**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C.  20549**

**Form 10-Q**

(MarkOne)

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

**Forthe quarterly period ended June 30, 2006**

**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**(Exactname of Registrant as Specified in its Charter)
| **Delaware**                              | **84-0608431**                        |
|-------------------------------------------|---------------------------------------|
| (State of  Incorporation or Organization) | (I.R.S. Employer  Identification No.) |

 

**5405 Spine Road, Boulder,Colorado 80301**(Addressof principal executive offices, including zip code)

**(303) 665-5700**(Registrant’stelephone number, including area code)

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

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer.
| Large accelerated  filer 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).   Yes o   No x

Thenumber of shares of Common Stock outstanding was 11,844,235 as of August 3,2006.

 

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CAUTIONARY NOTE ABOUTFORWARD-LOOKING STATEMENTS

Thisquarterly report on Form 10-Q contains “forward-looking statements” within themeaning of section 27A of the Securities Act of 1933 and section 21E of theSecurities Exchange Act of 1934. In particular, we direct your attention toPart I Item 1- Financial Statements, Item 2 - Management’s Discussion andAnalysis of Financial Condition and Results of Operations and Item 3 -Quantitative and Qualitative Disclosures About Market Risk. We intend theforward-looking statements throughout this quarterly report on Form 10-Q andthe information incorporated by reference herein to be covered by the safeharbor provisions for forward-looking statements. Statements contained in thisreport which are not historical facts are forward-looking statements thatinvolve risks and uncertainties that could cause actual results to differmaterially from projected results. All projections and statements regarding ourexpected financial position and operating results, our business strategy, ourfinancing plans and the outcome of any contingencies are forward-lookingstatements. These statements can sometimes be identified by our use offorward-looking words such as “may”, “believe”, “plan”, “anticipate”, “estimate”,“expect”, “intend” and other phrases of similar meaning. The forward-lookinginformation is based on information available as of the date of this quarterlyreport and on numerous assumptions and developments that are not within ourcontrol. Although we believe that our expectations as expressed in theseforward-looking statements are reasonable, we cannot assure you that ourexpectations will turn out to be correct. Factors that could cause actualresults to differ materially include, but are not limited to, the following:the ability to obtain new contracts at attractive prices; the size and timingof customer orders and shipment; fluctuations in customer demand; competitivefactors; the timely completion of contracts; the timing and size ofexpenditures; the timely receipt of government approvals and permits; theadequacy of local labor supplies at our facilities; current or future limits onmanufacturing capacity at our various operations; the availability and cost offunds; and general economic conditions, both domestic and foreign, impactingour business and the business of the end-market users we serve. Readers arecautioned not to place undue reliance on these forward-looking statements,which reflect management’s analysis only as of the date hereof. We undertake noobligation to publicly release the results of any revision to theseforward-looking statements that may be made to reflect events or circumstancesafter the date hereof or to reflect the occurrence of unanticipated events.

2

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**INDEX**
| PART I - FINANCIAL  INFORMATION                                                                              |   |   |
|--------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                         |   |   |
| Item  1 - Condensed Consolidated Financial Statements                                                        |   |   |
|                                                                                                         |   |   |
| Consolidated Balance Sheets as of June 30, 2006  (unaudited) and December 31, 2005                           |   |   |
| Consolidated Statements of Operations for the three  and six months ended June 30, 2006 and 2005 (unaudited) |   |   |
| Consolidated Statement of Stockholders’ Equity for the  six months ended June 30, 2006 (unaudited)      |   |   |
| Consolidated Statements of Cash Flows for the six  months ended June 30, 2006 and 2005 (unaudited)           |   |   |
| Notes to Condensed Consolidated Financial Statements  (unaudited)                                            |   |   |
|                                                                                                         |   |   |
| Item 2 - Management’s Discussion and Analysis of  Financial Condition and Results of Operations         |   |   |
|                                                                                                         |   |   |
| Item 3 - Quantitative and Qualitative Disclosures  about Market Risk                                         |   |   |
|                                                                                                         |   |   |
| Item 4 - Controls and Procedures                                                                             |   |   |
|                                                                                                         |   |   |
| PART  II - OTHER INFORMATION                                                                                 |   |   |
|                                                                                                         |   |   |
| Item  1 - Legal Proceedings                                                                                  |   |   |
|                                                                                                         |   |   |
| Item  1A - Risk Factors                                                                                      |   |   |
|                                                                                                         |   |   |
| Item 2 - Unregistered Sales of Equity Securities and  Use of Proceeds                                        |   |   |
|                                                                                                         |   |   |
| Item 3 - Defaults Upon Senior Securities                                                                     |   |   |
|                                                                                                         |   |   |
| Item 4 - Submission of Matters to a Vote of Security  Holders                                                |   |   |
|                                                                                                         |   |   |
| Item  5 - Other Information                                                                                  |   |   |
|                                                                                                         |   |   |
| Item 6 - Exhibits                                                                                            |   |   |
|                                                                                                         |   |   |
| Signatures                                                                                                   |   |   |

** **

3

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** **

**PartI - FINANCIAL INFORMATION**

**ITEM1.  Condensed Consolidated FinancialStatements**

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATEDBALANCE SHEETS

(Dollarsin Thousands)

 
| ** **                                                                                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                   | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                                                                   | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| ASSETS                                                                                       |       |              |       |                  |       |
| CURRENT ASSETS:                                                                              |       |              |       |                  |       |
| Cash and cash  equivalents                                                                   |       | $                 | 14,010     |                  | $          | 5,763 |   |
| Marketable  securities                                                                       |       | —            |       | 1,950                 |       |
| Accounts  receivable, net of allowance for doubtful accounts of $369 and $301,  respectively |       | 16,328            |       | 15,576                |       |
| Inventories                                                                                  |       | 13,947            |       | 11,869                |       |
| Prepaid expenses  and other                                                                  |       | 1,442             |       | 822                   |       |
| Current portion  of other receivables related to discontinued operations                     |       | 678               |       | —                |       |
| Current deferred  tax assets                                                                 |       | 619               |       | 572                   |       |
| Total current  assets                                                                        |       | 47,024            |       | 36,552                |       |
|                                                                                         |       |              |       |                  |       |
| PROPERTY, PLANT AND  EQUIPMENT                                                               |       | 25,527            |       | 22,635                |       |
| Less -  Accumulated depreciation                                                             |       | (10,833           | )          | (10,063               | )          |
| Property, plant  and equipment, net                                                          |       | 14,694            |       | 12,572                |       |
|                                                                                         |       |              |       |                  |       |
| GOODWILL, net                                                                                |       | 847               |       | 847                   |       |
|                                                                                         |       |              |       |                  |       |
| DEFERRED TAX ASSETS                                                                          |       | 249               |       | 819                   |       |
|                                                                                         |       |              |       |                  |       |
| OTHER ASSETS, net                                                                            |       | 68                |       | 101                   |       |
|                                                                                         |       |              |       |                  |       |
| OTHER RECEIVABLES  RELATED TO DISCONTINUED OPERATIONS                                        |       | —            |       | 681                   |       |
|                                                                                         |       |              |       |                  |       |
| ASSETS OF DISCONTINUED  OPERATIONS                                                           |       | 720               |       | 3,739                 |       |
| TOTAL ASSETS                                                                                 |       | $                 | 63,602     |                  | $          | 55,311 |   |

 

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

4

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DYNAMICMATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATEDBALANCE SHEETS

(Dollarsin Thousands, Except Share Data)

 
| ** **                                                                                                                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                          | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                                                                                                          | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                          |       |              |       |                  |       |
| CURRENT LIABILITIES:                                                                                                                |       |              |       |                  |       |
| Accounts payable                                                                                                                    |       | $                 | 8,977      |                  | $          | 7,278 |   |
| Accrued expenses                                                                                                                    |       | 1,490             |       | 1,615                 |       |
| Accrued income  taxes                                                                                                               |       | 2,117             |       | 979                   |       |
| Accrued employee  compensation and benefits                                                                                         |       | 2,034             |       | 2,508                 |       |
| Customer  advances                                                                                                                  |       | 1,219             |       | 1,885                 |       |
| Related party  debt                                                                                                                 |       | —            |       | 45                    |       |
| Current  maturities on long-term debt                                                                                               |       | 559               |       | 528                   |       |
| Total current  liabilities                                                                                                          |       | 16,396            |       | 14,838                |       |
|                                                                                                                                |       |              |       |                  |       |
| LONG-TERM DEBT                                                                                                                      |       | 1,799             |       | 2,221                 |       |
|                                                                                                                                |       |              |       |                  |       |
| DEFERRED TAX  LIABILITIES                                                                                                           |       | 298               |       | 195                   |       |
|                                                                                                                                |       |              |       |                  |       |
| OTHER LONG-TERM  LIABILITIES                                                                                                        |       | 246               |       | 222                   |       |
|                                                                                                                                |       |              |       |                  |       |
| LIABILITIES OF  DISCONTINUED OPERATIONS                                                                                             |       | —            |       | 2,880                 |       |
|                                                                                                                                |       |              |       |                  |       |
| COMMITMENTS AND  CONTINGENT LIABILITIES                                                                                             |       | —            |       | —                |       |
| Total  liabilities                                                                                                                  |       | 18,739            |       | 20,356                |       |
|                                                                                                                                |       |              |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                                          |       |              |       |                  |       |
| Preferred stock,  $.05 par value; 4,000,000 shares authorized; no issued and outstanding shares                                     |       | —            |       | —                |       |
| Common stock,  $.05 par value; 15,000,000 shares authorized; 11,844,235 and 11,758,920  shares issued and outstanding, respectively |       | 592               |       | 588                   |       |
| Additional  paid-in capital                                                                                                         |       | 20,428            |       | 19,778                |       |
| Retained  earnings                                                                                                                  |       | 22,837            |       | 14,104                |       |
| Other cumulative  comprehensive income                                                                                              |       | 1,006             |       | 485                   |       |
| Total  stockholders’ equity                                                                                                    |       | 44,863            |       | 34,955                |       |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                    |       | $                 | 63,602     |                  | $          | 55,311 |   |

