**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**Form 10-Q**

 

**(Mark One)**

 
| **x**                                                   | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES  AND EXCHANGE ACT OF 1934**                                                                                                                             |
|---------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                    |       |                                                                                                                                                                                                                                    |
| **For the quarterly period ended March 31,  2008** |
| ** **                                              | ** ** | ** **                                                                                                                                                                                                                              |
| **OR**                                                  |
| ** **                                              | ** ** | ** **                                                                                                                                                                                                                              |
| **o**                                                   | ** ** | **TRANSITION REPORT UNDER  SECTION 13 OR 15(d) OF THE SECURITIES  ACT OF 1934 FOR THE TRANSITION PERIOD FROM         TO         .** |

 

**Commissionfile number 0-8328**

 

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**DYNAMICMATERIALS CORPORATION**

(Exact name ofRegistrant as Specified in its Charter)

 

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

 

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

(Address of principalexecutive offices, including zip code)

 

**(303) 665-5700**

(Registrant’s telephonenumber, including area code)

 

Indicate by check markwhether 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  x   No  o

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company. See the definitionsof “large accelerated filer,” “accelerated filer,” and “smaller reportingcompany” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 underthe Act).    Yes  o   No  x

 

The number of shares ofCommon Stock outstanding was 12,602,768 as of April 30, 2008.

 

 

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CAUTIONARY NOTE ABOUT FORWARD-LOOKINGSTATEMENTS

 

Thisquarterly report on Form 10-Q contains “forward-looking statements” withinthe meaning of section 27A of the Securities Act of 1933 and section 21E of theSecurities Exchange Act of 1934. In particular, we direct your attention to Part I,Item 1- Financial Statements, Item 2 - Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and Item 3 - Quantitative andQualitative Disclosures About Market Risk and Part II, Item 1A – RiskFactors. We intend the forward-looking statements throughout this quarterlyreport on Form 10-Q and the information incorporated by reference hereinto be covered by the safe harbor provisions for forward-looking statements.Statements contained in this report which are not historical facts areforward-looking statements that involve risks and uncertainties that couldcause actual results to differ materially from projected results. Allprojections and statements regarding our expected financial position andoperating results, our business strategy, our financing plans and the outcomeof any contingencies are forward-looking statements. These statements cansometimes be identified by our use of forward-looking words such as “may”, “believe”,“plan”, “anticipate”, “estimate”, “expect”, “intend” and other phrases ofsimilar meaning. The forward-looking information is based on informationavailable as of the date of this quarterly report and on numerous assumptionsand developments that are not within our control. Although we believe that ourexpectations as expressed in these forward-looking statements are reasonable,we cannot assure you that our expectations will turn out to be correct. Factorsthat could cause actual results to differ materially include, but are notlimited to, the following: the ability to obtain new contracts at attractiveprices; the size and timing of customer orders and shipment; fluctuations incustomer demand; fluctuations in foreign currencies; competitive factors; thetimely completion of contracts; the timing and size of expenditures; the timelyreceipt of government approvals and permits; the adequacy of local laborsupplies at our facilities; current or future limits on manufacturing capacityat our various operations; the availability and cost of funds; and generaleconomic conditions, both domestic and foreign, impacting our business and thebusiness of the end-market users we serve. Readers are cautioned not to placeundue reliance on these forward-looking statements, which reflect management’sanalysis only as of the date hereof. We undertake no obligation to publiclyrelease the results of any revision to these forward-looking statements thatmay be made to reflect events or circumstances after the date hereof or toreflect the occurrence of unanticipated events.

 

2

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**INDEX**

 
| PART I -  FINANCIAL INFORMATION                                                                  |                                                                                                            |   |
|-------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                  |                                                                                                            |   |   |
| Item  1 - Condensed Consolidated Financial Statements                                                 |                                                                                                            | 4      |
|                                                                                                  |                                                                                                            |   |   |
|                                                                                                  | Consolidated  Balance Sheets as of March 31, 2008 (unaudited) and December 31,  2007                  |   | 4 |
|                                                                                                  |                                                                                                            |   |   |
|                                                                                                  | Consolidated  Statements of Operations for the three months ended March 31, 2008 and  2007 (unaudited)     |   | 6 |
|                                                                                                  |                                                                                                            |   |   |
|                                                                                                  | Consolidated Statement of Stockholders’ Equity for the  three months ended March 31, 2008 (unaudited) |   | 7 |
|                                                                                                  |                                                                                                            |   |   |
|                                                                                                  | Consolidated Statements of Cash Flows for the three  months ended March 31, 2008 and 2007 (unaudited)      |   | 8 |
|                                                                                                  |                                                                                                            |   |   |
|                                                                                                  | Notes to Condensed Consolidated Financial Statements  (unaudited)                                               |   | 10 |
|                                                                                                  |                                                                                                            |   |   |
| Item 2 -  Management’s Discussion and Analysis of Financial Condition and Results of  Operations |                                                                                                            | 21     |
|                                                                                                  |                                                                                                            |   |   |
| Item 3 -  Quantitative and Qualitative Disclosures about Market Risk                                  |                                                                                                            | 32     |
|                                                                                                  |                                                                                                            |   |   |
| Item 4 - Controls  and Procedures                                                                     |                                                                                                            | 32     |
|                                                                                                  |                                                                                                            |   |   |
| PART II - OTHER  INFORMATION                                                                     |                                                                                                            |   |
|                                                                                                  |                                                                                                            |   |   |
| Item 1 - Legal  Proceedings                                                                           |                                                                                                            | 34     |
|                                                                                                  |                                                                                                            |   |   |
| Item 1A - Risk Factors                                                                                |                                                                                                            | 34     |
|                                                                                                  |                                                                                                            |   |   |
| Item 2 -  Unregistered Sales of Equity Securities and Use of Proceeds                                 |                                                                                                            | 34     |
|                                                                                                  |                                                                                                            |   |   |
| Item 3 -  Defaults Upon Senior Securities                                                             |                                                                                                            | 34     |
|                                                                                                  |                                                                                                            |   |   |
| Item 4 -  Submission of Matters to a Vote of Security Holders                                         |                                                                                                            | 34     |
|                                                                                                  |                                                                                                            |   |   |
| Item 5 - Other  Information                                                                           |                                                                                                            | 34     |
|                                                                                                  |                                                                                                            |   |   |
| Item 6 - Exhibits                                                                                     |                                                                                                            | 34     |
|                                                                                                  |                                                                                                            |   |   |
|                                                                                                  | Signatures                                                                                                      |   | 36 |

 

3

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**Part I- FINANCIAL INFORMATION**

 

**ITEM 1. Condensed Consolidated Financial Statements**

** **

DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONSOLIDATEDBALANCE SHEETS

(Dollars in Thousands)

 
| ** **                                                                                  | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                  | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                                                                  | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
|                                                                                        |       |               |       |                  |       |
| ASSETS                                                                                      |       |               |       |                  |       |
|                                                                                        |       |               |       |                  |       |
| CURRENT ASSETS:                                                                             |       |               |       |                  |       |
| Cash and cash equivalents                                                                   |       | $                  | 17,610     |                  | $          | 9,045 |   |
| Restricted cash                                                                             |       | —             |       | 371                   |       |
| Accounts receivable, net of allowance for  doubtful accounts of $493 and $534, respectively |       | 35,341             |       | 39,833                |       |
| Inventories                                                                                 |       | 44,293             |       | 41,628                |       |
| Prepaid expenses and other                                                                  |       | 2,371              |       | 2,022                 |       |
| Related party receivable and loan                                                           |       | 1,245              |       | 1,103                 |       |
| Current deferred tax assets                                                                 |       | 899                |       | 728                   |       |
|                                                                                        |       |               |       |                  |       |
| Total current assets                                                                        |       | 101,759            |       | 94,730                |       |
|                                                                                        |       |               |       |                  |       |
| PROPERTY, PLANT AND EQUIPMENT                                                               |       | 53,287             |       | 49,590                |       |
| Less - Accumulated depreciation                                                             |       | (15,552            | )          | (14,144               | )          |
|                                                                                        |       |               |       |                  |       |
| Property, plant and equipment, net                                                          |       | 37,735             |       | 35,446                |       |
|                                                                                        |       |               |       |                  |       |
| GOODWILL, net                                                                               |       | 49,620             |       | 45,862                |       |
|                                                                                        |       |               |       |                  |       |
| PURCHASED INTANGIBLE ASSETS, net                                                            |       | 63,925             |       | 61,914                |       |
|                                                                                        |       |               |       |                  |       |
| DEFERRED TAX ASSETS                                                                         |       | 84                 |       | 42                    |       |
|                                                                                        |       |               |       |                  |       |
| OTHER ASSETS, net                                                                           |       | 1,618              |       | 1,544                 |       |
|                                                                                        |       |               |       |                  |       |
| INVESTMENT IN JOINT VENTURES                                                                |       | 1,474              |       | 1,361                 |       |
|                                                                                        |       |               |       |                  |       |
| TOTAL ASSETS                                                                                |       | $                  | 256,215    |                  | $          | 240,899 |   |

 

The accompanying notes are an integral partof these Condensed Consolidated Financial Statements.

