**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

**Form 10-Q**

(Mark One)

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF1934

**Forthe quarterly period ended June 30, 2007**

**OR**

**o**                                 TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 FOR THETRANSITION PERIOD FROM                TO                .

**Commissionfile number 0-8328**

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**DYNAMIC MATERIALS CORPORATION**

(Exact name of Registrantas Specified in its Charter)

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

 

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

(Address of principalexecutive offices, including zip code)

**(303) 665-5700**

(Registrant’s telephonenumber, including area code)

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

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.    Largeaccelerated filer  o    Acceleratedfiler  x    Non-acceleratedfiler  o

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 under the Act).  Yes  o  No  x

The number of shares of Common Stock outstanding was12,145,757 as of July 27, 2007.

** **

 

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CAUTIONARY NOTE ABOUTFORWARD-LOOKING STATEMENTS

Thisquarterly report on Form 10-Q contains “forward-looking statements” within themeaning of section 27A of the Securities Act of 1933 and section 21E of theSecurities Exchange Act of 1934. In particular, we direct your attention toPart I, Item 1- Financial Statements, Item 2 - Management’s Discussion andAnalysis of Financial Condition and Results of Operations and Item 3 -Quantitative and Qualitative Disclosures About Market Risk and Part II, Item 1A— Risk Factors. We intend the forward-looking statements throughout thisquarterly report on Form 10-Q and the information incorporated by referenceherein to be covered by the safe harbor provisions for forward-lookingstatements. Statements contained in this report which are not historical factsare forward-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; competitive factors; the timely completion of contracts; thetiming and size of expenditures; the timely receipt of government approvals andpermits; the adequacy of local labor supplies at our facilities; current orfuture limits on manufacturing capacity at our various operations; theavailability and cost of funds; and general economic conditions, both domesticand foreign, impacting our business and the business of the end-market users weserve. Readers are cautioned not to place undue reliance on theseforward-looking statements, which reflect management’s analysis only as of thedate hereof. We undertake no obligation to publicly release the results of anyrevision to these forward-looking statements that may be made to reflect eventsor circumstances after the date hereof or to reflect the occurrence ofunanticipated events.

** **

2

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**INDEX**
| PART  I - FINANCIAL INFORMATION                                                                              |   |   |   |
|--------------------------------------------------------------------------------------------------------------|--------|--------|--------|
|                                                                                                         |   |   |   |
| Item 1 - Condensed  Consolidated Financial Statements                                                        |   | 4      |   |
|                                                                                                         |   |   |   |
| Consolidated  Balance Sheets as of June 30, 2007 (unaudited) and December 31, 2006                           |   | 4      |   |
| Consolidated Statements of Operations for the three  and six months ended June 30, 2007 and 2006 (unaudited) |   | 6      |   |
| Consolidated Statement of Stockholders’ Equity for the  six months ended June 30, 2007 (unaudited)      |   | 7      |   |
| Consolidated Statements of Cash Flows for the six  months ended June 30, 2007 and 2006 (unaudited)           |   | 8      |   |
| Notes to Condensed Consolidated Financial Statements  (unaudited)                                            |   | 10     |   |
|                                                                                                         |   |   |   |
| Item 2 - Management’s Discussion and Analysis of  Financial Condition and Results of Operations         |   | 17     |   |
|                                                                                                         |   |   |   |
| Item 3 - Quantitative and Qualitative Disclosures  about Market Risk                                         |   | 28     |   |
|                                                                                                         |   |   |   |
| Item 4 - Controls and Procedures                                                                             |   | 28     |   |
|                                                                                                         |   |   |   |
| PART  II - OTHER INFORMATION                                                                                 |   |   |   |
|                                                                                                         |   |   |   |
| Item  1 - Legal Proceedings                                                                                  |   | 29     |   |
|                                                                                                         |   |   |   |
| Item  1A - Risk Factors                                                                                      |   | 29     |   |
|                                                                                                         |   |   |   |
| Item 2 - Unregistered Sales of Equity Securities and  Use of Proceeds                                        |   | 29     |   |
|                                                                                                         |   |   |   |
| Item 3 - Defaults Upon Senior Securities                                                                     |   | 29     |   |
|                                                                                                         |   |   |   |
| Item 4 - Submission of Matters to a Vote of Security  Holders                                                |   | 29     |   |
|                                                                                                         |   |   |   |
| Item  5 - Other Information                                                                                  |   | 30     |   |
|                                                                                                         |   |   |   |
| Item 6 - Exhibits                                                                                            |   | 30     |   |
|                                                                                                         |   |   |   |
| Signatures                                                                                                   |   | 31     |   |

** **

3

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**PartI - FINANCIAL INFORMATION**

**ITEM 1.  Condensed Consolidated Financial Statements**

** **

DYNAMIC MATERIALSCORPORATION & SUBSIDIARY

CONSOLIDATEDBALANCE SHEETS

(Dollars in Thousands)

 

ASSETS

 
| ** **                                                                                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                   | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| ** **                                                                                   | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
|                                                                                         |       |              |       |                  |       |
| CURRENT ASSETS:                                                                              |       |              |       |                  |       |
| Cash and cash  equivalents                                                                   |       | $                 | 10,374     |                  | $          | 17,886 |   |
| Restricted cash                                                                              |       | —            |       | 3,059                 |       |
| Accounts  receivable, net of allowance for doubtful accounts of $438 and $260,  respectively |       | 26,036            |       | 21,549                |       |
| Inventories                                                                                  |       | 30,350            |       | 19,226                |       |
| Prepaid expenses  and other                                                                  |       | 2,075             |       | 1,419                 |       |
| Current deferred  tax assets                                                                 |       | 703               |       | 708                   |       |
| Total current  assets                                                                        |       | 69,538            |       | 63,847                |       |
|                                                                                         |       |              |       |                  |       |
| PROPERTY, PLANT AND  EQUIPMENT                                                               |       | 37,057            |       | 31,963                |       |
| Less -  Accumulated depreciation                                                             |       | (12,653           | )          | (11,703               | )          |
| Property, plant  and equipment, net                                                          |       | 24,404            |       | 20,260                |       |
|                                                                                         |       |              |       |                  |       |
| GOODWILL, net                                                                                |       | 847               |       | 847                   |       |
|                                                                                         |       |              |       |                  |       |
| OTHER ASSETS, net                                                                            |       | 22                |       | 19                    |       |
| TOTAL ASSETS                                                                                 |       | $                 | 94,811     |                  | $          | 84,973 |   |

 

The accompanyingnotes are an integral part of these Condensed Consolidated FinancialStatements.

 

4

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARY

CONSOLIDATED BALANCESHEETS

(Dollars in Thousands,Except Share Data)

 

