** **

**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 September 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 theregistrant:  (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements 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.    Largeaccelerated filer  o    Acceleratedfiler  x    Non-acceleratedfiler  o

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

The number of shares of Common Stock outstandingwas 11,948,735 as of October 31, 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 September 30, 2006 (unaudited) and December 31, 2005                             |   |   |
|                                                                                                  | Consolidated  Statements of Operations for the three and nine months ended September 30,  2006 and 2005 (unaudited) |   |   |
|                                                                                                  | Consolidated  Statement of Stockholders’ Equity for the nine months ended September 30,  2006 (unaudited)      |   |   |
|                                                                                                  | Consolidated  Statements of Cash Flows for the nine months ended September 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**

DYNAMICMATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollarsin Thousands)

 
| ** **                                                                                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                   | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                                                                                   | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| ASSETS                                                                                       |       |                   |       |                  |       |
|                                                                                         |       |                   |       |                  |       |
| CURRENT ASSETS:                                                                              |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                   |       | $                      | 19,161     |                  | $          | 5,763 |   |
| Marketable  securities                                                                       |       | —                 |       | 1,950                 |       |
| Accounts  receivable, net of allowance for doubtful accounts of $400 and $301,  respectively |       | 19,884                 |       | 15,576                |       |
| Inventories                                                                                  |       | 14,025                 |       | 11,869                |       |
| Prepaid expenses  and other                                                                  |       | 788                    |       | 822                   |       |
| Current portion  of other receivables related to discontinued operations                     |       | 678                    |       | —                |       |
| Current deferred  tax assets                                                                 |       | 665                    |       | 572                   |       |
|                                                                                         |       |                   |       |                  |       |
| Total current  assets                                                                        |       | 55,201                 |       | 36,552                |       |
|                                                                                         |       |                   |       |                  |       |
| PROPERTY, PLANT AND  EQUIPMENT                                                               |       | 28,179                 |       | 22,635                |       |
| Less -  Accumulated depreciation                                                             |       | (11,247                | )          | (10,063               | )          |
|                                                                                         |       |                   |       |                  |       |
| Property, plant  and equipment, net                                                          |       | 16,932                 |       | 12,572                |       |
|                                                                                         |       |                   |       |                  |       |
| GOODWILL, net                                                                                |       | 847                    |       | 847                   |       |
|                                                                                         |       |                   |       |                  |       |
| DEFERRED TAX ASSETS                                                                          |       | 39                     |       | 819                   |       |
|                                                                                         |       |                   |       |                  |       |
| OTHER ASSETS, net                                                                            |       | 25                     |       | 101                   |       |
|                                                                                         |       |                   |       |                  |       |
| OTHER RECEIVABLES  RELATED TO DISCONTINUED OPERATIONS                                        |       | —                 |       | 681                   |       |
|                                                                                         |       |                   |       |                  |       |
| ASSETS OF DISCONTINUED  OPERATIONS                                                           |       | 651                    |       | 3,739                 |       |
|                                                                                         |       |                   |       |                  |       |
| TOTAL ASSETS                                                                                 |       | $                      | 73,695     |                  | $          | 55,311 |   |

 

The accompanying notes are anintegral part of these Condensed Consolidated Financial Statements.

4

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DYNAMICMATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATEDBALANCE SHEETS

(Dollarsin Thousands, Except Share Data)

 
| ** **                                                                                                                          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                                          | ** ** | **2006**          | ** ** | **2005**         | ** ** |
| ** **                                                                                                                          | ** ** | **(unaudited)**   | ** ** | ** **       | ** ** |
|                                                                                                                                |       |              |       |             |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                          |       |              |       |             |       |
| CURRENT LIABILITIES:                                                                                                                |       |              |       |             |       |
| Accounts payable                                                                                                                    |       | $                 | 8,182      |             | $          | 7,278 |   |
| Accrued expenses                                                                                                                    |       | 1,977             |       | 1,615            |       |
| Accrued income taxes                                                                                                                |       | 1,780             |       | 979              |       |
| Accrued employee  compensation and benefits                                                                                         |       | 2,486             |       | 2,508            |       |
| Customer advances                                                                                                                   |       | 8,026             |       | 1,885            |       |
| Related party debt                                                                                                                  |       | —            |       | 45               |       |
| Current maturities on  long-term debt                                                                                               |       | 368               |       | 528              |       |
|                                                                                                                                |       |              |       |             |       |
| Total current  liabilities                                                                                                          |       | 22,819            |       | 14,838           |       |
|                                                                                                                                |       |              |       |             |       |
| LONG-TERM DEBT                                                                                                                      |       | 368               |       | 2,221            |       |
|                                                                                                                                |       |              |       |             |       |
| DEFERRED TAX LIABILITIES                                                                                                            |       | 329               |       | 195              |       |
|                                                                                                                                |       |              |       |             |       |
| OTHER LONG-TERM LIABILITIES                                                                                                         |       | 236               |       | 222              |       |
|                                                                                                                                |       |              |       |             |       |
| LIABILITIES OF DISCONTINUED OPERATIONS                                                                                              |       | —            |       | 2,880            |       |
|                                                                                                                                |       |              |       |             |       |
| COMMITMENTS AND CONTINGENT LIABILITIES                                                                                              |       | —            |       | —           |       |
|                                                                                                                                |       |              |       |             |       |
| Total liabilities                                                                                                                   |       | 23,752            |       | 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; 11,948,735 and 11,758,920 shares issued  and outstanding, respectively |       | 597               |       | 588              |       |
| Additional paid-in  capital                                                                                                         |       | 21,676            |       | 19,778           |       |
| Retained earnings                                                                                                                   |       | 26,526            |       | 14,104           |       |
| Other cumulative  comprehensive income                                                                                              |       | 1,144             |       | 485              |       |
|                                                                                                                                |       |              |       |             |       |
| Total stockholders’  equity                                                                                                    |       | 49,943            |       | 34,955           |       |
|                                                                                                                                |       |              |       |             |       |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                    |       | $                 | 73,695     |             | $          | 55,311 |   |

 

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

5

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DYNAMICMATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED STATEMENTS OFOPERATIONS

FORTHE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(Dollarsin Thousands, Except Share Data)

(unaudited)

 
| ** **                                              | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                              | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                              | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| NET SALES                                               |       | $                                | 24,852     |                            | $          | 20,238 |   | $ | 77,781 |   | $ | 56,124 |   |
| COST OF PRODUCTS  SOLD                                  |       | 16,542                           |       | 13,970                          |       | 50,270 |   | 39,990 |   |
| Gross profit                                            |       | 8,310                            |       | 6,268                           |       | 27,511 |   | 16,134 |   |
| COSTS AND  EXPENSES:                                    |       |                             |       |                            |       |   |   |   |   |
| General and administrative expenses                     |       | 1,267                            |       | 1,020                           |       | 3,948 |   | 2,726 |   |
| Selling expenses                                        |       | 904                              |       | 849                             |       | 3,174 |   | 2,845 |   |
| Total costs and expenses                                |       | 2,171                            |       | 1,869                           |       | 7,122 |   | 5,571 |   |
| INCOME FROM  OPERATIONS OF CONTINUING OPERATIONS        |       | 6,139                            |       | 4,399                           |       | 20,389 |   | 10,563 |   |
| OTHER INCOME  (EXPENSE):                                |       |                             |       |                            |       |   |   |   |   |
| Other income (expense), net                             |       | (23                              | )          | (8                              | )          | (40 | ) | 9 |   |
| Interest expense                                        |       | (42                              | )          | (65                             | )          | (108 | ) | (233 | ) |
| Interest income                                         |       | 163                              |       | 2                               |       | 455 |   | 22 |   |
| INCOME BEFORE INCOME TAXES AND DISCONTINUED  OPERATIONS |       | 6,237                            |       | 4,328                           |       | 20,696 |   | 10,361 |   |
| INCOME TAX  PROVISION                                   |       | 2,547                            |       | 1,176                           |       | 7,865 |   | 3,445 |   |
|                                                    |       |                             |       |                            |       |   |   |   |   |
| INCOME FROM  CONTINUING OPERATIONS                      |       | 3,690                            |       | 3,152                           |       | 12,831 |   | 6,916 |   |
| DISCONTINUED  OPERATIONS:                               |       |                             |       |                            |       |   |   |   |   |
| Income from discontinued operations, net of tax         |       | —                           |       | —                          |       | 1,357 |   | — |   |
| Income from discontinued operations                     |       | —                           |       | —                          |       | 1,357 |   | — |   |
| NET INCOME                                              |       | $                                | 3,690      |                            | $          | 3,152 |   | $ | 14,188 |   | $ | 6,916 |   |
| INCOME PER SHARE  - BASIC:                              |       |                             |       |                            |       |   |   |   |   |
| Continuing operations                                   |       | $                                | 0.31       |                            | $          | 0.27 |   | $ | 1.09 |   | $ | 0.62 |   |
| Discontinued operations                                 |       | —                           |       | —                          |       | 0.11 |   | — |   |
| Net income                                              |       | $                                | 0.31       |                            | $          | 0.27 |   | $ | 1.20 |   | $ | 0.62 |   |
| INCOME PER SHARE  - DILUTED:                            |       |                             |       |                            |       |   |   |   |   |
| Continuing operations                                   |       | $                                | 0.30       |                            | $          | 0.26 |   | $ | 1.05 |   | $ | 0.58 |   |
| Discontinued operations                                 |       | —                           |       | —                          |       | 0.11 |   | — |   |
| Net income                                              |       | $                                | 0.30       |                            | $          | 0.26 |   | $ | 1.16 |   | $ | 0.58 |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING -        |       |                             |       |                            |       |   |   |   |   |
| Basic                                                   |       | 11,865,336                       |       | 11,648,502                      |       | 11,813,371 |   | 11,141,394 |   |
| Diluted                                                 |       | 12,210,791                       |       | 12,135,142                      |       | 12,216,283 |   | 12,028,562 |   |
|                                                    |       |                             |       |                            |       |   |   |   |   |
| ANNUAL DIVIDENDS  DECLARED PER COMMON SHARE             |       | $                                | —     |                            | $          | 0.10 |   | $ | 0.15 |   | $ | 0.10 |   |

