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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**Form 10-Q**

 

**(Mark One)**

 

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

 

**For the quarterly period ended March 31,2010**

** **

**OR**

 

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

 

**Commission file number 001-14775**

 

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**DYNAMIC MATERIALS CORPORATION**

(Exactname of Registrant as Specified in its Charter)

 

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

 

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

(Addressof principal executive offices, including zip code)

 

**(303) 665-5700**

(Registrant’stelephone number, including area code)

 

Indicateby check mark whether the registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes xNo o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

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

 

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

 

Thenumber of shares of Common Stock outstanding was 12,959,663 as of April 29,2010.

 

 

 

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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- Condensed Consolidated Financial Statements; Item 2 - Management’sDiscussion and Analysis of Financial Condition and Results of Operations; Item3 - Quantitative and Qualitative Disclosures About Market Risk; and Part II,Item 1A — Risk Factors. We intend the forward-looking statements throughoutthis quarterly report on Form 10-Q and the information incorporated byreference herein to be covered by the safe harbor provisions forforward-looking statements. Statements contained in this report which are nothistorical facts are forward-looking statements that involve risks anduncertainties that could cause actual results to differ materially fromprojected results. All projections, guidance and other statements regarding ourexpected financial position and operating results, our business strategy, ourfinancing plans and the outcome of any contingencies are forward-lookingstatements. These statements can sometimes be identified by our use offorward-looking words such as “may,” “believe,” “plan,” “anticipate,” “estimate,”“expect,” “intend,” and other phrases of similar meaning. The forward-lookinginformation is based on information available as of the date of this quarterlyreport and on numerous assumptions and developments that are not within ourcontrol. Although we believe that our expectations as expressed in theseforward-looking statements are reasonable, we cannot assure you that ourexpectations will turn out to be correct. Factors that could cause actualresults to differ materially include, but are not limited to, the following:changes in global economic conditions; the ability to obtain new contracts atattractive prices; the size and timing of customer orders and shipment; ourability to realize sales from our backlog; fluctuations in customer demand;fluctuations in foreign currencies; competitive factors; the timely completionof contracts; the timing and size of expenditures; the timely receipt ofgovernment approvals and permits; the price and availability of metal and otherraw material; the adequacy of local labor supplies at our facilities; currentor future limits on manufacturing capacity at our various operations; ourability to successfully integrate acquired businesses; the availability andcost of funds; and general economic conditions, both domestic and foreign,impacting our business and the business of the end-market users we serve.Readers are cautioned not to place undue reliance on these forward-lookingstatements, which reflect management’s analysis only as of the date hereof. Weundertake no obligation to publicly release the results of any revision tothese forward-looking statements that may be made to reflect events or circumstancesafter the date hereof or to reflect the occurrence of unanticipated events.

 

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**INDEX**

 

PART I - FINANCIAL INFORMATION

 
| Item 1 — Condensed Consolidated Financial Statements                                                 | 4                                                                                                                 |
|-----------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------|
|                                                                                                      |                                                                                                              |
|                                                                                                      | Consolidated Balance Sheets as of March 31, 2010  (unaudited) and   December 31, 2009                   | 4 |
|                                                                                                      | Consolidated Statements of Operations for the three months  ended   March 31, 2010 and 2009 (unaudited)      | 6 |
|                                                                                                      | Consolidated Statement of Stockholders’ Equity for the  three months ended   March 31, 2010 (unaudited) | 7 |
|                                                                                                      | Consolidated Statements of Cash Flows for the three  months ended   March 31, 2010 and 2009 (unaudited)      | 8 |
|                                                                                                      | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                 | 10 |
|                                                                                                      |                                                                                                              |   |
| Item 2 — Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 22                                                                                                                |
|                                                                                                      |                                                                                                              |
| Item 3 — Quantitative and Qualitative Disclosure about  Market Risk                                  | 35                                                                                                                |
|                                                                                                      |                                                                                                              |
| Item  4 — Controls and Procedures                                                                    | 35                                                                                                                |

 

PART II - OTHERINFORMATION

 
| Item  1 — Legal Proceedings                                           | 36         |
|----------------------------------------------------------------------------|------------|
|                                                                       |       |
| Item 1A  — Risk Factors                                               | 36         |
|                                                                       |       |
| Item 2 — Unregistered Sales of Equity Securities and  Use of Proceeds | 36         |
|                                                                       |       |
| Item 3 — Defaults Upon Senior Securities                              | 36         |
|                                                                       |       |
| Item  4 — Removed and Reserved                                        | 36         |
|                                                                       |       |
| Item  5 — Other Information                                           | 36         |
|                                                                       |       |
| Item 6 — Exhibits                                                     | 36         |
|                                                                       |       |
|                                                                       | Signatures | 37 |
|                                                                            |            |  |

 

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**Part I- FINANCIAL INFORMATION**

 

**ITEM 1.  Condensed ConsolidatedFinancial Statements**

 

DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars inThousands)

 
| ** **                                                                                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                   | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **                                                                                   | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| ASSETS                                                                                       |       |               |       |                  |       |
| CURRENT  ASSETS:                                                                             |       |               |       |                  |       |
| Cash  and cash equivalents                                                                   |       | $                  | 18,358     |                  | $          | 22,411 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $325 and $390,  respectively |       | 16,804             |       | 25,807                |       |
| Inventories                                                                                  |       | 35,529             |       | 32,501                |       |
| Prepaid  expenses and other                                                                  |       | 2,225              |       | 2,397                 |       |
| Related  party receivables and loans                                                         |       | 2,614              |       | 2,806                 |       |
| Current  deferred tax assets                                                                 |       | 1,693              |       | 2,052                 |       |
|                                                                                         |       |               |       |                  |       |
| Total  current assets                                                                        |       | 77,223             |       | 87,974                |       |
|                                                                                         |       |               |       |                  |       |
| PROPERTY,  PLANT AND EQUIPMENT                                                               |       | 64,313             |       | 64,944                |       |
| Less  - accumulated depreciation                                                             |       | (23,620            | )          | (22,892               | )          |
|                                                                                         |       |               |       |                  |       |
| Property,  plant and equipment, net                                                          |       | 40,693             |       | 42,052                |       |
|                                                                                         |       |               |       |                  |       |
| GOODWILL,  net                                                                               |       | 40,366             |       | 43,164                |       |
|                                                                                         |       |               |       |                  |       |
| PURCHASED  INTANGIBLE ASSETS, net                                                            |       | 44,938             |       | 49,079                |       |
|                                                                                         |       |               |       |                  |       |
| DEFERRED  TAX ASSETS                                                                         |       | 689                |       | 332                   |       |
|                                                                                         |       |               |       |                  |       |
| OTHER  ASSETS, net                                                                           |       | 1,067              |       | 1,443                 |       |
|                                                                                         |       |               |       |                  |       |
| INVESTMENT  IN JOINT VENTURES                                                                |       | 1,376              |       | 1,132                 |       |
|                                                                                         |       |               |       |                  |       |
| TOTAL  ASSETS                                                                                |       | $                  | 206,352    |                  | $          | 225,176 |   |

 

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

 

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONDENSEDCONSOLIDATED BALANCE SHEETS

(Dollars inThousands, Except Share Data)

 
| ** **                                                                                                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                           | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **                                                                                                                           | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                            |       |               |       |                  |       |
|                                                                                                                                 |       |               |       |                  |       |
| CURRENT  LIABILITIES:                                                                                                                |       |               |       |                  |       |
| Accounts  payable                                                                                                                    |       | $                  | 10,980     |                  | $          | 9,183 |   |
| Accrued  expenses                                                                                                                    |       | 3,924              |       | 4,808                 |       |
| Dividend  payable                                                                                                                    |       | 518                |       | 515                   |       |
| Accrued  income taxes                                                                                                                |       | 804                |       | 1,485                 |       |
| Accrued  employee compensation and benefits                                                                                          |       | 2,993              |       | 4,048                 |       |
| Customer  advances                                                                                                                   |       | 12,502             |       | 6,528                 |       |
| Lines  of credit                                                                                                                     |       | 1,379              |       | 1,777                 |       |
| Current  maturities on long-term debt                                                                                                |       | 7,558              |       | 13,485                |       |
| Current  portion of capital lease obligations                                                                                        |       | 306                |       | 306                   |       |
|                                                                                                                                 |       |               |       |                  |       |
| Total  current liabilities                                                                                                           |       | 40,964             |       | 42,135                |       |
|                                                                                                                                 |       |               |       |                  |       |
| LONG-TERM  DEBT                                                                                                                      |       | 23,958             |       | 34,120                |       |
|                                                                                                                                 |       |               |       |                  |       |
| CAPITAL  LEASE OBLIGATIONS                                                                                                           |       | 353                |       | 436                   |       |
|                                                                                                                                 |       |               |       |                  |       |
| DEFERRED  TAX LIABILITIES                                                                                                            |       | 13,516             |       | 15,217                |       |
|                                                                                                                                 |       |               |       |                  |       |
| OTHER  LONG-TERM LIABILITIES                                                                                                         |       | 1,120              |       | 1,157                 |       |
|                                                                                                                                 |       |               |       |                  |       |
| Total  liabilities                                                                                                                   |       | 79,911             |       | 93,065                |       |
|                                                                                                                                 |       |               |       |                  |       |
| COMMITMENTS  AND CONTINGENT LIABILITIES                                                                                              |       |               |       |                  |       |
|                                                                                                                                 |       |               |       |                  |       |
| STOCKHOLDERS’  EQUITY:                                                                                                          |       |               |       |                  |       |
| Preferred  stock, $0.05 par value; 4,000,000 shares authorized; no issued and  outstanding shares                                    |       | —             |       | —                |       |
| Common  stock, $0.05 par value; 25,000,000 shares authorized; 12,959,663 and  12,870,363 shares issued and outstanding, respectively |       | 647                |       | 643                   |       |
| Additional  paid-in capital                                                                                                          |       | 46,870             |       | 46,080                |       |
| Retained  earnings                                                                                                                   |       | 84,118             |       | 85,048                |       |
| Other  cumulative comprehensive income (loss)                                                                                        |       | (5,194             | )          | 340                   |       |
|                                                                                                                                 |       |               |       |                  |       |
| Total  stockholders’ equity                                                                                                     |       | 126,441            |       | 132,111               |       |
|                                                                                                                                 |       |               |       |                  |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                     |       | $                  | 206,352    |                  | $          | 225,176 |   |

