**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**Form 10-Q**

 
| **(Mark  One)**                                             |
|-------------------------------------------------------------|
| ** **                                                  |
| **ý**                                                  | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND  EXCHANGE ACT OF 1934** |
| ** **                                                  | ** ** |
| **For the quarterly period ended  September 30, 2005** |
| ** **                                                  | ** ** |
| **OR**                                                      |
| ** **                                                  | ** ** |
| **o**                                                       | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934** |
| ** **                                                  | **FOR  THE TRANSITION PERIOD  FROM                    TO                    .** |

 

**Commission file number 0-8328**

 

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**DYNAMIC MATERIALS CORPORATION**

(Exact name of Registrant as Specified in its Charter)

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

 

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

(Address of principal executive offices, including zip code)

 

**(303) 665-5700**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes ý  No o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 under the Act).  Yes o  No ý

 

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

 

The number of shares of Common Stock outstanding was 11,726,224 as of October 31,2005.

 

 

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CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q contains “forward-lookingstatements” within the meaning of section 27A of the Securities Act of1933 and section 21E of the Securities Exchange Act of 1934. Inparticular, we direct your attention to Part I Item 1- FinancialStatements, Item 2 - Management’s Discussion and Analysis of FinancialCondition and Results of Operations and Item 3 - Quantitative and QualitativeDisclosures About Market Risk. We intend the forward-looking statements throughoutthis quarterly report on Form 10-Q and the information incorporated byreference herein to be covered by the safe harbor provisions forforward-looking statements. Statements contained in this report which are nothistorical facts are forward-looking statements that involve risks anduncertainties that could cause actual results to differ materially fromprojected results. All projections and statements regarding our expectedfinancial position and operating results, our business strategy, our financingplans and the outcome of any contingencies are forward-looking statements.These statements can sometimes be identified by our use of forward-lookingwords such as “may”, “believe”, “plan”, “anticipate”, “estimate”, “expect”, “intend”and other phrases of similar meaning. The forward-looking information is basedon information available as of the date of this quarterly report and onnumerous assumptions and developments that are not within our control. Althoughwe believe that our expectations as expressed in these forward-lookingstatements are reasonable, we cannot assure you that our expectations will turnout to be correct. Factors that could cause actual results to differ materiallyinclude, but are not limited to, the following: the ability to obtain newcontracts at attractive prices; the size and timing of customer orders;fluctuations in customer demand; competitive factors; the timely completion ofcontracts; any actions which may be taken by SNPE as the controllingshareholder of Dynamic Materials Corporation (“DMC” or the “Company”) withrespect to the Company and our businesses; the timing and size of expenditures;the timely receipt of government approvals and permits; the adequacy of locallabor supplies at our facilities; the availability and cost of funds; andgeneral economic conditions, both domestically and abroad. 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 1 - FINANCIAL  INFORMATION                                                                                    |
|-------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                    |   |   |
| Item 1 – Condensed Consolidated Financial Statements                                                               |   |   |
|                                                                                                                    |   |   |
| Consolidated Balance Sheets as of September 30, 2005 (unaudited)  and December 31, 2004                       |   |   |
| Consolidated Statements of Operations for the three and nine months  ended September 30, 2005 and 2004 (unaudited) |   |   |
| Consolidated Statement of Stockholders’ Equity for the nine months  ended September 30, 2005 (unaudited)      |   |   |
| Consolidated Statements of Cash Flows for the nine months ended  September 30, 2005 and 2004 (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 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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**Part I - FINANCIAL INFORMATION**

 

**ITEM 1.  CondensedConsolidated Financial Statements**

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 
| ** **                                                                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                  | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| ** **                                                                                  | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| ** **                                                                                  | ** ** | ** **             | ** ** | ** **            | ** ** |
| ASSETS                                                                                      |       |                   |       |                  |       |
| CURRENT  ASSETS:                                                                            |       |                   |       |                  |       |
| Cash and cash equivalents                                                                   |       | $                      | 1,368      |                  | $          | 2,404 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $384 and $280, respectively |       | 14,109                 |       | 13,936                |       |
| Inventories                                                                                 |       | 12,577                 |       | 8,000                 |       |
| Prepaid expense and other                                                                   |       | 2,071                  |       | 527                   |       |
| Current portion of other receivables                                                        |       | —                 |       | 943                   |       |
| Current deferred tax assets                                                                 |       | 429                    |       | 436                   |       |
|                                                                                        |       |                   |       |                  |       |
| Total current assets                                                                        |       | 30,554                 |       | 26,246                |       |
|                                                                                        |       |                   |       |                  |       |
| PROPERTY,  PLANT AND EQUIPMENT                                                              |       | 22,043                 |       | 20,832                |       |
| Less - Accumulated depreciation                                                             |       | (9,857                 | )          | (8,988                | )          |
|                                                                                        |       |                   |       |                  |       |
| Property, plant and equipment, net                                                          |       | 12,186                 |       | 11,844                |       |
|                                                                                        |       |                   |       |                  |       |
| GOODWILL,  net of accumulated amortization of $234                                          |       | 847                    |       | 847                   |       |
|                                                                                        |       |                   |       |                  |       |
| DEFERRED TAX  ASSETS                                                                        |       | 896                    |       | —                |       |
|                                                                                        |       |                   |       |                  |       |
| OTHER  ASSETS, net                                                                          |       | 113                    |       | 171                   |       |
|                                                                                        |       |                   |       |                  |       |
| OTHER  RECEIVABLES                                                                          |       | 681                    |       | 753                   |       |
|                                                                                        |       |                   |       |                  |       |
| ASSETS OF  DISCONTINUED OPERATIONS                                                          |       | 3,808                  |       | 3,892                 |       |
|                                                                                        |       |                   |       |                  |       |
| TOTAL ASSETS                                                                                |       | $                      | 49,085     |                  | $          | 43,753 |   |

 

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

 

4

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 
| ** **                                                                                                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                        | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| ** **                                                                                                                        | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| ** **                                                                                                                        | ** ** | ** **             | ** ** | ** **            | ** ** |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                         |       |                   |       |                  |       |
| CURRENT  LIABILITIES:                                                                                                             |       |                   |       |                  |       |
| Accounts payable                                                                                                                  |       | $                      | 6,080      |                  | $          | 6,041 |   |
| Accrued expenses                                                                                                                  |       | 3,979                  |       | 3,287                 |       |
| Customer advances                                                                                                                 |       | 1,387                  |       | 1,232                 |       |
| Bank lines of credit                                                                                                              |       | —                 |       | 3,216                 |       |
| Related party debt                                                                                                                |       | 36                     |       | 2,001                 |       |
| Current maturities on long-term debt                                                                                              |       | 529                    |       | 1,185                 |       |
|                                                                                                                              |       |                   |       |                  |       |
| Total current liabilities                                                                                                         |       | 12,011                 |       | 16,962                |       |
|                                                                                                                              |       |                   |       |                  |       |
| LONG-TERM  DEBT                                                                                                                   |       | 2,283                  |       | 2,906                 |       |
|                                                                                                                              |       |                   |       |                  |       |
| DEFERRED TAX  LIABILITIES                                                                                                         |       | 1,412                  |       | 729                   |       |
|                                                                                                                              |       |                   |       |                  |       |
| OTHER  LONG-TERM LIABILITIES                                                                                                      |       | 202                    |       | 206                   |       |
|                                                                                                                              |       |                   |       |                  |       |
| LIABILITIES  OF DISCONTINUED OPERATIONS                                                                                           |       | 2,880                  |       | 2,880                 |       |
|                                                                                                                              |       |                   |       |                  |       |
| Total liabilities                                                                                                                 |       | 18,788                 |       | 23,683                |       |
|                                                                                                                              |       |                   |       |                  |       |
| 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; 5,863,112 and 5,320,438 shares issued and outstanding,  respectively |       | 293                    |       | 266                   |       |
| Additional paid-in capital                                                                                                        |       | 18,748                 |       | 13,617                |       |
| Retained earnings                                                                                                                 |       | 10,648                 |       | 4,887                 |       |
| Other cumulative comprehensive income                                                                                             |       | 608                    |       | 1,300                 |       |
|                                                                                                                              |       |                   |       |                  |       |
| Total stockholders’ equity                                                                                                   |       | 30,297                 |       | 20,070                |       |
|                                                                                                                              |       |                   |       |                  |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                   |       | $                      | 49,085     |                  | $          | 43,753 |   |

 

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

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(Dollars in Thousands, Except Per Share Data)