LIABILITIES ANDSTOCKHOLDERS' EQUITY

 
| ** **                                                                                                                                                                                                     | ** ** | **June 30,** | ** ** | **  December 31,  ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                                                                                     | ** ** | **2007**          | ** ** | **2006**                                      | ** ** |
| ** **                                                                                                                                                                                                     | ** ** | **(unaudited)**   | ** ** | ** **                                    | ** ** |
|                                                                                                                                                                                                           |       |              |       |                                          |       |
| CURRENT  LIABILITIES:                                                                                                                                                                                          |       |              |       |                                          |       |
| Accounts payable                                                                                                                                                                                               |       | $                 | 15,001     |                                          | $          | 13,572 |   |
| Accrued expenses                                                                                                                                                                                               |       | 2,399             |       | 3,347                                         |       |
| Dividend payable                                                                                                                                                                                               |       | 1,821             |       | —                                        |       |
| Accrued income taxes                                                                                                                                                                                           |       | 611               |       | 1,892                                         |       |
| Accrued employee compensation and benefits                                                                                                                                                                     |       | 2,728             |       | 3,710                                         |       |
| Customer advances                                                                                                                                                                                              |       | 2,754             |       | 2,394                                         |       |
| Current maturities on long-term debt                                                                                                                                                                           |       | 390               |       | 382                                           |       |
| Total current liabilities                                                                                                                                                                                      |       | 25,704            |       | 25,297                                        |       |
|                                                                                                                                                                                                           |       |              |       |                                          |       |
| LONG-TERM DEBT                                                                                                                                                                                                 |       | —            |       | 382                                           |       |
|                                                                                                                                                                                                           |       |              |       |                                          |       |
| DEFERRED TAX  LIABILITIES                                                                                                                                                                                      |       | 1,429             |       | 1,512                                         |       |
|                                                                                                                                                                                                           |       |              |       |                                          |       |
| OTHER LONG-TERM  LIABILITIES                                                                                                                                                                                   |       | 216               |       | 202                                           |       |
|                                                                                                                                                                                                           |       |              |       |                                          |       |
| COMMITMENTS AND  CONTINGENT LIABILITIES                                                                                                                                                                        |       | —            |       | —                                        |       |
| Total liabilities                                                                                                                                                                                              |       | 27,349            |       | 27,393                                        |       |
|                                                                                                                                                                                                           |       |              |       |                                          |       |
| 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 as of June 30, 2007; 15,000,000 shares authorized as of December  31, 2006; 12,141,757 and 11,981,999 shares issued and outstanding,  respectively |       | 607               |       | 599                                           |       |
| Additional paid-in capital                                                                                                                                                                                     |       | 23,059            |       | 22,166                                        |       |
| Retained earnings                                                                                                                                                                                              |       | 41,823            |       | 33,102                                        |       |
| Other cumulative comprehensive income                                                                                                                                                                          |       | 1,973             |       | 1,713                                         |       |
| Total stockholders' equity                                                                                                                                                                                     |       | 67,462            |       | 57,580                                        |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                    |       | $                 | 94,811     |                                          | $          | 84,973 |   |

 

The accompanying notesare an integral part of these Condensed Consolidated Financial Statements.

 

5

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF OPERATIONS

FOR THE THREE AND SIXMONTHS ENDED JUNE 30, 2007 AND 2006

(Dollars in Thousands,Except Share Data)

(unaudited)

 
| ** **                                              | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                              | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                              | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| NET SALES                                               |       | $                                | 34,454     |                           | $          | 27,754 |   | $ | 67,548 |   | $ | 52,928 |   |
| COST OF PRODUCTS  SOLD                                  |       | 22,375                           |       | 17,833                         |       | 44,618 |   | 33,727 |   |
| Gross profit                                            |       | 12,079                           |       | 9,921                          |       | 22,930 |   | 19,201 |   |
| COSTS AND  EXPENSES:                                    |       |                             |       |                           |       |   |   |   |   |
| General and administrative expenses                     |       | 1,854                            |       | 1,153                          |       | 3,516 |   | 2,681 |   |
| Selling expenses                                        |       | 1,455                            |       | 946                            |       | 3,101 |   | 2,270 |   |
| Total costs and expenses                                |       | 3,309                            |       | 2,099                          |       | 6,617 |   | 4,951 |   |
| INCOME FROM  OPERATIONS OF CONTINUING OPERATIONS        |       | 8,770                            |       | 7,822                          |       | 16,313 |   | 14,250 |   |
| OTHER INCOME  (EXPENSE):                                |       |                             |       |                           |       |   |   |   |   |
| Interest income, net                                    |       | 177                              |       | 132                            |       | 365 |   | 225 |   |
| Other expense                                           |       | (13                              | )          | (11                            | )          | (20 | ) | (16 | ) |
| INCOME BEFORE INCOME TAXES AND DISCONTINUED  OPERATIONS |       | 8,934                            |       | 7,943                          |       | 16,658 |   | 14,459 |   |
| INCOME TAX  PROVISION                                   |       | 3,275                            |       | 2,938                          |       | 6,116 |   | 5,317 |   |
| INCOME FROM  CONTINUING OPERATIONS                      |       | 5,659                            |       | 5,005                          |       | 10,542 |   | 9,142 |   |
| INCOME FROM  DISCONTINUED OPERATIONS, net of tax        |       | —                           |       | —                         |       | — |   | 1,357 |   |
| NET INCOME                                              |       | $                                | 5,659      |                           | $          | 5,005 |   | $ | 10,542 |   | $ | 10,499 |   |
| INCOME PER SHARE  - BASIC:                              |       |                             |       |                           |       |   |   |   |   |
| Continuing operations                                   |       | $                                | 0.47       |                           | $          | 0.42 |   | $ | 0.88 |   | $ | 0.78 |   |
| Discontinued operations                                 |       | —                           |       | —                         |       | — |   | 0.11 |   |
| Net income                                              |       | $                                | 0.47       |                           | $          | 0.42 |   | $ | 0.88 |   | $ | 0.89 |   |
| INCOME PER SHARE  - DILUTED:                            |       |                             |       |                           |       |   |   |   |   |
| Continuing operations                                   |       | $                                | 0.46       |                           | $          | 0.41 |   | $ | 0.86 |   | $ | 0.75 |   |
| Discontinued operations                                 |       | —                           |       | —                         |       | — |   | 0.11 |   |
| Net income                                              |       | $                                | 0.46       |                           | $          | 0.41 |   | $ | 0.86 |   | $ | 0.86 |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING -        |       |                             |       |                           |       |   |   |   |   |
| Basic                                                   |       | 12,048,969                       |       | 11,805,610                     |       | 12,029,382 |   | 11,786,957 |   |
| Diluted                                                 |       | 12,239,256                       |       | 12,229,189                     |       | 12,232,569 |   | 12,223,268 |   |
| ANNUAL DIVIDENDS  DECLARED PER COMMON SHARE             |       | $                                | 0.15       |                           | $          | — |   | $ | 0.15 |   | $ | 0.15 |   |

 

The accompanying notesare an integral part of these Condensed Consolidated Financial Statements

 

6

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE SIX MONTHS ENDEDJUNE 30, 2007

(Amounts in 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,  2006                                       |       | 11,982                |       | $              | 599        |         | $          | 22,166            |       | $          | 33,102     |              | $          | 1,713 |   | $ | 57,580 |   |   |   |
|                                                               |       |                  |       |           |       |         |       |              |       |       |       |              |       |   |   |
| Shares issued  for stock option exercises                          |       | 121                   |       | 6              |       | 284          |       | —            |       | —     |       | 290               |       |   |   |
|                                                               |       |                  |       |           |       |         |       |              |       |       |       |              |       |   |   |
| Restricted stock  awards                                           |       | 35                    |       | 2              |       | (2           | )          | —            |       | —     |       | —            |       |   |   |
|                                                               |       |                  |       |           |       |         |       |              |       |       |       |              |       |   |   |
| Shares issued in  connection with the employee stock purchase plan |       | 4                     |       | —         |       | 92           |       | —            |       | —     |       | 92                |       |   |   |
|                                                               |       |                  |       |           |       |         |       |              |       |       |       |              |       |   |   |
| Stock-based compensation                                           |       | —                |       | —         |       | 519          |       | —            |       | —     |       | 519               |       |   |   |
|                                                               |       |                  |       |           |       |         |       |              |       |       |       |              |       |   |   |
| Dividends  declared                                                |       | —                |       | —         |       | —       |       | (1,821            | )          | —     |       | (1,821            | )          |   |   |
|                                                               |       |                  |       |           |       |         |       |              |       |       |       |              |       |   |   |
| Net income                                                         |       | —                |       | —         |       | —       |       | 10,542            |       | —     |       | 10,542            |       | 10,542 |   |
|                                                               |       |                  |       |           |       |         |       |              |       |       |       |              |       |   |   |
| Change in  cumulative foreign currency translation adjustment      |       | —                |       | —         |       | —       |       | —            |       | 260        |       | 260               |       | 260 |   |
| Balances, June 30, 2007                                            |       | 12,142                |       | $              | 607        |         | $          | 23,059            |       | $          | 41,823     |              | $          | 1,973 |   | $ | 67,462 |   | $ | 10,802 |   |
|                                                                    |            |                       |            |                |            |              |            |                   |            |            |            |                   |            |  |  |  |  |  |  |  |  |

 

The accompanyingnotes are an integral part of these Condensed Consolidated FinancialStatements.

