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**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C.  20549**

 

**Form 10-Q**

 

**(Mark One)**

 

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

 

**For the quarterly period ended September 30,2009**

 

**OR**

 

**o****        ****TRANSITION REPORT UNDER SECTION 13 OR 15(d) OFTHE SECURITIES ACT OF 1934**

 

**FOR THE TRANSITION PERIOD FROM             TO             .**

 

**Commission file number 001-14775**

 

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**DYNAMICMATERIALS CORPORATION**

(Exactname of Registrant as Specified in its Charter)

 

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

 

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

(Addressof principal executive offices, including zip code)

 

**(303) 665-5700**

(Registrant’stelephone number, including area code)

 

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

 

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

 

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

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2under the Act).  Yes oNo x

 

Thenumber of shares of Common Stock outstanding was 12,886,890 as of October 30,2009.

 

 

 

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CAUTIONARY NOTE ABOUT FORWARD-LOOKINGSTATEMENTS

 

Thisquarterly report on Form 10-Q contains “forward-looking statements” withinthe meaning of section 27A of the Securities Act of 1933 and section 21E of theSecurities Exchange Act of 1934. In particular, we direct your attention to Part I,Item 1- Condensed Consolidated Financial Statements; Item 2 - Management’sDiscussion and Analysis of Financial Condition and Results of Operations; Item3 - Quantitative and Qualitative Disclosures About Market Risk; and Part II,Item 1A — Risk Factors. We intend the forward-looking statements throughoutthis quarterly report on Form 10-Q and the information incorporated byreference herein to be covered by the safe harbor provisions forforward-looking statements. Statements contained in this report which are nothistorical facts are forward-looking statements that involve risks anduncertainties that could cause actual results to differ materially fromprojected results. All projections, guidance and other statements regarding ourexpected financial position and operating results, our business strategy, ourfinancing plans and the outcome of any contingencies are forward-lookingstatements. These statements can sometimes be identified by our use offorward-looking words such as “may,” “believe,” “plan,” “anticipate,” “estimate,”“expect,” “intend,” and other phrases of similar meaning. The forward-lookinginformation is based on information available as of the date of this quarterlyreport and on numerous assumptions and developments that are not within ourcontrol. Although we believe that our expectations as expressed in theseforward-looking statements are reasonable, we cannot assure you that ourexpectations will turn out to be correct. Factors that could cause actualresults to differ materially include, but are not limited to, the following:changes in global economic conditions; the ability to obtain new contracts atattractive prices; the size and timing of customer orders and shipment; ourability to realize sales from our backlog; fluctuations in customer demand;fluctuations in foreign currencies; competitive factors; the timely completionof contracts; the timing and size of expenditures; the timely receipt of governmentapprovals and permits; the price and availability of metal and other rawmaterial; the adequacy of local labor supplies at our facilities; current orfuture limits on manufacturing capacity at our various operations; our abilityto successfully integrate acquired businesses; the availability and cost offunds; and general economic conditions, both domestic and foreign, impactingour business and the business of the end-market users we serve. Readers arecautioned not to place undue reliance on these forward-looking statements,which reflect management’s analysis only as of the date hereof. We undertake noobligation to publicly release the results of any revision to theseforward-looking statements that may be made to reflect events or circumstances afterthe date hereof or to reflect the occurrence of unanticipated events.

 

