Table of Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**Form 10-Q**

 

| **(Mark One)**                                              |
|-------------------------------------------------------------|
| ** **                                                  |
| **x**                                                       | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934** |
| ** **                                                  |
| **For the quarterly period ended  September 30, 2008** |
| ** **                                                  |
| **OR**                                                      |
| ** **                                                  |
| **o**                                                       | ** ** | **TRANSITION REPORT UNDER  SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 FOR THE  TRANSITION PERIOD FROM                           TO                           .** |

 

**Commissionfile number 001-14775**

 

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**DYNAMIC MATERIALS CORPORATION**

(Exact name ofRegistrant as Specified in its Charter)

 

| **Delaware**                                                  | ** ** | **84-0608431**                        |
|---------------------------------------------------------------|------------|---------------------------------------|
| (State  of Incorporation or Organization)                     |       | (I.R.S.  Employer Identification No.) |
|                                                          |       |                                  |
| **5405  Spine Road, Boulder, Colorado 80301**                 |
| (Address  of principal executive offices, including zip code) |
|                                                          |
| **(303)  665-5700**                                           |
| (Registrant’s  telephone number, including area code)    |

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.    Large accelerated filer  o  Acceleratedfiler  x  Non-acceleratedfiler  o  (Donot check if smaller reporting company)    Smallerreporting company  o

 

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

 

The number of shares ofCommon Stock outstanding was 12,676,527 as of October 31, 2008.

 

 

 

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CAUTIONARY NOTE ABOUT FORWARD-LOOKINGSTATEMENTS

 

Thisquarterly report on Form 10-Q contains “forward-looking statements” withinthe meaning of section 27A of the Securities Act of 1933 and section 21E of theSecurities Exchange Act of 1934. In particular, we direct your attention to Part I,Item 1- 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 and statements regarding our expectedfinancial position and operating results, our business strategy, our financingplans and the outcome of any contingencies are forward-looking statements.These statements can sometimes be identified by our use of forward-lookingwords such as “may,” “believe,” “plan,” “anticipate,” “estimate,” “expect,” “intend,”and other phrases of similar meaning. The forward-looking information is basedon information available as of the date of this quarterly report and onnumerous assumptions and developments that are not within our control. Althoughwe believe that our expectations as expressed in these forward-lookingstatements are reasonable, we cannot assure you that our expectations will turnout to be correct. Factors that could cause actual results to differ materiallyinclude, but are not limited to, the following: the ability to obtain newcontracts at attractive prices; the size and timing of customer orders andshipment; fluctuations in customer demand; fluctuations in foreign currencies;competitive factors; the timely completion of contracts; the timing and size ofexpenditures; the timely receipt of government approvals and permits; the priceand availability of metal and other raw material; the adequacy of local laborsupplies at our facilities; current or future limits on manufacturing capacityat our various operations; the availability and cost of funds; and generaleconomic conditions, both domestic and foreign, impacting our business and thebusiness of the end-market users we serve. Readers are cautioned not to placeundue reliance on these forward-looking statements, which reflect management’sanalysis only as of the date hereof. We undertake no obligation to publiclyrelease the results of any revision to these forward-looking statements thatmay be made to reflect events or circumstances after the date hereof or toreflect the occurrence of unanticipated events.

 

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**INDEX**

 
| PART I -  FINANCIAL INFORMATION                                                                 |                                                                                                                    |
|------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------|
|                                                                                                 |                                                                                                                    |
| Item  1 - Condensed Consolidated Financial Statements                                                | 4                                                                                                                       |
|                                                                                                 |                                                                                                                    |   |
|                                                                                                 | Consolidated  Balance Sheets as of September 30, 2008 (unaudited) and  December 31, 2007                      | 4 |
|                                                                                                 | Consolidated Statements of Operations for the three  and nine months ended September 30, 2008 and 2007 (unaudited) | 6 |
|                                                                                                 | Consolidated Statement of Stockholders’ Equity for the  nine months ended September 30, 2008 (unaudited)      | 7 |
|                                                                                                 | Consolidated Statements of Cash Flows for the nine months  ended September 30, 2008 and 2007 (unaudited)           | 8 |
|                                                                                                 | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                       | 10 |
|                                                                                                 |                                                                                                                    |   |
| Item 2 - Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 23                                                                                                                      |
|                                                                                                 |                                                                                                                    |
| Item 3 - Quantitative and Qualitative Disclosures  about Market Risk                                 | 37                                                                                                                      |
|                                                                                                 |                                                                                                                    |
| Item 4 - Controls and Procedures                                                                     | 37                                                                                                                      |
|                                                                                                 |                                                                                                                    |
| PART II  - OTHER INFORMATION                                                                    |                                                                                                                    |
|                                                                                                 |                                                                                                                    |
| Item  1 - Legal Proceedings                                                                          | 38                                                                                                                      |
|                                                                                                 |                                                                                                                    |
| Item  1A - Risk Factors                                                                              | 38                                                                                                                      |
|                                                                                                 |                                                                                                                    |
| Item 2 - Unregistered Sales of Equity Securities and  Use of Proceeds                                | 38                                                                                                                      |
|                                                                                                 |                                                                                                                    |
| Item 3 - Defaults Upon Senior Securities                                                             | 38                                                                                                                      |
|                                                                                                 |                                                                                                                    |
| Item 4 - Submission of Matters to a Vote of Security  Holders                                        | 38                                                                                                                      |
|                                                                                                 |                                                                                                                    |
| Item  5 - Other Information                                                                          | 38                                                                                                                      |
|                                                                                                 |                                                                                                                    |
| Item 6 -  Exhibits                                                                                   | 39                                                                                                                      |
|                                                                                                 |                                                                                                                    |
|                                                                                                 |  Signatures                                                                                                        | 40 |

 

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**Part I- FINANCIAL INFORMATION**

 

**ITEM 1.  Condensed ConsolidatedFinancial Statements**

 

DYNAMICMATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollarsin Thousands)

 
| ** **                                                                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                  | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                                                                                  | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
|                                                                                        |       |                   |       |                  |       |
| ASSETS                                                                                      |       |                   |       |                  |       |
|                                                                                        |       |                   |       |                  |       |
| CURRENT ASSETS:                                                                             |       |                   |       |                  |       |
| Cash and cash equivalents                                                                   |       | $                      | 30,508     |                  | $          | 9,045 |   |
| Restricted cash                                                                             |       | —                 |       | 371                   |       |
| Accounts receivable, net of allowance for  doubtful accounts of $617 and $534, respectively |       | 31,031                 |       | 39,833                |       |
| Inventories                                                                                 |       | 40,900                 |       | 41,628                |       |
| Prepaid expenses and other                                                                  |       | 4,706                  |       | 2,022                 |       |
| Related party receivable and loan                                                           |       | 1,965                  |       | 1,103                 |       |
| Current deferred tax assets                                                                 |       | 1,058                  |       | 728                   |       |
|                                                                                        |       |                   |       |                  |       |
| Total current assets                                                                        |       | 110,168                |       | 94,730                |       |
|                                                                                        |       |                   |       |                  |       |
| PROPERTY, PLANT AND EQUIPMENT                                                               |       | 56,303                 |       | 49,590                |       |
| Less - Accumulated depreciation                                                             |       | (17,594                | )          | (14,144               | )          |
|                                                                                        |       |                   |       |                  |       |
| Property, plant and equipment, net                                                          |       | 38,709                 |       | 35,446                |       |
|                                                                                        |       |                   |       |                  |       |
| GOODWILL, net                                                                               |       | 44,797                 |       | 45,862                |       |
|                                                                                        |       |                   |       |                  |       |
| PURCHASED INTANGIBLE ASSETS, net                                                            |       | 54,876                 |       | 61,914                |       |
|                                                                                        |       |                   |       |                  |       |
| DEFERRED TAX ASSETS                                                                         |       | 107                    |       | 42                    |       |
|                                                                                        |       |                   |       |                  |       |
| OTHER ASSETS, net                                                                           |       | 1,446                  |       | 1,544                 |       |
|                                                                                        |       |                   |       |                  |       |
| INVESTMENT IN JOINT VENTURES                                                                |       | 1,325                  |       | 1,361                 |       |
|                                                                                        |       |                   |       |                  |       |
| TOTAL ASSETS                                                                                |       | $                      | 251,428    |                  | $          | 240,899 |   |

 

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

 

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DYNAMICMATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATEDBALANCE SHEETS

(Dollarsin Thousands, Except Share Data)

 
| ** **                                                                                                                          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                          | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                                                                                                                          | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
|                                                                                                                                |       |                   |       |                  |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                          |       |                   |       |                  |       |
|                                                                                                                                |       |                   |       |                  |       |
| CURRENT LIABILITIES:                                                                                                                |       |                   |       |                  |       |
| Accounts payable                                                                                                                    |       | $                      | 18,722     |                  | $          | 22,590 |   |
| Accrued expenses                                                                                                                    |       | 3,502                  |       | 8,566                 |       |
| Accrued income taxes                                                                                                                |       | 993                    |       | 1,212                 |       |
| Accrued employee compensation and benefits                                                                                          |       | 5,292                  |       | 5,521                 |       |
| Customer advances                                                                                                                   |       | 4,780                  |       | 4,593                 |       |
| Related party accounts payable and loans                                                                                            |       | 520                    |       | 325                   |       |
| Lines of credit - current                                                                                                           |       | 4,785                  |       | 7,587                 |       |
| Current maturities on long-term debt                                                                                                |       | 7,471                  |       | 8,035                 |       |
| Current portion of capital lease  obligations                                                                                       |       | 382                    |       | 389                   |       |
|                                                                                                                                |       |                   |       |                  |       |
| Total current liabilities                                                                                                           |       | 46,447                 |       | 58,818                |       |
|                                                                                                                                |       |                   |       |                  |       |
| LINES OF CREDIT                                                                                                                     |       | 9,536                  |       | —                |       |
|                                                                                                                                |       |                   |       |                  |       |
| LONG-TERM DEBT                                                                                                                      |       | 60,440                 |       | 61,530                |       |
|                                                                                                                                |       |                   |       |                  |       |
| CAPITAL LEASE OBLIGATIONS                                                                                                           |       | 218                    |       | 521                   |       |
|                                                                                                                                |       |                   |       |                  |       |
| DEFERRED TAX LIABILITIES                                                                                                            |       | 18,040                 |       | 20,604                |       |
|                                                                                                                                |       |                   |       |                  |       |
| OTHER LONG-TERM LIABILITIES                                                                                                         |       | 907                    |       | 1,147                 |       |
|                                                                                                                                |       |                   |       |                  |       |
| COMMITMENTS AND CONTINGENT LIABILITIES                                                                                              |       | —                 |       | —                |       |
|                                                                                                                                |       |                   |       |                  |       |
| Total liabilities                                                                                                                   |       | 135,588                |       | 142,620               |       |
|                                                                                                                                |       |                   |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                                          |       |                   |       |                  |       |
| Preferred stock, $.05 par value; 4,000,000  shares authorized; no issued and outstanding shares                                     |       | —                 |       | —                |       |
| Common stock, $.05 par value; 25,000,000  shares authorized; 12,665,027 and 12,433,768 shares issued and outstanding,  respectively |       | 634                    |       | 622                   |       |
| Additional paid-in capital                                                                                                          |       | 40,939                 |       | 38,246                |       |
| Retained earnings                                                                                                                   |       | 72,657                 |       | 55,868                |       |
| Other cumulative comprehensive income                                                                                               |       | 1,610                  |       | 3,543                 |       |
|                                                                                                                                |       |                   |       |                  |       |
| Total stockholders’ equity                                                                                                     |       | 115,840                |       | 98,279                |       |
|                                                                                                                                |       |                   |       |                  |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                     |       | $                      | 251,428    |                  | $          | 240,899 |   |