 

7

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDEDJUNE 30, 2007 AND 2006

(Dollars in Thousands)

(unaudited)

 
| ** **                                                                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                        |       |     |       |     |       |
| Net income                                                                                    |       | $        | 10,542     |     | $          | 10,499 |   |
| Adjustments to reconcile net income to net cash provided  by (used in) operating activities - |       |     |       |     |       |
| Income from discontinued operations, net of tax                                               |       | —   |       | (1,357   | )          |
| Depreciation                                                                                  |       | 910      |       | 645      |       |
| Amortization of capitalized debt issuance costs                                               |       | —   |       | 14       |       |
| Stock-based compensation                                                                      |       | 519      |       | 353      |       |
| Deferred income tax provision (benefit)                                                       |       | (80      | )          | 656      |       |
| Change in -                                                                                   |       |     |       |     |       |
| Restricted cash                                                                               |       | 3,059    |       | —   |       |
| Accounts receivable, net                                                                      |       | (4,337   | )          | (373     | )          |
| Inventories                                                                                   |       | (10,943  | )          | (1,618   | )          |
| Prepaid expenses and other                                                                    |       | (636     | )          | (427     | )          |
| Accounts payable                                                                              |       | 1,276    |       | 1,432    |       |
| Customer advances                                                                             |       | 327      |       | (739     | )          |
| Accrued expenses and other liabilities                                                        |       | (3,249   | )          | (748     | )          |
| Net cash provided by (used in) operating activities                                           |       | (2,612   | )          | 8,337    |       |
|                                                                                          |       |     |       |     |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                        |       |     |       |     |       |
| Acquisition of property, plant and equipment                                                  |       | (4,977   | )          | (2,561   | )          |
| Sale of marketable securities                                                                 |       | —   |       | 1,950    |       |
| Loan to related party                                                                         |       | —   |       | (1,206   | )          |
| Repayment on loan to related party                                                            |       | —   |       | 1,206    |       |
| Change in other non-current assets                                                            |       | (13      | )          | 147      |       |
| Payment received on other receivables related to  discontinued operations                     |       | —   |       | 3        |       |
| Cash flows provided by investing activities of  discontinued operations                       |       | —   |       | 2,197    |       |
| Net cash flows  provided by (used in) investing activities                                    |       | (4,990   | )          | 1,736    |       |
|                                                                                               |            |          |            |          |            |  |  |

 

The accompanyingnotes are an integral part of these Condensed Consolidated FinancialStatements.

 

8

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARY

CONSOLIDATED STATEMENTSOF CASH FLOWS

FOR THE SIX MONTHS ENDEDJUNE 30, 2007 AND 2006

(Dollars in Thousands)

(unaudited)

 
| ** **                                                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                 |       |     |       |     |       |
| Repayments on related party lines of credit, net                       |       | —   |       | (47      | )          |
| Payment on industrial development revenue bond                         |       | —   |       | (90      | )          |
| Payment on term loan with French bank                                  |       | (385     | )          | (356     | )          |
| Payment of dividends                                                   |       | —   |       | (1,766   | )          |
| Change in other long-tem liabilities                                   |       | 10       |       | 15       |       |
| Net proceeds from issuance of common stock to  employees and directors |       | 382      |       | 207      |       |
| Tax benefit related to exercise of stock options                       |       | —   |       | 94       |       |
| Net cash flows provided by (used in) financing  activities             |       | 7        |       | (1,943   | )          |
|                                                                   |       |     |       |     |       |
| EFFECTS OF  EXCHANGE RATES ON CASH                                     |       | 83       |       | 117      |       |
|                                                                   |       |     |       |     |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                  |       | (7,512   | )          | 8,247    |       |
|                                                                   |       |     |       |     |       |
| CASH AND CASH  EQUIVALENTS, beginning of the period                    |       | 17,886   |       | 5,763    |       |
| CASH AND CASH  EQUIVALENTS, end of the period                          |       | $        | 10,374     |     | $          | 14,010 |   |
|                                                                        |            |          |            |          |            |  |  |

 

The accompanying notesare an integral part of these Condensed Consolidated Financial Statements.

 

9

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**DYNAMIC MATERIALSCORPORATION & SUBSIDIARY**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**(Dollars inThousands, 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 31,2006.

**2.      SIGNIFICANT ACCOUNTING POLICIES**

Principles of Consolidation

The Condensed Consolidated Financial Statements includethe accounts of the Company and its subsidiaries, all of which arewholly-owned. All significant intercompany accounts, profits and transactionshave been eliminated in consolidation.

Foreign Operations and Foreign 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.

** **

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Revenue Recognition

Sales of clad metal products and welding services aregenerally based upon customer specifications set forth in customer purchaseorders and require the Company to provide certifications relative to metalsused, services performed and the results of any non-destructive testing thatthe customer has requested be performed. All issues of conformity of the product to specifications are resolvedbefore the product is shipped and billed. Revenue is recognized only when all four of the following criteria havebeen satisfied: persuasive evidence of an arrangement exists; the price isfixed or determinable; delivery has occurred; and collection is reasonablyassured.  For contracts that requiremultiple shipments, revenue is recorded only for the units included in eachindividual shipment.  If, as a contractproceeds toward completion, projected total cost on an individual contractindicates a potential loss, the Company recognizes such anticipated loss atsuch time.

Loan to Related Party

The Company’s subsidiary, NobelcladEurope, S.A. (“Nobelclad”), had a Euro-denominated cash management agreementwith SNPE, the parent company of SNPE, Inc., the Company’s former majoritystockholder, which provided for loans to or from either party of up toapproximately $3,400, based on the December 31, 2005 exchange rates. Amountsoutstanding under this agreement bore interest at EURIBOR plus 1.5% annually.Due to Nobelclad’s excess cash position during the first quarter of 2006, itbegan advancing cash to SNPE through this intercompany cash agreement. At March31, 2006, these advances to SNPE totaled 1,003 Euros ($1,211). The interestrate earned on these advances exceeded the interest rate that Nobelclad couldearn on excess cash and cash equivalents held at its local bank. The agreementallowed Nobelclad to request repayment on the advances at any time. The balanceoutstanding at March 31, 2006 was repaid in full in April 2006 and theagreement was terminated upon the sale of our common stock by SNPE.

Earnings Per Share

Basic earnings per share (“EPS”) is computed bydividing net income by the weighted average number of shares of common stockoutstanding during the period.  DilutedEPS recognizes the potential dilutive effects of dilutive securities.  The following represents a reconciliation ofthe numerator and denominator used in the calculation of basic and diluted EPS:
| ** **                                           | ** ** | **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 |   |   |   |
|                                                 |       |                                                                            |       |   |   |   |   |
| Dilutive  earnings per share:                        |       |                                                                            |       |   |   |   |   |
| Net income                                           |       | $                                                                               | 5,659      |   | 12,239,256 |   | $ | 0.46 |   |

 

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| ** **                                           | ** ** | **For the three months ended June 30, 2006** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                   | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                           | ** ** | **Income**                                   | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings  per share:                           |       |                                         |       |   |   |   |   |
| Net income                                           |       | $                                            | 5,005      |   | 11,805,610 |   | $ | 0.42 |   |
|                                                 |       |                                         |       |   |   |   |   |
| Dilutive effect  of options to purchase common stock |       | —                                       |       | 423,579 |   |   |   |
|                                                 |       |                                         |       |   |   |   |   |
| Dilutive  earnings per share:                        |       |                                         |       |   |   |   |   |
| Net income                                           |       | $                                            | 5,005      |   | 12,229,189 |   | $ | 0.41 |   |

 
| ** **                                           | ** ** | **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 |   |   |   |
|                                                 |       |                                       |       |   |   |   |   |
| Dilutive  earnings per share:                        |       |                                       |       |   |   |   |   |
| Net income                                           |       | $                                          | 10,542     |   | 12,232,569 |   | $ | 0.86 |   |

 
| ** **                                           | ** ** | **For the six months ended June 30, 2006** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                 | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                           | ** ** | **Income**                                 | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings  per share:                           |       |                                       |       |   |   |   |   |
| Net income                                           |       | $                                          | 10,499     |   | 11,786,957 |   | $ | 0.89 |   |
|                                                 |       |                                       |       |   |   |   |   |
| Dilutive effect  of options to purchase common stock |       | —                                     |       | 436,311 |   |   |   |
|                                                 |       |                                       |       |   |   |   |   |
| Dilutive  earnings per share:                        |       |                                       |       |   |   |   |   |
| Net income                                           |       | $                                          | 10,499     |   | 12,223,268 |   | $ | 0.86 |   |