 

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

 

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREEMONTHS ENDED MARCH 31, 2010 AND 2009

(Dollars inThousands, Except Share Data)

(unaudited)

 
| ** **                                      | ** ** | **Three months ended** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **March 31,**     | ** ** |
| ** **                                      | ** ** | **2010**               | ** ** | **2009** | ** ** |
| NET  SALES                                      |       | $                      | 30,357     |   | $ | 49,759 |   |
|                                            |       |                   |       |   |   |
| COST  OF PRODUCTS SOLD                          |       | 23,373                 |       | 34,431 |   |
|                                            |       |                   |       |   |   |
| Gross  profit                                   |       | 6,984                  |       | 15,328 |   |
|                                            |       |                   |       |   |   |
| COSTS  AND EXPENSES:                            |       |                   |       |   |   |
| General  and administrative expenses            |       | 3,145                  |       | 3,526 |   |
| Selling  expenses                               |       | 2,321                  |       | 2,324 |   |
| Amortization  of purchased intangible assets    |       | 1,273                  |       | 1,183 |   |
|                                            |       |                   |       |   |   |
| Total  costs and expenses                       |       | 6,739                  |       | 7,033 |   |
|                                            |       |                   |       |   |   |
| INCOME  FROM OPERATIONS                         |       | 245                    |       | 8,295 |   |
|                                            |       |                   |       |   |   |
| OTHER  INCOME (EXPENSE):                        |       |                   |       |   |   |
| Other  income (expense), net                    |       | 129                    |       | (117 | ) |
| Interest  expense                               |       | (1,144                 | )          | (902 | ) |
| Interest  income                                |       | 35                     |       | 65 |   |
| Equity  in earnings (loss) of joint ventures    |       | 169                    |       | (49 | ) |
|                                            |       |                   |       |   |   |
| INCOME  (LOSS) BEFORE INCOME TAXES              |       | (566                   | )          | 7,292 |   |
|                                            |       |                   |       |   |   |
| INCOME  TAX PROVISION (BENEFIT)                 |       | (154                   | )          | 2,376 |   |
|                                            |       |                   |       |   |   |
| NET  INCOME (LOSS)                              |       | $                      | (412       | ) | $ | 4,916 |   |
|                                            |       |                   |       |   |   |
| INCOME  (LOSS) PER SHARE:                       |       |                   |       |   |   |
| Basic                                           |       | $                      | (0.03      | ) | $ | 0.38 |   |
| Diluted                                         |       | $                      | (0.03      | ) | $ | 0.38 |   |
|                                            |       |                   |       |   |   |
| WEIGHTED  AVERAGE NUMBER OF SHARES OUTSTANDING: |       |                   |       |   |   |
| Basic                                           |       | 12,690,510             |       | 12,527,452 |   |
| Diluted                                         |       | 12,690,510             |       | 12,569,879 |   |
|                                            |       |                   |       |   |   |
| DIVIDENDS  DECLARED PER COMMON SHARE            |       | $                      | 0.04       |   | $ | — |   |

 

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

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2010

(Amounts in Thousands)

(unaudited)

 
| ** **                                                    | ** ** | ** **        | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Other**         | ** ** | ** ** | ** ** | ** **          | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|-------------|------------|----------------|------------|-------------------|------------|-------------------|------------|------------|------------|---------------------|------------|
| ** **                                                    | ** ** | ** **        | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Cumulative**    | ** ** | ** ** | ** ** | **Comprehensive**   | ** ** |
| ** **                                                    | ** ** | **Common  Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | ** **        | ** ** | **Loss**   | ** ** |
| ** **                                                    | ** ** | **Shares**        | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Income/(loss)** | ** ** | **Total**  | ** ** | **for the  Period** | ** ** |
| Balances, December 31, 2009                              |       | 12,870            |       | $           | 643        |           | $          | 46,080            |       | $                 | 85,048     |       | $          | 340                 |       | $ | 132,111 |   |   |   |
| Shares issued in connection with stock compensation  plans    |       | 90                |       | 4           |       | (4             | )          | —            |       | —            |       | —     |       |                |       |
| Excess tax benefit related to stock options                   |       | —            |       | —      |       | 2              |       | —            |       | —            |       | 2          |       |                |       |
| Stock-based compensation                                      |       | —            |       | —      |       | 792            |       | —            |       | —            |       | 792        |       |                |       |
| Dividends                                                     |       | —            |       | —      |       | —         |       | (518              | )          | —            |       | (518       | )          |                |       |
| Net loss                                                      |       | —            |       | —      |       | —         |       | (412              | )          | —            |       | (412       | )          | (412                | )          |
| Derivative valuation, net of tax of $99                       |       | —            |       | —      |       | —         |       | —            |       | 105               |       | 105        |       | 105                 |       |
| Change in cumulative foreign currency translation  adjustment |       | —            |       | —      |       | —         |       | —            |       | (5,639            | )          | (5,639     | )          | (5,639              | )          |
| Balances, March 31, 2010                                 |       | 12,960            |       | $           | 647        |           | $          | 46,870            |       | $                 | 84,118     |       | $          | (5,194              | )          | $ | 126,441 |   | $ | (5,946 | ) |
|                                                               |            |                   |            |             |            |                |            |                   |            |                   |            |            |            |                     |            |  |  |  |  |  |  |

 

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

 

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREEMONTHS ENDED MARCH 31, 2010 AND 2009

(Dollars inThousands)

(unaudited)

 
| ** **                                                                         | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                             |       |     |       |     |       |
| Net  income (loss)                                                                 |       | $        | (412       | )        | $          | 4,916 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |     |       |     |       |
| Depreciation  (including capital lease amortization)                               |       | 1,154    |       | 1,267    |       |
| Amortization  of purchased intangible assets                                       |       | 1,273    |       | 1,183    |       |
| Amortization  of capitalized debt issuance costs                                   |       | 369      |       | 69       |       |
| Stock-based  compensation                                                          |       | 792      |       | 798      |       |
| Deferred  income tax benefit                                                       |       | (830     | )          | (605     | )          |
| Equity  in earnings of joint ventures                                              |       | (169     | )          | 49       |       |
| Change  in:                                                                        |       |     |       |     |       |
| Accounts  receivable, net                                                          |       | 8,799    |       | (2,702   | )          |
| Inventories                                                                        |       | (3,837   | )          | (2,721   | )          |
| Prepaid  expenses and other                                                        |       | 142      |       | 460      |       |
| Accounts  payable                                                                  |       | 2,123    |       | 2,388    |       |
| Customer  advances                                                                 |       | 6,082    |       | (961     | )          |
| Accrued  expenses and other liabilities                                            |       | (1,678   | )          | (904     | )          |
|                                                                               |       |     |       |     |       |
| Net  cash provided by operating activities                                         |       | 13,808   |       | 3,237    |       |
|                                                                               |       |     |       |     |       |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                             |       |     |       |     |       |
| Acquisition  of property, plant and equipment                                      |       | (764     | )          | (1,170   | )          |
| Change  in other non-current assets                                                |       | (4       | )          | 8        |       |
|                                                                               |       |     |       |     |       |
| Net  cash used in investing activities                                             |       | (768     | )          | (1,162   | )          |
|                                                                                    |            |          |            |          |            |  |  |

 

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

 

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREEMONTHS ENDED MARCH 31, 2010 AND 2009

(Dollars inThousands)

(unaudited)

 
| ** **                                                             | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                 |       |     |       |     |       |
| Payment  on syndicated term loans                                      |       | (15,374  | )          | (3,862   | )          |
| Payment  on Nord LB term loans                                         |       | (208     | )          | (233     | )          |
| Borrowings  (repayments) on bank lines of credit, net                  |       | (441     | )          | 4,215    |       |
| Payment  on capital lease obligations                                  |       | (74      | )          | (71      | )          |
| Payment  of dividends                                                  |       | (515     | )          | —   |       |
| Payment  of deferred debt issuance costs                               |       | —   |       | (19      | )          |
| Net  proceeds from issuance of common stock to employees and directors |       | —   |       | 236      |       |
| Excess  tax benefit related to exercise of stock options               |       | 2        |       | 57       |       |
|                                                                   |       |     |       |     |       |
| Net  cash provided by (used in) financing activities                   |       | (16,610  | )          | 323      |       |
|                                                                   |       |     |       |     |       |
| EFFECTS  OF EXCHANGE RATES ON CASH                                     |       | (483     | )          | (480     | )          |
|                                                                   |       |     |       |     |       |
| NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                  |       | (4,053   | )          | 1,918    |       |
|                                                                   |       |     |       |     |       |
| CASH  AND CASH EQUIVALENTS, beginning of the period                    |       | 22,411   |       | 14,360   |       |
|                                                                   |       |     |       |     |       |
| CASH  AND CASH EQUIVALENTS, end of the period                          |       | $        | 18,358     |     | $          | 16,278 |   |
|                                                                        |            |          |            |          |            |  |  |

 

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

 

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

##### ** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**(Currency Amounts in Thousands, Except Share and Per Share Data)**

 

**(unaudited)**

 

**1.      BASIS OF PRESENTATION**

 

Theinformation included in the Condensed Consolidated Financial Statements isunaudited but includes all normal and recurring adjustments which, in theopinion of management, are necessary for a fair presentation of the interimperiods presented. These Condensed Consolidated Financial Statements should beread in conjunction with the financial statements that are included in theCompany’s Annual Report filed on Form 10-K for the year ended December 31,2009.  Certain prior year balances in theconsolidated financial statements and notes have been reclassified to conformto the 2010 presentation.

