** **

**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

**Form 10-Q**

 

(Mark One)

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

**For the quarterly period endedSeptember 30, 2007**

**OR**

**o****                                ****TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES ACT OF 1934 FOR THE TRANSITION PERIOD FROM                  TO                .**

**Commission file number 0-8328**

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**DYNAMIC MATERIALS CORPORATION**

(Exact name of Registrant as Specified inits 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, includingarea code)

 

 

Indicateby check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90days.  Yes  x  No  o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer.    Large acceleratedfiler  o  Accelerated filer  x  Non-accelerated filer  o

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 under the Act).  o  No  x

Thenumber of shares of Common Stock outstanding was 12,148,857 as of October 26,2007.

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CAUTIONARY NOTE ABOUT FORWARD-LOOKINGSTATEMENTS

 

Thisquarterly report on Form 10-Q contains “forward-looking statements” within themeaning of section 27A of the Securities Act of 1933 and section 21E of theSecurities Exchange Act of 1934. In particular, we direct your attention toPart I, Item 1- Financial Statements, Item 2 - Management’s Discussion andAnalysis of Financial Condition and Results of Operations and Item 3 -Quantitative and Qualitative Disclosures About Market Risk and Part II, Item 1A— Risk Factors. We intend the forward-looking statements throughout thisquarterly report on Form 10-Q and the information incorporated by referenceherein to be covered by the safe harbor provisions for forward-lookingstatements. Statements contained in this report which are not historical factsare forward-looking statements that involve risks and uncertainties that couldcause actual results to differ materially from projected results. Allprojections and statements regarding our expected financial position andoperating results, our business strategy, our financing plans and the outcomeof any contingencies are forward-looking statements. These statements cansometimes be identified by our use of forward-looking words such as “may”, “believe”,“plan”, “anticipate”, “estimate”, “expect”, “intend” and other phrases ofsimilar meaning. The forward-looking information is based on informationavailable as of the date of this quarterly report and on numerous assumptionsand developments that are not within our control. Although we believe that ourexpectations as expressed in these forward-looking statements are reasonable,we cannot assure you that our expectations will turn out to be correct. Factorsthat could cause actual results to differ materially include, but are notlimited to, the following: the ability to obtain new contracts at attractiveprices; the size and timing of customer orders and shipment; fluctuations incustomer demand; competitive factors; the timely completion of contracts; thetiming and size of expenditures; the timely receipt of government approvals andpermits; the adequacy of local labor supplies at our facilities; current orfuture limits on manufacturing capacity at our various operations; theavailability and cost of funds; and general economic conditions, both domesticand foreign, impacting our business and the business of the end-market users weserve. Readers are cautioned not to place undue reliance on theseforward-looking statements, which reflect management’s analysis only as of thedate hereof. We undertake no obligation to publicly release the results of anyrevision to these forward-looking statements that may be made to reflect eventsor circumstances after the date hereof or to reflect the occurrence ofunanticipated events.

 

2

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**INDEX**

 

PARTI - FINANCIAL INFORMATION

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

 

3

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**Part I - FINANCIAL INFORMATION**

 

**ITEM 1.  CondensedConsolidated Financial Statements**

** **

** **

DYNAMICMATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollarsin Thousands)

 
| ASSETS                                                                                              | ** ** | **September 30, 2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                          | ** ** | ** **                  | ** ** |
| ** **                                                                                          | ** ** | (unaudited)                 | ** ** | ** **                  | ** ** |
| CURRENT ASSETS:                                                                                     |       |                        |       |                        |       |
| Cash and cash equivalents                                                                           |       | $                           | 22,044     |                        | $          | 17,886 |   |
| Restricted cash                                                                                     |       | —                      |       | 3,059                       |       |
| Accounts receivable, net of allowance for doubtful accounts of $321  and $260, respectively         |       | 20,077                      |       | 21,549                      |       |
| Inventories                                                                                         |       | 33,793                      |       | 19,226                      |       |
| Prepaid expenses and other                                                                          |       | 2,183                       |       | 1,419                       |       |
| Current deferred tax assets                                                                         |       | 804                         |       | 708                         |       |
|                                                                                                |       |                        |       |                        |       |
| Total current assets                                                                                |       | 78,901                      |       | 63,847                      |       |
|                                                                                                |       |                        |       |                        |       |
| PROPERTY, PLANT AND EQUIPMENT                                                                       |       | 39,904                      |       | 31,963                      |       |
| Less - Accumulated depreciation                                                                     |       | (13,320                     | )          | (11,703                     | )          |
|                                                                                                |       |                        |       |                        |       |
| Property, plant and equipment, net                                                                  |       | 26,584                      |       | 20,260                      |       |
|                                                                                                |       |                        |       |                        |       |
| GOODWILL, net                                                                                       |       | 847                         |       | 847                         |       |
|                                                                                                |       |                        |       |                        |       |
| OTHER ASSETS, net                                                                                   |       | 23                          |       | 19                          |       |
|                                                                                                |       |                        |       |                        |       |
| TOTAL ASSETS                                                                                        |       | $                           | 106,355    |                        | $          | 84,973 |   |
|                                                                                                |       |                        |       |                        |       |
| The  accompanying notes are an integral part of these Condensed Consolidated  Financial Statements. |

 

4

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARY

CONSOLIDATED BALANCESHEETS

(Dollars in Thousands,Except Share Data)

 

| LIABILITIES AND  STOCKHOLDERS' EQUITY                                                                                                                                                                              | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                         | ** ** | **(unaudited)**              | ** ** |                        | ** ** |
| CURRENT LIABILITIES:                                                                                                                                                                                               |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                                                                   |       | $                            | 17,400     |                        | $          | 13,572 |   |
| Accrued expenses                                                                                                                                                                                                   |       | 3,007                        |       | 3,347                       |       |
| Accrued income taxes                                                                                                                                                                                               |       | 1,455                        |       | 1,892                       |       |
| Accrued employee compensation and benefits                                                                                                                                                                         |       | 3,753                        |       | 3,710                       |       |
| Customer advances                                                                                                                                                                                                  |       | 2,619                        |       | 2,394                       |       |
| Current maturities on long-term debt                                                                                                                                                                               |       | 413                          |       | 382                         |       |
|                                                                                                                                                                                                               |       |                         |       |                        |       |
| Total current liabilities                                                                                                                                                                                          |       | 28,647                       |       | 25,297                      |       |
|                                                                                                                                                                                                               |       |                         |       |                        |       |
| LONG-TERM DEBT                                                                                                                                                                                                     |       | —                       |       | 382                         |       |
|                                                                                                                                                                                                               |       |                         |       |                        |       |
| DEFERRED TAX LIABILITIES                                                                                                                                                                                           |       | 1,024                        |       | 1,512                       |       |
|                                                                                                                                                                                                               |       |                         |       |                        |       |
| OTHER LONG-TERM LIABILITIES                                                                                                                                                                                        |       | 628                          |       | 202                         |       |
|                                                                                                                                                                                                               |       |                         |       |                        |       |
| COMMITMENTS AND CONTINGENT LIABILITIES                                                                                                                                                                             |       | —                       |       | —                      |       |
|                                                                                                                                                                                                               |       |                         |       |                        |       |
| Total liabilities                                                                                                                                                                                                  |       | 30,299                       |       | 27,393                      |       |
|                                                                                                                                                                                                               |       |                         |       |                        |       |
| STOCKHOLDERS' EQUITY:                                                                                                                                                                                              |       |                         |       |                        |       |
| Preferred stock, $.05 par value; 4,000,000 shares authorized; no  issued and outstanding shares                                                                                                                    |       | —                       |       | —                      |       |
| Common stock, $.05 par value; 25,000,000 shares authorized as of September  30, 2007; 15,000,000 shares authorized as of December 31, 2006; 12,147,757  and 11,981,999 shares issued and outstanding, respectively |       | 607                          |       | 599                         |       |
| Additional paid-in capital                                                                                                                                                                                         |       | 23,638                       |       | 22,166                      |       |
| Retained earnings                                                                                                                                                                                                  |       | 48,940                       |       | 33,102                      |       |
| Other cumulative comprehensive income                                                                                                                                                                              |       | 2,871                        |       | 1,713                       |       |
| Total stockholders' equity                                                                                                                                                                                         |       | 76,056                       |       | 57,580                      |       |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                         |       | $                            | 106,355    |                        | $          | 84,973 |   |
|                                                                                                                                                                                                               |       |                         |       |                        |       |
| The  accompanying notes are an integral part of these Condensed Consolidated  Financial Statements.                                                                                                                |       |

 

5

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF OPERATIONS

FOR THE THREE AND NINEMONTHS ENDED SEPTEMBER 30, 2007 AND 2006

(Dollars in Thousands,Except Share Data)