 

**3.      INCOME TAXES**

The Company adopted the provisions of FinancialAccounting Standards Board Interpretation No. 48, Accounting for Uncertainty inIncome Taxes — an interpretation of FASB No. 109 (“FIN 48”), which clarifies the accounting and disclosure foruncertainty in tax positions, on January 1, 2007.  FIN 48 seeks to harmonize certain accountingpractices associated with the recognition and measurement of income taxes.  As a result of the implementation of FIN 48, theCompany recognized no material adjustment in the liability for unrecognizedincome tax benefits.  On the adoptiondate of January 1, 2007, the Company had $394 of unrecognized tax benefits, allof which would affect our effective tax rate if recognized.  At June 30, 2007, the balance of unrecognizedtax benefits remains at $394, and primarily relates to uncertain U.S. Federaltax positions.  The Company hasidentified no uncertain tax position for which it is reasonably 

 

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possible that the total amount of unrecognizedtax benefits will significantly increase or decrease within the 12 monthsfollowing the date of adoption of FIN 48.

The Company recognizes interest and penalties relatedto uncertain tax positions in operating expense.  As of June 30, 2007, the Company’s accrualfor interest and penalties related to uncertain tax positions is insignificant.

The Company’s U.S. Federal tax returns for the taxyears 2003-2006 remain open to examination while most of the Company’s statetax returns remain open to examination for the tax years 2002-2006.  The Company’s foreign tax returns remain opento examination for the tax years 2003-2006 in France and 2001-2006 in Sweden.

**4.      INVENTORY**

The components of inventory are as follows at June 30,2007 and December 31, 2006:

|                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|-------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| ** **      | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| Raw materials   |       | $                 | 9,504      |                  | $          | 6,282 |   |
| Work-in-process |       | 19,981            |       | 12,314                |       |
| Supplies        |       | 865               |       | 630                   |       |
|            |       | $                 | 30,350     |                  | $          | 19,226 |   |

 

**5.      DEBT**

Long-term debt consists of the following at June 30,2007 and December 31, 2006:

|                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| ** **               | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| Term loan -  French bank |       | $                 | 390        |                  | $          | 764 |   |
| Less current  maturities |       | (390              | )          | (382                  | )          |
| Long-term debt           |       | $                 | —     |                  | $          | 382 |   |

 

Loan Covenants andRestrictions

The Company’s existing loan agreements include variouscovenants and restrictions, certain of which relate to the incurrence ofadditional indebtedness, mortgaging, pledging or disposition of major assets,limits on capital expenditures and maintenance of specified financialratios.  As of June 30, 2007, the Companywas in compliance with all financial covenants and other provisions of its debtagreements.

**6.      BUSINESS SEGMENTS**

The Company is organized in the following two segments:  the Explosive Metalworking segment and AMKWelding. The Explosive Metalworking segment uses explosives to perform metalcladding and shock synthesis of industrial diamonds. The most significantproduct of this 

 

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group is clad metal which is used in the fabrication of pressurevessels, 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. AMK Welding utilizes a number of welding technologiesto weld components for manufacturers of jet engines and ground-based turbines.

The accounting policies of both segmentsare the same as those described in the summary of significant accountingpolicies.  The Company’s reportablesegments are strategic business units that offer different products andservices and are separately managed. Each segment is marketed to differentcustomer types and requires different manufacturing processes andtechnologies.  Segment information ispresented for the three and six months ended June 30, 2007 and 2006 as follows:
| ** **                                       | ** ** | **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 of continuing operations |       | $                | 9,047      |        | $          | 18         |       | $ | 9,065 |   |
| Unallocated amounts:                             |       |             |       |        |       |       |       |
| Stock-based compensation                         |       |             |       |        |       | (295       | )          |
| Interest income, net                             |       |             |       |        |       | 177        |       |
| Other expense                                    |       |             |       |        |       | (13        | )          |
| Consolidated income before income taxes          |       |             |       |        |       | $          | 8,934      |   |

 
| ** **                                       | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| ** **                                       | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the three  months ended June 30, 2006:       |       |             |       |        |       |       |       |
| Net sales                                        |       | $                | 26,649     |        | $          | 1,105      |       | $ | 27,754 |   |
| Depreciation                                     |       | $                | 273        |        | $          | 55         |       | $ | 328 |   |
| Income from  operations of continuing operations |       | $                | 7,717      |        | $          | 122        |       | $ | 7,839 |   |
| Unallocated amounts:                             |       |             |       |        |       |       |       |
| Stock-based compensation                         |       |             |       |        |       | (17        | )          |
| Interest income, net                             |       |             |       |        |       | 132        |       |
| Other expense                                    |       |             |       |        |       | (11        | )          |
| Consolidated  income before income taxes         |       |             |       |        |       | $          | 7,943      |   |

 

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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  of continuing operations |       | $                | 16,550     |        | $          | 282        |       | $ | 16,832 |   |
| Unallocated  amounts:                            |       |             |       |        |       |       |       |
| Stock-based  compensation                        |       |             |       |        |       | (519       | )          |
| Interest income,  net                            |       |             |       |        |       | 365        |       |
| Other expense                                    |       |             |       |        |       | (20        | )          |
| Consolidated  income before income taxes         |       |             |       |        |       | $          | 16,658     |   |

 
| ** **                                       | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| ** **                                       | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the six months  ended June 30, 2006:         |       |             |       |        |       |       |       |
| Net sales                                        |       | $                | 50,823     |        | $          | 2,105      |       | $ | 52,928 |   |
| Depreciation                                     |       | $                | 535        |        | $          | 110        |       | $ | 645 |   |
| Income from operations  of continuing operations |       | $                | 14,373     |        | $          | 230        |       | $ | 14,603 |   |
| Unallocated  amounts:                            |       |             |       |        |       |       |       |
| Stock-based compensation                         |       |             |       |        |       | (353       | )          |
| Interest income,  net                            |       |             |       |        |       | 225        |       |
| Other expense                                    |       |             |       |        |       | (16        | )          |
| Consolidated  income before income taxes         |       |             |       |        |       | $          | 14,459     |   |

 

During the three and six months ended June 30, 2007,no sales to any one customer accounted for more than 10% of total netsales.  During the three and six monthsended June 30, 2006, sales to one customer represented approximately $4,006(14%) and $7,671 (14%) of total net sales, respectively.

**7.      COMPREHENSIVE INCOME**

The Company’s comprehensive income for the three andsix months ended June 30, 2007 and 2006 was as follows:
| ** **                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                               | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income for  the period               |       | $                                | 5,659      |                           | $          | 5,005 |   | $ | 10,542 |   | $ | 10,499 |   |
|                                     |       |                             |       |                           |       |   |   |   |   |
| Foreign currency  translation adjustment |       | 200                              |       | 379                            |       | 260 |   | 521 |   |
|                                     |       |                             |       |                           |       |   |   |   |   |
| Comprehensive income                     |       | $                                | 5,859      |                           | $          | 5,384 |   | $ | 10,802 |   | $ | 11,020 |   |

** **

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As of June 30, 2007 and December 31, 2006 other cumulativecomprehensive income of $1,973 and $1,713, respectively, consists entirely ofcumulative foreign currency translation adjustment.

**8.      DISCONTINUEDOPERATIONS**

On September 17, 2004, DMC completed the divestitureof its Spin Forge division under an agreement that involved subleasing the SpinForge real estate and leasing the manufacturing equipment and tooling to athird party.  Under the master agreementrelating to this divestiture transaction, the Company sold all inventory, booksand records, intangible personal property, business information and technology,customer contracts, and licenses and permits relating to the Spin Forgebusiness to this third party for a sales price of approximately $1,700.  The third party also assumed fullresponsibility for Spin Forge business activities and operating expenses.  Despite the fact that the Company retained ownershipof the equipment and continued to carry a capital lease asset of $2,880 on itsbooks, the Company concluded that the Spin Forge divestiture transactionqualified for treatment as discontinued operations since the Company hadcompletely exited the Spin Forge operating business and had no intent to everagain operate any of the leased assets. In December 2006, the third party purchaser of the Spin Forge businesspurchased the majority of these leased assets while the remainder of the leasedassets was liquidated by the Company. This transaction resulted in a pretax gain of $228, which was recordedas discontinued operations in the fourth quarter of 2006.   The Company had received rent of $23 permonth on these leased assets until the date of their sale.