 

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

5

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DYNAMICMATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED STATEMENTSOF OPERATIONS

FOR THE THREE AND SIXMONTHS ENDED JUNE 30, 2006 AND 2005

(Dollars in Thousands,Except Share Data)

(unaudited)

 
| ** **                                                        | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                        | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                        | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| NET SALES                                                         |       | $                                | 27,754     |                           | $          | 18,376 |   | $ | 52,928 |   | $ | 35,886 |   |
|                                                              |       |                             |       |                           |       |   |   |   |   |
| COST OF PRODUCTS SOLD                                             |       | 17,833                           |       | 13,161                         |       | 33,727 |   | 26,020 |   |
| Gross profit                                                      |       | 9,921                            |       | 5,215                          |       | 19,201 |   | 9,866 |   |
|                                                              |       |                             |       |                           |       |   |   |   |   |
| COSTS AND EXPENSES:                                               |       |                             |       |                           |       |   |   |   |   |
| General and  administrative expenses                              |       | 1,153                            |       | 898                            |       | 2,681 |   | 1,707 |   |
| Selling expenses                                                  |       | 946                              |       | 870                            |       | 2,270 |   | 1,995 |   |
| Total costs and  expenses                                         |       | 2,099                            |       | 1,768                          |       | 4,951 |   | 3,702 |   |
|                                                              |       |                             |       |                           |       |   |   |   |   |
| INCOME FROM OPERATIONS  OF CONTINUING OPERATIONS                  |       | 7,822                            |       | 3,447                          |       | 14,250 |   | 6,164 |   |
|                                                              |       |                             |       |                           |       |   |   |   |   |
| OTHER INCOME (EXPENSE):                                           |       |                             |       |                           |       |   |   |   |   |
| Other income  (expense), net                                      |       | (11                              | )          | 13                             |       | (16 | ) | 16 |   |
| Interest expense                                                  |       | (37                              | )          | (82                            | )          | (67 | ) | (168 | ) |
| Interest income                                                   |       | 169                              |       | 16                             |       | 292 |   | 20 |   |
| INCOME BEFORE  INCOME TAXES AND DISCONTINUED OPERATIONS           |       | 7,943                            |       | 3,394                          |       | 14,459 |   | 6,032 |   |
| INCOME TAX PROVISION                                              |       | 2,938                            |       | 1,279                          |       | 5,317 |   | 2,269 |   |
|                                                              |       |                             |       |                           |       |   |   |   |   |
| INCOME FROM CONTINUING  OPERATIONS BEFORE DISCONTINUED OPERATIONS |       | 5,005                            |       | 2,115                          |       | 9,142 |   | 3,763 |   |
| DISCONTINUED  OPERATIONS:                                         |       |                             |       |                           |       |   |   |   |   |
| Income from  discontinued operations, net of tax                  |       | —                           |       | —                         |       | 1,357 |   | — |   |
| Income from  discontinued operations                              |       | —                           |       | —                         |       | 1,357 |   | — |   |
| NET INCOME                                                        |       | $                                | 5,005      |                           | $          | 2,115 |   | $ | 10,499 |   | $ | 3,763 |   |
|                                                              |       |                             |       |                           |       |   |   |   |   |
| INCOME PER SHARE -  BASIC:                                        |       |                             |       |                           |       |   |   |   |   |
| Continuing  operations                                            |       | $                                | 0.42       |                           | $          | 0.19 |   | $ | 0.78 |   | $ | 0.35 |   |
| Discontinued  operations                                          |       | —                           |       | —                         |       | 0.11 |   | — |   |
| Net income                                                        |       | $                                | 0.42       |                           | $          | 0.19 |   | $ | 0.89 |   | $ | 0.35 |   |
|                                                              |       |                             |       |                           |       |   |   |   |   |
| INCOME PER SHARE -  DILUTED:                                      |       |                             |       |                           |       |   |   |   |   |
| Continuing  operations                                            |       | $                                | 0.41       |                           | $          | 0.18 |   | $ | 0.75 |   | $ | 0.32 |   |
| Discontinued  operations                                          |       | —                           |       | —                         |       | 0.11 |   | — |   |
| Net income                                                        |       | $                                | 0.41       |                           | $          | 0.18 |   | $ | 0.86 |   | $ | 0.32 |   |
|                                                              |       |                             |       |                           |       |   |   |   |   |
| WEIGHTED AVERAGE NUMBER  OF SHARES OUTSTANDING -                  |       |                             |       |                           |       |   |   |   |   |
| Basic                                                             |       | 11,805,610                       |       | 11,070,932                     |       | 11,786,957 |   | 10,883,636 |   |
| Diluted                                                           |       | 12,229,189                       |       | 12,053,338                     |       | 12,223,268 |   | 11,958,696 |   |
|                                                              |       |                             |       |                           |       |   |   |   |   |
| ANNUAL DIVIDENDS DECLARED PER COMMON SHARE                        |       | $                                | —     |                           | $          | 0.10 |   | $ | 0.15 |   | $ | 0.10 |   |

 

The accompanyingnotes are an integral part of these Condensed Consolidated Financial Statements

6

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DYNAMICMATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDEDJUNE 30, 2006

(Amounts in Thousands)

(unaudited)

 
| ** **                                                         | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Other**      | ** ** | ** **          | ** ** | ** **          | ** ** |
|--------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|-------------------|------------|----------------|------------|---------------------|------------|---------------------|------------|
| ** **                                                         | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Cumulative** | ** ** | ** **          | ** ** | **Comprehensive**   | ** ** |
| ** **                                                         | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | ** **     | ** ** | **Income for** | ** ** |
| ** **                                                         | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Income**     | ** ** | **Total**           | ** ** | **the Period** | ** ** |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |                |       |                |       |
| Balances, December 31,  2005                                       |       | 11,759                |       | $           | 588        |           | $          | 19,778            |       | $              | 14,104     |                | $          | 485                 |       | $ | 34,955 |   |   |   |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |                |       |                |       |
| Shares  issued for stock option exercises                          |       | 84                    |       | 4           |       | 175            |       | —            |       | —         |       | 179                 |       |                |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |                |       |                |       |
| Shares  issued in connection with the employee stock purchase plan |       | 1                     |       | —      |       | 28             |       | —            |       | —         |       | 28                  |       |                |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |                |       |                |       |
| Tax  benefit related to stock options                              |       | —                |       | —      |       | 94             |       | —            |       | —         |       | 94                  |       |                |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |                |       |                |       |
| Stock-based  compensation                                          |       | —                |       | —      |       | 353            |       | —            |       | —         |       | 353                 |       |                |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |                |       |                |       |
| Dividends  paid                                                    |       | —                |       | —      |       | —         |       | (1,766            | )          | —         |       | (1,766              | )          |                |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |                |       |                |       |
| Net  income                                                        |       | —                |       | —      |       | —         |       | 10,499            |       | —         |       | 10,499              |       | 10,499              |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |                |       |                |       |
| Change  in cumulative foreign currency translation adjustment      |       | —                |       | —      |       | —         |       | —            |       | 521            |       | 521                 |       | 521                 |       |
| Balances, June 30, 2006                                            |       | 11,844                |       | 592         |       | 20,428         |       | 22,837            |       | 1,006          |       | 44,863              |       | 11,020              |       |
|                                                                    |            |                       |            |             |            |                |            |                   |            |                |            |                     |            |                     |            |  |  |  |  |  |

 

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

7

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

FORTHE SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(Dollarsin Thousands)

(unaudited)

 
| ** **                                                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                              |       |     |       |     |       |
| Net income                                                                          |       | $        | 10,499     |     | $          | 3,763 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities - |       |     |       |     |       |
| Income from  discontinued operations, net of tax                                    |       | (1,357   | )          | —   |       |
| Depreciation                                                                        |       | 639      |       | 710      |       |
| Amortization                                                                        |       | 6        |       | 7        |       |
| Amortization of  capitalized debt issuance costs                                    |       | 14       |       | 26       |       |
| Stock-based  compensation                                                           |       | 353      |       | —   |       |
| Provision for  deferred income taxes                                                |       | 656      |       | (10      | )          |
| Tax benefit  related to exercise of stock options                                   |       | —   |       | 2,294    |       |
| Change in -                                                                         |       |     |       |     |       |
| Accounts  receivable, net                                                           |       | (373     | )          | (415     | )          |
| Inventories                                                                         |       | (1,618   | )          | (3,376   | )          |
| Prepaid expenses  and other                                                         |       | (427     | )          | (1,620   | )          |
| Accounts payable                                                                    |       | 1,432    |       | 1,978    |       |
| Accrued expenses  and other liabilities                                             |       | (1,487   | )          | (198     | )          |
| Net cash  provided by operating activities                                          |       | 8,337    |       | 3,159    |       |
|                                                                                |       |     |       |     |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                              |       |     |       |     |       |
| Acquisition of  property, plant and equipment                                       |       | (2,561   | )          | (1,376   | )          |
| 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                                                 |       | 147      |       | 148      |       |
| Payment received  on other receivables related to discontinued operations           |       | 3        |       | 874      |       |
| Cash flows  provided by investing activities of discontinued operations             |       | 2,197    |       | —   |       |
| Net cash flows provided  by (used in) investing activities                          |       | 1,736    |       | (354     | )          |
|                                                                                     |            |          |            |          |            |  |  |