(unaudited)

 
| ** **                                                                                         | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                         | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| NET SALES                                                                                          |       | $                                     | 42,099     |                                 | $          | 24,852 |   | $ | 109,964 |   | $ | 77,781 |   |
|                                                                                               |       |                                  |       |                                 |       |   |   |   |   |
| COST OF PRODUCTS SOLD                                                                              |       | 27,807                                |       | 16,542                               |       | 72,741 |   | 50,270 |   |
| Gross profit                                                                                       |       | 14,292                                |       | 8,310                                |       | 37,223 |   | 27,511 |   |
| COSTS AND EXPENSES:                                                                                |       |                                  |       |                                 |       |   |   |   |   |
| General and administrative expenses                                                                |       | 1,903                                 |       | 1,267                                |       | 5,419 |   | 3,948 |   |
| Selling expenses                                                                                   |       | 1,811                                 |       | 904                                  |       | 4,913 |   | 3,174 |   |
| Total costs and expenses                                                                           |       | 3,714                                 |       | 2,171                                |       | 10,332 |   | 7,122 |   |
| INCOME FROM OPERATIONS OF CONTINUING OPERATIONS                                                    |       | 10,578                                |       | 6,139                                |       | 26,891 |   | 20,389 |   |
|                                                                                               |       |                                  |       |                                 |       |   |   |   |   |
| OTHER INCOME (EXPENSE):                                                                            |       |                                  |       |                                 |       |   |   |   |   |
| Interest income, net                                                                               |       | 213                                   |       | 121                                  |       | 578 |   | 347 |   |
| Other income (expense)                                                                             |       | 23                                    |       | (23                                  | )          | 3 |   | (40 | ) |
| INCOME BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS                                             |       | 10,814                                |       | 6,237                                |       | 27,472 |   | 20,696 |   |
| INCOME TAX PROVISION                                                                               |       | 3,697                                 |       | 2,547                                |       | 9,813 |   | 7,865 |   |
| INCOME FROM CONTINUING OPERATIONS                                                                  |       | 7,117                                 |       | 3,690                                |       | 17,659 |   | 12,831 |   |
| INCOME FROM DISCONTINUED OPERATIONS, net of tax                                                    |       | —                                |       | —                               |       | — |   | 1,357 |   |
| NET INCOME                                                                                         |       | $                                     | 7,117      |                                 | $          | 3,690 |   | $ | 17,659 |   | $ | 14,188 |   |
| INCOME PER SHARE - BASIC:                                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Continuing operations                                                                              |       | $                                     | 0.59       |                                 | $          | 0.31 |   | $ | 1.47 |   | $ | 1.09 |   |
| Discontinued operations                                                                            |       | —                                |       | —                               |       | — |   | 0.11 |   |
| Net income                                                                                         |       | $                                     | 0.59       |                                 | $          | 0.31 |   | $ | 1.47 |   | $ | 1.20 |   |
| INCOME PER SHARE - DILUTED:                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Continuing operations                                                                              |       | $                                     | 0.58       |                                 | $          | 0.30 |   | $ | 1.44 |   | $ | 1.05 |   |
| Discontinued operations                                                                            |       | —                                |       | —                               |       | — |   | 0.11 |   |
| Net income                                                                                         |       | $                                     | 0.58       |                                 | $          | 0.30 |   | $ | 1.44 |   | $ | 1.16 |   |
| WEIGHTED AVERAGE NUMBER OF SHARES                                                                  |       |                                  |       |                                 |       |   |   |   |   |
| OUTSTANDING -                                                                                      |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                                                                              |       | 12,094,181                            |       | 11,865,336                           |       | 12,039,593 |   | 11,813,371 |   |
| Diluted                                                                                            |       | 12,301,772                            |       | 12,210,791                           |       | 12,245,212 |   | 12,216,283 |   |
|                                                                                               |       |                                  |       |                                 |       |   |   |   |   |
| ANNUAL DIVIDENDS DECLARED PER COMMON SHARE                                                         |       | $                                     | —     |                                 | $          | — |   | $ | 0.15 |   | $ | 0.15 |   |
|                                                                                               |       |                                  |       |                                 |       |   |   |   |   |
| The  accompanying notes are an integral part of these Condensed Consolidated  Financial Statements |

 

6

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE NINE MONTHS ENDEDSEPTEMBER 30, 2007

(Amounts in Thousands)

(unaudited)

 
| ** **                                                                                          | ** ** | **Common Stock** | ** ** | **Additional Paid-In** | ** ** | **Retained** | ** ** | **Other Cumulative Comprehensive** | ** ** | ** ** | ** ** | **Comprehensive Income** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------------|------------|--------------|------------|------------------------------------|------------|------------|------------|--------------------------|------------|
| ** **                                                                                          | ** ** | **Shares**       | ** ** | **Amount**             | ** ** | **Capital**  | ** ** | **Earnings**                       | ** ** | **Income** | ** ** | **Total**                | ** ** | **for the Period** | ** ** |
| Balances, December 31, 2006                                                                         |       | 11,982           |       | $                      | 599        |         | $          | 22,166                             |       | $          | 33,102     |                     | $          | 1,713 |   | $ | 57,580 |   |   |   |
|                                                                                                |       |             |       |                   |       |         |       |                               |       |       |       |                     |       |   |   |
| Shares issued for stock option exercises                                                            |       | 127              |       | 6                      |       | 465          |       | —                             |       | —     |       | 471                      |       |   |   |
|                                                                                                |       |             |       |                   |       |         |       |                               |       |       |       |                     |       |   |   |
| Restricted stock awards                                                                             |       | 35               |       | 2                      |       | (2           | )          | —                             |       | —     |       | —                   |       |   |   |
|                                                                                                |       |             |       |                   |       |         |       |                               |       |       |       |                     |       |   |   |
| Shares issued in connection with the employee stock purchase plan                                   |       | 4                |       | —                 |       | 92           |       | —                             |       | —     |       | 92                       |       |   |   |
|                                                                                                |       |             |       |                   |       |         |       |                               |       |       |       |                     |       |   |   |
| Tax benefit related to stock options                                                                |       | —           |       | —                 |       | 5            |       | —                             |       | —     |       | 5                        |       |   |   |
|                                                                                                |       |             |       |                   |       |         |       |                               |       |       |       |                     |       |   |   |
| Stock-based compensation                                                                            |       | —           |       | —                 |       | 912          |       | —                             |       | —     |       | 912                      |       |   |   |
|                                                                                                |       |             |       |                   |       |         |       |                               |       |       |       |                     |       |   |   |
| Dividends paid                                                                                      |       | —           |       | —                 |       | —       |       | (1,821                             | )          | —     |       | (1,821                   | )          |   |   |
|                                                                                                |       |             |       |                   |       |         |       |                               |       |       |       |                     |       |   |   |
| Net income                                                                                          |       | —           |       | —                 |       | —       |       | 17,659                             |       | —     |       | 17,659                   |       | 17,659 |   |
|                                                                                                |       |             |       |                   |       |         |       |                               |       |       |       |                     |       |   |   |
| Change in cumulative foreign currency translation adjustment                                        |       | —           |       | —                 |       | —       |       | —                             |       | 1,158      |       | 1,158                    |       | 1,158 |   |
| Balances, September 30, 2007                                                                   |       | 12,148           |       | $                      | 607        |         | $          | 23,638                             |       | $          | 48,940     |                     | $          | 2,871 |   | $ | 76,056 |   | $ | 18,817 |   |
|                                                                                                |       |             |       |                   |       |         |       |                               |       |       |       |                     |       |   |   |
| The  accompanying notes are an integral part of these Condensed Consolidated  Financial Statements. |
|                                                                                                     |            |                  |            |                        |            |              |            |                                    |            |            |            |                          |            |  |  |  |  |  |  |  |  |  |  |

 

7

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DYNAMICMATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FORTHE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

(Dollarsin Thousands)