 

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

 

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DYNAMIC MATERIALS CORPORATION &SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Dollars in Thousands, Except Share Data)

(unaudited)

 
| ** **                                           | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                           | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| NET SALES                                            |       | $                                | 52,380     |                            | $          | 42,099 |   | $ | 173,957 |   | $ | 109,964 |   |
| COST OF PRODUCTS SOLD                                |       | 35,355                           |       | 27,807                          |       | 120,171 |   | 72,741 |   |
| Gross profit                                         |       | 17,025                           |       | 14,292                          |       | 53,786 |   | 37,223 |   |
| COSTS AND EXPENSES:                                  |       |                             |       |                            |       |   |   |   |   |
| General and administrative expenses                  |       | 3,679                            |       | 1,903                           |       | 10,612 |   | 5,419 |   |
| Selling expenses                                     |       | 2,611                            |       | 1,811                           |       | 8,085 |   | 4,913 |   |
| Amortization expense of purchased  intangible assets |       | 1,363                            |       | —                          |       | 6,188 |   | — |   |
| Total costs and expenses                             |       | 7,653                            |       | 3,714                           |       | 24,885 |   | 10,332 |   |
| INCOME FROM OPERATIONS                               |       | 9,372                            |       | 10,578                          |       | 28,901 |   | 26,891 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| OTHER INCOME (EXPENSE):                              |       |                             |       |                            |       |   |   |   |   |
| Other income (expense)                               |       | (268                             | )          | 23                              |       | (227 | ) | 3 |   |
| Interest expense                                     |       | (1,469                           | )          | (20                             | )          | (4,203 | ) | (20 | ) |
| Interest income                                      |       | 153                              |       | 233                             |       | 477 |   | 598 |   |
| Equity in earnings (losses) of joint  ventures       |       | (19                              | )          | —                          |       | 270 |   | — |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| INCOME BEFORE INCOME TAXES                           |       | 7,769                            |       | 10,814                          |       | 25,218 |   | 27,472 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| INCOME TAX PROVISION                                 |       | 546                              |       | 3,697                           |       | 6,535 |   | 9,813 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| NET INCOME                                           |       | $                                | 7,223      |                            | $          | 7,117 |   | $ | 18,683 |   | $ | 17,659 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |   |   |   |   |
| INCOME PER SHARE:                                    |       |                             |       |                            |       |   |   |   |   |
| Basic                                                |       | $                                | 0.58       |                            | $          | 0.59 |   | $ | 1.50 |   | $ | 1.47 |   |
| Diluted                                              |       | $                                | 0.57       |                            | $          | 0.58 |   | $ | 1.49 |   | $ | 1.44 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |   |   |   |   |
| WEIGHTED  AVERAGE NUMBER OF SHARES OUTSTANDING:      |       |                             |       |                            |       |   |   |   |   |
| Basic                                                |       | 12,463,060                       |       | 12,094,181                      |       | 12,426,369 |   | 12,039,593 |   |
| Diluted                                              |       | 12,567,912                       |       | 12,301,772                      |       | 12,572,226 |   | 12,245,212 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| ANNUAL DIVIDENDS DECLARED PER COMMON SHARE           |       | $                                | —     |                            | $          | — |   | $ | 0.15 |   | $ | 0.15 |   |

 

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

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Amounts in Thousands)

(unaudited)

 
| ** **                                                         | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Other**      | ** ** | ** ** | ** ** | ** **                   | ** ** |
|--------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|-------------------|------------|----------------|------------|------------|------------|------------------------------|------------|
| ** **                                                         | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Cumulative** | ** ** | ** ** | ** ** | **Comprehensive**            | ** ** |
| ** **                                                         | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | ** **     | ** ** | **Income** | ** ** |
| ** **                                                         | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Income**     | ** ** | **Total**  | ** ** | **for the Period** | ** ** |
| Balances,  December 31, 2007                                  |       | 12,434                |       | $           | 622        |           | $          | 38,246            |       | $              | 55,868     |       | $          | 3,543                        |       | $ | 98,279 |   |   |   |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Shares  issued for stock option exercises                          |       | 74                    |       | 4           |       | 224            |       | —            |       | —         |       | 228        |       |                         |       |
| Restricted  stock awards                                           |       | 153                   |       | 8           |       | (8             | )          | —            |       | —         |       | —     |       |                         |       |
| Shares  issued in connection with the employee stock purchase plan |       | 4                     |       | —      |       | 105            |       | —            |       | —         |       | 105        |       |                         |       |
| Excess  tax benefit related to stock options                       |       | —                |       | —      |       | 9              |       | —            |       | —         |       | 9          |       |                         |       |
| Stock-based  compensation                                          |       | —                |       | —      |       | 2,363          |       | —            |       | —         |       | 2,363      |       |                         |       |
| Dividends  declared                                                |       | —                |       | —      |       | —         |       | (1,894            | )          | —         |       | (1,894     | )          |                         |       |
| Net  income                                                        |       | —                |       | —      |       | —         |       | 18,683            |       | —         |       | 18,683     |       | 18,683                       |       |
| Derivative  valuation adjustment, net of tax of $48                |       | —                |       | —      |       | —         |       | —            |       | 77             |       | 77         |       | 77                           |       |
| Change  in cumulative foreign currency translation adjustment      |       | —                |       | —      |       | —         |       | —            |       | (2,010         | )          | (2,010     | )          | (2,010                       | )          |
| Balances,  September 30, 2008                                 |       | 12,665                |       | $           | 634        |           | $          | 40,939            |       | $              | 72,657     |       | $          | 1,610                        |       | $ | 115,840 |   | $ | 16,750 |   |
|                                                                    |            |                       |            |             |            |                |            |                   |            |                |            |            |            |                              |            |  |  |  |  |  |  |

 

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

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Dollars in Thousands)

(unaudited)

 
| ** **                                                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                               |       |     |       |     |       |
| Net income                                                                          |       | $        | 18,683     |     | $          | 17,659 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities - |       |     |       |     |       |
| Depreciation (including capital lease  amortization)                                |       | 3,621    |       | 1,394    |       |
| Amortization of purchased intangible assets                                         |       | 6,188    |       | —   |       |
| Amortization of capitalized debt issuance  costs                                    |       | 210      |       | —   |       |
| Stock-based compensation                                                            |       | 2,363    |       | 912      |       |
| Deferred income tax benefit                                                         |       | (2,735   | )          | (239     | )          |
| Equity in earnings of joint ventures                                                |       | (270     | )          | —   |       |
| Change in -                                                                         |       |     |       |     |       |
| Restricted cash                                                                     |       | —   |       | 3,059    |       |
| Accounts receivable, net                                                            |       | 7,631    |       | 2,001    |       |
| Inventories                                                                         |       | 262      |       | (13,541  | )          |
| Prepaid expenses and other                                                          |       | (2,549   | )          | (636     | )          |
| Accounts payable                                                                    |       | (3,771   | )          | 3,125    |       |
| Customer advances                                                                   |       | 218      |       | 132      |       |
| Accrued expenses and other liabilities                                              |       | (5,046   | )          | (1,065   | )          |
|                                                                                |       |     |       |     |       |
| Net cash provided by operating activities                                           |       | 24,805   |       | 12,801   |       |
|                                                                                |       |     |       |     |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                               |       |     |       |     |       |
| Acquisition of property, plant and  equipment                                       |       | (7,325   | )          | (7,347   | )          |
| Change in other non-current assets                                                  |       | 50       |       | (11      | )          |
|                                                                                |       |     |       |     |       |
| Net cash used in investing activities                                               |       | (7,275   | )          | (7,358   | )          |
|                                                                                     |            |          |            |          |            |  |  |

 

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

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Dollars in Thousands)

(unaudited)

 
| ** **                                                             | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM FINANCING ACTIVITIES:                                  |       |     |       |     |       |
| Borrowings on bank lines of credit, net                                |       | 7,247    |       | —   |       |
| Payment on term loan with French bank                                  |       | (441     | )          | (389     | )          |
| Payment on Nord LB term loans                                          |       | (810     | )          | —   |       |
| Payment of capital lease obligations                                   |       | (308     | )          | —   |       |
| Payment of dividends                                                   |       | (1,894   | )          | (1,821   | )          |
| Payment of deferred debt issuance costs                                |       | (167     | )          | —   |       |
| Net proceeds from issuance of common stock  to employees and directors |       | 333      |       | 563      |       |
| Excess tax benefit related to exercise of  stock options               |       | 9        |       | 5        |       |
|                                                                   |       |     |       |     |       |
| Net cash provided by (used in) financing  activities                   |       | 3,969    |       | (1,642   | )          |
|                                                                   |       |     |       |     |       |
| EFFECTS OF EXCHANGE RATES ON CASH                                      |       | (36      | )          | 357      |       |
|                                                                   |       |     |       |     |       |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                              |       | 21,463   |       | 4,158    |       |
|                                                                   |       |     |       |     |       |
| CASH AND CASH EQUIVALENTS, beginning of the  period                    |       | 9,045    |       | 17,886   |       |
|                                                                   |       |     |       |     |       |
| CASH AND CASH EQUIVALENTS, end of the  period                          |       | $        | 30,508     |     | $          | 22,044 |   |
|                                                                        |            |          |            |          |            |  |  |

 

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

 

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##### **DYNAMICMATERIALS CORPORATION & SUBSIDIARIES**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

**(unaudited)**

 

**1.****                   BASISOF PRESENTATION**

 

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

 

**2.****                   SIGNIFICANTACCOUNTING POLICIES**

 

**Principlesof Consolidation**

 

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

 

**Foreign Operations and Foreign Exchange Rate Risk**

 

**The**functional currency for theCompany’s foreign operations is the applicable local currency for eachaffiliate company. Assets and liabilities of foreign subsidiaries for which thefunctional currency is the local currency are translated at exchange rates ineffect at period-end, and the statements of operations are translated at theaverage exchange rates during the period. Exchange rate fluctuations ontranslating foreign currency financial statements into U.S. dollars that resultin unrealized gains or losses are referred to as translation adjustments.Cumulative translation adjustments are recorded as a separate component ofstockholders’ equity and are included in other cumulative comprehensive income.Transactions denominated in currencies other than the local currency arerecorded based on exchange rates at the time such transactions arise.Subsequent changes in exchange rates result in transaction gains and losseswhich are reflected in income as unrealized (based on period-end translations)or realized upon settlement of the transactions. Cash flows from the Company’soperations in foreign countries are translated at actual exchange rates whenknown or at the average rate for the period. As a result, amounts related toassets and liabilities reported in the consolidated statements of cash flowswill not conform with changes in the corresponding balances in the ConsolidatedBalance Sheets. The effects of exchange rate changes on cash balances held inforeign currencies are reported as a separate line item below cash flows fromfinancing activities.

