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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**Form 10-Q**

 

**(MarkOne)**

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

 

**For thequarterly period ended September 30, 2010**

** **

**OR**

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

 

**FOR THE TRANSITION PERIOD FROM             TO             .**

 

**Commission file number 001-14775**

 

----

 

**DYNAMIC MATERIALS CORPORATION**

(Exact name of Registrant as 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 principal executive offices, including zip code)

 

**(303) 665-5700**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).  Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

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

 

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

 

Thenumber of shares of Common Stock outstanding was 13,202,177 as of October 28,2010.

 

 

 

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CAUTIONARY NOTE ABOUT FORWARD-LOOKINGSTATEMENTS

 

This quarterly report on Form 10-Qcontains “forward-looking statements” within the meaning of section 27A of theSecurities Act of 1933 and section 21E of the Securities Exchange Act of 1934.In particular, we direct your attention to Part I, Item 1- CondensedConsolidated Financial Statements; Item 2 - Management’s Discussion andAnalysis of Financial Condition and Results of Operations; Item 3 - Quantitativeand 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 byreference herein to be covered by the safe harbor provisions forforward-looking statements. Statements contained in this report which are nothistorical facts are forward-looking statements that involve risks anduncertainties that could cause actual results to differ materially fromprojected results. All projections, guidance and other statements regarding ourexpected financial position and operating results, our business strategy andthe outcome of any contingencies are forward-looking statements. Thesestatements can sometimes be identified by our use of forward-looking words suchas “may,” “believe,” “plan,” “anticipate,” “estimate,” “expect,” “intend,” andother phrases of similar meaning. The forward-looking information is based oninformation available as of the date of this quarterly report and on numerousassumptions and developments that are not within our control. Although webelieve that our expectations as expressed in these forward-looking statementsare reasonable, we cannot assure you that our expectations will turn out to becorrect. Factors that could cause actual results to differ materially include,but are not limited to, the following: changes in global economic conditions;the ability to obtain new contracts at attractive prices; the size and timingof customer orders and shipment; our ability to realize sales from our backlog;fluctuations in customer demand; fluctuations in foreign currencies;competitive factors; the timely completion of contracts; the timing and size ofexpenditures; the timely receipt of government approvals and permits; the priceand availability of metal and other raw material; the adequacy of local laborsupplies at our facilities; current or future limits on manufacturing capacityat our various operations; our ability to successfully integrate acquiredbusinesses; the availability and cost of funds; and general economicconditions, both domestic and foreign, impacting our business and the businessof the end-market users we serve. Readers are cautioned not to place unduereliance on these forward-looking statements, which reflect management’sanalysis only as of the date hereof. We undertake no obligation to publiclyrelease the results of any revision to these forward-looking statements thatmay be made to reflect events or circumstances after the date hereof or toreflect the occurrence of unanticipated events.

 

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**INDEX**

 
| PART I -  FINANCIAL INFORMATION                                                                      |                                                                                                                     |
|-----------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
|                                                                                                      |                                                                                                                     |
| Item  1 — Condensed Consolidated Financial Statements                                                | 4                                                                                                                        |
|                                                                                                      |                                                                                                                     |
|                                                                                                      | Consolidated  Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009                        | 4 |
|                                                                                                      |                                                                                                                     |   |
|                                                                                                      | Consolidated  Statements of Operations for the three and nine months ended September 30, 2010 and 2009  (unaudited) | 6 |
|                                                                                                      |                                                                                                                     |   |
|                                                                                                      | Consolidated Statement of Stockholders’ Equity for the  nine months ended September 30, 2010 (unaudited)       | 7 |
|                                                                                                      |                                                                                                                     |   |
|                                                                                                      | Consolidated Statements of Cash Flows for the nine  months ended September 30, 2010 and 2009 (unaudited)            | 8 |
|                                                                                                      |                                                                                                                     |   |
|                                                                                                      | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                        | 10 |
|                                                                                                      |                                                                                                                     |   |
| Item 2 — Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 25                                                                                                                       |
|                                                                                                      |                                                                                                                     |
| Item 3 — Quantitative and Qualitative Disclosure about  Market Risk                                  | 42                                                                                                                       |
|                                                                                                      |                                                                                                                     |
| Item 4 — Controls and Procedures                                                                     | 42                                                                                                                       |
|                                                                                                      |                                                                                                                     |
| PART II  - OTHER INFORMATION                                                                         |                                                                                                                     |
|                                                                                                      |                                                                                                                     |
| Item  1 — Legal Proceedings                                                                          | 43                                                                                                                       |
|                                                                                                      |                                                                                                                     |
| Item  1A — Risk Factors                                                                              | 43                                                                                                                       |
|                                                                                                      |                                                                                                                     |
| Item 2 — Unregistered Sales of Equity Securities and  Use of Proceeds                                | 43                                                                                                                       |
|                                                                                                      |                                                                                                                     |
| Item 3 — Defaults Upon Senior Securities                                                             | 43                                                                                                                       |
|                                                                                                      |                                                                                                                     |
| Item 4 — Removed and Reserved                                                                        | 43                                                                                                                       |
|                                                                                                      |                                                                                                                     |
| Item  5 — Other Information                                                                          | 43                                                                                                                       |
|                                                                                                      |                                                                                                                     |
| Item 6 —  Exhibits                                                                                   | 43                                                                                                                       |
|                                                                                                      |                                                                                                                     |
| Signatures                                                                                                | 44                                                                                                                       |

 

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**Part I - FINANCIAL INFORMATION**

 

**ITEM 1.  Condensed ConsolidatedFinancial Statements**

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATEDBALANCE SHEETS

(Dollars in Thousands)

 
| ** **                                                                                  | ** ** | **September 30,  2010  (unaudited)** | ** ** | **December 31,  2009** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------|------------|
| ASSETS                                                                                      |       |                                      |       |                        |       |
| CURRENT ASSETS:                                                                             |       |                                      |       |                        |       |
| Cash and cash equivalents                                                                   |       | $                                         | 11,097     |                        | $          | 22,411 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $444 and $390, respectively |       | 27,390                                    |       | 25,807                      |       |
| Inventories                                                                                 |       | 36,797                                    |       | 32,501                      |       |
| Prepaid expenses and other                                                                  |       | 3,465                                     |       | 2,397                       |       |
| Related party receivables and loans                                                         |       | —                                    |       | 2,806                       |       |
| Current deferred tax assets                                                                 |       | 885                                       |       | 2,052                       |       |
|                                                                                        |       |                                      |       |                        |       |
| Total current assets                                                                        |       | 79,634                                    |       | 87,974                      |       |
|                                                                                        |       |                                      |       |                        |       |
| PROPERTY, PLANT AND EQUIPMENT                                                               |       | 66,826                                    |       | 64,944                      |       |
| Less - accumulated depreciation                                                             |       | (26,356                                   | )          | (22,892                     | )          |
|                                                                                        |       |                                      |       |                        |       |
| Property, plant and equipment, net                                                          |       | 40,470                                    |       | 42,052                      |       |
|                                                                                        |       |                                      |       |                        |       |
| GOODWILL, net                                                                               |       | 40,414                                    |       | 43,164                      |       |
|                                                                                        |       |                                      |       |                        |       |
| PURCHASED INTANGIBLE ASSETS, net                                                            |       | 50,962                                    |       | 49,079                      |       |
|                                                                                        |       |                                      |       |                        |       |
| DEFERRED TAX ASSETS                                                                         |       | 940                                       |       | 332                         |       |
|                                                                                        |       |                                      |       |                        |       |
| OTHER ASSETS, net                                                                           |       | 1,046                                     |       | 1,443                       |       |
|                                                                                        |       |                                      |       |                        |       |
| INVESTMENT IN JOINT VENTURES                                                                |       | —                                    |       | 1,132                       |       |
|                                                                                        |       |                                      |       |                        |       |
| TOTAL ASSETS                                                                                |       | $                                         | 213,466    |                        | $          | 225,176 |   |

 

The accompanying notes are an integral part of these CondensedConsolidated Financial Statements.

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Share Data)

 
| ** **                                                                                                                           | ** ** | **September 30,  2010  (unaudited)** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------|------------|
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                           |       |                                      |       |                        |       |
| CURRENT LIABILITIES:                                                                                                                 |       |                                      |       |                        |       |
| Accounts payable                                                                                                                     |       | $                                         | 11,386     |                        | $          | 9,183 |   |
| Accrued expenses                                                                                                                     |       | 3,613                                     |       | 4,808                       |       |
| Dividend payable                                                                                                                     |       | 528                                       |       | 515                         |       |
| Accrued income taxes                                                                                                                 |       | 847                                       |       | 1,485                       |       |
| Accrued employee compensation and benefits                                                                                           |       | 3,185                                     |       | 4,048                       |       |
| Customer advances                                                                                                                    |       | 5,128                                     |       | 6,528                       |       |
| Lines of credit                                                                                                                      |       | 6,735                                     |       | 1,777                       |       |
| Current maturities on long-term debt                                                                                                 |       | 7,567                                     |       | 13,485                      |       |
| Current portion of capital lease obligations                                                                                         |       | 301                                       |       | 306                         |       |
| Current deferred tax liabilities                                                                                                     |       | 23                                        |       | —                      |       |
|                                                                                                                                 |       |                                      |       |                        |       |
| Total current liabilities                                                                                                            |       | 39,313                                    |       | 42,135                      |       |
|                                                                                                                                 |       |                                      |       |                        |       |
| LONG-TERM DEBT                                                                                                                       |       | 23,541                                    |       | 34,120                      |       |
|                                                                                                                                 |       |                                      |       |                        |       |
| CAPITAL LEASE OBLIGATIONS                                                                                                            |       | 214                                       |       | 436                         |       |
|                                                                                                                                 |       |                                      |       |                        |       |
| DEFERRED TAX LIABILITIES                                                                                                             |       | 13,469                                    |       | 15,217                      |       |
|                                                                                                                                 |       |                                      |       |                        |       |
| OTHER LONG-TERM LIABILITIES                                                                                                          |       | 1,140                                     |       | 1,157                       |       |
|                                                                                                                                 |       |                                      |       |                        |       |
| Total liabilities                                                                                                                    |       | 77,677                                    |       | 93,065                      |       |
|                                                                                                                                 |       |                                      |       |                        |       |
| COMMITMENTS AND CONTINGENT LIABILITIES                                                                                               |       |                                      |       |                        |       |
|                                                                                                                                 |       |                                      |       |                        |       |
| STOCKHOLDERS’ EQUITY:                                                                                                           |       |                                      |       |                        |       |
| Preferred stock, $0.05 par value; 4,000,000 shares  authorized; no issued and outstanding shares                                     |       | —                                    |       | —                      |       |
| Common stock, $0.05 par value; 25,000,000 shares  authorized; 13,202,177 and 12,870,363 shares issued and outstanding,  respectively |       | 660                                       |       | 643                         |       |
| Additional paid-in capital                                                                                                           |       | 51,332                                    |       | 46,080                      |       |
| Retained earnings                                                                                                                    |       | 87,424                                    |       | 85,048                      |       |
| Other cumulative comprehensive income (loss)                                                                                         |       | (3,627                                    | )          | 340                         |       |
|                                                                                                                                 |       |                                      |       |                        |       |
| Total stockholders’ equity                                                                                                      |       | 135,789                                   |       | 132,111                     |       |
|                                                                                                                                 |       |                                      |       |                        |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                      |       | $                                         | 213,466    |                        | $          | 225,176 |   |

 

The accompanying notes are an integral part of these CondensedConsolidated Financial Statements.

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(Dollars in Thousands, Except Share Data)

(unaudited)

 
| ** **                                     | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                     | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| NET SALES                                      |       | $                                | 41,298     |                            | $          | 34,690 |   | $ | 109,913 |   | $ | 122,268 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| COST OF PRODUCTS SOLD                          |       | 30,445                           |       | 25,936                          |       | 82,819 |   | 89,032 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| Gross profit                                   |       | 10,853                           |       | 8,754                           |       | 27,094 |   | 33,236 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| COSTS AND EXPENSES:                            |       |                             |       |                            |       |   |   |   |   |
| General and administrative expenses            |       | 3,487                            |       | 2,749                           |       | 9,990 |   | 9,318 |   |
| Selling expenses                               |       | 3,047                            |       | 2,212                           |       | 7,918 |   | 6,376 |   |
| Amortization of purchased intangible assets    |       | 1,376                            |       | 1,293                           |       | 3,913 |   | 3,709 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| Total costs and expenses                       |       | 7,910                            |       | 6,254                           |       | 21,821 |   | 19,403 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| INCOME FROM OPERATIONS                         |       | 2,943                            |       | 2,500                           |       | 5,273 |   | 13,833 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| OTHER INCOME (EXPENSE):                        |       |                             |       |                            |       |   |   |   |   |
| Gain on step acquisition of joint ventures     |       | —                           |       | —                          |       | 2,117 |   | — |   |
| Other income (expense), net                    |       | (416                             | )          | (633                            | )          | (402 | ) | (560 | ) |
| Interest expense                               |       | (667                             | )          | (752                            | )          | (2,473 | ) | (2,521 | ) |
| Interest income                                |       | 6                                |       | 41                              |       | 71 |   | 145 |   |
| Equity in earnings of joint ventures           |       | —                           |       | 91                              |       | 255 |   | 170 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| INCOME BEFORE INCOME TAXES                     |       | 1,866                            |       | 1,247                           |       | 4,841 |   | 11,067 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| INCOME TAX PROVISION                           |       | 540                              |       | 151                             |       | 891 |   | 3,540 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| NET INCOME                                     |       | $                                | 1,326      |                            | $          | 1,096 |   | $ | 3,950 |   | $ | 7,527 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| INCOME PER SHARE:                              |       |                             |       |                            |       |   |   |   |   |
| Basic                                          |       | $                                | 0.10       |                            | $          | 0.09 |   | $ | 0.30 |   | $ | 0.59 |   |
| Diluted                                        |       | $                                | 0.10       |                            | $          | 0.08 |   | $ | 0.30 |   | $ | 0.58 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: |       |                             |       |                            |       |   |   |   |   |
| Basic                                          |       | 12,939,274                       |       | 12,632,406                      |       | 12,807,826 |   | 12,597,023 |   |
| Diluted                                        |       | 12,951,397                       |       | 12,645,500                      |       | 12,820,508 |   | 12,621,970 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| DIVIDENDS DECLARED PER COMMON SHARE            |       | $                                | 0.04       |                            | $          | 0.04 |   | $ | 0.12 |   | $ | 0.08 |   |

 

The accompanying notes are in integral part of these CondensedConsolidated Financial Statements.