(unaudited)

 
| ** **                                                                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                               |       |     |       |     |       |
| Net income                                                                                          |       | $        | 17,659     |     | $          | 14,188 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities -                 |       |     |       |     |       |
| Income from discontinued operations, net of tax                                                     |       | —   |       | (1,357   | )          |
| Depreciation                                                                                        |       | 1,394    |       | 1,020    |       |
| Amortization of capitalized debt issuance costs                                                     |       | —   |       | 50       |       |
| Stock-based compensation                                                                            |       | 912      |       | 436      |       |
| Deferred income tax provision (benefit)                                                             |       | (239     | )          | 923      |       |
| Change in -                                                                                         |       |     |       |     |       |
| Restricted cash                                                                                     |       | 3,059    |       | —   |       |
| Accounts receivable, net                                                                            |       | 2,001    |       | (3,885   | )          |
| Inventories                                                                                         |       | (13,541  | )          | (1,608   | )          |
| Prepaid expenses and other                                                                          |       | (636     | )          | 150      |       |
| Accounts payable                                                                                    |       | 3,125    |       | 568      |       |
| Customer advances                                                                                   |       | 132      |       | 5,961    |       |
| Accrued expenses and other liabilities                                                              |       | (1,080   | )          | (189     | )          |
| Net cash provided by operating activities                                                           |       | 12,786   |       | 16,257   |       |
|                                                                                                |       |     |       |     |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                               |       |     |       |     |       |
| Acquisition of property, plant and equipment                                                        |       | (7,347   | )          | (5,154   | )          |
| Sale of marketable securities                                                                       |       | —   |       | 1,950    |       |
| Loan to related party                                                                               |       | —   |       | (1,206   | )          |
| Repayment on loan to related party                                                                  |       | —   |       | 1,206    |       |
| Change in other non-current assets                                                                  |       | (11      | )          | 219      |       |
| Payment received on other receivables related to discontinued operations                            |       | —   |       | 3        |       |
| Cash flows provided by investing activities of discontinued operations                              |       | —   |       | 2,197    |       |
| Net cash flows used in investing activities                                                         |       | (7,358   | )          | (785     | )          |
|                                                                                                |       |     |       |     |       |
| The  accompanying notes are an integral part of these Condensed Consolidated  Financial Statements. |
|                                                                                                     |            |          |            |          |            |  |  |

 

8

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DYNAMICMATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

FORTHE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

(Dollarsin Thousands)

(unaudited)

 
| ** **                                                                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                               |       |     |       |     |       |
| Repayments on related party lines of credit, net                                                    |       | —   |       | (47      | )          |
| Payment on industrial development revenue bond                                                      |       | —   |       | (1,720   | )          |
| Payment on term loan with French bank                                                               |       | (389     | )          | (361     | )          |
| Payment of dividends                                                                                |       | (1,821   | )          | (1,766   | )          |
| Change in other long-tem liabilities                                                                |       | 15       |       | 22       |       |
| Net proceeds from issuance of common stock to employees and directors                               |       | 563      |       | 523      |       |
| Tax benefit related to exercise of stock options                                                    |       | 5        |       | 948      |       |
|                                                                                                |       |     |       |     |       |
| Net cash flows used in financing activities                                                         |       | (1,627   | )          | (2,401   | )          |
|                                                                                                |       |     |       |     |       |
| EFFECTS OF EXCHANGE RATES ON CASH                                                                   |       | 357      |       | 327      |       |
|                                                                                                |       |     |       |     |       |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                                           |       | 4,158    |       | 13,398   |       |
|                                                                                                |       |     |       |     |       |
| CASH AND CASH EQUIVALENTS, beginning of the period                                                  |       | 17,886   |       | 5,763    |       |
|                                                                                                |       |     |       |     |       |
| CASH AND CASH EQUIVALENTS, end of the period                                                        |       | $        | 22,044     |     | $          | 19,161 |   |
|                                                                                                |       |     |       |     |       |
| The  accompanying notes are an integral part of these Condensed Consolidated  Financial Statements. |
|                                                                                                     |            |          |            |          |            |  |  |

 

9

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##### **DYNAMIC MATERIALS CORPORATION & SUBSIDIARY**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**(Dollarsin Thousands, Except Share and Per Share Data)**

 

**(unaudited)**

 

**1.      BASIS OF PRESENTATION**

 

The information included inthe Condensed Consolidated Financial Statements is unaudited but includes allnormal and recurring adjustments which, in the opinion of management, arenecessary for a fair presentation of the interim periods presented. TheseCondensed Consolidated Financial Statements should be read in conjunction withthe financial statements that are included in the Company’s Annual Report filedon Form 10-K for the year ended December 31, 2006.

 

**2.      SIGNIFICANT ACCOUNTING POLICIES**

 

**                Principlesof Consolidation**

**                TheCondensed Consolidated Financial Statements include the accounts of the Companyand its subsidiaries, all of which are wholly-owned. All significantintercompany accounts, profits and transactions have been eliminated inconsolidation.**

**                ForeignOperations and Foreign Exchange Rate Risk**

**                The**functional currency for the Company’s foreign operations is theapplicable local currency for each affiliate company. Assets and liabilities offoreign subsidiaries for which the functional currency is the local currencyare translated 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.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 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 conform with 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.

** **

**10**

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** **

**                RevenueRecognition**

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

          Loan to Related Party

**         **The Company’s subsidiary, Nobelclad Europe, S.A. (“Nobelclad”), had a Euro-denominated cashmanagement agreement with SNPE, the parent company of SNPE, Inc., the Company’sformer majority stockholder, which provided for loans to or from either partyof up to approximately $3,400, based on the December 31, 2005 exchangerates. Amounts outstanding under this agreement bore interest at EURIBOR plus1.5% annually. Due to Nobelclad’s excess cash position during the first quarterof 2006, it began advancing cash to SNPE through this intercompany cashagreement. At March 31, 2006, these advances to SNPE totaled 1,003 Euros($1,211). The interest rate earned on these advances exceeded the interest ratethat Nobelclad could earn on excess cash and cash equivalents held at its localbank. The agreement allowed Nobelclad to request repayment on the advances atany time. The balance outstanding at March 31, 2006 was repaid in full inApril 2006 and the agreement was terminated upon the sale of our common stockby SNPE.

**                   EarningsPer Share**

**Basicearnings per share (“EPS”) is computed by dividing net income by the weightedaverage number of shares of common stock outstanding during the period.  Diluted EPS recognizes the potential dilutiveeffects of dilutive securities.  Thefollowing represents a reconciliation of the numerator and denominator used inthe calculation of basic and diluted EPS:**

** **
| ** **                                           | ** ** | **For the three months ended September 30, 2007** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                        | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                           | ** ** | **Income**                                        | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings per share:                            |       |                                              |       |   |   |   |   |
| Net income                                           |       | $                                                 | 7,117      |   | 12,094,181 |   | $ | 0.59 |   |
|                                                 |       |                                              |       |   |   |   |   |
| Dilutive effect of options  to purchase common stock |       | —                                            |       | 182,455 |   |   |   |
| Dilutive effect of restricted  stock awards          |       | —                                            |       | 25,136 |   |   |   |
|                                                 |       |                                              |       |   |   |   |   |
| Dilutive earnings per  share:                        |       |                                              |       |   |   |   |   |
| Net income                                           |       | $                                                 | 7,117      |   | 12,301,772 |   | $ | 0.58 |   |

** **

**11**

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** **
| ** **                                           | ** ** | **For the three months ended September 30, 2006** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                        | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                           | ** ** | **Income**                                        | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings per share:                            |       |                                              |       |   |   |   |   |
| Net income                                           |       | $                                                 | 3,690      |   | 11,865,336 |   | $ | 0.31 |   |
|                                                 |       |                                              |       |   |   |   |   |
| Dilutive effect of options  to purchase common stock |       | —                                            |       | 345,455 |   |   |   |
|                                                 |       |                                              |       |   |   |   |   |
| Dilutive earnings per  share:                        |       |                                              |       |   |   |   |   |
| Net income                                           |       | $                                                 | 3,690      |   | 12,210,791 |   | $ | 0.30 |   |

** **
| ** **                                          | ** ** | **For the nine months ended September 30, 2007** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                          | ** ** | ** **                                       | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                          | ** ** | **Income**                                       | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings per share:                           |       |                                             |       |   |   |   |   |
| Net income                                          |       | $                                                | 17,659     |   | 12,039,593 |   | $ | 1.47 |   |
|                                                |       |                                             |       |   |   |   |   |
| Dilutive effect of options to purchase common stock |       | —                                           |       | 191,652 |   |   |   |
| Dilutive effect of restricted stock awards          |       | —                                           |       | 13,967 |   |   |   |
|                                                |       |                                             |       |   |   |   |   |
| Dilutive earnings per share:                        |       |                                             |       |   |   |   |   |
| Net income                                          |       | $                                                | 17,659     |   | 12,245,212 |   | $ | 1.44 |   |

** **
| ** **                                           | ** ** | **For the nine months ended September 30, 2006** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                       | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                           | ** ** | **Income**                                       | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings per share:                            |       |                                             |       |   |   |   |   |
| Net income                                           |       | $                                                | 14,188     |   | 11,813,371 |   | $ | 1.20 |   |
|                                                 |       |                                             |       |   |   |   |   |
| Dilutive effect of options  to purchase common stock |       | —                                           |       | 402,912 |   |   |   |
|                                                 |       |                                             |       |   |   |   |   |
| Dilutive earnings per  share:                        |       |                                             |       |   |   |   |   |
| Net income                                           |       | $                                                | 14,188     |   | 12,216,283 |   | $ | 1.16 |   |

** **

**3.      INCOME TAXES**

 

The Company adoptedthe provisions of Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB No. 109(“FIN 48”), which clarifies the accounting and disclosure for uncertainty in taxpositions, on January 1, 2007.  FIN 48seeks to harmonize certain accounting practices associated with the recognitionand measurement of income taxes.  As a result of the implementation of FIN48, the Company recognized no material adjustment in the liability forunrecognized income tax benefits.  On theadoption date of January 1, 2007, the Company had $394 of unrecognized taxbenefits, all of which would affect our effective tax rate if recognized.  At September 30, 2007, the balance ofunrecognized tax benefits remains at $394, and primarily relates to uncertainU.S. Federal tax positions.  Theunrecognized tax benefits have been reclassified from deferred tax liabilitiesto

 

12

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other long-term liabilities in 2007.  The Company has identified no uncertain taxposition for which it is reasonably possible that the total amount ofunrecognized tax benefits will significantly increase or decrease within the 12months following the date of adoption of FIN 48.