OnJanuary 10, 2006, the Company sold its purchase option on the Spin Forge realestate to the property owner for $2,300. The completion of this transaction resulted in a pretax gain of $2,197,which was recorded as discontinued operations in the first quarter of2006.  In connection with the sale of thepurchase option, the underlying lease agreement was terminated.  Accordingly, the capital lease asset of$2,880 and the related lease obligation of the same amount were removed fromthe Company’s balance sheet in the first quarter of 2006.

Discontinuedoperations for the six months ended June 30, 2006 is summarized as follows:

|                                                  | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|
| ** **                                       | ** ** | **June 30, 2006**    | ** ** |
| Gain on sale of  real estate purchase option     |       | $                              | 2,197      |   |
| Related income  tax expense                      |       | (840                           | )          |
| Income from  discontinued operations, net of tax |       | $                              | 1,357      |   |

** **

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

The following discussion shouldbe read in conjunction with our historical consolidated financial statementsand notes, as well as the selected historical consolidated financial data thatare included in the Company’s Annual Report filed on Form 10-K for the yearended December 31, 2006.

Unless stated otherwise, all dollar figures in thisdiscussion are presented in thousands (000’s).

**ExecutiveOverview**

Our business is organized into twosegments:  Explosive Metalworking and AMKWelding.  For the three months ended June30, 2007, Explosive Metalworking accounted for 96% of our net sales and 100% ofour income from operations of continuing operations before consideration ofstock-based compensation expense, which is not allocated to our businesssegments.  Year to date ExplosiveMetalworking accounted for 96% of our net sales and 98% or our income fromoperations of continuing operations before consideration of stock-basedcompensation expense.

Our year to date 2007 net sales increased by$14,620 (27.6%) compared to the first six months of 2006, reflectingyear-to-year net sales increases of $13,791 (27.1%) and $829 (39.4%) for ourExplosive Metalworking and AMK Welding segments, respectively.  Our operating income from continuingoperations increased by 14.5% to $16,313 in the first six months of 2007 from$14,250 in the first six months of 2006, reflecting a $2,177 improvement inExplosive Metalworking’s operating income and a $52 improvement in AMK Welding’soperating income.  Income from continuingoperations increased by 15.3% to $10,542 for the six months ended June 30, 2007from $9,142 in the same period of 2006. Our net income increased slightly to $10,542 in the first six months of2007 from $10,499 in the first six months of 2006.  For the six months ended June 30, 2006, netincome included $1,357 of income from discontinued operations, net of tax,relating to the sale of the Spin Forge real estate option as further discussedbelow.

*Net sales*

Explosive Metalworking’snet sales are generated principally from sales of clad metal plates and salesof transition joints, which are made from clad plates, to customers thatfabricate industrial equipment for various industries, including upstream oiland gas, oil refinery, petrochemicals, hydrometallurgy, aluminum production,shipbuilding, power generation, industrial refrigeration and similarindustries.  While demand for our cladmetal products in the United States is largely driven by new plant constructionand large plant expansion projects, maintenance and retrofit projects atexisting chemical processing, petrochemical processing and oil refiningfacilities account for a significant portion of total demand.  In contrast to the U.S. market, demand forour clad products in Europe and Asia is more dependent on new constructionprojects, such as the building of new purified terephthalic acid (“PTA”) plantsin different parts of the world, including China, and on sales of electricaltransition joints that are used in the aluminum production industry.

AMK Welding’s netsales are generated from welding, heat treatment and inspection services thatare provided with respect to customer-supplied parts for customers primarilyinvolved in the power generation industry and aircraft engine markets.

A significant portionof our net sales is derived from a relatively small number of customers; therefore,the failure to complete existing contracts on a timely basis, and to receive 

17

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payment for such services in a timelymanner, or to enter into future contracts at projected volumes andprofitability levels could adversely affect our ability to meet cashrequirements exclusively through operating activities. We attempt to minimizethe risk of losing customers or specific contracts by continually improvingproduct quality, delivering product on time and competing favorably on thebasis of price.

Explosive Metalworking’sbusiness 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 products sold*

Cost of products soldfor Explosive Metalworking include the cost of metals and alloys used tomanufacture clad metal plates, the cost of explosives, employee compensationand benefits, freight, outside processing costs, depreciation of manufacturingfacilities and equipment, manufacturing supplies and other manufacturingoverhead expenses.

AMK Welding’s cost ofproducts sold consists principally of employee compensation and benefits,welding supplies (wire and gas), depreciation of manufacturing facilities andequipment, outside services and other manufacturing overhead expenses.

*Discontinued operations*

In September 2004, we completed the sale of ourSpin Forge division.  On January 10,2006, we sold our option rights to purchase the Spin Forge real estate to theproperty owner for $2,300.  We recorded apre-tax gain of approximately $2,197 on this transaction, which was reported asdiscontinued operations, net of related taxes, in the first quarter of 2006.

*Income taxes*

Our effective income tax rate decreased slightly to36.7% for the first six months of 2007 from 36.8% for the first six months of2006.  Income tax provisions on theearnings of Nobelclad and Nitro Metall AB (“Nitro Metall”) have been providedbased upon the respective French and Swedish statutory tax rates.  Going forward, based upon existing taxregulations and current federal, state and foreign statutory tax rates, weexpect our effective tax rate on our consolidated pre-tax income to rangebetween 36% and 38%.

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*Backlog*

We use backlog as a primary means ofmeasuring 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 respect to the ExplosiveMetalworking segment increased to a record high of approximately $84.7 millionat June 30, 2007 from approximately $67.9 million at March 31, 2007 and fromapproximately $68.8 million at December 31, 2006.

**Three and Six Months Ended June 30,2007 Compared to Three and Six Months Ended June 30, 2006**

*Net sales*
| ** ** | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                                | 34,454     |       | $          | 27,754         |       | $ | 6,700 |   | 24.1 | % |
|            |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** ** | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2007**             | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                    | 67,548     |       | $          | 52,928         |       | $ | 14,620 |   | 27.6 | % |
|            |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Netsales for the second quarter of 2007 increased 24.1% to $34,454 from $27,754 inthe second quarter of 2006. Explosive Metalworking sales increased 24.3% to$33,119 in the three months ended June 30, 2007 (96% of total sales) from$26,649 in the same period of 2006 (96% of total sales).  Net sales for the six months ended June 30,2007 increased by 27.6% to $67,548 from $52,928 in the same period of2006.  Sales for our ExplosiveMetalworking Group increased 27.1% to $64,614 in the first six months of 2007(96% of total sales) from $50,823 for the first six months of 2006 (96% oftotal sales).  The significant increasein Explosive Metalworking sales is principally attributable to the continuedeconomic strength of the industries that this business segment serves.

AMKWelding contributed $1,335 to the second quarter 2007 sales (4% of total sales)which represented a 20.8% increase versus sales of $1,105 in the second quarterof 2006 (4% of total sales).  AMK Welding’syear to date 2007 sales increased by 39.4% to $2,934 (4% of total sales)compared to $2,105 (4% of total sales) in year to date 2006 sales.

** **

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*Grossprofit*
| ** **                             | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                             | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit                           |       | $                                | 12,079     |       | $          | 9,921          |       | $ | 2,158 |   | 21.8 | % |
| Consolidated gross  profit margin rate |       | 35.1                             | %          | 35.7       | %          |           |       |   |   |
|                                        |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **                            | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2007**             | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit                          |       | $                    | 22,930     |       | $          | 19,201         |       | $ | 3,729 |   | 19.4 | % |
| Consolidated gross profit margin rate |       | 33.9                 | %          | 36.3       | %          |           |       |   |   |
|                                       |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Gross profit increased by 21.8% to $12,079 forthe three months ended June 30, 2007 from $9,921 for the three months endedJune 30, 2006. Our second quarter 2007 consolidated gross profit margin ratedecreased to 35.1% from 35.7% in the second quarter of 2006. The gross profitmargin for Explosive Metalworking decreased from 36.3% in the second quarter of2006 to 35.7% in the second quarter of 2007 and the gross profit margin for AMKWelding decreased to 21.9% in the second quarter of 2007 from 24.9% in thesecond quarter of 2006.