 

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

8

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

FORTHE SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(Dollarsin Thousands)

(unaudited)

 
| ** **                                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                 |       |     |       |     |       |
| Repayments on  bank lines of credit, net                               |       | —   |       | (3,208   | )          |
| Borrowings /  (repayments) on related party lines of credit, net       |       | (47      | )          | 259      |       |
| Payment on SNPE,  Inc. term loan                                       |       | —   |       | (667     | )          |
| Payment on industrial  development revenue bond                        |       | (90      | )          | (490     | )          |
| Payment on term  loan with French bank                                 |       | (356     | )          | (373     | )          |
| Payment of  dividends                                                  |       | (1,766   | )          | —   |       |
| Change in other  long-tem liabilities                                  |       | 15       |       | 32       |       |
| Net proceeds  from issuance of common stock to employees and directors |       | 207      |       | 1,181    |       |
| Tax benefit  related to exercise of stock options                      |       | 94       |       | —   |       |
| Net cash flows  used in financing activities                           |       | (1,943   | )          | (3,266   | )          |
|                                                                   |       |     |       |     |       |
| EFFECTS OF EXCHANGE  RATES ON CASH                                     |       | 117      |       | (119     | )          |
|                                                                   |       |     |       |     |       |
| NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS                  |       | 8,247    |       | (580     | )          |
|                                                                   |       |     |       |     |       |
| CASH AND CASH  EQUIVALENTS, beginning of the period                    |       | 5,763    |       | 2,404    |       |
| CASH AND CASH EQUIVALENTS, end of the period                           |       | $        | 14,010     |     | $          | 1,824 |   |
|                                                                        |            |          |            |          |            |  |  |

 

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

 

9

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#####  

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

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

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

**(unaudited)**

**1.             BASIS OF PRESENTATION**

Theinformation included in the Condensed Consolidated Financial Statements isunaudited but includes all normal and recurring adjustments which, in theopinion of management, are necessary for a fair presentation of the interimperiods presented. These Condensed Consolidated Financial Statements should beread in conjunction with the financial statements that are included in theCompany’s Annual Report filed on Form 10-K for the year ended December 31,2005.

OnMay 15, 2006, SNPE, Inc., the Company’s former majority stockholder, sold in anunderwritten public offering 5,926,982 shares of the Company’s common stock,which represented all shares held by SNPE, Inc. Following the sale, four members of the Company’s board of directors,each of whom had represented SNPE, Inc., resigned from the board.  All transaction expenses were paid by SNPE,Inc.

**2.             SIGNIFICANT ACCOUNTING POLICIES**

Principlesof Consolidation

**The CondensedConsolidated Financial Statements include the accounts of the Company and asubsidiary in which it has a greater than 50% interest. All significant intercompanyaccounts, profits and transactions have been eliminated in consolidation.**

ForeignOperations and Foreign Exchange Rate Risk

**The**functionalcurrency for the Company’s foreign operations is the applicable local currencyfor each affiliate company. Assets and liabilities of foreign subsidiaries forwhich the functional currency is the local currency are translated at exchangerates in effect at period-end, and the statements of operations are translatedat the average exchange rates during the period.  Exchange rate fluctuations on translatingforeign currency financial statements into U.S. dollars that result inunrealized gains or losses are referred to as translation adjustments.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 cladmetal products and welding services are generally based upon customerspecifications set forth in customer purchase orders and require us to providecertifications relative to metals used, services performed and the results ofany non-destructive testing that the customer has requested be performed.  Any non-conformance issues 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.**

Loanto Related Party

**Nobelclad Europe,S.A. (“Nobelclad”) had a Euro-denominated cash management agreement with SNPE,the parent company of SNPE, Inc., the Company’s former majority stockholder,which provided for loans to or from either party of up to approximately $3,400,based on the December 31, 2005 exchange rates. Amounts outstanding under thisagreement bore interest at EURIBOR plus 1.5% annually. Due to Nobelclad’sexcess cash position during the first quarter of 2006, it began advancing cashto SNPE through this intercompany cash agreement. At March 31, 2006, theseadvances to SNPE totaled 1,003 Euros ($1,211). The interest rate earned onthese advances exceeded the interest rate that Nobelclad could earn on excesscash and cash equivalents held at its local bank. The agreement allowedNobelclad to request repayment on the advances at any time. The balanceoutstanding at March 31, 2006 was repaid in full in April 2006.**

EarningsPer Share

**Basic earningsper share (“EPS”) is computed by dividing net income by the weighted averagenumber 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 June 30, 2006** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                           | ** ** | **Net Income**                                                             | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|                                                 |       |                                                                            |       |   |   |   |   |
| Basic earnings  per share                            |       | $                                                                               | 5,005      |   | 11,805,610 |   | $ | 0.42 |   |
|                                                 |       |                                                                            |       |   |   |   |   |
| Dilutive effect  of options to purchase common stock |       | —                                                                          |       | 423,579 |   |   |   |
|                                                 |       |                                                                            |       |   |   |   |   |
| Dilutive  earnings per share                         |       | $                                                                               | 5,005      |   | 12,229,189 |   | $ | 0.41 |   |

 

11

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| ** **                                                    | ** ** | **For the three months ended  June 30, 2005** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                    | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                                    | ** ** | **Net Income**                                | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|                                                          |       |                                          |       |   |   |   |   |
| Basic earnings  per share                                     |       | $                                             | 2,115      |   | 11,070,932 |   | $ | 0.19 |   |
|                                                          |       |                                          |       |   |   |   |   |
| Dilutive effect  of options to purchase common stock          |       | —                                        |       | 679,110 |   |   |   |
| Dilutive effect  of convertible subordinated note, net of tax |       | 10                                            |       | 303,296 |   |   |   |
|                                                          |       |                                          |       |   |   |   |   |
| Dilutive  earnings per share                                  |       | $                                             | 2,125      |   | 12,053,338 |   | $ | 0.18 |   |

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

 
| ** **                                                    | ** ** | **For the six months ended  June 30, 2005** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                  | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                                    | ** ** | **Net Income**                              | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|                                                          |       |                                        |       |   |   |   |   |
| Basic earnings  per share                                     |       | $                                           | 3,763      |   | 10,883,636 |   | $ | 0.35 |   |
|                                                          |       |                                        |       |   |   |   |   |
| Dilutive effect  of options to purchase common stock          |       | —                                      |       | 723,678 |   |   |   |
| Dilutive effect  of convertible subordinated note, net of tax |       | 23                                          |       | 351,382 |   |   |   |
|                                                          |       |                                        |       |   |   |   |   |
| Dilutive earnings per  share                                  |       | $                                           | 3,786      |   | 11,958,696 |   | $ | 0.32 |   |

** **

RecentAccounting Pronouncements

**In December2004, the Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting Standards No. 123 (revised 2004), *Share-Based Payment*(“SFAS 123R”), whichis a revision of Statement of Financial Accounting Standards No. 123, *Accounting for Stock-Based Compensation*(“SFAS123”).  SFAS 123R requires measurement ofall employee stock-based compensation awards using a fair-value method and therecording of such expense in the consolidated financial statements.  In addition, the adoption of SFAS 123Rrequires additional accounting related to the income tax effects and disclosureregarding the cash flow effects resulting from share-based paymentarrangements.  In January 2005, the SECissued Staff Accounting Bulletin No. 107, which provides supplementalimplementation guidance for SFAS 123R. We selected the Black-Scholes option-pricing model as the mostappropriate fair-value method for our awards and will recognize compensationcost on a straight-line basis over our awards’ vesting periods.  We adopted SFAS 123R in the first quarter of2006.  See Note 3 for further detail.**

12

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** **

**In July 2006,the FASB issued FASB Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes — an interpretation of FASB No. 109* (“FIN 48”),which clarifies the accounting and disclosure for uncertainty in taxpositions.  FIN 48 seeks to harmonizecertain accounting practices associated with the recognition and measurement ofincome taxes.  This interpretation iseffective for fiscal years beginning after December 15, 2006.  The Company has not yet determined the impactthis interpretation will have on our results from operations or financialposition.**

**3.****                                     STOCK-BASEDCOMPENSATION**

**The Companymaintains a stock option plan that provides for grants of both incentive stockoptions and non-statutory stock options. Incentive stock options are granted atexercise prices that equal the fair market value of the stock at date of grantbased upon the closing sales price of the Company’s common stock on that date.Incentive stock options generally vest 25% annually and expire ten years fromthe date of grant. Non-statutory stock options are generally granted atexercise prices that equal the fair market value of the stock at date of grant.These options vest over periods ranging from one to four years and haveexpiration dates ten years from the date of grant.**