(unaudited)

 
| ** **                                                        | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                        | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| NET SALES                                                         |       | $                                          | 20,238     |                                      | $          | 12,070 |   | $ | 56,124 |   | $ | 34,215 |   |
| COST OF PRODUCTS SOLD                                             |       | 13,970                                     |       | 8,820                                     |       | 39,990 |   | 25,862 |   |
| Gross profit                                                      |       | 6,268                                      |       | 3,250                                     |       | 16,134 |   | 8,353 |   |
| COSTS AND EXPENSES:                                               |       |                                       |       |                                      |       |   |   |   |   |
| General and administrative expenses                               |       | 1,020                                      |       | 529                                       |       | 2,726 |   | 2,102 |   |
| Selling expenses                                                  |       | 849                                        |       | 774                                       |       | 2,845 |   | 2,471 |   |
| Total costs and expenses                                          |       | 1,869                                      |       | 1,303                                     |       | 5,571 |   | 4,573 |   |
| INCOME FROM OPERATIONS OF CONTINUING  OPERATIONS                  |       | 4,399                                      |       | 1,947                                     |       | 10,563 |   | 3,780 |   |
| OTHER INCOME (EXPENSE):                                           |       |                                       |       |                                      |       |   |   |   |   |
| Other income (expense)                                            |       | (8                                         | )          | (5                                        | )          | 9 |   | 2 |   |
| Interest expense                                                  |       | (65                                        | )          | (117                                      | )          | (233 | ) | (351 | ) |
| Interest income                                                   |       | 2                                          |       | 6                                         |       | 22 |   | 18 |   |
| INCOME BEFORE INCOME TAXES AND DISCONTINUED  OPERATIONS           |       | 4,328                                      |       | 1,831                                     |       | 10,361 |   | 3,449 |   |
| INCOME TAX PROVISION                                              |       | 1,176                                      |       | 696                                       |       | 3,445 |   | 1,343 |   |
| INCOME FROM CONTINUING OPERATIONS BEFORE  DISCONTINUED OPERATIONS |       | 3,152                                      |       | 1,135                                     |       | 6,916 |   | 2,106 |   |
| DISCONTINUED OPERATIONS:                                          |       |                                       |       |                                      |       |   |   |   |   |
| Loss from operations of discontinued  operations, net of tax      |       | —                                     |       | (133                                      | )          | — |   | (783 | ) |
| Loss on sale of discontinued operations, net  of tax              |       | —                                     |       | (168                                      | )          | — |   | (787 | ) |
| Loss from discontinued operations                                 |       | —                                     |       | (301                                      | )          | — |   | (1,570 | ) |
| NET INCOME                                                        |       | $                                          | 3,152      |                                      | $          | 834 |   | $ | 6,916 |   | $ | 536 |   |
| INCOME PER SHARE - BASIC:                                         |       |                                       |       |                                      |       |   |   |   |   |
| Continuing operations                                             |       | $                                          | 0.54       |                                      | $          | 0.22 |   | $ | 1.24 |   | $ | 0.41 |   |
| Discontinued operations                                           |       | —                                     |       | (0.06                                     | )          | — |   | (0.31 | ) |
| Net income                                                        |       | $                                          | 0.54       |                                      | $          | 0.16 |   | $ | 1.24 |   | $ | 0.10 |   |
| INCOME PER SHARE - DILUTED:                                       |       |                                       |       |                                      |       |   |   |   |   |
| Continuing operations                                             |       | $                                          | 0.52       |                                      | $          | 0.21 |   | $ | 1.15 |   | $ | 0.40 |   |
| Discontinued operations                                           |       | —                                     |       | (0.05                                     | )          | — |   | (0.29 | ) |
| Net income                                                        |       | $                                          | 0.52       |                                      | $          | 0.16 |   | $ | 1.15 |   | $ | 0.11 |   |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING  -                  |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                                             |       | 5,824,251                                  |       | 5,122,225                                 |       | 5,570,697 |   | 5,106,287 |   |
| Diluted                                                           |       | 6,067,571                                  |       | 5,416,542                                 |       | 6,014,281 |   | 5,392,441 |   |
| DIVIDENDS PER COMMON SHARE                                        |       | $                                          | 0.20       |                                      | $          | — |   | $ | 0.20 |   | $ | — |   |

 

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

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005

(Amounts in Thousands)

(unaudited)

 
| ** **                                                         | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Other**      | ** ** | ** **     | ** ** | ** **        | ** ** |
|--------------------------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|-------------------|------------|----------------|------------|----------------|------------|-------------------|------------|
| ** **                                                         | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Cumulative** | ** ** | ** **     | ** ** | **Comprehensive** | ** ** |
| ** **                                                         | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | ** **     | ** ** | **Income for** | ** ** |
| ** **                                                         | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Income**     | ** ** | **Total**      | ** ** | **the Period**    | ** ** |
|                                                               |       |             |       |        |       |           |       |              |       |           |       |           |       |              |       |
| Balances, December 31, 2004                                   |       | 5,320            |       | $           | 266        |           | $          | 13,617            |       | $              | 4,887      |           | $          | 1,300             |       | $ | 20,070 |   |   |   |
|                                                               |       |             |       |        |       |           |       |              |       |           |       |           |       |              |       |
| Shares issued for stock option exercises                           |       | 338              |       | 17          |       | 1,419          |       | —            |       | —         |       | 1,436          |       |              |       |
|                                                               |       |             |       |        |       |           |       |              |       |           |       |           |       |              |       |
| Shares issued in connection with the employee  stock purchase plan |       | 5                |       | —      |       | 45             |       | —            |       | —         |       | 45             |       |              |       |
|                                                               |       |             |       |        |       |           |       |              |       |           |       |           |       |              |       |
| Annual dividend paid                                               |       | —           |       | —      |       | —         |       | (1,155            | )          | —         |       | (1,155         | )          |              |       |
|                                                               |       |             |       |        |       |           |       |              |       |           |       |           |       |              |       |
| Conversion of subordinated note                                    |       | 200              |       | 10          |       | 1,190          |       | —            |       | —         |       | 1,200          |       |              |       |
|                                                               |       |             |       |        |       |           |       |              |       |           |       |           |       |              |       |
| Tax benefit related to exercise of stock  options                  |       | —           |       | —      |       | 2,477          |       | —            |       | —         |       | 2,477          |       |              |       |
|                                                               |       |             |       |        |       |           |       |              |       |           |       |           |       |              |       |
| Net income                                                         |       | —           |       | —      |       | —         |       | 6,916             |       | —         |       | 6,916          |       | $                 | 6,916      |   |
|                                                               |       |             |       |        |       |           |       |              |       |           |       |           |       |              |       |
| Change in cumulative foreign currency  translation adjustment      |       | —           |       | —      |       | —         |       | —            |       | (692           | )          | (692           | )          | (692              | )          |
|                                                               |       |             |       |        |       |           |       |              |       |           |       |           |       |              |       |
| Balances, September 30, 2005                                  |       | 5,863            |       | $           | 293        |           | $          | 18,748            |       | $              | 10,648     |           | $          | 608               |       | $ | 30,297 |   | $ | 6,224 |   |

 

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

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(Dollars in Thousands)

(unaudited)

 
| ** **                                                                                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                      |       |     |       |     |       |
| Income from continuing operations                                                                          |       | $        | 6,916      |     | $          | 2,106 |   |
| Adjustments to reconcile income from  continuing operations to net cash provided by operating activities - |       |     |       |     |       |
| Depreciation                                                                                               |       | 1,122    |       | 1,015    |       |
| Amortization                                                                                               |       | 10       |       | 10       |       |
| Amortization of capitalized debt issuance  costs                                                           |       | 33       |       | 61       |       |
| Provision for deferred income taxes                                                                        |       | (171     | )          | 1,265    |       |
| Tax benefit related to exercise of stock  options                                                          |       | 2,477    |       | —   |       |
| Change in -                                                                                                |       |     |       |     |       |
| Accounts receivable, net                                                                                   |       | (1,003   | )          | (1,883   | )          |
| Inventories                                                                                                |       | (5,126   | )          | (3,599   | )          |
| Prepaid expense and other                                                                                  |       | (1,585   | )          | 477      |       |
| Accounts payable                                                                                           |       | 421      |       | 2,934    |       |
| Accrued expenses and other liabilities                                                                     |       | 1,450    |       | 471      |       |
|                                                                                                       |       |     |       |     |       |
| Net cash flows provided by operating activities                                                            |       | 4,544    |       | 2,857    |       |
|                                                                                                       |       |     |       |     |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                      |       |     |       |     |       |
| Payment received on other receivables                                                                      |       | 1,016    |       | 105      |       |
| Acquisition of property, plant and  equipment                                                              |       | (1,966   | )          | (899     | )          |
| Change in other non-current assets                                                                         |       | 218      |       | (15      | )          |
|                                                                                                       |       |     |       |     |       |
| Net cash flows used in investing activities                                                                |       | (732     | )          | (809     | )          |
|                                                                                                            |            |          |            |          |            |  |  |

 

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

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(Dollars in Thousands)

(unaudited)

 
| ** **                                                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS  FROM FINANCING ACTIVITIES:                                 |       |     |       |     |       |
| Borrowings / (repayments) on bank lines of  credit, net                |       | (3,216   | )          | 1,120    |       |
| Repayments on related party lines of  credit, net                      |       | (86      | )          | (61      | )          |
| Payment on SNPE, Inc. term loan                                   |       | (667     | )          | (667     | )          |
| Payment on industrial development revenue  bond                        |       | (745     | )          | (690     | )          |
| Payment on term loan with French bank                                  |       | (366     | )          | (355     | )          |
| Payment of dividends                                                   |       | (1,155   | )          | —   |       |
| Change in other long-tem liabilities                                   |       | 23       |       | 4        |       |
| Net proceeds from issuance of common stock  to employees and directors |       | 1,481    |       | 98       |       |
| Bank overdraft                                                         |       | —   |       | 357      |       |
|                                                                   |       |     |       |     |       |
| Net cash flows used in financing activities                            |       | (4,731   | )          | (194     | )          |
|                                                                   |       |     |       |     |       |
| EFFECTS OF  EXCHANGE RATES ON CASH                                     |       | (117     | )          | 7        |       |
|                                                                   |       |     |       |     |       |
| CASH FLOWS  USED IN DISCONTINUED OPERATIONS                            |       | —   |       | (1,807   | )          |
|                                                                   |       |     |       |     |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                  |       | (1,036   | )          | 54       |       |
|                                                                   |       |     |       |     |       |
| CASH AND  CASH EQUIVALENTS, beginning of the period                    |       | 2,404    |       | 522      |       |
|                                                                   |       |     |       |     |       |
| CASH AND  CASH EQUIVALENTS, end of the period                          |       | $        | 1,368      |     | $          | 576 |   |
|                                                                   |       |     |       |     |       |
| NON-CASH  FINANCING ACTIVITY:                                          |       |     |       |     |       |
| Conversion of SNPE convertible subordinated  note into common stock    |       | $        | 1,200      |     | $          | — |   |

 

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

 

9

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

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Dollars in Thousands, Except Share and Per ShareData)**

**(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 31,2004.

 

**2.****                                   ****SIGNIFICANT ACCOUNTINGPOLICIES**

 

Principlesof Consolidation

 

TheCondensed Consolidated Financial Statements include the accounts of the Companyand each subsidiary in which it has a greater than 50% interest. Allsignificant intercompany accounts, profits and transactions have beeneliminated in consolidation.