 

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**Revenue Recognition**

 

**Sales ofclad metal products and welding services are generally based upon customerspecifications set forth in customer purchase orders and require the Company toprovide certifications relative to metals used, services performed and theresults of any non-destructive testing that the customer has requested beperformed. All issues of conformity of the product to specifications areresolved before the product is shipped and billed. Products related to theoilfield products segment, which include detonating cords, detonators,bi-directional boosters and shaped charges, as well as seismic relatedexplosives and accessories, are standard in nature. 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. Forcontracts that require multiple shipments, revenue is recorded only for theunits included in each individual shipment. If, as a contract proceeds towardcompletion, projected total cost on an individual contract indicates apotential loss, the Company will account for such anticipated loss.**

 

**RelatedParty Transactions**

 

**TheCompany has related party transactions with its unconsolidated joint ventures,as well as with the minority partner of one of its consolidated joint ventures.A summary of those transactions for the three and nine months ended September 30,2008 is presented below:**

 
| ** **                | ** ** | **3 months ended**     | ** ** | **9 months ended**     | ** ** |
|---------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **September 30, 2008** | ** ** | **September 30, 2008** | ** ** |
| ** **                | ** ** | ** **                       | ** ** | **Interest**                     | ** ** | ** ** | ** ** | **Interest** | ** ** |
| ** **                | ** ** | **Sales to**                | ** ** | **income from**             | ** ** | **Sales to** | ** ** | **income from** | ** ** |
| Perfoline                 |       | $                                | 115        |                             | $          | 11 |   | $ | 162 |   | $ | 37 |   |
| DYNAenergetics RUS        |       | 1,008                            |       | —                           |       | 2,145 |   | — |   |
| Minority Interest Partner |       | 547                              |       | —                           |       | 1,531 |   | — |   |
|                      |       |                             |       |                             |       |   |   |   |   |
| Total                     |       | $                                | 1,669      |                             | $          | 11 |   | $ | 3,838 |   | $ | 37 |   |

 

**A summaryof related party balances as of September 30, 2008 and December 31,2007 is presented below:**

 
| ** **                | ** ** | **As of September 30, 2008** | ** ** | **As of December 31, 2007** | ** ** |
|---------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                | ** ** | **Accounts**                                     | ** ** | **Accounts**                                    | ** ** | **Accounts** | ** ** | **Accounts** | ** ** |
| ** **                | ** ** | **receivable**                                   | ** ** | **payable**                                     | ** ** | **receivable** | ** ** | **payable** | ** ** |
| ** **                | ** ** | **and loan to**                        | ** ** | **and loan from**                     | ** ** | **and loan to** | ** ** | **and loan from** | ** ** |
| Perfoline                 |       | $                                                | 451        |                                            | $          | 137 |   | $ | 523 |   | $ | 120 |   |
| DYNAenergetics RUS        |       | 660                                              |       | —                                          |       | 449 |   | — |   |
| KazDYNAenergetics         |       | —                                           |       | —                                          |       | 131 |   | — |   |
| Minority Interest Partner |       | 854                                              |       | 383                                             |       | — |   | 205 |   |
|                      |       |                                             |       |                                            |       |   |   |   |   |
| Total                     |       | $                                                | 1,965      |                                            | $          | 520 |   | $ | 1,103 |   | $ | 325 |   |

 

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**EarningsPer Share**

 

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

 
| ** **                                           | ** ** | **For the three months ended September 30, 2008** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                                                           | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                           | ** ** | **Income**                                                                           | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings per share:                            |       |                                                                                 |       |   |   |   |   |
| Net income                                           |       | $                                                                                    | 7,223      |   | 12,463,060 |   | $ | 0.58 |   |
|                                                 |       |                                                                                 |       |   |   |   |   |
| Dilutive effect of options to purchase  common stock |       | —                                                                               |       | 93,260 |   |   |   |
| Dilutive effect of restricted stock awards           |       | —                                                                               |       | 11,592 |   |   |   |
|                                                 |       |                                                                                 |       |   |   |   |   |
| Diluted earnings per share:                          |       |                                                                                 |       |   |   |   |   |
| Net income                                           |       | $                                                                                    | 7,223      |   | 12,567,912 |   | $ | 0.57 |   |

** **
| ** **                                           | ** ** | **For the three months ended September 30, 2007** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                                                           | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                           | ** ** | **Income**                                                                           | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings per share:                            |       |                                                                                 |       |   |   |   |   |
| Net income                                           |       | $                                                                                    | 7,117      |   | 12,094,181 |   | $ | 0.59 |   |
|                                                 |       |                                                                                 |       |   |   |   |   |
| Dilutive effect of options to purchase  common stock |       | —                                                                               |       | 182,455 |   |   |   |
| Dilutive effect of restricted stock awards           |       | —                                                                               |       | 25,136 |   |   |   |
|                                                 |       |                                                                                 |       |   |   |   |   |
| Diluted earnings per share:                          |       |                                                                                 |       |   |   |   |   |
| Net income                                           |       | $                                                                                    | 7,117      |   | 12,301,772 |   | $ | 0.58 |   |

** **
| ** **                                           | ** ** | **For the nine months ended September 30, 2008** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                           | ** ** | **Income**                                                                          | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings per share:                            |       |                                                                                |       |   |   |   |   |
| Net income                                           |       | $                                                                                   | 18,683     |   | 12,426,369 |   | $ | 1.50 |   |
|                                                 |       |                                                                                |       |   |   |   |   |
| Dilutive effect of options to purchase  common stock |       | —                                                                              |       | 120,374 |   |   |   |
| Dilutive effect of restricted stock awards           |       | —                                                                              |       | 25,483 |   |   |   |
|                                                 |       |                                                                                |       |   |   |   |   |
| Diluted earnings per share:                          |       |                                                                                |       |   |   |   |   |
| Net income                                           |       | $                                                                                   | 18,683     |   | 12,572,226 |   | $ | 1.49 |   |

 

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| ** **                                           | ** ** | **For the nine months ended September 30, 2007** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                           | ** ** | **Income**                                                                          | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings per share:                            |       |                                                                                |       |   |   |   |   |
| Net income                                           |       | $                                                                                   | 17,659     |   | 12,039,593 |   | $ | 1.47 |   |
|                                                 |       |                                                                                |       |   |   |   |   |
| Dilutive effect of options to purchase  common stock |       | —                                                                              |       | 191,652 |   |   |   |
| Dilutive effect of restricted stock awards           |       | —                                                                              |       | 13,967 |   |   |   |
|                                                 |       |                                                                                |       |   |   |   |   |
| Diluted earnings per share:                          |       |                                                                                |       |   |   |   |   |
| Net income                                           |       | $                                                                                   | 17,659     |   | 12,245,212 |   | $ | 1.44 |   |

 

**RecentAccounting Pronouncements**

 

**In September 2006, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 157, *Fair Value Measurements* (“SFAS157”). SFAS 157 defines fair value, establishes a framework for measuring fairvalue in accordance with accounting principles generally accepted in the UnitedStates, and expands disclosures about fair value measurements. SFAS No. 157was initially effective for financial statements issued for fiscal yearsbeginning after November 15, 2007. The FASB issued a staff positionstatement (“FSP”) in February 2008 that deferred the requiredimplementation date of SFAS 157 for certain assets and liabilities. Theadoption of SFAS 157 in the nine months ended September 30, 2008 did nothave a material impact on the Company’s results of operations or financialposition.**

** **

**In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities –Including an Amendment of FASB Statement No. 115*. ThisStatement permits entities to measure many financial instruments and certainother items at fair value. This election is made on an instrument-by-instrumentbasis and is irrevocable. Unrealized gains and losses on items for which thefair value option has been elected are reported in earnings. This statement iseffective for fiscal years beginning after November 15, 2007. The Companydid not elect the fair value option for any of its existing financial assetsand liabilities during the nine months ended September 30, 2008.**

** **

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

 

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

 

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**3.****                   ACQUISITION**

 

On November 15,2007, the Company and a newly-formed subsidiary, DYNAenergetics Holding GmbH(the “Purchaser”), entered into a Purchase, Sale and Assignment Agreement (the “PurchaseAgreement”) with Rolf Rospek, Patrick Xylander, Uwe Gessel, and OagBeteiligungs-GmbH, a German limited liability company (collectively the “Sellers”).Pursuant to the terms of the Purchase Agreement, on November 15, 2007, thePurchaser acquired 100% of the issued and outstanding shares of DYNAenergeticsBeteiligungs-GmbH and all of the interests in DYNAenergetics GmbH and Co. KG(collectively, “DYNAenergetics”) from the Sellers.

 

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

 

As part of theOilfield Products business segment, the Company has several joint ventures,some of which are unconsolidated and accounted for under the equity method (seeNote 4).

 

Theacquisition was valued at $112,701 and was financed by (i) the payment of$81,781 in cash, net of cash acquired of $1,870 and transaction related taxesof $3,708 (2,530 Euros) due from one of the Sellers and withheld by thePurchaser, (ii) the issuance of 251,041 shares of common stock of theCompany (valued at $13,509), and (iii) the assumption of approximately$11,833 (8,074 Euros) of DYNAenergetics debt. The cash portion of the purchaseprice was financed using proceeds from the new syndicated credit agreement andexisting available cash.

 

The purchaseprice of the acquisition was allocated to the Company’s tangible andidentifiable intangible assets based on their fair values as determined byappraisals performed as of the acquisition date. The excess of the purchaseprice over the tangible and identifiable intangible assets was recorded asgoodwill.