 

4

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands,Except Share Data)

 
| ** **                                                                                                                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                          | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                                                                                                          | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
|                                                                                                                                |       |               |       |                  |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                          |       |               |       |                  |       |
|                                                                                                                                |       |               |       |                  |       |
| CURRENT LIABILITIES:                                                                                                                |       |               |       |                  |       |
| Accounts payable                                                                                                                    |       | $                  | 19,703     |                  | $          | 22,590 |   |
| Accrued expenses                                                                                                                    |       | 8,971              |       | 8,566                 |       |
| Accrued income taxes                                                                                                                |       | 3,286              |       | 1,212                 |       |
| Accrued employee compensation and benefits                                                                                          |       | 3,863              |       | 5,521                 |       |
| Customer advances                                                                                                                   |       | 2,563              |       | 4,593                 |       |
| Related party accounts payable and loans                                                                                            |       | 351                |       | 325                   |       |
| Lines of credit - current                                                                                                           |       | 7,265              |       | 7,587                 |       |
| Current maturities on long-term debt                                                                                                |       | 8,293              |       | 8,035                 |       |
| Current portion of capital lease  obligations                                                                                       |       | 417                |       | 389                   |       |
|                                                                                                                                |       |               |       |                  |       |
| Total current liabilities                                                                                                           |       | 54,712             |       | 58,818                |       |
|                                                                                                                                |       |               |       |                  |       |
| LINES OF CREDIT                                                                                                                     |       | 4,741              |       | —                |       |
|                                                                                                                                |       |               |       |                  |       |
| LONG-TERM DEBT                                                                                                                      |       | 62,778             |       | 61,530                |       |
|                                                                                                                                |       |               |       |                  |       |
| CAPITAL LEASE OBLIGATIONS                                                                                                           |       | 448                |       | 521                   |       |
|                                                                                                                                |       |               |       |                  |       |
| DEFERRED TAX LIABILITIES                                                                                                            |       | 21,046             |       | 20,604                |       |
|                                                                                                                                |       |               |       |                  |       |
| OTHER LONG-TERM LIABILITIES                                                                                                         |       | 1,234              |       | 1,147                 |       |
|                                                                                                                                |       |               |       |                  |       |
| COMMITMENTS AND CONTINGENT LIABILITIES                                                                                              |       | —             |       | —                |       |
|                                                                                                                                |       |               |       |                  |       |
| Total liabilities                                                                                                                   |       | 144,959            |       | 142,620               |       |
|                                                                                                                                |       |               |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                                          |       |               |       |                  |       |
| Preferred stock, $.05 par value; 4,000,000  shares authorized; no issued and outstanding shares                                     |       | —             |       | —                |       |
| Common stock, $.05 par value; 25,000,000  shares authorized; 12,602,768 and 12,433,768 shares issued and outstanding,  respectively |       | 630                |       | 622                   |       |
| Additional paid-in capital                                                                                                          |       | 38,995             |       | 38,246                |       |
| Retained earnings                                                                                                                   |       | 61,113             |       | 55,868                |       |
| Other cumulative comprehensive income                                                                                               |       | 10,518             |       | 3,543                 |       |
|                                                                                                                                |       |               |       |                  |       |
| Total stockholders’ equity                                                                                                     |       | 111,256            |       | 98,279                |       |
|                                                                                                                                |       |               |       |                  |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                     |       | $                  | 256,215    |                  | $          | 240,899 |   |

 

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

 

5

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31,2008 AND 2007

(Dollars in Thousands,Except Share Data)

(unaudited)

 
| ** **                                           | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **March 31,**               | ** ** |
| ** **                                           | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| NET SALES                                            |       | $                                | 58,393     |   | $ | 33,094 |   |
| COST OF PRODUCTS SOLD                                |       | 40,682                           |       | 22,243 |   |
| Gross profit                                         |       | 17,711                           |       | 10,851 |   |
| COSTS AND EXPENSES:                                  |       |                             |       |   |   |
| General and administrative expenses                  |       | 3,119                            |       | 1,662 |   |
| Selling expenses                                     |       | 2,841                            |       | 1,647 |   |
| Amortization expense of purchased  intangible assets |       | 2,361                            |       | — |   |
| Total costs and expenses                             |       | 8,321                            |       | 3,309 |   |
| INCOME FROM OPERATIONS                               |       | 9,390                            |       | 7,542 |   |
| OTHER INCOME (EXPENSE):                              |       |                             |       |   |   |
| Other expense                                        |       | (149                             | )          | (7 | ) |
| Interest expense                                     |       | (1,279                           | )          | — |   |
| Interest income                                      |       | 239                              |       | 188 |   |
| Equity in earnings of joint ventures                 |       | 16                               |       | — |   |
| INCOME BEFORE INCOME TAXES                           |       | 8,217                            |       | 7,723 |   |
| INCOME TAX PROVISION                                 |       | 2,972                            |       | 2,841 |   |
| NET INCOME                                           |       | $                                | 5,245      |   | $ | 4,882 |   |
| INCOME PER SHARE:                                    |       |                             |       |   |   |
| Basic                                                |       | $                                | 0.42       |   | $ | 0.41 |   |
| Diluted                                              |       | $                                | 0.42       |   | $ | 0.40 |   |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:       |       |                             |       |   |   |
| Basic                                                |       | 12,377,019                       |       | 12,009,577 |   |
| Diluted                                              |       | 12,557,068                       |       | 12,222,601 |   |

 

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

 

6

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DYNAMICMATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY

FORTHE THREE MONTHS ENDED MARCH 31, 2008

(Amountsin Thousands)

(unaudited)

 
| ** **                                                    | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Other**      | ** ** | ** ** | ** ** | ** **                   | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|-------------------|------------|----------------|------------|------------|------------|------------------------------|------------|
| ** **                                                    | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Cumulative** | ** ** | ** ** | ** ** | **Comprehensive**            | ** ** |
| ** **                                                    | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | ** **     | ** ** | **Income** | ** ** |
| ** **                                                    | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Income**     | ** ** | **Total**  | ** ** | **for the Period** | ** ** |
| Balances,  December 31, 2007                             |       | 12,434                |       | $           | 622        |           | $          | 38,246            |       | $              | 55,868     |       | $          | 3,543                        |       | $ | 98,279 |   |   |   |
|                                                          |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Shares issued for  stock option exercises                     |       | 25                    |       | 1           |       | 92             |       | —            |       | —         |       | 93         |       |                         |       |
| Restricted stock  awards                                      |       | 144                   |       | 7           |       | (7             | )          | —            |       | —         |       | —     |       |                         |       |
| Stock-based  compensation                                     |       | —                |       | —      |       | 664            |       | —            |       | —         |       | 664        |       |                         |       |
| Net income                                                    |       | —                |       | —      |       | —         |       | 5,245             |       | —         |       | 5,245      |       | 5,245                        |       |
| Derivative  valuation, net of tax of $174                     |       | —                |       | —      |       | —         |       | —            |       | (285           | )          | (285       | )          | (285                         | )          |
| Change in  cumulative foreign currency translation adjustment |       | —                |       | —      |       | —         |       | —            |       | 7,260          |       | 7,260      |       | 7,260                        |       |
| Balances,  March 31, 2008                                |       | 12,603                |       | $           | 630        |           | $          | 38,995            |       | $              | 61,113     |       | $          | 10,518                       |       | $ | 111,256 |   | $ | 12,220 |   |
|                                                               |            |                       |            |             |            |                |            |                   |            |                |            |            |            |                              |            |  |  |  |  |  |  |

 

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

 

7

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DYNAMIC MATERIALS CORPORATION &SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007

(Dollars in Thousands)

(unaudited)

 
| ** **                                                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                               |       |     |       |     |       |
| Net income                                                                          |       | $        | 5,245      |     | $          | 4,882 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities - |       |     |       |     |       |
| Depreciation (including capital lease  amortization)                                |       | 1,113    |       | 395      |       |
| Amortization of purchased intangible assets                                         |       | 2,361    |       | —   |       |
| Amortization of capitalized debt issuance  costs                                    |       | 60       |       | —   |       |
| Stock-based compensation                                                            |       | 664      |       | 224      |       |
| Deferred income tax benefit                                                         |       | (1,174   | )          | (46      | )          |
| Equity in earnings of joint ventures                                                |       | (16      | )          | —   |       |
| Change in -                                                                         |       |     |       |     |       |
| Restricted cash                                                                     |       | 377      |       | 3,059    |       |
| Accounts receivable, net                                                            |       | 5,968    |       | 553      |       |
| Inventories                                                                         |       | (670     | )          | (2,487   | )          |
| Prepaid expenses and other                                                          |       | (580     | )          | 6        |       |
| Accounts payable                                                                    |       | (3,837   | )          | (2,011   | )          |
| Customer advances                                                                   |       | (2,144   | )          | 46       |       |
| Accrued expenses and other liabilities                                              |       | (118     | )          | 212      |       |
|                                                                                |       |     |       |     |       |
| Net cash provided by operating activities                                           |       | 7,249    |       | 4,833    |       |
|                                                                                |       |     |       |     |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                               |       |     |       |     |       |
| Acquisition of property, plant and  equipment                                       |       | (2,361   | )          | (3,257   | )          |
| Change in other non-current assets                                                  |       | 15       |       | —   |       |
|                                                                                |       |     |       |     |       |
| Net cash used in investing activities                                               |       | (2,346   | )          | (3,257   | )          |
|                                                                                     |            |          |            |          |            |  |  |

 

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

 

8

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007

(Dollars in Thousands)

(unaudited)

 
| ** **                                                             | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM FINANCING ACTIVITIES:                                  |       |     |       |     |       |
| Payment on Nord LB term loans                                          |       | (265     | )          | —   |       |
| Borrowings on bank lines of credit, net                                |       | 3,665    |       | —   |       |
| Payment of capital lease obligations                                   |       | (105     | )          | —   |       |
| Payment of deferred debt issuance costs                                |       | (125     | )          | —   |       |
| Change in other long-tem liabilities                                   |       | 16       |       | 5        |       |
| Net proceeds from issuance of common stock  to employees and directors |       | 93       |       | 278      |       |
|                                                                   |       |     |       |     |       |
| Net cash provided by financing activities                              |       | 3,279    |       | 283      |       |
|                                                                   |       |     |       |     |       |
| EFFECTS OF EXCHANGE RATES ON CASH                                      |       | 383      |       | 34       |       |
|                                                                   |       |     |       |     |       |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                              |       | 8,565    |       | 1,893    |       |
|                                                                   |       |     |       |     |       |
| CASH AND CASH EQUIVALENTS, beginning of the  period                    |       | 9,045    |       | 17,886   |       |
|                                                                   |       |     |       |     |       |
| CASH AND CASH EQUIVALENTS, end of the  period                          |       | $        | 17,610     |     | $          | 19,779 |   |
|                                                                        |            |          |            |          |            |  |  |

 

The accompanying notes are an integral partof these Condensed Consolidated Financial Statements.