 

**2.      SIGNIFICANT ACCOUNTING POLICIES**

 

Principlesof Consolidation

 

**The Condensed Consolidated Financial Statements include theaccounts of the Company and its controlled subsidiaries.  Only subsidiaries in which controllinginterests are maintained are consolidated. The equity method is used to account for our ownership in subsidiarieswhere we do not have a controlling interest. All significant intercompany accounts, profits, and transactions havebeen eliminated in consolidation.**

 

Foreign Operations and Foreign Exchange Rate Risk

 

**The functional currency for the Company’s foreignoperations is the applicable local currency for each affiliate company. Assetsand liabilities of foreign subsidiaries for which the functional currency isthe local currency are translated at exchange rates in effect at period-end,and the statements of operations are translated at the average exchange ratesduring the period.  Exchange ratefluctuations on translating foreign currency financial statements into U.S.dollars that result in unrealized gains or losses are referred to astranslation adjustments. Cumulative translation adjustments are recorded as aseparate component of stockholders’ equity and are included in other cumulativecomprehensive income (loss). Transactions denominated in currencies other thanthe local currency are recorded based on exchange rates at the time suchtransactions arise. Subsequent changes in exchange rates result in transactiongains and losses which are reflected in income as unrealized (based onperiod-end translations) or realized upon settlement of the transactions. Cashflows from 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 agree to 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.**

 

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Revenue Recognition

 

**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 includedetonating cords, detonators, bi-directional boosters, and shaped charges, aswell as seismic related explosives and accessories, are standard innature.  In all cases, revenue isrecognized only when all four of the following criteria have been satisfied:persuasive evidence of an arrangement exists; the price is fixed ordeterminable; delivery has occurred; and collection is reasonably assured.  For contracts that require multipleshipments, revenue is recorded only for the units included in each individualshipment.  If, as a contract proceedstoward completion, projected total cost on an individual contract indicates aprobable loss, the Company will account for such anticipated loss.**

 

Fair Value of Financial Instruments

 

Thecarrying values of cash and cash equivalents, trade accounts receivable andpayable, and accrued expenses are considered to approximate fair value due tothe short-term nature of these instruments. Based upon the 150 basis point increase in our LIBOR/EURIBOR basisborrowing spread negotiated in the October 21, 2009 amendment to oursyndicated credit agreement, we believe the fair value of our long-term debt approximatesits carrying value at March 31, 2010. The majority of the Company’s debt was incurred in connection with theacquisition of DYNAenergetics.

 

Additionally,the Company has an interest rate swap agreement (see Note 9), which is recordedat fair value.  Fair value is defined asthe price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at themeasurement date. The Company is required to use an established hierarchy forfair value measurements based upon the inputs to the valuation and the degreeto which they are observable or not observable in the market. The three levelsin the hierarchy are as follows:

 

·                       Level1 — Inputs to the valuation based upon quoted prices (unadjusted) for identicalassets or liabilities in active markets that are accessible as of themeasurement date.

 

·                       Level2 — Inputs to the valuation include quoted prices in either markets that arenot active, or in active markets for similar assets or liabilities, inputsother than quoted prices that are observable, and inputs that are derivedprincipally from or corroborated by observable market data.

 

·                       Level3 — Inputs to the valuation that are unobservable inputs for the asset orliability.

 

Thehighest priority is assigned to Level 1 inputs and the lowest priority to Level3 inputs.

 

The Company’s interest rate swap agreement is not exchange listed andis therefore valued with models that use Level 2 inputs.  The degree to which the Company’s creditworthiness impacts the value requires management judgment but as of March 31,2010 and December 31, 2009, the impact of this assessment on the overallvalue of the outstanding interest rate swap was not significant and the Company’svaluation of the agreement is classified within Level 2 of the hierarchy.

 

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RelatedParty Transactions

 

**The Company has related party transactions with itsunconsolidated joint ventures and the former owners of LRI.  We also had transactions in the period of January 1through March 31 2009 with LRI, who, at the time, was the minorityinterest partner of one of our consolidated joint ventures.  A summary of related party balances as of March 31,2010 and December 31, 2009 is summarized below:**

** **
| ** **           | ** ** | **As of**                    | ** ** | **As of**                  | ** ** |
|----------------------|------------|------------------------------|------------|----------------------------|------------|
| ** **           | ** ** | **March 31, 2010**      | ** ** | **December 31, 2009** | ** ** |
| ** **           | ** ** | **Accounts receivable from** | ** ** |
| ** **           | ** ** | **and loan to**              | ** ** |
| DYNAenergetics RUS   |       | $                            | 2,178      |                       | $          | 2,265 |   |
| Perfoline            |       | 436                          |       | 466                        |       |
| Former owners of LRI |       | —                       |       | 75                         |       |
|                 |       |                         |       |                       |       |
| Total                |       | $                            | 2,614      |                       | $          | 2,806 |   |

 

Asummary of related party transactions for the three months ended March 31,2010 and 2009 is summarized below:

 
| ** **                | ** ** | **Three Months Ended**  | ** ** | **Three Months Ended**  | ** ** |
|---------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **March 31, 2010** | ** ** | **March 31, 2009** | ** ** |
| ** **                | ** ** | ** **              | ** ** | **Interest**            | ** ** | ** ** | ** ** | **Interest** | ** ** |
| ** **                | ** ** | **Sales to**            | ** ** | **income from**         | ** ** | **Sales to** | ** ** | **income from** | ** ** |
| DYNAenergetics RUS        |       | $                       | 502        |                    | $          | — |   | $ | 42 |   | $ | — |   |
| Perfoline                 |       | 19                      |       | 10                      |       | 40 |   | 10 |   |
| Minority Interest Partner |       | —                  |       | —                  |       | 298 |   | — |   |
|                      |       |                    |       |                    |       |   |   |   |   |
| Total                     |       | $                       | 521        |                    | $          | 10 |   | $ | 380 |   | $ | 10 |   |

 

Earnings Per Share

 

**Unvested awards of share-basedpayments with rights to receive dividends or dividend equivalents, such as ourrestricted stock awards (“RSAs”), are considered participating securities forpurposes of calculating earnings per share (“EPS”) and require the use of thetwo class method for calculating EPS. Under this method a portion of net income is allocated to theseparticipating securities and therefore is excluded from the calculation of EPSallocated to common stock, as shown in the table below.**

 

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** **

**Computation and reconciliation ofearnings per common share are as follows:**

 
| ** **                                                       | ** ** | **For the Three Months Ended** | ** ** | **For the Three Months Ended** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                       | ** ** | **March 31, 2010**        | ** ** | **March 31, 2009**        | ** ** |
| ** **                                                       | ** ** | **Income**                     | ** ** | **Shares**                     | ** ** | **EPS** | ** ** | **Income** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Basic  earnings per share:                                       |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Net  income (loss)                                               |       | $                              | (412       | )                              |       |   |   |   | $ | 4,916 |   |   |   |   |   |
| Less  income allocated to RSAs                                   |       | —                         |       |                           |       |   |   | (103 | ) |   |   |   |   |
|                                                             |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Net  income (loss) allocated to common stock for EPS calculation |       | $                              | (412       | )                              | 12,690,510 |   | $ | (0.03 | ) | $ | 4,813 |   | 12,527,452 |   | $ | 0.38 |   |
|                                                             |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Adjust  shares for Dilutives:                                    |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Stock-based  compensation plans                                  |       |                           |       | —                         |       |   |   |   |   | 42,427 |   |   |   |
|                                                             |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Diluted  earnings per share:                                     |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Net  income (loss)                                               |       | $                              | (412       | )                              |       |   |   |   | $ | 4,916 |   |   |   |   |   |
| Less  income allocated to RSAs                                   |       | —                         |       |                           |       |   |   | (103 | ) |   |   |   |   |
|                                                             |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Net  income (loss) allocated to common stock for EPS calculation |       | $                              | (412       | )                              | 12,690,510 |   | $ | (0.03 | ) | $ | 4,813 |   | 12,569,879 |   | $ | 0.38 |   |

 

**3.      ACQUISITIONS**

 

LRIOil Tools Inc.

 

On October 1, 2009, the Company completed its acquisition of LRIOil Tools Inc. (“LRI”) which is part of the Oilfield Products business.  LRI produces and distributes perforatingequipment for use by the oil and gas exploration and production industry.  The business had a long-term strategicrelationship with the Company’s Oilfield Products segment and had served forseveral years as its sole Canadian distributor.

 

The acquisition was valued at $5,946 and was financed by (i) thepayment of $284 in cash, net of cash acquired of $15, (ii) the issuance of4,875 shares of common stock of the Company (valued at $94), and (iii) theassumption of $5,553 (5,982 Canadian Dollars (“CAD”)) of LRI’s debt.  The assumed debt consisted of $2,676 (2,883CAD) for a line of credit, $2,445 (2,634 CAD) for loans with the former ownersof LRI and $432 (465 CAD) for capital lease obligations.

 

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The purchase price of the acquisition was allocated to the Company’stangible and identifiable intangible assets based on their fair values asdetermined by appraisals performed as of the acquisition date.  The allocation of the purchase price to theassets and liabilities of LRI was as follows:

 
| Current assets                |   | $      | 5,430  |   |
|-------------------------------|--------|--------|--------|--------|
| Property, plant and equipment |   | 2,191  |   |
| Intangible assets             |   | 1,117  |   |
| Deferred tax assets           |   | 298    |   |
| Other assets                  |   | 1      |   |
|                          |   |   |   |
| Total assets acquired         |   | 9,037  |   |
|                          |   |   |   |
| Line of credit                |   | 2,676  |   |
| Other current liabilities     |   | 2,448  |   |
| Long term debt                |   | 2,877  |   |
| Deferred tax liabilities      |   | 643    |   |
|                          |   |   |   |
| Total liabilities acquired    |   | 8,644  |   |
|                          |   |   |   |
| Net assets acquired           |   | $      | 393    |   |

 

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

 
| ** **              | ** ** | ** ** | ** ** | **Weighted Average** | ** ** |
|-------------------------|------------|------------|------------|----------------------|------------|
| ** **              | ** ** | ** ** | ** ** | **Amortization**     | ** ** |
| ** **              | ** ** | **Value**  | ** ** | **Period**           | ** ** |
| Core technology         |       | $          | 347        |                 | 15 years   |   |
| Customer relationships  |       | 770        |       | 15 years             |       |
|                    |       |       |       |                 |       |
| Total intangible assets |       | $          | 1,117      |                 |       |   |

 

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The following table presentsthe pro-forma combined results of operations for the three months ended March 31,2009 assuming (i) the acquisition had occurred on January 1, 2009; (ii) pro-formaamortization expense of the purchased intangible assets; (iii) pro-formadepreciation expense of the appraised value of the property, plant andequipment; and (iv) reduction of interest expense assuming the Companypaid down LRI’s debt by 2,200 CAD (1,200 CAD for the loans to former owners ofLRI and 1,000 CAD for the line of credit) immediately following theacquisition:

 
| ** **             | ** ** | **2009** | ** ** |
|------------------------|------------|----------|------------|
| Net sales              |       | $        | 52,060     |   |
| Income from operations |       | $        | 8,131      |   |
| Net income             |       | $        | 4,735      |   |
|                   |       |     |       |
| Net income per share:  |       |     |       |
| Basic                  |       | $        | 0.37       |   |
| Diluted                |       | $        | 0.37       |   |

 

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.