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

(Amounts in Thousands)

(unaudited)

 
| ** **                                                    | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Other**         | ** ** | ** ** | ** ** | ** **                   | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|-------------------|------------|-------------------|------------|------------|------------|------------------------------|------------|
| ** **                                                    | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Cumulative**    | ** ** | ** ** | ** ** | **Comprehensive**            | ** ** |
| ** **                                                    | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | ** **        | ** ** | **Loss**   | ** ** |
| ** **                                                    | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Income/(loss)** | ** ** | **Total**  | ** ** | **for the Period** | ** ** |
| Balances, December 31, 2009                              |       | 12,870                |       | $           | 643        |           | $          | 46,080            |       | $                 | 85,048     |       | $          | 340                          |       | $ | 132,111 |   |   |   |
| Shares issued for AECO acquisition                            |       | 222                   |       | 11          |       | 3,290          |       | —            |       | —            |       | 3,301      |       |                         |       |
| Shares issued in connection with stock  compensation plans    |       | 110                   |       | 6           |       | 64             |       | —            |       | —            |       | 70         |       |                         |       |
| Tax impact of stock-based compensation                        |       | —                |       | —      |       | (639           | )          | —            |       | —            |       | (639       | )          |                         |       |
| Stock-based compensation                                      |       | —                |       | —      |       | 2,537          |       | —            |       | —            |       | 2,537      |       |                         |       |
| Dividends                                                     |       | —                |       | —      |       | —         |       | (1,574            | )          | —            |       | (1,574     | )          |                         |       |
| Net income                                                    |       | —                |       | —      |       | —         |       | 3,950             |       | —            |       | 3,950      |       | 3,950                        |       |
| Derivative valuation, net of tax of $248                      |       | —                |       | —      |       | —         |       | —            |       | 365               |       | 365        |       | 365                          |       |
| Change in cumulative foreign currency translation  adjustment |       | —                |       | —      |       | —         |       | —            |       | (4,332            | )          | (4,332     | )          | (4,332                       | )          |
| Balances, September 30, 2010                             |       | 13,202                |       | $           | 660        |           | $          | 51,332            |       | $                 | 87,424     |       | $          | (3,627                       | )          | $ | 135,789 |   | $ | (17 | ) |
|                                                               |            |                       |            |             |            |                |            |                   |            |                   |            |            |            |                              |            |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these CondensedConsolidated Financial Statements.

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(Dollars in Thousands)

(unaudited)

 
| ** **                                                                         | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |     |       |     |       |
| Net income                                                                         |       | $        | 3,950      |     | $          | 7,527 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities: |       |     |       |     |       |
| Depreciation (including capital lease  amortization)                               |       | 3,908    |       | 3,701    |       |
| Amortization of purchased intangible assets                                        |       | 3,913    |       | 3,709    |       |
| Amortization of capitalized debt issuance costs                                    |       | 489      |       | 215      |       |
| Stock-based compensation                                                           |       | 2,537    |       | 2,657    |       |
| Deferred income tax benefit                                                        |       | (953     | )          | (1,875   | )          |
| Equity in earnings of joint ventures                                               |       | (255     | )          | (170     | )          |
| Gain on step acquisition of joint ventures                                         |       | (2,117   | )          | —   |       |
| Change in (excluding assets acquired):                                             |       |     |       |     |       |
| Accounts receivable, net                                                           |       | 2,465    |       | 13,632   |       |
| Inventories                                                                        |       | 1,198    |       | 3,334    |       |
| Prepaid expenses and other                                                         |       | 321      |       | 496      |       |
| Accounts payable                                                                   |       | (2,075   | )          | (5,980   | )          |
| Customer advances                                                                  |       | (1,327   | )          | 246      |       |
| Accrued expenses and other liabilities                                             |       | (1,800   | )          | (4,078   | )          |
|                                                                               |       |     |       |     |       |
| Net cash provided by operating activities                                          |       | 10,254   |       | 23,414   |       |
|                                                                               |       |     |       |     |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |     |       |     |       |
| Acquisition of Austin Explosives Company                                           |       | (3,620   | )          | —   |       |
| Step acquisition of joint ventures, net of cash  acquired                          |       | (2,065   | )          | —   |       |
| Acquisition of property, plant and equipment                                       |       | (2,309   | )          | (3,238   | )          |
| Change in other non-current assets                                                 |       | (59      | )          | 42       |       |
|                                                                               |       |     |       |     |       |
| Net cash used in investing activities                                              |       | (8,053   | )          | (3,196   | )          |
|                                                                                    |            |          |            |          |            |  |  |

 

The accompanying notes are an integral part of these CondensedConsolidated Financial Statements.

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(Dollars in Thousands)

(unaudited)

 
| ** **                                                             | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM FINANCING ACTIVITIES:                                  |       |     |       |     |       |
| Payment on syndicated term loans                                       |       | (15,374  | )          | (3,912   | )          |
| Payment on Nord LB term loans                                          |       | (593     | )          | (653     | )          |
| Borrowings on bank lines of credit, net                                |       | 4,682    |       | —   |       |
| Payment on capital lease obligations                                   |       | (215     | )          | (132     | )          |
| Payment of dividends                                                   |       | (1,561   | )          | (513     | )          |
| Payment of deferred debt issuance costs                                |       | —   |       | (58      | )          |
| Net proceeds from issuance of common stock to employees  and directors |       | 70       |       | 373      |       |
| Tax impact of stock-based compensation                                 |       | (639     | )          | 90       |       |
|                                                                   |       |     |       |     |       |
| Net cash used in financing activities                                  |       | (13,630  | )          | (4,805   | )          |
|                                                                   |       |     |       |     |       |
| EFFECTS OF EXCHANGE RATES ON CASH                                      |       | 115      |       | 258      |       |
|                                                                   |       |     |       |     |       |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                   |       | (11,314  | )          | 15,671   |       |
|                                                                   |       |     |       |     |       |
| CASH AND CASH EQUIVALENTS, beginning of the period                     |       | 22,411   |       | 14,360   |       |
|                                                                   |       |     |       |     |       |
| CASH AND CASH EQUIVALENTS, end of the period                           |       | $        | 11,097     |     | $          | 30,031 |   |
|                                                                        |            |          |            |          |            |  |  |

 

The accompanying notes are an integral part of these CondensedConsolidated Financial Statements.

 

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**DYNAMIC MATERIALS CORPORATION &SUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**(Currency Amounts in Thousands, Except Share and Per Share Data)**

 

**(unaudited)**

 

**1.****                  ****BASISOF 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 31,2009.

 

**2.****                  ****SIGNIFICANTACCOUNTING POLICIES**

 

Principlesof Consolidation

 

TheCondensed Consolidated Financial Statements include the accounts of the Companyand its controlled subsidiaries.  Onlysubsidiaries in which controlling interests are maintained areconsolidated.  The equity method is usedto account for our ownership in subsidiaries where we do not have a controllinginterest.  All significant intercompanyaccounts, profits, and transactions have been eliminated in consolidation.

 

Foreign Operations and Foreign Exchange Rate Risk

 

Thefunctional currency for the Company’s foreign operations is the applicablelocal currency for each affiliate company. Assets and liabilities of foreignsubsidiaries for which the functional currency is the local currency aretranslated at exchange rates in effect at period-end, and the statements ofoperations are translated at the average exchange rates during the period.  Exchange rate fluctuations on translatingforeign currency financial statements into U.S. Dollars that result inunrealized gains or losses are referred to as translation adjustments.Cumulative translation adjustments are recorded as a separate component ofstockholders’ equity and are included in other cumulative comprehensive income(loss). Transactions denominated in currencies other than the local currencyare recorded based on exchange rates at the time such transactions arise.Subsequent changes in exchange rates result in transaction gains and losseswhich are reflected in income as unrealized (based on period-end translations)or realized upon settlement of the transactions. Cash flows from the Company’soperations in foreign countries are translated at actual exchange rates whenknown or at the average rate for the period. As a result, amounts related toassets and liabilities reported in the consolidated statements of cash flowswill not agree to changes in the corresponding balances in the consolidatedbalance sheets. The effects of exchange rate changes on cash balances held inforeign currencies are reported as a separate line item below cash flows fromfinancing activities.

 

InSeptember 2010, the Company’s German subsidiary, DYNAenergetics, enteredinto a currency swap agreement with its bank to hedge the currency riskassociated with a large U.S. Dollar order ($2,700) that was recently awarded tothe Company.   Under the agreement,DYNAenergetics will exchange $2,700 for Euros at an exchange rate of 1.269 U.S.Dollars per Euro between January 18, 2011 and February 15, 2011 (thedate range of expected payment settlement on this order).  The Company has not designated thisderivative as an effective cash 

 

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flow hedge and as such, gains and lossesrelated to changes in its valuation will be recorded in the statement of operations.  During the three months and nine months endedSeptember 30, 2010, the Company recorded a gain on this currency swapagreement of $185 based on the U.S. Dollar to Euro exchange rate as ofSeptember 30, 2010.  The gain isclassified in other income in the Company’s statement of operations.

 

Revenue Recognition

 

Sales of clad metal products and welding servicesare generally based upon customer specifications set forth in customer purchaseorders and require us to provide certifications relative to metals used,services performed, and the results of any non-destructive testing that thecustomer has requested be performed.  Allissues of conformity of the product to specifications are resolved before theproduct is shipped and billed.  Productsrelated to the oilfield products segment, which include detonating cords,detonators, bi-directional boosters, and shaped charges, as well as seismicrelated explosives and accessories, are standard in nature.  In all cases, revenue is recognized only whenall four of the following criteria have been satisfied: persuasive evidence ofan arrangement exists; the price is fixed or determinable; delivery hasoccurred; and collection is reasonably assured. For contracts that require multiple shipments, revenue is recorded onlyfor the units included in each individual shipment.  If, as a contract proceeds toward completion,projected total cost on an individual contract indicates a probable loss, theCompany will account for such anticipated loss.

 

Fair Value of Financial Instruments

 

The carrying values of cash and cashequivalents, trade accounts receivable and payable, and accrued expenses areconsidered to approximate fair value due to the short-term nature of theseinstruments.  Based upon the 150 basispoint increase in our LIBOR/EURIBOR basis borrowing spread negotiated in theOctober 21, 2009 amendment to our syndicated credit agreement, we believethe fair value of our long-term debt approximates its carrying value atSeptember 30, 2010.  The majority ofthe Company’s debt was incurred in connection with the acquisition ofDYNAenergetics.

 

Additionally, the Company has an interestrate swap agreement (see Note 9) and a foreign currency hedge agreement (seedisclosure above in Note 2), which are recorded at fair value.  Fair value is defined as the price that wouldbe received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date. The Company isrequired to use an established hierarchy for fair value measurements based uponthe inputs to the valuation and the degree to which they are observable or notobservable in the market. The three levels in the hierarchy are as follows:

 

·                  Level1 — Inputs to the valuation based upon quoted prices (unadjusted) for identicalassets or liabilities in active markets that are accessible as of themeasurement date. 

 

·                  Level2 — Inputs to the valuation include quoted prices in either markets that arenot active, or in active markets for similar assets or liabilities, inputsother than quoted prices that are observable, and inputs that are derivedprincipally from or corroborated by observable market data. 

 

·               Level3 — Inputs to the valuation that are unobservable inputs for the asset orliability. 

 

The highest priority is assigned toLevel 1 inputs and the lowest priority to Level 3 inputs.

 

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The Company’s interest rate swap and foreign currency hedge agreementsare not exchange listed and are therefore valued with models that use Level 2inputs.  The degree to which theCompany’s credit worthiness impacts the value requires management judgment butas of September 30, 2010 and December 31, 2009, the impact of thisassessment on the overall value of the outstanding interest rate swap was notsignificant and the Company’s valuation of the agreement is classified withinLevel 2 of the hierarchy.