 

The Company recognizes interest and penaltiesrelated to uncertain tax positions in operating expense.  As of September 30, 2007, the Company’saccrual for interest and penalties related to uncertain tax positions isinsignificant.

 

The Company’s U.S.Federal tax returns for the tax years 2003-2006 remain open to examinationwhile most of the Company’s state tax returns remain open to examination forthe tax years 2002-2006.  The Company’s foreigntax returns remain open to examination for the tax years 2003-2006 in Franceand 2001-2006 in Sweden.

 

**4.      INVENTORY**

 

**Thecomponents of inventory are as follows at September 30, 2007 and December 31,2006:**

** **

| ** **      | ** ** | **September 30,**

**2007** | ** ** | **December 31,**

**2006** | ** ** |
|-----------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **      | ** ** | ** **                  | ** ** |
| ** **      | ** ** | **(unaudited)**             | ** ** | ** **                 | ** ** |
| Raw materials   |       | $                           | 12,177     |                       | $          | 6,282 |   |
| Work-in-process |       | 20,825                      |       | 12,314                     |       |
| Supplies        |       | 791                         |       | 630                        |       |
|            |       | $                           | 33,793     |                       | $          | 19,226 |   |

** **

** **

**5.      DEBT**

 

**Long-termdebt consists of the following at September 30, 2007 and December 31, 2006:**

** **

| ** **              | ** ** | **September 30,  2007** | ** ** | **December 31,**

**2006** | ** ** |
|-------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **              | ** ** | ** **              | ** ** |
| ** **              | ** ** | **(unaudited)**         | ** ** | ** **                 | ** ** |
| Term loan - French bank |       | $                       | 413        |                       | $          | 764 |   |
| Less current maturities |       | (413                    | )          | (382                       | )          |
| Long-term debt          |       | $                       | —     |                       | $          | 382 |   |

** **

** **

Loan Covenants and Restrictions

TheCompany’s existing loan agreements include various covenants and restrictions,certain of which relate to the incurrence of additional indebtedness,mortgaging, pledging or disposition of major assets, limits on capitalexpenditures and maintenance of specified financial ratios.  As of September 30, 2007, the Company was incompliance with all financial covenants and other provisions of its debtagreements.

 

13

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**6.      BUSINESS SEGMENTS**

 

The Company is organized in the following two segments:  the Explosive Metalworking segment and AMKWelding. The Explosive Metalworking segment uses explosives to perform metalcladding and shock synthesis of industrial diamonds. The most significantproduct of this group is clad metal which is used in the fabrication ofpressure vessels, heat exchangers and transition joints for various industries,including upstream oil and gas, oil refinery, petrochemicals, hydrometallurgy,aluminum production, shipbuilding, power generation, industrial refrigerationand similar industries. AMK Welding utilizes a number of welding technologiesto weld components for manufacturers of jet engines and ground-based turbines.

            The accounting policies of bothsegments are the same as those described in the summary of significantaccounting policies.  The Company’sreportable segments are strategic business units that offer different productsand services and are separately managed. Each segment is marketed to differentcustomer types and requires different manufacturing processes and technologies.  Segment information is presented for thethree and nine months ended September 30, 2007 and 2006 as follows:
| ** **                                      | ** ** | **Explosive  Metalworking**

**Group** | ** ** | **AMK  Welding** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|------------------|------------|-----------|------------|
| ** **                                      | ** ** | ** **                             | ** ** | ** **       |
| ** **                                      | ** ** | ** **                             | ** ** | ** **       |
| For the three months ended September 30, 2007:  |       |                                   |       |             |       |      |       |
| Net sales                                       |       | $                                      | 40,326     |             | $          | 1,773     |       | $ | 42,099 |   |
| Depreciation                                    |       | $                                      | 402        |             | $          | 82        |       | $ | 484 |   |
| Income from operations of continuing operations |       | $                                      | 10,646     |             | $          | 325       |       | $ | 10,971 |   |
| Unallocated amounts:                            |       |                                   |       |             |       |      |       |
| Stock-based compensation                        |       |                                   |       |             |       | (393      | )          |
| Interest income, net                            |       |                                   |       |             |       | 213       |       |
| Other income                                    |       |                                   |       |             |       | 23        |       |
| Consolidated income before income taxes         |       |                                   |       |             |       | $         | 10,814     |   |

 

 

 
| ** **                                      | ** ** | **Explosive  Metalworking  Group** | ** ** | **AMK  Welding** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|------------------------------------|------------|------------------|------------|-----------|------------|
| ** **                                      | ** ** | ** **                         | ** ** | ** **       |
| ** **                                      | ** ** | ** **                         | ** ** | ** **       |
| For the three months ended September 30, 2006:  |       |                               |       |             |       |      |       |
| Net sales                                       |       | $                                  | 23,511     |             | $          | 1,341     |       | $ | 24,852 |   |
| Depreciation                                    |       | $                                  | 320        |             | $          | 55        |       | $ | 375 |   |
| Income from operations of continuing operations |       | $                                  | 5,831      |             | $          | 391       |       | $ | 6,222 |   |
| Unallocated amounts:                            |       |                               |       |             |       |      |       |
| Stock-based compensation                        |       |                               |       |             |       | (83       | )          |
| Interest income, net                            |       |                               |       |             |       | 121       |       |
| Other expense                                   |       |                               |       |             |       | (23       | )          |
| Consolidated income before income taxes         |       |                               |       |             |       | $         | 6,237      |   |

 

14

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| ** **                                      | ** ** | **Explosive  Metalworking**

**Group** | ** ** | **AMK  Welding** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|------------------|------------|-----------|------------|
| ** **                                      | ** ** | ** **                             | ** ** | ** **       |
| ** **                                      | ** ** | ** **                             | ** ** | ** **       |
| For the nine months ended September 30, 2007:   |       |                                   |       |             |       |      |       |
| Net sales                                       |       | $                                      | 105,257    |             | $          | 4,707     |       | $ | 109,964 |   |
| Depreciation                                    |       | $                                      | 1,190      |             | $          | 204       |       | $ | 1,394 |   |
| Income from operations of continuing operations |       | $                                      | 27,197     |             | $          | 606       |       | $ | 27,803 |   |
| Unallocated amounts:                            |       |                                   |       |             |       |      |       |
| Stock-based compensation                        |       |                                   |       |             |       | (912      | )          |
| Interest income, net                            |       |                                   |       |             |       | 578       |       |
| Other income                                    |       |                                   |       |             |       | 3         |       |
| Consolidated income before income taxes         |       |                                   |       |             |       | $         | 27,472     |   |
|                                                 |            |                                        |            |                  |            |           |            |  |  |  |  |

 

 
| ** **                                      | ** ** | **Explosive  Metalworking  Group** | ** ** | **AMK  Welding** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|------------------------------------|------------|------------------|------------|-----------|------------|
| For the nine months ended September 30, 2006:   |       |                               |       |             |       |      |       |
| Net sales                                       |       | $                                  | 74,336     |             | $          | 3,445     |       | $ | 77,781 |   |
| Depreciation                                    |       | $                                  | 854        |             | $          | 166       |       | $ | 1,020 |   |
| Income from operations of continuing operations |       | $                                  | 20,204     |             | $          | 621       |       | $ | 20,825 |   |
| Unallocated amounts:                            |       |                               |       |             |       |      |       |
| Stock-based compensation                        |       |                               |       |             |       | (436      | )          |
| Interest income, net                            |       |                               |       |             |       | 347       |       |
| Other expense                                   |       |                               |       |             |       | (40       | )          |
| Consolidated income before income taxes         |       |                               |       |             |       | $         | 20,696     |   |

 

** **

**Duringthe three months ended September 30, 2007, sales to one customer representedapproximately $7,333 (17%) of total net sales. During the nine months ended September 30, 2007, no sales to any onecustomer accounted for more than 10% of total net sales.  During the three and nine months endedSeptember 30, 2006, no sales to any one customer accounted for more than 10% oftotal net sales.**

** **

**7.               COMPREHENSIVEINCOME**

 

**  **The Company’s comprehensive income for the three and nine months ended September 30,2007 and 2006 was as follows:

** **

| ** **                              | ** ** | **Three Months Ended**

**September 30,** | ** ** | **Nine Months Ended**

**September 30,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                              | ** ** | ** **                                | ** ** |
| ** **                              | ** ** | **2007**                                  | ** ** | **2006**                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income for the period               |       | $                                         | 7,117      |                                     | $          | 3,690 |   | $ | 17,659 |   | $ | 14,188 |   |
| Foreign currency translation adjustment |       | 898                                       |       | 137                                      |       | 1,158 |   | 659 |   |
| Comprehensive income                    |       | $                                         | 8,015      |                                     | $          | 3,827 |   | $ | 18,817 |   | $ | 14,847 |   |

** **

**15**

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** **

            As of September 30, 2007 and December 31, 2006 othercumulative comprehensive income of $2,871 and $1,713, respectively, consistsentirely of cumulative foreign currency translation adjustment.