 

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The allocationof the purchase price to the assets and liabilities of DYNAenergetics was asfollows:

 
| Current assets                |   | $       | 30,222  |   |
|-------------------------------|--------|---------|---------|--------|
| Property, plant and equipment |   | 7,845   |    |
| Intangible assets             |   | 62,794  |    |
| Goodwill                      |   | 45,985  |    |
| Investment in joint ventures  |   | 1,324   |    |
| Other assets                  |   | 11      |    |
|                          |   |    |    |
| Total assets acquired         |   | 148,181 |    |
|                          |   |    |    |
| Current liabilities           |   | 14,524  |    |
| Long term debt                |   | 11,833  |    |
| Deferred tax liabilities      |   | 19,850  |    |
| Other long term liabilities   |   | 1,096   |    |
| Minority interest             |   | 10      |    |
|                          |   |    |    |
| Total liabilities acquired    |   | 47,313  |    |
|                          |   |    |    |
| Net assets acquired           |   | $       | 100,868 |   |

 

The Companyacquired identifiable finite-lived intangible assets as a result of theacquisition of DYNAenergetics. The finite-lived intangible assets acquired arepreliminarily classified and valued as follows:

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

 

The Companyacquired goodwill in the amount of $45,985 as a result of the acquisition ofDYNAenergetics. The amount of goodwill assigned to each reportable segment isas follows:

 
| ** **             | ** ** | **Value** | ** ** |
|------------------------|------------|-----------|------------|
| Explosive Metalworking |       | $         | 25,258     |   |
| Oilfield Products      |       | 20,727    |       |
|                   |       |      |       |
| Total goodwill         |       | $         | 45,985     |   |

 

Goodwill as ofSeptember 30, 2008 amounts to $44,797 and the change from December 31,2007 reflects the impact of foreign currency translation and subsequentpurchase price adjustments resulting from the compilation of additionalacquisition related expenses.

 

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The following table presents the unaudited, pro-forma combined resultsof operations for the three and nine months ended September 30, 2007assuming (i) the acquisition had occurred on January 1, 2007; (ii) pro-formaamortization expense of the purchased intangible assets and (iii) pro-formainterest expense assuming the Company utilized its syndicated credit agreementto finance the acquisition:

 
| ** **             | ** ** | **Three months**  | ** ** | **Nine months**   | ** ** |
|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **             | ** ** | **ended**              | ** ** | **ended**              | ** ** |
| ** **             | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **             | ** ** | **2007**               | ** ** | **2007**               | ** ** |
| Net sales              |       | $                      | 60,180     |                   | $          | 154,195 |   |
| Income from operations |       | $                      | 12,483     |                   | $          | 28,315 |   |
| Net income             |       | $                      | 7,346      |                   | $          | 15,793 |   |
|                   |       |                   |       |                   |       |
| Net income per share:  |       |                   |       |                   |       |
| Basic                  |       | $                      | 0.60       |                   | $          | 1.28 |   |
| Diluted                |       | $                      | 0.59       |                   | $          | 1.26 |   |

 

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

 

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

 

Operating results include the Company’s proportionate share of incomefrom joint ventures, which consist of unconsolidated joint ventures accountedfor under the equity method. These investments (all of which resulted from theacquisition of DYNAenergetics and pertain to the Company’s Oilfield Productsbusiness segment) include the following: (1) 65.19% interest in Perfoline,which is a Russian manufacturer of perforating gun systems and (2) 55%interest in DYNAenergetics RUS which is a Russian trading company that sellsthe Company’s oilfield products. Due to certain minority interest veto rightsthat effectively require the minority interest shareholders to participate inordinary course of business decisions, these joint ventures have been accountedfor under the equity method instead of being consolidated in these financialstatements. Investments in these joint ventures totaled $1,325 and $1,361 as ofSeptember 30, 2008 and December 31, 2007, respectively.

 

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Summarized unaudited financial information for the joint venturesaccounted for under the equity method as of September 30, 2008 and December 31,2007 and for the three and nine months ended September 30, 2008 is asfollows:

 
| ** **                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| Current assets               |       | $                      | 4,099      |                  | $          | 4,148 |   |
| Noncurrent assets            |       | 848                    |       | 666                   |       |
| Total assets                 |       | $                      | 4,947      |                  | $          | 4,814 |   |
|                         |       |                   |       |                  |       |
| Current liabilities          |       | $                      | 1,151      |                  | $          | 1,400 |   |
| Noncurrent liabilities       |       | 917                    |       | 1,048                 |       |
| Equity                       |       | 2,879                  |       | 2,366                 |       |
| Total liabilities and equity |       | $                      | 4,947      |                  | $          | 4,814 |   |

 
| ** **                                     | ** ** | **Three months**  | ** ** | **Nine months**   | ** ** |
|------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **ended**              | ** ** | **ended**              | ** ** |
| ** **                                     | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                     | ** ** | **2008**               | ** ** | **2008**               | ** ** |
| Net sales                                      |       | $                      | 1,875      |                   | $          | 6,600 |   |
| Gross profit                                   |       | $                      | 347        |                   | $          | 1,580 |   |
| Operating income                               |       | $                      | 120        |                   | $          | 908 |   |
| Net income                                     |       | $                      | 60         |                   | $          | 595 |   |
| Equity in earnings (losses) of joint  ventures |       | $                      | (19        | )                      | $          | 270 |   |

 

**5.      INVENTORY**

 

**The components of inventory areas follows at September 30, 2008 and December 31, 2007:**

 
| ** **      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|------------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **      | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| Raw materials   |       | $                      | 12,628     |                  | $          | 13,744 |   |
| Work-in-process |       | 21,992                 |       | 23,699                |       |
| Finished goods  |       | 5,293                  |       | 3,564                 |       |
| Supplies        |       | 987                    |       | 621                   |       |
|            |       |                   |       |                  |       |
|            |       | $                      | 40,900     |                  | $          | 41,628 |   |

 

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**6.      PURCHASED INTANGIBLEASSETS**

 

Thefollowing table presents details of our purchased intangible assets, other thangoodwill, as of September 30, 2008:

 
| ** **               | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|--------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **               | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
| Core technology          |       | $          | 24,185     |             | $          | (1,058     | )          | $ | 23,127 |   |
| Customer relationships   |       | 32,633     |       | (3,173           | )          | 29,460     |       |
| Trademarks / Trade names |       | 2,634      |       | (345             | )          | 2,289      |       |
| Order backlog DYNAplat   |       | 2,456      |       | (2,456           | )          | —     |       |
|                     |       |       |       |             |       |       |       |
| Total intangible assets  |       | $          | 61,908     |             | $          | (7,032     | )          | $ | 54,876 |   |

 

Thefollowing table presents details of our purchased intangible assets, other thangoodwill, as of December 31, 2007:

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

 

The decrease in the gross value of our purchased intangible assets fromDecember 31, 2007 to September 30, 2008 is due to the impact offoreign currency translation.

 

**7.      DEBT**

 

**Lines of credit consist of thefollowing at September 30, 2008 and December 31, 2007:**

 
| ** **                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                                 | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| Syndicated credit agreement revolving loan |       | $                      | 9,536      |                  | $          | — |   |
| Commerzbank revolving line of credit       |       | 1,173                  |       | 3,225                 |       |
| Commerzbank line of credit                 |       | 3,612                  |       | 1,473                 |       |
| Deutsche Bank revolving line of credit     |       | —                 |       | 680                   |       |
| Nord LB line of credit                     |       | —                 |       | 2,209                 |       |
|                                       |       |                   |       |                  |       |
|                                       |       | 14,321                 |       | 7,587                 |       |
| Less current portion                       |       | (4,785                 | )          | (7,587                | )          |
|                                       |       |                   |       |                  |       |
| Long-term lines of credit                  |       | $                      | 9,536      |                  | $          | — |   |

 

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**Long-term debt consists of thefollowing at September 30, 2008 and December 31, 2007:**

 
| ** **                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                                 | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| Syndicated credit agreement term loan      |       | $                      | 45,000     |                  | $          | 45,000 |   |
| Syndicated credit agreement Euro term loan |       | 20,229                 |       | 20,621                |       |
| Euro term loan - French bank               |       | —                 |       | 427                   |       |
| Nord LB 3,000 Euro term loan               |       | 2,601                  |       | 3,314                 |       |
| Nord LB 500 Euro term loan                 |       | 81                     |       | 203                   |       |
|                                       |       |                   |       |                  |       |
|                                       |       | 67,911                 |       | 69,565                |       |
| Less current maturities                    |       | (7,471                 | )          | (8,035                | )          |
|                                       |       |                   |       |                  |       |
| Long-term debt                             |       | $                      | 60,440     |                  | $          | 61,530 |   |

** **

Loan Covenants and Restrictions

 

The Company’s existing loan agreements include various covenants andrestrictions, certain of which relate to the incurrence of additionalindebtedness, mortgaging, pledging or disposition of major assets, limits oncapital expenditures and maintenance of specified financial ratios.  As of September 30, 2008, the Companywas in compliance with all financial covenants and other provisions of its debtagreements.

 

Swap Agreement

 

On November 15, 2007, the Company entered into an interest swapagreement that effectively converted the LIBOR based variable rate borrowingsunder the $45,000 term loan to a fixed rate of 6.34%.  The company has designated the swap agreementas an effective cash flow hedge with matched terms in accordance with SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities,*and as a result, changes in the fair value of the swapagreement are recorded in other comprehensive income with the offset as a swapasset or liability.  As of September 30,2008, the fair value of the swap agreement was a liability of $70, net oftax.  The swap agreement expires on November 16,2008.

 

On October 15, 2008, the Company entered into a new two-yearinterest rate swap agreement which becomes effective on November 17,2008.  Similar to the interest rate swapagreement described above, this new agreement will effectively convert theLIBOR based variable rate US borrowings to a fixed rate of 4.87% and theCompany has designated this new swap agreement as an effective cash flow hedgewith matched terms in accordance with SFAS No. 133.

 

**8.      BUSINESS SEGMENTS**

 

The Company is organized in the followingthree segments:  Explosive Metalworking,Oilfield Products and AMK Welding. The Explosive Metalworking segment usesexplosives to perform metal cladding and shock synthesis of industrialdiamonds. The most significant product of this group is clad metal which isused in the fabrication of pressure vessels, heat exchangers and transitionjoints for various industries, including upstream oil and gas, oil refinery,petrochemicals, hydrometallurgy, aluminum production, shipbuilding, powergeneration, industrial refrigeration, and similar industries. The OilfieldProducts segment manufactures, markets and sells oilfield perforating equipmentand explosives, including detonating cords, detonators, bi-directional

 

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boosters and shaped charges, and seismicrelated explosives and accessories.  AMKWelding utilizes a number of welding technologies to weld components formanufacturers of jet engines and ground-based turbines.