 

The Company has recorded the fair value of itsderivatives as follows:

 
| ** **             | ** ** | **September 30, 2010**     | ** ** | **December 31, 2009** | ** ** |
|------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **Balance sheet location** | ** ** | **Fair value**             | ** ** | **Balance sheet location** | ** ** | **Fair value** | ** ** |
|                   |       |                                 |       |                            |       |   |   |   |   |
| Interest rate swap     |       | Accrued  expenses                    |       | $                               | 164        |   | Accrued  expenses |   | $ | 820 |   |
|                   |       |                                 |       |                            |       |   |   |   |   |
| Foreign currency hedge |       | Prepaid  expenses and other          |       | $                               | 185        |   | Prepaid  expenses and other |   | $ | — |   |

 

Related Party Transactions

 

Priorto acquiring the remaining outstanding interests in its unconsolidated jointventures on April 30, 2010 (See Note 3), the Company had related partytransactions with these joint ventures. Additionally the Company had related party transactions with the formerowners of LRI Oil Tools Inc. (“LRI”). The Company also had transactions in the period from January 1through September 30, 2009 with LRI who, at the time, was thenon-controlling interest partner in one of the Company’s consolidated jointventures.  A summary of related partybalances as of December 31, 2009 is summarized below:

 
| ** **           | ** ** | **Accounts receivable**        | ** ** |
|----------------------|------------|-------------------------------------|------------|
| ** **           | ** ** | **from and loan to** | ** ** |
| DYNAenergetics RUS   |       | $                                   | 2,265      |   |
| Perfoline            |       | 466                                 |       |
| Former owners of LRI |       | 75                                  |       |
|                 |       |                                |       |
| Total                |       | $                                   | 2,806      |   |

 

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Asummary of related party transactions for the three months ended September 30,2009 and the nine months ended September 30, 2010 and 2009 is summarizedbelow:

 
| ** **                | ** ** | **Three Months Ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **September 30, 2009** | ** ** |
| ** **                | ** ** | ** **                       | ** ** | **Interest** | ** ** |
| ** **                | ** ** | **Sales to**                | ** ** | **income from** | ** ** |
| DYNAenergetics RUS        |       | $                                | 366        |   | $ | — |   |
| Perfoline                 |       | 3                                |       | 12 |   |
| Minority Interest Partner |       | 301                              |       | — |   |
|                      |       |                             |       |   |   |
| Total                     |       | $                                | 670        |   | $ | 12 |   |

 
| ** **                | ** ** | **Nine Months Ended**  | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **September 30, 2010** | ** ** | **September 30, 2009** | ** ** |
| ** **                | ** ** | ** **                       | ** ** | **Interest**                     | ** ** | ** ** | ** ** | **Interest** | ** ** |
| ** **                | ** ** | **Sales to**                | ** ** | **income from**             | ** ** | **Sales to** | ** ** | **income from** | ** ** |
| DYNAenergetics RUS        |       | $                                | 663        |                             | $          | — |   | $ | 1,100 |   | $ | — |   |
| Perfoline                 |       | 19                               |       | 13                               |       | 59 |   | 31 |   |
| Minority Interest Partner |       | —                           |       | —                           |       | 745 |   | — |   |
|                      |       |                             |       |                             |       |   |   |   |   |
| Total                     |       | $                                | 682        |                             | $          | 13 |   | $ | 1,904 |   | $ | 31 |   |

 

Earnings Per Share

 

Unvested awards of share-based payments with rightsto receive dividends or dividend equivalents, such as the Company’s restrictedstock awards (“RSAs”), are considered participating securities for purposes ofcalculating earnings per share (“EPS”) and require the use of the two classmethod for calculating EPS.  Under this method,a portion of net income is allocated to these participating securities andtherefore is excluded from the calculation of EPS allocated to common stock, asshown in the table below.

 

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Computation and reconciliation of earnings percommon share are as follows:

 
| ** **                                                | ** ** | **For the Three Months Ended** | ** ** | **For the Three Months Ended** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                | ** ** | **September 30, 2010**                   | ** ** | **September 30, 2009**                   | ** ** |
| ** **                                                | ** ** | **Income**                                         | ** ** | **Shares**                                         | ** ** | **EPS** | ** ** | **Income** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Basic earnings per share:                                 |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Net income                                                |       | $                                                  | 1,326      |                                               |       |   |   |   | $ | 1,096 |   |   |   |   |   |
| Less income allocated to RSAs                             |       | (26                                                | )          |                                               |       |   |   | (22 | ) |   |   |   |   |
|                                                      |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Net income allocated to common stock for EPS  calculation |       | $                                                  | 1,300      |                                               | 12,939,274 |   | $ | 0.10 |   | $ | 1,074 |   | 12,632,406 |   | $ | 0.09 |   |
|                                                      |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Adjust shares for Dilutives:                              |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Stock-based compensation plans                            |       |                                               |       | 12,123                                             |       |   |   |   |   | 13,094 |   |   |   |
|                                                      |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Diluted earnings per share:                               |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Net income                                                |       | $                                                  | 1,326      |                                               |       |   |   |   | $ | 1,096 |   |   |   |   |   |
| Less income allocated to RSAs                             |       | (26                                                | )          |                                               |       |   |   | (22 | ) |   |   |   |   |
|                                                      |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Net income allocated to common stock for EPS  calculation |       | $                                                  | 1,300      |                                               | 12,951,397 |   | $ | 0.10 |   | $ | 1,074 |   | 12,645,500 |   | $ | 0.08 |   |

 
| ** **                                                | ** ** | **For the Nine Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                | ** ** | **September 30, 2010**                  | ** ** | **September 30, 2009**                  | ** ** |
| ** **                                                | ** ** | **Income**                                        | ** ** | **Shares**                                        | ** ** | **EPS** | ** ** | **Income** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Basic earnings per share:                                 |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Net income                                                |       | $                                                 | 3,950      |                                              |       |   |   |   | $ | 7,527 |   |   |   |   |   |
| Less income allocated to RSAs                             |       | (79                                               | )          |                                              |       |   |   | (148 | ) |   |   |   |   |
|                                                      |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Net income allocated to common stock for EPS  calculation |       | $                                                 | 3,871      |                                              | 12,807,826 |   | $ | 0.30 |   | $ | 7,379 |   | 12,597,023 |   | $ | 0.59 |   |
|                                                      |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Adjust shares for Dilutives:                              |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Stock-based compensation plans                            |       |                                              |       | 12,682                                            |       |   |   |   |   | 24,947 |   |   |   |
|                                                      |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Diluted earnings per share:                               |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Net income                                                |       | $                                                 | 3,950      |                                              |       |   |   |   | $ | 7,527 |   |   |   |   |   |
| Less income allocated to RSAs                             |       | (79                                               | )          |                                              |       |   |   | (148 | ) |   |   |   |   |
|                                                      |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Net income allocated to common stock for EPS  calculation |       | $                                                 | 3,871      |                                              | 12,820,508 |   | $ | 0.30 |   | $ | 7,379 |   | 12,621,970 |   | $ | 0.58 |   |

 

**3.****                  ****ACQUISITIONS**

 

Austin Explosives

 

On June 4, 2010, the Company completed its acquisition ofTexas-based, Austin Explosives Company (“AECO”), which is now operating underthe name DYNAenergetics US, Inc. This business is now part of the Company’s Oilfield Products businesssegment.  AECO had been a long-timedistributor of DYNAenergetics shaped charges. This acquisition, along with the acquisition of the outstandinginterests in our Russian joint ventures (discussed below), further expands theCompany’s Oilfield Products business, and positions the segment to capitalizeon the long-term demand from the oil and gas industry.  From June 5, 2010 through September 30,2010, 

 

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DYNAenergetics US, Inc. contributedincremental net sales of $2,187 and an incremental net loss of $10 after theelimination of intercompany sales and the related gross profit. On a standalonebasis, DYNAenergetics U.S., Inc. reported sales of $6,097 and net incomeof $290 for the same period.

 

The acquisition was structured as an asset purchase valued at $6,921which was financed by (i) the payment of $3,620 in cash and (ii) theissuance of 222,445 shares of common stock of the Company (valued at $3,301).

 

The purchase price of the acquisition was allocated to the Company’stangible and identifiable intangible assets based on their fair values asdetermined by appraisals performed as of the acquisition date.  The allocation of the purchase price to theassets of AECO was as follows:

 
| Current assets                |   | $      | 5,792  |   |
|-------------------------------|--------|--------|--------|--------|
| Property, plant and equipment |   | 368    |   |
| Intangible assets             |   | 4,773  |   |
| Deferred tax assets           |   | 7      |   |
| Other assets                  |   | 81     |   |
|                          |   |   |   |
| Total assets acquired         |   | 11,021 |   |
|                          |   |   |   |
| Current liabilities           |   | 4,100  |   |
|                          |   |   |   |
| Total liabilities assumed     |   | 4,100  |   |
|                          |   |   |   |
| Net assets acquired           |   | $      | 6,921  |   |

 

The Company acquired identifiable finite-lived intangible assets as aresult of the acquisition of AECO.  Thefinite-lived intangible assets acquired were classified as customerrelationships and were valued at $4,773 which will be amortized over 11years.  These amounts are included inIntangible Assets and are further discussed in Note 7.

 

Russian Joint Ventures

 

On April 30, 2010 the Company purchased the outstandingminority-owned interests in its two Russian joint ventures that were previouslymajority-owned by the Company’s Oilfield Products business segment.  These joint ventures include DYNAenergeticsRUS, which is a Russian trading companythat sells the Company’s oilfield products, and Perfoline, which is a Russianmanufacturer of perforating gun systems. The Company paid a combined $2,065 for the respective 45% and34.81% outstanding stakes in DYNAenergetics RUS and Perfoline.  From April 30, 2010 through September 30,2010, DYNAenergetics RUS and Perfoline contributed incremental net sales of$2,548 and incremental net income of $213 after the elimination of intercompanysales and the related gross profit.  Asstandalone companies, these two entities reported sales of $3,165 and netincome of $311 for the same period.

 

Prior to the acquisition date, the Company accounted for its 55% and65.19% interest in DYNAenergetics RUS and Perfoline, respectively, asequity-method investments (See Note 4). The acquisition date fair value of the previous equity interest was$3,533.  The Company recognized a gain of$2,117 as a result of revaluing its prior equity interest held before theacquisition.  The gain is included in theline item “gain on step acquisition of joint ventures” in the consolidatedstatement of operations.

 

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Appraisals performed as of the acquisition date resulted in a new fairvalue of the combined entities of $5,598 which was allocated to the Company’stangible and identifiable intangible assets as follows:

 
| Current assets                                       |   | $      | 5,243  |   |
|------------------------------------------------------|--------|--------|--------|--------|
| Property, plant and equipment                        |   | 411    |   |
| Intangible assets                                    |   | 3,669  |   |
| Deferred tax assets                                  |   | 12     |   |
| Other assets                                         |   | 56     |   |
|                                                 |   |   |   |
| Total assets acquired                                |   | 9,391  |   |
|                                                 |   |   |   |
| Line of credit                                       |   | 36     |   |
| Other current liabilities                            |   | 2,547  |   |
| Deferred tax liabilities                             |   | 813    |   |
| Other long term liabilities                          |   | 397    |   |
|                                                 |   |   |   |
| Total liabilities assumed                            |   | 3,793  |   |
|                                                 |   |   |   |
| Fair value of net assets following step  acquisition |   | $      | 5,598  |   |

 

The Company acquired identifiable finite-lived intangible assets as aresult of acquiring the remaining interests of DYNAenergetics RUS andPerfoline.  The finite-lived intangibleassets acquired were classified as customer relationships and were valued at$3,669 which will be amortized over 11 years. These amounts are included in Intangible Assets and are furtherdiscussed in Note 7.

 

LRI Oil Tools Inc.

 

On October 1, 2009, the Company completed its acquisition of LRIOil Tools Inc. (“LRI”), which is part of the Oilfield Products business.  LRI produces and distributes perforatingequipment for use by the oil and gas exploration and production industry.  The business had a long-term strategicrelationship with the Company’s Oilfield Products segment and had served forseveral years as its sole Canadian distributor. From January 1, 2010 through September 30, 2010, LRIcontributed incremental net sales of $7,399 and incremental net income of $525after the elimination of intercompany sales and related gross profit. On astandalone basis, LRI reported sales of $10,808 and net income of $666 for thesame period.

 

The acquisition was valued at $5,946 and was financed by (i) thepayment of $284 in cash, net of cash acquired of $15, (ii) the issuance of4,875 shares of common stock of the Company (valued at $94), and (iii) theassumption of $5,553 (5,982 Canadian Dollars (“CAD”)) of LRI’s debt.  The assumed debt consisted of $2,676 (2,883CAD) for a line of credit, $2,445 (2,634 CAD) for loans with the former ownersof LRI and $432 (465 CAD) for capital lease obligations.

 

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The purchase price of the acquisition was allocated to the Company’stangible and identifiable intangible assets based on their fair values asdetermined by appraisals performed as of the acquisition date.  The allocation of the purchase price to theassets and liabilities of LRI was as follows:

 
| Current assets                |   | $      | 5,430  |   |
|-------------------------------|--------|--------|--------|--------|
| Property, plant and equipment |   | 2,191  |   |
| Intangible assets             |   | 1,117  |   |
| Deferred tax assets           |   | 298    |   |
| Other assets                  |   | 1      |   |
|                          |   |   |   |
| Total assets acquired         |   | 9,037  |   |
|                          |   |   |   |
| Line of credit                |   | 2,676  |   |
| Other current liabilities     |   | 2,448  |   |
| Long term debt                |   | 2,877  |   |
| Deferred tax liabilities      |   | 643    |   |
|                          |   |   |   |
| Total liabilities assumed     |   | 8,644  |   |
|                          |   |   |   |
| Net assets acquired           |   | $      | 393    |   |

 

The Company acquired identifiable finite-lived intangible assets as aresult of the acquisition of LRI.  Thefinite-lived intangible assets acquired are classified and valued as follows:

 
| ** **              | ** ** | ** ** | ** ** | **Amortization** | ** ** |
|-------------------------|------------|------------|------------|------------------|------------|
| ** **              | ** ** | **Value**  | ** ** | **Period**       | ** ** |
| Core technology         |       | $          | 347        |             | 15 years   |   |
| Customer relationships  |       | 770        |       | 15 years         |       |
|                    |       |       |       |             |       |
| Total intangible assets |       | $          | 1,117      |             |       |   |

 

These amounts are included in Intangible Assets andare further discussed in Note 7.