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**INDEX**

 
| PART I -  FINANCIAL INFORMATION                                                                       |                                                                                                                     |
|------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
|                                                                                                       |                                                                                                                     |
| Item 1 —  Condensed Consolidated Financial Statements                                                 | 4                                                                                                                        |
|                                                                                                       |                                                                                                                     |   |
|                                                                                                       | Consolidated  Balance Sheets as of September 30, 2009 (unaudited) and  December 31, 2008                       | 4 |
|                                                                                                       | Consolidated  Statements of Operations for the three and nine months ended  September 30, 2009 and 2008 (unaudited) | 6 |
|                                                                                                       | Consolidated  Statement of Stockholders’ Equity for the nine months ended  September 30, 2009 (unaudited)      | 7 |
|                                                                                                       | Consolidated  Statements of Cash flows for the nine months ended September 30, 2009  and 2008 (unaudited)           | 8 |
|                                                                                                       | Notes to  Condensed Consolidated Financial Statements (unaudited)                                                        | 10 |
|                                                                                                       |                                                                                                                     |   |
| Item 2 —  Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 21                                                                                                                       |
|                                                                                                       |                                                                                                                     |
| Item 3 —  Quantitative and Qualitative Disclosure about Market Risk                                   | 36                                                                                                                       |
|                                                                                                       |                                                                                                                     |
| Item 4 — Controls  and Procedures                                                                     | 36                                                                                                                       |
|                                                                                                       |                                                                                                                     |
| 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                                                                           | 39                                                                                                                       |
|                                                                                                       |                                                                                                                     |
| Item 6  — Exhibits                                                                                    | 39                                                                                                                       |
|                                                                                                       |                                                                                                                     |
| Signatures                                                                                                 | 40                                                                                                                       |

 

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**Part I- FINANCIAL INFORMATION**

 

**ITEM 1.  Condensed ConsolidatedFinancial Statements**

 

DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars inThousands)

 
| ** **                                                                                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                   | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                                                                                   | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
|                                                                                         |       |                   |       |                  |       |
| ASSETS                                                                                       |       |                   |       |                  |       |
| CURRENT  ASSETS:                                                                             |       |                   |       |                  |       |
| Cash  and cash equivalents                                                                   |       | $                      | 30,031     |                  | $          | 14,360 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $599 and $614,  respectively |       | 21,945                 |       | 34,719                |       |
| Inventories                                                                                  |       | 32,565                 |       | 35,300                |       |
| Prepaid  expenses and other                                                                  |       | 2,150                  |       | 2,956                 |       |
| Related  party receivable and loan                                                           |       | 2,626                  |       | 2,611                 |       |
| Current  deferred tax assets                                                                 |       | 1,867                  |       | 1,103                 |       |
|                                                                                         |       |                   |       |                  |       |
| Total  current assets                                                                        |       | 91,184                 |       | 91,049                |       |
|                                                                                         |       |                   |       |                  |       |
| PROPERTY,  PLANT AND EQUIPMENT                                                               |       | 62,473                 |       | 58,454                |       |
| Less  - Accumulated depreciation                                                             |       | (21,705                | )          | (17,997               | )          |
|                                                                                         |       |                   |       |                  |       |
| Property,  plant and equipment, net                                                          |       | 40,768                 |       | 40,457                |       |
|                                                                                         |       |                   |       |                  |       |
| GOODWILL,  net                                                                               |       | 44,045                 |       | 43,066                |       |
|                                                                                         |       |                   |       |                  |       |
| PURCHASED  INTANGIBLE ASSETS, net                                                            |       | 50,137                 |       | 52,264                |       |
|                                                                                         |       |                   |       |                  |       |
| DEFERRED  TAX ASSETS                                                                         |       | 344                    |       | 331                   |       |
|                                                                                         |       |                   |       |                  |       |
| OTHER  ASSETS, net                                                                           |       | 1,259                  |       | 1,449                 |       |
|                                                                                         |       |                   |       |                  |       |
| INVESTMENT  IN JOINT VENTURES                                                                |       | 1,182                  |       | 970                   |       |
|                                                                                         |       |                   |       |                  |       |
| TOTAL  ASSETS                                                                                |       | $                      | 228,919    |                  | $          | 229,586 |   |

 

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

 

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONDENSEDCONSOLIDATED BALANCE SHEETS