 

Theaccompanying notes are an integral part of these Condensed ConsolidatedFinancial Statements

6

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DYNAMICMATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FORTHE NINE MONTHS ENDED SEPTEMBER 30, 2006

(Amountsin Thousands)

(unaudited)

 
| ** **                                                         | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Other**      | ** ** | ** ** | ** ** | ** **                   | ** ** |
|--------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|-------------------|------------|----------------|------------|------------|------------|------------------------------|------------|
| ** **                                                         | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Cumulative** | ** ** | ** ** | ** ** | **Comprehensive**            | ** ** |
| ** **                                                         | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | ** **     | ** ** | **Income** | ** ** |
| ** **                                                         | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Income**     | ** ** | **Total**  | ** ** | **for the Period** | ** ** |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Balances,  December 31, 2005                                       |       | 11,759                |       | $           | 588        |           | $          | 19,778            |       | $              | 14,104     |       | $          | 485                          |       | $ | 34,955 |   |   |   |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Shares issued in connection with stock-based  compensation         |       | 189                   |       | 9           |       | 486            |       | —            |       | —         |       | 495        |       |                         |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Shares issued in connection with the employee stock  purchase plan |       | 1                     |       | —      |       | 28             |       | —            |       | —         |       | 28         |       |                         |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Tax benefit related to stock options                               |       | —                |       | —      |       | 948            |       | —            |       | —         |       | 948        |       |                         |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Stock-based compensation                                           |       | —                |       | —      |       | 436            |       | —            |       | —         |       | 436        |       |                         |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Dividends paid                                                     |       | —                |       | —      |       | —         |       | (1,766            | )          | —         |       | (1,766     | )          |                         |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Net income                                                         |       | —                |       | —      |       | —         |       | 14,188            |       | —         |       | 14,188     |       | 14,188                       |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Change in cumulative foreign currency translation  adjustment      |       | —                |       | —      |       | —         |       | —            |       | 659            |       | 659        |       | 659                          |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Balances, September 30,  2006                                      |       | 11,949                |       | 597         |       | 21,676         |       | 26,526            |       | 1,144          |       | 49,943     |       | 14,847                       |       |
|                                                                    |            |                       |            |             |            |                |            |                   |            |                |            |            |            |                              |            |  |  |  |  |  |

 

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

7

----

 

DYNAMIC MATERIALSCORPORATION & SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDEDSEPTEMBER 30, 2006 AND 2005

(Dollars in Thousands)

(unaudited)

 
| ** **                                                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                              |       |     |       |     |       |
| Net income                                                                          |       | $        | 14,188     |     | $          | 6,916 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities - |       |     |       |     |       |
| Income from discontinued operations, net of tax                                     |       | (1,357   | )          | —   |       |
| Depreciation                                                                        |       | 1,020    |       | 1,132    |       |
| Amortization of capitalized debt issuance costs                                     |       | 50       |       | 33       |       |
| Stock-based compensation                                                            |       | 436      |       | —   |       |
| Provision for deferred income taxes                                                 |       | 923      |       | (171     | )          |
| Tax benefit related to exercise of stock options                                    |       | —   |       | 2,477    |       |
| Change in -                                                                         |       |     |       |     |       |
| Accounts receivable, net                                                            |       | (3,885   | )          | (1,003   | )          |
| Inventories                                                                         |       | (1,608   | )          | (5,126   | )          |
| Prepaid expenses and other                                                          |       | 150      |       | (1,585   | )          |
| Accounts payable                                                                    |       | 568      |       | 421      |       |
| Customer advances                                                                   |       | 5,961    |       | 264      |       |
| Accrued expenses and other liabilities                                              |       | (189     | )          | 1,186    |       |
|                                                                                |       |     |       |     |       |
| Net cash provided by operating activities                                           |       | 16,257   |       | 4,544    |       |
|                                                                                |       |     |       |     |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                              |       |     |       |     |       |
| Acquisition of property, plant and equipment                                        |       | (5,154   | )          | (1,966   | )          |
| 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                                                  |       | 219      |       | 218      |       |
| Payment received on other receivables related to  discontinued operations           |       | 3        |       | 1,016    |       |
| Cash flows provided by investing activities of  discontinued operations             |       | 2,197    |       | —   |       |
|                                                                                |       |     |       |     |       |
| Net cash flows  used in investing activities                                        |       | (785     | )          | (732     | )          |
|                                                                                     |            |          |            |          |            |  |  |

 

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

8

----

 
| ** **                                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                 |       |     |       |     |       |
| Repayments on bank lines of credit, net                                |       | —   |       | (3,216   | )          |
| Repayments on related party lines of credit, net                       |       | (47      | )          | (86      | )          |
| Payment on SNPE, Inc. term loan                                        |       | —   |       | (667     | )          |
| Payment on industrial development revenue bond                         |       | (1,720   | )          | (745     | )          |
| Payment on term loan with French bank                                  |       | (361     | )          | (366     | )          |
| Payment of dividends                                                   |       | (1,766   | )          | (1,155   | )          |
| Change in other long-tem liabilities                                   |       | 22       |       | 23       |       |
| Net proceeds from issuance of common stock to  employees and directors |       | 523      |       | 1,481    |       |
| Tax benefit related to exercise of stock options                       |       | 948      |       | —   |       |
|                                                                   |       |     |       |     |       |
| Net cash flows used in financing activities                            |       | (2,401   | )          | (4,731   | )          |
|                                                                   |       |     |       |     |       |
| EFFECTS OF  EXCHANGE RATES ON CASH                                     |       | 327      |       | (117     | )          |
|                                                                   |       |     |       |     |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                  |       | 13,398   |       | (1,036   | )          |
|                                                                   |       |     |       |     |       |
| CASH AND CASH  EQUIVALENTS, beginning of the period                    |       | 5,763    |       | 2,404    |       |
|                                                                   |       |     |       |     |       |
| CASH AND CASH  EQUIVALENTS, end of the period                          |       | $        | 19,161     |     | $          | 1,368 |   |
|                                                                   |       |     |       |     |       |
| NON-CASH  FINANCING ACTIVITY:                                          |       |     |       |     |       |
| Conversion of  SNPE convertible subordinated note into common stock    |       | $        | —     |     | $          | 1,200 |   |

 

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

9

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

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

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

**(unaudited)**

**1.      BASIS OF PRESENTATION**

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**

**Principles of Consolidation**

**The Condensed ConsolidatedFinancial Statements include the accounts of the Company and its subsidiaries,all of which are wholly-owned. All significant intercompany accounts, profitsand 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 clad metal products and welding servicesare generally based upon customer specifications set forth in customer purchaseorders and require the Company to provide certifications relative to metalsused, services performed and the results of any non-destructive testing thatthe customer has requested be performed. Any non-conformance issues are resolved before the product is shippedand billed.  Revenue is recognized onlywhen all four of the following criteria have been satisfied: persuasiveevidence of an arrangement exists; the price is fixed or determinable; deliveryhas occurred; and collection is reasonably assured.  For contracts that require multipleshipments, revenue is recorded only for the units included in each individualshipment.  If, as a contract proceedstoward completion, projected total cost on an individual contract indicates apotential loss, the Company recognizes such anticipated loss at such time.**