**Prior to January1, 2006, the Company accounted for its stock-based compensation plan under therecognition and measurement provisions of Accounting Principles Board OpinionNo. 25, *Accounting for Stock Issued toEmployees*(“APB 25”) and related interpretations, as permitted bySFAS 123.  Accordingly, no stock-basedcompensation expense was recognized in the Consolidated Statements ofOperations for the three and six months ended June 30, 2005 as the optionsgranted under the Company’s stock option plan had exercise prices equal to themarket value of the underlying common stock on the date of grant.  Effective January 1, 2006, the Companyadopted the fair value recognition provisions of SFAS 123R using the modifiedprospective transition method.  Underthat transition method, compensation cost recognized in the three and sixmonths ended June 30, 2006 includes: (a) compensation cost for all share-basedpayments granted prior to, but not yet vested as of January 1, 2006, based onthe grant date fair value estimated in accordance with the original provisionsof SFAS 123, and (b) compensation cost for all share-based payments grantedsubsequent to January 1, 2006, based on grant date fair value estimated inaccordance with SFAS 123R.**

**The fair value for each optionwas estimated on the date of grant using a Black-Scholes option-pricing modelwith the following assumptions used for the single grant during the six monthsended June 30, 2006: a risk free interest rate of 4.35%; an expected volatilityfactor of 86.6%; an expected dividend yield of .375%; and an expected life of 4years.  No options were granted during thethree months ended June 30, 2006.  Ourcomputation of expected volatility for the three months ended March 31, 2006 isbased on historical**volatility from the past four years, based onthe current expected life of outstanding options.  Our computation of expected life is based on historical exercise patterns.  The interest rate for periods within thecontractual life of the award is based on the U.S. Treasury yield curve ineffect at the time of grant.  The fairvalue of the options granted during the six months ended June 30, 2006 was$22.30 per underlying share.  Each grantis valued as a single award and compensation expense is recognized on astraight-line basis over the vesting period. In accordance with the modified prospective transition method, resultsfor prior periods have not been restated.

13

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** **

**The followingtable sets forth the total stock-based compensation expense included in theConsolidated Statements of Operations as a result of adopting SFAS 123R onJanuary 1, 2006, and thereby the related decrease of pretax income and netincome and earnings per share than if it had continued to account forstock-based compensation under APB 25:**

|                                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **June 30, 2006**      | ** ** | **June 30, 2006**    | ** ** |
| Cost of products  sold                                 |       | $                                | 16         |                           | $          | 27 |   |
| General and  administrative expense                    |       | (13                              | )          | 294                            |       |
| Selling expense                                        |       | 14                               |       | 32                             |       |
|                                                   |       |                             |       |                           |       |
| Stock-based  compensation expense before income taxes  |       | 17                               |       | 353                            |       |
| Income tax                                             |       | 27                               |       | (69                            | )          |
|                                                   |       |                             |       |                           |       |
| Stock-based  compensation expense, net of income taxes |       | $                                | 44         |                           | $          | 284 |   |
|                                                   |       |                             |       |                           |       |
| Earnings per  share:                                   |       |                             |       |                           |       |
| Basic- income before income taxes                      |       | $                                | 0.00       |                           | $          | 0.03 |   |
| Basic - net income                                     |       | $                                | 0.00       |                           | $          | 0.02 |   |
| Diluted - income before income taxes                   |       | $                                | 0.00       |                           | $          | 0.02 |   |
| Diluted - net  income                                  |       | $                                | 0.00       |                           | $          | 0.02 |   |

** **

**Prior to the adoption of SFAS123R, the Company presented all tax benefits of deductions resulting from theexercise of stock options as operating cash flows in the ConsolidatedStatements of Cash Flows.  SFAS 123Rrequires the tax benefits resulting from deductions in excess of thecompensation cost recognized for those options (“excess tax benefits”) to beclassified as financing cash flows.  The$94 excess tax benefit classified as a financing cash inflow in theConsolidated Statements of Cash Flows for the six months ended June 30, 2006would have been classified as an operating cash inflow if the Company had notadopted SFAS 123R.**

14

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** **

**The followingtable illustrates the effect on net income and basic and diluted earnings pershare if the Company had applied the fair value recognition provisions of SFAS123R to stock-based compensation for the three and six months ended June 30,2005.  For purposes of this pro formadisclosure, the value of the options is estimated using a Black-Scholesoption-pricing model and amortized to expense over the options’ vesting periods.  The following assumptions were used in theoptions pricing model for the three months ended June 30, 2005: a risk freeinterest rate of 3.7%; an expected volatility factor of 92.2%; an expecteddividend yield of 0.5%; and an expected life of 4 years.  The following assumptions were used in theoptions pricing model for the six months ended June 30, 2005: a risk freeinterest rate of 3.7%; an expected volatility factor of 91.1%; an expecteddividend yield of 0.5%; and an expected life of 4 years.**

|                                                                                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                               | ** ** | **June 30, 2005**      | ** ** | **June 30, 2005**    | ** ** |
|                                                                                                     |       |                             |       |                           |       |
| Net income-as  reported                                                                                  |       | $                                | 2,115      |                           | $          | 3,763 |   |
| Deduct  stock-based compensation expense determined under fair value method, net of  related tax effects |       | (179                             | )          | (260                           | )          |
| Pro forma net  income                                                                                    |       | $                                | 1,936      |                           | $          | 3,503 |   |
|                                                                                                     |       |                             |       |                           |       |
| Earnings per  share:                                                                                     |       |                             |       |                           |       |
| Basic-as reported                                                                                        |       | $                                | 0.19       |                           | $          | 0.35 |   |
| Basic-pro forma                                                                                          |       | $                                | 0.17       |                           | $          | 0.32 |   |
| Diluted-as reported                                                                                      |       | $                                | 0.18       |                           | $          | 0.32 |   |
| Diluted-pro  forma                                                                                       |       | $                                | 0.16       |                           | $          | 0.29 |   |

** **

**The followingtable summarizes the stock options outstanding as of June 30, 2006 as well asactivity for the six months then ended:**
| ** **                          | ** ** | ** **  | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **    | ** ** |
|-------------------------------------|------------|-------------|------------|--------------|------------|-----------------|------------|---------------|------------|
| ** **                          | ** ** | ** **  | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                          | ** ** | ** **  | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                          | ** ** | ** **  | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                          | ** ** | **Options** | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**     | ** ** |
| Outstanding at  beginning of period |       | 588,426     |       | $            | 4.77       |            |       |          |       |   |
| Granted                             |       | 20,000      |       | 35.21        |       |            |       |          |       |
| Exercised                           |       | (84,250     | )          | 2.12         |       |            |       |          |       |
| Cancelled                           |       | (40,754     | )          | 20.62        |       |            |       |          |       |
| Outstanding at  end of period       |       | 483,422     |       | $            | 5.16       |            | 7.73       |          | $          | 13,843 |   |
| Exercisable at end of  period       |       | 252,172     |       | $            | 4.16       |            | 7.33       |          | $          | 7,456 |   |

** **

15

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** **

**The intrinsicvalue of options exercised for the three and six months ended June 30, 2006 was$1,763 and $2,476, respectively.  As ofJune 30, 2006, there was $796 of total unrecognized stock-based compensationcost related to unvested stock options. The cost is expected to be recognized over a weighted average period of1.36 years.**

**4.             INVENTORY**

**The componentsof inventory are as follows at June 30, 2006 and December 31, 2005:**

|                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|-------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **      | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| Raw materials   |       | $                 | 6,226      |                  | $          | 5,767 |   |
| Work-in-process |       | 1,887             |       | 5,878                 |       |
| Supplies        |       | 5,834             |       | 224                   |       |
|            |       | $                 | 13,947     |                  | $          | 11,869 |   |

** **

**5.             DEBT**

**Long-term debtconsists of the following at June 30, 2006 and December 31, 2005:**

|                                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                            | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| Term loan -  French bank              |       | $                 | 728        |                  | $          | 1,029 |   |
| Industrial  development revenue bonds |       | 1,630             |       | 1,720                 |       |
|                                  |       | 2,358             |       | 2,749                 |       |
| Less current  maturities              |       | (559              | )          | (528                  | )          |
| Long-term debt                        |       | $                 | 1,799      |                  | $          | 2,221 |   |

** **

**Loan Covenants andRestrictions**

**The Company’s existingloan agreements include various covenants and restrictions, certain of whichrelate to the incurrence of additional indebtedness, mortgaging, pledging ordisposition of major assets, limits on capital expenditures and maintenance ofspecified financial ratios.  As of June30, 2006, the Company was in compliance with all financial covenants and otherprovisions of its debt agreements.**

**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. The most significant product of this group isclad metal, which is used in the fabrication of pressure vessels, heatexchangers and transition joints for various industries, including upstream oiland gas, oil refinery, petrochemicals, hydrometallurgy, aluminum production,shipbuilding, power generation, industrial refrigeration and similar  

16

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industries. AMK Welding utilizes a number of welding technologies toweld components for manufacturers of jet engine and ground-based turbines.