 

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Pro Forma Statement of Operations

 

The following table presents the pro-forma combined results ofoperations for the three months ended September 30, 2009 and the ninemonths ended September 30, 2010 and September 30, 2009, respectively,assuming (i) the acquisitions of LRI, AECO and the Russian joint ventureshad occurred on January 1, 2010 and January 1, 2009; (ii) pro-formaamortization expense of the purchased intangible assets; (iii) pro-formadepreciation expense of the fair value of purchased property, plant andequipment; (iv) reduction of interest expense assuming the Company paiddown LRI’s debt by 2,200 CAD (1,200 CAD for the loans to former owners of LRIand 1,000 CAD for the line of credit) immediately following the acquisition(net of a related pro forma reduction in interest income); (v) eliminationof intercompany sales; and (vi) increase in interest expense for borrowing1,500 Euros to fund the acquisition of the Russian joint ventures:

 
| ** **             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **             | ** ** | **2009**                         | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| Net sales              |       | $                                | 38,781     |                            | $          | 117,202 |   | $ | 134,613 |   |
| Income from operations |       | $                                | 2,027      |                            | $          | 5,620 |   | $ | 12,646 |   |
| Net income             |       | $                                | 527        |                            | $          | 3,852 |   | $ | 6,127 |   |
|                   |       |                             |       |                            |       |   |   |
| Net income per share:  |       |                             |       |                            |       |   |   |
| Basic                  |       | $                                | 0.04       |                            | $          | 0.29 |   | $ | 0.47 |   |
| Diluted                |       | $                                | 0.04       |                            | $          | 0.29 |   | $ | 0.47 |   |

 

Since all acquisitions were completed prior to June 30, 2010, apro forma statement of operations was not necessary for the three months endedSeptember 20, 2010.  The pro-formaresults above are not necessarily indicative of the operating results thatwould have actually occurred if the acquisitions had been in effect on thedates indicated, nor are they necessarily indicative of future results of thecombined companies.

 

**4.      INVESTMENT IN JOINTVENTURES**

 

Asdiscussed in Note 2, on April 30, 2010, the Company acquired the remainingminority-owned interests in two joint ventures that were previouslymajority-owned by the Company’s Oilfield Product’s business segment.  Prior to the April 30, 2010 stepacquisition, these investments, which include DYNAenergetics RUS and Perfoline, were accounted for under the equitymethod due to certain non-controlling interest veto rights that allowed thenon-controlling interest shareholders to participate in ordinary course ofbusiness decisions.  Operating resultsfrom January 1, 2010 through April 30, 2010 include the Company’sproportionate share of income from these unconsolidated joint ventures.  Investments in these joint ventures totaled$1,132 as of December 31, 2009.  Asa result of the step acquisition, the Company now consolidates the financialstatements of these entities.

 

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Summarized unaudited financial information for thejoint ventures accounted for under the equity method as of December 31,2009 and for the three months ended September 30, 2009 and the nine monthsended September 30, 2010 and 2009 is as follows:

 
| ** **                   | ** ** | **December 31,** | ** ** |
|------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2009**              | ** ** |
| Current assets               |       | $                     | 5,350      |   |
| Noncurrent assets            |       | 655                   |       |
| Total assets                 |       | $                     | 6,005      |   |
|                         |       |                  |       |
| Current liabilities          |       | $                     | 2,892      |   |
| Noncurrent liabilities       |       | 555                   |       |
| Equity                       |       | 2,558                 |       |
| Total liabilities and equity |       | $                     | 6,005      |   |

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                           | ** ** | **2009**                         | ** ** | **2010 (a)**               | ** ** | **2009** | ** ** |
| Net sales                            |       | $                                | 1,645      |                            | $          | 2,575 |   | $ | 4,427 |   |
| Gross Profit                         |       | $                                | 455        |                            | $          | 656 |   | $ | 1,271 |   |
| Operating income                     |       | $                                | 233        |                            | $          | 302 |   | $ | 596 |   |
| Net income                           |       | $                                | 168        |                            | $          | 468 |   | $ | 310 |   |
| Equity in earnings of joint ventures |       | $                                | 91         |                            | $          | 255 |   | $ | 170 |   |

 

----

(a) Through April 30, 2010

 

**5.      INVENTORY**

 

The components of inventory are as follows atSeptember 30, 2010 and December 31, 2009:

 
| ** **      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|------------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Raw materials   |       | $                      | 10,262     |                  | $          | 10,321 |   |
| Work-in-process |       | 14,641                 |       | 15,963                |       |
| Finished goods  |       | 11,164                 |       | 5,526                 |       |
| Supplies        |       | 730                    |       | 691                   |       |
|            |       |                   |       |                  |       |
|            |       | $                      | 36,797     |                  | $          | 32,501 |   |

 

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**6.      GOODWILL**

 

Thechanges to the carrying amount of goodwill during the period are summarizedbelow:

 
| ** **                                                                            | ** ** | **Explosive**    | ** ** | ** **   | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------|------------|--------------|------------|------------|------------|
| ** **                                                                            | ** ** | **Metalworking** | ** ** | **Oilfield** | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | **Group**        | ** ** | **Products** | ** ** | **Total**  | ** ** |
| Goodwill balance at December 31, 2009                                            |       | $                | 24,577     |         | $          | 18,587     |       | $ | 43,164 |   |
| Adjustment due to recognition of tax benefit of  tax amortization of certain goodwill |       | (256             | )          | (327         | )          | (583       | )          |
| Adjustment due to exchange rate differences                                           |       | (1,194           | )          | (973         | )          | (2,167     | )          |
|                                                                                  |       |             |       |         |       |       |       |
| Goodwill balance at September 30, 2010                                           |       | $                | 23,127     |         | $          | 17,287     |       | $ | 40,414 |   |

 

**7.      PURCHASED INTANGIBLEASSETS**

 

Thefollowing table presents details of our purchased intangible assets, other thangoodwill, as of September 30, 2010:

 
| ** **               | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|--------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **               | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
| Core technology          |       | $          | 23,147     |             | $          | (3,299     | )          | $ | 19,848 |   |
| Customer relationships   |       | 39,854     |       | (10,154          | )          | 29,700     |       |
| Trademarks / Trade names |       | 2,481      |       | (1,067           | )          | 1,414      |       |
|                     |       |       |       |             |       |       |       |
| Total intangible assets  |       | $          | 65,482     |             | $          | (14,520    | )          | $ | 50,962 |   |

 

Thefollowing table presents details of our purchased intangible assets, other thangoodwill, as of December 31, 2009:

 
| ** **               | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|--------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **               | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
| Core technology          |       | $          | 24,347     |             | $          | (2,555     | )          | $ | 21,792 |   |
| Customer relationships   |       | 33,161     |       | (7,657           | )          | 25,504     |       |
| Trademarks / Trade names |       | 2,613      |       | (830             | )          | 1,783      |       |
|                     |       |       |       |             |       |       |       |
| Total intangible assets  |       | $          | 60,121     |             | $          | (11,042    | )          | $ | 49,079 |   |

 

Thechange in the gross value of our purchased intangible assets from December 31,2009 to September 30, 2010 reflects the additional intangible assetsassociated with the acquisitions of AECO and the two Russian joint ventures(see Note 3) and by the impact of foreign currency translation adjustments.

 

**8.      CUSTOMER ADVANCES**

 

On occasion, customers makeadvance payments prior to the shipment of their orders in order to help financethe Company’s inventory investment on large orders or to keep credit limits atacceptable levels.  As of September 30,2010 and December 31, 2009, customer advances totaled $5,128 and $6,528respectively.

 

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**9.      DEBT**

 

Lines of credit consisted of the following atSeptember 30, 2010 and December 31, 2009:

 
| ** **                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| HSBC line of credit                        |       | $                      | 81         |                  | $          | 1,774 |   |
| Syndicated credit agreement revolving loan |       | 3,403                  |       | —                |       |
| Commerzbank line of credit                 |       | 1,518                  |       | 3                     |       |
| Nord LB line of credit                     |       | 1,733                  |       | —                |       |
|                                       |       |                   |       |                  |       |
|                                       |       | $                      | 6,735      |                  | $          | 1,777 |   |

 

Long-term debt consists of the following atSeptember 30, 2010 and December 31, 2009:

 
| ** **                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Syndicated credit agreement term loan      |       | $                      | 28,997     |                  | $          | 31,005 |   |
| Syndicated credit agreement Euro term loan |       | —                 |       | 13,826                |       |
| Nord LB 3,000 Euro term loan               |       | 817                    |       | 1,505                 |       |
| Loans with former owners of LRI            |       | 1,294                  |       | 1,269                 |       |
|                                       |       |                   |       |                  |       |
|                                       |       | 31,108                 |       | 47,605                |       |
| Less current maturities                    |       | (7,567                 | )          | (13,485               | )          |
|                                       |       |                   |       |                  |       |
| Long-term debt                             |       | $                      | 23,541     |                  | $          | 34,120 |   |

 

InMarch of 2010, the Company made required prepayments of principal underthe U.S. Dollar and Euro term loans in the amounts of $2,008 and 626 Euros($868), respectively, from excess cash flow generated in 2009. Additionally,the Company made a March payment of 9,020 Euros ($12,498) to retire theremaining principal balance outstanding under the Euro term loan, which wasscheduled to mature on November 16, 2012.

 

LoanCovenants and Restrictions

 

The Company’s existing loan agreements includevarious covenants and restrictions, certain of which relate to the incurrenceof additional indebtedness; mortgaging, pledging or disposition of majorassets; limits on capital expenditures; and maintenance of specified financialratios.  As of September 30, 2010,the Company was in compliance with all financial covenants and other provisionsof its debt agreements.

 

SwapAgreement

 

On November 17, 2008, the Company enteredinto a two-year interest rate swap agreement with an initial notional amount of$40,500 (decreasing to $33,750 in November 2009) that effectively converted the LIBOR based variable rate U.S.borrowings under the syndicated credit agreement to a fixed rate of 4.87%(6.37% effective October 21, 2009 due to an amendment in the Company’ssyndicated credit facility and the Company’s current leverage ratio).  The Company had designated the swap agreementas an effective cash flow hedge with matched terms and, as a result,changes in the fair value of the swap agreement were recorded in othercomprehensive income with the offset as a swap agreement asset or liability. During March 2009 and March 

 

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2010, the Company made repayments of $2,744and $2,008, respectively, on its variable rate U.S. borrowings and in bothcases elected to de-designate the related portion of the cash flow hedge.  These principal payments were required underthe terms of the Company’s syndicated credit facility since certain annuallycalculated cash flow measures were met. Settlements and changes in the fair value related to the de-designatedportion of the cash flow hedge are recorded as realized and unrealizedgains/losses on swap agreement within other income in the Company’s statementof operations.   The Company recorded animmaterial loss of less than $100 during 2009 and an immaterial gain of approximately$43 during the nine months ended September 30, 2010.

 

**10.    BUSINESS SEGMENTS**

 

TheCompany is organized in the following three segments:  Explosive Metalworking, Oilfield Products,and AMK Welding. The Explosive Metalworking segment uses explosives to performmetal cladding and shock synthesis of industrial diamonds. The most significantproduct of this group is clad metal which is used in the fabrication ofpressure vessels, heat exchangers, and transition joints for variousindustries, including upstream oil and gas, oil refinery, petrochemicals,hydrometallurgy, aluminum production, shipbuilding, power generation,industrial refrigeration, and similar industries.  The Oilfield Products segment manufactures,markets and sells oilfield perforating equipment and explosives, includingdetonating cords, detonators, bi-directional boosters and shaped charges, andseismic related explosives and accessories. AMK Welding utilizes a number of welding technologies to weld componentsfor manufacturers of jet engine and ground-based turbines.

 

Theaccounting policies of all the segments are the same as those described in thesummary of significant accounting policies. The Company’s reportable segments are separately managed strategicbusiness units that offer different products and services. Each segment’sproducts are marketed to different customer types and require differentmanufacturing processes and technologies.