**Loan toRelated Party**

**Nobelclad Europe, S.A. (“Nobelclad”) had a Euro-denominatedcash management agreement with SNPE, the parent company of SNPE, Inc., theCompany’s former majority stockholder, which provided for loans to or fromeither party of up to approximately $3,400, based on the December 31, 2005exchange rates. Amounts outstanding under this agreement bore interest atEURIBOR plus 1.5% annually. Due to Nobelclad’s excess cash position during thefirst quarter of 2006, it began advancing cash to SNPE through thisintercompany cash agreement. At March 31, 2006, these advances to SNPE totaled1,003 Euros ($1,211). The interest rate earned on these advances exceeded theinterest rate that Nobelclad could earn on excess cash and cash equivalentsheld at its local bank. The agreement allowed Nobelclad to request repayment onthe advances at any time. The balance outstanding at March 31, 2006 was repaidin full in April 2006.**

**EarningsPer Share**

**Basic earnings per share (“EPS”) is computed bydividing net income by the weighted average number of shares of common stockoutstanding during the period.  DilutedEPS recognizes the potential dilutive effects of dilutive securities.  The following represents a reconciliation ofthe numerator and denominator used in the calculation of basic and diluted EPS:**
| ** **                                           | ** ** | **For the three months ended September 30, 2006** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                                                           | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                           | ** ** | **Net Income**                                                                  | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|                                                 |       |                                                                                 |       |   |   |   |   |
| Basic earnings  per share                            |       | $                                                                                    | 3,690      |   | 11,865,336 |   | $ | 0.31 |   |
|                                                 |       |                                                                                 |       |   |   |   |   |
| Dilutive effect  of options to purchase common stock |       | —                                                                               |       | 345,455 |   |   |   |
|                                                 |       |                                                                                 |       |   |   |   |   |
| Dilutive earnings per  share                         |       | $                                                                                    | 3,690      |   | 12,210,791 |   | $ | 0.30 |   |

 

11

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| ** **                                                    | ** ** | **For the three months ended September 30, 2005** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                                                           | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                                    | ** ** | **Net Income**                                                                  | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|                                                          |       |                                                                                 |       |   |   |   |   |
| Basic earnings  per share                                     |       | $                                                                                    | 3,152      |   | 11,648,502 |   | $ | 0.27 |   |
|                                                          |       |                                                                                 |       |   |   |   |   |
| Dilutive effect  of options to purchase common stock          |       | —                                                                               |       | 486,640 |   |   |   |
| Dilutive effect  of convertible subordinated note, net of tax |       | —                                                                               |       | — |   |   |   |
|                                                          |       |                                                                                 |       |   |   |   |   |
| Dilutive earnings per  share                                  |       | $                                                                                    | 3,152      |   | 12,135,142 |   | $ | 0.26 |   |

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

 
| ** **                                                    | ** ** | **For the nine months ended September 30, 2005** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                                    | ** ** | **Net Income**                                                                 | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|                                                          |       |                                                                                |       |   |   |   |   |
| Basic earnings  per share                                     |       | $                                                                                   | 6,916      |   | 11,141,394 |   | $ | 0.62 |   |
|                                                          |       |                                                                                |       |   |   |   |   |
| Dilutive effect  of options to purchase common stock          |       | —                                                                              |       | 654,202 |   |   |   |
| Dilutive effect  of convertible subordinated note, net of tax |       | 23                                                                                  |       | 232,966 |   |   |   |
|                                                          |       |                                                                                |       |   |   |   |   |
| Dilutive earnings per  share                                  |       | $                                                                                   | 6,939      |   | 12,028,562 |   | $ | 0.58 |   |

 

**Recent Accounting Pronouncements**

**In December 2004, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards No. 123(revised 2004), *Share-Based Payment*(“SFAS123R”), which is a revision of Statement of Financial Accounting Standards No.123, *Accounting for Stock-Based Compensation*(“SFAS 123”).  SFAS 123Rrequires measurement of all employee stock-based compensation awards using afair-value method and the recording of such expense in the consolidatedfinancial statements.  In addition, theadoption of SFAS 123R requires additional accounting related to the income taxeffects and disclosure regarding the cash flow effects resulting fromshare-based payment arrangements.  InJanuary 2005, the SEC issued Staff Accounting Bulletin No. 107, which providessupplemental implementation guidance for SFAS 123R.  The Company selected the Black-Scholesoption-pricing model as the most appropriate fair-value method for its awardsand will recognize compensation cost on a straight-line basis over the awards’vesting periods.  The Company adoptedSFAS 123R in the first quarter of 2006. See Note 3 for further detail.**

12

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**In July 2006, the FASB issued FASB InterpretationNo. 48, *Accounting for Uncertainty in Income Taxes – aninterpretation of FASB No. 109* (“FIN 48”), which clarifies theaccounting and disclosure for uncertainty in tax positions.  FIN 48 seeks to harmonize certain accounting practicesassociated with the recognition and measurement of income taxes.  This interpretation is effective for fiscalyears beginning after December 15, 2006. The Company has not yet determined the impact this interpretation willhave on its results from operations or financial position.**

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

**Through its 1997 Equity Incentive Plan (“1997 Plan”),the Company**had provided for grants of both incentive stock options and non-statutorystock options. On September 21, 2006, the Company’s stockholders approved, andthe Company adopted, the 2006 Stock Incentive Plan (“2006 Plan”).  Upon the adoption of the 2006 Plan, the 1997Plan was terminated with respect to new grants of stock options; however, all unexercisedoptions previously granted under the 1997 Plan remain outstanding.  The 2006 Plan provides for the grant of varioustypes of equity-based incentives, including stock options, restricted stock,restricted stock units, stock appreciation rights, performance shares,performance units and other stock-based awards. As of September 30, 2006, the only awards granted under the 2006 Planwere 25,000 shares of restricted stock.

**Prior to January 1, 2006, the Company accounted forits stock-based compensation plan under the recognition and measurementprovisions of Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*(“APB25”) and related interpretations, as permitted by SFAS 123.  Accordingly, no stock-based compensationexpense was recognized in the Consolidated Statements of Operations for thethree and nine months ended September 30, 2005 because the options grantedunder the Company’s stock-based compensation plan had exercise prices equal tothe market 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.  Under thetransition method, compensation cost recognized in the three and nine monthsended September 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 the grant date fair value estimated inaccordance with SFAS 123R.**

**Prior to the adoption of SFAS 123R, the Companypresented all tax benefits of deductions resulting from the exercise of stockoptions as operating cash flows in the Consolidated Statements of CashFlows.  SFAS 123R requires tax benefitsresulting from deductions in excess of the compensation cost recognized forthose options (“excess tax benefits”) to be classified as financing cashflows.  The $948 excess tax benefitclassified as a financing cash inflow in the Consolidated Statements of CashFlows for the nine months ended September 30, 2006 would have been classifiedas an operating cash inflow if the Company had not adopted SFAS 123R.**

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**The following table sets forth the total stock-basedcompensation expense included in the Consolidated Statements of Operations as aresult of adopting SFAS 123R on January 1, 2006, and the related decrease inpretax income and net income and earnings per share compared to what it wouldhave reported had it continued to account for stock-based compensation underAPB 25:**
|                                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **September 30, 2006** | ** ** | **September 30, 2006** | ** ** |
| Cost of products  sold                                 |       | $                                | 9          |                             | $          | 36 |   |
| General and  administrative expense                    |       | 59                               |       | 353                              |       |
| Selling expense                                        |       | 15                               |       | 47                               |       |
| Stock-based  compensation expense before income taxes  |       | 83                               |       | 436                              |       |
| Income tax  benefit                                    |       | (16                              | )          | (85                              | )          |
| Stock-based  compensation expense, net of income taxes |       | $                                | 67         |                             | $          | 351 |   |
|                                                   |       |                             |       |                             |       |
| Earnings per  share:                                   |       |                             |       |                             |       |
| Basic- income before income taxes                      |       | $                                | 0.01       |                             | $          | 0.04 |   |
| Basic - net income                                     |       | $                                | 0.01       |                             | $          | 0.03 |   |
| Diluted - income before income taxes                   |       | $                                | 0.01       |                             | $          | 0.04 |   |
| Diluted - net  income                                  |       | $                                | 0.01       |                             | $          | 0.03 |   |

 