(Dollars inThousands, Except Share Data)

 
| ** **                                                                                                                          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                          | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                                                                                                                          | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
|                                                                                                                                |       |                   |       |                  |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                           |       |                   |       |                  |       |
| CURRENT  LIABILITIES:                                                                                                               |       |                   |       |                  |       |
| Accounts  payable                                                                                                                   |       | $                      | 9,403      |                  | $          | 15,402 |   |
| Accrued  expenses                                                                                                                   |       | 4,717                  |       | 6,605                 |       |
| Dividend  payable                                                                                                                   |       | 515                    |       | —                |       |
| Accrued  income taxes                                                                                                               |       | 72                     |       | 846                   |       |
| Accrued  employee compensation and benefits                                                                                         |       | 4,501                  |       | 5,579                 |       |
| Customer  advances                                                                                                                  |       | 3,039                  |       | 2,685                 |       |
| Related  party accounts payable                                                                                                     |       | 28                     |       | 17                    |       |
| Current  maturities on long-term debt                                                                                               |       | 10,690                 |       | 14,450                |       |
| Current  portion of capital lease obligations                                                                                       |       | 116                    |       | 163                   |       |
|                                                                                                                                |       |                   |       |                  |       |
| Total  current liabilities                                                                                                          |       | 33,081                 |       | 45,747                |       |
|                                                                                                                                |       |                   |       |                  |       |
| LONG-TERM  DEBT                                                                                                                     |       | 45,957                 |       | 46,178                |       |
|                                                                                                                                |       |                   |       |                  |       |
| CAPITAL  LEASE OBLIGATIONS                                                                                                          |       | 259                    |       | 336                   |       |
|                                                                                                                                |       |                   |       |                  |       |
| DEFERRED  TAX LIABILITIES                                                                                                           |       | 15,909                 |       | 16,833                |       |
|                                                                                                                                |       |                   |       |                  |       |
| OTHER  LONG-TERM LIABILITIES - RELATED PARTY                                                                                        |       | 366                    |       | 303                   |       |
|                                                                                                                                |       |                   |       |                  |       |
| OTHER  LONG-TERM LIABILITIES                                                                                                        |       | 1,178                  |       | 1,687                 |       |
|                                                                                                                                |       |                   |       |                  |       |
| Total  liabilities                                                                                                                  |       | 96,750                 |       | 111,084               |       |
|                                                                                                                                |       |                   |       |                  |       |
| COMMITMENTS  AND CONTINGENT LIABILITIES                                                                                             |       |                   |       |                  |       |
|                                                                                                                                |       |                   |       |                  |       |
| 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; 12,877,306 and  12,780,877 shares issued and outstanding, respectively |       | 644                    |       | 639                   |       |
| Additional  paid-in capital                                                                                                         |       | 45,165                 |       | 42,050                |       |
| Retained  earnings                                                                                                                  |       | 84,541                 |       | 78,042                |       |
| Other  cumulative comprehensive income (loss)                                                                                       |       | 1,819                  |       | (2,229                | )          |
|                                                                                                                                |       |                   |       |                  |       |
| Total  stockholders’ equity                                                                                                    |       | 132,169                |       | 118,502               |       |
|                                                                                                                                |       |                   |       |                  |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                    |       | $                      | 228,919    |                  | $          | 229,586 |   |

 

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

 

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE ANDNINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(Dollars inThousands, Except Share Data)

(unaudited)