The accounting policies of both segments are the same as thosedescribed in the summary of significant accounting policies.  The Company’s reportable segments arestrategic business units that offer different products and services and areseparately managed. Each segment is marketed to different customer types andrequires different manufacturing processes and technologies.  Segment information is presented for thethree and six months ended June 30, 2006 and 2005 as follows:
| ** **                                                           | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| ** **                                                           | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the three  months ended June 30, 2006:                           |       |             |       |        |       |       |       |
| Net sales                                                            |       | $                | 26,649     |        | $          | 1,105      |       | $ | 27,754 |   |
| Depreciation and  amortization                                       |       | $                | 273        |        | $          | 55         |       | $ | 328 |   |
| Segment income  from operations of continuing operations             |       | $                | 7,717      |        | $          | 122        |       | $ | 7,839 |   |
| Unallocated amounts:                                                 |       |             |       |        |       |       |       |
| Stock-based compensation                                             |       |             |       |        |       | (17        | )          |
| Other expense                                                        |       |             |       |        |       | (11        | )          |
| Interest income, net                                                 |       |             |       |        |       | 132        |       |
| Consolidated income before income taxes and  discontinued operations |       |             |       |        |       | $          | 7,943      |   |

 
| ** **                                                           | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| *** ***                                                         | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the three  months ended June 30, 2005:                           |       |             |       |        |       |       |       |
| Net sales                                                            |       | $                | 17,247     |        | $          | 1,129      |       | $ | 18,376 |   |
| Depreciation and  amortization                                       |       | $                | 307        |        | $          | 44         |       | $ | 351 |   |
| Segment income  from operations of continuing operations             |       | $                | 3,104      |        | $          | 343        |       | $ | 3,447 |   |
| Unallocated amounts:                                                 |       |             |       |        |       |       |       |
| Other income                                                         |       |             |       |        |       | 13         |       |
| Interest expense, net                                                |       |             |       |        |       | (66        | )          |
| Consolidated income before income taxes and  discontinued operations |       |             |       |        |       | $          | 3,394      |   |

 

17

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

 
| ** **                                                           | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| *** ***                                                         | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the six  months ended June 30, 2005:                             |       |             |       |        |       |       |       |
| Net sales                                                            |       | $                | 34,214     |        | $          | 1,672      |       | $ | 35,886 |   |
| Depreciation and  amortization                                       |       | $                | 627        |        | $          | 90         |       | $ | 717 |   |
| Segment income  from operations of continuing operations             |       | $                | 5,937      |        | $          | 227        |       | $ | 6,164 |   |
| Unallocated amounts:                                                 |       |             |       |        |       |       |       |
| Other income                                                         |       |             |       |        |       | 16         |       |
| Interest expense, net                                                |       |             |       |        |       | (148       | )          |
| Consolidated  income before income taxes and discontinued operations |       |             |       |        |       | $          | 6,032      |   |

** **

During the three and six months ended June30, 2006, sales to one customer represented approximately $4,006 (14%) and$7,671 (14%) of total net sales, respectively. During the three and six months ended June 30, 2005, sales to no onecustomer accounted for more than 10% of total net sales.

** **

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**7.             COMPREHENSIVE INCOME**

**DMC’s comprehensive income forthe three and six months ended June 30, 2006 and 2005 was as follows:**
| ** **                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                               | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income for  the period               |       | $                                | 5,005      |                           | $          | 2,115 |   | $ | 10,499 |   | $ | 3,763 |   |
|                                     |       |                             |       |                           |       |   |   |   |   |
| Foreign currency  translation adjustment |       | 379                              |       | (406                           | )          | 521 |   | (690 | ) |
| Comprehensive income                     |       | $                                | 5,384      |                           | $          | 1,709 |   | $ | 11,020 |   | $ | 3,073 |   |

** **

As of June 30, 2006 and December 31, 2005 other cumulativecomprehensive income of $1,006 and $485, respectively, consists entirely ofcumulative 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, DMC sold all inventory, books andrecords, intangible personal property, business information and technology,customer contracts, and licenses and permits relating to the Spin Forgebusiness to this third party for a sales price of approximately $1,700.  The third party also assumed fullresponsibility for the Spin Forge business activities and operatingexpenses.  Despite the fact that theCompany retained ownership of the equipment and continued to carry a capitallease asset of $2,880 on its books, the Company concluded that the Spin Forgedivestiture transaction qualified for treatment as discontinued operationssince the Company had completely exited the Spin Forge operating business andhas no intent to ever again operate any of the leased assets.  To the extent that the third party purchaserof the Spin Forge business does not exercise its option to purchase all or aportion of the leased equipment and tooling when the lease term expires onJanuary 1, 2007, DMC plans to immediately liquidate such equipment.

On January 10, 2006, the Company sold its purchaseoption on the Spin Forge real estate to the property owner for $2,300.  The completion of this transaction resultedin a pretax gain of $2,197, which was recorded as discontinued operations inthe first quarter of 2006.  In connectionwith the sale of the purchase option, the underlying lease agreement wasterminated.  Accordingly, the capitallease asset of $2,880 and the related lease obligation of the same amount wereremoved from the Company’s balance sheet in the first quarter of 2006.

 

19

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Assetsof discontinued operations are comprised of the following:

|                                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                              | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| Leased manufacturing  equipment         |       | 720               |       | 859                   |       |
| Capital lease asset -  real estate      |       | —            |       | 2,880                 |       |
| Total assets of discontinued operations |       | $                 | 720        |                  | $          | 3,739 |   |
|                                         |            |                   |            |                       |            |  |  |

 

TheCompany is receiving rent of $23 per month on the leased manufacturingequipment through the end of the initial lease term, which expires in December2006.  As part of the September 17, 2004divestiture of Spin Forge, the Company sold inventory totaling $1,697 and thesale of this inventory was reflected in other receivables.  As of June 30, 2006, the unpaid balance ofthis receivable, which is due no later than January 1, 2007, is $678 and isclassified as short-term based on the payment schedule specified in thedivestiture agreement.  As of December31, 2005, this receivable totaled $681 and was classified as long-term.

Discontinuedoperations for the three and six months ended June 30, 2006 is summarized asfollows:

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

 

20

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

The following discussion should be read in conjunctionwith our historical consolidated financial statements and notes, as well as theselected historical consolidated financial data that are included in theCompany’s Annual Report filed on Form 10-K for the year ended December 31,2005.

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

**Executive Overview**

Ourbusiness is organized into two segments: Explosive Metalworking (which we also refer to as DMC Clad) and AMKWelding.  For the three months ended June30, 2006, Explosive Metalworking accounted for 96% of our net sales and 98% ofour income from operations of continuing operations before consideration ofstock-based compensation expense, which is not allocated to our businesssegments.  Year to date ExplosiveMetalworking accounted for 96% of our net sales and 98% of our income from operationsof continuing operations before consideration of stock-based compensationexpense.

Ouryear to date 2006 net sales increased 47.5% compared to the first six monthsof  2005, reflecting ExplosiveMetalworking’s year-to-year net sales increases in our U.S.-based and Europeanoperations of 54.3% and 36.3%, respectively. Our operating income from continuing operations increased 131.2%, to$14,250 in the first six months of 2006 from $6,164 in the first six months of2005, reflecting an $8,436 improvement in Explosive Metalworking’s operatingincome and a $3 improvement in AMK Welding’s operating income.  Income from continuing operations beforediscontinued operations increased 142.9%, to $9,142 for the six months endedJune 30, 2006 from $3,763 in the first half of 2005.  Our net income increased to $10,499 in thefirst half of 2006 from $3,763 in the first half of 2005.  For the six months ended June 30, 2006 netincome included $1,357 of income from discontinued operations, net of tax,relating to the sale of the Spin Forge real estate option as further discussedbelow.  The large increase in our netincome for the first half of 2006 compared to the first half of 2005 isattributable to a strong demand from the end users of our products due toincreased capital investment in the industries we serve.  A portion of the increased sales in thesecond quarter of 2006 is related to the earlier than expected fulfillment oforders that were scheduled to be delivered in the third quarter of 2006.

*Net sales*

ExplosiveMetalworking’s net sales are generated principally from sales of clad metalplates and sales of transition joints, which are made from clad plates, tofabricator customers that fabricate industrial equipment for variousindustries, including upstream oil and gas, oil refinery, petrochemicals,hydrometallurgy, aluminum production, shipbuilding, power generation,industrial refrigeration and similar industries.  Demand for our clad metal products in theUnited States is driven by plant maintenance and retrofit projects at existingchemical processing, petrochemical processing and oil refining facilities, aswell as new plants and large plant expansion projects.  In contrast to the U.S. market, demand forour clad products in Europe and Asia is more dependent on new constructionprojects, such as the building of new purified terephthalic acid (“PTA”) plantsin different parts of the world, including China, and on sales of electricaltransition joints that are used in the aluminum production industry.

21

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

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

DMCClad’s business is cyclical since it is linked to its customers’ end-marketactivity.  The construction cycle for newmanufacturing capacity in the chemical industry has historically been onecharacterized by significant amplitude. It is driven both by world 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.  Excess capacity drives prices down andcapacity utilization drops.

*Gross profit and cost of products sold*

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

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

*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*

Oureffective income tax rate decreased to 36.8% in the first half of 2006 from37.6% in the first half of 2005.  Incometax provisions on the earnings of Nobelclad and Nitro Metall AB (“Nitro Metall”)have been provided based upon the respective French and Swedish statutory taxrates.  Our effective tax rate for thesix months ended June 30, 2006 is higher than the full year 2005 and 2004effective income tax rates of 33.5% and 30.8%, respectively, as a result of therecognition in 2005 and 2004 of U.S. tax benefits relating to research anddevelopment tax credits, extraterritorial income exclusions and foreign taxcredits.  Going forward, based upon existingtax regulations and current federal, state and foreign statutory tax rates, weexpect our effective tax rate on our consolidated pre-tax income to rangebetween 36% and 38%.

22

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*Backlog*

We use backlog as a primary means to measure theimmediate outlook for our business.  Wedefine “backlog” at any given point in time to consist of all firm, unfulfilledpurchase orders and commitments at that time. Generally speaking, we expect to fill most backlog orders within thefollowing 12 months.  From experience, most firm purchaseorders and commitments are realized. However, since orders may be rescheduled or canceled, and a significantportion of our net sales is derived from a small number of customers, backlogis not necessarily indicative of future sales levels.  Moreover, we cannot be sure of when duringthe future 12-month period we will be able to recognize revenue correspondingto our backlog; nor can we be sure that revenues corresponding to our backlogwill not fall into periods beyond the 12-month horizon.