**The following table illustrates the effect on netincome and basic and diluted earnings per share if the Company had applied thefair value recognition provisions of SFAS 123R to stock-based compensation forthe three and nine months ended September 30, 2005.  For purposes of this pro forma disclosure,the value of the options is estimated using a Black-Scholes option-pricingmodel and amortized to expense over the options’ vesting periods.  No options were granted for the three monthsended September 30, 2005.  The followingassumptions were used in the options pricing model for the nine months ended September30, 2005: a risk free interest rate of 3.7%; an expected volatility factor of91.1%; an expected dividend yield of 0.5%; and an expected life of 4 years.**
|                                                                                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                               | ** ** | **September 30, 2005** | ** ** | **September 30, 2005** | ** ** |
|                                                                                                     |       |                             |       |                             |       |
| Net income-as  reported                                                                                  |       | $                                | 3,152      |                             | $          | 6,916 |   |
| Deduct  stock-based compensation expense determined under fair value method, net of  related tax effects |       | (326                             | )          | (586                             | )          |
| Pro forma net  income                                                                                    |       | $                                | 2,826      |                             | $          | 6,330 |   |
|                                                                                                     |       |                             |       |                             |       |
| Earnings per  share:                                                                                     |       |                             |       |                             |       |
| Basic-as reported                                                                                        |       | $                                | 0.27       |                             | $          | 0.62 |   |
| Basic-pro forma                                                                                          |       | $                                | 0.24       |                             | $          | 0.57 |   |
| Diluted-as reported                                                                                      |       | $                                | 0.26       |                             | $          | 0.58 |   |
| Diluted-pro  forma                                                                                       |       | $                                | 0.23       |                             | $          | 0.53 |   |

 

14

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**The Company’s stock-based compensation expenserelates to both stock option grants and restricted stock awards.**

**Stock Options: Under the 1997 Plan, incentive stock options were granted at exerciseprices that equaled the fair market value of the stock at the date of grantbased upon the closing sales price of the Company’s common stock on that date.Incentive stock options generally vested 25% annually and expired ten yearsfrom the date of grant. Non-statutory stock options were generally granted atexercise prices that equaled the fair market value of the stock at the date ofgrant. These options vested over periods ranging from one to four years and hadexpiration dates ten years from the date of grant.  As of September 30, 2006, no options havebeen granted under the 2006 plan.**

**The fair value for the single option granted sinceJanuary 1, 2006 was estimated on the date of grant using a Black-Scholesoption-pricing model with the following assumptions: a risk free interest rateof 4.35%; an expected volatility factor of 86.6%; an expected dividend yield of..375%; and an expected life of 4 years. No options were granted during the three months ended September 30,2006.  The computation of expectedvolatility is based on historical**volatility from the past four years, based on the current expected lifeof outstanding options.  The computationof expectedlife is based on historical exercise patterns. The interest rate for periods within the contractual life of the awardis based on the U.S. Treasury yield curve in effect at the time of grant.  The fair value of the options granted duringthe nine months ended September 30, 2006 was $22.30 per underlying share.  Each grant is valued as a single award andcompensation expense is recognized on a straight-line basis over the vestingperiod.  In accordance with the modifiedprospective transition method, results for prior periods have not beenrestated.

**The following table summarizes the stock optionsoutstanding as of September 30, 2006 as well as activity for the nine monthsthen ended:**
| ** **                          | ** ** | ** **  | ** ** | **Weighted** | ** ** | **Weighted**              | ** ** | ** **    | ** ** |
|-------------------------------------|------------|-------------|------------|--------------|------------|---------------------------|------------|---------------|------------|
| ** **                          | ** ** | ** **  | ** ** | **Average**  | ** ** | **Average**               | ** ** | **Aggregate** | ** ** |
| ** **                          | ** ** | ** **  | ** ** | **Exercise** | ** ** | **Remaining**             | ** ** | **Intrinsic** | ** ** |
| ** **                          | ** ** | **Options** | ** ** | **Price**    | ** ** | **Contractual Term** | ** ** | **Value**     | ** ** |
| Outstanding at  beginning of period |       | 588,426     |       | $            | 4.77       |                      |       |          |       |   |
| Granted                             |       | 20,000      |       | 35.21        |       |                      |       |          |       |
| Exercised                           |       | (163,750    | )          | 3.02         |       |                      |       |          |       |
| Cancelled                           |       | (74,426     | )          | 12.08        |       |                      |       |          |       |
|                                |       |        |       |         |       |                      |       |          |       |
| Outstanding at  end of period       |       | 370,250     |       | $            | 5.72       |                      | 7.66       |          | $          | 9,942 |   |
|                                |       |        |       |         |       |                      |       |          |       |
| Exercisable at end of  period       |       | 139,000     |       | $            | 4.86       |                      | 7.24       |          | $          | 3,832 |   |

 

**The intrinsic value of options exercised for thethree and nine months ended September 30, 2006 was $2,563 and $5,040,respectively.  As of September 30, 2006, therewas $722 of total unrecognized stock-based compensation cost related tounvested stock options.  The cost isexpected to be recognized over a weighted average period of 1.11 years.**

**Restricted Stock Awards:  Restricted stock granted to the executive officersof the Company vest in one-third increments on the first, second and thirdanniversary of the grant.  Restrictedstock granted to directors of the Company vest on the date of the second annualmeeting following the date of grant.  Thefair value of the restricted stock awards is based on the fair value**

15

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**of theCompany’s stock on the date of grant and is amortized to compensation expenseover the vesting period on a straight line basis.**

**The only restricted stock awards outstanding as ofSeptember 30, 2006, were 25,000 shares granted under the 2006 Plan on September21, 2006.   These shares, none of whichwere vested as of September 30, 2006, had a weighted-average grant date fairvalue of $34.39 per share.  As ofSeptember 30, 2006, there was $852 of total unrecognized stock-basedcompensation cost related to unvested restricted stock awards.  The cost is expected to be recognized over aweighted average period of 1.92 years.**

**4.      INVENTORY**

**The components of inventory are as follows at September30, 2006 and December 31, 2005:**
|                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|-------------------|------------|------------------|------------|
| ** **      | ** ** | **2006**          | ** ** | **2005**         | ** ** |
| ** **      | ** ** | **(unaudited)**   | ** ** | ** **       | ** ** |
| Raw materials   |       | $                 | 6,213      |             | $          | 5,767 |   |
| Work-in-process |       | 7,272             |       | 5,878            |       |
| Supplies        |       | 540               |       | 224              |       |
|            |       |              |       |             |       |
|            |       | $                 | 14,025     |             | $          | 11,869 |   |

 

**5.      DEBT**

**Long-term debt consists of the following at September30, 2006 and December 31, 2005:**
|                                       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                            | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| Term loan -  French bank              |       | $                      | 736        |                  | $          | 1,029 |   |
| Industrial  development revenue bonds |       | —                 |       | 1,720                 |       |
|                                  |       |                   |       |                  |       |
|                                  |       | 736                    |       | 2,749                 |       |
| Less current  maturities              |       | (368                   | )          | (528                  | )          |
|                                  |       |                   |       |                  |       |
| Long-term debt                        |       | $                      | 368        |                  | $          | 2,221 |   |

 

Loan Covenants andRestrictions

TheCompany’s existing loan agreements include various covenants and restrictions,certain of which relate to the incurrence of additional indebtedness,mortgaging, pledging or disposition of major assets, limits on capitalexpenditures and maintenance of specified financial ratios.  As of September 30, 2006, the Company was incompliance with all financial covenants and other provisions of its debtagreements.

**6.      BUSINESS SEGMENTS**

The Company isorganized in the following two segments: the Explosive Metalworking segment and AMK Welding. The ExplosiveMetalworking segment uses explosives to perform

16

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metal cladding and shock synthesis. The most significant product ofthis group is clad metal, which is used in the fabrication of pressure vessels,heat exchangers and transition joints for various industries, includingupstream oil and gas, oil refinery, petrochemicals, hydrometallurgy, aluminumproduction, shipbuilding, power generation, industrial refrigeration and similarindustries. AMK Welding utilizes a number of welding technologies to weldcomponents for manufacturers of jet engine and ground-based turbines.