 
| ** **                                           | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                           | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| NET  SALES                                           |       | $                      | 34,690     |                   | $          | 52,380 |   | $ | 122,268 |   | $ | 173,957 |   |
| COST  OF PRODUCTS SOLD                               |       | 25,936                 |       | 35,355                 |       | 89,032 |   | 120,171 |   |
| Gross  profit                                        |       | 8,754                  |       | 17,025                 |       | 33,236 |   | 53,786 |   |
| COSTS  AND EXPENSES:                                 |       |                   |       |                   |       |   |   |   |   |
| General  and administrative expenses                 |       | 2,749                  |       | 3,679                  |       | 9,318 |   | 10,612 |   |
| Selling  expenses                                    |       | 2,212                  |       | 2,611                  |       | 6,376 |   | 8,085 |   |
| Amortization  expense of purchased intangible assets |       | 1,293                  |       | 1,363                  |       | 3,709 |   | 6,188 |   |
| Total  costs and expenses                            |       | 6,254                  |       | 7,653                  |       | 19,403 |   | 24,885 |   |
| INCOME  FROM OPERATIONS                              |       | 2,500                  |       | 9,372                  |       | 13,833 |   | 28,901 |   |
| OTHER  INCOME (EXPENSE):                             |       |                   |       |                   |       |   |   |   |   |
| Other  income (expense), net                         |       | (633                   | )          | (268                   | )          | (560 | ) | (227 | ) |
| Interest  expense                                    |       | (752                   | )          | (1,469                 | )          | (2,521 | ) | (4,203 | ) |
| Interest  income                                     |       | 41                     |       | 153                    |       | 145 |   | 477 |   |
| Equity  in earnings (losses) of joint ventures       |       | 91                     |       | (19                    | )          | 170 |   | 270 |   |
| INCOME  BEFORE INCOME TAXES                          |       | 1,247                  |       | 7,769                  |       | 11,067 |   | 25,218 |   |
| INCOME  TAX PROVISION                                |       | 151                    |       | 546                    |       | 3,540 |   | 6,535 |   |
| NET  INCOME                                          |       | $                      | 1,096      |                   | $          | 7,223 |   | $ | 7,527 |   | $ | 18,683 |   |
| INCOME  PER SHARE:                                   |       |                   |       |                   |       |   |   |   |   |
| Basic                                                |       | $                      | 0.09       |                   | $          | 0.57 |   | $ | 0.59 |   | $ | 1.48 |   |
| Diluted                                              |       | $                      | 0.08       |                   | $          | 0.57 |   | $ | 0.58 |   | $ | 1.47 |   |
|                                                 |       |                   |       |                   |       |   |   |   |   |
| WEIGHTED  AVERAGE NUMBER OF SHARES OUTSTANDING -     |       |                   |       |                   |       |   |   |   |   |
| Basic                                                |       | 12,632,406             |       | 12,463,060             |       | 12,597,023 |   | 12,426,369 |   |
| Diluted                                              |       | 12,645,500             |       | 12,556,320             |       | 12,621,970 |   | 12,546,743 |   |
|                                                 |       |                   |       |                   |       |   |   |   |   |
| DIVIDENDS  DECLARED PER COMMON SHARE                 |       | $                      | 0.04       |                   | $          | — |   | $ | 0.08 |   | $ | 0.15 |   |

 

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

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009

(Amounts in Thousands)

(unaudited)

 
| ** **                                                         | ** ** | ** **        | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Other**          | ** ** | ** ** | ** ** | ** **          | ** ** |
|--------------------------------------------------------------------|------------|-------------------|------------|-------------|------------|----------------|------------|-------------------|------------|--------------------|------------|------------|------------|---------------------|------------|
| ** **                                                         | ** ** | ** **        | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Cumulative**     | ** ** | ** ** | ** ** | **Comprehensive**   | ** ** |
| ** **                                                         | ** ** | **Common  Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | ** **         | ** ** | **Income** | ** ** |
| ** **                                                         | ** ** | **Shares**        | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Income  (loss)** | ** ** | **Total**  | ** ** | **for the  Period** | ** ** |
| Balances,  December 31, 2008                                  |       | 12,781            |       | $           | 639        |           | $          | 42,050            |       | $                  | 78,042     |       | $          | (2,229              | )          | $ | 118,502 |   |   |   |
|                                                               |       |              |       |        |       |           |       |              |       |               |       |       |       |                |       |
| Shares  issued for stock option exercises                          |       | 78                |       | 4           |       | 260            |       | —            |       | —             |       | 264        |       |                |       |
| Restricted  stock awards                                           |       | 12                |       | 1           |       | (1             | )          | —            |       | —             |       | —     |       |                |       |
| Shares  issued in connection with the employee stock purchase plan |       | 6                 |       | —      |       | 109            |       | —            |       | —             |       | 109        |       |                |       |
| Excess  tax benefit related to stock options                       |       | —            |       | —      |       | 90             |       | —            |       | —             |       | 90         |       |                |       |
| Stock-based  compensation                                          |       | —            |       | —      |       | 2,657          |       | —            |       | —             |       | 2,657      |       |                |       |
| Dividends                                                          |       | —            |       | —      |       | —         |       | (1,028            | )          | —             |       | (1,028     | )          |                |       |
| Net  income                                                        |       | —            |       | —      |       | —         |       | 7,527             |       | —             |       | 7,527      |       | 7,527               |       |
| Derivative  valuation adjustment, net of tax of $172               |       | —            |       | —      |       | —         |       | —            |       | 301                |       | 301        |       | 301                 |       |
| Change  in cumulative foreign currency translation adjustment      |       | —            |       | —      |       | —         |       | —            |       | 3,747              |       | 3,747      |       | 3,747               |       |
| Balances,  September 30, 2009                                 |       | 12,877            |       | $           | 644        |           | $          | 45,165            |       | $                  | 84,541     |       | $          | 1,819               |       | $ | 132,169 |   | $ | 11,575 |   |
|                                                                    |            |                   |            |             |            |                |            |                   |            |                    |            |            |            |                     |            |  |  |  |  |  |  |