 

Austin Explosives

 

On March 3, 2010, the Company entered into a definitive agreementto acquire the assets of Texas-based Austin Explosives Company, which has beena long-time distributor of DYNAenergetics shaped charges.  The purchase price for Austin’s assets is$7.0 million, $3.5 million of which is payable in cash and the balance of whichis payable in shares of the Company’s stock, cash or a combination of both, atour election.  The acquisition is expectedto close during the second quarter of 2010.

 

**4.      INVESTMENT IN JOINT VENTURES**

 

Operating results include the Company’sproportionate share of income from unconsolidated joint ventures, which areaccounted for under the equity method. These investments (all of which resulted from the acquisition ofDYNAenergetics and pertain to the Company’s Oilfield Products business segment)include the following: (1) 65.19% interest in Perfoline, which is aRussian manufacturer of perforating gun systems and (2) 55% interest inDYNAenergetics RUS which is a Russian trading company that sells the Company’soilfield products.  Due to certainnoncontrolling interest veto rights that allow the minority interestshareholders to participate in ordinary course of business decisions, thesejoint ventures have been accounted for under the equity method instead of beingconsolidated in these financial statements. Investments in these joint ventures totaled $1,376 and $1,132 as of March 31,2010 and December 31, 2009, respectively.

 

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Summarized unaudited financial information for thejoint ventures accounted for under the equity method as of March 31, 2010and December 31, 2009 and for the three months ended March 31, 2010and 2009 is as follows:

 
| ** **                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| Current assets               |       | $                  | 5,137      |                  | $          | 5,350 |   |
| Noncurrent assets            |       | 666                |       | 655                   |       |
| Total assets                 |       | $                  | 5,803      |                  | $          | 6,005 |   |
|                         |       |               |       |                  |       |
| Current liabilities          |       | $                  | 2,388      |                  | $          | 2,892 |   |
| Noncurrent liabilities       |       | 473                |       | 555                   |       |
| Equity                       |       | 2,942              |       | 2,558                 |       |
| Total liabilities and equity |       | $                  | 5,803      |                  | $          | 6,005 |   |

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **March 31,**     | ** ** |
| ** **                                    | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Net sales                                     |       | $                      | 1,734      |   | $ | 1,106 |   |
| Gross Profit                                  |       | $                      | 416        |   | $ | 270 |   |
| Operating income                              |       | $                      | 170        |   | $ | 79 |   |
| Net income (loss)                             |       | $                      | 310        |   | $ | (90 | ) |
| Equity in earnings (losses) of joint ventures |       | $                      | 169        |   | $ | (49 | ) |

 

**5.      INVENTORY**

 

**The components of inventory areas follows at March 31, 2010 and December 31, 2009:**

** **
| ** **      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|--------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| Raw materials   |       | $                  | 11,014     |                  | $          | 10,321 |   |
| Work-in-process |       | 18,053             |       | 15,963                |       |
| Finished goods  |       | 5,617              |       | 5,526                 |       |
| Supplies        |       | 845                |       | 691                   |       |
|            |       |               |       |                  |       |
|            |       | $                  | 35,529     |                  | $          | 32,501 |   |

 

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**6.      GOODWILL**

 

Thechanges to the carrying amount of goodwill during the period are summarizedbelow:

 
| ** **                                                                            | ** ** | **Explosive**    | ** ** | ** **   | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------|------------|--------------|------------|------------|------------|
| ** **                                                                            | ** ** | **Metalworking** | ** ** | **Oilfield** | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | **Group**        | ** ** | **Products** | ** ** | **Total**  | ** ** |
| Goodwill balance at December 31, 2009                                            |       | $                | 24,577     |         | $          | 18,587     |       | $ | 43,164 |   |
| Adjustment due to recognition of tax benefit of  tax amortization of certain goodwill |       | (85              | )          | (121         | )          | (206       | )          |
| Adjustment due to exchange rate differences                                           |       | (1,454           | )          | (1,138       | )          | (2,592     | )          |
|                                                                                  |       |             |       |         |       |       |       |
| Goodwill balance at March 31, 2010                                               |       | $                | 23,038     |         | $          | 17,328     |       | $ | 40,366 |   |

 

**7.      PURCHASED INTANGIBLE ASSETS**

 

The following tablepresents details of our purchased intangible assets, other than goodwill, as ofMarch 31, 2010:

 
| ** **               | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|--------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **               | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
| Core technology          |       | $          | 22,887     |             | $          | (2,686     | )          | $ | 20,201 |   |
| Customer relationships   |       | 31,202     |       | (8,047           | )          | 23,155     |       |
| Trademarks / Trade names |       | 2,453      |       | (871             | )          | 1,582      |       |
|                     |       |       |       |             |       |       |       |
| Total intangible assets  |       | $          | 56,542     |             | $          | (11,604    | )          | $ | 44,938 |   |

 

The following tablepresents details of our purchased intangible assets, other than goodwill, as ofDecember 31, 2009:

 
| ** **               | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|--------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **               | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
| Core technology          |       | $          | 24,347     |             | $          | (2,555     | )          | $ | 21,792 |   |
| Customer relationships   |       | 33,161     |       | (7,657           | )          | 25,504     |       |
| Trademarks / Trade names |       | 2,613      |       | (830             | )          | 1,783      |       |
|                     |       |       |       |             |       |       |       |
| Total intangible assets  |       | $          | 60,121     |             | $          | (11,042    | )          | $ | 49,079 |   |

 

Thedecrease in the gross value of our purchased intangible assets from December 31,2009 to March 31, 2010 is due solely to the impact of foreign currencytranslation.

 

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**8.      CUSTOMER ADVANCES**

 

On occasion, customers makeadvance payments prior to the shipment of their orders in order to help financethe Company’s inventory investment on large orders or to keep credit limits atacceptable levels.  As of March 31,2010 and December 31, 2009, customer advances totaled $12,502 and $6,528respectively, with $10,258 of the March 31 balance relating to two largeorders which are scheduled to ship during the remaining three quarters of 2010.

 

**9.      DEBT**

 

**Lines of credit consisted of thefollowing at March 31, 2010 and December 31, 2009:**

** **
| ** **                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| HSBC line of credit        |       | $                  | 1,379      |                  | $          | 1,774 |   |
| Commerzbank line of credit |       | —             |       | 3                     |       |
|                       |       |               |       |                  |       |
|                       |       | $                  | 1,379      |                  | $          | 1,777 |   |

** **

**Long-term debt consists of thefollowing at March 31, 2010 and December 31, 2009:**

 
| ** **                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| Syndicated credit agreement term loan      |       | $                  | 28,998     |                  | $          | 31,005 |   |
| Syndicated credit agreement Euro term loan |       | —             |       | 13,826                |       |
| Nord LB 3,000 Euro term loan               |       | 1,211              |       | 1,505                 |       |
| Loans with former owners of LRI            |       | 1,307              |       | 1,269                 |       |
|                                       |       |               |       |                  |       |
|                                       |       | 31,516             |       | 47,605                |       |
| Less current maturities                    |       | (7,558             | )          | (13,485               | )          |
|                                       |       |               |       |                  |       |
| Long-term debt                             |       | $                  | 23,958     |                  | $          | 34,120 |   |

** **

InMarch of 2010, the Company made required prepayments of principal underthe U.S. Dollar and Euro term loans in the amounts of $2,007 and 626 Euros($868), respectively, from excess cash flow generated in 2009. Additionally,the Company made a March payment of 9,020 Euros ($12,498) to retire theremaining principal balance outstanding under the Euro term loan, which wasscheduled to mature on November 16, 2012.

 

LoanCovenants and Restrictions

 

The Company’s existing loan agreements includevarious covenants and restrictions, certain of which relate to the incurrenceof additional indebtedness; mortgaging, pledging or disposition of majorassets; limits on capital expenditures; and maintenance of specified financialratios.  As of March 31, 2010, theCompany was in compliance with all financial covenants and other provisions ofits debt agreements.

 

SwapAgreement

 

On November 17, 2008, the Company enteredinto a two-year interest rate swap agreement with an initial notional amount of$40,500 (decreasing to $33,750 in November 2009) that 

 

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effectively converted the LIBOR based variable rateUS borrowings under the syndicated credit agreement to a fixed rate of 4.87%(6.37% effective October 21, 2009 due to an amendment in the Company’ssyndicated credit facility and the Company’s current leverage ratio).  The Company had designated the swap agreementas an effective cash flow hedge with matched terms and, as a result, changesin the fair value of the swap agreement were recorded in other comprehensiveincome with the offset as a swap agreement asset or liability. During March 2009 and March 2010, the Company made repaymentsof $2,744 and $2,007, respectively, on its variable rate US borrowings and inboth cases elected to de-designate the related portion of the cash flowhedge.  These principal payments wererequired under the terms of the Company’s syndicated credit facility sincecertain annually calculated cash flow measures were met.  Settlements and changes in the fair valuerelated to the de-designated portion of the cash flow hedge are recorded asrealized and unrealized gains/losses on swap agreement within other income inthe Company’s statement of operations.  The Company recorded an immaterial loss of less than $100 during 2009and less than $25 during the quarter ended March 31, 2010.