 

**8.      DISCONTINUED OPERATIONS**

 

            On September 17, 2004, DMC completed the divestitureof its Spin Forge division under an agreement that involved subleasing the SpinForge real estate and leasing the manufacturing equipment and tooling to athird party.  Under the master agreementrelating to this divestiture transaction, the Company sold all inventory, booksand records, intangible personal property, business information and technology,customer contracts, and licenses and permits relating to the Spin Forgebusiness to this third party for a sales price of approximately $1,700.  The third party also assumed full responsibilityfor Spin Forge business activities and operating expenses.  Despite the fact that the Company retainedownership of the equipment and continued to carry a capital lease asset of$2,880 on its books, the Company concluded that the Spin Forge divestituretransaction qualified for treatment as discontinued operations since theCompany had completely exited the Spin Forge operating business and had nointent to ever again operate any of the leased assets.  In December 2006, the third party purchaserof the Spin Forge business purchased the majority of these leased assets whilethe remainder of the leased assets was liquidated by the Company.  This transaction resulted in a pretax gain of$228, which was recorded as discontinued operations in the fourth quarter of2006.   The Company had received rent of$23 per month on these leased assets until the date of their sale.

 

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

 

Discontinuedoperations for the nine months ended September 30, 2006 is summarized asfollows:

            

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

 

16

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**ITEM 2.     Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

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

Unless stated otherwise, all dollar figuresin this discussion are presented in thousands (000’s).

**Executive Overview**

 

Ourbusiness is organized into two segments: Explosive Metalworking and AMK Welding. For the three months ended September 30, 2007, Explosive Metalworkingaccounted for 96% of our net sales and 97% of our income from operations ofcontinuing operations before consideration of stock-based compensation expense,which is not allocated to our business segments.  Year to date Explosive Metalworking accountedfor 96% of our net sales and 98% or our income from operations of continuingoperations before consideration of stock-based compensation expense.

Ouryear to date 2007 net sales increased by $32,183 (41.4%) compared to the firstnine months of 2006, reflecting year-to-year net sales increases of $30,921(41.6%) and $1,262 (36.6%) for our Explosive Metalworking and AMK Weldingsegments, respectively.  Our operatingincome from continuing operations increased by 31.9% to $26,891 in the firstnine months of 2007 from $20,389 in the first nine months of 2006, reflecting a$6,993 improvement in Explosive Metalworking’s operating income and a decreaseof $15 in AMK Welding’s operating income. Income from continuing operations increased by 37.6% to $17,659 for thenine months ended September 30, 2007 from $12,831 in the same period of2006.  Our net income increased to $17,659in the first nine months of 2007 from $14,188 in the first nine months of2006.  For the nine months endedSeptember 30, 2006, net income included $1,357 of income from discontinuedoperations, net of tax, relating to the sale of the Spin Forge real estateoption as further discussed below.

*Net sales*

Explosive Metalworking’s net sales aregenerated principally from sales of clad metal plates and sales of transitionjoints, which are made from clad plates, to customers that fabricate industrialequipment for various industries, including upstream oil and gas, oil refinery,petrochemicals, hydrometallurgy, aluminum production, shipbuilding, powergeneration, industrial refrigeration and similar industries.  While demand for our clad metal products inthe United States is largely driven by new plant construction and large plantexpansion projects, maintenance and retrofit projects at existing chemicalprocessing, petrochemical processing and oil refining facilities also accountfor a significant portion of total demand. Demand for our clad products inEurope and Asia is more dependent on new construction projects, such as thebuilding of new purified terephthalic acid (“PTA”) plants in different parts ofthe world, including China, and on sales of electrical transition joints thatare used in the aluminum production industry.

AMK Welding’s net sales are generatedfrom welding, heat treatment and inspection services that are provided withrespect to customer-supplied parts for customers primarily involved in thepower generation industry and aircraft engine markets.

 

17

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A significant portion of our net sales isderived from a relatively small number of customers; therefore, the failure tocomplete existing contracts on a timely basis, and to receive payment for suchservices in a timely manner, or to enter into future contracts at projectedvolumes and profitability levels could adversely affect our ability to meetcash requirements exclusively through operating activities. We attempt tominimize the risk of losing customers or specific contracts by continuallyimproving product quality, delivering product on time and competing favorablyon the basis of price.

Explosive Metalworking’s business iscyclical since it is linked to its customers’ end-market activity.  For example, the construction cycle for newmanufacturing capacity in the chemical industry has historically been onecharacterized by significant amplitude. It is driven both by global economic demand growth and capacityutilization.  As capacity starts tobecome tight for various chemicals and prices begin to rise, new manufacturingcapacity is added in relatively large incremental amounts.

*Gross profit and cost of products sold*

Cost of products sold for ExplosiveMetalworking include the cost of metals and alloys used to manufacture cladmetal plates, the cost of explosives, employee compensation and benefits,freight, outside processing costs, depreciation of manufacturing facilities andequipment, manufacturing supplies and other manufacturing overhead expenses.

AMK Welding’s cost of products soldconsists principally of employee compensation and benefits, welding supplies(wire and gas), depreciation of manufacturing facilities and equipment, outsideservices and other manufacturing overhead expenses.

*Discontinued operations*

InSeptember 2004, we completed the sale of our Spin Forge division.  On January 10, 2006, we sold our optionrights to purchase the Spin Forge real estate to the property owner for$2,300.  We recorded a pre-tax gain ofapproximately $2,197 on this transaction, which was reported as discontinuedoperations, net of related taxes, in the first quarter of 2006.

*Income taxes*

Our effectiveincome tax rate decreased to 35.7% for the first nine months of 2007 from 38.0%for the first nine months of 2006. Income tax provisions on the earnings of Nobelclad and Nitro Metall AB (“NitroMetall”) have been provided based upon the respective French and Swedishstatutory tax rates.  Going forward,based upon existing tax regulations and current federal, state and foreignstatutory tax rates, we expect our effective tax rate on our consolidatedpre-tax income to range between 36% and 38%.

 

18

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*Backlog*

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

Ourbacklog with respect to the Explosive Metalworking segment increased toapproximately $77.1 million at September 30, 2007 from approximately $68.8million at December 31, 2006 but was down from the record backlog ofapproximately $84.7 million that we reported as of June 30, 2007.

 

**Threeand Nine Months Ended September 30, 2007 Compared to Three and Nine MonthsEnded September 30, 2006**

 

*Net sales*

 
| ** ** | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** **     | ** ** | ** ** |
|------------|------------|---------------------------------------|------------|------------|----------------|------------|------------|
| ** ** | ** ** | ** **                            | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2007**                              | ** ** | **2006**   | ** **     | **Change** | ** ** | **Change** | ** ** |
| Net sales  |       | $                                     | 42,099     |       | $              | 24,852     |       | $ | 17,247 |   | 69.4 | % |
|            |            |                                       |            |            |                |            |            |  |  |  |  |  |

 
| ** ** | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|------------|------------|--------------------------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **2007**                             | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                                    | 109,964    |       | $          | 77,781         |       | $ | 32,183 |   | 41.4 | % |
|            |            |                                      |            |            |            |                |            |  |  |  |  |  |

 

 

 

Netsales for the third quarter of 2007 increased 69.4% to $42,099 from $24,852 inthe third quarter of 2006. Explosive Metalworking sales increased 71.5% to$40,326 in the three months ended September 30, 2007 (96% of total sales)from $23,511 in the same period of 2006 (95% of total sales).  Net sales for the nine months endedSeptember 30, 2007 increased by 41.4% to $109,964 from $77,781 in the sameperiod of 2006.  Sales for our ExplosiveMetalworking Group increased 41.6% to $105,257 in the first nine months of 2007(96% of total sales) from $74,336 for the first nine months of 2006 (96% oftotal sales).  The significant increasein Explosive Metalworking sales is principally attributable to the continuedeconomic strength of the industries that this business segment serves.