 

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Segmentinformation is presented for the three and nine months ended September 30,2010 and 2009 as follows:

 
| ** **                                           | ** ** | **Explosive**    | ** ** | ** **   | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------------|------------|--------------|------------|-------------|------------|------------|------------|
| ** **                                           | ** ** | **Metalworking** | ** ** | **Oilfield** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Group**        | ** ** | **Products** | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the three months ended September 30,  2010: |       |             |       |         |       |        |       |       |       |
| Net sales                                            |       | $                | 24,925     |         | $          | 13,208      |       | $          | 3,165      |   | $ | 41,298 |   |
| Depreciation and amortization                        |       | $                | 1,608      |         | $          | 1,152       |       | $          | 120        |   | $ | 2,880 |   |
| Income from operations                               |       | $                | 1,225      |         | $          | 1,691       |       | $          | 861        |   | $ | 3,777 |   |
| Unallocated amounts:                                 |       |             |       |         |       |        |       |       |       |
| Stock-based compensation                             |       |             |       |         |       |        |       | (834       | )          |
| Other expense                                        |       |             |       |         |       |        |       | (416       | )          |
| Interest expense                                     |       |             |       |         |       |        |       | (667       | )          |
| Interest income                                      |       |             |       |         |       |        |       | 6          |       |
|                                                 |       |             |       |         |       |        |       |       |       |
| Consolidated income before income taxes              |       |             |       |         |       |        |       | $          | 1,866      |   |
|                                                 |       |             |       |         |       |        |       |       |       |
| ** **                                           | ** ** | **Explosive**    | ** ** | ** **   | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Metalworking** | ** ** | **Oilfield** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Group**        | ** ** | **Products** | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the three months ended September 30,  2009: |       |             |       |         |       |        |       |       |       |
| Net sales                                            |       | $                | 27,327     |         | $          | 5,123       |       | $          | 2,240      |   | $ | 34,690 |   |
| Depreciation and amortization                        |       | $                | 1,527      |         | $          | 912         |       | $          | 114        |   | $ | 2,553 |   |
| Income (loss) from operations                        |       | $                | 3,370      |         | $          | (414        | )          | $          | 441        |   | $ | 3,397 |   |
| Equity in earnings of joint ventures                 |       | $                | —     |         | $          | 91          |       | $          | —     |   | 91 |   |
| Unallocated amounts:                                 |       |             |       |         |       |        |       |       |       |
| Stock-based compensation                             |       |             |       |         |       |        |       | (897       | )          |
| Other expense                                        |       |             |       |         |       |        |       | (633       | )          |
| Interest expense                                     |       |             |       |         |       |        |       | (752       | )          |
| Interest income                                      |       |             |       |         |       |        |       | 41         |       |
|                                                 |       |             |       |         |       |        |       |       |       |
| Consolidated income before income taxes              |       |             |       |         |       |        |       | $          | 1,247      |   |
|                                                 |       |             |       |         |       |        |       |       |       |
| ** **                                           | ** ** | **Explosive**    | ** ** | ** **   | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Metalworking** | ** ** | **Oilfield** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Group**        | ** ** | **Products** | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the nine months ended September 30, 2010:   |       |             |       |         |       |        |       |       |       |
| Net sales                                            |       | $                | 72,921     |         | $          | 28,868      |       | $          | 8,124      |   | $ | 109,913 |   |
| Depreciation and amortization                        |       | $                | 4,340      |         | $          | 3,131       |       | $          | 350        |   | $ | 7,821 |   |
| Income from operations                               |       | $                | 4,408      |         | $          | 1,490       |       | $          | 1,912      |   | $ | 7,810 |   |
| Equity in earnings of joint ventures                 |       | $                | —     |         | $          | 255         |       | $          | —     |   | 255 |   |
| Unallocated amounts:                                 |       |             |       |         |       |        |       |       |       |
| Stock-based compensation                             |       |             |       |         |       |        |       | (2,537     | )          |
| Other income                                         |       |             |       |         |       |        |       | 1,715      |       |
| Interest expense                                     |       |             |       |         |       |        |       | (2,473     | )          |
| Interest income                                      |       |             |       |         |       |        |       | 71         |       |
|                                                 |       |             |       |         |       |        |       |       |       |
| Consolidated income before income taxes              |       |             |       |         |       |        |       | $          | 4,841      |   |

 

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| ** **                                         | ** ** | **Explosive**    | ** ** | ** **   | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|------------------|------------|--------------|------------|-------------|------------|------------|------------|
| ** **                                         | ** ** | **Metalworking** | ** ** | **Oilfield** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **Group**        | ** ** | **Products** | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the nine months ended September 30, 2009: |       |             |       |         |       |        |       |       |       |
| Net sales                                          |       | $                | 102,403    |         | $          | 13,171      |       | $          | 6,694      |   | $ | 122,268 |   |
| Depreciation and amortization                      |       | $                | 4,452      |         | $          | 2,616       |       | $          | 342        |   | $ | 7,410 |   |
| Income (loss) from operations                      |       | $                | 17,381     |         | $          | (2,013      | )          | $          | 1,122      |   | $ | 16,490 |   |
| Equity in earnings of joint ventures               |       | $                | —     |         | $          | 170         |       | $          | —     |   | 170 |   |
| Unallocated amounts:                               |       |             |       |         |       |        |       |       |       |
| Stock-based compensation                           |       |             |       |         |       |        |       | (2,657     | )          |
| Other expense                                      |       |             |       |         |       |        |       | (560       | )          |
| Interest expense                                   |       |             |       |         |       |        |       | (2,521     | )          |
| Interest income                                    |       |             |       |         |       |        |       | 145        |       |
|                                               |       |             |       |         |       |        |       |       |       |
| Consolidated income before income taxes            |       |             |       |         |       |        |       | $          | 11,067     |   |

 

During the three months ended September 30,2010, no sales to any one customer accounted for more than 10% of total netsales.  During the nine months endedSeptember 30, 2010, sales to one customer represented $11,882 (10.8%) oftotal net sales.  During the three monthsended September 30, 2009, sales to one customer represented approximately$4,033 (11.6%) of total net sales. During the nine months ended September 30, 2009, no sales to anyone customer accounted for more than 10% of total sales.

 

**11.    COMPREHENSIVEINCOME (LOSS)**

 

TheCompany’s comprehensive income (loss) for the three and nine months endedSeptember 30, 2010 and 2009 was as follows:

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                           | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income for the period                            |       | $                                | 1,326      |                            | $          | 1,096 |   | $ | 3,950 |   | $ | 7,527 |   |
| Interest rate swap valuation adjustment, net of  tax |       | 123                              |       | 104                             |       | 365 |   | 301 |   |
| Foreign currency translation adjustment              |       | 11,240                           |       | 3,942                           |       | (4,332 | ) | 3,747 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Comprehensive income (loss)                          |       | $                                | 12,689     |                            | $          | 5,142 |   | $ | (17 | ) | $ | 11,575 |   |

 

Othercumulative comprehensive income (loss) as of September 30, 2010 andDecember 31, 2009 consisted of the following:

 
| ** **                                                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Currency translation adjustment                                                    |       | $                      | (3,538     | )                     | $          | 794 |   |
| Interest rate swap valuation adjustment, net of  tax of $51 and $299, respectively |       | (89                    | )          | (454                  | )          |
|                                                                               |       |                   |       |                  |       |
|                                                                               |       | $                      | (3,627     | )                     | $          | 340 |   |

 

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

 

The following discussion should be read in conjunctionwith our historical consolidated financial statements and notes, as well as theselected historical consolidated financial data that are included in theCompany’s Annual Report filed on Form 10-K for the year ended December 31,2009.

 

Unlessstated otherwise, all currency amounts in this discussion are presented inthousands (000’s).

 

**Executive Overview**

 

Ourbusiness is organized into three segments: Explosive Metalworking, Oilfield Products, and AMK Welding.  For the nine months ended September 30,2010, Explosive Metalworking accounted for 66% of our net sales and 56% of ourincome from operations before consideration of stock-based compensationexpense, which is not allocated to our business segments.  Our Oilfield Products and AMK Weldingsegments accounted for 26% and 8%, respectively, of our year-to-date 2010 netsales and 19% and 25 %, respectively, of our year-to-date income fromoperations before consideration of stock-based compensation expense.

 

Ournet sales for the nine months ended September 30, 2010 decreased by$12,355 (10.1%) compared to the same period of 2009, reflecting a year-to-yearnet sales decrease of $29,482 (28.8%) for our Explosive Metalworking segment,which was partially offset by sales increases of $15,697 (119.2%) and $1,430(21.4%) for our Oilfield Products and AMK Welding segments, respectively.  Excluding incremental sales of $12,134 fromthe acquisitions of LRI and Austin Explosives on October 1, 2009 and June 4,2010, respectively, and the step acquisition of two Russian joint ventures thatwas completed on April 30, 2010, our Oilfield Products segment reported anincrease of $3,563 or 27.1% in its year-to-date 2010 net sales.  Our consolidated income from operationsdecreased to $5,273 for the nine months ended September 30, 2010 from $13,833for the same period of 2009.  This $8,560decrease reflects a decline in Explosive Metalworking’s operating income of$12,973 which was partially offset by a $3,503 increase in the operatingresults reported by our Oilfield Products segment from an operating loss of$2,013 in 2009 to operating income of $1,490 for the first nine months of 2010,an increase in operating income for AMK Welding of $790, and a $120 decrease instock-based compensation expense.  Werecorded net income of $3,950 for the nine months ended September 30, 2010compared to net income of $7,527 for the same period of 2009.

 

*Impact of Current Economic Situation on the Company*

 

TheCompany was only minimally impacted in 2008 by the global economicslowdown.  However, during 2009 and thefirst nine months of 2010, we experienced a significant slowdown in ExplosiveMetalworking sales to some of the markets we serve.  The explosion-welded clad plate market isdependent upon sales of products for use by customers in a number of heavy industries,including oil and gas, alternative energy, chemicals and petrochemicals,hydrometallurgy, aluminum production, shipbuilding, power generation, andindustrial refrigeration.  Theseindustries tend to be cyclical in nature and the current worldwide economicdownturn has affected many of these markets. Despite the slowdown we have already seen in certain sectors, includingchemical, petrochemical and hydrometallurgy, quoting activity in other endmarkets remains relatively healthy, and we continue to track an extensive listof projects. While timing of new order inflow remains difficult to predict, webelieve that our Explosive Metalworking segment is well-positioned to benefitas global economic conditions improve.

 

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Asa result of our Explosive Metalworking backlog decreasing from $97,247 atDecember 31, 2008 to $49,584 at December 31, 2009 and relatively lowbooking activity during the first nine months of 2010 which further reduced ourbacklog amount to $41,154 at September 30, 2010, we currently expect thatour 2010 consolidated net sales will decline by approximately 8% from theconsolidated net sales that we reported in 2009.  In light of the slowdown in order inflow thatwe have experienced, we continue to manage expenses carefully.  Despite the significant sales and net incomedeclines that we reported in the first nine months of 2010, we generated cashflow from operations of $10,254 and expect to generate positive cash flow fromoperations for the full year 2010.

 

*Net sales*

 

ExplosiveMetalworking’s revenues are generated principally from sales of clad metalplates and sales of transition joints, which are made from clad plates, tocustomers that fabricate industrial equipment for various industries, includingoil and gas, petrochemicals, alternative energy, hydrometallurgy, aluminumproduction, shipbuilding, power generation, industrial refrigeration, andsimilar industries.  While a largeportion of the demand for our clad metal products is driven by new plantconstruction and large plant expansion projects, maintenance and retrofitprojects at existing chemical processing, petrochemical processing, oilrefining, and aluminum smelting facilities also account for a significantportion of total demand.

 

OilfieldProducts’ revenues are generated principally from sales of shaped charges,detonators and detonating cord, and bidirectional booster sand perforating gunsto customers who perform the perforation of oil and gas wells and from sales ofseismic products to customers involved in oil and gas exploration activities.

 

AMKWelding’s revenues are generated from welding, heat treatment, and inspection servicesthat are provided with respect to customer-supplied parts for customersprimarily involved in the power generation industry and aircraft enginemarkets.

 

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

 

*Gross profit and cost of products sold*

 

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

 

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

 

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

 

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*Income taxes*

 

Oureffective income tax rate decreased to 18.4% for the nine months endedSeptember 30, 2010 from 32.0% for the same period of 2009.  After adjusting for the non-recurring gain onthe step acquisition of two Russian joint ventures, our effective tax rate onthe remaining “ordinary” pretax income that we reported for the first ninemonths of 2010 was 30.5%.  Based uponexisting tax regulations and current federal, state and foreign statutory taxrates, an expected reduction in our 2010 consolidated pre-tax income from thatreported in 2009, and the amount of our projected 2010 consolidated pre-taxincome that we expect to be generated by our U.S. and foreign operations,respectively, we currently expect our blended effective tax rate for 2010 torange between 22% and 23%.  Our full year2009 effective tax rate was 33.9% and, for 2011 and subsequent years, we expectthat our blended effective tax rate will to return to a normalized level of 33%to 35%.

 

*Backlog*

 

We use backlog as a primary means of measuringthe immediate outlook for our Explosive Metalworking business.  We define “backlog” at any given point intime as consisting of all firm, unfulfilled purchase orders and commitments atthat time.  Generally speaking, we expectto fill most backlog orders within the following 12 months.  From experience, most firm purchase ordersand commitments are realized.

 

Our backlog with respect to the ExplosiveMetalworking segment decreased to $41,154 at September 30, 2010 from$49,584 at December 31, 2009 and was well below the backlog of $97,247that we reported at December 31, 2008. In light of the slowdown in order inflow and decrease in backlog that wehave experienced for our Explosive Metalworking segment, we are currentlyanticipating that our consolidated net sales for fiscal 2010 will beapproximately 8% lower than the consolidated net sales that we reported in2009.

 

**Three and Nine Months Ended September 30, 2010 Comparedto Three and Nine Months Ended September 30, 2009**

 

*Net sales*

 
| ** ** | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2010**                         | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                                | 41,298     |       | $          | 34,690         |       | $ | 6,608 |   | 19.0 | % |
|            |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** ** | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2010**                        | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                               | 109,913    |       | $          | 122,268        |       | $ | (12,355 | ) | (10.1 | )% |
|            |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

Netsales for the third quarter of 2010 increased 19.0% to $41,298 from $34,690 forthe third quarter of 2009.  ExplosiveMetalworking sales decreased 8.8% to $24,925 for the three months endedSeptember 30, 2010 (60% of total sales) from $27,327 for the same periodof 2009 (79% of total sales).  Thedecrease in Explosive Metalworking sales reflects a business slowdown inseveral of the industries that this business segment serves.

 

OilfieldProducts contributed $13,208 to third quarter 2010 sales (32% of total sales),which represents a 157.8% increase from sales of $5,123 for the third quarterof 2009 (15% of 

 

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totalsales). Excluding incremental sales of $5,194 from our acquisitions of LRI andAustin Explosives and the step acquisition of two Russian joint ventures, thethird quarter 2010 sales increase for Oilfield Products was $2,891 or 56.4%.

 

AMKWelding contributed $3,165 to third quarter 2010 sales (8% of total sales),which represents a 41.3% increase from sales of $2,240 for the third quarter of2009 (6% of total sales).

 

Ourconsolidated net sales for the nine months ended September 30, 2010decreased 10.1% to $109,913 from $122,268 in the same period of 2009.  Explosive Metalworking sales decreased 28.8%to $72,921 for the nine months ended September 30, 2010 (66% of totalsales) from $102,403 for the same period of 2009 (84% of total sales).