 

The Company has recorded the fair value of itsinterest rate swap agreement as follows:

 
| ** **                    | ** ** | **March 31, 2010**    | ** ** | **December 31, 2009** | ** ** |
|-------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                    | ** ** | **Balance sheet location** | ** ** | **Fair value**             | ** ** | **Balance sheet location** | ** ** | **Fair value** | ** ** |
|                          |       |                       |       |                       |       |   |   |   |   |
| Interest  rate swap liability |       | Accrued expenses           |       | $                          | 640        |   | Accrued expenses |   | $ | 820 |   |
|                               |            |                            |            |                            |            |  |  |  |  |  |  |

 

**10.    BUSINESS SEGMENTS**

 

TheCompany is organized in the following three segments:  Explosive Metalworking, Oilfield Products,and AMK Welding. The Explosive Metalworking segment uses explosives to performmetal cladding and shock synthesis of industrial diamonds. The most significantproduct of this group is clad metal which is used in the fabrication ofpressure vessels, heat exchangers, and transition joints for variousindustries, including upstream oil and gas, oil refinery, petrochemicals,hydrometallurgy, aluminum production, shipbuilding, power generation,industrial refrigeration, and similar industries.  The Oilfield Products segment manufactures,markets and sells oilfield perforating equipment and explosives, includingdetonating cords, detonators, bi-directional boosters and shaped charges, andseismic related explosives and accessories. AMK Welding utilizes a number of welding technologies to weld componentsfor manufacturers of jet engine and ground-based turbines.

 

The accounting policies of all the segments are the same as thosedescribed in the summary of significant 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 andrequire different manufacturing processes and technologies.

 

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Segment information ispresented for the three months ended March 31, 2010 and 2009 as follows:

 
| ** **                                       | ** ** | **Explosive**    | ** ** | ** **   | ** ** | ** **  | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|------------------|------------|--------------|------------|-------------|------------|------------|------------|
| ** **                                       | ** ** | **Metalworking** | ** ** | **Oilfield** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Group**        | ** ** | **Products** | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For  the three months ended March 31, 2010: |       |             |       |         |       |        |       |       |       |
| Net  sales                                       |       | $                | 21,306     |         | $          | 7,006       |       | $          | 2,045      |   | $ | 30,357 |   |
| Depreciation  and amortization                   |       | $                | 1,367      |         | $          | 945         |       | $          | 115        |   | $ | 2,427 |   |
| Income  (loss) from operations                   |       | $                | 1,217      |         | $          | (404        | )          | $          | 224        |   | $ | 1,037 |   |
| Equity  in earnings of joint ventures            |       | $                | —     |         | $          | 169         |       | $          | —     |   | 169 |   |
| Unallocated  amounts:                            |       |             |       |         |       |        |       |       |       |
| Stock-based  compensation                        |       |             |       |         |       |        |       | (792       | )          |
| Other  income                                    |       |             |       |         |       |        |       | 129        |       |
| Interest  expense                                |       |             |       |         |       |        |       | (1,144     | )          |
| Interest  income                                 |       |             |       |         |       |        |       | 35         |       |
|                                             |       |             |       |         |       |        |       |       |       |
| Consolidated  loss before income taxes           |       |             |       |         |       |        |       | $          | (566       | ) |

 
| ** **                                       | ** ** | **Explosive**    | ** ** | ** **   | ** ** | ** **  | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|------------------|------------|--------------|------------|-------------|------------|------------|------------|
| ** **                                       | ** ** | **Metalworking** | ** ** | **Oilfield** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Group**        | ** ** | **Products** | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For  the three months ended March 31, 2009: |       |             |       |         |       |        |       |       |       |
| Net  sales                                       |       | $                | 43,472     |         | $          | 4,034       |       | $          | 2,253      |   | $ | 49,759 |   |
| Depreciation  and amortization                   |       | $                | 1,488      |         | $          | 848         |       | $          | 114        |   | $ | 2,450 |   |
| Income  (loss) from operations                   |       | $                | 9,412      |         | $          | (694        | )          | $          | 375        |   | $ | 9,093 |   |
| Equity  in losses of joint ventures              |       | $                | —     |         | $          | (49         | )          | $          | —     |   | (49 | ) |
| Unallocated  amounts:                            |       |             |       |         |       |        |       |       |       |
| Stock-based  compensation                        |       |             |       |         |       |        |       | (798       | )          |
| Other  expense                                   |       |             |       |         |       |        |       | (117       | )          |
| Interest  expense                                |       |             |       |         |       |        |       | (902       | )          |
| Interest  income                                 |       |             |       |         |       |        |       | 65         |       |
|                                             |       |             |       |         |       |        |       |       |       |
| Consolidated  income before income taxes         |       |             |       |         |       |        |       | $          | 7,292      |   |

 

**During the three months ended March 31,2010 and 2009, no sales to any one customer accounted for more than 10% oftotal net sales.**

** **

**11.    COMPREHENSIVE LOSS**

 

**The Company’s comprehensive lossfor the three months ended March 31, 2010 and 2009 was as follows:**

** **
| ** **                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **March 31,**     | ** ** |
| ** **                                           | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Net income (loss) for the period                     |       | $                      | (412       | ) | $ | 4,916 |   |
| Interest rate swap valuation adjustment, net of  tax |       | 105                    |       | 38 |   |
| Foreign currency translation adjustment              |       | (5,639                 | )          | (5,918 | ) |
|                                                 |       |                   |       |   |   |
| Comprehensive loss                                   |       | $                      | (5,946     | ) | $ | (964 | ) |

 

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Other cumulativecomprehensive income (loss) as of March 31, 2010 and December 31,2009 consisted of the following:

 
| ** **                                                                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                          | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| Currency translation adjustment                                                     |       | $                  | (4,845     | )                     | $          | 794 |   |
| Interest rate swap valuation adjustment, net of  tax of $201 and $299, respectively |       | (349               | )          | (454                  | )          |
|                                                                                |       |               |       |                  |       |
|                                                                                |       | $                  | (5,194     | )                     | $          | 340 |   |

 

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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 our historicalconsolidated financial statements and notes, as well as the selected historicalconsolidated financial data that are included in the Company’s Annual Reportfiled on Form 10-K for the year ended December 31, 2009.

 

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

 

**Executive Overview**

 

Our business isorganized into three segments:  ExplosiveMetalworking, Oilfield Products, and AMK Welding.  For the three months ended March 31,2010, Explosive Metalworking accounted for 70% of our net sales and 117% of ourincome from operations before consideration of stock-based compensationexpense, which is not allocated to our business segments.  Our Oilfield Products and AMK Weldingsegments accounted for 23% and 7%, respectively, of our first quarter 2010 netsales.

 

Our net sales for thethree months ended March 31, 2010 decreased by $19,402 (39.0%) compared tothe same period of 2009, reflecting year-to-year net sales decreases of $22,166(51.0%) and $208 (9.2%) for our Explosive Metalworking and AMK Weldingsegments, respectively, which were partially offset by a sales increase of$2,972 (73.7%) for Oilfield Products. Excluding incremental sales of $2,816 from our October 1, 2009acquisition of LRI, our Oilfield Products segment reported a modest firstquarter 2010 net sales increase of $156 or 3.9%.  Our consolidated income from operationsdecreased to $245 in the three months ended March 31, 2010 from $8,295 inthe same period of 2009.  This $8,050decrease reflects declines in Explosive Metalworking’s and AMK Welding’soperating income of $8,195 and $151, respectively, which were slightly offsetby a $290 decrease in the operating loss reported by our Oilfield Productssegment and a $6 decrease in stock-based compensation expense.  We recorded a net loss of $412 for the threemonths ended March 31, 2010 compared to net income of $4,916 for the sameperiod of 2009.

 

*Impact of Current EconomicSituation on the Company*

 

TheCompany was only minimally impacted in 2008 by the global economicslowdown.  However, during 2009 and thefirst quarter of 2010, we experienced a significant slowdown in ExplosiveMetalworking sales to some of the markets we serve.  The explosion-welded clad plate market isdependent upon sales of products for use by customers in a number of heavyindustries, including oil and gas, alternative energy, chemicals andpetrochemicals, hydrometallurgy, aluminum production, shipbuilding, powergeneration, and industrial refrigeration. These industries tend to be cyclical in nature and the current worldwideeconomic downturn has affected many of these markets.  Despite the slowdown we have already seen incertain sectors, including chemical, petrochemical and hydrometallurgy, quotingactivity in other end markets remains relatively healthy, and we continue totrack an extensive list of projects. While timing of new order inflow remainsdifficult to predict, we believe that our Explosive Metalworking segment iswell-positioned to benefit as global economic conditions improve.

 

Asa result of our Explosive Metalworking backlog decreasing from $97,247 at December 31,2008 to $49,584 at December 31, 2009 and relatively low booking activityduring the first quarter of 2010 which led to only a slight increase in ourbacklog to $51,417 at March 31, 2010, 

 

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we believe that our2010 consolidated net sales could decline by as much as 5% from consolidatednet sales that we reported in 2009. However, if booking activity for both our Explosive Metalworking andOilfield Products business segments improves during the middle quarters of2010, our 2010 consolidated net sales could approach those of 2009.  In light of the slowdown in order inflow thatwe have experienced, we continue to manage expenses carefully.  Despite the significant sales and net incomedeclines that we reported in the first quarter of 2010, we generated cash flowfrom operations of $13,808 and expect to generate positive cash flow fromoperations for the full year 2010.

 

*Net sales*

 

ExplosiveMetalworking’s revenues 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 a largeportion of the demand for our clad metal products is driven by new plantconstruction and large plant expansion projects, maintenance and retrofitprojects at existing chemical processing, petrochemical processing, oilrefining, and aluminum smelting facilities also account for a significantportion of total demand.

 

OilfieldProducts’ revenues 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 revenues 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 revenue is derived from a relatively small number ofcustomers; therefore, the failure to complete existing contracts on a timelybasis, 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 aggressively on the basis of price.

 

*Gross profit and cost of productssold*

 

Costof products sold for Explosive Metalworking includes 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 includes 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.