Ourbacklog with respect to the Explosion Metalworking segment increased toapproximately $52,372 at June 30, 2006 from approximately $42,311 at March 31,2006 and $41,966 at December 31, 2005. The backlog as of June 30, 2006 hasincreased because it includes our largest ever order in the amount ofapproximately $11,000 related to an Eastern European refinery project.  We expect to ship the majority of this orderduring the fourth quarter of 2006.

**Three and Six Months Ended June 30,2006 Compared to Three and Six Months Ended June 30, 2005**

*Net sales*
| ** ** | ** ** | **Three Months Ended  June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------|------------|-------------------------------------------------|------------|------------|------------|------------|------------|
| ** ** | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2006**                                        | ** ** | **2005**   | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales  |       | $                                               | 27,754     |       | $          | 18,376     |       | $ | 9,378 |   | 51.0 | % |
|            |            |                                                 |            |            |            |            |            |  |  |  |  |  |

 
| ** ** | ** ** | **Six Months Ended  June 30,** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------|------------|--------------------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | ** **                     | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2006**                       | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                              | 52,928     |       | $          | 35,886         |       | $ | 17,042 |   | 47.5 | % |
|            |            |                                |            |            |            |                |            |  |  |  |  |  |

 

Netsales for the second quarter of 2006 increased 51.0% to $27,754 from $18,376 inthe second quarter of 2005. Explosive Metalworking sales increased 54.5% to$26,649 in the three months ended June 30, 2006 (96% of total sales) from$17,247 in the same period of 2005 (94% of total sales). The ExplosiveMetalworking sales increase reflects a 58.0% increase in sales by ourU.S.-based operations and a 46.2% U.S. dollar sales increase at NobelcladEurope. Net sales for the six months ended June 30, 2006 increased 47.5% to$52,928 from $35,886 in the same period of 2005.  Sales for our Explosive Metalworking segmentincreased 48.5% to $50,823 in the first six months of 2006 (96% of total sales)from $34,214 for the first six months of 2005 (95% of total sales). Theyear-to-date increase in the Explosive Metalworking segment’s sales reflects a54.3% increase in U.S. clad sales and a 36.3% U.S. dollar sales increase atNobelclad Europe.  The year-to-yearincrease in worldwide Explosive Metalworking sales is principally attributableto the improved economic condition of the industries that this business segmentserves. Our net sales are likely to continue to fluctuate fromquarter-to-quarter.  While we expect netsales for the second half of 2006 to be comparable to those reported for thefirst half of the year, net sales for the third quarter are expected to be downfrom those reported in the first and second quarters.

AMKWelding contributed $1,105 to second quarter 2006 sales (4% of total sales)versus sales of $1,129 in the second quarter of 2005 (6% of total sales).  AMK Welding’s year to date 

23

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2006 sales were$2,105 (4% of total sales) compared to $1,672 (5% of total sales) in year todate 2005 sales.

*Gross profit*
| ** **                             | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                             | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit                           |       | $                                | 9,921      |       | $          | 5,215          |       | $ | 4,706 |   | 90.2 | % |
| Consolidated gross  profit margin rate |       | 35.7                             | %          | 28.4       | %          |           |       |   |   |
|                                        |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **                            | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | **June 30,**         | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2006**             | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit                          |       | $                    | 19,201     |       | $          | 9,866          |       | $ | 9,335 |   | 94.6 | % |
| Consolidated gross profit margin rate |       | 36.3                 | %          | 27.5       | %          |           |       |   |   |
|                                       |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Gross profit increased by 90.2% to $9,921 for thethree months ended June 30, 2006 from $5,215 for the three months ended June30, 2005. Our second quarter 2006 consolidated gross profit margin rateincreased to 35.7% from 28.4% in the second quarter of 2005. The gross profitmargin for Explosive Metalworking increased from 27.8% in the second quarter of2005 to 36.3% in the second quarter of 2006 and the gross profit margin for AMKWelding decreased to 24.9% in the second quarter of 2006 from 37.6% in thesecond quarter of 2005. The increased gross profit margin rate for ExplosiveMetalworking reflects gross margin rates of 37.6% and 32.8% in the secondquarter of 2006 for our U.S.-based clad operations and Nobelclad Europe,respectively, as compared to gross margin rates of 29.6% and 23.4%,respectively, in 2005.

For the six months ended June 30, 2006, gross profitincreased to $19,201 from $9,866 for the same period of 2005, a 94.6%increase.  Our year to date consolidatedgross profit margin rate increased to 36.3% from 27.5% for the first six monthsof 2005.  The gross profit margin ratefor Explosive Metalworking increased to 36.8% from 27.7%, reflecting increasedgross profit margin rates of 38.3% and 33.1% for the first half of 2006 for ourU.S.-based clad operations and Nobelclad Europe, respectively, as compared togross margin rates of 29.9% and 23.1%, respectively, in 2005.  For the six months ended June 30, 2006, thegross profit margin for AMK Welding increased to 24.9% from 22.8% for the sameperiod in 2005.

The gross margin improvements for ExplosiveMetalworking relates primarily to the sales increases discussed above and theresultant more favorable absorption of fixed manufacturing overhead expenses.The Explosive Metalworking gross margin increase also reflects favorablechanges in product mix and higher average prices in 2006 with respect to bothour U.S. and European operations. The gross profit margin typically fluctuatesfrom one quarter to the next for various reasons, including a change in productmix. Our gross margins are likely to continue to fluctuate fromquarter-to-quarter.  In light of expectedlower net sales in the third quarter of 2006 as discussed above, we expect thatour gross margins for the third quarter will be lower than they were in thefirst two quarters.  However, based uponsales that we currently expect to report for the fourth quarter, we expect ourfourth quarter gross margins to meet or exceed the gross margin levels that wereported for the first half of the year.

24

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*General and administrative expenses*
| ** **                             | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                             | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General & administrative  expenses |       | $                                | 1,153      |       | $          | 898            |       | $ | 255 |   | 28.4 | % |
| Percentage of net sales                |       | 4.2                              | %          | 4.9        | %          |           |       |   |   |
|                                        |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **                             | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | **June 30,**         | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                             | ** ** | **2006**             | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General &  administrative expenses |       | $                    | 2,681      |       | $          | 1,707          |       | $ | 974 |   | 57.1 | % |
| Percentage of net sales                |       | 5.1                  | %          | 4.8        | %          |           |       |   |   |
|                                        |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Generaland administrative expenses increased by $255, or 28.4%, to $1,153 in thesecond quarter of 2006 from $898 in the second quarter of 2005.  This increase in general and administrativeexpenses reflects a $206 increase for our U.S. operations and a $49 increase inour European general and administrative expenses.  Expense increases for our U.S. operations,which include all corporate headquarters expenses, reflect an $83 increase in accruedincentive compensation expense, a $35 increase in legal fees, a $29 increase inNASDAQ fees relating to the transfer of our listing to the NASDAQ NationalMarket from the NASDAQ Capital Market, and the impact of annual salaryadjustments.  As a percentage of netsales, general and administrative expenses decreased to 4.2% in the secondquarter of 2006 from 4.9% in the second quarter of 2005.

Generaland administrative expenses for the six months ended June 30, 2006 totaled$2,681 compared to $1,707 for the same period of 2005.  This reflects an increase of 57.1%.  The $974 increase in 2006 general andadministrative expenses for the six-month period reflects a $940 increase inspending by our U.S. operations and a $34 increase in spending by our Europeanoperations.  Increased expenses for ourU.S. operations reflect stock-based compensation expense of $294, an aggregateincrease of $125 in audit, tax advisory, consulting and investor relationsexpenses, a $198 increase in accrued incentive compensation expense, and theimpact of annual salary adjustments.  The2006 increases in audit, tax advisory, consulting and investor relationsexpenses relate primarily to continued compliance with the Sarbanes-Oxley Actof 2002, tax planning initiatives and increased investor relationsactivities.  As a percentage of netsales, general and administrative expenses increased to 5.1% in the first halfof 2006 from 4.8% in the first half of 2005.

25

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*Selling expenses*
| ** **              | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **              | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses        |       | $                                | 946        |       | $          | 870            |       | $ | 76 |   | 8.7 | % |
| Percentage of net sales |       | 3.4                              | %          | 4.7        | %          |           |       |   |   |
|                         |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **              | ** ** | **Six Months Ended  June 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|-------------------------|------------|--------------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **2006**                       | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses        |       | $                              | 2,270      |       | $          | 1,995          |       | $ | 275 |   | 13.8 | % |
| Percentage of net sales |       | 4.3                            | %          | 5.6        | %          |           |       |   |   |
|                         |            |                                |            |            |            |                |            |  |  |  |  |  |

 

Sellingexpenses increased by 8.7% to $946 in the second quarter of 2006 from $870 inthe second quarter of 2005.  The $76increase in selling expenses reflects increases of $24 and $52 for our U.S.operations and European operations, respectively.  Increased spending in our U.S. operationsreflects the impact of annual salary adjustments and higher travel expensesduring the quarter.  The increasedexpenses for our European operations reflect higher sales commissions attributableto increased sales levels and the impact of annual salary adjustments.  As a result of the significant increase in2006 net sales, selling expenses as a percentage of net sales decreased to 3.4%in the second quarter of 2006 from 4.7% in the second quarter of 2005.