 

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

 

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINEMONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(Dollars in Thousands)

(unaudited)

 
| ** **                                                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                              |       |     |       |     |       |
| Net  income                                                                         |       | $        | 7,527      |     | $          | 18,683 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities - |       |     |       |     |       |
| Depreciation  (including capital lease amortization)                                |       | 3,701    |       | 3,621    |       |
| Amortization  of purchased intangible assets                                        |       | 3,709    |       | 6,188    |       |
| Amortization  of capitalized debt issuance costs                                    |       | 215      |       | 210      |       |
| Stock-based  compensation                                                           |       | 2,657    |       | 2,363    |       |
| Deferred  income tax benefit                                                        |       | (1,875   | )          | (2,735   | )          |
| Equity  in earnings of joint ventures                                               |       | (170     | )          | (270     | )          |
| Change  in -                                                                        |       |     |       |     |       |
| Accounts  receivable, net                                                           |       | 13,632   |       | 7,631    |       |
| Inventories                                                                         |       | 3,334    |       | 262      |       |
| Prepaid  expenses and other                                                         |       | 496      |       | (2,549   | )          |
| Accounts  payable                                                                   |       | (5,980   | )          | (3,771   | )          |
| Customer  advances                                                                  |       | 246      |       | 218      |       |
| Accrued  expenses and other liabilities                                             |       | (4,078   | )          | (5,046   | )          |
|                                                                                |       |     |       |     |       |
| Net  cash provided by operating activities                                          |       | 23,414   |       | 24,805   |       |
|                                                                                |       |     |       |     |       |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                              |       |     |       |     |       |
| Acquisition  of property, plant and equipment                                       |       | (3,238   | )          | (7,325   | )          |
| Change  in other non-current assets                                                 |       | 42       |       | 50       |       |
|                                                                                |       |     |       |     |       |
| Net  cash used in investing activities                                              |       | (3,196   | )          | (7,275   | )          |
|                                                                                     |            |          |            |          |            |  |  |

 

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

 

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINEMONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(Dollars inThousands)

 
| ** **                                                             | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                 |       |     |       |     |       |
| Payment  on syndicated term loans                                      |       | (3,912   | )          | —   |       |
| Payment  on term loan with French bank                                 |       | —   |       | (441     | )          |
| Payment  on Nord LB term loans                                         |       | (653     | )          | (810     | )          |
| Borrowings  on bank lines of credit, net                               |       | —   |       | 7,247    |       |
| Payment  of capital lease obligations                                  |       | (132     | )          | (308     | )          |
| Payment  of dividends                                                  |       | (513     | )          | (1,894   | )          |
| Payment  of deferred debt issuance costs                               |       | (58      | )          | (167     | )          |
| Net  proceeds from issuance of common stock to employees and directors |       | 373      |       | 333      |       |
| Excess  tax benefit related to exercise of stock options               |       | 90       |       | 9        |       |
|                                                                   |       |     |       |     |       |
| Net  cash provided by (used in) financing activities                   |       | (4,805   | )          | 3,969    |       |
|                                                                   |       |     |       |     |       |
| EFFECTS  OF EXCHANGE RATES ON CASH                                     |       | 258      |       | (36      | )          |
|                                                                   |       |     |       |     |       |
| NET  INCREASE IN CASH AND CASH EQUIVALENTS                             |       | 15,671   |       | 21,463   |       |
|                                                                   |       |     |       |     |       |
| CASH  AND CASH EQUIVALENTS, beginning of the period                    |       | 14,360   |       | 9,045    |       |
|                                                                   |       |     |       |     |       |
| CASH  AND CASH EQUIVALENTS, end of the period                          |       | $        | 30,031     |     | $          | 30,508 |   |
|                                                                        |            |          |            |          |            |  |  |