The accounting policies of both segmentsare the same as those described in the summary of significant accountingpolicies.  The Company’s reportablesegments are strategic business units that offer different products andservices and are separately managed. Each segment is marketed to differentcustomer types and requires different manufacturing processes andtechnologies.  Segment information ispresented for the three and nine months ended September 30, 2006 and 2005 asfollows:
| ** **                                                           | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| ** **                                                           | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the three  months ended September 30, 2006:                      |       |             |       |        |       |       |       |
| Net sales                                                            |       | $                | 23,511     |        | $          | 1,341      |       | $ | 24,852 |   |
| Depreciation                                                         |       | $                | 320        |        | $          | 55         |       | $ | 375 |   |
| Segment income  from operations of continuing operations             |       | $                | 5,831      |        | $          | 391        |       | $ | 6,222 |   |
| Unallocated amounts:                                                 |       |             |       |        |       |       |       |
| Stock-based compensation                                             |       |             |       |        |       | (83        | )          |
| Other expense                                                        |       |             |       |        |       | (23        | )          |
| Interest income, net                                                 |       |             |       |        |       | 121        |       |
| Consolidated  income before income taxes and discontinued operations |       |             |       |        |       | $          | 6,237      |   |

 
| ** **                                                           | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| ** **                                                           | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the three  months ended September 30, 2005:                      |       |             |       |        |       |       |       |
| Net sales                                                            |       | $                | 19,188     |        | $          | 1,050      |       | $ | 20,238 |   |
| Depreciation                                                         |       | $                | 361        |        | $          | 54         |       | $ | 415 |   |
| Segment income  from operations of continuing operations             |       | $                | 4,141      |        | $          | 258        |       | $ | 4,399 |   |
| Unallocated amounts:                                                 |       |             |       |        |       |       |       |
| Other expense                                                        |       |             |       |        |       | (8         | )          |
| Interest expense, net                                                |       |             |       |        |       | (63        | )          |
| Consolidated  income before income taxes and discontinued operations |       |             |       |        |       | $          | 4,328      |   |

 

17

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

 
| ** **                                                           | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| ** **                                                           | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the nine  months ended September 30, 2005:                       |       |             |       |        |       |       |       |
| Net sales                                                            |       | $                | 53,402     |        | $          | 2,722      |       | $ | 56,124 |   |
| Depreciation                                                         |       | $                | 989        |        | $          | 143        |       | $ | 1,132 |   |
| Segment income  from operations of continuing operations             |       | $                | 10,078     |        | $          | 485        |       | $ | 10,563 |   |
| Unallocated amounts:                                                 |       |             |       |        |       |       |       |
| Other income                                                         |       |             |       |        |       | 9          |       |
| Interest expense, net                                                |       |             |       |        |       | (211       | )          |
| Consolidated  income before income taxes and discontinued operations |       |             |       |        |       | $          | 10,361     |   |

 

**During the three and nine months ended September 30,2006, no sales to any one customer accounted for more than 10% of total netsales.  During the three months ended September30, 2005, sales to one customer represented approximately $2,225 (11%) of totalnet sales and sales to another customer represented approximately $3,125 (15%)of total net sales.  During the ninemonths ended September 30, 2005, no sales to any one customer accounted for morethan 10% of total net sales.**

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**7.****                                      COMPREHENSIVEINCOME**

**The Company**’s comprehensive income for the three and ninemonths ended September 30, 2006 and 2005 was as follows:
|                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                               | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income for  the period               |       | $                                | 3,690      |                            | $          | 3,152 |   | $ | 14,188 |   | $ | 6,916 |   |
|                                     |       |                             |       |                            |       |   |   |   |   |
| Foreign currency  translation adjustment |       | 137                              |       | (2                              | )          | 659 |   | (692 | ) |
|                                     |       |                             |       |                            |       |   |   |   |   |
| Comprehensive income                     |       | $                                | 3,827      |                            | $          | 3,150 |   | $ | 14,847 |   | $ | 6,224 |   |

 

As of September 30, 2006 and December 31, 2005 other cumulativecomprehensive income of $1,144 and $485, respectively, consists entirely ofcumulative foreign currency translation adjustment.

**8.      DISCONTINUEDOPERATIONS**

On September 17, 2004, the Company completed thedivestiture of its Spin Forge division under an agreement that involvedsubleasing the Spin Forge real estate and leasing the manufacturing equipmentand tooling to a third party.  Under themaster agreement relating to this divestiture transaction, the Company sold allinventory, books and records, intangible personal property, businessinformation and technology, customer contracts, and licenses and permitsrelating to the Spin Forge business to this third party for a sales price ofapproximately $1,700.  The third partyalso assumed full responsibility for the Spin Forge business activities andoperating expenses.  Despite the factthat the Company retained ownership of the equipment and continued to carry acapital lease asset of $2,880 on its books, the Company concluded that the SpinForge divestiture transaction qualified for treatment as discontinuedoperations since the Company had completely exited the Spin Forge operatingbusiness and has 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, the Company plans to immediately liquidate such equipment.

On January 10, 2006, the Company sold its purchase option on the SpinForge 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.

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Assets of discontinued operations are comprised of the following:
|                                          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                               | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| Leased  manufacturing equipment          |       | 651                    |       | 859                   |       |
| Capital lease  asset - real estate       |       | —                 |       | 2,880                 |       |
|                                     |       |                   |       |                  |       |
| Total assets of  discontinued operations |       | $                      | 651        |                  | $          | 3,739 |   |
|                                          |            |                        |            |                       |            |  |  |

 

The Company is receiving rent of $23 per month on theleased manufacturing equipment through the end of the initial lease term, whichexpires in December 2006.  As part of theSeptember 17, 2004 divestiture of Spin Forge, the Company sold inventorytotaling $1,697 and the sale of this inventory was reflected in otherreceivables.  As of September 30, 2006,the unpaid balance of this receivable, which is due no later than January 1,2007, is $678 and is classified as short-term based on the payment schedulespecified in the divestiture agreement. As of December 31, 2005, this receivable totaled $681 and was classifiedas long-term.

Discontinued operations for the three and nine monthsended September 30, 2006 is summarized as follows:
| ** **                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **September 30, 2006** | ** ** | **September 30, 2006** | ** ** |
| Gain on sale of  real estate purchase option     |       | $                                | —     |                             | $          | 2,197 |   |
| Related income  tax expense                      |       | —                           |       | (840                             | )          |
| Income from  discontinued operations, net of tax |       | $                                | —     |                             | $          | 1,357 |   |

 

20

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

The following discussion shouldbe read in conjunction with our historical consolidated financial statementsand notes, as well as the selected historical consolidated financial data thatare included in the Company’s Annual Report filed on Form 10-K for the yearended December 31, 2005.

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

**ExecutiveOverview**

Our business is organized into twosegments:  Explosive Metalworking (to whichwe also refer as DMC Clad) and AMK Welding. For the three months ended September 30, 2006, Explosive Metalworkingaccounted for 95% of our net sales and 94% of our income from operations ofcontinuing operations before consideration of stock-based compensation expense,which is not allocated to our business segments.  For the nine months ended September 30, 2006,Explosive Metalworking accounted for 96% of our net sales and 97% of our incomefrom operations of continuing operations before consideration of stock-basedcompensation expense.

For the nine months ended September 30, 2006,net sales increased 38.6% compared to the first nine months of 2005, reflectingyear-to-year net sales increases of 39.2% and 26.6% for our ExplosiveMetalworking and AMK Welding segments, respectively.  Our operating income from continuingoperations increased 93.0% to $20,389 in the first nine months of 2006 from $10,563in the first nine months of 2005, reflecting a $10,126 improvement in ExplosiveMetalworking’s operating income and a $136 improvement in AMK Welding’soperating income.  Income from continuingoperations increased 85.5%, to $12,831 for the nine months ended September 30,2006 from $6,916 in the same period of 2005. Our net income increased to $14,188 in the first nine months of 2006from $6,916 in the first nine months of 2005. For the nine months ended September 30, 2006, net income included $1,357of income from discontinued operations, net of tax, relating to the sale of theSpin Forge real estate option as further discussed below.  The large increase in our net income for thefirst nine months of 2006 compared to the first nine months of 2005 isattributable to a strong demand from the end users of our products due toincreased capital investment in the industries we serve.

*Net sales*

Explosive Metalworking’s net sales are generatedprincipally from sales of clad metal plates and sales of transition joints,which are made from clad plates, to customers that fabricate industrialequipment for various industries, including upstream oil and gas, oil refinery,petrochemicals, hydrometallurgy, aluminum production, shipbuilding, powergeneration, industrial refrigeration and similar industries.  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’s net sales are generated fromwelding, heat treatment and inspection services that are provided with respectto customer-supplied parts for customers primarily involved in the powergeneration industry and aircraft engine markets.

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

DMC Clad’s business is cyclical because it islinked to its customers’ end-market activity. For example, the construction cycle for new manufacturing capacity inthe chemical industry has historically been one characterized by significantamplitude.  It is driven both by globaleconomic demand growth and capacity utilization.  As capacity starts to become tight forvarious chemicals and prices begin to rise, new manufacturing capacity is addedin relatively large incremental amounts. Excess capacity drives prices down and capacity utilization drops.

*Gross profit and cost of products sold*

Cost of products sold for Explosive Metalworkinginclude the cost of metals and alloys used to manufacture clad metal plates,the cost of explosives, employee compensation and benefits, freight, outsideprocessing costs, depreciation of manufacturing facilities and equipment,manufacturing supplies and other manufacturing overhead expenses.