 

9

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##### **DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES**

##### ** **

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**(Dollars in Thousands, Except Share and PerShare Data)**

 

**(unaudited)**

 

**1.      BASIS OF PRESENTATION**

 

The information included in the Condensed Consolidated FinancialStatements is unaudited but includes all normal and recurring adjustmentswhich, in the opinion of management, are necessary for a fair presentation ofthe interim periods presented. These Condensed Consolidated FinancialStatements should be read in conjunction with the financial statements that areincluded in the Company’s Annual Report filed on Form 10-K for the yearended December 31, 2007.

 

**2.      SIGNIFICANT ACCOUNTINGPOLICIES**

 

**Principlesof Consolidation**

 

**TheCondensed Consolidated Financial Statements include the accounts of the Companyand its subsidiaries.  Only subsidiariesin which controlling interests are maintained are consolidated.  The equity method is used to account for ourownership in subsidiaries where we do not have controlling interest.  All significant intercompany accounts,profits and transactions have been eliminated in consolidation.**

** **

**Foreign Operations and Foreign Exchange Rate Risk**

 

**The**functional currency for theCompany’s foreign operations is the applicable local currency for eachaffiliate company. Assets and liabilities of foreign subsidiaries for which thefunctional currency is the local currency are translated at exchange rates ineffect at period-end, and the statements of operations are translated at theaverage exchange rates during the period. Exchange rate fluctuations on translating foreign currency financialstatements into U.S. dollars that result in unrealized gains or losses arereferred to as translation adjustments. Cumulative translation adjustments arerecorded as a separate component of stockholders’ equity and are included inother cumulative comprehensive income. Transactions denominated in currenciesother than the local currency are recorded based on exchange rates at the timesuch transactions arise. Subsequent changes in exchange rates result intransaction gains and losses which are reflected in income as unrealized (basedon period-end translations) or realized upon settlement of the transactions.Cash flows from the Company’s operations in foreign countries are translated atactual exchange rates when known, or at the average rate for the period. As aresult, amounts related to assets and liabilities reported in the consolidatedstatements of cash flows will not conform with changes in the correspondingbalances in the Consolidated Balance Sheets. The effects of exchange ratechanges on cash balances held in foreign currencies are reported as a separateline item below cash flows from financing activities.

** **

**10**

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** **

**Revenue Recognition**

** **

**Sales ofclad metal products and welding services are generally based upon customerspecifications set forth in customer purchase orders and require the Company toprovide certifications relative to metals used, services performed and theresults of any non-destructive testing that the customer has requested beperformed.  All issues of conformity ofthe product to specifications are resolved before the product is shipped andbilled.  Products related to the oilfieldproducts segment, which include detonating cords, detonators, bi-directionalboosters and shaped charges, as well as, seismic related explosives andaccessories, are standard in nature.  Inall cases, revenue is recognized only when all four of the following criteriahave been satisfied: persuasive evidence of an arrangement exists; the price isfixed or determinable; delivery has occurred; and collection is reasonablyassured.  For contracts that requiremultiple shipments, revenue is recorded only for the units included in eachindividual shipment.  If, as a contractproceeds toward completion, projected total cost on an individual contractindicates a potential loss, the Company will account for such anticipated loss.**

** **

**RelatedParty Transactions**

 

**TheCompany has related party transactions with its unconsolidated joint ventures,as well as with the minority partner of its consolidated joint venture.  A summary of those transactions and balancesas of March 31, 2008 and for the three months ended March 31, 2008 ispresented below:**

 
| ** **                       | ** ** | ** **    | ** ** | ** **                  | ** ** | ** **            | ** ** | **Minority Interest** | ** ** | ** ** | ** ** |
|----------------------------------|------------|---------------|------------|-----------------------------|------------|-----------------------|------------|----------------------------|------------|------------|------------|
| ** **                       | ** ** | **Perfoline** | ** ** | **DYNAenergetics RUS** | ** ** | **KazDYNAenergetics** | ** ** | **Partner**                | ** ** | **Total**  | ** ** |
| Sales to                         |       | 33            |       | —                      |       | 235                   |       | 524                        |       | 792        |       |
| Interest income  from            |       | 13            |       | —                      |       | —                |       | —                     |       | 13         |       |
| Accounts  receivable and loan to |       | 559           |       | 1                           |       | 316                   |       | 369                        |       | 1,245      |       |
| Accounts payable  and loan from  |       | 112           |       | —                      |       | —                |       | 239                        |       | 351        |       |

** **

**A summary of related party balances as of December 31,2007 is presented below:**

** **
| ** **                       | ** ** | ** **    | ** ** | ** **                  | ** ** | ** **            | ** ** | **Minority Interest** | ** ** | ** ** | ** ** |
|----------------------------------|------------|---------------|------------|-----------------------------|------------|-----------------------|------------|----------------------------|------------|------------|------------|
| ** **                       | ** ** | **Perfoline** | ** ** | **DYNAenergetics RUS** | ** ** | **KazDYNAenergetics** | ** ** | **Partner**                | ** ** | **Total**  | ** ** |
|                             |       |          |       |                        |       |                  |       |                       |       |       |       |
| Accounts  receivable and loan to |       | 523           |       | 449                         |       | 131                   |       | —                     |       | 1,103      |       |
| Accounts payable  and loan from  |       | 120           |       | —                      |       | —                |       | 205                        |       | 325        |       |

** **

**11**

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** **

**EarningsPer Share**

 

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

** **
| ** **                                           | ** ** | **For the three months ended March 31, 2008** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                                                       | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                           | ** ** | **Income**                                                                       | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings per share:                            |       |                                                                             |       |   |   |   |   |
| Net income                                           |       | $                                                                                | 5,245      |   | 12,377,019 |   | $ | 0.42 |   |
|                                                 |       |                                                                             |       |   |   |   |   |
| Dilutive effect of options to purchase  common stock |       | —                                                                           |       | 144,717 |   |   |   |
| Dilutive effect of restricted stock awards           |       | —                                                                           |       | 35,332 |   |   |   |
| Diluted earnings per share:                          |       |                                                                             |       |   |   |   |   |
| Net income                                           |       | $                                                                                | 5,245      |   | 12,557,068 |   | $ | 0.42 |   |

** **
| ** **                                           | ** ** | **For the three months ended March 31, 2007** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                                                       | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                           | ** ** | **Income**                                                                       | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings per share:                            |       |                                                                             |       |   |   |   |   |
| Net income                                           |       | $                                                                                | 4,882      |   | 12,009,577 |   | $ | 0.41 |   |
|                                                 |       |                                                                             |       |   |   |   |   |
| Dilutive effect of options to purchase  common stock |       | —                                                                           |       | 209,141 |   |   |   |
| Dilutive effect of restricted stock awards           |       | —                                                                           |       | 3,883 |   |   |   |
| Diluted earnings per share:                          |       |                                                                             |       |   |   |   |   |
| Net income                                           |       | $                                                                                | 4,882      |   | 12,222,601 |   | $ | 0.40 |   |

** **

**RecentAccounting Pronouncements**

 

**In September 2006, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 157, *Fair Value Measurements* (“SFAS157”). SFAS 157 defines fair value, establishes a framework for measuring fairvalue in accordance with accounting principles generally accepted in the UnitedStates, and expands disclosures about fair value measurements. SFAS No. 157was initially effective for financial statements issued for fiscal yearsbeginning after November 15, 2007. The FASB issued a staff position statement (“FSP”) in February 2008that deferred the required interpretation date of SFAS 157 for certain assetsand liabilities.  The adoption of SFAS157 in the three months ended March 31, 2008 did not have a materialimpact on the Company’s results of operations or financial position.**

** **

**12**

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** **

**In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities – Including an Amendment of FASB Statement No. 115.”This Statement permits entities to measure many financial instruments andcertain other items at fair value. This election is made on aninstrument-by-instrument basis and is irrevocable. Unrealized gains and losseson items for which the fair value option has been elected are reported inearnings. This statement is effective for fiscal years beginning after November 15,2007. The Company did not elect the fair value option for any of its existingfinancial assets and liabilities during the three months ended March 31,2008.**

** **

In December 2007, the FASB issued SFAS No. 141(R),*Business Combinations* and SFAS No. 160,*Accounting and Reporting of Noncontrolling Interestin Consolidated Financial Statements*, an amendment of ARB No. 51.These new standards will significantly change the accounting for and reportingof business combination transactions and noncontrolling (minority) interests inconsolidated financial statements. SFAS Nos. 141(R) and 160 arerequired to be adopted simultaneously and are effective for the first annualreporting period beginning on or after December 15, 2008. Thus, we arerequired to adopt these Standards on January 1, 2009. Earlier adoption isprohibited. The Company is in the process of determining the effect, if any,the adoption SFAS Nos. 141(R) and 160 will have on its results ofoperations or financial position.