Selling expenses increased by 13.8% to $2,270 in thefirst half of 2006 from $1,995 in the same period of 2005.  The $275 increase in 2006 selling expensesfor the six month period includes a $199 increase for our U.S. operations and a$76 for our European operations.  Theyear to date increased spending in our U.S. operations reflects $145 for salescommission on a large export order, the impact of annual salary adjustments andhigher travel expenses during the first half of the year.  The $76 increase in expenses for our Europeanoperations reflect higher sales commissions attributable to increased saleslevels and the impact of annual salary adjustments.  As a percentage of net sales, sellingexpenses decreased to 4.3% in the first six months of 2006 from 5.6% in thefirst six months of 2005.

*Income from operations of continuing operations*
| ** **                                      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                                      | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                      | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from operations of continuing operations |       | $                                | 7,822      |       | $          | 3,447          |       | $ | 4,375 |   | 126.9 | % |
|                                                 |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **                                      | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                                      | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                      | ** ** | **2006**             | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from operations of continuing operations |       | $                    | 14,250     |       | $          | 6,164          |       | $ | 8,086 |   | 131.2 | % |
|                                                 |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Incomefrom operations increased by 126.9% to $7,822 in the second quarter of 2006from $3,447 in the second quarter of 2005. Explosive Metalworking reported income from operations of $7,717 in thesecond quarter of 2006 as compared to $3,104 in the second quarter of2005.  This 

26

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148.6% increase islargely attributable to the 54.5% sales increase discussed above.  AMK Welding reported income from operationsof $122 for the three months ended June 30, 2006, compared to $343 for the sameperiod of 2005.  The decline in AMK’soperating income against flat quarter-to-quarter sales is attributable to increasesin manufacturing overhead and administrative expenses that relate principallyto headcount additions as AMK readies itself for expected higher productionlevels during the last half of the year and beyond.

Incomefrom operations increased by 131.2% to $14,250 in the first six months of 2006from $6,164 in the first six months of 2005. Explosive Metalworking reported income from operations of $14,373 in thefirst half of 2006 as compared to $5,937 in the first half of 2005.  This 142.1% increase is largely attributableto the 48.5% sales increase discussed above. AMK Welding reported income from operations of $230 for the first sixmonths of 2006, compared to the $227 that it reported for the first six monthsof 2005.

Incomefrom operations of continuing operations for the three and six months endedJune 30, 2006 includes $17 and $353, respectively, of stock-based compensationexpense. This expense is not allocated to our two business segments and thus isnot included in the above second quarter and year to date 2006 operating incometotals for Explosive Metalworking and AMK Welding. The $319 decline in secondquarter stock-based compensation expense as compared to that for the firstquarter of 2006 relates principally to the cancellation of certain unvestedoptions held by four members of our board of directors who represented SNPE,Inc., our former majority stockholder, and who resigned from our boardfollowing the sale of all shares held by SNPE, Inc.  Stock-based compensation expense associatedwith currently outstanding stock-based compensation awards is expected toapproximate $147 during the second half of 2006.  If any new stock-based compensation awardsare granted to employees and directors during the last half of 2006, expenseassociated with any such awards would add to this total.

*Interest income (expense), net*
| ** **                      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                      | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                      | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income  (expense), net |       | $                                | 132        |       | $          | (66            | )          | $ | 198 |   | NM |   |
|                                 |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **                     | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                     | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                     | ** ** | **2006**             | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income (expense), net |       | $                    | 225        |       | $          | (148           | )          | $ | 373 |   | NM |   |
|                                |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Netinterest income (expense) improved by $198, to a net of $132 in interest incomefor the second quarter 2006 from a net of $66 in interest expense in the secondquarter of 2005.  We recorded netinterest income of $225 for the first six months of 2006 compared to a netinterest expense of $148 for the first six months of 2005, an improvement of$373.  This change in net interest income(expense) reflects a significant decrease in average outstanding borrowingsyear-to-year and the large cash balances we are currently carrying.

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*Income tax provision*
| ** **           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **           | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **           | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax provision |       | $                                | 2,938      |       | $          | 1,279          |       | $ | 1,659 |   | 129.7 | % |
| Effective tax rate   |       | 37.0                             | %          | 37.7       | %          |           |       |   |   |
|                      |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **           | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **           | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **           | ** ** | **2006**             | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax provision |       | $                    | 5,317      |       | $          | 2,269          |       | $ | 3,048 |   | 134.3 | % |
| Effective tax rate   |       | 36.8                 | %          | 37.6       | %          |           |       |   |   |
|                      |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Werecorded an income tax provision of $2,938 in the second quarter of 2006compared to $1,279 in the second quarter of 2005.  The effective tax rate decreased to 37.0% inthe second quarter of 2006 from 37.7% in the second quarter of 2005.  The income tax provisions for the threemonths ended June 30, 2006 and 2005 include $2,337 and $1,036, respectively,related to U.S. taxes, with the remainder relating to foreign taxes associatedwith the operations of Nobelclad and its Swedish subsidiary, Nitro Metall.

Forthe six months ended June 30, 2006, we recorded an income tax provision of$5,317 compared to $2,269 for the same period of 2005.  The effective tax rate decreased to 36.8% forthe first six months of 2006 from 37.6% for the first six months of 2005.  The income tax provisions for the six monthsended June 30, 2006 and 2005 include $4,181 and $1,815, respectively, relatedto U.S. taxes, with the remainder relating to foreign taxes associated with theoperations of Nobelclad and Nitro Metall.

*Income from discontinued operations*
| ** **                           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                           | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                           | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from  discontinued operations |       | $                                | —     |       | $          | —         |       | $ | — |   | NA |   |
|                                      |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **                          | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                          | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                          | ** ** | **2006**             | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from discontinued operations |       | $                    | 1,357      |       | $          | —         |       | $ | 1,357 |   | NA |   |
|                                     |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Wecompleted the divestiture of our Spin Forge division in September 2004.  Under the principal divestiture agreement, wesold the assets of the Spin Forge division to a third party, excluding certainequipment and real estate which were leased or subleased to the buyer, for asales price of approximately $1,665 to be paid in cash according to thearrangement set forth in the divestiture agreement.  With respect to the Spin Forge manufacturingequipment and tooling, we recorded an after tax impairment loss of $619 basedupon the difference between the carrying 

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value of theequipment and the present value of the future minimum equipment lease paymentsfrom the lessee plus estimated liquidation proceeds at the end of the minimumlease term.

Weheld a purchase option on the Spin Forge real estate that allowed us topurchase the real estate for $2,880, a price that was below the real estate’sappraised value.  We completed the saleof the purchase option on the Spin Forge real estate on January 10, 2006.  The option rights were sold to the propertyowner for $2,300.  We recorded a pre-taxgain of approximately $2,197 on this transaction, which was reported indiscontinued operations, net of related taxes. We continue to own the Spin Forge manufacturing equipment and toolingand lease it to the third party purchaser of the Spin Forge business.  To the extent that this third party does notexercise its option to purchase all or a portion of the leased equipment andtooling when the lease term expires on January 1, 2007, we plan to immediatelyliquidate such equipment.

# **Liquidity and Capital Resources**

Wehave historically financed our operations from a combination of internallygenerated cash flow, revolving credit borrowings, various long-term debtarrangements and the issuance of common stock. We believe that cash flow fromoperations 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, including the expansion that we have initiated atour Mount Braddock, Pennsylvania manufacturing facility. Nevertheless, ourability to generate sufficient cash flows from operations will depend upon oursuccess in executing our strategies, including our ability to secure newcustomer orders at our operating divisions, and to continue to implementcost-effective internal processes.

*Debt and other contractual obligations andcommitments*

Any restriction on the availability of borrowingunder our credit facilities could negatively affect our ability to meet futurecash requirements. Our existing loan agreements include various covenants andrestrictions, certain of which relate to the incurrence of additionalindebtedness, mortgaging, pledging or disposition of major assets andmaintenance of specified financial ratios. As of June 30, 2006, we were in compliance with all financial covenantsand other provisions of our debt agreements.

The Company’s principal cash flows related to debtobligations and other contractual obligations and commitments have notmaterially changed since December 31, 2005.

*Cash flows from operating activities*

Netcash flows provided by operating activities for the six months ended June 30,2006 totaled $8,337.  Significant sourcesof operating cash flow included net income from continuing operations of$9,142, non-cash depreciation and amortization expense of $659, stock-basedcompensation of $353, $656 from provision for deferred income taxes and netnegative changes in various components of working capital in the amount of$2,473.  Net negative changes in workingcapital included an increase in accounts receivable, inventories and prepaidexpenses of $373, $1,618 and $427, respectively and a decrease in accruedexpenses and other liabilities of $1,487. These negative changes in working capital were partially offset by anincrease in accounts payable of $1,432.

Netcash flows provided by operating activities for the six months ended June 30,2005 totaled $3,159.  Significant sourcesof operating cash flow included net income of $3,763, non-

 

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cashdepreciation and amortization expense of $743, and $2,294 from the tax benefitrelated to stock options exercised during the year.  These sources of cash flow were partiallyoffset by net negative changes of $3,631 in various components of working capital.  Net negative changes in working capitalduring the first half of 2005 include an increase in accounts receivable,inventories and prepaid expenses of $415, $3,376 and $1,620 respectively.  It also includes a decrease in accruedexpenses and other liabilities of $198. These negative changes in working capital were partially offset by anincrease in accounts payable of $1,978.

*Cash flows from investing activities*

Netcash flows provided by investing activities for the first six months of 2006were $1,736 and consisted primarily of $1,950 from the sale of marketablesecurities and $2,197 for investment activities of discontinued operations thatconsisted of the sale of the Spin Forge real estate purchase option.  These cash inflows were partially offset by$2,561 in capital expenditures.