AMK Welding’s cost of products sold consistsprincipally of employee compensation and benefits, welding supplies (wire andgas), depreciation of manufacturing facilities and equipment, outside servicesand other manufacturing overhead expenses.

*Discontinued operations*

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

*Income taxes*

Our effective income tax rate increased to 38.0% forthe first nine months of 2006 from 33.2% for the first nine months of2005.  Income tax provisions on theearnings of Nobelclad and Nitro Metall AB (“Nitro Metall”) have been providedbased upon the respective French and Swedish statutory tax rates.  Our effective tax rate for the nine monthsended September 30, 2006 is higher than the full year 2005 and 2004 effectiveincome 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 uponexisting tax regulations and current federal, state and foreign statutory taxrates, we expect our effective tax rate on our consolidated pre-tax income to rangebetween 37% and 38%.

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*Backlog*

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

Our backlog with respect to the ExplosionMetalworking segment increased to approximately $68.5 million at September 30,2006 from approximately $52.4 million at June 30, 2006 and $42.0 million atDecember 31, 2005. The record backlog as of September 30, 2006 includes ourlargest ever order in the amount of approximately $11.0 million that was bookedin May and relates to an Eastern European refinery project and two ordersaggregating $8.7 million that were booked in September for a nickelhydrometallurgy project in Madagascar. We expect to ship the majority of the Eastern European refinery order duringthe fourth quarter of 2006 and the nickel hydrometallurgy orders are expectedto ship during the first half of 2007.

**Three and Nine Months Ended September30, 2006 Compared to Three and Nine Months Ended September 30, 2005**

*Net sales*
|            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                                | 24,852     |       | $          | 20,238         |       | $ | 4,614 |   | 22.8 | % |
|            |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
|            | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2006**                        | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                               | 77,781     |       | $          | 56,124         |       | $ | 21,657 |   | 38.6 | % |
|            |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

Netsales for the third quarter of 2006 increased 22.8% to $24,852 from $20,238 inthe third quarter of 2005. Explosive Metalworking sales increased 22.5% to $23,511in the three months ended September 30, 2006 (95% of total sales) from $19,188in the same period of 2005 (95% of total sales).  AMK Welding contributed $1,341 to thirdquarter 2006 sales (5% of total sales) which represented a 27.7% increaseversus sales of $1,050 in the third quarter of 2005 (5% of total sales).

Netsales for the nine months ended September 30, 2006 increased 38.6% to $77,781from $56,124 in the same period of 2005. Sales for our Explosive Metalworking segment increased 39.2% to $74,336in the first nine months of 2006 (96% of total sales) from $53,402 for thefirst nine months of 2005 (95% of total sales). AMK Welding’s year to date salesincreased by 26.6% to $3,445 in 2006 (4% of total sales) from $2,722 in 2005 (5%of total sales).  The year-to-yearincrease in worldwide Explosive Metalworking sales is principally attributableto the improved economic condition of the industries that this business segmentserves. As expected, our third quarter net sales were lower than those reportedin this year’s first and second quarters. However, net sales are expected tostrengthen in the fourth quarter and we expect net sales for the second half of2006 to be comparable to those reported for the first half of the year.

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*Gross profit*
|                                        | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                             | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit                           |       | $                                | 8,310      |       | $          | 6,268          |       | $ | 2,042 |   | 32.6 | % |
| Consolidated gross  profit margin rate |       | 33.4                             | %          | 31.0       | %          |           |       |   |   |
|                                        |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
|                                        | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                             | ** ** | **2006**                        | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit                           |       | $                               | 27,511     |       | $          | 16,134         |       | $ | 11,377 |   | 70.5 | % |
| Consolidated gross  profit margin rate |       | 35.4                            | %          | 28.7       | %          |           |       |   |   |
|                                        |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

Gross profit increased by 32.6% to $8,310 forthe three months ended September 30, 2006 from $6,268 for the three monthsended September 30, 2005. Our third quarter 2006 consolidated gross profitmargin rate increased to 33.4% from 31.0% in the third quarter of 2005. Thegross profit margin for Explosive Metalworking increased from 30.9% in the thirdquarter of 2005 to 33.1% in the third quarter of 2006 and the gross profitmargin for AMK Welding increased to 40.8% in the third quarter of 2006 from 33.0%in the third quarter of 2005.

For the nine months ended September 30, 2006,gross profit increased to $27,511 from $16,134 for the same period of 2005, a 70.5%increase.  Our year to date consolidatedgross profit margin rate increased to 35.4% from 28.7% for the first ninemonths of 2005.  The gross profit marginrate for Explosive Metalworking increased to 35.6% from 28.8%.  For the nine months ended September 30, 2006,the gross profit margin for AMK Welding increased to 31.1% from 26.7% for thesame period in 2005.

The year to date gross margin improvement forExplosive Metalworking relates primarily to the sales increase discussed aboveand the resultant more favorable absorption of fixed manufacturing overheadexpenses. This gross margin increase also reflects favorable changes in productmix and higher average prices in 2006 with respect to both our U.S. andEuropean operations. The Explosive Metalworking gross profit margin typicallyfluctuates from one quarter to the next for various reasons, including a changein product mix. Our gross margins are likely to continue to fluctuate fromquarter-to-quarter.  As expected, the lowernet sales that we reported in the third quarter of 2006 resulted in thirdquarter gross margins that were lower than those we reported in the first twoquarters of 2006.  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.

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*General and administrative expenses*
|                                        | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                             | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General &  administrative expenses |       | $                                | 1,267      |       | $          | 1,020          |       | $ | 247 |   | 24.2 | % |
| Percentage of net sales                |       | 5.1                              | %          | 5.0        | %          |           |       |   |   |
|                                        |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
|                                        | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                             | ** ** | **2006**                        | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General &  administrative expenses |       | $                               | 3,948      |       | $          | 2,726          |       | $ | 1,222 |   | 44.8 | % |
| Percentage of net sales                |       | 5.1                             | %          | 4.9        | %          |           |       |   |   |
|                                        |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

General and administrative expenses increased by$247, or 24.2%, to $1,267 in the third quarter of 2006 from $1,020 in the thirdquarter of 2005.  Expense increasesreflect stock-based compensation expense of $59, an impact of $68 from annualsalary adjustments, a $32 increase in director’s fees, and a $27 increase inNASDAQ fees relating to the transfer of our listing to the NASDAQ NationalMarket from the NASDAQ Capital Market. As a percentage of net sales, general and administrative expenses increasedto 5.1% in the third quarter of 2006 from 5.0% in the third quarter of 2005.

General and administrative expenses for the ninemonths ended September 30, 2006 totaled $3,948 compared to $2,726 for the sameperiod of 2005.  This represents anincrease of 44.8%.  The $1,222 increasein 2006 general and administrative expenses for the nine-month period reflectsstock-based compensation expense of $353, an impact of $255 from annual salaryadjustments, a $196 increase in accrued incentive compensation expense, anaggregate increase of $116 in audit, tax advisory, consulting and investorrelations expenses, and a $57 increase in NASDAQ fees relating to the transferof our listing to the NASDAQ National Market from the NASDAQ Capital Market.  The 2006 increases in audit, tax advisory,consulting and investor relations expenses relate primarily to continuedcompliance with the Sarbanes-Oxley Act of 2002, tax planning initiatives andincreased investor relations activities. As a percentage of net sales, general and administrative expensesincreased to 5.1% in the first nine months of 2006 from 4.9% in the first ninemonths of 2005.

*Selling expenses*
|                         | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **              | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses        |       | $                                | 904        |       | $          | 849            |       | $ | 55 |   | 6.5 | % |
| Percentage of net sales |       | 3.6                              | %          | 4.2        | %          |           |       |   |   |
|                         |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
|                         | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **              | ** ** | **2006**                        | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses        |       | $                               | 3,174      |       | $          | 2,845          |       | $ | 329 |   | 11.6 | % |
| Percentage of net sales |       | 4.1                             | %          | 5.1        | %          |           |       |   |   |
|                         |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

Selling expenses increased by 6.5% to $904 in the thirdquarter of 2006 from $849 in the third quarter of 2005.  The $55 increase in selling expenses reflectsthe impact of annual salary

25

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adjustments and highertravel expenses that were partially offset by a decrease in sales commissions.  As a percentage of net sales, sellingexpenses decreased to 3.6% in the third quarter of 2006 from 4.2% in the third quarterof 2005.

Selling expenses increased by 11.6% to $3,174 in thefirst nine months of 2006 from $2,845 in the same period of 2005.  The $329 increase in year to date sellingexpenses reflects $145 for a sales commission on a large export order from the U.S.,the impact of annual salary adjustments and higher travel expenses.  As a percentage of net sales, sellingexpenses decreased to 4.1% in the first nine months of 2006 from 5.1% in thefirst nine months of 2005.