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments and HedgingActivities*.  SFAS 161 requires additional disclosures relatedto the use of derivative instruments, the accounting for derivatives and howderivatives impact financial statements.  SFAS No. 161 is effectivefor fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the impact of adopting SFAS No. 161 onour consolidated financial statements.

 

**3.****                                     ****ACQUISITION**

 

OnNovember 15, 2007, the Company and a newly-formed subsidiary,DYNAenergetics Holding GmbH (the “Purchaser”), entered into a Purchase, Saleand Assignment Agreement (the “Purchase Agreement”) with Rolf Rospek, PatrickXylander, Uwe Gessel, and Oag Beteiligungs-GmbH, a German limited liabilitycompany (collectively the “Sellers”). Pursuant to the terms of the PurchaseAgreement, on November 15, 2007 the Purchaser acquired 100% of the issuedand outstanding shares of DYNAenergetics Beteiligungs-GmbH and all of the interestsin DYNAenergetics GmbH and Co. KG (collectively, “DYNAenergetics”) from theSellers.

 

DYNAenergeticsmanufactures clad metal plates and various explosives-related oilfield productsand operates under two business segments: Explosive Metalworking and OilfieldProducts. The acquisition enhances the Company’s ability to address growingworldwide demand for clad metal plates and expands the Company’s position inthe global explosion welding market. The addition of the Oilfield Productsbusiness segment will augment the Company’s involvement in specializedexplosive manufacturing processes and position the Company within the growinginternational oil and gas services industry.

 

Aspart of the Oilfield Products business segment, the Company has several jointventures, most of which are unconsolidated and accounted for under the equitymethod (see Note 4).

 

Theacquisition was valued at $112,587 and was financed by (i) the payment of$81,667 in cash, net of cash acquired of $1,870 and transaction related taxesof $3,708 (2,530 Euros) due from one of the sellers and withheld by thePurchaser, (ii) the issuance of 251,041 shares of common stock of theCompany (valued at $13,509), and (iii) the assumption of approximately$11,833

 

13

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(8,074Euros) of DYNAenergetics debt. The cash portion of the purchase price wasfinanced using proceeds from the new syndicated credit agreement and existingavailable cash.

 

The purchase price of the acquisition was allocated to the Company’stangible and identifiable intangible assets based on their estimated fairvalues as set forth below. Property, plant and equipment were recorded at fairvalues based on appraisals performed as of the acquisition date. Thepreliminary allocation to identifiable intangible assets was based onpreliminary valuation data and the estimates and assumptions are subject tochange. The excess of the purchase price over the tangible and identifiableintangible assets was recorded as goodwill. The Company is still in the processof analyzing other potential purchase accounting adjustments includingcompiling remaining acquisition related expenses.

 

The preliminary allocation of the purchase price to the assets andliabilities of DYNAenergetics is as follows:

 
| Current assets                |   | $       | 30,222  |   |
|-------------------------------|--------|---------|---------|--------|
| Property, plant and equipment |   | 7,845   |    |
| Intangible assets             |   | 62,794  |    |
| Goodwill                      |   | 45,871  |    |
| Investment in joint ventures  |   | 1,324   |    |
| Other assets                  |   | 11      |    |
| Total assets acquired         |   | 148,067 |    |
|                          |   |    |    |
| Current liabilities           |   | 14,524  |    |
| Long term debt                |   | 11,833  |    |
| Deferred tax liabilities      |   | 19,850  |    |
| Other long term liabilities   |   | 1,096   |    |
| Minority interest             |   | 10      |    |
| Total liabilities acquired    |   | 47,313  |    |
| Net assets acquired           |   | $       | 100,754 |   |

 

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

 
| ** **               | ** ** | ** ** | ** ** | **Weighted Average** | ** ** |
|--------------------------|------------|------------|------------|---------------------------|------------|
| ** **               | ** ** | ** ** | ** ** | **Amortization**          | ** ** |
| ** **               | ** ** | **Value**  | ** ** | **Period**                | ** ** |
| Core technology          |       | $          | 24,531     |                      | 20  years  |   |
| Customer relationships   |       | 33,099     |       | 9  years                  |       |
| Trademarks / Trade names |       | 2,672      |       | 9  years                  |       |
| Order backlog DYNAplat   |       | 2,492      |       | Within  1 year            |       |
| Total intangible assets  |       | $          | 62,794     |                      |       |   |

 

14

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The Company acquired Goodwill in the amount of $45,871 as a result ofthe acquisition of DYNAenergetics. The amount of goodwill assigned to eachreportable segment is as follows:

 
| ** **                  | ** ** | **Value** | ** ** |
|-----------------------------|------------|-----------|------------|
| Explosive Metalworking |       | $         | 25,196     |   |
| Oilfield Products      |       | 20,675    |       |
| Total goodwill              |       | $         | 45,871     |   |

 

Goodwill as of March 31, 2008 amounts to $49,620 and the changefrom December 31, 2007 primarily reflects the impact of foreign currencytranslation.

 

Thefollowing table presents the unaudited, pro-forma combined results ofoperations for the three months ended March 31, 2007 assuming (i) theacquisition had occurred on January 1, 2007; (ii) pro-formaamortization expense of the purchased intangible assets and (iii) pro-formainterest expense assuming the Company utilized its syndicated credit agreementto finance the acquisition:

 
| ** **             | ** ** | **2007** | ** ** |
|------------------------|------------|----------|------------|
| Net sales              |       | $        | 46,064     |   |
| Income from operations |       | $        | 7,050      |   |
| Net income             |       | $        | 3,690      |   |
|                   |       |     |       |
| Net income per share:  |       |     |       |
| Basic                  |       | $        | 0.30       |   |
| Diluted                |       | $        | 0.30       |   |

 

The pro-forma results above are not necessarily indicative of theoperating results that would have actually occurred if the acquisition had beenin effect on the dates indicated, nor are they necessarily indicative of futureresults of the combined companies.

 

**4.****                                     ****INVESTMENTIN JOINT VENTURES**

 

Operatingresults include the Company’s proportionate share of income from jointventures, which consist of unconsolidated joint ventures accounted for underthe equity method. These investments (all of which resulted from theacquisition of DYNAenergetics and pertain to the Company’s Oilfield Productsbusiness segment) include the following: (1) 53.5% interest in Perfoline,which is a Russian manufacturer of perforating gun systems; (2) 55%interest in DYNAenergetics RUS which is a Russian trading company that sellsthe Company’s oilfield products and (3) 60% interest in KazDYNAenergeticswhich is a Kazakhstan trading company that sells the Company’s oilfieldproducts. Due to certain minority interest veto rights that effectively requirethe minority interest shareholders to participate in ordinary course ofbusiness decisions, these joint ventures have been accounted for under theequity method instead of being consolidated in these financial statements. Investmentsin these joint ventures totaled $1,474 and $1,361 as of March 31, 2008 andDecember 31, 2007, respectively.

 

15

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Summarizedunaudited financial information for the joint ventures accounted for under theequity method as of March 31, 2008 and December 31, 2007 and for thethree months ended March 31, 2008 is as follows:

 
| ** **                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Current assets                       |       | $                  | 4,191      |                  | $          | 4,148 |   |
| Noncurrent assets                    |       | 713                |       | 666                   |       |
| Total assets                         |       | $                  | 4,904      |                  | $          | 4,814 |   |
|                                 |       |               |       |                  |       |
| Current liabilities                  |       | $                  | 946        |                  | $          | 1,400 |   |
| Noncurrent liabilities               |       | 1,447              |       | 1,048                 |       |
| Equity                               |       | 2,511              |       | 2,366                 |       |
| Total liabilities and equity         |       | $                  | 4,904      |                  | $          | 4,814 |   |
|                                 |       |               |       |                  |       |
| Net sales                            |       | $                  | 2,203      |                  |       |   |
| Gross profit                         |       | $                  | 413        |                  |       |   |
| Operating income                     |       | $                  | 171        |                  |       |   |
| Net loss                             |       | $                  | (14        | )                     |       |   |
| Equity in earnings of joint ventures |       | $                  | 16         |                  |       |   |

 

**5.****            ****INVENTORY**

 

**The components of inventory areas follows at March 31, 2008 and December 31, 2007:**

** **
| ** **      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|--------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **      | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| Raw materials   |       | $                  | 13,545     |                  | $          | 13,744 |   |
| Work-in-process |       | 25,536             |       | 23,699                |       |
| Finished goods  |       | 4,614              |       | 3,564                 |       |
| Supplies        |       | 598                |       | 621                   |       |
|            |       | $                  | 44,293     |                  | $          | 41,628 |   |

 

**6.****            ****PURCHASEDINTANGIBLE ASSETS**

 

The following tablepresents details of our purchased intangible assets, other than goodwill, as ofMarch 31, 2008:

 
| ** **               | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|--------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **               | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
| Core technology          |       | $          | 26,446     |             | $          | (496       | )          | $ | 25,950 |   |
| Customer relationships   |       | 35,683     |       | (1,487           | )          | 34,196     |       |
| Trademarks / Trade names |       | 2,880      |       | (162             | )          | 2,718      |       |
| Order backlog DYNAplat   |       | 2,686      |       | (1,625           | )          | 1,061      |       |
| Total intangible assets  |       | $          | 67,695     |             | $          | (3,770     | )          | $ | 63,925 |   |

 

16

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The following tablepresents details of our purchased intangible assets, other than goodwill, as ofDecember 31, 2007:

 
| ** **               | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|--------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **               | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
| Core technology          |       | $          | 24,653     |             | $          | (154       | )          | $ | 24,499 |   |
| Customer relationships   |       | 33,263     |       | (461             | )          | 32,802     |       |
| Trademarks / Trade names |       | 2,685      |       | (50              | )          | 2,635      |       |
| Order backlog DYNAplat   |       | 2,504      |       | (526             | )          | 1,978      |       |
| Total intangible assets  |       | $          | 63,105     |             | $          | (1,191     | )          | $ | 61,914 |   |

 

Theincrease in the gross value of our purchased intangible assets from December 31,2007 to March 31, 2008 is due to the impact of foreign currencytranslation.