 

OilfieldProducts contributed $28,868 to year-to-date 2010 sales (26% of total sales),which represents a 119.2% increase from sales of $13,171 for year-to-date 2009sales (11% of total sales).  Excludingincremental sales of $12,134 from our acquisitions of LRI and Austin Explosivesand step acquisition of two Russian joint ventures, the year-to-date 2010 salesincrease for Oilfield Products was $3,563 or 27.1%.

 

AMKWelding contributed $8,124 to the first nine months of 2010 sales (8% of totalsales), which represents a 21.4% increase from sales of $6,694 in the sameperiod 2009 (5% of total sales).

 

*Gross profit*

* *
| ** **                            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2010**                         | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit                          |       | $                                | 10,853     |       | $          | 8,754          |       | $ | 2,099 |   | 24.0 | % |
| Consolidated gross profit margin rate |       | 26.3                             | %          | 25.2       | %          |           |       |   |   |
|                                       |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **                            | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2010**                        | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit                          |       | $                               | 27,094     |       | $          | 33,236         |       | $ | (6,142 | ) | (18.5 | )% |
| Consolidated gross profit margin rate |       | 24.7                            | %          | 27.2       | %          |           |       |   |   |
|                                       |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

Grossprofit increased by 24.0% to $10,853 for the three months ended September 30,2010 from $8,754 for the three months ended September 30, 2009. Our thirdquarter 2010 consolidated gross profit margin rate increased to 26.3% from the25.2% gross margin that we reported for the third quarter of 2009.  For the nine months ended September 30,2010, gross profit decreased by 18.5% to $27,094 from $33,236 for the sameperiod of 2009.  Our year to dateconsolidated gross profit margin rate decreased to 24.7% from 27.2% for thefirst nine months of 2009.

 

Thegross margin for Explosive Metalworking decreased from 25.8% for the thirdquarter of 2009 to 18.7% for the third quarter of 2010.  This 27.5% decrease in the ExplosiveMetalworking third quarter gross margin rate relates entirely to our U.S.cladding division where the gross margin of 20.1% for the third quarter of 2010was 37% lower than the gross margin reported for the third quarter of 2009 on ayear-to-year sales increase of 1.6%. Despite a 31.4% decline in their third quarter 2010 sales, our Europeancladding divisions reported a gross margin of 14.0% in the third quarter of2010 which was higher than the third quarter 2009 gross margin of 12.4%.  Our gross margin for the ExplosiveMetalworking segment decreased to 20.0% for the nine months ended September 30,2010 from 28.3% for the same period in 2009. This 29.3% 

 

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decreasein the nine-month Explosive Metalworking gross margin rate reflects a 31.4%decrease in our U.S. gross margin from 34.5% in 2009 to 23.7% in 2010 and adecrease in our European gross margin from 19.0% in 2009 to 11.5% in 2010 onyear-to-year sales declines of 16.9% and 46.3%, respectively. While lower salesand the resultant less favorable absorption of fixed manufacturing overhead costshave negatively impacted gross margins reported by all of our claddingdivisions, the significant decline in our U.S. gross margin rate for the thirdquarter and first nine months of 2010 compared to the same periods in 2009relates principally to unfavorable changes in product mix and an extremelycompetitive pricing environment in certain end markets that comprise asignificant portion of our 2010 sales. Historically, gross margins for ourEuropean explosion welding divisions have been lower than those reported by ourU.S. division due to less efficient fixed manufacturing cost structuresassociated with our smaller European facilities and this has again been thecase during the first nine months of 2010. While our European cladding divisions also face a competitive pricingenvironment, the principal reason for the large decrease in our European grossmargin rate for the first nine months of 2010 compared to the same period in2009 is the 46.3% decline in sales.  Ashas been the case historically, we expect to see continued fluctuations inExplosive Metalworking’s quarterly gross margin rates in the future that resultfrom fluctuations in quarterly sales volume and changes in product mix. Basedupon the reported year-to-date gross margin, the composition of our September 30,2010 backlog and the anticipated mix of new orders that we expect to shipbefore the end of the year, we expect the full year 2010 gross margin to be inthe range of 18% to 20% for our Explosive Metalworking segment.

 

OilfieldProducts reported a gross margin of 39.2% for the third quarter of 2010compared to a gross margin of 22.4% for the third quarter of 2009.  Oilfield Products reported a gross margin of35.0% for the first nine months of 2010 compared to a gross margin of 21.7% forthe first nine months of 2009.  Theincrease in Oilfield Products’ gross margin for the third quarter and firstnine months of 2010 relates principally to the significant sales increases thatare discussed above and favorable changes in product/customer mix. Grossmargins reported by the Oilfield Products segment also reflect the incrementalmargin on intercompany sales to recently acquired former distributors inCanada, the U.S. and Russia as these acquired entities sell products through tothe end customers.  We currently expectOilfield Products to report full year 2010 sales in excess of $40,000 and agross margin in the range of 33% to 35%.

 

Thegross margin for AMK Welding increased to 34.9% for the third quarter of 2010from 29.7% for the third quarter of 2009. The gross margin for AMK Welding increased to 32.7% in the first ninemonths of 2010 from 26.5% in the first nine months of 2009.  These increases in AMK Welding’s gross marginrelate principally to the sales increases discussed above and resultant morefavorable absorption of fixed manufacturing overhead expenses.  AMK Welding sales for the full year 2010 areexpected to approximate $10,500 and its full year gross margin is expected tobe in the range of 32% to 34%.

 

*General and administrative expenses*

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                                 | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                 | ** ** | **2010**                         | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General & administrative expenses |       | $                                | 3,487      |       | $          | 2,749          |       | $ | 738 |   | 26.8 | % |
| Percentage of net sales                    |       | 8.4                              | %          | 7.9        | %          |           |       |   |   |
|                                            |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

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| ** **                                 | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **                                 | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                 | ** ** | **2010**                        | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General & administrative expenses |       | $                               | 9,990      |       | $          | 9,318          |       | $ | 672 |   | 7.2 | % |
| Percentage of net sales                    |       | 9.1                             | %          | 7.6        | %          |           |       |   |   |
|                                            |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

Generaland administrative expenses increased by $738, or 26.8%, to $3,487 in the thirdquarter of 2010 from $2,749 in the third quarter of 2009.  Excluding incremental general and administrativeexpenses of $428 that resulted from the acquisitions of LRI, Austin Explosivesand the Russian joint ventures, our general and administrative expensesincreased by $310 or 11.3% compared to the prior year third quarter. Thisincrease includes an increase of $178 in salaries, an increase in accruedincentive compensation of $121 and a net increase of $11 in all other spendingcategories.  As a percentage of netsales, general and administrative expenses increased to 8.4% in the thirdquarter of 2010 from 7.9% in the third quarter of 2009.

 

Generaland administrative expenses for the nine months ended September 30, 2010totaled $9,990 compared to $9,318 for the same period of 2009, an increase of$672 or 7.2%.  Excluding incrementalgeneral and administrative expenses of $924 that resulted from the acquisitionsof LRI, Austin Explosives and the Russian joint ventures, our general andadministrative expenses decreased by $252 or 2.7%.  This decrease includes an increase of $252 insalaries that was entirely offset by an $88 decrease in accrued incentivecompensation and a net decrease of $416 in all other expenses categories thatreflects the impact of tight controls over discretionary spending.  As a percentage of net sales, general andadministrative expenses increased to 9.1% in the first nine months of 2010 from7.6% in the first nine months of 2009.

 

*Selling expenses*

 
| ** **              | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **              | ** ** | **2010**                         | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses        |       | $                                | 3,047      |       | $          | 2,212          |       | $ | 835 |   | 37.7 | % |
| Percentage of net sales |       | 7.4                              | %          | 6.4        | %          |           |       |   |   |
|                         |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **              | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **              | ** ** | **2010**                        | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses        |       | $                               | 7,918      |       | $          | 6,376          |       | $ | 1,542 |   | 24.2 | % |
| Percentage of net sales |       | 7.2                             | %          | 5.2        | %          |           |       |   |   |
|                         |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

Sellingexpenses, which include sales commissions of $75 in 2010 and $237 in 2009,increased by 37.7% to $3,047 in the third quarter of 2010 from $2,212 in thethird quarter of 2009.  Excludingincremental selling expenses of $1,260 that resulted from the acquisitions ofLRI, Austin Explosives and the Russian joint ventures, our selling expensesdecreased by $425 or 19.2%.  This $425decrease in our selling expenses includes increased selling expenses of $86 atour U.S. divisions that was offset by decreased selling expenses of $511 at ourEuropean divisions.  The decrease inEuropean selling expenses relates principally to staff reductions within ourEuropean explosion welding facilities and lower sales commissions. The $86increase in our U.S. selling expenses reflects increased travel expenses of$62, a $57 increase in bad debt expense and a net decrease of $33 in otherspending categories. As a percentage of net sales, selling expenses increasedto 7.4% in the third quarter of 2010 from 6.4% in the third quarter of 2009.

 

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Sellingexpenses increased by 24.2% to $7,918 in the nine months ended September 30,2010 from $6,376 in the same period of 2009. These selling expenses include sales commissions of $646 and $1,045 for2010 and 2009, respectively.  Excludingincremental selling expenses of $2,489 that resulted from the acquisitions ofLRI, Austin Explosives and the Russian joint ventures, our selling expensesdecreased by $947 or 14.9%.  This $947decrease in our selling expenses includes decreased selling expenses of $907and $40 at our European and U.S. divisions, respectively.  The decrease in European selling expensesrelates principally to staff reductions within our European explosion weldingfacilities and lower sales commissions. The $40 decrease in our U.S. sellingexpenses reflects decreased sales commissions of $205, a $195 decrease insalaries and accrued incentive compensation and a net increase of $360 in otherspending categories. As a percentage of net sales, selling expenses increasedto 7.2% in the first nine months of 2010 from 5.2% in the first nine months of2009.

 

*Amortization expenses*

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                                  | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                  | ** ** | **2010**                         | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Amortization of purchased intangible assets |       | $                                | 1,376      |       | $          | 1,293          |       | $ | 83 |   | 6.4 | % |
| Percentage of net sales                     |       | 3.3                              | %          | 3.7        | %          |           |       |   |   |
|                                             |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **                                  | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **                                  | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                  | ** ** | **2010**                        | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Amortization of purchased intangible assets |       | $                               | 3,913      |       | $          | 3,709          |       | $ | 204 |   | 5.5 | % |
| Percentage of net sales                     |       | 3.6                             | %          | 3.0        | %          |           |       |   |   |
|                                             |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

Amortization expense relates to the amortization ofvalues assigned to intangible assets in connection with the November 15,2007 acquisition of DYNAenergetics, our October 1, 2009 acquisition ofLRI, our April 30, 2010 acquisition of the Russian joint ventures and ourJune 5, 2010 acquisition of Austin Explosives.  Amortization expense for the three monthsended September 30, 2010 includes $1,012, $276 and $88 relating to valuesassigned to customer relationships, core technology and trademarks/trade names,respectively.  Amortization expense forthe three months ended September 30, 2009 includes $897, $299 and $97relating to values assigned to customer relationships, core technology andtrademarks/trade names, respectively.

 

Amortization expense for the nine months endedSeptember 30, 2010 includes $2,799, $845 and $269 relating to valuesassigned to customer relationships, core technology and trademarks/trade names,respectively.  Amortization expense forthe nine months ended September 30, 2009 includes $2,572, $858 and $279relating to values assigned to customer relationships, core technology andtrademarks/trade names, respectively.  Amortization expense (as measured in Euros) associated with theDYNAenergetics acquisition is expected to approximate €3,603 in 2010, and 2010amortization expense (as measured in Canadian Dollars) associated with the LRIacquisition is expected to approximate 80 CAD. Amortization expense associated with the acquisition of AustinExplosives is expected to approximate $249 for approximately seven months of2010 and amortization expense associated with the acquisition of the Russianjoint ventures is expected to approximate €185 for eight months of 2010.

 

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*Operating income*

 
| ** **       | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **       | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **       | ** ** | **2010**                         | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Operating income |       | $                                | 2,943      |       | $          | 2,500          |       | $ | 443 |   | 17.7 | % |
|                  |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **       | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **       | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **       | ** ** | **2010**                        | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Operating income |       | $                               | 5,273      |       | $          | 13,833         |       | $ | (8,560 | ) | (61.9 | )% |
|                  |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

Incomefrom operations (“operating income”) increased by $443 to $2,943 in the thirdquarter of 2010 from $2,500 in the third quarter of 2009.  For the nine months ended September 30,2010, operating income decreased by 61.9% to $5,273 from $13,833 for the sameperiod of 2009.

 

ExplosiveMetalworking reported operating income of $1,225 in the third quarter of 2010compared to $3,370 in the third quarter of 2009.  This 63.6% decrease in Explosive Metalworkingoperating income is largely attributable to the 8.8% decrease in net sales andthe 27.5% decline in the gross margin rate as discussed above.  Explosive Metalworking reported operatingincome of $4,408 in the nine months ended September 30, 2010 compared to$17,381 in the same period of 2009. This 74.6% decrease in ExplosiveMetalworking operating income is largely attributable to the 28.8% decrease innet sales and the 29.3% decline in the gross margin rate as discussed above.

 

OilfieldProducts reported operating income of $1,691 for the third quarter of 2010 ascompared to an operating loss of $414 for the third quarter of 2009.  For the nine months ended September 30,2010, Oilfield Products reported operating income of $1,490 compared to anoperating loss of $2,013 for the same period of 2009. The significantimprovement in operating results for our Oilfield Products segment isattributable to the significant increases in sales and gross profit asdiscussed above that reflect the incremental sales and gross profit from theacquisitions of LRI, Austin Explosives and the Russian joint ventures as wellas an increase in global oil and gas drilling activities, particularly in NorthAmerica.