 

ForeignOperations and Foreign Exchange Rate Risk

 

Thefunctional currency for our foreign operations is the applicable local currencyfor each affiliate company. Assets and liabilities of foreign subsidiaries forwhich the functional currency is the local currency are translated at exchangerates in effect at period-end, and the statements of operations are translatedat the average exchange rates during the period. Exchange rate fluctuations ontranslating foreign currency financial statements into U.S. Dollars that resultin unrealized 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 our operationsin foreign countries are translated at actual exchange rates when known, or atthe average rate for the period. As a result, amounts related to assets andliabilities reported in the consolidated statements of cash flows will not agreewith changes in the corresponding balances in the Consolidated Balance Sheets.The effects of exchange rate changes on cash balances held in foreigncurrencies are reported as a separate line item below cash flows from financingactivities.

 

RevenueRecognition

 

Salesof clad metal products and welding services are generally based upon customerspecifications set forth in customer purchase orders and require us to providecertifications relative to metals used, services performed and the results ofany non-destructive testing that the

 

10

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customerhas requested be performed.  Anynon-conformance issues are resolved before the product is shipped andbilled.  Revenue is recognized only whenall four of the following criteria have been satisfied: persuasive evidence ofan arrangement exists; the price is fixed or determinable; delivery hasoccurred; and collection is reasonably assured. For contracts that require multiple shipments, revenue is recorded onlyfor the units included in each individual shipment.  If, as a contract proceeds toward completion,projected total cost on an individual contract indicates a potential loss, weprovide currently for such anticipated loss.

 

StockBased Compensation

 

TheCompany has elected to follow Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (“APB25”), and related interpretations in accounting for its employee stock optionsincluding Statement of Financial Accounting Standard (“SFAS”) No. 148, *Accounting for Stock-Based Compensation — Transitionand Disclosure* (“SFAS 148”).  Under APB 25, because the exercise price ofthe Company’s employee stock options is equal to the market price of theunderlying stock on the date of the grant, no compensation expense isrecognized.  SFAS No. 123, *Accounting for Stock-Based Compensation* (“SFAS123”), establishes an alternative method of expense recognition for stock-basedcompensation awards to employees that is based on fair values.  The Company elected not to adopt SFAS 123 forexpense recognition purposes.

 

Pro-formainformation regarding net income and earnings per share is required by SFAS123, and has been determined as if the Company had accounted for its employeestock options and employees stock purchase plan under the fair value method ofSFAS 123.  The fair value of the optionsgranted was estimated at the date of grant using a Black-Scholes option pricingmodel with the following weighted-average assumptions:

** **
| ** **               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **               | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                     |       |                                       |       |                                      |       |   |   |   |   |
| Risk-free  interest rate |       | N/A                                        |       | N/A                                       |       | 3.7 | % | 3.2 | % |
| Expected  lives          |       | N/A                                        |       | N/A                                       |       | 4.0 years |   | 4.0 years |   |
| Expected  volatility     |       | N/A                                        |       | N/A                                       |       | 91.1 | % | 77.6 | % |
| Expected  dividend yield |       | N/A                                        |       | N/A                                       |       | 0.5 | % | 0.0 | % |

 

TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded options which have no vesting restrictions and are fullytransferable.  In addition, optionvaluation models require the input of highly subjective assumptions includingexpected stock price characteristics significantly different from those oftraded options.  Expected volatility iscomputed using the Company’s historic stock prices over the preceding four-yearperiod.  Because changes in thesubjective input assumptions can materially affect the fair value estimate, inmanagement’s opinion, the existing models do not necessarily provide a reliablesingle measure of the fair value of its employee stock options.

 

Nooptions were granted for the three months ended September 30, 2005 and2004.  For the nine months ended September 30,2005 and 2004, the weighted average fair value of options granted was $12.85and $1.99, respectively.  For purposes ofpro-forma disclosures, the

 

11

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estimatedfair value of the options is amortized to expense over the options’ vestingperiods.  The Company’s pro-forma netincome and pro-forma net income per share, as if the Company had used the fairvalue accounting provisions of SFAS 123, are****shownbelow.

 
| ** **                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income:                           |       |                                       |       |                                      |       |   |   |   |   |
| As reported                           |       | $                                          | 3,152      |                                      | $          | 834 |   | $ | 6,916 |   | $ | 536 |   |
| Expense calculated under SFAS 123     |       | (326                                       | )          | (59                                       | )          | (586 | ) | (159 | ) |
| Pro forma                             |       | $                                          | 2,826      |                                      | $          | 775 |   | $ | 6,330 |   | $ | 377 |   |
|                                  |       |                                       |       |                                      |       |   |   |   |   |
| Basic net  income per common share:   |       |                                       |       |                                      |       |   |   |   |   |
| As reported                           |       | $                                          | 0.54       |                                      | $          | 0.16 |   | $ | 1.24 |   | $ | 0.10 |   |
| Pro forma                             |       | $                                          | 0.49       |                                      | $          | 0.15 |   | $ | 1.14 |   | $ | 0.07 |   |
|                                  |       |                                       |       |                                      |       |   |   |   |   |
| Diluted net  income per common share: |       |                                       |       |                                      |       |   |   |   |   |
| As reported                           |       | $                                          | 0.52       |                                      | $          | 0.16 |   | $ | 1.15 |   | $ | 0.11 |   |
| Pro forma                             |       | $                                          | 0.47       |                                      | $          | 0.15 |   | $ | 1.06 |   | $ | 0.08 |   |

 

Thepro forma net income calculation above reflects $24 and $10 in compensationexpense associated with the Employee Stock Purchase Plan for the three and ninemonths ended September 30, 2005 and 2004, respectively.

 

Earnings Per Share

 

Basic earnings per share (“EPS”) is computed by dividing net income bythe weighted average number of shares of common stock outstanding during theperiod.  Diluted EPS recognizes thepotential effects of dilutive securities. The following represents a reconciliation of the numerator and denominatorused in the calculation of basic and diluted EPS:

 

12

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| ** **                                                    | ** ** | **For the three months ended September 30, 2005** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                    | ** ** | **Net Income**                                         | ** ** | **Shares** | ** ** | **Per share  Amount** | ** ** |
|                                                          |       |                                                   |       |   |   |   |   |
| Basic  earnings per share                                     |       | $                                                      | 3,152      |   | 5,824,251 |   | $ | 0.54 |   |
|                                                          |       |                                                   |       |   |   |   |   |
| Dilutive  effect of options to purchase common stock          |       | —                                                 |       | 243,320 |   |   |   |
| Dilutive  effect of convertible subordinated note, net of tax |       | —                                                 |       | — |   |   |   |
|                                                          |       |                                                   |       |   |   |   |   |
| Dilutive  earnings per share                                  |       | $                                                      | 3,152      |   | 6,067,571 |   | $ | 0.52 |   |

 
| ** **                                                    | ** ** | **For the three months ended September 30, 2004** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                    | ** ** | **Net Income**                                         | ** ** | **Shares** | ** ** | **Per share  Amount** | ** ** |
|                                                          |       |                                                   |       |   |   |   |   |
| Basic  earnings per share                                     |       | $                                                      | 834        |   | 5,122,225 |   | $ | 0.16 |   |
|                                                          |       |                                                   |       |   |   |   |   |
| Dilutive  effect of options to purchase common stock          |       | —                                                 |       | 94,317 |   |   |   |
| Dilutive  effect of convertible subordinated note, net of tax |       | 12                                                     |       | 200,000 |   |   |   |
|                                                          |       |                                                   |       |   |   |   |   |
| Dilutive  earnings per share                                  |       | $                                                      | 846        |   | 5,416,542 |   | $ | 0.16 |   |

 
| ** **                                                    | ** ** | **For the nine months ended September 30, 2005** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                    | ** ** | **Net Income**                                        | ** ** | **Shares** | ** ** | **Per share  Amount** | ** ** |
|                                                          |       |                                                  |       |   |   |   |   |
| Basic  earnings per share                                     |       | $                                                     | 6,916      |   | 5,570,697 |   | $ | 1.24 |   |
|                                                          |       |                                                  |       |   |   |   |   |
| Dilutive  effect of options to purchase common stock          |       | —                                                |       | 327,101 |   |   |   |
| Dilutive  effect of convertible subordinated note, net of tax |       | 23                                                    |       | 116,483 |   |   |   |
|                                                          |       |                                                  |       |   |   |   |   |
| Dilutive  earnings per share                                  |       | $                                                     | 6,939      |   | 6,014,281 |   | $ | 1.15 |   |

 

13

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| ** **                                                    | ** ** | **For the nine months ended September 30, 2004** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                    | ** ** | **Net Income**                                        | ** ** | **Shares** | ** ** | **Per share  Amount** | ** ** |
|                                                          |       |                                                  |       |   |   |   |   |
| Basic  earnings per share                                     |       | $                                                     | 536        |   | 5,106,287 |   | $ | 0.10 |   |
|                                                          |       |                                                  |       |   |   |   |   |
| Dilutive  effect of options to purchase common stock          |       | —                                                |       | 86,154 |   |   |   |
| Dilutive  effect of convertible subordinated note, net of tax |       | 37                                                    |       | 200,000 |   |   |   |
|                                                          |       |                                                  |       |   |   |   |   |
| Dilutive  earnings per share                                  |       | $                                                     | 573        |   | 5,392,441 |   | $ | 0.11 |   |

 

RecentAccounting Pronouncements

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedFASB Statement No. 123 (revised 2004), *Share-BasedPayment*(“SFAS 123R”), which is a revision of SFAS 123.  SFAS 123R supersedes APB 25 and amends SFAS95, *Statement of Cash Flows*.  Generally the approach in SFAS 123R issimilar to the approach described in SFAS 123. However, SFAS 123R requires all share-based payments to employees,including grants of employee stock options, to be recognized in the incomestatement based on their fair values. The Company must adopt SFAS 123R no later than January 1, 2006.