 

**7.****               ****DEBT**

 

**Lines of credit consist of thefollowing at March 31, 2008 and December 31, 2007:**

** **
| ** **                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                 | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| Syndicated credit agreement revolving loan |       | $                  | 4,741      |                  | $          | — |   |
| Commerzbank revolving line of credit       |       | 1,388              |       | 3,225                 |       |
| Commerzbank line of credit                 |       | 1,580              |       | 1,473                 |       |
| Deutsche Bank revolving line of credit     |       | 788                |       | 680                   |       |
| Nord LB line of credit                     |       | 3,509              |       | 2,209                 |       |
|                                       |       | 12,006             |       | 7,587                 |       |
| Less current portion                       |       | (7,265             | )          | (7,587                | )          |
| Long-term lines of credit                  |       | $                  | 4,741      |                  | $          | — |   |

** **

**Long-term debt consists of thefollowing at March 31, 2008 and December 31, 2007:**

** **
| ** **                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                 | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| Syndicated credit agreement term loan      |       | $                  | 45,000     |                  | $          | 45,000 |   |
| Syndicated credit agreement Euro term loan |       | 22,120             |       | 20,621                |       |
| Euro term loan - French bank               |       | 458                |       | 427                   |       |
| Nord LB 3,000 Euro term loan               |       | 3,318              |       | 3,314                 |       |
| Nord LB 500 Euro term loan                 |       | 175                |       | 203                   |       |
|                                       |       | 71,071             |       | 69,565                |       |
| Less current maturities                    |       | (8,293             | )          | (8,035                | )          |
| Long-term debt                             |       | $                  | 62,778     |                  | $          | 61,530 |   |

** **

**17**

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** **

LoanCovenants and Restrictions

 

TheCompany’s existing loan agreements include various covenants and restrictions,certain of which relate to the incurrence of additional indebtedness,mortgaging, pledging or disposition of major assets, limits on capitalexpenditures and maintenance of specified financial ratios. As of March 31,2008, the Company was in compliance with all financial covenants and otherprovisions of its debt agreements.

 

SwapAgreement

 

OnNovember 15, 2007, the Company entered into an interest swap agreementthat effectively converted the LIBOR based variable rate borrowings under the$45,000 term loan to a fixed rate of 6.34%. The company has designated the swapagreement as an effective cash flow hedge with matched terms in accordance withSFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities,*and as a result, changes in thefair value of the swap agreement are recorded in other comprehensive incomewith the offset as a swap asset or liability. As of March 31, 2008, thefair value of the swap agreement was a liability of $696. The swap agreementexpires on November 16, 2008.

 

**8.****               ****BUSINESSSEGMENTS**

 

The Company is organized in the following three segments: ExplosiveMetalworking, Oilfield Products and AMK Welding. The Explosive Metalworkingsegment uses explosives to perform metal cladding and shock synthesis of industrialdiamonds. The most significant product of this group is clad metal which isused in the fabrication of pressure vessels, heat exchangers and transitionjoints for various industries, including upstream oil and gas, oil refinery,petrochemicals, hydrometallurgy, aluminum production, shipbuilding, powergeneration, industrial refrigeration and similar industries. The OilfieldProducts segment manufactures, markets and sells oilfield perforating equipmentand explosives, including detonating cords, detonators, bi-directional boostersand shaped charges, and seismic related explosives and accessories. AMK Weldingutilizes a number of welding technologies to weld components for manufacturersof jet engines and ground-based turbines.

 

The accounting policiesof all the segments are the same as those described in the summary ofsignificant accounting policies. The Company’s reportable segments areseparately managed strategic business units that offer different products andservices. Each segment’s products are marketed to different customer types andrequires different manufacturing processes and technologies. Segmentinformation is presented for the three months ended March 31, 2008 and2007 as follows:

 

18

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| ** **                                      | ** ** | **Explosive**    | ** ** | ** **   | ** ** | ** **  | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------------|------------|--------------|------------|-------------|------------|------------|------------|
| ** **                                      | ** ** | **Metalworking** | ** ** | **Oilfield** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Group**        | ** ** | **Products** | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the three months ended March 31, 2008: |       |             |       |         |       |        |       |       |       |
| Net sales                                       |       | $                | 51,644     |         | $          | 4,450       |       | $          | 2,299      |   | $ | 58,393 |   |
| Depreciation and amortization                   |       | $                | 2,384      |         | $          | 982         |       | $          | 108        |   | $ | 3,474 |   |
| Income (loss) from operations                   |       | $                | 9,982      |         | $          | (565        | )          | $          | 637        |   | $ | 10,054 |   |
| Equity in earnings of joint ventures            |       | $                | —     |         | $          | 16          |       | $          | —     |   | 16 |   |
| Unallocated amounts:                            |       |             |       |         |       |        |       |       |       |
| Stock-based compensation                        |       |             |       |         |       |        |       | (664       | )          |
| Other expense                                   |       |             |       |         |       |        |       | (149       | )          |
| Interest expense                                |       |             |       |         |       |        |       | (1,279     | )          |
| Interest income                                 |       |             |       |         |       |        |       | 239        |       |
| Consolidated income before income taxes         |       |             |       |         |       |        |       | $          | 8,217      |   |

 
| ** **                                      | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| ** **                                      | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the three months ended March 31, 2007: |       |             |       |        |       |       |       |
| Net sales                                       |       | $                | 31,495     |        | $          | 1,599      |       | $ | 33,094 |   |
| Depreciation                                    |       | $                | 335        |        | $          | 60         |       | $ | 395 |   |
| Income from operations                          |       | $                | 7,502      |        | $          | 264        |       | $ | 7,766 |   |
| Unallocated amounts:                            |       |             |       |        |       |       |       |
| Stock-based compensation                        |       |             |       |        |       | (224       | )          |
| Other expense                                   |       |             |       |        |       | (7         | )          |
| Interest income                                 |       |             |       |        |       | 188        |       |
| Consolidated income before income taxes         |       |             |       |        |       | $          | 7,723      |   |

 

**During the three months ended March 31,2008, sales to one customer represented approximately $5,974 (10.2%) of totalnet sales. During the three months ended March 31, 2007, sales to onecustomer represented approximately $5,417 (16%) of total net sales.**

** **

**9.****               ****COMPREHENSIVE INCOME**

 

**The Company**’s comprehensive income for the three months ended March 31, 2008and 2007 was as follows:

** **
| ** **                                          | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                          | ** ** | **March 31,**               | ** ** |
| ** **                                          | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Net income for the period                           |       | $                                | 5,245      |   | $ | 4,882 |   |
| Interest rate swap valuation adjustment, net of tax |       | (285                             | )          | — |   |
| Foreign currency translation adjustment             |       | 7,260                            |       | 61 |   |
| Comprehensive income                                |       | $                                | 12,220     |   | $ | 4,943 |   |

** **

**19**

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** **

Accumulatedother cumulative comprehensive income as of March 31, 2008 and December 31,2007 consisted of the following:

 
| ** **                                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                          | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| Currency translation adjustment                     |       | $                  | 10,950     |                  | $          | 3,690 |   |
| Interest rate swap valuation adjustment, net of tax |       | (432               | )          | (147                  | )          |
|                                                |       | $                  | 10,518     |                  | $          | 3,543 |   |

 

20

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

 

The following discussion should be read in conjunction with ourhistorical consolidated financial statements and notes, as well as the selectedhistorical consolidated financial data that are included in the Company’sAnnual Report filed on Form 10-K for the year ended December 31,2007.

 

Unless statedotherwise, all dollar figures in this discussion are presented in thousands(000’s).

 

**Executive Overview**

 

Historically, ourbusiness has been organized into two segments: Explosive Metalworking (which we also refer to as DMC Clad) and AMKWelding.  On November 15, 2007, weacquired 100% ownership of a German company, DYNAenergetics.  DYNAenergetics operates two distinctbusinesses which have historically been known as DYNAplat and DYNAwell.  DYNAplat is a manufacturer of explosion cladproducts similar to those manufactured by DMC Clad and its operating resultsfrom the date of acquisition are included in our Explosive Metalworkingsegment.  DYNAwell manufactures a numberof products for the perforation of oil and gas wells and also distributes aline of seismic products for oil and gas exploration activities.  DYNAwell’s operating results from the date ofacquisition are reported under a new segment that we have named “OilfieldProducts”.

 

For the three monthsended March 31, 2008, Explosive Metalworking accounted for 88% of our netsales and 99% of our income from operations before consideration of stock-basedcompensation expense, which is not allocated to our business segments.  Our AMK Welding and Oilfield Productssegments accounted for 4% and 8%, respectively, of our first quarter 2008 netsales.