 

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*Income taxes*

 

Our effective income taxrate decreased to 27.2% for the three months ended March 31, 2010 from32.6% for the same period of 2009.  Basedupon existing tax regulations and current federal, state and foreign statutorytax rates, an expected reduction in our 2010 consolidated pre-tax income fromthat reported in 2009, and the amount of our projected 2010 consolidatedpre-tax income that we expect to be generated by our U.S. and foreignoperations, respectively, we expect our blended effective tax rate for 2010 torange between 25% and 28%.  Our full year2009 effective tax rate was 33.9% and, subsequent to 2010, we expect that ourblended effective tax rate will to return to a normalized level of 33% to 35%.

 

*Backlog*

 

Weuse backlog as a primary means of measuring the immediate outlook for ourbusiness.  We define “backlog” at anygiven point in time as consisting of all firm, unfulfilled purchase orders andcommitments at that time.  Generallyspeaking, we expect to fill most backlog orders within the following 12months.  From experience, most firmpurchase orders and commitments are realized.

 

Our backlogwith respect to the Explosive Metalworking segment increased slightly to$51,417 at March 31, 2010 from $49,584 at December 31, 2009 but waswell below the backlog of $97,247 that we reported at December 31,2008.  In light of the slowdown in orderinflow and decrease in backlog that we have experienced, we are currentlyanticipating that our consolidated net sales for fiscal 2010 will be in a rangeof flat to down 5% from the consolidated net sales that we reported in 2009.

 

**Three Months Ended March 31, 2010 Compared toThree Months Ended March 31, 2009**

 

*Net sales*

 
| ** ** | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **March 31,**     | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                      | 30,357     |       | $          | 49,759         |       | $ | (19,402 | ) | (39.0 | )% |
|            |            |                        |            |            |            |                |            |  |  |  |  |  |

 

Net sales for the first quarter of 2010 decreased 39.0% to $30,357 from$49,759 for the first quarter of 2009. Explosive Metalworking sales decreased 51.0% to $21,306 for the threemonths ended March 31, 2010 (70% of total sales) from $43,472 for the sameperiod of 2009 (87% of total sales).  Thedecrease in Explosive Metalworking sales reflects a business slowdown inseveral of the industries that this business segment serves.

 

Oilfield Productscontributed $7,006 to first quarter 2010 sales (23% of total sales), whichrepresents a 73.7% increase from sales of $4,034 for the first quarter of 2009 (8%of total sales). Excluding incremental sales of $2,816 from our October 1,2009 acquisition of LRI, the first quarter 2010 sales increase for OilfieldProducts was $156 or 3.9%.

 

AMKWelding contributed $2,045 to first quarter 2010 sales (7% of total sales),which represents a 9.2% decrease from sales of $2,253 for the first quarter of2009 (5% of total sales).

 

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*Gross profit*

* *
| ** **                            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | **March 31,**     | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit                          |       | $                      | 6,984      |       | $          | 15,328         |       | $ | (8,344 | ) | (54.4 | )% |
| Consolidated gross profit margin rate |       | 23.0                   | %          | 30.8       | %          |           |       |   |   |
|                                       |            |                        |            |            |            |                |            |  |  |  |  |  |

 

Grossprofit decreased by 54.4% to $6,984 for the three months ended March 31,2010 from $15,328 for the three months ended March 31, 2009. Our firstquarter 2010 consolidated gross profit margin rate decreased to 23.0% from30.8% for the first quarter of 2009.

 

Thegross profit margin rate for Explosive Metalworking decreased from 31.8% forthe first quarter of 2009 to 21.9% for the first quarter of 2010.  This 31.3% decrease in the ExplosiveMetalworking gross margin rate relates almost entirely to our European claddingoperations where the gross margin rate for the quarter was 81% lower than thegross margin rate reported for the first quarter of 2009 on a year-to-yearsales decline of 48%.  The significantyear-to-year decline in our European gross margin performance is attributableto negative changes in product mix as well as less favorable absorption offixed manufacturing overhead expenses resulting from the 48% salesdecline.  Our U.S. clad division reportedonly a slightly lower gross margin rate (35.2% vs. 36.1%) for the first quarterof 2010 versus the comparable period of 2009 despite a 53% drop in sales.  The strong first quarter 2010 gross marginperformance by our U.S. clad division reflects the positive impact of asizeable order that shipped during the quarter and that involved customer-suppliedmetal. U.S. gross margin rates are expected to be substantially lower duringthe remaining three quarters of 2010 than the rate reported in the firstquarter. Historically, gross margins for our European explosion weldingdivisions have been lower than those reported by our U.S. division due to lessefficient fixed manufacturing cost structures associated with our smallerEuropean facilities.  While we have takensteps to reduce fixed manufacturing overhead costs at all of our facilities,the benefit of these actions on our 2010 gross margin performance will likelybe offset by the expected continuation of a very competitive pricingenvironment.  As has been the casehistorically, we expect to see continued fluctuations in Explosive Metalworking’squarterly gross margin rates throughout 2010 that result from anticipatedfluctuations in quarterly sales volume and changes in product mix. Based uponthe reported first quarter gross margin rate, the composition of our March 31,2010 backlog and the current competitive pricing environment, we expect fullyear 2010 gross margins to be in the range of 22% to 24%.

 

OilfieldProducts reported a gross profit margin rate of 27.5% for the first quarter of2010 compared to a gross profit margin rate of 24.7% for the first quarter of2009.  The increase in Oilfield Products’2010 gross margin relates principally to favorable changes in product/customermix.  While the acquisition of LRI, whichnow operates under the name DYNAenergetics Canada, added $2,816 to firstquarter 2010 sales, the gross margin rate reported for these Canadian sales wassomewhat lower than the gross margin reported by this segment’s Europeanoperations.  We currently expect OilfieldProducts to report gross margins in the range of 28% to 30% for the full year2010.

 

Thegross profit margin rate for AMK Welding decreased to 22.5% for the firstquarter of 2010 from 26.1% for the first quarter of 2009.  The decrease in AMK Welding’s gross marginrelates principally to the 9.2% sales decrease discussed above and resultantless efficient absorption of fixed manufacturing overhead expenses.  AMK Welding sales and gross margins for thefull year 2010 are expected to be comparable to the $9,038 and 27.0%, respectively,reported in 2009.

 

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*Generaland administrative expenses*

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                                 | ** ** | **March 31,**     | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                 | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General & administrative expenses |       | $                      | 3,145      |       | $          | 3,526          |       | $ | (381 | ) | (10.8 | )% |
| Percentage of net sales                    |       | 10.4                   | %          | 7.1        | %          |           |       |   |   |
|                                            |            |                        |            |            |            |                |            |  |  |  |  |  |

 

General andadministrative expenses decreased by $381, or 10.8%, to $3,145 in the firstquarter of 2010 from $3,526 in the first quarter of 2009.  Excluding incremental general andadministrative expenses of $175 that resulted from the LRI acquisition, ourgeneral and administrative expenses decreased by $556 or 15.8%.  This decrease includes a $254 decrease inaccrued incentive compensation, a decrease of $42 in legal, audit andconsulting expenses, and a net decrease of $260 in all other expensescategories that reflects the impact of tight controls over discretionaryspending.  As a percentage of net sales,general and administrative expenses increased to 10.4% in the first quarter of2010 from 7.1% in the first quarter of 2009.

 

*Sellingexpenses*

 
| ** **              | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **March 31,**     | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **              | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses        |       | $                      | 2,321      |       | $          | 2,324          |       | $ | (3 | ) | (0.1 | )% |
| Percentage of net sales |       | 7.6                    | %          | 4.7        | %          |           |       |   |   |
|                         |            |                        |            |            |            |                |            |  |  |  |  |  |

 

Sellingexpenses, which include sales commissions of $266 in the first quarter of 2010and $383 in the first quarter of 2009, decreased by 0.1% to $2,321 in the firstquarter of 2010 from $2,324 in the first quarter of 2009.  Excluding incremental selling expenses of$482 that resulted from the LRI acquisition, our selling expenses decreased by$485 or 20.9%.  This $485 decrease in ourselling expenses includes decreased selling expenses of $172 and $313 at ourEuropean and U.S. divisions, respectively. The decrease in European selling expenses relates principally to staffreductions within our European explosion welding facilities and lower salescommissions. The $313 decrease in our U.S. selling expenses reflects decreasedsales commissions of $142, an $88 decrease in bad debt expense, an $88 decreasein accrued incentive compensation and a net increase of $5 in other spendingcategories. As a percentage of net sales, selling expenses increased to 7.6% inthe first quarter of 2010 from 4.7% in the first quarter of 2009.

 

*Amortization expenses*

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------------------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                                           | ** ** | **March 31,**     | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                           | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Amortization expense of purchased intangible  assets |       | $                      | 1,273      |       | $          | 1,183          |       | $ | 90 |   | 7.6 | % |
| Percentage of net sales                              |       | 4.2                    | %          | 2.4        | %          |           |       |   |   |
|                                                      |            |                        |            |            |            |                |            |  |  |  |  |  |

 

Amortization expense relates entirely to the amortization of valuesassigned to intangible assets in connection with the November 15, 2007acquisition of DYNAenergetics and our October 1, 2009 acquisition ofLRI.  Amortization expense for the threemonths ended March 31, 2010 

 

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includes $883, $296 and $94 relating tovalues assigned to customer relationships, core technology and trademarks/tradenames, respectively.  Amortizationexpense for the three months ended March 31, 2009 includes $820, $274 and$89 relating to values assigned to customer relationships, core technology andtrademarks/trade names, respectively.  Amortization expense (as measured in Euros) associated with theDYNAenergetics acquisition is expected to approximate €3,603 in 2010, and 2010amortization expense (as measured in Canadian dollars) associated with the LRIacquisition is expected to approximate 80 CAD.

 

*Operating income*

 
| ** **       | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **       | ** ** | **March 31,**     | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **       | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Operating income |       | $                      | 245        |       | $          | 8,295          |       | $ | (8,050 | ) | (97.0 | )% |
|                  |            |                        |            |            |            |                |            |  |  |  |  |  |

 

Income from operations (“operatingincome”) decreased by $8,050 to $245 in the first quarter of 2010 from $8,295in the first quarter of 2009.

 

Explosive Metalworkingreported operating income of $1,217 in the first quarter of 2010 compared to$9,412 in the first quarter of 2009. This 87.1% decrease in Explosive Metalworking operating income islargely attributable to the 51.0% decrease in net sales and the 31.1% declinein gross margin rate as discussed above.