 

The accounting policies of all the segmentsare the same as those described in the summary of significant accountingpolicies.  The Company’s reportablesegments are separately managed strategic business units that offer differentproducts and services. Each segment’s products are marketed to differentcustomer types and require different manufacturing processes andtechnologies.  Segment information ispresented for the three and nine months ended September 30, 2008 and 2007as follows:

 
| ** **                                           | ** ** | **Explosive**    | ** ** | ** **   | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------------|------------|--------------|------------|-------------|------------|------------|------------|
| ** **                                           | ** ** | **Metalworking** | ** ** | **Oilfield** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Group**        | ** ** | **Products** | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the three months ended  September 30, 2008: |       |             |       |         |       |        |       |       |       |
| Net sales                                            |       | $                | 42,703     |         | $          | 6,756       |       | $          | 2,921      |   | $ | 52,380 |   |
| Depreciation and amortization                        |       | $                | 1,574      |         | $          | 947         |       | $          | 109        |   | $ | 2,630 |   |
| Income from operations                               |       | $                | 8,593      |         | $          | 725         |       | $          | 874        |   | $ | 10,192 |   |
| Equity in earnings (losses) of joint  ventures       |       | $                | —     |         | $          | (19         | )          | $          | —     |   | (19 | ) |
| Unallocated amounts:                                 |       |             |       |         |       |        |       |       |       |
| Stock-based compensation                             |       |             |       |         |       |        |       | (820       | )          |
| Other expense                                        |       |             |       |         |       |        |       | (268       | )          |
| Interest expense                                     |       |             |       |         |       |        |       | (1,469     | )          |
| Interest income                                      |       |             |       |         |       |        |       | 153        |       |
|                                                 |       |             |       |         |       |        |       |       |       |
| Consolidated income before income taxes              |       |             |       |         |       |        |       | $          | 7,769      |   |

 
| ** **                                           | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| ** **                                           | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the three months ended September 30,  2007: |       |             |       |        |       |       |       |
| Net sales                                            |       | $                | 40,326     |        | $          | 1,773      |       | $ | 42,099 |   |
| Depreciation                                         |       | $                | 402        |        | $          | 82         |       | $ | 484 |   |
| Income from operations                               |       | $                | 10,646     |        | $          | 325        |       | $ | 10,971 |   |
| Unallocated amounts:                                 |       |             |       |        |       |       |       |
| Stock-based compensation                             |       |             |       |        |       | (393       | )          |
| Other income                                         |       |             |       |        |       | 23         |       |
| Interest expense                                     |       |             |       |        |       | (20        | )          |
| Interest income                                      |       |             |       |        |       | 233        |       |
|                                                 |       |             |       |        |       |       |       |
| Consolidated income before income taxes              |       |             |       |        |       | $          | 10,814     |   |

 

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| ** **                                          | ** ** | **Explosive**    | ** ** | ** **   | ** ** | ** **  | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|------------------|------------|--------------|------------|-------------|------------|------------|------------|
| ** **                                          | ** ** | **Metalworking** | ** ** | **Oilfield** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **Group**        | ** ** | **Products** | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the nine months ended  September 30, 2008: |       |             |       |         |       |        |       |       |       |
| Net sales                                           |       | $                | 147,344    |         | $          | 19,128      |       | $          | 7,485      |   | $ | 173,957 |   |
| Depreciation and amortization                       |       | $                | 6,619      |         | $          | 2,866       |       | $          | 324        |   | $ | 9,809 |   |
| Income from operations                              |       | $                | 28,393     |         | $          | 775         |       | $          | 2,096      |   | $ | 31,264 |   |
| Equity in earnings of joint ventures                |       | $                | —     |         | $          | 270         |       | $          | —     |   | 270 |   |
| Unallocated amounts:                                |       |             |       |         |       |        |       |       |       |
| Stock-based compensation                            |       |             |       |         |       |        |       | (2,363     | )          |
| Other expense                                       |       |             |       |         |       |        |       | (227       | )          |
| Interest expense                                    |       |             |       |         |       |        |       | (4,203     | )          |
| Interest income                                     |       |             |       |         |       |        |       | 477        |       |
|                                                |       |             |       |         |       |        |       |       |       |
| Consolidated income before income taxes             |       |             |       |         |       |        |       | $          | 25,218     |   |

 
| ** **                                          | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| ** **                                          | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the nine months ended  September 30, 2007: |       |             |       |        |       |       |       |
| Net sales                                           |       | $                | 105,257    |        | $          | 4,707      |       | $ | 109,964 |   |
| Depreciation                                        |       | $                | 1,190      |        | $          | 204        |       | $ | 1,394 |   |
| Income from operations                              |       | $                | 27,197     |        | $          | 606        |       | $ | 27,803 |   |
| Unallocated amounts:                                |       |             |       |        |       |       |       |
| Stock-based compensation                            |       |             |       |        |       | (912       | )          |
| Other income                                        |       |             |       |        |       | 3          |       |
| Interest expense                                    |       |             |       |        |       | (20        | )          |
| Interest income                                     |       |             |       |        |       | 598        |       |
|                                                |       |             |       |        |       |       |       |
| Consolidated income before income taxes             |       |             |       |        |       | $          | 27,472     |   |

 

**During the three and nine monthsended September 30, 2008 no sales to any one customer accounted for morethan 10% of total net sales.  During thethree months ended September 30, 2007, sales to one customer representedapproximately $7,333 (17%) of total net sales. During the nine months ended September 30, 2007, no sales to anyone customer accounted for more than 10% of total net sales.**

 

**9.      COMPREHENSIVEINCOME**

 

**The Company**’scomprehensive income for the three and nine months ended September 30,2008 and 2007 was as follows:

** **
| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                           | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income for the period                            |       | $                                | 7,223      |                            | $          | 7,117 |   | $ | 18,683 |   | $ | 17,659 |   |
| Interest rate swap valuation adjustment, net  of tax |       | 167                              |       | —                          |       | 77 |   | — |   |
| Foreign currency translation adjustment              |       | (9,117                           | )          | 898                             |       | (2,010 | ) | 1,158 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Comprehensive income (loss)                          |       | $                                | (1,727     | )                               | $          | 8,015 |   | $ | 16,750 |   | $ | 18,817 |   |

 

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Accumulated other cumulative comprehensiveincome as of September 30, 2008 and December 31, 2007 consisted ofthe following:

 
| ** **                                                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                        | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                                                                        | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| Currency translation adjustment                                                   |       | $                      | 1,680      |                  | $          | 3,690 |   |
| Interest rate swap valuation adjustment, net  of tax of $42 and $90, respectively |       | (70                    | )          | (147                  | )          |
|                                                                              |       |                   |       |                  |       |
|                                                                              |       | $                      | 1,610      |                  | $          | 3,543 |   |

 

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

 

The following discussion should be read inconjunction with our historical consolidated financial statements and notes, aswell as the selected historical consolidated financial data that are includedin the Company’s Annual Report filed on Form 10-K for the year ended December 31,2007.

 

Unless stated otherwise, all dollar figures in this discussion arepresented in thousands (000’s).

 

**Executive Overview**

 

Historically, ourbusiness has been organized into two segments: Explosive Metalworking (which we also refer to as DMC Clad) and AMKWelding.  On November 15, 2007, we acquired100% ownership of a German company, DYNAenergetics.  DYNAenergetics operates two distinctbusinesses which have historically been known as DYNAplat and DYNAwell.  DYNAplat is a manufacturer of explosion cladproducts similar to those manufactured by DMC Clad, and its operating resultsfrom the date of acquisition are included in our Explosive Metalworkingsegment.  DYNAwell manufactures a numberof products for the perforation of oil and gas wells and also distributes aline of seismic products for oil and gas exploration activities.  DYNAwell’s operating results from the date ofacquisition are reported under a new segment that we have named “OilfieldProducts.”

 

For the nine monthsended September 30, 2008, Explosive Metalworking accounted for 85% of ournet sales and 91% of our income from operations before consideration ofstock-based compensation expense, which is not allocated to our businesssegments.  Our AMK Welding and OilfieldProducts segments accounted for 4% and 11%, respectively, of our year-to-date2008 net sales.

 

Our net sales for thenine months ended September 30, 2008, which include $44,099 of sales fromour recently acquired DYNAenergetics’ businesses, increased by $63,993 (58.2%)compared to the first nine months of 2007, reflecting year-to-year net salesincreases of $42,087 (40.0%) and $2,778 (59.0%) for our Explosive Metalworkingand AMK Welding segments, respectively, and a sales contribution of $19,128from our new Oilfield Products segment. Income from operations increased by 7.5% to $28,901 in the first ninemonths of 2008 from $26,891 in the first nine months of 2007, reflectingimprovements in Explosive Metalworking’s and AMK Welding’s operating income of$1,196 and $1,490, respectively, that were partially offset by a $1,451increase in stock-based compensation expense. Our Oilfield Products segment reported operating income of $775 in thefirst nine months of 2008.  Our netincome increased by 5.8% to $18,683 for the nine months ended September 30,2008 from $17,659 in the same period of 2007.

 

*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 demand for ourclad metal products in the United States is largely driven by new plantconstruction and large plant expansion projects, maintenance and retrofitprojects at existing chemical processing, petrochemical processing and oilrefining facilities also account for a significant portion of total demand. In contrastto the U.S. market, 

 

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

 

OilfieldProducts’ revenues are generated principally from sales of shaped charges,detonators and detonating cord, boosters, and perforating guns to customers whoperform the perforation of oil and gas wells and from sales of seismic productsto 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 enter intofuture contracts at projected volumes and profitability levels could adverselyaffect our ability to meet cash requirements exclusively through operatingactivities. We attempt to minimize the risk of losing customers or specificcontracts by continually improving product quality, delivering products ontime, and competing favorably on the basis of price.

 

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

 

*Gross profit and cost of productssold*

 

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

 

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

 

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

 

*Income taxes*

 

Our effective income tax rate decreased to 25.9% for the first ninemonths of 2008 from 35.7% for the same period of 2007.  Income tax provisions on the earnings ofNobelclad, Nitro Metall, DYNAenergetics and our German and Luxembourg holdingcompanies have been provided based upon the respective French, Swedish, Germanand Luxembourg statutory tax rates. Based upon existing tax regulations and current federal, state andforeign statutory tax rates, we expect our full year 2008 blended effective taxrate on our consolidated pre-tax income to 

 

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approximate 27%. We currently expect our blended effective tax rate for2009 to increase to a range from 31% to 32%.

 

*Backlog*

 

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

 

Our backlog with respectto the Explosive Metalworking segment, which totaled approximately $100,000 atthe beginning of 2008, decreased during the current quarter to approximately$98,610 at September 30, 2008 from approximately $104,871 at June 30,2008.  Approximately $4 million of thebacklog reduction from June 30 to September 30 relates to the changein the Euro to U.S. dollar exchange rate as of the respective quarter-enddates.