 

Theadoption of SFAS 123R, which will occur on January 1, 2006, will result ina reduction of net income.  The Companyis currently evaluating the significance of the effect that the adoption willhave on its financial position and results of operations.

 

InNovember 2004, the FASB issued SFAS 151, *InventoryCosts*, which amends the guidance in ARB No. 43, Chapter 4, *Inventory Pricing*.  This statement requires abnormal amounts ofidle facility expense, freight, handling costs and wasted material to beexcluded from inventory costing and instead included as period expenses.  In addition, this standard requires theallocation of fixed production overhead to be based on normal capacity of theproduction facilities.  The Company doesnot believe the adoption of this standard on January 1, 2006 will have asignificant impact on its results of operations.

 

InMay 2005, the FASB issued SFAS 154, *AccountingChanges and Error Corrections*, which requires the direct effects ofvoluntary accounting principle changes to be retrospectively applied to priorperiods’ financial statements. This Statement does not change the transitionprovisions of any existing accounting pronouncements, but would apply in theunusual instance that a pronouncement does not include specific transitionprovisions. SFAS No. 154 maintains existing guidance with respect toaccounting estimate changes and corrections of errors. The Statement iseffective for the Company beginning on January 1, 2006. Adoption is notexpected to have a material impact on the Company’s financial position, resultsof operation or cash flows.

 

14

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**3.****                                   ****INVENTORY**

 

Thecomponents of inventory are as follows at September 30, 2005 and December 31,2004:

 
| ** **      | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **      | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| Raw  materials  |       | $                            | 5,187      |                        | $          | 3,619 |   |
| Work-in-process |       | 7,111                        |       | 4,049                       |       |
| Supplies        |       | 279                          |       | 332                         |       |
|            |       | $                            | 12,577     |                        | $          | 8,000 |   |

 

**4.****                                   ****DEBT**

 

Relatedparty debt consists of the following at September 30, 2005 and December 31,2004:

 
| ** **                          | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| SNPE S.A  line of credit            |       | $                            | 36         |                        | $          | 134 |   |
| SNPE  convertible subordinated note |       | —                       |       | 1,200                       |       |
| SNPE term  loan                     |       | —                       |       | 667                         |       |
| Related  party debt (all current)   |       | $                            | 36         |                        | $          | 2,001 |   |

 

Long-termdebt consists of the following at September 30, 2005 and December 31,2004:

 
| ** **                            | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| Term loan -  French bank              |       | $                            | 1,047      |                        | $          | 1,581 |   |
| Industrial  development revenue bonds |       | 1,765                        |       | 2,510                       |       |
|                                  |       | 2,812                        |       | 4,091                       |       |
| Less current  maturities              |       | (529                         | )          | (1,185                      | )          |
| Long-term  debt                       |       | $                            | 2,283      |                        | $          | 2,906 |   |

 

Conversion of SNPE Convertible Subordinated Note

 

OnJune 8, 2005, SNPE, Inc. exercised its conversion rights on theconvertible subordinated note it held from the Company.  In accordance with the provisions of thenote, the $1,200 note was converted into 200,000 shares of common stock of theCompany at a conversion rate of $6 per share.

 

15

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Bank Line of Credit

 

OnSeptember 15, 2005, the Company entered into a new $7,500 credit facilitywith Wells Fargo Bank, National Association (“Bank”).  The credit facility, which expires June 30,2007, replaces the $6,000 credit facility between the Company and Wells FargoBusiness Credit Inc., an affiliate of the Bank that terminated concurrentlywith the signing of the new credit facility. The new credit facility allows for Euro-denominated advances up to a$2,000 equivalent.  Dollar-denominatedadvances bear interest at either the Bank’s prime rate less 0.5% (6.25% as of September 30,2005) or LIBOR plus 2% (the rate selection is at the Company’s option subjectto certain conditions).  Euro-denominatedadvances bear interest at EURIBOR plus 2%. Borrowings on the credit facility are secured by accounts receivable,inventory and any equipment acquired after the date of the agreement.  There were no borrowings outstanding on thecredit facility as of September 30, 2005.

 

Loan Covenants and Restrictions

 

TheCompany’s existing loan agreements include various covenants and restrictions,certain of which relate to the payment of dividends or other distributions tostockholders, redemption of capital stock, incurrence of additionalindebtedness, mortgaging, pledging or disposition of major assets, limits oncapital expenditures and maintenance of specified financial ratios.  As of September 30, 2005, the Companywas in compliance with all financial covenants and other provisions of its debtagreements.

 

**5.****                                   ****INCOME TAXES**

 

Duringthe quarter ended September 30, 2005, the Company completed several U.S.tax projects that impacted the tax provision recorded for the three and ninemonths ended September 30, 2005. The tax provision for the three and nine months ended September 30,2005 includes U.S. Federal and state tax benefits of approximately $254 relatingto tax credits and other attributes identified in connection with these taxprojects and claimed on 2004 and amended prior year Federal and state taxreturns that were filed during the third quarter.  Upon completion of its 2004 and amended prioryear tax returns, the Company was able to estimate better the effects thatrecent divestitures and other changes in its business are expected to have onits 2005 effective state income tax rate and, thus, on its overall consolidatedeffective income tax rate for the full year 2005, which is currently estimatedto approximate 34%.

 

**6.****                                   ****BUSINESS SEGMENTS**

 

DMCis organized in the following two segments: the Explosive Metalworking Groupand AMK Welding.  The ExplosiveMetalworking Group uses explosives to perform metal cladding and shocksynthesis. The most significant product of this segment is clad metal which isused in the fabrication of pressure vessels, heat exchangers and transitionjoints used in the petrochemical, refining, hydrometallurgy, aluminum smelting,shipbuilding and other industries.  AMKWelding utilizes a number of welding technologies to weld components formanufacturers of jet engines and ground-based turbines.

 

Theaccounting policies of both segments are the same as those described in the summaryof significant accounting policies.  TheCompany’s reportable segments are strategic business

 

16

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unitsthat offer different products and services and are separately managed. Eachsegment is marketed to different customer types and requires differentmanufacturing processes and technologies. Segment information is presented forthe three and nine months ended September 30, 2005 and 2004 as follows:

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

 
| ** **                                                           | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| ** **                                                           | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the  three months ended September 30, 2004:                 |       |             |       |        |       |       |       |
| Net sales                                                            |       | $                | 11,342     |        | $          | 728        |       | $ | 12,070 |   |
| Depreciation  and amortization                                       |       | $                | 288        |        | $          | 54         |       | $ | 342 |   |
| Income from  operations of continuing operations                     |       | $                | 1,869      |        | $          | 78         |       | $ | 1,947 |   |
| Unallocated amounts:                                                 |       |             |       |        |       |       |       |
| Other expense                                                        |       |             |       |        |       | (5         | )          |
| Interest expense, net                                                |       |             |       |        |       | (111       | )          |
| Consolidated income before income taxes and  discontinued operations |       |             |       |        |       | $          | 1,831      |   |

 
| ** **                                                           | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| ** **                                                           | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the nine  months ended September 30, 2005:                  |       |             |       |        |       |       |       |
| Net sales                                                            |       | $                | 53,402     |        | $          | 2,722      |       | $ | 56,124 |   |
| Depreciation  and amortization                                       |       | $                | 989        |        | $          | 143        |       | $ | 1,132 |   |
| 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     |   |

 

17

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| ** **                                                           | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| ** **                                                           | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the nine  months ended September 30, 2004:                  |       |             |       |        |       |       |       |
| Net sales                                                            |       | $                | 32,428     |        | $          | 1,787      |       | $ | 34,215 |   |
| Depreciation  and amortization                                       |       | $                | 862        |        | $          | 163        |       | $ | 1,025 |   |
| Income from  operations of continuing operations                     |       | $                | 3,736      |        | $          | 44         |       | $ | 3,780 |   |
| Unallocated amounts:                                                 |       |             |       |        |       |       |       |
| Other income                                                         |       |             |       |        |       | 2          |       |
| Interest expense, net                                                |       |             |       |        |       | (333       | )          |
| Consolidated income before income taxes and  discontinued operations |       |             |       |        |       | $          | 3,449      |   |

 

During the three months ended September 30, 2005 sales to onecustomer represented approximately $2,225 (11%) of total net sales and sales toanother customer represented approximately $3,125 (15%) of total netsales.  During the three months ended September 30,2004, and the nine months ended September 30, 2005 and 2004, sales to noone customer accounted for more than 10% of total net sales.