 

Oilfield Productsreported an operating loss of $404 for the first quarter of 2010 as compared toan operating loss of $694 for the first quarter of 2009.

 

AMK Welding reportedoperating income of $224 for the three months ended March 31, 2010 ascompared to $375 for the same period of 2009.

 

Operating income for thethree months ended March 31, 2010 and 2009 includes $792 and $798,respectively, of stock-based compensation. This expense is not allocated to our business segments and thus is notincluded in the above first quarter operating income or loss totals forExplosive Metalworking, Oilfield Products and AMK Welding.

 

*Interest income (expense), net*

* *
| ** **                     | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                     | ** ** | **March 31,**     | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                     | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income (expense), net |       | $                      | (1,109     | )          | $          | (837           | )          | $ | (272 | ) | 32.5 | % |
|                                |            |                        |            |            |            |                |            |  |  |  |  |  |

 

We recordednet interest expense of $1,109 in the three months ended March 31, 2010compared to net interest expense of $837 in the same time period of 2009.  Interest expense for the first quarter of2010 included a non-recurring, non-cash charge of $251 related to the write-offof unamortized debt issuance costs associated with the March prepayment ofthe Euro term loan in the amount of $12,498 (9,020 Euros) under our banksyndicate credit facility.  This Euroterm loan was scheduled to mature on November 16, 2012.

 

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*Income tax provision (benefit)*

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                     | ** ** | **March 31,**     | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                     | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax provision (benefit) |       | $                      | (154       | )          | $          | 2,376          |       | $ | (2,530 | ) | (106.5 | )% |
| Effective tax rate             |       | 27.2                   | %          | 32.6       | %          |           |       |   |   |
|                                |            |                        |            |            |            |                |            |  |  |  |  |  |

 

We recorded an income tax benefit of $154 inthe first quarter of 2010 compared to an income tax provision of $2,376 in thefirst quarter of 2009.  The effective taxrate decreased to 27.2% in the first quarter of 2010 from 32.6% in the sameperiod of 2009.  Our consolidated incometax benefit of $154 for the three months ended March 31, 2010 andconsolidated income tax provision of $2,376 for the three months ended March 31,2009 included provisions of $386 and $2,122, respectively, related to U.S.taxes, with the remainder of the consolidated income tax benefit or provisionrelating to foreign taxes and foreign tax benefits associated with theoperations of Nobelclad, Nitro Metall, Dynaplat, DYNAenergetics, DYNAenergeticsCanada, and our German and Luxembourg holding companies.  Our blended effective tax rate for 2010 isexpected to range from 25% to 28% based on projected consolidated pre-taxincome.

 

*Adjusted EBITDA*

* *
| ** **      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **      | ** ** | **March 31,**     | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **      | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Adjusted EBITDA |       | $                      | 3,464      |       | $          | 11,543         |       | $ | (8,079 | ) | (70.0 | )% |
|                 |            |                        |            |            |            |                |            |  |  |  |  |  |

 

Adjusted EBITDA is anon-GAAP measure that we use as an indicator of the ongoing operatingperformance and the cash generating ability of the Company.  The following is a reconciliation of the mostdirectly comparable GAAP measure to Adjusted EBITDA.

 
| ** **                            | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------|------------|------------------------|------------|
| ** **                            | ** ** | **March 31,**     | ** ** |
| ** **                            | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Income from operations                |       | $                      | 245        |   | $ | 8,295 |   |
| Adjustments:                          |       |                   |       |   |   |
| Stock-based compensation              |       | 792                    |       | 798 |   |
| Depreciation                          |       | 1,154                  |       | 1,267 |   |
| Amortization of purchased intangibles |       | 1,273                  |       | 1,183 |   |
|                                  |       |                   |       |   |   |
| Adjusted EBITDA                       |       | $                      | 3,464      |   | $ | 11,543 |   |

 

Adjusted EBITDA decreasedby 70.0% to $3,464 in 2010 from $11,543 in 2009 primarily due to the $8,050decrease in operating income.

 

# **Liquidity and Capital Resources**

# ** **

**We havehistorically financed our operations from a combination of internally generatedcash flow, revolving credit borrowings, various long-term debt arrangements,and the issuance of common stock.  In connectionwith the acquisition of DYNAenergetics, we entered into a five-year syndicatedcredit agreement.  The credit agreement,which provided term loans of $45,000 and**

 

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**14,000 Euros and revolving creditloan availability of $25,000 and 7,000 Euros, is through a syndicate of sevenbanks.**

** **

Thereare two significant financial covenants under our credit facility, the leverageratio and fixed charge coverage ratio requirements.  The leverage ratio is defined in the creditfacility as Consolidated Funded Indebtedness at the balance sheet date ascompared to Consolidated EBITDA, which is defined as earnings before provisionsfor income taxes, interest expense, depreciation and amortization,extraordinary, non-recurring charges and other non-cash charges, for theprevious twelve months.  For the yearended December 31, 2009 and three months ended March 31, 2010, ConsolidatedEBITDA approximated the “Adjusted EBITDA” that we reported for the respectiveperiods.  As of December 31, 2009,the maximum leverage ratio permitted by our credit facility was 2.0 to 1.0. Theactual leverage ratio as of December 31, 2009 was 1.69 to 1.0. The maximumleverage ratio permitted as of March 31, June 30, September 30and December 31, 2010 is 2.25 to 1.0, 2.25 to 1.0, 2.0 to 1.0 and 1.5 to1.0, respectively.  The actual leverageratio as of March 31, 2010 was 1.52 to 1.0.

 

Thefixed charge ratio, as defined in the credit facility, means, for any period,the ratio of Earnings Available for Fixed Charges to Fixed Charges.  Earnings Available for Fixed Charges equalsConsolidated EBITDA plus lease expenses minus cash income taxes and non-financedcapital expenditures.  Fixed Chargesequals the sum of cash interest expense, lease expense, scheduled principalpayments and cash dividends.  As of December 31,2009, the minimum fixed charge ratio permitted by our credit facility was 1.1to 1.0. The actual fixed charge ratio as of December 31, 2009 was 1.31 to1.0. The minimum fixed charge coverage ratio permitted for the twelve monthperiods ending March 31, June 30, September 30 and December 31,2010 is 0.8 to 1.0, 0.8 to 1.0, 1.0 to 1.0 and 1.0 to 1.0, respectively. Theactual fixed charge ratio as of March 31, 2010 was 1.04 to 1.0.

 

Asa result of the slowdown in our business during 2009 which has continued intothe early part of 2010, we were concerned about our ability to comply withfinancial covenants as of March 31, 2010 and subsequent quarters of2010.  In an effort to alleviate thisconcern and remain in compliance with financial covenants as of March 31,2010 and in future periods, we made a March prepayment of the remainingprincipal balance due under our bank syndicate Euro term loan in the amount of$12,498 (9,020 Euros) and, on April 19, 2010, amended the credit agreementto exclude scheduled principal payments under the Euro term loan from fixedcharge coverage ratio computations for March 31, 2010 and forward.

 

**In connectionwith the October 1, 2009 acquisition of LRI, we assumed outstanding debtobligations including line of credit loans, loans with the former owners andcapital lease obligations in the amounts of $2,676 (2,883 CAD), $2,445 (2,634CAD) and $432 (465 CAD), respectively.**

** **

**As of March 31,2010, a U.S. Dollar term loan of $28,998 was outstanding under our syndicatedcredit agreement, $1,211 was outstanding under term loan obligations ofDYNAenergetics and $1,307 was outstanding under loan agreements with the formerowners of LRI.  We had no outstandingrevolving credit borrowings under our syndicated credit agreement or under ourseparate DYNAenergetics’ line of credit agreements with German banks.  We had $1,379 outstanding under the line ofcredit assumed with the acquisition of LRI. While we had approximately $44,118 of unutilized revolving credit loancapacity as of March 31, 2010 under our various credit facilities, futureborrowings are subject to compliance with financial covenants that couldsignificantly limit availability.**

 

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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; and (iii) continue to implementcost-effective internal processes, our ability to meet cash requirementsthrough operating activities could be impacted. Furthermore, any restriction on the availability of borrowings under ourcredit facilities could negatively affect our ability to meet future cashrequirements.

 

***Debt and othercontractual 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, 2010, wewere in compliance with all financial covenants and other provisions of ourdebt agreements.**

** **

Other than the unscheduled $12,498 (9,020 Euros) prepayment of theremaining principal balance on our bank syndicate Euro term loan, the Company’sprincipal cash flows related to debt obligations and other contractual obligationsand commitments have not materially changed since December 31, 2009.

 

***Cash flowsfrom operating activities***

** **

Net cash flows providedby operating activities for the first quarter of 2010 totaled $13,808.  Significant sources of operating cash flow includednon-cash depreciation and amortization expense of $2,795 and stock-basedcompensation of $792 and net positive changes in various components of workingcapital in the amount of $11,631.  Thesesources of operating cash flow were partially offset by a net loss of $412 anda deferred income tax benefit of $830. Net positive changes in working capital included decreases in accountsreceivable of $8,799 and increases in accounts payable and customer advances of$2,123 and $6,082, respectively.  These positivechanges in working capital were partially offset by increases in inventory of$3,837 and a decrease in accrued expenses of $1,678.

 

Net cash flows providedby operating activities for the first quarter of 2009 totaled $3,237.  Significant sources of operating cash flowincluded net income of $4,916, non-cash depreciation and amortization expenseof $2,519 and stock-based compensation of $798. These sources of operating cash flow were partially offset by a deferredincome tax benefit of $605 and net negative changes in various components ofworking capital in the amount of $4,440. Net negative changes in working capital included increases in accountsreceivable and inventories of $2,702 and $2,721, respectively, and decreases incustomer advances and accrued expenses of $961 and $904, respectively.  These negative changes in working capitalwere partially offset by decreases in prepaid expenses of $460 and an increasein accounts payable of $2,388.

 

*Cashflows from investing activities*

 

Net cash flows used byinvesting activities for the first quarter of 2010 and 2009 totaled $768$1,162, respectively, and consisted almost entirely of capital expenditures.