AMKWelding contributed $1,773 to third quarter 2007 sales (4% of total sales)which represented a 32.2% increase from sales of $1,341 in the third quarter of2006 (5% of total sales).  AMK Welding’syear to date 2007 sales increased by 36.6% to $4,707 (4% of total sales)compared to $3,445 (4% of total sales) in year to date 2006 sales. Theincreases in AMK’s third quarter and year to date sales relates principally toincreased revenues from H System ground-based gas turbine work.

 

19

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*Gross profit*

* *
| ** **                            | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** **     | ** ** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|------------|----------------|------------|------------|
| ** **                            | ** ** | ** **                            | ** ** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2007**                              | ** ** | **2006**   | ** **     | **Change** | ** ** | **Change** | ** ** |
| Gross profit                          |       | $                                     | 14,292     |       | $              | 8,310      |       | $ | 5,982 |   | 72.0 | % |
| Consolidated gross profit margin rate |       | 33.9                                  | %          | 33.4       | %              |       |       |   |   |
|                                       |            |                                       |            |            |                |            |            |  |  |  |  |  |

 
| ** **                            | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** **     | ** ** | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|------------|----------------|------------|------------|
| ** **                            | ** ** | ** **                           | ** ** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2007**                             | ** ** | **2006**   | ** **     | **Change** | ** ** | **Change** | ** ** |
| Gross profit                          |       | $                                    | 37,223     |       | $              | 27,511     |       | $ | 9,712 |   | 35.3 | % |
| Consolidated gross profit margin rate |       | 33.9                                 | %          | 35.4       | %              |       |       |   |   |
|                                       |            |                                      |            |            |                |            |            |  |  |  |  |  |

 

 

Gross profit increasedby 72.0% to $14,292 for the three months ended September 30, 2007 from$8,310 for the three months ended September 30, 2006. Our third quarter2007 consolidated gross profit margin rate increased to 33.9% from 33.4% in thethird quarter of 2006. The gross profit margin for Explosive Metalworkingincreased from 33.1% in the third quarter of 2006 to 34.3% in the third quarterof 2007 and the gross profit margin for AMK Welding decreased to 27.7% in thethird quarter of 2007 from 40.8% in the third quarter of 2006.

 

For the nine monthsended September 30, 2007, gross profit increased to $37,223 from $27,511for the same period of 2006, a 35.3% increase. Our year to date consolidated gross profit margin rate decreased to33.9% from 35.4% for the first nine months of 2006.  The gross profit margin rate for ExplosiveMetalworking decreased to 34.3% from 35.6%. For the nine months ended September 30, 2007, the gross profit marginfor AMK Welding decreased to 26.5% from 31.1% for the same period of 2006.

 

The decreased year todate gross margin rate for Explosive Metalworking relates primarily to changesin product mix during the first nine months of 2007 as compared to that for thefirst nine months of 2006. AMK Welding’s decreased year to date gross marginrate relates to an increase in fixed manufacturing overhead expenses andchanges in products mix.  The increase infixed manufacturing overhead expenses at AMK Welding is attributable to therecently competed facility expansion and staffing additions as AMK readiesitself for anticipated increases in production levels during the remainder of2007 and in 2008.  Gross profit marginstypically fluctuate from one quarter to the next for various reasons, includingchanges in sales volume and product mix. Our gross margins are likely to continueto fluctuate from quarter-to-quarter.

 

*General and administrativeexpenses*

 
| ** **                            | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** **     | ** ** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|------------|----------------|------------|------------|
| ** **                            | ** ** | ** **                            | ** ** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2007**                              | ** ** | **2006**   | ** **     | **Change** | ** ** | **Change** | ** ** |
| General & administrative expenses |       | $                                     | 1,903      |       | $              | 1,267      |       | $ | 636 |   | 50.2 | % |
| Percentage of net sales               |       | 4.5                                   | %          | 5.1        | %              |       |       |   |   |
|                                       |            |                                       |            |            |                |            |            |  |  |  |  |  |

 

20

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| ** **                            | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** **     | ** ** | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|------------|----------------|------------|------------|
| ** **                            | ** ** | ** **                           | ** ** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2007**                             | ** ** | **2006**   | ** **     | **Change** | ** ** | **Change** | ** ** |
| General & administrative expenses |       | $                                    | 5,419      |       | $              | 3,948      |       | $ | 1,471 |   | 37.3 | % |
| Percentage of net sales               |       | 4.9                                  | %          | 5.1        | %              |       |       |   |   |
|                                       |            |                                      |            |            |                |            |            |  |  |  |  |  |

 

 

General and administrative expenses increased by$636, or 50.2%, to $1,903 in the third quarter of 2007 from $1,267 in the thirdquarter of 2006.  Expense increasesreflect a $229 increase in stock-based compensation, an increase of $179 inaccrued incentive compensation expense, a $154 increase in legal and consultingexpenses, an impact of $61 from annual salary adjustments and staffing changes,and minor net increases of $13 in a number of other expense categories.  As a percentage of net sales, general andadministrative expenses decreased to 4.5% in the third quarter of 2007 from5.1% in the third quarter of 2006.

 

General and administrative expenses for the ninemonths ended September 30, 2007 totaled $5,419 compared to $3,948 for the sameperiod of 2006.  This reflects anincrease of 37.3%.  The $1,471 increasein 2007 general and administrative expenses for the nine-month period reflectsan impact of $399 from annual salary adjustments and staffing changes, a $308increase in legal and consulting expenses, a $294 increase in accrued incentivecompensation expense, a $262 increase in stock-based compensation and netincreases of $208 in a number of other expense categories.  As a percentage of net sales, general andadministrative expenses decreased to 4.9% in the first nine months of 2007 from5.1% in the first nine months of 2006.

 

*Selling expenses*
| ** **              | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|-------------------------|------------|---------------------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **2007**                              | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses        |       | $                                     | 1,811      |       | $          | 904            |       | $ | 907 |   | 100.3 | % |
| Percentage of net sales |       | 4.3                                   | %          | 3.6        | %          |           |       |   |   |
|                         |            |                                       |            |            |            |                |            |  |  |  |  |  |

 
| ** **              | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|-------------------------|------------|--------------------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **2007**                             | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses        |       | $                                    | 4,913      |       | $          | 3,174          |       | $ | 1,739 |   | 54.8 | % |
| Percentage of net sales |       | 4.5                                  | %          | 4.1        | %          |           |       |   |   |
|                         |            |                                      |            |            |            |                |            |  |  |  |  |  |

 

 

Selling expenses,which include sales commissions of $663 in 2007 and $79 in 2006, increased by100.3% to $1,811 in the third quarter of 2007 from $904 in the third quarter of2006.  The $907 increase in sellingexpenses reflects an increase in sales commissions of $584, an $86 increase inaccrued incentive compensation expense, an impact of $70 from annual salaryadjustments and staffing changes, and a $53 increase in stock-basedcompensation expense.  As a percentage ofnet sales, selling expenses increased to 4.3% in the third quarter of 2007 from3.6% in the third quarter of 2006.

 

Selling expenses increasedby 54.8% to $4,913 in the first nine months of 2007 from $3,174 in the sameperiod of 2006.  These expenses includesales commissions of $1,378 and $674 for 2007 and 2006, respectively.  The $1,739 increase in 2007 selling expensesfor the nine-month period includes an increase in sales commissions of $704, animpact of $290 from annual salary

 

21

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adjustments and staffingchanges, an increase of $173 in accrued incentive compensation expense, a $107increase in the provision for doubtful accounts and an increase of $130 instock-based compensation expense.  As apercentage of net sales, selling expenses increased to 4.5% in the first ninemonths of 2007 from 4.1% in the first nine months of 2006.

 

*Incomefrom operations of continuing operations*

* *
| ** **                                      | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|------------|------------|----------------|------------|
| ** **                                      | ** ** | **2007**                              | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from operations of continuing operations |       | $                                     | 10,578     |       | $          | 6,139          |       | $ | 4,439 |   | 72.3 | % |
|                                                 |            |                                       |            |            |            |                |            |  |  |  |  |  |

 
| ** **                                       | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|------------|------------|----------------|------------|
| ** **                                       | ** ** | **2007**                             | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from  operations of continuing operations |       | $                                    | 26,891     |       | $          | 20,389         |       | $ | 6,502 |   | 31.9 | % |
|                                                  |            |                                      |            |            |            |                |            |  |  |  |  |  |

 

 

Incomefrom operations increased by 72.3% to $10,578 in the third quarter of 2007 from$6,139 in the third quarter of 2006. Explosive Metalworking reported income from operations of $10,646 in thethird quarter of 2007 as compared to $5,831 in the third quarter of 2006.  This 82.6% increase is largely attributableto the 71.5% sales increase discussed above. AMK Welding reported income from operations of $325 for the three monthsended September 30, 2007 as compared to $391 for the same period of 2006.