*Income from operations of continuingoperations*
|                                                            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                                                 | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                                 | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from operations  of continuing operations |       | $                                | 6,139      |       | $          | 4,399          |       | $ | 1,740 |   | 39.6 | % |
|                                                            |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
|                                                  | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **                                       | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                       | ** ** | **2006**                        | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from  operations of continuing operations |       | $                               | 20,389     |       | $          | 10,563         |       | $ | 9,826 |   | 93.0 | % |
|                                                  |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

Income from operations increased by 39.6% to $6,139in the third quarter of 2006 from $4,399 in the third quarter of 2005.  Explosive Metalworking reported income fromoperations of $5,831 in the third quarter of 2006 as compared to $4,141 in the thirdquarter of 2005.  This 40.8% increase islargely attributable to the 22.5% sales increase discussed above.  AMK Welding reported income from operationsof $391 for the three months ended September 30, 2006, compared to $258 for thesame period of 2005.

Incomefrom operations increased by 93.0% to $20,389 in the first nine months of 2006from $10,563 in the first nine months of 2005. Explosive Metalworking reported income from operations of $20,204 in thefirst nine months of 2006 as compared to $10,078 in the first nine months of2005.  This 100.5% increase is largelyattributable to the 39.2% sales increase discussed above.  AMK Welding reported income from operationsof $621 for the first nine months of 2006, compared to the $485 that itreported for the first nine months of 2005.

Income from operations of continuing operationsfor the three and nine months ended September 30, 2006 includes $83 and $436,respectively, of stock-based compensation expense. This expense is notallocated to our two business segments and thus is not included in the above thirdquarter and year to date 2006 operating income totals for Explosive Metalworkingand AMK Welding. Stock-based compensation expense associated with currentlyoutstanding stock-based compensation awards is expected to approximate $200 in thefourth quarter of 2006.

*Interest income (expense), net*
|                                 | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                      | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                      | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income  (expense), net |       | $                                | 121        |       | $          | (63            | )          | $ | 184 |   | NM |   |
|                                 |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

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|                                 | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **                      | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                      | ** ** | **2006**                        | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income  (expense), net |       | $                               | 347        |       | $          | (211           | )          | $ | 558 |   | NM |   |
|                                 |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

Net interest income (expense) improved by $184, to anet of $121 in interest income for the third quarter 2006 from a net of $63 ininterest expense in the third quarter of 2005. We recorded net interest income of $347 for the first nine months of2006 compared to net interest expense of $211 for the first nine months of2005, an improvement of $558.  Thischange in net interest income (expense) reflects a significant decrease inaverage outstanding borrowings year-to-year and the large cash balances we arecurrently carrying.

*Income tax provision*
|                       | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** |
|-----------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|------------|
| ** **            | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** | ** ** |
| ** **            | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** | ** ** |
| Income tax  provision | ** ** | $                                | 2,547      |       | $          | 1,176          |       | $          | 1,371 |   | 116.6 | % | ** ** |
| Effective tax rate    | ** ** | 40.8                             | %          | 27.2       | %          |           |       | ** ** | ** ** | ** ** |
|                       |            |                                  |            |            |            |                |            |            |  |  |  |  |  |

 
|                       | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **            | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **            | ** ** | **2006**                        | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax  provision |       | $                               | 7,865      |       | $          | 3,445          |       | $ | 4,420 |   | 128.3 | % |
| Effective tax rate    |       | 38.0                            | %          | 33.2       | %          |           |       |   |   |
|                       |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

We recorded an income tax provision of $2,547 in the thirdquarter of 2006 compared to $1,176 in the third quarter of 2005.  The effective tax rate increased to 40.8% inthe third quarter of 2006 from 27.2% in the third quarter of 2005.  The income tax provisions for the three monthsended September 30, 2006 and 2005 include $2,370 and $601, respectively,related to U.S. taxes, with the remainder relating to foreign taxes associatedwith the operations of Nobelclad and its Swedish subsidiary, Nitro Metall.  The somewhat higher than expected thirdquarter 2006 effective tax rate of 40.8% relates to certain tax provision adjustmentsthat were recorded in the third quarter in connection with the reconciliationof our tax accounts to the actual federal and state tax returns for 2005 thatwere completed and filed during the quarter and to minor adjustments to ourestimated effective tax rate for the full year 2006.  The third quarter 2005 effective tax rate of27.2% was well below the full year 2005 effective tax rate of 33.5% as a resultof the completion of a number of tax projects during the quarter that impactedour tax provision for the three and nine months ended September 30, 2005.  Our third quarter and year-to-date 2005 tax provisionincluded combined U.S. federal and state benefits of approximately $254relating to tax credits and other attributes identified in connection withthese projects and claimed on 2004 and amended prior year Federal and state taxreturns that were filed during the quarter.

For the nine months ended September 30, 2006, werecorded an income tax provision of $7,865 compared to $3,445 for the sameperiod of 2005.  The effective tax rate increasedto 38.0% for the first nine months of 2006 from 33.2% for the first nine monthsof 2005.  The income tax provisions forthe nine months ended September 30, 2006 and 2005 include $6,551 and $2,416,respectively, related to U.S. taxes, with the remainder relating to foreigntaxes associated with the operations of Nobelclad and Nitro Metall.  We expect our full year 2006 effective taxrate on consolidated pre-tax income to be in the 37% to 38% range.

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

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

 

We completed the divestiture of our Spin Forgedivision in September 2004.  Under theprincipal divestiture agreement, we sold the assets of the Spin Forge divisionto a third party, excluding certain equipment and real estate which were leasedor subleased to the buyer, for a sales price of approximately $1,665 to be paidin cash according to the arrangement set forth in the divestitureagreement.  With respect to the SpinForge manufacturing equipment and tooling, we recorded an after tax impairmentloss of $619 based upon the difference between the carrying 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**

We have historically financed our operationsfrom a combination of internally generated cash flow, revolving creditborrowings, various long-term debt arrangements and the issuance of commonstock. We believe that cash flow from operations and funds available under ourcurrent credit facilities and any future replacement thereof will be sufficientto fund the working capital, debt service and capital expenditure requirementsof our current business operations for the foreseeable future, including theexpansion that we have initiated at our Mount Braddock, Pennsylvaniamanufacturing facility. Nevertheless, our ability to generate sufficient cashflows from operations will depend upon our success in executing our strategies,including our ability to secure new customer orders at our operating divisions,and to continue to implement cost-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,**

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**mortgaging, pledging or disposition of major assetsand maintenance of specified financial ratios. As of September 30, 2006, we were in compliance with all financialcovenants and other provisions of our debt agreements**.

Except for the earlyredemption on September 1, 2006 of industrial development revenue bonds in theprincipal amount of $1,630, 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 operatingactivities***

Net cash flows provided by operating activitiesfor the nine months ended September 30, 2006 totaled $16,257.  Significant sources of operating cash flowincluded net income from continuing operations of $14,188, non-cashdepreciation and amortization expense of $1,070, $923 from provision fordeferred income taxes, stock-based compensation of $436 and net positivechanges in various components of working capital in the amount of $997.  Net positive changes in working capitalincluded increases in customer advances and accounts payable of $5,961 and $568,respectively.  These positive changes inworking capital were largely offset by increases in accounts receivable andinventories of $3,885 and $1,608, respectively.

Net cash flows provided by operating activitiesfor the nine months ended September 30, 2005 totaled $4,544.  Significant sources of operating cash flowincluded net income of $6,916, non-cash depreciation and amortization expenseof $1,165, and $2,477 from the tax benefit related to stock options exercisedduring the year.  These sources of cashflow were partially offset by net negative changes of $5,843 in variouscomponents of working capital.  Netnegative changes in working capital during the first nine months of 2005included increases in accounts receivable, inventories and prepaid expenses of$1,003, $5,126 and $1,585, respectively. These negative changes in working capital were partially offset by increasesin accounts payable, customer advances, and accrued expenses and otherliabilities of $421, $264 and $1,186, respectively.

*Cash flows from investing activities*

Net cash flows used by investing activities forthe first nine months of 2006 totaled $785 and consisted primarily of $5,154 incapital expenditures that were largely offset by $1,950 from the sale ofmarketable securities and $2,197 for investment activities of discontinuedoperations that consisted of the sale of the Spin Forge real estate purchaseoption.

Net cash flows used by investing activities forthe first nine months of 2005 totaled $732 and consisted primarily of $1,966 incapital expenditures that were largely offset by a $1,016 payment received on aportion of the outstanding receivable relating to the Spin Forge divestiture.