 

**Three and Nine Months Ended September 30, 2008Compared to Three and Nine Months Ended September 30, 2007**

 

*Net sales*

 
| ** ** | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                                | 52,380     |       | $          | 42,099         |       | $ | 10,281 |   | 24.4 | % |
|            |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** ** | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2008**                        | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                               | 173,957    |       | $          | 109,964        |       | $ | 63,993 |   | 58.2 | % |
|            |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

Net sales for the thirdquarter of 2008 increased 24.4% to $52,380 from $42,099 in the third quarter of2007.  Explosive Metalworking salesincreased 5.9% to $42,703 in the three months ended September 30, 2008(81% of total sales) from $40,326 in the same period of 2007 (96% of totalsales).  The increase in ExplosiveMetalworking sales reflects a sales contribution of $5,622 from the DYNAplatdivision of DYNAenergetics that offset the decreased sales of $3,245 from ourother DMC Clad divisions.

 

Oilfield Productscontributed $6,756 to third quarter 2008 sales (13% of total sales).

 

AMK Welding contributed $2,921 to third quarter 2008 sales (6% of totalsales), which represents a 64.7% increase from sales of $1,773 in the thirdquarter of 2007 (4% of total sales).  Theincrease in AMK’s sales relates principally to increased revenues fromground-based gas turbine work.

 

Net sales for the firstnine months of 2008 increased 58.2% to $173,957 from $109,964 in the first ninemonths of 2007.  Explosive Metalworkingsales increased 40.0% to $147,344 in the 

 

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nine months ended September 30, 2008 (85%of total sales) from $105,257 in the same period of 2007 (96% of totalsales).  The significant increase inExplosive Metalworking sales reflects a sales contribution of $24,971 from theDYNAplat division of DYNAenergetics and increased sales of $17,116 from our otherDMC Clad divisions which reflect the continued strong economic condition of theindustries this business segment serves. At the end of this year’s second quarter, we disclosed that thirdquarter 2008 sales were expected to be up to 20% less than the $52,996 in salesthat we reported in the second quarter due to longer lead times on carbon steelsupply in the United States. Actual third quarter sales of $42,703 were 19.4%below those of the second quarter.  We haveseen some improvement in carbon steel deliveries and expect our fourth quartersales to return to the level that we enjoyed in the second quarter.

 

Oilfield Productscontributed $19,128 to first nine months 2008 sales (11% of total sales).  Fourth quarter sales are expected to be 20%to 25% higher than the $6,756 in sales that Oilfield Products reported in thethird quarter.

 

AMK Welding contributed $7,485 to sales for the first nine months 2008(4% of total sales), which represented a 59.0% increase from sales of $4,707 inthe first nine months of 2007 (4% of total sales).  As indicated above, AMK’s 2008 sales relateprincipally to increased revenues from ground-based gas turbine work.  Third quarter sales at AMK were stronger thanexpected as a result of earlier than planned shipments of certain orders.  We expect AMK’s fourth quarter sales todecline to a level that is more consistent with amounts that we reported in thefirst and second quarter of this year ($2,299 and $2,265, respectively).

 

*Gross profit*

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit                          |       | $                                | 17,025     |       | $          | 14,292         |       | $ | 2,733 |   | 19.1 | % |
| Consolidated gross profit margin rate |       | 32.5                             | %          | 33.9       | %          |           |       |   |   |
|                                       |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **                            | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2008**                        | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit                          |       | $                               | 53,786     |       | $          | 37,223         |       | $ | 16,563 |   | 44.5 | % |
| Consolidated gross profit margin rate |       | 30.9                            | %          | 33.9       | %          |           |       |   |   |
|                                       |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

Grossprofit increased by 19.1% to $17,025 for the three months ended September 30,2008 from $14,292 for the three months ended September 30, 2007. Our thirdquarter 2008 consolidated gross profit margin rate decreased to 32.5% from33.9% in the third quarter of 2007. The gross profit margin rate for ExplosiveMetalworking decreased from 34.3% in the third quarter of 2007 to 31.9% in thethird quarter of 2008, for the reasons discussed below.  The gross profit margin rate for AMK Weldingincreased to 37.9% in the third quarter of 2008 from 27.7% in the third quarterof 2007, with this improvement being largely attributable to the 64.7% increasein AMK’s sales volume as discussed above. Oilfield Products reported a gross profit margin rate of 35.6% on itsthird quarter 2008 sales of $6,756, which was higher than the normal grossmargin level for this business due to a favorable third quarter product andcustomer mix.

 

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Forthe nine months ended September 30, 2008, gross profit increased to$53,786 from $37,223 for the same period of 2007, a 44.5% increase.  Our year to date consolidated gross profitmargin grate decreased to 30.9% from 33.9% for the first nine months of2007.  The gross profit margin rate forExplosive Metalworking decreased to 30.6% from 34.3%.  For the nine months ended September 30,2007, the gross profit margin rate for AMK Welding increased to 36.3% from26.5% for the same period of 2007. Oilfield Products reported a gross profit margin rate of 32.4% for thefirst nine months of 2008, which is considered somewhat higher than the normalgross margin range for this business.

 

Thedecreased third quarter and year-to-date 2008 gross profit margin rates forExplosive Metalworking relates primarily to a higher proportion of sales by ourEuropean divisions in the first nine months of 2008 than in the first ninemonths of 2007 as a result of the DYNAenergetics acquisition.  As mentioned above, the DYNAplat division ofDYNAenergetics reported year-to-date 2008 sales of $24,971.  Historically, gross margins for our Europeanexplosion welding divisions, including those of the DYNAplat division, havegenerally been lower than those reported by our U.S. division.

 

Ourthird quarter consolidated gross margin of 32.5% was higher than expected as a resultof the strong gross margins reported in the third quarter by both our OilfieldProducts and AMK Welding segments as discussed above and higher than expectedproportionate Explosive Metalworking sales by our U.S. division, whichgenerally enjoys higher gross margins than our European Explosive Metalworkingdivisions.  Based upon expected fourthquarter sales volume and normal quarter to quarter fluctuations in product mix,we expect our fourth quarter consolidated gross margin to be comparable to the grossmargin rates that we reported in the first and second quarter of this year(30.3% and 30.1%, respectively).

 

*Generaland administrative expenses*

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                                 | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                 | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General & administrative expenses |       | $                                | 3,679      |       | $          | 1,903          |       | $ | 1,776 |   | 93.3 | % |
| Percentage of net sales                    |       | 7.0                              | %          | 4.5        | %          |           |       |   |   |
|                                            |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **                                 | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **                                 | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                 | ** ** | **2008**                        | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General & administrative expenses |       | $                               | 10,612     |       | $          | 5,419          |       | $ | 5,193 |   | 95.8 | % |
| Percentage of net sales                    |       | 6.1                             | %          | 4.9        | %          |           |       |   |   |
|                                            |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

General andadministrative expenses increased by $1,776, or 93.3%, to $3,679 in the thirdquarter of 2008 from $1,903 in the third quarter of 2007.  Excluding $1,050 of incremental general andadministrative expenses that resulted from the DYNAenergetics acquisition, ourgeneral and administrative expenses increased by $726 or 38.1%.  This increase included a $258 increase instock-based compensation and an impact of $172 from annual salary adjustmentsand staffing changes.  As a percentage ofnet sales, general and administrative expenses increased to 7.0% in the thirdquarter of 2008 from 4.5% in the third quarter of 2007.

 

General andadministrative expenses for the nine months ended September 30, 2008totaled $10,612 compared to $5,419 for the same period of 2007.  This reflects an increase of 95.8%.  

 

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Excluding $3,388 of incremental general andadministrative expenses for DYNAenergetics, our general and administrativeexpenses increased by $1,805 or 33.3%. This increase reflects a $909 increase in stock-based compensation andan impact of $294 from annual salary adjustments and staffing changes.  As a percentage of net sales, general andadministrative expenses increased to 6.1% in the first nine months of 2008 from4.9% in the first nine months of 2007.

 

*Sellingexpenses*

 
| ** **              | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **              | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses        |       | $                                | 2,611      |       | $          | 1,811          |       | $ | 800 |   | 44.2 | % |
| Percentage of net sales |       | 5.0                              | %          | 4.3        | %          |           |       |   |   |
|                         |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **              | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **              | ** ** | **2008**                        | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses        |       | $                               | 8,085      |       | $          | 4,913          |       | $ | 3,172 |   | 64.6 | % |
| Percentage of net sales |       | 4.6                             | %          | 4.5        | %          |           |       |   |   |
|                         |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

Selling expenses, which include sales commissions of $270 in 2008 and$663 in 2007, increased by 44.2% to $2,611 in the third quarter of 2008 from$1,811 in the third quarter of 2007. Excluding $1,083 of incremental selling expenses that resulted from theDYNAenergetics acquisition, our selling expenses decreased by $283 or15.6%.  This decrease reflects a $393decrease in sales commissions and a net decrease of $113 in other expensecategories that were partially offset by increases of $119 in stock-basedcompensation expense and $104 resulting from annual salary adjustments/staffingchanges.  As a percentage of net sales,selling expenses increased to 5.0% in the third quarter of 2008 from 4.3% inthe third quarter of 2007.

 

Sellingexpenses increased by 64.6% to $8,085 in the first nine months of 2008 from$4,913 in the same period of 2007.  Theseexpenses include sales commission of $892 and $1,378 for 2008 and 2007,respectively.  Excluding $2,747 ofincremental selling expenses from DYNAenergetics, our selling expensesincreased by $425 or 8.6%.  This increasereflects an increase in stock-based compensation expense of $385, an impact of$289 from annual salary adjustments and staffing changes, and a $229 increasein travel expenses that were partially offset by a $486 decrease in salescommissions. As a percentage of net sales, selling expenses increased to 4.6%in the first nine months of 2008 from 4.5% in the first nine months of 2007.

 

*Amortization expenses*

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                                           | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                           | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Amortization expense of purchased intangible  assets |       | $                                | 1,363      |       | $          | —         |       | $ | 1,363 |   | NA |   |
| Percentage of net sales                              |       | 2.6                              | %          | 0.0        | %          |           |       |   |   |
|                                                      |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

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| ** **                                           | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **                                           | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                           | ** ** | **2008**                        | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Amortization expense of purchased intangible  assets |       | $                               | 6,188      |       | $          | —         |       | $ | 6,188 |   | NA |   |
| Percentage of net sales                              |       | 3.6                             | %          | 0.0        | %          |           |       |   |   |
|                                                      |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

Amortization expense relates entirely to theamortization of values assigned to intangible assets in connection with the November 15,2007 acquisition of DYNAenergetics. Amortization expense for the three monthsended September 30, 2008 includes $945, $315 and $103 relating to valuesassigned to customer relationships, core technology and trademarks/trade names,respectively. Amortization expense for the nine months ended September 30,2008 includes $2,055, $2,866, $956 and $311 relating to values assigned toorder backlog, customer relationships, core technology and trademarks/tradenames, respectively. Based upon the current foreign exchange rates, we expectamortization expense for 2008 to approximate $7,500.