 

**7.****                                   ****COMPREHENSIVE INCOME**

 

DMC’s comprehensive income for the three and nine months ended September 30,2005 and 2004 was as follows:

 
| ** **                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income  for the period               |       | $                                          | 3,152      |                                      | $          | 834 |   | $ | 6,916 |   | $ | 536 |   |
| Derivative  valuation adjustment         |       | —                                     |       | —                                    |       | — |   | 43 |   |
| Foreign  currency translation adjustment |       | (2                                         | )          | 88                                        |       | (692 | ) | (51 | ) |
| Comprehensive  income                    |       | $                                          | 3,150      |                                      | $          | 922 |   | $ | 6,224 |   | $ | 528 |   |

 

As of September 30, 2005 and December 31, 2004 othercumulative comprehensive income of $608 and $1,300, respectively, consistsentirely of cumulative foreign currency translation adjustment.

 

**8.****                                   ****STOCK SPLIT**

 

On September 23, 2005, the Company announced that its Board ofDirectors had approved a 2-for-1 split of the Company’s common stock.  The split was effected as a stock dividend,and was paid to stockholders of record as of the close of business on October 5,2005.  Stockholders as of the record datereceived one additional share of common stock for each share held.  The payment date was October 12,2005.  The stock split increased thenumber of common

 

18

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sharesissued and outstanding from approximately 5,860,000 shares to approximately11,720,000 shares.

 

The Company’s historical earnings per share for the three and ninemonths ended September 30, 2005 and 2004, on a pro-forma basis assumingthe stock split had occurred as of January 1, 2004, would be as follows:

 
| ** **                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Pro forma  earnings per basic common share:   |       |                                       |       |                                      |       |   |   |   |   |
| Continuing operations                         |       | $                                          | 0.27       |                                      | $          | 0.11 |   | $ | 0.62 |   | $ | 0.21 |   |
| Discontinued operations                       |       | —                                     |       | (0.03                                     | )          | — |   | (0.16 | ) |
| Net income                                    |       | $                                          | 0.27       |                                      | $          | 0.08 |   | $ | 0.62 |   | $ | 0.05 |   |
|                                          |       |                                       |       |                                      |       |   |   |   |   |
| Pro forma  earnings per diluted common share: |       |                                       |       |                                      |       |   |   |   |   |
| Continuing operations                         |       | $                                          | 0.26       |                                      | $          | 0.11 |   | $ | 0.58 |   | $ | 0.20 |   |
| Discontinued operations                       |       | —                                     |       | (0.03                                     | )          | — |   | (0.15 | ) |
| Net income                                    |       | $                                          | 0.26       |                                      | $          | 0.08 |   | $ | 0.58 |   | $ | 0.05 |   |

 

**9.****                                   ****DISCONTINUED OPERATIONS**

 

On September 17, 2004, DMC completed the divestiture of its SpinForge division under an agreement that involved subleasing the Spin Forge realestate and leasing the manufacturing equipment and tooling to a thirdparty.  The division’s inventory was soldat carrying value to this third party who also assumed full responsibility forSpin Forge business activities and operating expenses.  The Company holds a purchase option on theSpin Forge real estate that allows it to purchase the real estate for $2,880, aprice that is below the real estate’s recently appraised value.  The value inherent in the real estatepurchase option is believed to be significant but was not considered in thecalculation of the reported impairment loss on the Spin Forge equipment andtooling due to uncertainties surrounding its ultimate realization.

 

Assets of discontinued operations are comprised of the following:

 
| ** **                               | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                               | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| Leased manufacturing  equipment          |       | 928                          |       | 1,012                       |       |
| Capital  lease asset - real estate       |       | 2,880                        |       | 2,880                       |       |
| Total assets  of discontinued operations |       | $                            | 3,808      |                        | $          | 3,892 |   |
|                                          |            |                              |            |                             |            |  |  |

 

19

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TheCompany is receiving rent of $23 per month on the leased manufacturingequipment through the end of the initial lease term, which expires in December 2006.  As part of the September 17, 2004divestiture of Spin Forge, the Company sold inventory totaling approximately$1,700 and the sale of this inventory was reflected in other receivables.  As of September 30, 2005, the otherreceivables balance was $681, which is classified as long term, based upon theagreed upon payment schedule.

 

Operating results of the discontinued operations for the three and ninemonths ended September 30, 2005 and 2004 are summarized as follows:

 
| ** **                                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                   | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                                    |       | $                                          | —     |                                      | $          | 821 |   | $ | — |   | $ | 1,790 |   |
|                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Loss from operations of discontinued operations              |       | —                                     |       | (218                                      | )          | — |   | (1,284 | ) |
| Tax benefit                                                  |       | —                                     |       | 85                                        |       | — |   | 501 |   |
| Loss from operations of discontinued operations,  net of tax |       | $                                          | —     |                                      | $          | (133 | ) | $ | — |   | $ | (783 | ) |
|                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Loss on sale of discontinued operations                      |       | —                                     |       | (275                                      | )          | — |   | (1,290 | ) |
| Tax benefit                                                  |       | —                                     |       | 107                                       |       | — |   | 503 |   |
| Loss on sale of discontinued operations, net  of tax         |       | $                                          | —     |                                      | $          | (168 | ) | $ | — |   | $ | (787 | ) |

 

**10.****                            ****SUBSEQUENT EVENT**

 

TheCompany reached an agreement to sell the property purchase option rightsassociated with its former Spin Forge division to the property owner for$2,300.  The transaction is currentlyscheduled to close in late January 2006.

 

20

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**ITEM 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations(Dollars in Thousands)**

 

**Executive Overview**

 

The business of DMC is organized into two segments: the ExplosiveMetalworking Group and AMK Welding (“AMK”). The business of the Explosive Metalworking Group has been good, and,based on its current backlog, should continue to be good for the foreseeablefuture.  In addition, while AMK incurreda loss in the first quarter of 2005, business volume improvements that wereexpected have now taken place, and AMK’s prospects look good.  DMC’s consolidated sales for the nine monthsended September 30, 2005 increased by 64% from those for the first ninemonths of 2004 including sales increases of 63% and 67% by the U.S. Clad MetalDivision and Nobelclad Europe, respectively. Consolidated income from operations increased by $6,783, or 179%, to$10,563 for the nine months ended September 30, 2005 from $3,780 for thecomparable period of 2004, reflecting a $6,342 improvement in ExplosiveMetalworking Group’s operating income and a $441 improvement in AMK’s operatingresults.  Our year-to-date consolidatednet income increased to $6,916 in 2005 from net income of $536 in 2004.  The 2004 net income included a loss fromdiscontinued operations of $1,570 relating to the divestiture of our Spin Forgedivision that was completed on September 17, 2004.  Income from continuing operations beforediscontinued operations increased to $6,916 for the first nine months of 2005from $2,106 for the comparable 2004 period.

 

Our Explosive Metalworking Group reported sales of $53,402 for the ninemonths ended September 30, 2005 versus comparable 2004 sales of $32,428and an increase in operating income to $10,078 in 2005 from $3,736 in2004.  The Explosive Metalworking Group’sbacklog, which had increased from $11,700 at December 31, 2003 to $27,500at December 31, 2004, increased further to $34,100 as of September 30,2005 and reflects record booking levels during the first nine months of 2005,including a March order valued at more than $5,300 for work related to anickel hydrometallurgy project in New Caledonia and an order booked byNobelclad Europe in early August for approximately $6,000 relating to apetrochemical project in Kuwait. Shipments on the nickel hydrometallurgy project order began in the thirdquarter and most of the order is expected to ship by the end of 2005.  The order relating to the petrochemicalproject in Kuwait will be manufactured at our facilities in France and the U.S.and is scheduled to ship during the fourth quarter of 2005 and first quarter of2006.  With the exception of the largenickel hydrometallurgy project orders that we receive periodically, U.S. demandfor our clad metal products is largely driven by plant maintenance and retrofitprojects at existing chemical processing, petrochemical processing and oilrefining facilities.  In contrast to theU.S. market, demand for our clad products in Europe is more dependent on largeprojects, such as the building of new purified terephthalic acid plants indifferent parts of the world, including China, and on sales of electricaltransition joints that are used in the aluminum smelting industry.  Based upon a strong backlog as of September 30,2005 and generally favorable market conditions in most of the industries thatwe serve, we are optimistic that 2006 will be another good year for ourExplosive Metalworking Group.

 

For the nine months ended September 30, 2005, AMK reported salesof $2,722 as compared to sales of $1,787 in the comparable period of 2004.  As a result of this 52% sales increase, AMKreported year-to-date operating income of $485 in 2005 compared to operatingincome of $44 for the same nine months of 2004. AMK was expected to get off to a slow start in 2005 as it prepareditself for a significant increase in business activity relating to the start-upof production for a key customer on a new ground-based power turbine thatcommenced during the

 

21

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secondquarter.  Prospects at AMK for calendaryear 2006 and beyond appear to be quite good as AMK’s production volumerelating to the new ground-based turbine program increases and the demand forcommercial aircraft engines, which has been depressed since 2001, continues toimprove.

 

DMCgenerated cash flow from operating activities of $4,544 during the nine monthsended September 30, 2005.  Thisoperating cash flow was supplemented by the receipt of a $1,016 payment on anoutstanding receivable relating to the 2004 Spin Forge divestiture and $1,481in cash proceeds from stock option exercises and employee stock plan purchases,which enabled us to pay annual dividends of $1,151, reduce term debt (excludingthe conversion of the $1,200 convertible subordinated note discussed below) by$1,946 and line of credit borrowings by $3,314 during 2005.  Debt levels were further reduced in 2005 as aresult of the June conversion of a $1,200 convertible subordinated noteheld by Groupe SNPE into 200,000 shares of the Company’s common stock.  We funded $1,966 of capital expendituresduring the first nine months of 2005. Based upon our expectations of future sales and operating incomeperformance and the expected stabilization of working capital levels, we expectto continue to generate strong operating cash flow in the fourth quarter of2005 and during the 2006 calendar year. After the reductions to term debt thathave either already occurred or are scheduled to occur in the fourth quarter of2005, outstanding obligations under term debt agreements will be reduced toapproximately $2,900 by the end of 2005 from approximately $6,100 as of December 31,2004.  Minimum annual principal paymentson existing term debt will be less than $600 in 2006.