*Cash flows from financing activities*

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

Net cash flows used in financing activities forthe nine months ended September 30, 2005 were $4,731.  Significant uses of cash for financingactivities included net repayments on bank

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linesof credit of $3,216, payment of annual dividends of $1,155, final principalpayments on the SNPE term loan of $667, industrial development revenue bondprincipal payments of $745 and a principal payment on a term loan with Frenchbank of $366.  Sources of cash flow fromfinancing activities include $1,481 in net proceeds from the issuance of commonstock relating to the exercise of stock options and employee stock purchasesunder our employee stock purchase plan.

*Payment of Dividends*

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

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**Critical Accounting Policies**

Our historical consolidated financial statementsand notes to our historical consolidated financial statements containinformation that is pertinent to our management’s discussion and analysis offinancial condition and results of operations. Preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires that our management make estimates, judgments andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses, and the disclosure of contingent assets and liabilities. However,the accounting principles used by us generally do not change our reported cashflows or liquidity. Interpretation of the existing rules must be done andjudgments made on how the specifics of a given rule apply to us.

In management’s opinion, the more significantreporting areas impacted by management’s judgments and estimates are revenuerecognition, asset impairments, impact of foreign currency exchange rate risks,income taxes and stock-based compensation. Management’s judgments and estimatesin these areas are based on information available from both internal andexternal sources, and actual results could differ from the estimates, asadditional information becomes known.  Webelieve the following to be our most critical accounting policies.

*Revenue recognition*

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

*Asset impairments*

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

*Goodwill*

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

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The entire amount of goodwill, which had acarrying value of $847 on our balance sheet as of September 30, 2006, relatesto our U.S. operations of the Explosive Metalworking segment.  Based on the analysis performed in the fourthquarter of 2005, no impairment was recorded to the carrying value of goodwill.

*Impact of foreign currency exchange rate risks*

The functional currency for our foreignoperations is the applicable local currency for each affiliate company. Assetsand liabilities of foreign subsidiaries for which the functional currency isthe local currency are translated at exchange rates in effect at period-end,and the statements of operations are translated at the average exchange ratesduring the period.  Exchange ratefluctuations on translating foreign currency financial statements into U.S.dollars that result in unrealized gains or losses are referred to astranslation adjustments. Cumulative translation adjustments are recorded as aseparate component of stockholders’ equity and are included in other cumulativecomprehensive income (loss). Transactions denominated in currencies other thanthe local currency are recorded based on exchange rates at the time suchtransactions arise. Subsequent changes in exchange rates result in transactiongains and losses, which are reflected in income as unrealized (based onperiod-end translations) or realized upon settlement of the transactions. Cashflows from our operations in foreign countries are translated at actualexchange rates when known, or at the average rate for the period. As a result,amounts related to assets and liabilities reported in the consolidatedstatements of cash flows will not agree to changes in the corresponding balancesin the consolidated balance sheets. The effects of exchange rate changes oncash balances held in foreign currencies are reported as a separate line itembelow cash flows from financing activities.

*Incometaxes*

Weaccount for income taxes in accordance with Statement of Financial AccountingStandards No.  109, *Accounting for Income Taxes* (“SFAS 109”)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 evaluatedeferred tax assets to determine if they will more likely than not be recoveredfrom future 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 during the first nine months of 2006, our projected utilization of thenet operating losses and tax credits is more favorable and, as a result, thevaluation at September 30, 2006 has been reduced to $135.

*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

32

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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 Financial Accounting StandardsBoard (“FASB”) issued SFAS 123R, which is a revision of Statement of FinancialAccounting Standards No. 123 (“SFAS 123”). 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. Inaddition, the adoption of SFAS 123R requires additional accounting related tothe income tax effects and disclosure regarding the cash flow effects resultingfrom share-based payment arrangements. In January 2005, the SEC issued StaffAccounting Bulletin No. 107, which provides supplemental implementationguidance for SFAS 123R. The Company selected the Black-Scholes option-pricingmodel as the most appropriate fair-value method for its awards and willrecognize compensation cost on a straight-line basis over the awards’ vestingperiods. The Company adopted SFAS 123R in the first quarter of 2006, whichresulted in an after tax reduction in net income of $351 for the first ninemonths of 2006.**

**In July 2006, the FASB issued FASB InterpretationNo. 48, *Accounting for Uncertainty in Income Taxes — aninterpretation of FASB No. 109* (“FIN 48”), which clarifies theaccounting and disclosure for uncertainty in tax positions.  FIN 48 seeks to harmonize certain accountingpractices associated with the recognition and measurement of income taxes.  This interpretation is effective for fiscalyears beginning after December 15, 2006. The Company has not yet determined the impact this interpretation willhave on its results from operations or financial position.**

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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 and Procedures**

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 the cost-benefitrelationship of possible controls and procedures.

As of September 30, 2006, the Company carried out an evaluation, underthe supervision and with the participation of the Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures (as defined in Exchange Act Rule 13a-15(e)).  Based on that evaluation, the Company’s ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective.  There have been no 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 all fraud.  Further, the design of a control system mustreflect the fact that there are resource constraints, and the benefits ofcontrols must be considered relative to their costs.  As a result of the inherent limitations inall control systems, no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within the Company havebeen detected.  These inherentlimitations include the realities that judgments in decision-making can befaulty, and that breakdowns can occur because of simple 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 adetailed discussion of our risk factors. The information presented below updates and should be read inconjunction with the risk factors and information disclosed in our Form 10-K.

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

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

The Company’s Annual Meeting of Stockholders was heldon September 21, 2006.  At the AnnualMeeting, the stockholders of the Company (i) elected the persons listed belowto serve as directors of the Company until the 2007 Annual Meeting ofStockholders (ii) approved the Company’s 2006 Stock Incentive Plan and (iii)ratified the appointment of Ernst & Young LLP as the Company’s independentregistered public accounting firm for the fiscal year ending December 31, 2006.

TheCompany had 11,844,235 shares of Common Stock outstanding as of August 11,2006, the record date for the Annual Meeting. At the Annual Meeting, holders of a total of 10,837,966 shares of CommonStock were present in person or represented by proxy.  The following sets forth informationregarding the results of the voting at the Annual Meeting:

Proposal1
|                           | ** ** | **Shares Voted**    | ** ** | **Shares**   | ** ** |
|---------------------------|------------|---------------------|------------|--------------|------------|
| **Election of Directors** | ** ** | **“For”** | ** ** | **Withheld** | ** ** |
|                      |       |                |       |         |       |
| Dean K Allen              |       | 9,871,644           |       | 966,322      |       |
| Yvon Pierre Cariou        |       | 7,879,024           |       | 2,958,942    |       |
| Bernard Hueber            |       | 7,879,800           |       | 2,958,166    |       |
| Gerard Munera             |       | 10,533,476          |       | 304,490      |       |

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Proposal 2                                        To approve the Company’s 2006 Stock IncentivePlan.

 
| Shares Voted        | ** ** | **Shares Voted**        | ** ** | **Shares Voted**        | ** ** |
|---------------------|------------|-------------------------|------------|-------------------------|------------|
| **“For”** | ** ** | **“Against”** | ** ** | **“Abstain”** | ** ** |
|                |       |                    |       |                    |       |
| 5,256,882           |       | 694,320                 |       | 184,812                 |       |

 

Proposal 3                                        To ratify the appointment of Ernst &Young LLP as the Company’s independent registered public accounting firm forthe fiscal year ending December 31, 2006.

 
| Shares Voted        | ** ** | **Shares Voted**        | ** ** | **Shares Voted**        | ** ** |
|---------------------|------------|-------------------------|------------|-------------------------|------------|
| **“For”** | ** ** | **“Against”** | ** ** | **“Abstain”** | ** ** |
|                |       |                    |       |                    |       |
| 10,749,183          |       | 45,596                  |       | 43,187                  |       |

 

**Item 5.Other Information**

None.

**Item 6.**

**Exhibits**
| 10.1   |   | -      |   | Dynamic Materials Corporation 2006 Stock Incentive  Plan                                                                                                                                          |
|--------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                              |
| 31.1   |   | -      |   | Certification of the President and Chief Executive  Officer pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.      |
|   |   |   |   |                                                                                                                                                                                              |
| 31.2   |   | -      |   | Certification of the Vice President and Chief  Financial Officer pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a),  as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|   |   |   |   |                                                                                                                                                                                              |
| 32.1   |   | -      |   | Certification of the President and Chief Executive  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.                            |
|   |   |   |   |                                                                                                                                                                                              |
| 32.2   |   | -      |   | Certification of the Vice President and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                       |

 

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**SIGNATURES**

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: November  2, 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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