 

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

 

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##### **Tableof Contents**

 

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

##### ** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

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

 

**(unaudited)**

 

**1.      BASIS OF PRESENTATION**

 

Theinformation included in the Condensed Consolidated Financial Statements isunaudited but includes all normal and recurring adjustments which, in theopinion of management, are necessary for a fair presentation of the interimperiods presented. These Condensed Consolidated Financial Statements should beread in conjunction with the financial statements that are included in theCompany’s Annual Report filed on Form 10-K for the year ended December 31,2008.  Certain prior year balances in theconsolidated financial statements and notes have been reclassified to conformto the 2009 presentation.

 

**2.      SIGNIFICANT ACCOUNTING POLICIES**

 

**Principlesof Consolidation**

** **

**TheCondensed Consolidated Financial Statements include the accounts of the Companyand its controlled subsidiaries.  Onlysubsidiaries in which controlling interests are maintained areconsolidated.  The equity method is usedto account for our ownership in entities where we do not have a controllinginterest.  All significant intercompanyaccounts, profits, and transactions have been eliminated in consolidation.**

** **

**Foreign Operations and Foreign Exchange Rate Risk**

** **

**Thefunctional currency for the Company’s foreign operations is the applicablelocal currency for each affiliate company. Assets and liabilities of foreignsubsidiaries are translated at exchange rates in effect at period-end, and thestatements of operations are translated at the average exchange rates duringthe period.  Exchange rate fluctuationson translating foreign currency financial statements into U.S. dollars thatresult in unrealized gains or losses are referred to as translationadjustments. Cumulative translation adjustments are recorded as a separatecomponent of stockholders’ equity and are included in other cumulativecomprehensive income (loss). Transactions denominated in currencies other thanthe local currency are recorded based on exchange rates at the time suchtransactions arise. Subsequent changes in exchange rates result in transactiongains and losses which are reflected in income as unrealized (based onperiod-end translations) or realized upon settlement of the transactions. Cashflows from the Company’s operations in foreign countries are translated atactual exchange rates when known, or at the average rate for the period. As aresult, amounts related to assets and liabilities reported in the consolidatedstatements of cash flows will not agree to changes in the correspondingbalances in the consolidated balance sheets. The effects of exchange ratechanges on cash balances held in foreign currencies are reported as a separateline item below cash flows from financing activities.**

 

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** **

**Revenue Recognition**

** **

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

** **

**FairValue of Financial Instruments**

** **

The carrying values of cash and cash equivalents, trade accountsreceivable and payable, and accrued expenses are considered to approximate fairvalue due to the short-term nature of these instruments.  Based upon the 150 basis point increase inour LIBOR/EURIBOR basis borrowing spread negotiated in the October 21,2009 amendment to our credit agreement (see Note 6), we believe the fair valueof our long-term debt is approximately 5% less than its carrying value at September 30,2009.  The majority of the Company’s debtwas incurred in connection with the acquisition of DYNAenergetics.