 

**Three and Nine Months Ended September 30, 2005 Comparedto Three and Nine Months Ended September 30, 2004**

 
| ** ** | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|------------|------------|--------------------------------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **2005**                                   | ** ** | **2004**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                                          | 20,238     |       | $          | 12,070         |       | $ | 8,168 |   | 67.7 | % |
|            |            |                                            |            |            |            |                |            |  |  |  |  |  |

 
| ** ** | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|------------|------------|-------------------------------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **2005**                                  | ** ** | **2004**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                                         | 56,124     |       | $          | 34,215         |       | $ | 21,909 |   | 64.0 | % |
|            |            |                                           |            |            |            |                |            |  |  |  |  |  |

 

Thesignificant increases in consolidated net sales for the three and nine-monthperiods ended September 30, 2005 as compared to the same periods of 2004reflect the strong sales performance of our Explosive Metalworking Group.  Sales by the Explosive Metalworking Group,which include explosion welding of clad metal and shock synthesis of syntheticdiamonds, increased by 69.2% to $19,188 in the third quarter of 2005 from$11,342 in the third quarter of 2004. The Explosive Metalworking Group thirdquarter sales increase reflects a 44.7% increase in U.S. clad sales and a130.5% U.S. dollar increase in sales by Nobleclad Europe.  For the nine-month period, the ExplosiveMetalworking Group’s sales increased by 64.7% to $53,402 in 2005 from $32,428in 2004. The year-to-date increase in Explosive Metalworking Group’s salesreflects a 63.3% increase in U.S. clad sales and a 67.3% U.S. dollar salesincrease at Nobleclad Europe.  The substantialincreases in third quarter and year-to-date Explosive Metalworking Group salesis principally attributable to the improved economic condition of the

 

22

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industriesthat the Explosive Metalworking Group serves as evidenced by an increase in theExplosive Metalworking Group’s backlog from $11,700 at December 31, 2003to $27,500 as of December 31, 2004, $34,100 as of March 31, 2005 and$33,200 as of June 30, 2005. Explosive Metalworking Group sales for the fourth quarter of 2005 areexpected to approximate those reported for the third quarter. Third quartersales at AMK increased by 44.2% to $1,050 in 2005 from $728 in 2004.  For the nine months ended September 30,AMK’s sales increased by 52.3% to $2,722 in 2005 from $1,787 in 2004.  The significant increases in third quarterand year-to-date sales at AMK reflect the start-up of production by a keycustomer on a new ground-based power turbine during the second quarter of2005.  AMK’s fourth quarter sales areexpected be comparable to those reported for the third quarter, with salesexpected to strengthen during 2006 as AMK increases production levels relatingto the new ground-based turbine program.

 
| ** **               | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|------------|------------|----------------|------------|
| ** **               | ** ** | **2005**                                   | ** ** | **2004**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit             |       | $                                          | 6,268      |       | $          | 3,250          |       | $ | 3,018 |   | 92.9 | % |
| Percentage  of net sales |       | 31.0                                       | %          | 26.9       | %          |           |       |   |   |
|                          |            |                                            |            |            |            |                |            |  |  |  |  |  |

 
| ** **               | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|------------|------------|----------------|------------|
| ** **               | ** ** | **2005**                                  | ** ** | **2004**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit             |       | $                                         | 16,134     |       | $          | 8,353          |       | $ | 7,781 |   | 93.2 | % |
| Percentage  of net sales |       | 28.7                                      | %          | 24.4       | %          |           |       |   |   |
|                          |            |                                           |            |            |            |                |            |  |  |  |  |  |

 

Theimprovements in our gross profit margin in the third quarter reflect anincrease in our Explosive Metalworking Group’s gross profit margin to 30.9% in2005 from 27.4% in 2004 and an increase in AMK’s gross margin to 33.0% in 2005from 19.2% in 2004.  The ExplosiveMetalworking Group’s gross margin improvement includes an increase in the U.S.Clad Metal gross margin to 31.4% in 2005 from 30.9% in 2004 and an increase inNobelclad Europe’s gross profit margin to 30.1% in 2005 from 18.7% in 2004. Forboth the U.S. and European cladding operations and for AMK, the third quarter2005 gross margin improvement relates primarily to the sales increasesdiscussed above and the resultant more favorable absorption of fixedmanufacturing overhead expenses.

 

Theimprovements in our gross profit margin for the nine months ended September 30,2005 reflect an increase in our Explosive Metalworking Group’s gross profitmargin to 28.8% in 2005 from 25.0% in 2004 and an increase in AMK’s grossmargin to 26.7% in 2005 from 13.6% in 2004. The Explosive Metalworking Group gross margin improvement includes anincrease in the U.S. Clad Metal gross margin to 30.4% in 2005 from 29.1% in2004 and an increase in Nobelclad Europe’s gross profit margin to 25.9% in 2005from 17.0% in 2004. AMK reported a gross margin of 26.7% for the nine monthsended September 30, 2005 as compared to a gross margin of 13.6% for thenine months ended September 30, 2004. As was the case for the third quarter, the year-to-date 2005 grossmargin improvements for both the Explosive Metalworking Goup and AMK relateprimarily to the sales increases discussed above and the resultant morefavorable absorption of fixed manufacturing overhead expenses.

 

23

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| ** **                                  | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|------------|------------|----------------|------------|
| ** **                                  | ** ** | **2005**                                   | ** ** | **2004**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General &  administrative expenses |       | $                                          | 1,020      |       | $          | 529            |       | $ | 491 |   | 92.8 | % |
| Percentage  of net sales                    |       | 5.0                                        | %          | 4.4        | %          |           |       |   |   |
|                                             |            |                                            |            |            |            |                |            |  |  |  |  |  |

 
| ** **                                  | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|------------|------------|----------------|------------|
| ** **                                  | ** ** | **2005**                                  | ** ** | **2004**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General &  administrative expenses |       | $                                         | 2,726      |       | $          | 2,102          |       | $ | 624 |   | 29.7 | % |
| Percentage  of net sales                    |       | 4.9                                       | %          | 6.1        | %          |           |       |   |   |
|                                             |            |                                           |            |            |            |                |            |  |  |  |  |  |

 

The $491 increase in third quarter 2005 general and administrativeexpenses reflects a $434 increase in spending by our U.S. operations and a $57increase in our European general and administrative expenses. Increasedspending by our U.S. operations, which currently absorbs all corporateheadquarters expenses, reflects an aggregate increase of $165 in audit, taxadvisory,  consulting and investorrelations expenses, a $219 increase in accrued incentive compensation expense,and the impact of annual salary adjustments. The $624 increase in 2005 general and administrative expenses for thenine-month period reflects a $709 increase in spending by our U.S. operationsoffset by an $85 decrease in European general and administrative expenses.Increased U.S. spending includes the effects of an aggregate increase of $189in audit, tax consulting and investor relations expenses, a $287 increase inaccrued incentive compensation expense, and the impact of annual salaryadjustments.  The 2005 increases inaudit, tax advisory, consulting and investor relations expenses relatesprincipally to compliance with the Sarbanes-Oxley Act of 2002, tax planninginitiatives and increased investor relations activities.  The decrease in European expenses for thenine-month period of 2005 relates primarily to the 2004 salary, payroll taxesand benefits paid, and a one-time provision recorded in the second quarter of2004 for termination payments payable to the former managing director of ourSwedish operation whose employment was terminated during the second quarter of2004.  All expenses associated with thisformer managing director were allocated to both general and administrativeexpenses and selling expenses based on his job responsibilities.

 
| ** **               | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|------------|------------|----------------|------------|
| ** **               | ** ** | **2005**                                   | ** ** | **2004**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling  expenses        |       | $                                          | 849        |       | $          | 774            |       | $ | 75 |   | 9.7 | % |
| Percentage  of net sales |       | 4.2                                        | %          | 6.4        | %          |           |       |   |   |
|                          |            |                                            |            |            |            |                |            |  |  |  |  |  |

 
| ** **               | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|------------|------------|----------------|------------|
| ** **               | ** ** | **2005**                                  | ** ** | **2004**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling  expenses        |       | $                                         | 2,845      |       | $          | 2,471          |       | $ | 374 |   | 15.1 | % |
| Percentage  of net sales |       | 5.1                                       | %          | 7.2        | %          |           |       |   |   |
|                          |            |                                           |            |            |            |                |            |  |  |  |  |  |

 

24

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The$75 increase in third quarter 2005 selling expenses reflects a $6 increase inselling expenses for our U.S. operations and a $69 increase in our Europeanselling expense. The $374 increase in 2005 selling expenses for the nine-monthperiod includes a $164 increase for our U.S. operations and a $210 increase forour European operations.  The increase inselling expenses for our U.S. operations for the nine-month period reflects increasedcompensation expense of $82 relating to additional personnel, higher accruedbonus expense in 2005 and annual salary adjustments, as well as increasedspending in 2005 on the development of a new website and business travel.Increased European selling expenses for both the three and nine months ended September 30,2005 reflect an increase in outside sales commissions due to the increase insales.

 
| ** **              | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **2005**                                   | ** ** | **2004**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from  operations |       | $                                          | 4,399      |       | $          | 1,947          |       | $ | 2,452 |   | 125.9 | % |
|                         |            |                                            |            |            |            |                |            |  |  |  |  |  |

 
| ** **              | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|-------------------------|------------|-------------------------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **2005**                                  | ** ** | **2004**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from  operations |       | $                                         | 10,563     |       | $          | 3,780          |       | $ | 6,783 |   | 179.4 | % |
|                         |            |                                           |            |            |            |                |            |  |  |  |  |  |

 

OurExplosive Metalworking Group reported income from operations of $4,141 in thethird quarter of 2005 compared to $1,869 in the third quarter of 2004.  This 121.6% operating income increasereflects a sales increase of $7,846, or 69.2%, and an increase in the ExplosiveMetalworking Group’s gross profit margin from 27.4% in 2004 to 30.9% in2005.  AMK reported operating income of$258 in the third quarter of 2005 compared to $78 in the prior year thirdquarter.  The substantial increase in AMK’soperating income reflects a sales increase of $322, or 44.2%, and an increasein the gross margin rate from 19.2% in 2004 to 33.0% in 2005.