Incomefrom operations increased by 31.9% to $26,891 in the first nine months of 2007from $20,389 in the first nine months of 2006. Explosive Metalworking reported income from operations of $27,197 in thefirst nine months of 2007 as compared to $20,204 in the first nine months of2006.  This 34.6% increase is largelyattributable to the 41.6% sales increase discussed above.  AMK Welding reported income from operationsof $606 for the nine months ended September 30, 2007 as compared to the $621that it reported for the same period of 2006.

Income from operations of continuing operationsfor the three and nine months ended September 30, 2007 includes $393 and $912,respectively, of stock-based compensation expense compared to stock-basedcompensation expense for the three and nine months ended September 30, 2006 of$83 and $436, respectively.  This expenseis not allocated to our two business segments and thus is not included in theabove third quarter and year to date operating income totals for ExplosiveMetalworking and AMK Welding.

 

*Interest income (expense), net*

* *
|                 | ** ** | **Three Months Ended   September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|----------------------|------------|----------------------------------------|------------|------------|------------|----------------|------------|
| ** **           | ** ** | **2007**                               | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income, net |       | $                                      | 213        |       | $          | 121            |       | $ | 92 |   | 76.0 | % |
|                      |            |                                        |            |            |            |                |            |  |  |  |  |  |

 

.

 
| ** **           | ** ** | **Nine Months Ended   September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|----------------------|------------|---------------------------------------|------------|------------|------------|----------------|------------|
| ** **           | ** ** | **2007**                              | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income, net |       | $                                     | 578        |       | $          | 347            |       | $ | 231 |   | 66.6 | % |
|                      |            |                                       |            |            |            |                |            |  |  |  |  |  |

 

 

22

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Net interestincome improved by $92 to a net of $213 in interest income for the thirdquarter 2007 from a net of $121 in interest income in the third quarter of2006.  We recorded net interest income of$578 for the first nine months of 2007 compared to a net interest income of$347 for the first nine months of 2006, an improvement of $231.  This change in net interest income reflectsincreased investment earnings on larger average cash balances during 2007.

 

 

*Income tax provision*

 
| ** **           | ** ** | **Three Months Ended   September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|----------------------|------------|----------------------------------------|------------|------------|------------|----------------|------------|
| ** **           | ** ** | **2007**                               | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax provision |       | $                                      | 3,697      |       | $          | 2,547          |       | $ | 1,150 |   | 45.2 | % |
| Effective tax rate   |       | 34.2                                   | %          | 40.8       | %          |           |       |   |   |
|                      |            |                                        |            |            |            |                |            |  |  |  |  |  |

 
| ** **           | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|----------------------|------------|--------------------------------------|------------|------------|------------|----------------|------------|
| ** **           | ** ** | **2007**                             | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax provision |       | $                                    | 9,813      |       | $          | 7,865          |       | $ | 1,948 |   | 24.8 | % |
| Effective tax rate   |       | 35.7                                 | %          | 38.0       | %          |           |       |   |   |
|                      |            |                                      |            |            |            |                |            |  |  |  |  |  |

 

 

We recorded anincome tax provision of $3,697 in the third quarter of 2007 compared to $2,547in the third quarter of 2006.  Theeffective tax rate decreased to 34.2% in the third quarter of 2007 from 40.8%in the third quarter of 2006.  The incometax provisions for the three months ended September 30, 2007 and 2006 include$3,274 and $2,370, respectively, related to U.S. taxes, with the remainderrelating to foreign taxes associated with the operations of Nobelclad and itsSwedish subsidiary, Nitro Metall.  Thelower than expected third quarter 2007 effective tax rate of 34.2% relates to afavorable tax provision adjustment that was recorded in the third quarter inconnection with the reconciliation of our tax accounts to the actual federaland state tax returns for 2006 that were completed and filed during the quarterand to minor adjustments to our estimated effective tax rate for the full year2007.

 

For the nine months endedSeptember 30, 2007, we recorded an income tax provision of $9,813 compared to$7,865 for the same period of 2006.  Theeffective tax rate decreased to 35.7% for the first nine months of 2007 from38.0% for the first nine months of 2006. The income tax provisions for the nine months ended September 30, 2007and 2006 include $8,317 and $6,551, respectively, related to U.S. taxes, withthe remainder relating to foreign taxes associated with the operations ofNobelclad and Nitro Metall.  Weexpect our full year 2007 effective tax rate on consolidated pre-tax income toapproximate 36% and our 2008 effective tax rate to range between 36% and 38%.

 

*Income from discontinued operations*

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

 

                We completed the divestiture of our Spin Forgedivision in September 2004.  Under theprincipal divestiture agreement, we sold the assets of the Spin Forge divisionto a third party, 

 

 

23

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excluding certain equipmentand real estate which were leased or subleased to the buyer.  We held a purchase option on the Spin Forgereal estate that allowed us to purchase the real estate for $2,880, a pricethat was below the real estate’s appraised value.  On January 10, 2006, we sold our purchaseoption on the Spin Forge real estate to the property owner for $2,300.  We recorded a pre-tax gain of approximately$2,197 on this transaction, which was reported in discontinued operations, netof related taxes.

# ** **

# **Liquidity and Capital Resources**

 

We have historically financed ouroperations from a combination of internally generated cash flow, revolvingcredit borrowings, various long-term debt arrangements and the issuance ofcommon stock.  We believe that cash flowfrom operations and funds available under our current credit facilities and anyfuture replacement thereof will be sufficient to fund the working capital, debtservice and capital expenditure requirements of our current business operationsfor the foreseeable future. Nevertheless, our ability to generate sufficient cash flows from operationswill depend upon our success in executing our strategies, including our abilityto secure new customer orders at our operating divisions, and to continue toimplement cost-effective internal processes. We continue to evaluate potential investment opportunities includingstrategic acquisitions and joint ventures. A significant acquisition or joint venture may require us to secureadditional debt or equity financing.

*Debt and other contractual obligations andcommitments*

**                Wehave a $10,000 credit facility with Wells Fargo Bank, N.A.**Any restriction on the availability of borrowing under this creditfacility could negatively affect our ability to meet future cash requirements.Our existing loan agreements include various covenants and restrictions, certainof which relate to the payment of dividends or other distributions tostockholders, redemption of capital stock, incurrence of additionalindebtedness, mortgaging, pledging or disposition of major assets andmaintenance of specified financial ratios. As of September 30, 2007, we were in compliance with all financialcovenants and other provisions of our debt agreements.

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

**               ***Cash flows from operating activities*

Netcash flows provided by operating activities for the nine months ended September30, 2007 totaled $12,786.  Significantsources of operating cash flow included net income of $17,659, non-cashdepreciation expense of $1,394 and stock-based compensation of $912.  These sources of operating cash flow werepartially offset by net negative changes in various components of workingcapital in the amount of $6,940.  Netnegative changes in working capital included increases in inventories andprepaid expenses of $13,541 and $636, respectively, and decreases in accruedexpenses and other liabilities of $1,080. These negative changes in working capital were partially offset by adecrease in restricted cash and accounts receivable of $3,059 and $2,001,respectively, and increases in accounts payable and customer advances of $3,125and $132, respectively.  The net negativechanges in working capital are reflective of the growth in our business from2006 to 2007.

Netcash flows provided by operating activities for the nine months ended September30, 2006 totaled $16,257.  Significantsources of operating cash flow included net income of $14,188, non-cashdepreciation and amortization expense of $1,070, $923 from provision fordeferred 

 

24

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incometaxes, stock-based compensation of $436 and net positive changes in variouscomponents of working capital in the amount of $997.  Net positive changes in working capitalincluded increases in customer advances and accounts payable of $5,961 and$568, respectively.  These positivechanges in working capital were largely offset by increases in accountsreceivable and inventories of $3,885 and $1,608, respectively.

*Cash flows from investing activities*

Netcash flows used in investing activities for the first nine months of 2007totaled $7,358 and consisted primarily of capital expenditures.

Netcash flows used by investing activities for the first nine months of 2006totaled $785 and consisted primarily of $5,154 in capital expenditures thatwere largely offset by $1,950 from the sale of marketable securities and $2,197for investment activities of discontinued operations that consisted of the saleof the Spin Forge real estate purchase option.

*Cash flows from financing activities*

Netcash flows used in financing activities for the first nine months of 2007 were$1,627.  Significant uses of cash forfinancial activities included a $1,821 payment of annual dividends and a $389principal payment on a term loan with French bank.  Sources of cash flow from financingactivities include $563 in net proceeds from the issuance of common stockrelating to the exercise of stock options.

Netcash flows used in financing activities for the nine months ended September 30,2006 were $2,401.  Significant uses ofcash for financing activities included a $1,766 payment of annual dividends, a$361 principal payment on a term loan with French bank and final principalpayments on the industrial development revenue bond in the amount of $1,720,including $1,630 that was redeemed in advance of scheduled maturity dates.  Sources of cash flow from financingactivities included $523 in net proceeds from the issuance of common stockrelating to the exercise of stock options and $948 for tax benefits related tothe exercise of stock options.