 

AMKWelding reported operating income of $861 for the three months ended September 30,2010 as compared to $441 for the same period of 2009.  AMK Welding reporting operating income of$1,912 for the nine months ended September 30, 2010 compared to $1,122 forthe same nine month period of 2009. The improvement in AMK’s operating incomeis largely attributable to sales increases of 41.3% and 21.4% for the three andnine month periods, respectively,

 

Operatingincome for the three and nine months ended September 30, 2010 includes$834 and $2,537, respectively, of stock-based compensation.  Operating income for the three and ninemonths ended September 30, 2009 includes $897 and $2,657, respectively, ofstock-based compensation.  This expenseis not allocated to our business segments and thus is not included in the abovethird quarter operating income or loss totals for Explosive Metalworking,Oilfield Products and AMK Welding.

 

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*Gain on step acquisition of joint ventures*

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                                 | ** ** | **September 30,**                | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                 | ** ** | **2010**                         | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gain on step acquisition of joint ventures |       | $                                | —     |       | $          | —         |       | $ | — |   | N/A |   |
|                                            |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **                                 | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **                                 | ** ** | **September 30,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                 | ** ** | **2010**                        | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gain on step acquisition of joint ventures |       | $                               | 2,117      |       | $          | —         |       | $ | 2,117 |   | N/A |   |
|                                            |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

During the second quarter of 2010, we acquired the remainingnon-controlling interests in two Russian joint ventures that were previouslymajority-owned.  Prior to the acquisitiondate, we accounted for the joint ventures as equity investments.  As a result of the acquisition of theremaining non-controlling interests, we now consolidate these entities. Inaccordance with accounting standards applicable to transactions of this nature,we determined the fair value of our interests in these joint venturesimmediately prior to the purchase and recognized a resultant gain of $2,117.

 

*Other income (expense), net*

* *
| ** **                  | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                  | ** ** | **September 30,**                | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                  | ** ** | **2010**                         | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Other income (expense), net |       | $                                | (416       | )          | $          | (633           | )          | $ | 217 |   | (34.3 | )% |
|                             |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **                  | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **                  | ** ** | **September 30,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                  | ** ** | **2010**                        | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Other income (expense), net |       | $                               | (402       | )          | $          | (560           | )          | $ | 158 |   | (28.2 | )% |
|                             |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

Net other expense for the three months endedSeptember 30, 2010 was $416 compared to net other expense of $633 for thesame period of 2009.  For year to date2010, we recorded net other expense of $402 compared to net other expense of$560 for the same period of 2009.  The netother expense for the three and nine month periods relates principally torealized and unrealized foreign exchange losses recognized by consolidatedsubsidiaries that prepare their financial statements in functional currenciesother than the U.S. Dollar.  For 2010,the foreign exchange losses recorded by our Swedish, German and Russiansubsidiaries reflect the weakening of the Euro against the Swedish Krona, theweakening of the U.S. Dollar against the Euro and the weakening of the RussianRuble against the Euro, respectively. These losses were partially offset by a gain of $185 on our currency swapagreement.  For 2009 the foreign exchangelosses recorded by our Swedish, German and Kazakhstani subsidiaries reflect theweakening of the Euro against the Swedish Krona, the weakening of the U.S.Dollar against and Euro and the weakening of the Kazakhstan Tenge against theEuro, respectively.

 

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*Interest income (expense), net*

* *
| ** **                     | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                     | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                     | ** ** | **2010**                         | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income (expense), net |       | $                                | (661       | )          | $          | (711           | )          | $ | 50 |   | (7.0 | )% |
|                                |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **                     | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **                     | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                     | ** ** | **2010**                        | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income (expense), net |       | $                               | (2,402     | )          | $          | (2,376         | )          | $ | (26 | ) | 1.1 | % |
|                                |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

Werecorded net interest expense of $661 in the third quarter of 2010 compared tonet interest expense of $711 in the same period of 2009.  We recorded net interest expense of $2,402 inthe nine months ended September 30, 2010 compared to net interest expenseof $2,376 for the same nine month period of 2009.  Year-to-date 2010 interest expense included anon-recurring, non-cash charge of $251 related to the write-off of unamortizeddebt issuance costs associated with the March prepayment, in the amount of$12,498 (9,020 Euros), of the remaining balance of the Euro term loan that wasoutstanding under our bank syndicate credit facility.  This Euro term loan was scheduled to matureon November 16, 2012.  The decreasein interest expense for the comparable three month periods ended September 30is attributable to a significant reduction in average outstanding borrowingsduring the respective quarters that resulted from scheduled term loan paymentsand the March prepayment of the Euro term loan. Interest savings fromthese term loan reductions was partially offset by higher average interestrates in 2010 that relate principally to the October 2009 amendment to ourbank syndicate credit facility which resulted in an increase in the interestrate charged on outstanding borrowings of 1.5% per annum.

 

*Income tax provision*

 
| ** **           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **           | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **           | ** ** | **2010**                         | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax provision |       | $                                | 540        |       | $          | 151            |       | $ | 389 |   | 257.6 | % |
| Effective tax rate   |       | 28.9                             | %          | 12.1       | %          |           |       |   |   |
|                      |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **           | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **           | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **           | ** ** | **2010**                        | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax provision |       | $                               | 891        |       | $          | 3,540          |       | $ | (2,649 | ) | (74.8 | )% |
| Effective tax rate   |       | 18.4                            | %          | 32.0       | %          |           |       |   |   |
|                      |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

Werecorded an income tax provision of $540 in the third quarter of 2010 comparedto $151 in the third quarter of 2009. Our overall effective tax rate decreased to 28.9% in the third quarterof 2010 from an effective tax rate of 12.1% in the prior year third quarter.  Our consolidated income tax provision for thethree months ended September 30, 2010 and 2009 included provisions of $510and $1,079, respectively, related to U.S. taxes, with the remainder relating toa net foreign tax provision of $30 in 2010 and a net foreign tax benefit of$928 in 2009 associated with our foreign operations and holding companieslocated in Canada, France, Germany, Sweden, Russia, Kazakhstan and Luxembourg.

 

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Forthe nine months ended September 30, 2010, we recorded an income taxprovision of $891 compared to $3,540 in the same period of 2009.  Our year-to-date 2010 income tax provisionincluded a provision of $59 associated with the $2,117 non-recurring gain thatwe recorded on the acquisition of non-controlling interests in two Russianjoint ventures as discussed above and a provision of $832 on the remaining“ordinary” pretax income of $2,724.  Theeffective tax rate decreased to 18.4% for the first nine months of 2010 from32.0% in the first nine months of 2009 due principally to the low tax rateapplicable to the non-recurring gain on the acquisition of non-controllinginterests in two Russian joint ventures. Our effective tax rate on the $832 of “ordinary” pretax income that wereported for the nine months ended September 30, 2010 was 30.5%.  Our consolidated income tax provision for thenine months ended September 30, 2010 and 2009 included $1,359 and $4,250,respectively, related to U.S. taxes, with the remainder relating to a netforeign tax benefit of $468 in 2010 and a net foreign tax benefit of $710 in2009 associated with our foreign operations and holding companies.

 

Weexpect our blended effective tax rate for 2010 to range from 22% to 23% basedupon the low effective tax rate we experienced during the first nine months of2010 and our current projection of full year consolidated pre-tax income.  Our full year 2009 effective tax rate was33.9% and we expect that our blended effective tax rate will return to anormalized level of 33% to 35% in 2011 and subsequent years.

 

*Adjusted EBITDA*

* *
| ** **      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **      | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **      | ** ** | **2010**                         | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Adjusted EBITDA |       | $                                | 6,657      |       | $          | 5,950          |       | $ | 707 |   | 11.9 | % |
|                 |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **      | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **      | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **      | ** ** | **2010**                        | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Adjusted EBITDA |       | $                               | 15,631     |       | $          | 23,900         |       | $ | (8,269 | ) | (34.6 | )% |
|                 |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

AdjustedEBITDA is a non-GAAP measure that we use as an indicator of the ongoingoperating performance and the cash generating ability of the Company.  The following is a reconciliation of the mostdirectly comparable GAAP measure to Adjusted EBITDA.

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                            | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Income from operations                |       | $                                | 2,943      |                            | $          | 2,500 |   | $ | 5,273 |   | $ | 13,833 |   |
| Adjustments:                          |       |                             |       |                            |       |   |   |   |   |
| Stock-based compensation              |       | 834                              |       | 897                             |       | 2,537 |   | 2,657 |   |
| Depreciation                          |       | 1,504                            |       | 1,260                           |       | 3,908 |   | 3,701 |   |
| Amortization of purchased intangibles |       | 1,376                            |       | 1,293                           |       | 3,913 |   | 3,709 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| Adjusted EBITDA                       |       | $                                | 6,657      |                            | $          | 5,950 |   | $ | 15,631 |   | $ | 23,900 |   |

 

AdjustedEBITDA increased by 11.9% to $6,657 in the third quarter of 2010 from $5,950 inthe third quarter of 2009 primarily due to the $443 increase in operatingincome.  Adjusted EBITDA decreased by34.6% to $15,631 in the nine months ended September 30, 2010 from $23,900in the same period of 2009 primarily due to the $8,560 decrease in operatingincome.

 

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**Liquidity and Capital Resources**

 

We have historically financed our operations from a combination ofinternally generated cash flow, revolving credit borrowings, various long-termdebt arrangements, and the issuance of common stock.  In connection with the acquisition ofDYNAenergetics in 2007, we entered into a five-year syndicated creditagreement.  The credit agreement, whichprovided term loans of $45,000 and 14,000 Euros and revolving credit loanavailability of $25,000 and 7,000 Euros, is through a syndicate of seven banks.

 

Thereare two significant financial covenants under our credit facility, the leverageratio and fixed charge coverage ratio requirements.  The leverage ratio is defined in the creditfacility as Consolidated Funded Indebtedness at the balance sheet date ascompared to Consolidated EBITDA, which is defined as earnings before provisionsfor income taxes, interest expense, depreciation and amortization,extraordinary, non-recurring charges and other non-cash charges, for theprevious twelve months.  For the yearended December 31, 2009 and nine months ended September 30, 2010,Consolidated EBITDA approximated the “Adjusted EBITDA” that we reported for therespective periods.  As ofDecember 31, 2009, the maximum leverage ratio permitted by our creditfacility was 2.0 to 1.0. The actual leverage ratio as of December 31, 2009was 1.69 to 1.0. The maximum leverage ratio permitted as of September 30and December 31, 2010 is 2.0 to 1.0 and 1.5 to 1.0, respectively.  The actual leverage ratio as of September 30,2010 was 1.77 to 1.0.

 

Thefixed charge ratio, as defined in the credit facility, means, for any period,the ratio of Earnings Available for Fixed Charges to Fixed Charges.  Earnings Available for Fixed Charges equalsConsolidated EBITDA plus lease expenses minus cash income taxes andnon-financed capital expenditures.  FixedCharges equals the sum of cash interest expense, lease expense, scheduledprincipal payments and cash dividends. As of December 31, 2009, the minimum fixed charge ratio permittedby our credit facility was 1.1 to 1.0. The actual fixed charge ratio as ofDecember 31, 2009 was 1.31 to 1.0. The minimum fixed charge coverage ratiopermitted for the twelve month periods ending September 30 and December 31,2010 is 1.0 to 1.0. The actual fixed charge ratio as of September 30, 2010was 1.19 to 1.0.

 

Asa result of the slowdown in our business during 2009 which has continued intothe early part of 2010, we were concerned about our ability to comply withfinancial covenants as of March 31, 2010 and subsequent quarters of2010.  In an effort to alleviate thisconcern and remain in compliance with financial covenants as of March 31,2010 and in future periods, we made a March prepayment of the remainingprincipal balance due under our bank syndicated Euro term loan in the amount of$12,498 (9,020 Euros) and, on April 19, 2010, amended the credit agreementto exclude scheduled principal payments under the Euro term loan from fixedcharge coverage ratio computations for March 31, 2010 and forward.

 

In connection with the October 1, 2009 acquisition of LRI, weassumed outstanding debt obligations including line of credit loans, loans withthe former owners and capital lease obligations in the amounts of $2,676 (2,883CAD), $2,445 (2,634 CAD) and $432 (465 CAD), respectively.

 

As of September 30, 2010, a U.S. Dollar term loan of $28,997 wasoutstanding under our syndicated credit agreement, $817 was outstanding underterm loan obligations of DYNAenergetics and $1,294 was outstanding under loanagreements with the former owners of LRI. We had $3,403 in outstanding revolving credit borrowings under oursyndicated credit 

 

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agreementand $3,251 outstanding under our separate DYNAenergetics’ line of creditagreements with German banks.  We alsohad $81 outstanding under the line of credit assumed with the acquisition ofLRI.  While we had approximately $38,986of unutilized revolving credit loan capacity as of September 30, 2010under our various credit facilities, future borrowings are subject tocompliance with financial covenants that could significantly limit availability.

 

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

 

*Debt and other contractual obligations and commitments*

 

Our existing loan agreements include various covenants andrestrictions, certain of which relate to the payment of dividends or otherdistributions to stockholders, redemption of capital stock, incurrence ofadditional indebtedness, mortgaging, pledging or disposition of major assets,and maintenance of specified financial ratios. As of September 30, 2010, we were in compliance with all financialcovenants and other provisions of our debt agreements.

