|
| **Election of Directors** | ** ** | **“For”** | ** ** | **Withheld** | ** ** |
|                      |       |                |       |         |       |
| Dean K.  Allen            |       | 11,319,449          |       | 189,236      |       |
| Yvon Pierre  Cariou       |       | 11,368,885          |       | 139,800      |       |
| Bernard  Hueber           |       | 11,361,852          |       | 146,833      |       |
| Gerard  Munera            |       | 11,353,990          |       | 154,695      |       |
| Richard P.  Graff         |       | 11,348,868          |       | 159,817      |       |
| Rolf Rospek               |       | 11,267,756          |       | 240,929      |       |

 

Proposal 2             To approve the Company’s Short Term IncentivePlan

 
| **Shares Voted**    | ** ** | **Shares Voted**        | ** ** | **Shares Voted**        | ** ** | ** **    | ** ** |
|---------------------|------------|-------------------------|------------|-------------------------|------------|---------------|------------|
| **“For”** | ** ** | **“Against”** | ** ** | **“Abstain”** | ** ** | **Non-votes** | ** ** |
|                |       |                    |       |                    |       |          |       |
| 8,715,768           |       | 624,439                 |       | 347,479                 |       | 1,820,999     |       |

 

Proposal 3             To ratify the appointment of Ernst &Young LLP as the Company’s independent registered public accounting firm forthe fiscal year ending December 31, 2008.

 
| **Shares Voted**    | ** ** | **Shares Voted**        | ** ** | **Shares Voted**        | ** ** |
|---------------------|------------|-------------------------|------------|-------------------------|------------|
| **“For”** | ** ** | **“Against”** | ** ** | **“Abstain”** | ** ** |
|                |       |                    |       |                    |       |
| 11,209,184          |       | 291,227                 |       | 8,274                   |       |

 

**Item 5. Other Information**

 

None.

 

**Item 6.**

 

**Exhibits**

 

10.1         Form ofIndemnification Agreement (incorporated by reference to the Company’s Form 8-Kfiled with the Commission on April 28, 2008). *

 

10.2         Employment Agreementdated as of April 23, 2008, between the Company and Yvon Pierre Cariou(incorporated by reference to the Company’s Form 8-K filed with theCommission on April 28, 2008). *

 

10.3         Employment Agreementdated as of April 23, 2008, between the Company and Richard A. Santa(incorporated by reference to the Company’s Form 8-K filed with theCommission on April 28, 2008). *

 

10.4         Employment Agreementdated as of April 23, 2008, between the Company and John G. Banker(incorporated by reference to the Company’s Form 8-K filed with theCommission on April 28, 2008). *

 

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10.5         2008 Dynamic MaterialsCorporation Short Term Incentive Plan (incorporated by reference to Appendix Ato the Company’s Proxy Statement filed with the Commission on April 30,2008). *

 

31.1         Certification of thePresident and Chief Executive Officer pursuant to 17 CFR 240.13a-14(a) or17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

31.2         Certification of the VicePresident and Chief Financial Officer pursuant to 17 CFR 240.13a-14(a) or17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

32.1         Certification of thePresident and Chief Executive Officer pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2         Certification of the VicePresident and Chief Financial Officer pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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##### ***  Management contract or compensatory plan.**

 

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##### **SIGNATURES**

##### ** **

In accordance with the requirements of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
|                      | **DYNAMIC MATERIALS CORPORATION**                                                                                                              |
|---------------------------|------------------------------------------------------------------------------------------------------------------------------------------------|
|                      | (Registrant)                                                                                                                                   |
|                      |                                                                                                                                           |
|                      |                                                                                                                                           |
| Date: August 1, 2008 | /s/ Richard A. Santa                                                                                                                           |
|                      | Richard A. Santa, Senior Vice President and Chief  Financial Officer (Duly Authorized Officer and  Principal Financial and Accounting Officer) |

 

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