 

Our net sales for thethree months ended March 31, 2008, which include $15,194 of sales from ourrecently acquired DYNAenergetics’ businesses, increased by $25,299 (76.4%)compared to the first three months of 2007, reflecting year-to-year net salesincreases of $20,149 (64.0%) and $700 (43.8%) for our Explosive Metalworkingand AMK Welding segments, respectively, and a sales contribution of $4,450 fromour new Oilfield Products segment. Income from operations increased by 24.5% to $9,390 in the first threemonths of 2008 from $7,542 in the first three months of 2007, reflectingimprovements in Explosive Metalworking’s and AMK Welding’s operating income of$2,480 and $373, respectively, that were partially offset by an operating lossof $565 that was reported by our Oilfield Products segment and a $440 increasein stock-based compensation expense. Our net income increased by 7.4% to $5,245for the three months ended March 31, 2008 from $4,882 in the same periodof 2007.

 

*Net sales*

 

ExplosiveMetalworking’s net sales are generated principally from sales of clad metalplates and sales of transition joints, which are made from clad plates, tocustomers that fabricate industrial equipment for various industries, includingoil and gas, petrochemicals, alternative energy, hydrometallurgy, aluminumproduction, shipbuilding, power generation, industrial refrigeration andsimilar industries.  While demand for ourclad metal products in the United States is largely driven by new plantconstruction and large plant expansion projects, maintenance and retrofitprojects at existing chemical processing, petrochemical processing and oilrefining facilities also account for a significant portion of total demand. Incontrast to the U.S. market, 

 

21

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demand for our cladproducts in Europe and Asia is more dependent on new construction projects,such as the building of new Purified Terephthalic Acid (“PTA”) plants indifferent parts of the world, including China, and on sales of electricaltransition joints that are used in the aluminum production industry.

 

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

 

AMKWelding’s net sales are generated from welding, heat treatment and inspectionservices that are provided with respect to customer-supplied parts forcustomers primarily involved in the power generation industry and aircraftengine markets.

 

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

 

DMCClad’s business is cyclical since it is linked to its customers’ end-marketactivity.  For example, the constructioncycle for new manufacturing capacity in the chemical industry has historicallybeen one characterized by significant amplitude.  It is driven both by global economic demandgrowth and capacity utilization.  Ascapacity starts to become tight for various chemicals and prices begin to rise,new manufacturing capacity is added in relatively large incremental amounts.

 

*Gross profit and cost of productssold*

 

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

 

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

 

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

 

*Income taxes*

 

Our effectiveincome tax rate decreased to 36.2% for the first three months of 2008 from36.8% for the first three months of 2007. Income tax provisions on the earnings of Nobelclad, Nitro Metall andDYNAenergetics have been provided based upon the respective French, Swedish andGerman statutory tax rates.  Goingforward, based upon existing tax regulations and current federal, state andforeign statutory tax rates, we expect our effective tax rate on ourconsolidated pre-tax income to range between 36% and 37%.

 

22

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*Backlog*

 

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

 

Our backlog with respectto the Explosive Metalworking segment increased to approximately $102,106 at March 31,2008 from approximately $100,000 at December 31, 2007.

 

**Three Months Ended March 31, 2008 Compared toThree Months Ended March 31, 2007**

 

*Net sales*

 
| ** ** | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                                | 58,393     |       | $          | 33,094         |       | $ | 25,299 |   | 76.4 | % |
|            |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

Net sales for the firstquarter of 2008 increased 76.4% to $58,393 from $33,094 in the first quarter of2007.  Explosive Metalworking salesincreased 64.0% to $51,644 in the three months ended March 31, 2008 (88%of total sales) from $31,495 in the same period of 2007 (95% of totalsales).  The significant increase inExplosive Metalworking sales reflects a sales contribution of $10,744 from theDYNAplat division of DYNAenergetics and increased sales of $9,405 from ourother DMC Clad divisions which reflect the continued strong economic conditionof the industries this business segment serves.

 

Oilfield Products contributed$4,450 to first quarter 2008 sales (8% of total sales).

 

AMK Welding contributed $2,299 to first quarter 2008 sales (4% of totalsales), which represented a 43.8% increase from sales of $1,599 in the firstquarter of 2007 (5% of total sales).  Theincreases in AMK’s sales relates principally to increased revenues from HSystem ground-based gas turbine work.

 

*Gross profit*

* *
| ** **                            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit                          |       | $                                | 17,711     |       | $          | 10,851         |       | $ | 6,860 |   | 63.2 | % |
| Consolidated gross profit margin rate |       | 30.3                             | %          | 32.8       | %          |           |       |   |   |
|                                       |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

Grossprofit increased by 63.2% to $17,711 for the three months ended March 31,2008 from $10,851 for the three months ended March 31, 2007. Our firstquarter 2008 consolidated

 

23

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gross profitmargin rate decreased to 30.3% from 32.8% in the first quarter of 2007. Thegross profit margin for Explosive Metalworking decreased from 33.1% in thefirst quarter of 2007 to 30.6% in the first quarter of 2008.  The gross profit margin for AMK Weldingincreased to 36.4% in the first quarter of 2008 from 28.8% in the first quarterof 2007, with this improvement being largely attributable to the 43.8% increasein AMK’s sales volume as discussed above. Oilfield Products reported a gross margin of 25.3% on its first quarter2008 sales of $4,450, which is considered to be within the range of normal forthis business.

 

Thedecreased first quarter 2008 gross margin rate for Explosive Metalworkingrelates primarily to a higher proportion of sales by our European operations inthe first quarter of 2008 than in the first quarter of 2007 as a result of theDYNAenergetics acquisition.  As mentionedabove, the DYNAplat division of DYNAenegetics reported first quarter 2008 salesof $10,744.  Gross margins for ourEuropean operations, including those of the DYNAplat division, are generallylower than those reported by our U.S. Operation.  Additionally, the acquired order backlog ofDYNAplat included certain orders that were booked at lower than customarymargin levels for DYNAplat and that shipped during the first quarter of2008.  While we expect an upward trend inour reported gross margins during the remainder of 2008, future quarterly grossmargin rates for our Explosive Metalworking segment are expected to fluctuatebased upon anticipated fluctuations in quarterly sales volume and product mix.

 

*Generaland administrative expenses*

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                                 | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                 | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General & administrative expenses |       | $                                | 3,119      |       | $          | 1,662          |       | $ | 1,457 |   | 87.7 | % |
| Percentage of net sales                    |       | 5.3                              | %          | 5.0        | %          |           |       |   |   |
|                                            |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

General andadministrative expenses increased by $1,457, or 87.7%, to $3,119 in the firstquarter of 2008 from $1,662 in the first quarter of 2007.  Excluding $892 of incremental general andadministrative expenses that resulted from the DYNAenergetics acquisition, ourgeneral and administrative expenses increased by $565 or 34.0%.  This increase reflects a $272 increase instock-based compensation, a $136 increase in legal and consulting expenses andan impact of $113 from annual salary adjustments and staffing changes.  As a percentage of net sales, general andadministrative expenses increased to 5.3% in the first quarter of 2008 from5.0% in the first quarter of 2007.

 

*Sellingexpenses*

 
| ** **              | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **              | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses        |       | $                                | 2,841      |       | $          | 1,647          |       | $ | 1,194 |   | 72.5 | % |
| Percentage of net sales |       | 4.9                              | %          | 5.0        | %          |           |       |   |   |
|                         |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

Selling expenses,which include sales commissions of $313 in 2008 and $423 in 2007, increased by72.5% to $2,841 in the first quarter of 2008 from $1,647 in the first quarterof 2007.  Excluding $855 of incrementalselling expenses that resulted from the DYNAenergetics

 

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acquisition, our selling expenses increased by $339 or 20.6%.  This increase reflects an increase instock-based compensation expense of $124 and an impact of $98 from annualsalary adjustments and staffing changes. As a percentage of net sales, selling expenses decreased to 4.9% in thefirst quarter of 2008 from 5.0% in the first quarter of 2007.

 

*Amortization expenses*

* *
| ** **                                           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                                           | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                           | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Amortization expense of purchased intangible  assets |       | $                                | 2,361      |       | $          | —         |       | $ | 2,361 |   | NA |   |
| Percentage of net sales                              |       | 4.0                              | %          | 0.0        | %          |           |       |   |   |
|                                                      |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

Amortization expense relates entirely to the amortization of valuesassigned to intangible assets in connection with the November 15, 2007acquisition of DYNAenergetics. Amortization expense for the three months ended March 31, 2008includes $1,006, $940, $313 and $102 relating to values assigned to orderbacklog, customer relationships, core technology and trademarks/trade names,respectively.  Based upon the preliminarypurchase price allocation and current foreign exchange rates, we expectamortization expense for 2008 to approximate $7,700.

 

*Income from operations*

* *
| ** **             | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **             | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **             | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from operations |       | $                                | 9,390      |       | $          | 7,542          |       | $ | 1,848 |   | 24.5 | % |
|                        |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

Income from operationsincreased by 24.5% to $9,390 in the first quarter of 2008 from $7,542 in thefirst quarter of 2007.  ExplosiveMetalworking reported income from operations of $9,982 in the first quarter of2008 as compared to $7,502 in the first quarter of 2007.  This 33.1% increase is largely attributableto the 64.0% sales increase as discussed above.

 

Oilfield Productsreported a loss from operations of $565 for the first three months of 2008.

 

AMK Welding reportedincome from operations of $637 for the three months ended March 31, 2008as compared to $264 for the same period of 2007.  This significant increase is attributable tothe $700, or 43.8%, increase in sales as discussed above.