 

*Income from operations*

 
| ** **             | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **             | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **             | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from operations |       | $                                | 9,372      |       | $          | 10,578         |       | $ | (1,206 | ) | (11.4 | )% |
|                        |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **             | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **             | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **             | ** ** | **2008**                        | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from operations |       | $                               | 28,901     |       | $          | 26,891         |       | $ | 2,010 |   | 7.5 | % |
|                        |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

Income from operationsdecreased by 11.4% to $9,372 in the third quarter of 2008 from $10,578 in thethird quarter of 2007. Explosive Metalworking reported income from operationsof $8,593 in the third quarter of 2008 as compared to $10,646 in the thirdquarter of 2007. This 19.3% decrease in Explosive Metalworking operating incomeis largely attributable to a decline in the gross margin rate from 34.3% in2007 to 31.9% in 2008 and increased operating expenses from the acquiredDYNAplat business. Oilfield Products reported income from operations of $725for the third quarter of 2008. AMK Welding reported income from operations of$874 for the three months ended September 30, 2008 as compared to $325 forthe same period of 2007. This significant increase is attributable to the$1,148, or 64.7%, increase in sales as discussed above.

 

Income from operationsincreased by 7.5% to $28,901 in the first nine months of 2008 from $26,891 inthe first nine months of 2007. Explosive Metalworking reported income fromoperations of $28,393 in the first nine months of 2008 as compared to $27,197in the first nine months of 2007. This modest 4.4% increase reflects afavorable impact from the 40.0% sales increase discussed above that was offsetby a decline in the gross margins rate from 34.3% in 2007 to 30.6% in 2008 andincreased operating expenses from the acquired DYNAplat business. OilfieldProducts reported income from operations of $775 for the first nine months of2008. AMK Welding reported income from operations of $2,096 for the first ninemonths of 2008 as compared to $606 for the first nine months of 2007, with thisincrease of $1,490 reflecting a $2,778, or 59.0%, increase in sales asdiscussed above.

 

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Income from operationsfor the three and nine months ended September 30, 2008 includes $820 and$2,363, respectively, of stock-based compensation expense compared tostock-based compensation expense for the three and nine months ended September 30,2007 of $393 and $912, respectively. This expense is not allocated to ourbusiness segments and thus is not included in the above third quarter and yearto date operating income totals for Explosive Metalworking, Oilfield Productsand AMK Welding.

 

*Interest income (expense), net*

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                     | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                     | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income (expense), net |       | $                                | (1,316     | )          | $          | 213            |       | $ | (1,529 | ) | NM |   |
|                                |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

 
| ** **                     | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **                     | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                     | ** ** | **2008**                        | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income (expense), net |       | $                               | (3,726     | )          | $          | 578            |       | $ | (4,304 | ) | NM |   |
|                                |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

We recorded net interest expense of $1,316 in the three months ended September 30,2008 compared to net interest income of $213 in the same time period of 2007. Werecorded net interest expense of $3,726 in the first nine months of 2008compared to net interest income of $578 in the first nine months of 2007. Duringthe first nine months of 2007, we were in a positive net cash position andearned interest on investment of excess cash balances. In connection with theacquisition of DYNAenergetics, we borrowed approximately $65,000 under our new$100,000 five-year credit facility, assumed approximately $12,000 ofDYNAenergetics’ debt outstanding as of the acquisition date, and usedapproximately $16,000 of our existing cash balances to finance the acquisition.As a result of this new indebtedness and a decrease in our cash position, wereported a significant amount of interest expense during the third quarter andfirst nine months of 2008.

 

*Income tax provision*

 
| ** **           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **           | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **           | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax provision |       | $                                | 546        |       | $          | 3,697          |       | $ | (3,151 | ) | (85.2 | )% |
| Effective tax rate   |       | 7.0                              | %          | 34.2       | %          |           |       |   |   |
|                      |            |                                  |            |            |            |                |            |  |  |  |  |  |

 
| ** **           | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|
| ** **           | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **           | ** ** | **2008**                        | ** ** | **2007**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax provision |       | $                               | 6,535      |       | $          | 9,813          |       | $ | (3,278 | ) | (33.4 | )% |
| Effective tax rate   |       | 25.9                            | %          | 35.7       | %          |           |       |   |   |
|                      |            |                                 |            |            |            |                |            |  |  |  |  |  |

 

We recorded an income tax provision of $546 in the third quarter of2008 compared to $3,697 in the third quarter of 2007. The effective tax ratedecreased to 7.0% in the third quarter of 2008 from 34.2% in the third quarterof 2007. The income tax provisions for the three months ended September 30,2008 and 2007 include $83 and $3,274, respectively, related to U.S. taxes, 

 

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with the remainder relating to foreign taxes and foreign tax benefitsassociated with the operations of Nobelclad and its Swedish subsidiary, NitroMetall, as well as the newly acquired DYNAenergetics division and relatedholding companies in Germany and Luxembourg. The third quarter 2008 effectivetax rate of 7.0% represents a significant deviation from the expected full year2008 effective tax rate of 32% to 33% that was disclosed at the end of thesecond quarter. The deviation arose primarily from the completion during thethird quarter of an Internal Revenue Service examination and from adjustmentsthat were identified during the third quarter 2008 preparation and filing ofour 2007 federal and state tax returns. The closure of the Internal RevenueService examination enabled the Company to record previously unrecognized taxbenefits of approximately $300. The “book-to-return” adjustments favorablyimpacted the third quarter tax provision by approximately $1,100 and relatedprimarily to apportionment factors utilized to compute state income taxes. As aresult of these third quarter tax provision adjustments, we now expect our fullyear 2008 blended effective tax rate on our consolidated pre-tax income toapproximate 27%. Our blended effective tax rate for 2009 is expected toincrease to a range from 31% to 32%.

 

For the nine months ended September 30, 2008, we recorded anincome tax provision of $6,535 compared to $9,813 for the same period of 2007. Theeffective tax rate decreased to 25.9% for the first nine months of 2008 from35.7% for the first nine months of 2007. The income tax provisions for the ninemonths ended September 30, 2008 and 2007 include $5,643 and $8,317,respectively, related to U.S. taxes, with the remainder relating to foreigntaxes and foreign tax benefits associated with the operations of Nobelclad,Nitro Metall, DYNAenergetics and our holding companies in Germany andLuxembourg. The effective taxrate for the nine months ended September 30, 2008 was favorably impactedby the items noted above in the preceding paragraph.

 

# **Liquidityand Capital Resources**

# ** **

Wehave historically financed our operations from a combination of internallygenerated cash flow, revolving credit borrowings, various long-term debtarrangements and the issuance of common stock. Prior to the November 15,2007 acquisition of DYNAenergetics, we had no outstanding borrowings under our$10,000 revolving credit facility with a U.S. bank and term debt outstanding of290 Euros (approximately $458) under a term loan with a French bank. Inconnection with the acquisition of DYNAenergetics, we terminated our $10,000revolving credit facility and entered into a five-year syndicated creditagreement. The credit agreement, which provides for term loans of $45,000 and14,000 Euros and revolving loans of $25,000 and 7,000 Euros, is through asyndicate of seven banks. The credit facility in the approximate amount of$100,000 expires on November 16, 2012. As of September 30, 2008, termloans of $45,000 and 14,000 Euros ($20,229) and revolving loans of 6,600 Euros($9,536) were outstanding under the new credit facility. Additionally, we haveassumed outstanding debt obligations of DYNAenergetics, including lines ofcredit loans and term loans with outstanding amounts of $4,785 and $2,682,respectively, as of September 30, 2008.

 

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, ourability to generate sufficient cash flows from operations will depend upon oursuccess in executing our strategies. If we are unable to (i) realize salesfrom our backlog; (ii) secure new customer orders at attractive prices; (iii) successfullyintegrate the recently-acquired DYNAenergetics businesses; or (iv) continueto implement cost-effective internal processes, our ability to meet cashrequirements through operating activities could be impacted. Furthermore, anyrestriction on the availability of borrowings under our credit facilities couldnegatively affect our ability to meet future cash requirements.

 

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*Debtand other contractual obligations and commitments*

 

**Our existing loan agreementsinclude various covenants and restrictions, certain of which relate to the paymentof dividends or other distributions to stockholders, redemption of capitalstock, incurrence of additional indebtedness, mortgaging, pledging ordisposition of major assets and maintenance of specified financial ratios.  As of September 30, 2008, we were incompliance with all financial covenants and other provisions of our debtagreements.**

** **

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

 

***Cash flowsfrom operating activities***

** **

Net cash flows providedby operating activities for the first nine months of 2008 totaled $24,805.  Significant sources of operating cash flowincluded net income of $18,683, non-cash depreciation and amortization expenseof $10,019 and stock-based compensation of $2,363.  These sources of operating cash flow werepartially offset by a deferred income tax benefit of $2,735, $270 in equity inlosses of joint ventures and net negative changes in various components ofworking capital in the amount of $3,255. Net negative changes in working capital included increases in prepaidexpenses of $2,549 and decreases in accounts payable and accrued expenses andother liabilities of $3,771 and $5,046, respectively.  These negative changes in working capitalwere partially offset by decreases in accounts receivable and inventories of$7,631 and $262, respectively, and increases in customer advances of $218.

 

Net cash flows providedby operating activities for the nine months ended September 30, 2007totaled $12,801.  Significant sources ofoperating cash flow included net income of $17,659, non-cash depreciationexpense of $1,394 and stock-based compensation of $912.  These sources of operating cash flow wereoffset by net negative changes in various components of working capital in theamount of $6,925.  Net negative changesin working capital included increases in inventories and prepaid expenses of$13,541 and $636, respectively, and decreases in accrued expenses and otherliabilities of $1,065.  These negativechanges in working capital were partially offset by decreases in restrictedcash and accounts receivable of $3,059 and $2,001, respectively, and increasesin accounts payable and customer advances of $3,125 and $132, respectively.

 

*Cash flows from investingactivities*

 

Net cash flows used byinvesting activities for the first nine months of 2008 totaled $7,275 andconsisted almost entirely of capital expenditures.

 

Net cash flows used ininvesting activities for the first nine months of 2007 totaled $7,358 andconsisted primarily of capital expenditures.

 

*Cash flows from financingactivities*

 

Net cash flows providedby financing activities for the first nine months of 2008 were $3,969, whichconsisted primarily of net borrowings on bank lines of credit of $7,247 and$333 in net proceeds from the issuance of common stock relating to the exerciseof stock options.  These sources of cashflow were partially offset by payment of annual dividends of $1,894, a finalprincipal payment on a term loan with French bank of $441, an $810 principalpayment on a Nord LB term loan, payments of deferred debt issuance costs of$167 and payment on capital lease obligations of $308.

 

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Net cash flows used infinancing activities for the first nine months of 2007 were $1,627.  Significant uses of cash for financialactivities included a $1,821 payment of annual dividends and $389 principalpayment on a term loan with French bank. Sources of cash flow from financial activities include $563 in netproceeds from the issuance of common stock relating to the exercise of stockoptions.