 

Forthe nine-month period, our Explosive Metalworking Group reported income fromoperations of $10,078 in 2005 compared to $3,736 in 2004.  This 169.8% operating income increasereflects a sales increase of $20,974, or 64.7%, and an increase in the Group’sgross profit margin from 25.0% in 2004 to 28.8% in 2005.  AMK reported operating income of $485 for thenine months ended September 30, 2005 as compared to operating income of$44 for the same period of 2004.  Thisimproved operating performance reflects a sales increase of $935, or 52.3%, andan increase in the gross margin from 13.6% in 2004 to 26.7% in 2005.

 
| ** **            | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|------------|------------|----------------|------------|
| ** **            | ** ** | **2005**                                   | ** ** | **2004**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax  provision |       | $                                          | 1,176      |       | $          | 696            |       | $ | 480 |   | 69.0 | % |
| Percentage            |       | 27.2                                       | %          | 38.0       | %          |           |       |   |   |
|                       |            |                                            |            |            |            |                |            |  |  |  |  |  |

 
| ** **            | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|-----------------------|------------|-------------------------------------------|------------|------------|------------|----------------|------------|
| ** **            | ** ** | **2005**                                  | ** ** | **2004**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax  provision |       | $                                         | 3,445      |       | $          | 1,343          |       | $ | 2,102 |   | 156.5 | % |
| Percentage            |       | 33.2                                      | %          | 38.9       | %          |           |       |   |   |
|                       |            |                                           |            |            |            |                |            |  |  |  |  |  |

 

25

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For the three months ended September 30, 2005 and 2004, theconsolidated income tax provisions included $601 and $634, respectively,related to U.S. taxes that were provided at effective tax rates of 23.0% and38.6% for the respective periods.  Forthe nine months ended September 30, 2005 and 2004, the consolidated incometax provisions included $2,416 and $1,240, respectively, related to U.S. taxesthat were provided at effective tax rates of 33.3% and 39.0% for the respectiveperiods.  The remainder of theconsolidated income tax provision for all periods relates to foreign taxesassociated with the operations of Nobelclad Europe and its Swedish subsidiary,Nitro Metall.  The significantly lowerconsolidated effective tax rates in 2005 are primarily attributable to U.S. taxbenefits and U.S. effective rate adjustments that were recorded in the thirdquarter as further explained below but also reflect higher proportionatepre-tax earnings by the European operations in the 2005 periods for which taxeswere provided at French and Swedish statutory tax rates that are slightly lowerthan the normal combined Federal and state effective tax rate applicable to ourU.S. operations.

 

During the quarter ended September 30, 2005, we completed severalU. S. tax projects that impacted our tax provision recorded for the three andnine months ended September 30, 2005. Our third quarter and year-to-date 2005 tax provision included combinedU.S. federal and state benefits of approximately $254 relating to tax creditsand other attributes identified in connection with these projects and claimedon 2004 and amended prior year Federal and state tax returns that were filedduring the quarter. Upon the completion of the 2004 and amended prior year taxreturns, we were able to estimate better the effects that recent divestituresand other changes in our business are expected to have our 2005 effective stateincome tax rate and thus, on our overall effective income tax rate.  The aforementioned tax benefits and a lower2005 estimated effective state income tax rate are expected to result in anestimated effective tax rate for the full year 2005 of approximately 34% forboth our consolidated and U.S. operations. On a going forward basis, we expect effective tax rates on ourconsolidated and U.S. operations of approximately 36% and 37%, respectively.

 

**Liquidity and Capital Resources**

 

Historically, DMC has obtained its operational financing from acombination of internally generated cash flows, revolving credit borrowings,long-term debt arrangements and the issuance of common stock.       We believe that cash flow from operationsand funds available under our current credit facilities and any futurereplacement thereof will be sufficient to fund working capital, debt serviceobligations and capital expenditure requirements of our current businessoperations for the foreseeable future. However, a significant portion of our sales is derived from a relativelysmall number of customers; therefore, the failure to complete existingcontracts on a timely basis, and to receive payment for such services in atimely manner, or to enter into future contracts at projected volumes andprofitability levels could adversely affect our ability to meet cashrequirements exclusively through operating activities. Consequently, anyrestriction on the availability of borrowing under our credit facilities couldnegatively affect our ability to meet future cash requirements. DMC attempts tominimize its risk of losing customers or specific contracts by continuallyimproving product quality, delivering products on time and competing favorablyon the basis of price. Risks associated with the availability of funds areminimized by borrowing from multiple lenders. The nature of DMC’s business islargely insulated from the negative effects of inflation on sales and operatingincome because the pricing on custom orders reflects current raw material andother manufacturing costs.

 

26

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The Company’s existing loan agreements include covenants andrestrictions, certain of which relate to the payment of dividends or otherdistributions to stockholders, redemption of capital stock, incurrence ofadditional indebtedness, mortgaging, pledging or disposition of major assetsand maintenance of specified financial ratios. As of September 30, 2005, the Company was in compliance with allfinancial covenants and other provisions of our debt agreements.

 

The Company’s principal cash flows related to debt obligations,operating lease obligations and purchase obligations have not materiallychanged since December 31, 2004.

 

# **Highlightsfrom the Statement of Cash Flows for the Nine Months Ended September 30,2005 (dollars in thousands)**

#  

Net cash flows provided by operating activities for the nine monthsended September 30, 2005 totaled $4,544. Significant sources of operating cash flow included income fromcontinuing operations of $6,916, non-cash depreciation and amortization of$1,165 and a tax benefit related to stock options exercised during the ninemonths ended September 30, 2005 in the amount of $2,477.  These sources of cash flow were partiallyoffset by net negative changes in working capital.  Net negative changes in working capital forthe nine months ended September 30, 2005 totaled $5,843, reflecting anincrease in inventories, prepaid expenses and accounts receivable of $5,126,$1,585 and $1,003, respectively.  Thesenegative changes to working capital were partially offset by a net increase inaccounts payable and accrued expenses of $1,871.

 

Net cash flows used in investing activities totaled $732, whichincludes $1,966 for capital expenditures that was largely offset by an $1,016payment received on a portion of the outstanding receivable relating to theSpin Forge divestiture and a $218 net decrease in other non-current assets.

 

Net cash flows used in financing activities for the nine months ended September 30,2005 totaled $4,731.  Significant uses ofcash for financing activities included net repayments on bank lines of creditof $3,216, payment of annual dividends of $1,155, final principal payments onthe SNPE, Inc. term loan of $667, industrial development revenue bondprincipal payments of $745 and an annual principal payment of $366 on a termloan with a French bank.  Sources of cashflow from financing activities include $1,481 in net proceeds from the issuanceof common stock relating to the exercise of stock options and employee stockpurchases under the Company’s employee stock purchase plan.

 

# **Highlightsfrom the Statement of Cash Flows for the Nine Months Ended September 30,2004 (dollars in thousands)**

#  

Net cash flows from operating activities for the nine months ended September 30,2004 totaled $2,857. Significant sources of operating cash flow included incomefrom continuing operations of $2,106, depreciation and amortization of $1,086and deferred tax expense of $1,265. These sources of cash flow were partially offset by $1,600 of netnegative changes in components of working capital.  Net negative changes in working capitalincluded an increase in accounts receivable and inventories of $1,883 and$3,599, respectively.  These negativechanges in working capital were partially offset by an increase in accountspayable and accrued expenses of $2,934 and $471, respectively, and a decreasein prepaid expenses of $477.

 

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Cash used in investing activities totaled $809 and was comprisedprimarily of capital expenditures in the amount of $899.

 

Net cash flows used in financing activities for the nine months ended September 30,2004 totaled $194.  Significant uses ofcash for financing activities included principal payments on industrialdevelopment revenue bonds in the amount of $690, principal payments on the SNPE, Inc.term loan of $667 and $355 in annual principal payments on a term loan with aFrench bank.  These uses of cash forfinancing activities were almost entirely offset by a bank overdraft of $357and borrowings on bank lines of credit in the amount of $1,120.

 

Cash flows used in discontinued operations totaled $1,807 and were theresult of the operating losses of Spin Forge as well as negative changes inworking capital for that division.

 

**Future Capital Needs and Resources**

 

Weanticipate that, for the foreseeable future, significant amounts of availablecash flows will be utilized for:

 

•                  operating expenses to support our domesticand foreign manufacturing operations;

•                  capital expenditures;

•                  debt service requirements; and

•                  other general corporate expenditures,including annual dividend payments.

 

Weexpect cash inflows from operating activities to exceed outflows for the fullyear 2005 and during 2006.  However, oursuccess depends on the execution of our strategies, including our ability to:

 

•                  secure an adequate level of new customerorders at all operating divisions; and

•                  continue to implement the most cost-effectiveinternal processes.