 

Other than the unscheduled $12,498 (9,020 Euros)prepayment of the remaining principal balance on our bank syndicate Euro termloan, the Company’s principal cash flows related to debt obligations and othercontractual obligations and commitments have not materially changed sinceDecember 31, 2009.

 

*Cash flows from operating activities*

 

Netcash flows provided by operating activities for the nine months ended September 30,2010 totaled $10,254.  Significantsources of operating cash flow included net income of $3,950, non-cashdepreciation and amortization expense of $8,310, stock-based compensation of$2,537.  These sources of operating cashflow were partially offset by a $2,117 gain on step acquisition of jointventures and a deferred income tax benefit of $953 and net negative changes inworking capital of $1,218.  Net negativechanges in working capital included decreases in accounts payable, accrued expensesand customer advances of $2,075, $1,800 and $1,327, respectively.  These negative changes in working capitalwere partially offset by decreases in accounts receivable and inventory of$2,465 and $1,198, respectively.

 

Netcash flows provided by operating activities for the nine months ended September 30,2009 totaled $23,414.  Significantsources of operating cash flow included net income of $7,527, non-cashdepreciation and amortization expense of $7,625, stock-based compensation of$2,657 and net positive changes in various components of working capital in theamount of $7,650.  These sources ofoperating cash flow were partially offset by a deferred income tax benefit of$1,875.  Net positive changes in workingcapital included decreases in accounts receivable, inventories and prepaidexpenses of $13,632, $3,334 and $496, respectively, and an increase in customeradvances of $246.  These positive changesin working capital were partially offset by decreases in accounts payable andaccrued expenses of $5,980 and $4,078, respectively.

 

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*Cash flows from investing activities*

 

Netcash flows used in investing activities for the nine months ended September 30,2010 totaled $8,053 which included investments in acquisitions of $5,685 andcapital expenditures of $2,309.

 

Netcash flows used by investing activities for the nine months ended September 30,2009 totaled $3,196 and consisted almost entirely of capital expenditures.

 

*Cash flows from financing activities*

 

Netcash flows used in financing activities for the nine months ended September 30,2010 were $13,630, which included $2,876 in required prepayments of term loansunder our syndicated credit agreement from excess cash flow that we generatedin fiscal year 2009, $12,498 to prepay the remaining principal balance of ourEuro term loan under our syndicated credit agreement, $593 in principalpayments on Nord LB term loans, payment of quarterly dividends of $1,561, $639for the negative tax impact of stock-based compensation and payment on capitallease obligations of $215.  These uses ofcash were partially offset by net borrowings on bank lines of credit of $4,682and $70 in net proceeds from the issuance of common stock relating to theexercise of stock options.

 

Netcash flows used in financing activities for the nine months ended September 30,2009 were $4,805, which consisted primarily of $3,912 in required prepaymentsof term loans under our syndicated credit agreement from excess cash flow thatwe generated in fiscal year 2008, $653 in principal payments on Nord LB termloans, payment of quarterly dividends of $513 and payment on capital leaseobligations of $132.  These uses of cashflow were slightly offset by $373 in net proceeds from the issuance of commonstock relating to the exercise of stock options.

 

*Payment of Dividends*

 

OnSeptember 22, 2010, our board of directors declared a quarterly cashdividend of $0.04 per share which was paid on October 15, 2010.  The dividend totaled $528 and was payable toshareholders of record as of September 30, 2010.  We also paid a quarterly cash dividend of$0.04 per share in the first and second quarters of 2010 totaling $518 and$528, respectively.  We paid a quarterlycash dividend of $0.04 per share in the third and fourth quarters of 2009.

 

Wemay continue to pay quarterly dividends in the future subject to capitalavailability and periodic determinations that cash dividends are in compliancewith our debt covenants and are in the best interests of our stockholders, butwe cannot assure you that such payments will continue.  Future dividends may be affected by, amongother items, our views on potential future capital requirements, futurebusiness prospects, debt covenant compliance, changes in federal income taxlaws, or any other factors that our board of directors deems relevant.  Any decision to pay cash dividends is andwill continue to be at the discretion of board of directors.

 

**CriticalAccounting Policies**

 

Ourhistorical consolidated financial statements and notes to our historicalconsolidated financial statements contain information that is pertinent to ourmanagement’s discussion and analysis of financial condition and results ofoperations.  Preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires that our management make estimates, judgments and assumptionsthat affect the reported amounts of assets, liabilities, revenues and expenses,and the disclosure of contingent assets and liabilities.  However, the accounting principles used by usgenerally do not change our reported cash flows or 

 

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liquidity. Interpretation of the existing rules must be done and judgmentsmade on how the specifics of a given rule apply to us.

 

Inmanagement’s opinion, the more significant reporting areas impacted bymanagement’s judgments and estimates are revenue recognition, assetimpairments, impact of foreign currency exchange rate risks and incometaxes.  Management’s judgments andestimates in these areas are based on information available from both internaland external sources, and actual results could differ from the estimates, asadditional information becomes known.  We believe the following to be our most critical accounting policies.

 

*Revenue recognition*

 

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

 

*Asset impairments*

 

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

 

*Business Combinations*

 

Weaccount for our business acquisitions using the purchase method of accounting.We allocate the total cost of the acquisition to the underlying net assetsbased on their respective estimated fair values. As part of this allocationprocess, we identify and attribute values and estimated lives to the intangibleassets acquired. These determinations involve significant estimates andassumptions regarding multiple, highly subjective variables, including thosewith respect to future cash flows, discount rates, asset lives, and the use ofdifferent valuation models and therefore require considerable judgment. Ourestimates and assumptions are based, in part, on the availability of listedmarket prices or other transparent market data. These determinations affect theamount of amortization expense recognized in future periods. We base our fairvalue estimates on assumptions we believe to be reasonable but are inherentlyuncertain.

 

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*Goodwill and Other Intangible Assets*

 

Wereview the carrying value of goodwill at least annually to assess impairmentbecause it is not amortized. Additionally, we review the carrying value of any intangible asset orgoodwill whenever events or changes in circumstances indicate that its carryingamount may not be recoverable. Examples of such events or changes incircumstances, many of which are subjective in nature, include significantnegative industry or economic trends, significant changes in the manner of ouruse of the acquired assets or our strategy, a significant decrease in themarket value of the asset, and a significant change in legal factors or in thebusiness climate that could affect the value of the asset. We assess impairmentby comparing the fair value of an identifiable intangible asset or goodwillwith its carrying value. The determination of fair value involves significantmanagement judgment as described further below. Impairments are expensed whenincurred. Specifically, we test for impairment as follows:

 

*Goodwill*

 

Wetest goodwill for impairment on a “reporting unit” level on at least an annualbasis. A reporting unit is a group of businesses (i) for which discretefinancial information is available and (ii) that have similar economiccharacteristics. We test goodwill for impairment using the following two-stepapproach:

 

Thefirst step is a comparison of each reporting unit’s fair value to its carryingvalue. We estimate fair value using the best information available, includingmarket information and discounted cash flow projections, also referred to asthe income approach. The income approach uses a reporting unit’s projection ofestimated operating results and cash flows that is discounted using aweighted-average cost of capital that reflects current market conditions. Theprojections incorporate our best estimates of economic and market conditionsover the projected period including growth rates in sales and estimates offuture expected changes in operating margins and cash expenditures. Othersignificant estimates and assumptions include terminal value growth rates,future estimates of capital expenditures and changes in future working capitalrequirements.  We validate our estimatesof fair value under the income approach by comparing the values to fair valueestimates using a market approach.

 

Ifthe carrying value of the reporting unit is higher than its fair value, thereis an indication that impairment may exist, and the second step must beperformed to measure the amount of impairment loss.  In the second step, we allocate the fairvalue of the reporting unit to the assets and liabilities of the reporting unitas if it had just been acquired in a business combination and as if thepurchase price was equivalent to the fair value of the reporting unit.  The excess of the fair value of the reportingunit over the amounts assigned to its assets and liabilities is referred to asthe implied fair value of goodwill. We then compare that implied fair value ofthe reporting unit’s goodwill to the carrying value of that goodwill. If theimplied fair value is less than the carrying value, we recognize an impairmentloss for the excess.

 

Ourimpairment testing in the fourth quarter of 2009 did not result in adetermination that any of our goodwill was impaired.  The fair value of the Explosives Metalworkingreporting unit was $171.7 million at December 31, 2009 compared to itscarrying value of $108.4 million.  Thefair value of the Oilfield Products reporting unit was $74.2 million atDecember 31, 2009 compared to its carrying value of $63.6 million.  A discount rate of 17% was utilized in theincome approach component of the model used to measure fair value.  A future impairment is possible and couldoccur if (i) the unit’s operating results underperform what we haveestimated or (ii) additional volatility of the capital markets or otherfactors should cause us to raise the discount rate utilized in our discountedcash flow analysis or decrease the multiples utilized in our market-basedanalysis.  

 

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Theuse of different estimates or assumptions within our discounted cash flow modelwhen determining the fair value of our reporting units or using methodologiesother than as described above could result in different values for reportingunits and could result in an impairment charge.

 

*Intangible assets subject to amortization*

 

Anintangible asset that is subject to amortization is reviewed when impairmentindicators are present. We compare the expected undiscounted future operatingcash flows associated with finite-lived assets to their respective carryingvalues to determine if the asset is fully recoverable. If the expected futureoperating cash flows are not sufficient to recover the carrying value, weestimate the fair value of the asset. Impairment is recognized when thecarrying amount of the asset is not recoverable and when the carrying valueexceeds fair value. The projected cash flows require several assumptionsrelated to, among other things, relevant market factors, revenue growth, ifany, and operating margins.

 

*Impact of foreign currency exchange rate risks*

 

Thefunctional currency for our foreign operations is the applicable local currencyfor each affiliate company. Assets and liabilities of foreign subsidiaries forwhich the functional currency is the local currency are translated at exchangerates in effect at period-end, and the statements of operations are translatedat the average exchange rates during the period.  Exchange rate fluctuations on translatingforeign currency financial statements into U.S. Dollars that result inunrealized gains or losses are referred to as translation adjustments. Cumulativetranslation adjustments are recorded as a separate component of stockholders’equity and are included in other cumulative comprehensive income (loss).Transactions denominated in currencies other than the local currency arerecorded based on exchange rates at the time such transactions arise.Subsequent changes in exchange rates result in transaction gains and losses,which are reflected in income as unrealized (based on period-end translations)or realized upon settlement of the transactions. Cash flows from our operationsin foreign countries are translated at actual exchange rates when known, or atthe average rate for the period. As a result, amounts related to assets andliabilities reported in the consolidated statements of cash flows will notagree to changes in the corresponding balances in the consolidated balancesheets. The effects of exchange rate changes on cash balances held in foreigncurrencies are reported as a separate line item below cash flows from financingactivities.

 

*Income taxes*

 

Weare required to recognize deferred tax assets and deferred tax liabilities forthe expected future income tax consequences of transactions that have beenincluded in our financial statements but not our tax returns.  Deferred tax assets and liabilities aredetermined based on income tax credits and on the temporary differences betweenthe Consolidated Financial Statement basis and the tax basis of assets andliabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse.  Weroutinely evaluate deferred tax assets to determine if they will, more likelythan not, be recovered from future projected taxable income; if not, we recordan appropriate valuation allowance.

 

*Stock-Based Compensation Expense*

 

Weare required to account for stock-based compensation under fair valuerecognition provisions.  The stock-basedcompensation cost is estimated at the grant date based on the value of theaward and is recognized as expense ratably over the requisite service period ofthe award.  The fair value of restrictedstock awards is based on the fair value of the Company’s stock on the date ofgrant.  For the last several years wehave not granted stock options.  Were weto do so, determining the appropriate fair value model and calculating the fairvalue of stock options at the 

 

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grantdate would require judgment, including estimating stock price volatility,forfeiture rates, and expected option life.

 

**ITEM 3.                  Quantitative and Qualitative Disclosure aboutMarket Risk**

 

Therehave been no events that materially affect our quantitative and qualitativedisclosure about market risk from that reported in our Annual Report on Form 10-Kfor the year ended December 31, 2009.

 

**ITEM 4.                 ****Controlsand Procedures**

 

TheCompany maintains disclosure controls and procedures that are designed toensure that information required to be disclosed in the Company’s Exchange Actreports is accurately recorded, processed, summarized and reported within thetime 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, asappropriate, 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 onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily applied its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

Asof September 30, 2010, 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 at the reasonable assurancelevel.  There have been no changes in theCompany’s internal controls during the quarter ended September 30, 2010 orin other factors that could materially affect the Company’s internal controlsover financial reporting.

 

TheCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, does not expect that the Company’s disclosure controls orits internal controls will prevent all errors and all fraud.  Further, the design of a control system mustreflect the fact that there are resource constraints, and the benefits ofcontrols 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 errors ormistakes.  As a result of the inherentlimitations in a cost-effective control system, misstatements due to error orfraud may occur and not be detected. Accordingly, the Company’s disclosure controls and procedures aredesigned to provide reasonable, not absolute, assurance that the disclosurecontrols and procedures are met.

 

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**Part II - OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

None.

 

**Item 1A. Risk Factors**

 

Therehave been no significant changes in the risk factors identified as beingattendant to our business in our Annual Report on Form 10-K for the yearended December 31, 2009.

 

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

 

None.

 

**Item 3. Defaults Upon Senior Securities**

 

None.

 

**Item 4. Removed and Reserved**

 

None.

 

**Item 5. Other Information**

 

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:  October 28, 2010 | /s/  Richard A. Santa                                                                                                                          |
|                         | Richard  A. Santa, Senior Vice President and Chief Financial Officer (Duly Authorized  Officer and Principal Financial and Accounting Officer) |

 

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