For the six months ended June 30, 2007, grossprofit increased to $22,930 from $19,201 for the same period of 2006, a 19.4%increase.  Our year to date consolidatedgross profit margin rate decreased to 33.9% from 36.3% for the first six monthsof 2006.  The gross profit margin ratefor Explosive Metalworking decreased to 34.4% from 36.8%.  For the six months ended June 30, 2007, thegross profit margin for AMK Welding increased to 25.7% from 24.9% for the sameperiod of 2006.

The decreased gross margin rate for ExplosiveMetalworking relates primarily to changes in product mix during the first halfof 2007 as compared to that for the first half of 2006. AMK Welding’s grossmargin improvement relates principally to the sales increase and the resultantmore favorable absorption of fixed manufacturing overhead expenses.  Gross profit margins typically fluctuate fromone quarter to the next for various reasons, including changes in sales volumeand product mix. Our gross margins are likely to continue to fluctuate fromquarter-to-quarter.

*General and administrative expenses*
| ** **                             | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                             | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General &  administrative expenses |       | $                                | 1,854      |       | $          | 1,153          |       | $ | 701 |   | 60.8 | % |
| Percentage of  net sales               |       | 5.4                              | %          | 4.2        | %          |           |       |   |   |
|                                        |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **                             | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                             | ** ** | **2007**             | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General &  administrative expenses |       | $                    | 3,516      |       | $          | 2,681          |       | $ | 835 |   | 31.1 | % |
| Percentage of  net sales               |       | 5.2                  | %          | 5.1        | %          |           |       |   |   |
|                                        |            |                      |            |            |            |                |            |  |  |  |  |  |

 

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General and administrative expenses increased by$701, or 60.8%, to $1,854 in the second quarter of 2007 from $1,153 in thesecond quarter of 2006.  Expenseincreases reflect an impact of $167 from annual salary adjustments and staffingchanges, a $201 increase in stock-based compensation, a $70 increase in accruedincentive compensation expense, a $149 increase in legal and consultingexpenses and minor net increases of $95 in a number of other expensecategories.  As a percentage of netsales, general and administrative expenses increased to 5.4% in the secondquarter of 2007 from 4.2% in the second quarter of 2006.

General and administrative expenses for the sixmonths ended June 30, 2007 totaled $3,516 compared to $2,681 for the sameperiod of 2006.  This reflects anincrease of 31.1%.  The $835 increase in2007 general and administrative expenses for the six-month period reflects animpact of $305 from annual salary adjustments and staffing changes, a $116increase in accrued incentive compensation expense, a $154 increase in legaland consulting expenses, an increase of $77 in board of director fees, a $49increase in directors and officers’ insurance premiums, a $33 increase instock-based compensation and net increases of $102 in a number of other expensecategories.  As a percentage of netsales, general and administrative expenses slightly increased to 5.2% in thefirst half of 2007 from 5.1% in the first half of 2006.

*Selling expenses*
| ** **               | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **               | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **               | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses         |       | $                                | 1,455      |       | $          | 946            |       | $ | 509 |   | 53.8 | % |
| Percentage of  net sales |       | 4.2                              | %          | 3.4        | %          |           |       |   |   |
|                          |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **               | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **               | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **               | ** ** | **2007**             | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses         |       | $                    | 3,101      |       | $          | 2,270          |       | $ | 831 |   | 36.6 | % |
| Percentage of  net sales |       | 4.6                  | %          | 4.3        | %          |           |       |   |   |
|                          |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Selling expenses, which include sales commissions of$291 in 2007 and $122 in 2006, increased by 53.8% to $1,455 in the secondquarter of 2007 from $946 in the second quarter of 2006.  The $509 increase in selling expensesreflects an increase in sales commissions of $169, an impact of $114 fromannual salary adjustments and staffing changes, an increase of $26 in theprovision for doubtful accounts, a $35 increase in accrued incentivecompensation expense and a $46 increase in stock-based compensationexpense.  As a percentage of net sales,selling expenses increased to 4.2% in the second quarter of 2007 from 3.4% inthe second quarter of 2006.

Selling expenses increased by 36.6% to $3,101 in thefirst half of 2007 from $2,270 in the same period of 2006.  These expenses include sales commissions of$714 and $595 for 2007 and 2006 respectively. The $831 increase in 2007 selling expenses for the six-month periodincludes an increase in sales commissions of $119, an impact of $221 fromannual salary adjustments and staffing changes, an increase of $87 in accruedincentive compensation expense, a $107 increase in the provision for doubtfulaccounts and an $78 increase in stock-based compensation expense.  As a percentage of net sales, sellingexpenses increased to 4.6% in the first six months of 2007 from 4.3% in thefist six months of 2006.

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*Income from operations of continuingoperations*
| ** **                                       | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                                       | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                       | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from  operations of continuing operations |       | $                                | 8,770      |       | $          | 7,822          |       | $ | 948 |   | 12.1 | % |
|                                                  |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **                                       | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                                       | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                       | ** ** | **2007**             | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from  operations of continuing operations |       | $                    | 16,313     |       | $          | 14,250         |       | $ | 2,063 |   | 14.5 | % |
|                                                  |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Income from operations increased by 12.1% to$8,770 in the second quarter of 2007 from $7,822 in the second quarter of2006.  Explosive Metalworking reportedincome from operations of $9,047 in the second quarter of 2007 as compared to$7,717 in the second quarter of 2006. This 17.2% increase is largely attributable to the 24.3% sales increasediscussed above.  AMK Welding reportedincome from operations of $18 for the three months ended June 30, 2007 ascompared to $122 for the same period of 2006.

Income from operations increased by 14.5% to$16,313 in the first six months of 2007 from $14,250 in the first six months of2006.  Explosive Metalworking reportedincome from operations of $16,550 in the first half of 2007 as compared to$14,373 in the first half of 2006.  This15.1% increase is largely attributable to the 27.1% sales increase discussedabove.  AMK Welding reported income fromoperations of $282 for the first six months of 2007 as compared to the $230that it reported for the first six months of 2006.

Income from operations of continuing operationsfor the three and six months ended June 30, 2007 includes $295 and $519,respectively, of stock-based compensation expense compared to the stock-basedcompensation expense for the three and six months ended June 30, 2006 of $17and $353, respectively . This expense is not allocated to our two businesssegments and thus is not included in the above second quarter and year to dateoperating income totals for Explosive Metalworking and AMK Welding.  The second quarter of 2006 reflects a $248reversal of stock-based compensation expense relating to the cancellation of certainunvested options held by four members of our board of directors who representedSNPE, Inc., our former majority stockholder, and who resigned from our boardfollowing the sale of all shares held by SNPE, Inc.

*Interest income (expense), net*
| ** **            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **            | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **            | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income,  net |       | $                                | 177        |       | $          | 132            |       | $ | 45 |   | 34.1 | % |
|                       |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **            | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **            | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **            | ** ** | **2007**             | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income,  net |       | $                    | 365        |       | $          | 225            |       | $ | 140 |   | 62.2 | % |
|                       |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Net interest income improved by $45 to a net of $177in interest income for the second quarter 2007 from a net of $132 in interestincome in the second quarter of 2006.  Werecorded net interest income of $365 for the first six months of 2007 comparedto a net interest income of $225 

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for the first six monthsof 2006, an improvement of $140.  Thischange in net interest income reflects increased investment earnings on thelarger average cash balances during 2007.