 

*Payment of Dividends*

 

We paid annual dividendsin 2008 and 2007 and may continue to pay annual dividends in the future subjectto capital availability and periodic determinations that cash dividends are incompliance with our debt covenants and are in the best interests of ourstockholders, but we cannot assure you that such payments will continue.  Future dividends may be affected by, amongother items, our views on potential future capital requirements, futurebusiness prospects, changes in federal income tax laws, or any other factorsthat our board of directors deems relevant. Any decision to pay cash dividends is and will continue to be at thediscretion of board of directors.

 

**Critical Accounting Policies**

 

Ourhistorical consolidated financial statements and notes to our historicalconsolidated financial statements contain information that is pertinent to ourmanagement’s discussion and analysis of financial condition and results ofoperations. Preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires that our managementmake estimates, judgments, and assumptions that affect the reported amounts ofassets, liabilities, revenues, and expenses, and requires the disclosure ofcontingent assets and liabilities. However, the accounting principles used byus generally do not change our reported cash flows or liquidity. Interpretationof the existing rules must be performed and judgments made on how thespecifics of a given rule apply to us.

 

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

 

*Revenuerecognition*

 

**Sales of clad metal products andwelding services are generally based upon customer specifications set forth incustomer purchase orders and require us to provide certifications relative tometals used, services performed, and the results of any non-destructive testingthat the customer has requested be performed. All issues of conformity of the product to specifications are resolvedbefore the product is shipped and billed. Products related to the oilfield products segment, which 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 apotential loss, the Company will account for such anticipated loss.**

 

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*Assetimpairments*

 

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

 

*BusinessCombinations*

 

Weaccounted for our business acquisition in accordance with the provisions ofSFAS No. 141, Business Combinations, using the purchase method ofaccounting. We allocated the total cost of the acquisition to the underlyingnet assets based on their respective estimated fair values. As part of thisallocation process, we identified and attributed values and estimated lives tothe intangible assets acquired. These determinations involved significantestimates and assumptions regarding multiple, highly subjective variables,including those with respect to future cash flows, discount rates, asset lives,and the use of different valuation models and therefore require considerablejudgment. Our estimates and assumptions were based, in part, on theavailability of listed market prices or other transparent market data. Thesedeterminations affect the amount of amortization expense recognized in futureperiods. We based our fair value estimates on assumptions we believe to bereasonable but are inherently uncertain.

 

*Goodwill*

 

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

 

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

 

In the second step, if required, we allocate the fair value of thereporting unit to the assets and liabilities of the reporting unit as if it hadjust been acquired in a business combination and as if the purchase price wasequivalent to the fair value of the reporting unit.  The excess of the fair value of the reportingunit over the amounts assigned to its assets and liabilities is referred to asthe implied fair value of goodwill. We then compare that implied fair value ofthe reporting unit’s goodwill to the carrying value of that goodwill. If theimplied fair value is less than the carrying value, we recognize an impairmentloss for the excess.

 

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

 

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*Intangible assets subject to amortization*

 

An intangible asset that is subject to amortization is reviewed whenimpairment indicators are present in accordance with SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*.We compare the expected undiscounted future operating cash flows associatedwith finite-lived assets to their respective carrying values to determine ifthe asset is fully recoverable. If the expected future operating cash flows arenot sufficient to recover the carrying value, we estimate the fair value of theasset. Impairment is recognized when the carrying amount of the asset is notrecoverable and when the carrying value exceeds fair value. The projected cashflows require several assumptions related to, among other things, relevant marketfactors, revenue growth, if any, and operating margins. While we believe ourassumptions are reasonable, changes in these assumptions may have a materialimpact on our financial results.

 

*Impactof foreign currency exchange rate risks*

 

Thefunctional currency for our foreign operations is the applicable local currencyfor each affiliate company. Assets and liabilities of foreign subsidiaries forwhich the functional currency is the local currency are translated at exchangerates in effect at period-end, and the statements of operations are translatedat the average exchange rates during the period.  Exchange rate fluctuations on translatingforeign currency financial statements into U.S. dollars that result in unrealizedgains or losses are referred to as translation adjustments. Cumulativetranslation adjustments are recorded as a separate component of stockholders’equity and are included in other cumulative comprehensive income (loss).Transactions denominated in currencies other than the local currency arerecorded based on exchange rates at the time such transactions arise.Subsequent changes in exchange rates result in transaction gains and losses,which are reflected in income as unrealized (based on period-end translations)or realized (based upon settlement of the transactions). Cash flows from ouroperations in foreign countries are translated at actual exchange rates whenknown, or at the average rate for the period. As a result, amounts related toassets and liabilities reported in the consolidated statements of cash flowswill not agree to changes in the corresponding balances in the consolidatedbalance sheets. The effects of exchange rate changes on cash balances held inforeign currencies are reported as a separate line item below cash flows fromfinancing activities.

 

*Incometaxes*

 

Weaccount for income taxes in accordance with Statement of Financial AccountingStandards No.  109, Accounting for Income Taxes (“SFAS 109”), whichrequires the recognition of deferred tax assets and deferred tax liabilitiesfor the expected future income tax consequences of transactions that have beenincluded in our financial statements but not our tax returns.  Deferred tax assets and liabilities aredetermined based on 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.

 

We continue to maintain a full valuation allowance of $111 against thecarryforward tax attributes of a state in which we are no longer considered tobe doing business.

 

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*Stock-Based Compensation Expense*

 

Weaccount for stock-based compensation in accordance with the provisions ofStatement of Financial Accounting Standards No. 123 (revised 2004), *Share-Based Payment* (“SFAS 123R”).  Under the fair value recognition provisionsof SFAS 123R, stock-based compensation cost is estimated at the grant datebased on the value of the award and is recognized as expense ratably over therequisite service period of the award. The fair value of restricted stock awards is based on the fair value ofthe Company’s stock on the date of grant. Determining the appropriate fair value model and calculating the fairvalue of stock options at the grant date requires judgment, includingestimating stock price volatility, forfeiture rates, and expected option life.

 

**Recent Accounting Pronouncements**

 

**In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurements*(“SFAS 157”). SFAS 157 defines fair value, establishes a framework formeasuring fair value in accordance with accounting principles generallyaccepted in the United States, and expands disclosures about fair valuemeasurements. SFAS No. 157 was initially effective for financialstatements issued for fiscal years beginning after November 15, 2007.  The FASB issued a staff position statement (“FSP”)in February 2008 that deferred the required implementation date of SFAS157 for certain assets and liabilities. The adoption of SFAS 157 in the nine months ended September 30,2008 did not have a material impact on the Company’s results of operations orfinancial position.**

** **

**In February 2007, the FASBissued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities – Including an Amendment of FASBStatement No. 115*. This Statement permits entities to measuremany financial instruments and certain other items at fair value. This electionis made on an instrument-by-instrument basis and is irrevocable. Unrealizedgains and losses on items for which the fair value option has been elected arereported in earnings. This statement is effective for fiscal years beginningafter November 15, 2007. The Company did not elect the fair value optionfor any of its existing financial assets and liabilities during the nine monthsended September 30, 2008.**

** **

**In December 2007,the FASB issued SFAS No. 141(R), *Business Combinations*and SFAS No. 160, *Accounting and Reportingof Noncontrolling Interest in Consolidated Financial Statements*, anamendment of ARB No. 51. These new standards will significantly change theaccounting for and reporting of business combination transactions andnoncontrolling (minority) interests in consolidated financial statements. SFASNos. 141(R) and 160 are required to be adopted simultaneously and areeffective for the first annual reporting period beginning on or after December 15,2008. Thus, we are required to adopt these Standards on January 1, 2009.Earlier adoption is prohibited. The Company is in the process of determiningthe effect, if any, the adoption SFAS Nos. 141(R) and 160 will haveon its results of operations or financial position.**

** **

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

 

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**ITEM 3.**               Quantitative and QualitativeDisclosure about Market Risk

** **

There have been no events that materially affect our quantitative andqualitative disclosure about market risk from that reported in our AnnualReport on Form 10-K for the year ended December 31, 2007.

 

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

 

The Companymaintains disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in the Company’s Exchange Act reports isaccurately recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms, and that such information isaccumulated and communicated to the Company’s management, including its ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures,management recognized that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, and management necessarily applied its judgment inevaluating the cost-benefit relationship of possible controls and procedures.

 

As of September 30,2008, the Company carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures (asdefined in Exchange Act Rule 13a-15(e)). Based on that evaluation, the Company’s Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures were effective.  There havebeen no changes in the Company’s internal controls during the quarter ended September 30,2008 or in other factors that could materially affect the Company’s internalcontrols over financial reporting.

 

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

 

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**Part II - OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

None.

 

**Item 1A. RiskFactors**

 

Our 2007 Annual Report on Form 10-Kincludes a detailed discussion of our risk factors.  The information presented below updates andshould be read in conjunction with the risk factors and information disclosedin our Form 10-K.

 

**Our backlog figures may not accuratelypredict future sales.**

 

We define “backlog” at any givenpoint in time to consist of all firm, unfulfilled purchase orders andcommitments at that time.  Generallyspeaking, we expect to fill most items of backlog within the following 12months.  However, since orders may berescheduled or canceled, and a significant portion of our net sales is derivedfrom a small number of customers, backlog is not necessarily indicative offuture sales levels.  Moreover, we cannotbe sure of when during the future 12-month period we will be able to recognizerevenue corresponding to our backlog; nor can we be certain that revenuescorresponding to our backlog will not fall into periods beyond the 12-monthhorizon.

 

**Weakness in the general global economy mayadversely affect certain segments of our end market customers and reduce oursales and results of operations.**

 

We supply products to customersthat fabricate industrial equipment for various capital-intensiveindustries.  The current weakness in thegeneral global economy may adversely affect our end market customers, causingthem to cancel or postpone new plant or infrastructure construction, expansionor maintenance and retrofitting projects that use our products.  While to date we have not seen material signsof postponements or cancellations of projects important to us, there can be noassurances that general economic conditions will not lessen demand for ourproducts and reduce our sales and results of operations.

 

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

 

None.

 

**Item 3. Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**Item 5. Other Information**

 

None.

 

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**Item 6.**

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

 

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##### **SIGNATURES**

 

 

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

 

 
|                         | **DYNAMIC  MATERIALS CORPORATION**                                                                                                             |
|------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------|
|                         | (Registrant)                                                                                                                                   |
|                         |                                                                                                                                           |
|                         |                                                                                                                                           |
| Date:  October 31, 2008 | /s/ Richard  A. Santa                                                                                                                          |
|                         | Richard A. Santa, Senior Vice President and Chief  Financial Officer (Duly Authorized Officer and  Principal Financial and Accounting Officer) |

 

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