*Payment of Dividends*

Wepaid annual dividends in both 2006 and 2007 and may continue to pay annualdividends in the future subject to capital availability and periodicdeterminations that cash dividends are in the best interests of ourstockholders, but we cannot assure you that such payments will continue.  Future dividends may be affected by, amongother items, our views on potential future capital requirements, futurebusiness prospects, changes in federal income tax law and any other factorsthat our board of directors deems relevant. Any decision to pay cash dividends is and will continue to be at thediscretion of the board of directors.

**Critical Accounting Policies**

 

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

 

25

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          In management’s opinion, the moresignificant reporting areas impacted by management’s judgments and estimatesare revenue recognition, asset impairments, inventory valuation and impact offoreign currency exchange rate risks. Management’s judgments and estimates inthese areas are based on information available from both internal and externalsources, and actual results could differ from the estimates, as additionalinformation becomes known.  We believethe following to be our most critical accounting policies.

 

*Revenue recognition*

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

*Asset impairments*

We review our long-lived assets held andused by us for impairment whenever events or changes in circumstances indicatetheir carrying amount may not be recoverable. In so doing, we estimate thefuture net cash flows expected to result from the use of the asset and itseventual disposition. If the sum of the expected future net cash flows(undiscounted and without interest charges) is less than the carrying amount ofthe asset, an impairment loss is recognized to reduce the asset to itsestimated fair value. Otherwise, an impairment loss is not recognized.  Long-lived assets to be disposed of, if any,are reported at the lower of carrying amount or fair value less cost to sell.

*Goodwill*

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

The entire amount of goodwill, which hada carrying value of $847 on our balance sheet as of September 30, 2007, relatesto our Explosive Metalworking segment. Based on the analysis performed in the fourth quarter of 2006, noimpairment was recorded to the carrying value of goodwill.

*Impact of foreign currencyexchange rate risks*

The functional currency for our foreignoperations is the applicable local currency for each affiliate company. Assetsand liabilities of foreign subsidiaries for which the functional currency isthe local currency are translated at exchange rates in effect at period-end,and the statements of operations are translated at the average exchange ratesduring the period.  Exchange rate fluctuationson translating foreign currency financial statements into U.S. dollars thatresult in 

 

26

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unrealized gains or losses are referred to astranslation adjustments. Cumulative translation adjustments are recorded as aseparate component of stockholders’ equity and are included in other cumulativecomprehensive income (loss). Transactions denominated in currencies other thanthe local currency are recorded based on exchange rates at the time suchtransactions arise. Subsequent changes in exchange rates result in transactiongains and losses, which are reflected in income as unrealized (based onperiod-end translations) or realized upon settlement of the transactions. Cashflows from our operations in foreign countries are translated at actual exchangerates when known, or at the average rate for the period. As a result, amountsrelated to assets and liabilities reported in the consolidated statements ofcash flows will not conform with changes in the corresponding balances in theconsolidated balance sheets. The effects of exchange rate changes on cashbalances held in foreign currencies are reported as a separate line item belowcash flows from financing activities.

*Income taxes*

We account for income taxes in accordancewith Statement of Financial Accounting Standards No.  109, Accounting for Income Taxes (“SFAS 109”),which requires the recognition of deferred tax assets and deferred taxliabilities for the expected future income tax consequences of transactionsthat have been included in our financial statements but not our taxreturns.  Deferred tax assets andliabilities are determined based on the temporary differences between theConsolidated Financial Statement basis and the tax basis of assets and liabilitiesusing enacted tax rates in effect for the year in which the differences areexpected to reverse.  We routinelyevaluate deferred tax assets to determine if they will more likely than not berecovered from future projected taxable income and, if not, we record anappropriate valuation allowance.

Weadopted the provisions of Financial Accounting Standards Board InterpretationNo. 48, Accounting for Uncertainty in Income Taxes — an interpretation of SFAS109 (“FIN 48”), which clarifies the accounting and disclosure for uncertainty in tax positions,on January 1, 2007.  FIN 48 seeks toharmonize certain accounting practices associated with the recognition andmeasurement of income taxes.  As a result of the implementation of FIN48, we recognized no material adjustment in the liability for unrecognizedincome tax benefits.  On the adoptiondate of January 1, 2007, we had $394 of unrecognized tax benefits, all of whichwould affect our effective tax rate if recognized.  At September 30, 2007, the balance ofunrecognized tax benefits remains at $394, and primarily relates to uncertainU.S. Federal tax positions.

 

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

 

**            Our U.S.Federal tax returns for the tax years 2003-2006 remain open to examinationwhile most of our state tax returns remain open to examination for the taxyears 2002-2006.  Our foreign tax returnsremain open to examination for the tax years 2003-2006 in France and 2001-2006in Sweden.**

During 2005, we completed ananalysis of prior year tax credits and related items.  As a result of the analysis, we filed amendedfederal and state income tax returns. The amended state returns reported additional net operating losses andcredits above the amounts we had previously recorded in our books andrecords.  In assessing these additionallosses and credits, we determined that the utilization of a portion of thesedid not meet the more likely than not criteria, due to potential changes in thestates in which we have income tax nexus. Thus, we recorded a net valuation allowance of approximately $177against the deferred tax assets during 2005. As of September 30, 2007, the balance of this allowance is $143.

 

 

 

27

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*Stock-Based CompensationExpense*

 

We account for stock-based compensation inaccordance with the provisions of Statement of Financial Accounting StandardsNo. 123 (revised 2004), Share-Based Payment (“SFAS 123R”).  Under the fair value recognition provisionsof SFAS 123R, stock-based compensation cost is estimated at the grant datebased on the value of the award and is recognized as expense ratably over therequisite service period of the award. Determining the appropriate fair value model and calculating the fairvalue of stock options at the grant date requires judgment, includingestimating stock price volatility, forfeiture rates and expected option life.

 

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**ITEM 3.     Quantitativeand Qualitative Disclosure about Market Risk**

 

          There have been no events thatmaterially affect our quantitative and qualitative disclosure about market riskfrom that reported in our Annual Report on Form 10-K for the year endedDecember 31, 2006.

 

**ITEM 4.    ****Controls and Procedures**

 

The Company maintains disclosure controls and procedures that aredesigned to ensure that information required to be disclosed in the Company’sExchange Act reports is accurately recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms, and that suchinformation is accumulated and communicated to the Company’s management,including its Chief Executive Officer and Chief Financial Officer, 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 only reasonableassurance of achieving the desired control objectives, and managementnecessarily applied its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.

 

As of September 30, 2007, the Company carried out an evaluation, underthe supervision and with the participation of the Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures (as defined in Exchange Act Rule 13a-15(e)).  Based on that evaluation, the Company’s ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective.  There have been no changes in the Company’sinternal controls during the quarter ended September 30, 2007 or in otherfactors that could materially affect the Company’s internal controls overfinancial reporting.

 

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

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**28**

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**Part II - OTHERINFORMATION**

 

**Item 1.Legal Proceedings**

 

None.

 

**Item 1A. Risk Factors**

 

          Our 2006 Annual Report onForm 10-K includes a detailed discussion of our risk factors.  The information presented below updates andshould be read in conjunction with the risk factors and information disclosedin our Form 10-K.

 

**Our backlog figures may not accurately predictfuture sales.**

We define “backlog” at any given point in time to consist of all firm,unfulfilled purchase orders and commitments at that time.  Generally speaking, we expect to fill mostitems of backlog within the following 12 months.  However, since orders may be rescheduled orcanceled, and a significant portion of our net sales is derived from a smallnumber of customers, backlog is not necessarily indicative of future saleslevels.  Moreover, we cannot be sure ofwhen during the future 12-month period we will be able to recognize revenuecorresponding to our backlog; nor can we be sure that revenues corresponding toour backlog will not fall into periods beyond the 12-month horizon.

 

**Item 2.Unregistered Sales of Equity Securitiesand Use of Proceeds**

 

          None.

 

**Item 3.Defaults Upon Senior Securities**

 

          None.

 

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

 

None.

 

**Item 5.Other Information**

 

None.

 

**Item 6.**

 

**Exhibits**

 

 

31.1                          —  Certification of the President and Chief Executive Officer pursuantto 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to Section302 of the Sarbanes-Oxley Act of 2002.

 

31.2                          —  Certification of the Vice President and Chief Financial Officerpursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuantto Section 302 of the Sarbanes-Oxley Act of 2002.

 

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

##### ** **

32.2                          —  Certification of the Vice President and Chief Financial Officerpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-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 26, 2007 | /s/ Richard A. Santa                                                                                                                   |   |
|                   | Richard A. Santa, Vice President and Chief Financial Officer (Duly  Authorized Officer and Principal Financial and Accounting Officer) |
|                   |                                                                                                                                   |

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**31**

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