 

Income from operationsfor the three months ended March 31, 2008 and 2007 includes $664 and $224,respectively, of stock-based compensation expense.  This expense is not allocated to our businesssegments and thus is not included in the above first quarter operating incometotals for Explosive Metalworking, Oilfield Products and AMK Welding.

 

25

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*Interest income (expense), net*

* *
| ** **                     | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                     | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                     | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income (expense), net |       | $                                | (1,040     | )          | $          | 188            |       | $ | (1,228 | ) | NM |   |
|                                |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

We recordednet interest expense of $1,040 in the first three months of 2008 compared tonet interest income of $188 in the same time period of 2007.   During the first three months of 2007, wewere in a positive cash position and earned interest on investment of excesscash balances.  In connection withacquisition of DYNAenergetics, we borrowed approximately $65,000 under our new$100,000 five-year credit facility, assumed approximately $12,000 ofDYNAenergetics’ debt outstanding as of the acquisition date, and usedapproximately $16,000 of our existing cash balances to finance the acquisition.As a result of this new indebtedness and a decrease in our cash position, wereported a significant amount of interest expense during the first three monthsof 2008.

 

*Income tax provision*

 
| ** **           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **           | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **           | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax provision |       | $                                | 2,972      |       | $          | 2,841          |       | $ | 131 |   | 4.6 | % |
| Effective tax rate   |       | 36.2                             | %          | 36.8       | %          |           |       |   |   |
|                      |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

We recorded an income tax provision of $2,972 in the first quarter of2008 compared to $2,841 in the first quarter of 2007.  The effective tax rate decreased to 36.2% inthe first quarter of 2008 from 36.8% in the first quarter of 2007.  The income tax provisions for the threemonths ended March 31, 2008 and 2007 include $2,951 and $2,102,respectively, related to U.S. taxes, with the remainder relating to foreigntaxes associated with the operations of Nobelclad and its Swedish subsidiary,Nitro Metall, as well as the newly acquired DYNAenergetics division.

 

# **Liquidity and Capital Resources**

# ** **

Wehave historically financed our operations from a combination of internallygenerated cash flow, revolving credit borrowings, various long-term debtarrangements and the issuance of common stock. Prior to the November 15, 2007 acquisition of DYNAenergetics, wehad no outstanding borrowings under our $10,000 revolving credit facility witha U.S. bank and term debt outstanding of 290 Euros (approximately $458) under aterm loan with a French bank.   Inconnection with the acquisition of DYNAenergetics, we terminated our $10,000revolving credit facility and entered into a five-year syndicated creditagreement.  The credit agreement, whichprovides for term loans of $45,000 and 14,000 Euros and revolving loans of$25,000 and 7,000 Euros, is through a syndicate of seven banks.  The credit facility in the approximate amountof $100,000 expires on November 16, 2012. As of March 31, 2008, term loans of $45,000 and 14,000 Euros($22,120) and revolving loans of 3,000 Euros ($4,741) were outstanding underthe new credit facility. Additionally, we have assumed outstanding debtobligations of DYNAenergetics, including lines of credit loans and term loanswith outstanding amounts of $7,265 and $3,493, respectively, as of March 31,2008.

 

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

 

*Debtand other contractual obligations and commitments*

 

**Our existingloan agreements include various covenants and restrictions, certain of whichrelate to the payment of dividends or other distributions to stockholders,redemption of capital stock, incurrence of additional indebtedness, mortgaging,pledging or disposition of major assets and maintenance of specified financialratios.  As of March 31, 2008, wewere in compliance with all financial covenants and other provisions of ourdebt agreements.**

** **

The Company’s principal cash flows related to debt obligations and othercontractual obligations and commitments have not materially changed since December 31,2007.

 

***Cash flowsfrom operating activities***

** **

Net cash flows providedby operating activities for the first quarter of 2008 totaled $7,249.  Significant sources of operating cash flowincluded net income of $5,245, non-cash depreciation and amortization expense of$3,534 and stock-based compensation of $664. These sources of operating cash flow were partially offset by a deferredincome tax benefit of $1,174 and net negative changes in various components ofworking capital in the amount of $1,004. Net negative changes in working capital included increases ininventories and prepaid expenses of $670 and $580, respectively, and decreasesin accounts payable and customer advances of $3,837 and $2,144,respectively.  These negative changes inworking capital were partially offset by decreases in restricted cash andaccounts receivable of $377 and $5,968, respectively.

 

Net cash flows providedby operating activities for the first quarter of 2007 totaled $4,833.  Significant sources of operating cash flowincluded net income of $4,882, non-cash depreciation and amortization expenseof $395 and stock-based compensation of $224. These sources of operating cash flow were partially offset by netnegative changes in various components of working capital in the amount of$622.  Net negative changes in workingcapital included increases in inventories of $2,487 and decreases in accountspayable of $2,011.  These negativechanges in working capital were largely offset by decreases in restricted cashand accounts receivable of $3,059 and $553, respectively.

 

*Cash flows from investingactivities*

 

Net cash flows used byinvesting activities for the first quarter of 2008 totaled $2,346 and consistedalmost entirely of capital expenditures.

 

Net cash flows used byinvesting activities for the first quarter of 2007 totaled $3,257 and consistedentirely of capital expenditures.

 

27

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*Cash flows from financingactivities*

 

Net cash flows providedby financing activities for the first quarter of 2008 were $3,279, whichconsisted primarily of net borrowings on bank lines of credit of $3,665 and $93in net proceeds from the issuance of common stock relating to the exercise ofstock options.  These sources of cashflow were partially offset by a $265 principal payment on a Nord LB term loan,payments of deferred debt issuance costs of $125 and payment on capital leaseobligations of $105.

 

Net cash flows providedby financing activities for the first quarter of 2007 were $283, whichconsisted primarily of net proceeds from the issuance of common stock relatingto the exercise of stock options.

 

*Payment of Dividends*

 

We paid annual dividendsin 2007 and may continue to pay annual dividends in the future subject tocapital availability and periodic determinations that cash dividends are in thebest interests of our stockholders, but we cannot assure you that such paymentswill continue.  Future dividends may beaffected by, among other items, our views on potential future capitalrequirements, future business prospects, changes in federal income tax law andany other factors that our board of directors deems relevant.  Any decision to pay cash dividends is andwill continue to be at the discretion of the board of directors.

 

**Critical Accounting Policies**

 

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

 

Inmanagement’s opinion, the more significant reporting areas impacted bymanagement’s judgments and estimates are revenue recognition, assetimpairments,, business combinations, goodwill, intangible assets subject toamortization, impact of foreign currency exchange rate risks, income taxes andstock-based compensation expense. Management’s judgments and estimates in theseareas are based on information available from both internal and externalsources, and actual results could differ from the estimates, as additionalinformation becomes known.  We believethe following to be our most critical accounting policies.

 

*Revenuerecognition*

 

**Sales of clad metal products andwelding services are generally based upon customer specifications set forth incustomer purchase orders and require us to provide certifications relative tometals used, services performed and the results of any non-destructive testingthat the customer has requested be performed. All issues of conformity of the product to specifications are resolvedbefore the product is shipped and billed. Products related to the oilfield products segment, which include detonatingcords, detonators, bi-directional boosters and shaped charges, as well as,seismic related explosives and accessories, are standard in nature.  In all cases, revenue is recognized only whenall four of the following criteria have been satisfied: persuasive evidence of**

 

28

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**an arrangement exists; the price is fixedor determinable; delivery has occurred; and collection is reasonablyassured.  For contracts that requiremultiple shipments, revenue is recorded only for the units included in eachindividual shipment.  If, as a contractproceeds toward completion, projected total cost on an individual contractindicates a potential loss, the Company will account for such anticipated loss.**

** **

*Assetimpairments*

 

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

 

*BusinessCombinations*

 

Weaccounted for our business acquisition in accordance with the provisions ofSFAS No. 141, Business Combinations, using the purchase method ofaccounting. We allocated the total cost of the acquisition to the underlyingnet assets based on their respective estimated fair values. As part of this allocationprocess, we identified and attributed values and estimated lives to theintangible assets acquired. These determinations involved significant estimatesand assumptions regarding multiple, highly subjective variables, includingthose with respect to future cash flows, discount rates, asset lives, and theuse of different valuation models and therefore require considerable judgment.Our estimates and assumptions were based, in part, on the availability oflisted market prices or other transparent market data. These determinationsaffect the amount of amortization expense recognized in future periods. Webased our fair value estimates on assumptions we believe to be reasonable butare inherently uncertain.

 

*Goodwill*

 

In accordance with SFAS No. 142, we test goodwill for impairmenton a “reporting unit” level as defined by reference to SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information on at leastan annual basis. A reporting unit is a group of businesses (i) for whichdiscrete financial information is available and (ii) that have similareconomic characteristics. We test goodwill for impairment using the followingtwo-step approach:

 

We first determine the fair value of each reporting unit. If the fairvalue of a reporting unit is less than its carrying value, this is an indicatorthat the goodwill assigned to that reporting unit might be impaired, whichrequires performance of the second step. We determine the fair value of ourreporting units based on projected future discounted cash flows, which, inturn, are based on our views of uncertain variables such as growth rates,anticipated future economic conditions and the appropriate discount ratesrelative to risk and estimates of residual values.

 

In the second step, we allocate the fair value of the reporting unit tothe assets and liabilities of the reporting unit as if it had just beenacquired in a business combination and as if the purchase price was equivalentto the fair value of the reporting unit. The excess of the fair value of the reporting unit over the amountsassigned to its assets and liabilities is referred to as the implied fair valueof goodwill. We then compare that implied fair value of the reporting unit’sgoodwill to the 

 

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carrying value of that goodwill. If the implied fair value is less thanthe carrying value we recognize an impairment loss for the excess.