 

Basedon available cash resources, anticipated capital expenditures and projectedoperating cash flow, we believe that we will be able to fully fund ouroperations through the end of 2005 and in 2006. In making this assessment, we have considered:

 

•                  presently scheduled debt service requirementsduring the remainder of 2005 and in 2006, as well as the availability offunding related to our line of credit with SNPE and our bank lines of credit;

•                  the anticipated level of capital expendituresduring the remainder of 2005 and in 2006; and

•                  our expectation of realizing positive cashflow from operations during the remainder of 2005 and in 2006.

 

Ifour business plans change, or if economic conditions change materially, ourcash flow, profitability and anticipated cash needs could change significantly.In particular, any acquisition or new business opportunity could involvesignificant additional funding needs in excess of the identified currentlyavailable sources, and could require us to raise additional equity or debtfunding to meet those needs.

 

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### **CriticalAccounting Policies**

 

Wehave identified the most critical accounting principles upon which ourfinancial status depends by considering those accounting policies that involvethe most complex or subjective decisions or assessments. We identified our mostcritical accounting policies to be those related to revenue recognition, assetimpairments, goodwill, impact of foreign currency exchange rate risks andincome taxes.

 

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

 

AssetImpairments.  The Company reviews its long-lived assets andcertain identifiable intangibles to be held and used by the Company forimpairment whenever events or changes in circumstances indicate their carryingamount may not be recoverable. In so doing, the Company estimates the futurenet cash flows expected to result from the use of the asset and its eventualdisposition. If the sum of the expected future net cash flows (undiscounted andwithout interest charges) is less than the carrying amount of the asset, animpairment loss is recognized to reduce the asset to its estimated fair value.Otherwise, an impairment loss is not recognized.  Long-lived assets and certain identifiableintangibles to be disposed of, if any, are reported at the lower of carryingamount or fair value less cost to sell.

 

Goodwill. Goodwill is tested for impairment at least annually on reporting unitsone level below the segment level and any impairment is based on the reportingunit’s estimated fair value.  Fair valuecan be determined based on discounted cash flows, comparable sales orvaluations of similar businesses. Impairment occurs when the carrying amount of goodwill exceeds itsestimated fair value.  The Company’spolicy is to test goodwill for impairment in the fourth quarter of each yearunless an indicator of impairment arises earlier.

 

Theentire amount of goodwill, which had a carrying value of $847 on theConsolidated Balance Sheet as of September 30, 2005, relates to theCompany’s U.S. Clad Metal Products division. Based on the analysis performed in the fourth quarter of 2004, noimpairment was recorded to the carrying value of goodwill.

 

Impact of Foreign Currency Exchange Rate Risks.  Thefunctional currency for the Company’s foreign operations is the applicablelocal currency for each affiliate company. Assets and liabilities of foreignsubsidiaries for which the functional currency is the local currency aretranslated at exchange rates in effect at period-end, and the statements ofoperations are translated at the average exchange rates during the period.  Exchange rate fluctuations on translatingforeign currency financial statements into U.S. dollars that result inunrealized gains

 

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orlosses are referred to as translation adjustments. Cumulative translationadjustments are recorded as a separate component of stockholders’ equity andare included in other cumulative comprehensive income (loss). Transactionsdenominated in currencies other than the local currency are recorded based onexchange rates at the time such transactions arise. Subsequent changes inexchange rates result in transaction gains and losses, which are reflected inincome as unrealized (based on period-end translations) or realized uponsettlement of the transactions. Cash flows from the Company’s operations inforeign countries are translated at actual exchange rates when known, or at theaverage rate for the period. As a result, amounts related to assets andliabilities reported in the consolidated statements of cash flows will notagree to changes in the corresponding balances in the consolidated balancesheets. The effects of exchange rate changes on cash balances held in foreigncurrencies are reported as a separate line item below cash flows from financingactivities.

 

IncomeTaxes.  The Company accounts for income taxes inaccordance with Statement of Financial Accounting Standards No. 109, *Accounting for Income Taxes* (SFAS 109)which requires the recognition of deferred tax assets and deferred taxliabilities for the expected future income tax consequences of transactionsthat have been included in the Consolidated Financial Statements or taxreturns.  Deferred tax assets andliabilities are determined based on the temporary differences between theConsolidated Financial Statement base and the tax base of assets andliabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse.  TheCompany believes that deferred tax assets will more likely than not berecovered from future projected taxable income and as such no allowance hasbeen recorded on the deferred tax assets in the Consolidated Balance Sheet asof September 30, 2005.

 

**Significant Accounting Pronouncements**

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedFASB Statement No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”),which is a revision of SFAS 123.  SFAS123R supersedes APB 25 and amends SFAS 95, Statement of Cash Flows.  Generally the approach in SFAS 123R issimilar to the approach described in SFAS 123. However, SFAS 123R requires all share-based payments to employees,including grants of employee stock options, to be recognized in the incomestatement based on their fair values. The Company must adopt SFAS 123R no later than January 1, 2006.

 

Theadoption of SFAS 123R, which will occur on January 1, 2006, will result ina reduction of net income.  The Companyis currently evaluating the significance of the effect that the adoption willhave on its financial position and results of operations.

 

InNovember 2004, the FASB issued SFAS 151, Inventory Costs, which amends theguidance in ARB No. 43, Chapter 4, Inventory Pricing.  This statement requires abnormal amounts ofidle facility expense, freight, handling costs and wasted material to beexcluded from inventory costing and instead included as period expenses.  In addition, this standard requires theallocation of fixed production overhead to be based on normal capacity of theproduction facilities.  The Company doesnot believe the adoption of this standard on January 1, 2006 will have asignificant impact on its results of operations.

 

InMay 2005, the FASB issued SFAS 154, Accounting Changes and ErrorCorrections, which requires the direct effects of voluntary accountingprinciple changes to be retrospectively applied to prior periods’ financialstatements. This Statement does not change the transition provisions of anyexisting accounting pronouncements, but would apply in the unusual instance

 

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thata pronouncement does not include specific transition provisions. SFAS No. 154maintains existing guidance with respect to accounting estimate changes andcorrections of errors. The Statement is effective for the Company beginning on January 1,2006. Adoption is not expected to have a material impact on the Company’sfinancial position, results of operation or cash flows.

 

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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, 2004.

 

**ITEM 4.  Controlsand 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 thatsuch information 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 and procedures,no matter how well designed and operated, can provide only reasonable assuranceof achieving the desired control objectives, and management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.

 

As of September 30, 2005, the Company carried out an evaluation,under the 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 allfraud.  Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs.  As a result of the inherent limitations inall control systems, no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within the Company havebeen detected.  These inherentlimitations include the realities that judgments in decision-making can befaulty, and that breakdowns can occur because of simple error or mistake.  As a result of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.  Accordingly, theCompany’s disclosure controls and procedures are designed to providereasonable, not absolute, assurance that the disclosure controls and proceduresare met.

 

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**Part II- OTHER INFORMATION**

 

**Item 1.Legal Proceedings**

 

None.

 

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

 

None.

 

**Item 3. Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**Item 5.Other Information**

 

On March 18, 1998, the Company entered into an Operating Leasewith Spin Forge, LLC (the “Owner”) with respect to a parcel of real property ownedby the Owner (the “Property”).  TheCompany and the Owner also concurrently entered into an Option Agreement givingthe Company an option to purchase the Property from the Owner at a fixed price,which Option Agreement has since been amended five times (as amended, the “OptionAgreement”).  The Option Agreement may beexercised by the Company beginning after November 1, 2006.

 

On September 17, 2004, the Company subleased the Property (the “Sublease”)to Aerojet-General Corporation (“Aerojet”) and assigned its rights in theOption Agreement to Aerojet (the “Option Assignment”).  Under the Option Assignment, Aerojet’s rightsin the Option Agreement terminated on August 1, 2005.  The Sublease expires on January 1, 2007.

 

The Company and the Owner have entered into an Option PurchaseAgreement, dated as of November 4, 2005 (the “Option Purchase Agreement”),whereby the Company has agreed to sell the Option Agreement to the Owner forthe purchase price of $2,300.  Anon-refundable deposit of $100 has been paid by the Owner to the Company andthe balance of the purchase price will be paid at the closing of escrow whichmust occur no later than January 31, 2006. Under the Option Purchase Agreement, each party has agreed to indemnifythe other for its breaches of any representations and warranties under theOption Purchase Agreement.  In addition,if the escrow fails to close for reasons other than the Company’s default underthe Option Purchase Agreement, the Company will retain the non-refundabledeposit and the Option Agreement will be replaced by an Amended and RestatedOption Agreement, effective February 1, 2006.

 

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**Item 6.**

 

**Exhibits**

 
| 10.1   |   | -      |   | Credit  Agreement dated as of September 15, 2005 between Dynamic Materials  Corporation and Wells Fargo Bank, National Association (incorporated by  reference to the Company’s Current Report on Form 8-K filed with the  Commission on September 21, 2005)                                  |
|--------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                              |
| 10.2   |   | -      |   | $7,500,000  Revolving Line of Credit Note dated September 15, 2005 of Dynamic  Materials Corporation payable to the order of Wells Fargo Bank, National  Association (incorporated by reference to the Company’s Current Report on  Form 8-K filed with the Commission on September 21, 2005) |
|   |   |   |   |                                                                                                                                                                                                                                                                                                              |
| 10.3   |   | -      |   | Spin  Forge Agreement                                                                                                                                                                                                                                                                                             |
|   |   |   |   |                                                                                                                                                                                                                                                                                                              |
| 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 with the requirements of the Exchange Act, the Registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

 
|                         | **DYNAMIC MATERIALS CORPORATION**                                                                                                        |
|------------------------------|------------------------------------------------------------------------------------------------------------------------------------------|
|                         | (Registrant)                                                                                                                             |
|                         |                                                                                                                                     |
|                         |                                                                                                                                     |
| Date:  November 9, 2005 | /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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