Netcash flows used by investing activities for the first six months of 2005totaled $354 and consisted primarily of $1,376 in capital expenditures that waslargely offset by an $874 payment received on a portion of the outstandingreceivable relating to the Spin Forge divestiture.

*Cash flows from financing activities*

Netcash flows used in financing activities for the six months ended June 30, 2006were $1,943.  Significant uses of cashfor financing activities included a $1,766 payment of annual dividends, a $356principal payment on a term loan with French bank, a $47 repayment on relatedparty line of credit and industrial development revenue bond principal paymentsof $90.  Sources of cash flow fromfinancing activities include $207 in net proceeds from the issuance of commonstock relating to the exercise of stock options and $94 for tax benefitsrelated to the exercise of stock options.

Netcash flows used in financing activities for the six months ended June 30, 2005were $3,266.  Significant uses of cashfor financing activities included net repayments on bank lines of credit of$3,208, final principal payments on the SNPE term loan of $667, industrialdevelopment revenue bond principal payments of $490 and a principal payment ona term loan with French bank of $373. Sources of cash flow from financing activities included net borrowingson related party lines of credit of $259 and $1,181 in net proceeds from theissuance of common stock relating to the exercise of stock options and employeestock purchases under our employee stock purchase plan.

*Payment of Dividends*

Wemay pay annual dividends subject to capital availability and periodicdeterminations that cash dividends are in the best interests of our stockholders,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 factors thatour board of directors deems relevant. Any decision to pay cash dividends is and will continue to be at thediscretion of the board of directors.

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**Critical Accounting Policies**

Ourhistorical consolidated financial statements and notes to our historicalconsolidated financial statements contain information that is pertinent to ourmanagement’s discussion and analysis of financial condition and results ofoperations. Preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires that our managementmake estimates, judgments and assumptions that affect the reported amounts ofassets, liabilities, revenues and expenses, and the disclosure of contingentassets and liabilities. However, the accounting principles used by us generallydo not change our reported cash flows or liquidity. Interpretation of theexisting rules must be done and judgments made on how the specifics of a givenrule apply to us.

Inmanagement’s opinion, the more significant reporting areas impacted bymanagement’s judgments and estimates are revenue recognition, assetimpairments, impact of foreign currency exchange rate risks, income taxes andstock-based compensation. Management’s judgments and estimates in these areasare based on information available from both internal and external sources, andactual results could differ from the estimates, as additional informationbecomes known.  We believe the followingto be our most critical accounting policies.

*Revenue recognition*

Salesof clad metal products and welding services are generally based upon customerspecifications set forth in customer purchase orders and require us to providecertifications relative to metals used, services performed and the results ofany non-destructive testing that the customer has requested be performed.  All issues of conformity of the product tospecifications are resolved before the product is shipped and billed.  Revenue is recognized only when all four ofthe following criteria have been satisfied: persuasive evidence of anarrangement exists; the price is fixed or determinable; delivery has occurred;and collection is reasonably assured. For contracts that require multiple shipments, revenue is recorded onlyfor the units included in each individual shipment.  If, as a contract proceeds toward completion,projected total cost on an individual contract indicates a potential loss, weprovide currently for such anticipated loss.

*Asset impairments*

Wereview our long-lived assets and certain identifiable intangibles to be heldand used by us for impairment whenever events or changes in circumstancesindicate their carrying amount may not be recoverable. In so doing, we estimatethe future 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 and certain identifiableintangibles to be disposed of, if any, are reported at the lower of carryingamount or fair value less cost to sell.

*Goodwill*

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

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Theentire amount of goodwill, which had a carrying value of $847 on our balancesheet as of June 30, 2006, relates to our U.S. operations of the ExplosiveMetalworking segment.  Based on theanalysis performed in the fourth quarter of 2005, no impairment was recorded tothe carrying value of goodwill.

*Impact of foreign currency exchange rate risks*

Thefunctional currency for our foreign operations is the applicable local currencyfor each affiliate company. Assets and liabilities of foreign subsidiaries forwhich the functional currency is the local currency are translated at exchangerates in effect at period-end, and the statements of operations are translatedat the average exchange rates during the period.  Exchange rate fluctuations on translating foreigncurrency financial statements into U.S. dollars that result in unrealized gainsor losses are referred to as translation adjustments. Cumulative translationadjustments are recorded as a separate component of stockholders’ equity andare included in other cumulative comprehensive income (loss). Transactionsdenominated in currencies other than the local currency are recorded based onexchange rates at the time such transactions arise. Subsequent changes inexchange rates result in transaction gains and losses, which are reflected inincome as unrealized (based on period-end translations) or realized uponsettlement of the transactions. Cash flows from our operations in foreigncountries are translated at actual exchange rates when known, or at the averagerate for the period. As a result, amounts related to assets and liabilitiesreported in the consolidated statements of cash flows will not agree to changesin the corresponding balances in the consolidated balance sheets. The effectsof exchange rate changes on cash balances held in foreign currencies arereported as a separate line item below cash flows from financing activities.

*Income taxes*

Weaccount for income taxes in accordance with Statement of Financial AccountingStandards 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 or tax returns.  Deferred tax assets and liabilities aredetermined based on the temporary differences between the ConsolidatedFinancial Statement base and the tax base of assets and liabilities usingenacted tax rates in effect for the year in which the differences are expectedto reverse.  We routinely evaluate deferredtax assets to determine if they will more likely than not be recovered fromfuture projected taxable income and record a valuation allowance accordingly.

During2005, we completed an analysis of prior year tax credits and relateditems.  As a result of the analysis, wefiled amended federal and state income tax returns.  The amended state returns reported additionalnet operating losses and credits above the amounts we had previously recordedon our books and records.  In assessingthese additional losses and credits, we determined that the utilization of aportion of these was not probable, due to potential changes in the states inwhich we have income tax nexus.  Thus, werecorded a net valuation allowance of approximately $177 against the deferredtax assets during 2005.  Due to ourearnings in the first half of 2006, our projected utilization of the netoperating losses and tax credits is more favorable and, as a result, thevaluation at June 30, 2006 has been reduced to $156.

*Stock-Based Compensation Expense*

Weaccount for stock-based compensation in accordance with the provisions ofStatement of Financial Accounting Standards No. 123 (revised 2004), *Share-Based Payment*(“SFAS 123R”).  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 

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over the requisiteservice period of the award.  Determiningthe appropriate fair value model and calculating the fair value of stock-basedawards at the grant date requires judgment, including estimating stock pricevolatility, forfeiture rates and expected option life.

**Recent Accounting Pronouncements**

**In December 2004, the FinancialAccounting Standards Board (“FASB”) issued SFAS 123R, which is a revision ofStatement of Financial Accounting Standards No. 123 (“SFAS 123”). SFAS 123Rrequires measurement of all employee stock-based compensation awards using afair-value method and the recording of such expense in the consolidated financialstatements. In addition, the adoption of SFAS 123R requires additionalaccounting related to the income tax effects and disclosure regarding the cashflow effects resulting from share-based payment arrangements. In January 2005,the SEC issued Staff Accounting Bulletin No. 107, which provides supplementalimplementation guidance for SFAS 123R. We selected the Black-Scholesoption-pricing model as the most appropriate fair-value method for our awardsand will recognize compensation cost on a straight-line basis over our awards’vesting periods. We adopted SFAS 123R in the first quarter of 2006, whichresulted in an after tax reduction in net income of $284 for the first sixmonths of 2006.**

**In July 2006, the FASB issuedFASB Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes — an interpretation of FASB No. 109* (“FIN 48”),which clarifies the accounting and disclosure for uncertainty in taxpositions.  FIN 48 seeks to harmonizecertain accounting practices associated with the recognition and measurement ofincome taxes.  This interpretation iseffective for fiscal years beginning after December 15, 2006.  The Company has not yet determined the impactthis interpretation will have on our results from operations or financialposition.**

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** **

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

There have been no events that materially affect our quantitative andqualitative disclosure about market risk from that reported in our AnnualReport on Form 10-K for the year ended December 31, 2005.

**ITEM 4.  Controls andProcedures**

The Company maintains disclosure controls and procedures that aredesignated 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 onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

As of June 30, 2006, the Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in Exchange Act Rule 13a-15(e)).  Based on that evaluation, the Company’s ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective.  There have been no significant changes in theCompany’s internal controls or in other factors that could significantly affectinternal controls subsequent to the date the Company completed its evaluation.

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

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**Part II - OTHER INFORMATION**

**Item 1.Legal Proceedings**

None.

**Item 1A. RiskFactors**

Our 2005 Annual Report on Form 10-K includes a detailed discussion ofour risk factors.  The informationpresented below updates and should be read in conjunction with the risk factorsand information disclosed in our Form 10-K.

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

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

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

None.

**Item 3.Defaults Upon Senior Securities**

None.

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

None.

**Item 5.Other Information**

None.

**Item 6.**

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

 

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| 32.1   | — | Certification of the President and Chief Executive  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                        |
| 32.2   | — | Certification of the Vice President and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

#####  

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#####  

##### **SIGNATURES**

In accordance withthe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
| ** **            | **DYNAMIC MATERIALS CORPORATION**                                                                                                       |
|-----------------------|-----------------------------------------------------------------------------------------------------------------------------------------|
|                  | (Registrant)                                                                                                                            |
|                  |                                                                                                                                    |
| Date: August 3,  2006 | /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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