 

The use of different estimates or assumptions within our discountedcash flow model when determining the fair value of our reporting units or usinga methodology other than a discounted cash flow model could result in differentvalues for reporting units and could result in an impairment charge.

 

*Intangible assets subject to amortization*

 

An intangible asset that is subject to amortization is reviewed whenimpairment indicators are present in accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. We compare theexpected undiscounted future operating cash flows associated with finite-livedassets to their respective carrying values to determine if the asset is fullyrecoverable. If the expected future operating cash flows are not sufficient torecover the carrying value, we estimate the fair value of the asset. Impairmentis recognized when the carrying amount of the asset is not recoverable and whenthe carrying value exceeds fair value. The projected cash flows require severalassumptions related to, among other things, relevant market factors, revenuegrowth, if any, and operating margins. While we believe our assumptions arereasonable, changes in these assumptions may have a material impact on ourfinancial results.

 

*Impactof foreign currency exchange rate risks*

 

Thefunctional currency for our foreign operations is the applicable local currencyfor each affiliate company. Assets and liabilities of foreign subsidiaries forwhich the functional currency is the local currency are translated at exchangerates in effect at period-end, and the statements of operations are translatedat the average exchange rates during the period.  Exchange rate fluctuations on translatingforeign currency financial statements into U.S. dollars that result inunrealized gains or losses are referred to as translation adjustments. Cumulativetranslation adjustments are recorded as a separate component of stockholders’equity and are included in other cumulative comprehensive income (loss).Transactions denominated in currencies other than the local currency arerecorded based on exchange rates at the time such transactions arise.Subsequent changes in exchange rates result in transaction gains and losses,which are reflected in income as unrealized (based on period-end translations)or realized upon settlement of the transactions. Cash flows from our operationsin foreign countries are translated at actual exchange rates when known, or atthe average rate for the period. As a result, amounts related to assets andliabilities reported in the consolidated statements of cash flows will not agreeto 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.

 

*Incometaxes*

 

Weaccount for income taxes in accordance with Statement of Financial AccountingStandards No.  109, Accounting for Income Taxes (“SFAS 109”), whichrequires the recognition of deferred tax assets and deferred tax liabilitiesfor the expected future income tax consequences of transactions that have beenincluded in our financial statements but not our tax returns.  Deferred tax assets and liabilities aredetermined based on the temporary differences between the ConsolidatedFinancial Statement basis and the tax basis of assets and liabilities usingenacted tax rates in effect for the year in which the differences are expectedto reverse.  We routinely evaluatedeferred tax assets to determine if they will, more likely than not, berecovered from future projected taxable income and; if not, we record anappropriate valuation allowance.

 

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During 2005, we completed an analysis of prior year tax credits andrelated items.  As a result of theanalysis, we filed amended federal and state income tax returns.  The amended state returns reported additionalnet operating losses and credits above the amounts we had previously recordedin our books and records.  In assessingthese additional losses and credits, we determined that the utilization of aportion of these did not meet the more likely than not criteria, due topotential changes in the states in which we have income tax nexus.  Thus, we recorded a net valuation allowance ofapproximately $177 against the deferred tax assets during 2005.  As of March 31, 2008, the balance ofthis allowance is $111.

 

*Stock-Based Compensation Expense*

 

Weaccount for stock-based compensation in accordance with the provisions ofStatement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment (“SFAS 123R”).  Underthe fair value recognition provisions of SFAS 123R, stock-based compensationcost is estimated at the grant date based on the value of the award and isrecognized as expense ratably over the requisite service period of theaward.  The fair value of restrictedstock awards is based on the fair value of the Company’s stock on the date ofgrant.  Determining the appropriate fairvalue model and calculating the fair value of stock options at the grant date requiresjudgment, including estimating stock price volatility, forfeiture rates andexpected option life.

 

**Recent Accounting Pronouncements**

 

**In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurements*(“SFAS 157”). SFAS 157 defines fair value, establishes a framework formeasuring fair value in accordance with accounting principles generallyaccepted in the United States, and expands disclosures about fair valuemeasurements. SFAS No. 157 was initially effective for financialstatements issued for fiscal years beginning after November 15, 2007.  The FASB issued a staff position statement (“FSP”)in February 2008 that deferred the required interpretation date of SFAS157 for certain assets and liabilities. The adoption of SFAS 157 in the three months ended March 31, 2008did not have a material impact on the Company’s results of operations orfinancial position.**

** **

**In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities – Including an Amendment of FASB Statement No. 115.”This Statement permits entities to measure many financial instruments andcertain other items at fair value. This election is made on aninstrument-by-instrument basis and is irrevocable. Unrealized gains and losseson items for which the fair value option has been elected are reported inearnings. This statement is effective for fiscal years beginning after November 15,2007. The Company did not elect the fair value option for any of its existingfinancial assets and liabilities during the three months ended March 31,2008.**

** **

**In December 2007,the FASB issued SFAS No. 141(R), Business Combinations and SFAS No. 160,Accounting and Reporting of Noncontrolling Interest in Consolidated FinancialStatements, an amendment of ARB No. 51. These new standards willsignificantly change the accounting for and reporting of business combinationtransactions and noncontrolling (minority) interests in consolidated financialstatements. SFAS Nos. 141(R) and 160 are required to be adopted simultaneouslyand are effective for the first annual reporting period beginning on or after December 15,2008. Thus, we are required to adopt these Standards on January 1, 2009.Earlier adoption is prohibited. The Company is in the process of determining theeffect, if any, the adoption SFAS Nos. 141(R) and 160 will have onits results of operations or financial position.**

 

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**In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments and HedgingActivities*.  SFAS 161 requires additional disclosures relatedto the use of derivative instruments, the accounting for derivatives and howderivatives impact financial statements.  SFAS No. 161 is effectivefor fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the impact of adopting SFAS No. 161 onour consolidated financial statements.**

** **

**ITEM 3.     Quantitative and Qualitative Disclosureabout Market Risk**

** **

There have been noevents that materially affect our quantitative and qualitative disclosure aboutmarket risk from that reported in our Annual Report on Form 10-K for theyear ended December 31, 2007.

 

**ITEM 4.     Controls and Procedures**

 

The Companymaintains disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in the Company’s Exchange Act reports isaccurately recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms, and that such information is accumulatedand communicated to the Company’s management, including its Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure.  Indesigning and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management necessarily applied its judgment inevaluating the cost-benefit relationship of possible controls and procedures.

 

As of March 31,2008, the Company carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures (asdefined in Exchange Act Rule 13a-15(e)). Based on that evaluation, the Company’s Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures were effective.  There havebeen no changes in the Company’s internal controls during the quarter ended March 31,2008 or in other factors that could materially affect the Company’s internalcontrols over financial reporting.

 

Management’sassessment of and conclusion on the effectiveness of internal control overfinancial reporting did not include the internal controls of DYNAenergetics,which is included in the March 2008 consolidated financial statements ofDynamic Materials Corporation and constituted $154 million and $3 million oftotal and net assets, respectively, as of March 31, 2008 and $15.2 millionand $1.9 million of revenues and net loss, respectively, for the quarter thenended.

 

The Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, does not expect that the Company’s disclosure controls or its internalcontrols will prevent all errors and all fraud. Further, the design of a control system must reflect the fact that thereare resource constraints, and the benefits of controls must be consideredrelative to their costs.  As a result ofthe inherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within the Company have been detected. These inherent limitations include the realities that judgments indecision-making can be faulty, and that breakdowns can occur because of simpleerror or mistake.  As a result of theinherent limitations in a cost-effective control system, misstatements due toerror 

 

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or fraud may occur and not be detected. Accordingly, the Company’s disclosure controls and procedures aredesigned to provide reasonable, not absolute, assurance that the disclosurecontrols and procedures are met.

 

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**Part II - OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

None.

 

**Item 1A. RiskFactors**

 

Our 2007 Annual Report on Form 10-K includes a detailed discussionof our risk factors.  The informationpresented below updates and should be read in conjunction with the risk factorsand information disclosed in our Form 10-K.

 

**Our backlog figures may not accurately predict future sales.**

 

We define “backlog” at any given point in time toconsist of all firm, unfulfilled purchase orders and commitments at thattime.  Generally speaking, we expect tofill most items of backlog within the following 12 months.  However, since orders may be rescheduled orcanceled, and a significant portion of our net sales is derived from a smallnumber of customers, backlog is not necessarily indicative of future sales levels.  Moreover, we cannot be sure of when duringthe future 12-month period we will be able to recognize revenue correspondingto our backlog; nor can we be sure that revenues corresponding to our backlogwill not fall into periods beyond the 12-month horizon.

 

**Item 2. Unregistered Sales of EquitySecurities and Use of Proceeds**

 

None.

 

**Item 3. Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**Item 5. Other Information**

 

None.

 

**Item 6.**

 

**Exhibits**

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

 

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

 

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##### **SIGNATURES**

 

 

In accordance with the requirements of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
| ** **             |   | **DYNAMIC MATERIALS CORPORATION**                                                                                                                |
|------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|                   |   | (Registrant)                                                                                                                                     |
|                   |   |                                                                                                                                             |
|                   |   |                                                                                                                                             |
| Date: May 2, 2008 |   | /s/ Richard A. Santa                                                                                                                             |
|                   |   | Richard A. Santa, Senior Vice President and Chief   Financial Officer (Duly Authorized Officer and   Principal Financial and Accounting Officer) |

 

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