*Income tax provision*
| ** **            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **            | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **            | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax  provision |       | $                                | 3,275      |       | $          | 2,938          |       | $ | 337 |   | 11.5 | % |
| Effective tax  rate   |       | 36.7                             | %          | 37.0       | %          |           |       |   |   |
|                       |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **            | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **            | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **            | ** ** | **2007**             | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax  provision |       | $                    | 6,116      |       | $          | 5,317          |       | $ | 799 |   | 15.0 | % |
| Effective tax  rate   |       | 36.7                 | %          | 36.8       | %          |           |       |   |   |
|                       |            |                      |            |            |            |                |            |  |  |  |  |  |

 

We recorded an income tax provision of $3,275 in thesecond quarter of 2007 compared to $2,938 in the second quarter of 2006.  The effective tax rate decreased to 36.7% inthe second quarter of 2007 from 37.0% in the second quarter of 2006.  The income tax provisions for the threemonths ended June 30, 2007 and 2006 include $2,941 and $2,337, respectively,related to U.S. taxes, with the remainder relating to foreign taxes associatedwith the operations of Nobelclad and its Swedish subsidiary, Nitro Metall.

For the six months ended June 30, 2007, we recorded anincome tax provision of $6,116 compared to $5,317 for the same period of2006.  The effective tax rate decreasedto 36.7% for the first six months of 2007 from 36.8% for the first six monthsof 2006.  The income tax provisions forthe six months ended June 30, 2007 and 2006 include $5,043 and $4,181,respectively, related to U.S. taxes, with the remainder relating to foreigntaxes associated with the operations of Nobelclad and Nitro Metall.  We expect our full year 2007 effective taxrate on consolidated pre-tax income to be in the 36% to 38% range.

*Incomefrom discontinued operations*
| ** **                           | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                           | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                           | ** ** | **2007**             | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from  discontinued operations |       | $                    | —     |       | $          | 1,357          |       | $ | (1,357 | ) | NA |   |
|                                      |            |                      |            |            |            |                |            |  |  |  |  |  |

 

We completed the divestiture of our Spin Forgedivision in September 2004.  Under theprincipal divestiture agreement, we sold the assets of the Spin Forge divisionto a third party, excluding certain equipment and real estate which were leasedor subleased to the buyer.  We held apurchase option on the Spin Forge real estate that allowed us to purchase thereal estate for $2,880, a price that was below the real estate’s appraisedvalue.  On January 10, 2006, we sold ourpurchase option on the Spin Forge real estate to the property owner for$2,300.  We recorded a pre-tax gain ofapproximately $2,197 on this transaction, which was reported in discontinuedoperations, net of related taxes.

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# **Liquidity and Capital Resources**

We have historically financed our operations from acombination of internally generated cash flow, revolving credit borrowings,various long-term debt arrangements and the issuance of common stock.  We believe that cash flow from operations andfunds available under our current credit facilities and any future replacementthereof will be sufficient to fund the working capital, debt service andcapital expenditure requirements of our current business operations for theforeseeable future.  Nevertheless, ourability to generate sufficient cash flows from operations will depend upon oursuccess in executing our strategies, including our ability to secure newcustomer orders at our operating divisions, and to continue to implementcost-effective internal processes.  Wecontinue to evaluate potential investment opportunities including strategicacquisitions and joint ventures.  Asignificant acquisition or joint venture may require us to secure additionaldebt or equity financing.

*Debt and other contractual obligations andcommitments*

We have a $10,000 creditfacility with Wells Fargo Bank, N.A. Any restriction on the availabilityof borrowing under this credit facility could negatively affect our ability tomeet future cash requirements. Our existing loan agreements include variouscovenants and restrictions, certain of which relate to the payment of dividendsor other distributions to stockholders, redemption of capital stock, incurrenceof additional indebtedness, mortgaging, pledging or disposition of major assetsand maintenance of specified financial ratios. As of June 30, 2007, we were in compliance with all financial covenantsand other provisions of our debt agreements.

The Company’s principal cash flows related to debtobligations and other contractual obligations and commitments have notmaterially changed since December 31, 2006.

*Cash flows from operating activities*

Net cash flows used in operating activities for thesix months ended June 30, 2007 totaled $2,612.  Significant sources of operating cash flowincluded net income of $10,542, non-cash depreciation expense of $910 andstock-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 an increase in accounts payable and customeradvances of $1,276 and $327, respectively. The net negative changes in working capital are reflective of the growthin our business from 2006 to 2007.

Net cash flows provided by operating activities forthe six months ended June 30, 2006 totaled $8,337.  Significant sources of operating cash flowincluded net income from continuing operations of $9,142, non-cash depreciationand amortization expense of $659, stock-based compensation of $353, $656 fromprovision for deferred income taxes partially offset by net negative changes invarious components of working capital in the amount of $2,473.  Net negative changes in working capitalincluded an increase in accounts receivable, inventories and prepaid expensesof $373, $1,618 and $427, respectively and a decrease in accrued expenses andother liabilities and customer advances of $748 and $739, respectively.  These negative changes in working capitalwere partially offset by an increase in accounts payable of $1,432.

** **

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*Cash flows from investing activities*

Net cash flows used in investing activities forthe first six months of 2007 totaled $4,990 and consisted primarily of capitalexpenditures.

Net cash flows provided by investing activitiesfor the first six months of 2006 were $1,736 and consisted primarily of $1,950from the sale of marketable securities and $2,197 for investment activities ofdiscontinued operations that consisted of the sale of the Spin Forge realestate purchase option.  These cashinflows were partially offset by $2,561 in capital expenditures.

*Cash flows from financing activities*

Net cash flows provided by financing activitiesfor the first six months of 2007 were $7, which consisted primarily of netproceeds from the issuance of common stock relating to the exercise of stockoptions of $382 that was offset by a $385 principal payment on a term loan withFrench bank.

Net cash flows used in financing activities forthe six months ended June 30, 2006 were $1,943. Significant uses of cash for financing activities included a $1,766payment of annual dividends, a $356 principal payment on a term loan withFrench bank, a $47 repayment on related party line of credit and industrialdevelopment revenue bond principal payments of $90.  Sources of cash flow from financingactivities include $207 in net proceeds from the issuance of common stockrelating to the exercise of stock options and $94 for tax benefits related tothe exercise of stock options.

*Payment of Dividends*

On June 6, 2007, our board of directors declareda $.15 per share cash dividend which was paid on July 6, 2007.  The dividend totaled $1,821 and was payableto shareholders of record as of June 22, 2007.

We may pay annual dividends subject to capitalavailability and periodic determinations that cash dividends are in the bestinterests of our stockholders, but we cannot assure you that such payments willcontinue.  Future dividends may beaffected by, among other items, our views on potential future capitalrequirements, future business prospects, changes in federal income tax law andany other factors that our board of directors deems relevant.  Any decision to pay cash dividends is andwill continue to be at the discretion of the board of directors.

**Critical Accounting Policies**

Our historical consolidatedfinancial statements and notes to our historical consolidated financialstatements contain information that is pertinent to our management’s discussionand analysis of financial condition and results of operations. Preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires that our management make estimates,judgments and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses, and the disclosure of contingent assets andliabilities. However, the accounting principles used by us generally do notchange our reported cash flows or liquidity. Interpretation of the existingrules must be done and judgments made on how the specifics of a given rule applyto us.

In management’sopinion, the more significant reporting areas impacted by management’sjudgments and estimates are revenue recognition, asset impairments, inventoryvaluation and impact of foreign currency exchange rate risks. Management’sjudgments and estimates in these 

25

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areas are based on information availablefrom both internal and external sources, and actual results could differ fromthe estimates, as additional information becomes known.  We believe the following to be our most criticalaccounting policies.

*Revenuerecognition*

Sales of clad metalproducts and welding services are generally based upon customer specificationsset forth in customer purchase orders and require us 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.  Revenue is recognized only when all four ofthe following criteria have been satisfied: persuasive evidence of anarrangement exists; the price is fixed or determinable; delivery has occurred;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, weprovide currently for such anticipated loss.

*Assetimpairments*

We review ourlong-lived assets held and used by us for impairment whenever events or changesin circumstances indicate their carrying amount may not be recoverable. In sodoing, we estimate the future net cash flows expected to result from the use ofthe asset and its eventual disposition. If the sum of the expected future netcash flows (undiscounted and without interest charges) is less than thecarrying amount of the asset, an impairment loss is recognized to reduce theasset to its estimated fair value. Otherwise, an impairment loss is notrecognized.  Long-lived assets to bedisposed of, if any, are reported at the lower of carrying amount or fair valueless cost to sell.