 

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*Cash flows from financingactivities*

 

Net cash flows used infinancing activities for the first quarter of 2010 were $16,610, which included$2,876 in required prepayments of term loans under our syndicated creditagreement from excess cash flow that we generated in fiscal year 2009, $12,498to prepay the remaining principal balance of our Euro term loan under oursyndicated credit agreement, $441 of net repayments on bank lines of credit,$208 in principal payments on Nord LB term loans, payment of quarterlydividends of $515 and payment on capital lease obligations of $74.

 

Net cash flows providedby financing activities for the first quarter of 2009 were $323, whichconsisted primarily of net borrowings on bank lines of credit of $4,215 and$236 in net proceeds from the issuance of common stock relating to the exerciseof stock options.  These sources of cashflow were almost entirely offset by $3,862 in required prepayments of termloans under our syndicated credit agreement from excess cash flow that wegenerated in fiscal year 2008, $233 in principal payments on Nord LB termloans, payments of deferred debt issuance costs of $19 and payment on capitallease obligations of $71.

 

*Payment of Dividends*

 

On March 11, 2010,our board of directors declared a quarterly cash dividend of $.04 per sharewhich was paid on April 15, 2010. The dividend totaled $518 and was payable to shareholders of record asof March 31, 2010.

 

We may continue to payquarterly dividends in the future subject to capital availability and periodicdeterminations that cash dividends are in compliance with our debt covenantsand are in the best interests of our stockholders, but we cannot assure youthat such payments will continue.  Futuredividends may be affected by, among other items, our views on potential futurecapital requirements, future business prospects, debt covenant compliance,changes in federal income tax laws, or any other factors that our board ofdirectors deems relevant.  Any decisionto pay cash dividends is and will continue to be at the discretion of board ofdirectors.

 

**CriticalAccounting 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 financialstatements in conformity with accounting principles generally accepted in theUnited States requires that our management make estimates, judgments andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses, and the disclosure of contingent assets and liabilities.  However, the accounting principles used by usgenerally do not change our reported cash flows or liquidity.  Interpretation of the existing rules mustbe done and judgments made on how the specifics of a given rule apply tous.

 

Inmanagement’s opinion, the more significant reporting areas impacted bymanagement’s judgments and estimates are revenue recognition, assetimpairments,  impact of foreign currencyexchange rate risks and income taxes. Management’s judgments and estimates in these areas are based oninformation available from both internal and external sources, and actualresults could differ from the estimates, as additional information becomesknown.   We believe the following to beour most critical accounting policies.

 

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*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 includedetonating cords, detonators, bi-directional boosters and shaped charges, aswell as, seismic related explosives and accessories, are standard innature.  In all cases, revenue isrecognized only when all four of the following criteria have been satisfied:persuasive evidence of an arrangement exists; the price is fixed ordeterminable; delivery has occurred; and collection is reasonably assured.  For contracts that require multipleshipments, revenue is recorded only for the units included in each individualshipment.  If, as a contract proceedstoward completion, projected total cost on an individual contract indicates aprobable loss, the Company will account for such anticipated loss.**

** **

*Assetimpairments*

 

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

 

*BusinessCombinations*

 

Weaccount for our business acquisitions using the purchase method of accounting.We allocate the total cost of the acquisition to the underlying net assetsbased on their respective estimated fair values. As part of this allocationprocess, we identify and attribute values and estimated lives to the intangibleassets acquired. These determinations involve significant estimates andassumptions regarding multiple, highly subjective variables, including thosewith respect to future cash flows, discount rates, asset lives, and the use of differentvaluation models and therefore require considerable judgment. Our estimates andassumptions are based, in part, on the availability of listed market prices orother transparent market data. These determinations affect the amount ofamortization expense recognized in future periods. We base our fair valueestimates on assumptions we believe to be reasonable but are inherentlyuncertain.

 

*Goodwilland Other Intangible Assets*

 

Wereview the carrying value of goodwill at least annually to assess impairmentbecause it is not amortized. Additionally, we review the carrying value of any intangible asset orgoodwill whenever events or changes in circumstances indicate that its carryingamount may not be recoverable. Examples of such events or changes in circumstances,many of which are subjective in nature, include significant negative industryor economic trends, significant changes in the manner of our use of theacquired assets or our strategy, a significant decrease in the market value ofthe asset, and a significant change in legal factors or in the business climatethat could affect the value of the asset. We assess impairment by comparing thefair value of an identifiable intangible asset or goodwill with its carryingvalue. The determination of fair value involves significant management judgmentas described further below. Impairments are expensed when incurred.Specifically, we test for impairment as follows:

 

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*Goodwill*

 

Wetest goodwill for impairment on a “reporting unit” level on at least an annualbasis. A reporting unit is a group of businesses (i) for which discretefinancial information is available and (ii) that have similar economiccharacteristics. We test goodwill for impairment using the following two-stepapproach:

 

Thefirst step is a comparison of each reporting unit’s fair value to its carryingvalue. We estimate fair value using the best information available, includingmarket information and discounted cash flow projections, also referred to asthe income approach. The income approach uses a reporting unit’s projection ofestimated operating results and cash flows that is discounted using a weighted-averagecost of capital that reflects current market conditions. The projectionsincorporate our best estimates of economic and market conditions over theprojected period including growth rates in sales and estimates of futureexpected changes in operating margins and cash expenditures. Other significantestimates and assumptions include terminal value growth rates, future estimatesof capital expenditures and changes in future working capitalrequirements.  We validate our estimatesof fair value under the income approach by comparing the values to fair valueestimates using a market approach.

 

Ifthe carrying value of the reporting unit is higher than its fair value, thereis an indication that impairment may exist, and the second step must be performedto measure the amount of impairment loss. 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 carrying value of that goodwill. If the implied fair value isless than the carrying value, we recognize an impairment loss for the excess.

 

Ourimpairment testing in the fourth quarter of 2009 did not result in adetermination that any of our goodwill was impaired.  The fair value of the Oilfield Productsreporting unit was $74.2 million at December 31, 2009 compared to itscarrying value of $63.6 million.  Adiscount rate of 17% was utilized in the income approach component of the modelused to measure fair value.  A futureimpairment is possible and could occur if (i) the unit’s operating resultsunderperform what we have estimated or (ii) additional volatility of thecapital markets or other factors should cause us to raise the percent discountrate utilized in our discounted cash flow analysis or decrease the multiplesutilized in our market-based analysis. The use of different estimates or assumptions within our discounted cashflow model when determining the fair value of our reporting units or usingmethodologies other than as described above could result in different valuesfor reporting units and could result in an impairment charge.

 

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*Intangible assets subject to amortization*

 

Anintangible asset that is subject to amortization is reviewed when impairmentindicators are present. We compare the expected undiscounted future operatingcash flows associated with finite-lived assets to their respective carryingvalues to determine if the asset is fully recoverable. If the expected futureoperating cash flows are not sufficient to recover the carrying value, weestimate the fair value of the asset. Impairment is recognized when thecarrying amount of the asset is not recoverable and when the carrying valueexceeds fair value. The projected cash flows require several assumptionsrelated to, among other things, relevant market factors, revenue growth, ifany, and operating margins.

 

*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.Cumulative translation adjustments are recorded as a separate component ofstockholders’ equity and are included in other cumulative comprehensive income(loss). Transactions denominated in currencies other than the local currencyare recorded 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 notagree to changes in the corresponding balances in the consolidated balancesheets. The effects of exchange rate changes on cash balances held in foreigncurrencies are reported as a separate line item below cash flows from financingactivities.

 

*Incometaxes*

 

Weare required to recognize deferred tax assets and deferred tax liabilities forthe 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 income tax credits and on the temporary differences betweenthe Consolidated Financial Statement basis and the tax basis of assets andliabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse.  Weroutinely evaluate deferred tax assets to determine if they will, more likelythan not, be recovered from future projected taxable income; if not, we recordan appropriate valuation allowance.

 

*Stock-BasedCompensation Expense*

 

Weare required to account for stock-based compensation under fair valuerecognition provisions.  The stock-basedcompensation cost is estimated at the grant date based on the value of theaward and is recognized as expense ratably over the requisite service period ofthe award.  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 daterequires judgment, including estimating stock price volatility, forfeiture rates,and expected option life.

 

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

 

There have been no events that materially affect our quantitative andqualitative disclosure about market risk from that reported in our AnnualReport on Form 10-K for the year ended December 31, 2009.

 

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

 

The Company maintains disclosure controls and procedures that are designedto ensure that information required to be disclosed in the Company’s ExchangeAct reports is accurately recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms, and that suchinformation is accumulated and communicated to the Company’s management,including its Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosurecontrols and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily applied its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

As of March 31, 2010, the Company carried out an evaluation, underthe supervision and with the participation of the Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures (as defined in Exchange Act Rule 13a-15(e)).  Based on that evaluation, the Company’s ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective at the reasonable assurancelevel.  There have been no changes in theCompany’s internal controls during the quarter ended March 31, 2010 or inother factors that could materially affect the Company’s internal controls overfinancial reporting.

 

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

 

There have been no significantchanges in the risk factors identified as being attendant to our business inour Annual Report on Form 10-K for the year ended December 31, 2009.

 

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

 

None.

 

**Item 3. Defaults Upon Senior Securities**

 

None.

 

**Item 4. Removed and Reserved**

 

None.

 

**Item 5. Other Information**

 

None.

 

**Item 6.**

 

**Exhibits**

 

31.1         Certificationof the President and Chief Executive Officer pursuant to 17 CFR 240.13a-14(a) or17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

31.2         Certificationof the Vice President and Chief Financial Officer pursuant to 17 CFR 240.13a-14(a) or17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

32.1         Certificationof 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         Certificationof 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**

##### ** **

Inaccordance with the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|                       | **DYNAMIC  MATERIALS CORPORATION**                                                                                                             |
|----------------------------|------------------------------------------------------------------------------------------------------------------------------------------------|
|                       | (Registrant)                                                                                                                                   |
|                       | ** **                                                                                                                                     |
|                       | ** **                                                                                                                                     |
| Date:  April 29, 2010 | /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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