*Goodwill*

Goodwill is tested forimpairment at least annually on reporting units one level below the segmentlevel and any impairment is based on the reporting unit’s estimated fairvalue.  Fair value can be determinedbased on discounted cash flows, comparable sales or valuations of similarbusinesses.  Impairment occurs when thecarrying amount of goodwill exceeds its estimated fair value.  Our policy is to test goodwill for impairmentin the fourth quarter of each year unless an indicator of impairment arisesearlier.

The entire amount ofgoodwill, which had a carrying value of $847 on our balance sheet as of June30, 2007, relates to our Explosive Metalworking segment.  Based on the analysis performed in the fourthquarter of 2006, no impairment was recorded to the carrying value of goodwill.

*Impactof foreign currency exchange rate risks*

The functionalcurrency for our 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 are referredto as translation adjustments. Cumulative translation adjustments are recordedas a separate component of stockholders’ equity and are included in othercumulative comprehensive income (loss). Transactions denominated in currenciesother than the 

26

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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 conform withchanges in the corresponding balances in the consolidated balance sheets. Theeffects of exchange rate changes on cash balances held in foreign currenciesare reported as a separate line item below cash flows from financingactivities.

*Incometaxes*

We account for income taxes in accordance withStatement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS 109”), which requires therecognition of deferred tax assets and deferred tax liabilities for theexpected future income tax consequences of transactions that have been includedin 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 be recoveredfrom future projected taxable income and, if not, we record an appropriatevaluation allowance.

We adopted theprovisions of Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of SFAS 109 (“FIN48”), which clarifies the accountingand disclosure for uncertainty in tax positions, on January 1, 2007.  FIN 48 seeks to harmonize certain accountingpractices associated with the recognition and measurement of income taxes.  As a result of the implementation ofFIN 48, we recognized no material adjustment in the liability for unrecognizedincome tax benefits.  On the adoptiondate of January 1, 2007, we had $394 of unrecognized tax benefits, all of whichwould affect our effective tax rate if recognized.  At June 30, 2007, the balance of unrecognizedtax benefits remains at $394, and primarily relate to uncertain U.S. Federaltax positions.

We recognize interest and penalties related touncertain tax positions in operating expense. As of June 30, 2007, our accrual for interest and penalties related touncertain tax positions is insignificant.

Our U.S. Federal tax returns for the tax years2003-2006 remain open to examination while most of our state tax returns remainopen to examination for the tax years 2002-2006.  Our foreign tax returns remain open toexamination for the tax years 2003-2006 in France and 2001-2006 in Sweden.

During 2005, we completed an analysis of prior yeartax credits and related items.  As a resultof the analysis, 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, 2007, the balance of thisallowance is $143.

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*Stock-Based Compensation Expense*

We account forstock-based compensation in accordance with the provisions of Statement ofFinancial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS123R”).  Under the fair value recognitionprovisions of SFAS 123R, stock-based compensation cost is estimated at thegrant date based on the value of the award and is recognized as expense ratablyover the requisite service period of the award. Determining the appropriate fair value model and calculating the fairvalue of stock options at the grant date requires judgment, includingestimating stock price volatility, forfeiture rates and expected option life.

**ITEM 3.**                    Quantitativeand Qualitative Disclosure about 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, 2006.

**ITEM 4.**                    Controls andProcedures

The Company maintains disclosure controls and procedures that aredesigned to ensure that information required to be disclosed in the Company’sExchange Act reports is accurately recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms, and that suchinformation is accumulated and communicated to the Company’s management,including its Chief Executive Officer and Chief Financial Officer, as appropriate,to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosurecontrols and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide only reasonableassurance of achieving the desired control objectives, and managementnecessarily applied its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.

As of June 30, 2007, the Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive 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 significant changes in theCompany’s internal controls or in other factors that could significantly affectinternal controls subsequent to the date the Company completed its evaluation.

The Company’s management, including the Company’s Chief ExecutiveOfficer and Chief Financial Officer, does not expect that the Company’sdisclosure controls or its internal controls will prevent all errors and allfraud.  Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits 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. LegalProceedings**

None.

**Item 1A. RiskFactors**

Our 2006 Annual Report on Form 10-K includes adetailed discussion of our risk factors. The information presented below updates and should be read inconjunction with the risk factors and information disclosed in our Form 10-K.

**Ourbacklog figures may not accurately predict future sales.**

We define “backlog” at any given point in time to consist of all firm,unfulfilled purchase orders and commitments at that time.  Generally speaking, we expect to fill mostitems of backlog within the following 12 months.  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.

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

None.

**Item 3. DefaultsUpon Senior Securities**

None.

**Item 4. Submissionof Matters to a Vote of Security Holders**

The Company’s Annual Meeting of Stockholders was heldon June 6, 2007.  At the Annual Meeting,the stockholders of the Company (i) elected the persons listed below to serveas directors of the Company until the 2008 Annual Meeting of Stockholders (ii)approved the amendment to our Certificate of Incorporation to increase thenumber of authorized shares of Common Stock from 15,000,000 to 25,000,000 and(iii) ratified the appointment of Ernst & Young LLP as the Company’sindependent registered public accounting firm for the fiscal year endingDecember 31, 2007.

TheCompany had 12,045,249 shares of Common Stock outstanding as of April 20, 2007,the record date for the Annual Meeting. At the Annual Meeting, holders of a total of 11,371,845 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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Proposal 1                             Election of Directors

 

|                     | ** ** | **Shares Voted** | ** ** | **Shares**   | ** ** |
|---------------------|------------|-----------------------|------------|--------------|------------|
| ** **          | ** ** | **"For"**   | ** ** | **Withheld** | ** ** |
|                |       |                  |       |         |       |
| Dean K Allen        |       | 10,157,402            |       | 1,214,443    |       |
| Yvon Pierre  Cariou |       | 10,824,109            |       | 547,736      |       |
| Bernard Hueber      |       | 10,738,169            |       | 633,676      |       |
| Gerard Munera       |       | 11,140,384            |       | 231,461      |       |
| Richard P. Graff    |       | 11,226,932            |       | 144,913      |       |

 

Proposal 2                               To approve an amendmentto our Certificate of Incorporation to increase the number of authorized sharesof common stock from 15,000,000 to 25,000,000.

 

| Shares Voted   | ** ** | **Shares Voted**   | ** ** | **Shares**              | ** ** |
|---------------------|------------|-------------------------|------------|-------------------------|------------|
| **"For"** | ** ** | **"Against"** | ** ** | **"Abstain"** | ** ** |
| 9,940,335           |       | 1,373,842               |       | 57,668                  |       |

 

Proposal 3                               To ratify theappointment of Ernst & Young LLP as the Company's independent registeredpublic accounting firm for the fiscal year ending December 31, 2007.

 

| Shares Voted   | ** ** | **Shares Voted**   | ** ** | **Shares**              | ** ** |
|---------------------|------------|-------------------------|------------|-------------------------|------------|
| **"For"** | ** ** | **"Against"** | ** ** | **"Abstain"** | ** ** |
| 11,324,197          |       | 23,877                  |       | 23,771                  |       |

 

**Item 5. OtherInformation**

None.

**Item 6.**

**Exhibits**
| 31.1   | — | Certification of the President and Chief Executive  Officer pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                              |
| 31.2   | — | Certification of the Vice President and Chief  Financial Officer pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a),  as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                                                              |
| 32.1   | — | Certification of the President 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 Vice President 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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##### **SIGNATURES**

Inaccordance with the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|                      | ** ** | **DYNAMIC MATERIALS CORPORATION**                    |   |
|----------------------|------------|------------------------------------------------------|--------|
|                 |       | (Registrant)                                         |   |
|                 |       |                                                 |   |
| Date: July 27,  2007 |       | /s/ Richard A. Santa                                 |   |
|                 |       | Richard A. Santa, Vice President and Chief Financial |   |
|                 |       | Officer (Duly Authorized Officer and Principal       |   |
|                 |       | Financial and Accounting Officer)                    |   |

** **

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