 

Additionally, the Company has an interest rate swap agreement (see Note6), which is recorded at fair value. Fair value is defined as the price that would be received to sell anasset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date. The Company is required to use anestablished hierarchy for fair value measurements based upon the inputs to thevaluation and the degree to which they are observable or not observable in themarket. The three levels in the hierarchy are as follows:

 
| · |   | Level  1 – Inputs to the valuation based upon quoted prices (unadjusted) for  identical assets or liabilities in active markets that are accessible as of  the measurement date.                                                                                                                        |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                         |
| · |   | Level  2 – Inputs to the valuation include quoted prices in either markets that are  not active, or in active markets for similar assets or liabilities, inputs  other than quoted prices that are observable, and inputs that are derived  principally from or corroborated by observable market data. |
|   |   |                                                                                                                                                                                                                                                                                                         |
| · |   | Level  3 – Inputs to the valuation that are unobservable inputs for the asset or  liability.                                                                                                                                                                                                            |

 

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

 

The Company’s interest rate swap agreement is not exchange listed andis therefore valued with models that use Level 2 inputs.  The degree to which the Company’s creditworthiness impacts the value requires management judgment but as of September 30,2009 and December 31, 2008, the impact of this assessment on the overallvalue of the outstanding interest rate swap was not significant and theCompany’s valuation of the agreement is classified within Level 2 of thehierarchy.

 

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**RelatedParty Transactions**

** **

**TheCompany has related party transactions with its unconsolidated joint ventures,as well as with the minority shareholder of one of its consolidated jointventures.  A summary of related partybalances as of September 30, 2009 and December 31, 2008 is summarizedbelow:**

** **
| ** **                 | ** ** | **As of September 30, 2009** | ** ** | **As of December 31, 2008** | ** ** |
|----------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **Accounts**                      | ** ** | **Accounts**                     | ** ** | **Other** | ** ** | **Accounts** | ** ** | **Accounts** | ** ** | **Other** | ** ** |
| ** **                 | ** ** | **receivable from**               | ** ** | **payable to**                   | ** ** | **long-term** | ** ** | **receivable from** | ** ** | **payable to** | ** ** | **long-term** | ** ** |
| ** **                 | ** ** | **and loan to**                   | ** ** | **and loan from**                | ** ** | **loan from** | ** ** | **and loan to** | ** ** | **and loan from** | ** ** | **loan from** | ** ** |
| Perfoline                  |       | $                                 | 483        |                             | $          | 18 |   | $ | — |   | $ | 449 |   | $ | 17 |   | $ | — |   |
| DYNAenergetics  RUS        |       | 1,273                             |       | —                           |       | — |   | 1,582 |   | — |   | — |   |
| Minority  Interest Partner |       | 870                               |       | 10                               |       | 366 |   | 580 |   | — |   | 303 |   |
|                       |       |                              |       |                             |       |   |   |   |   |   |   |   |   |
| Total                      |       | $                                 | 2,626      |                             | $          | 28 |   | $ | 366 |   | $ | 2,611 |   | $ | 17 |   | $ | 303 |   |

** **

A summary of relatedparty transactions for the three and nine months ended September 30, 2009and 2008 is summarized below:

 
| ** **                | ** ** | **Three Months Ended**      | ** ** | **Three Months Ended**      | ** ** |
|---------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                | ** ** | **September 30, 2009** | ** ** | **September 30, 2008** | ** ** |
| ** **                | ** ** | ** **                  | ** ** | **Interest**                | ** ** | ** ** | ** ** | **Interest** | ** ** |
| ** **                | ** ** | **Sales to**                | ** ** | **income from**             | ** ** | **Sales to** | ** ** | **income from** | ** ** |
| Perfoline                 |       | $                           | 3          |                        | $          | 12 |   | $ | 115 |   | $ | 11 |   |
| DYNAenergetics RUS        |       | 366                         |       | —                      |       | 1,008 |   | — |   |
| Minority Interest Partner |       | 301                         |       | —                      |       | 547 |   | — |   |
|                      |       |                        |       |                        |       |   |   |   |   |
| Total                     |       | $                           | 670        |                        | $          | 12 |   | $ | 1,670 |   | $ | 11 |   |

 
| ** **                | ** ** | **Nine Months Ended**       | ** ** | **Nine Months Ended**       | ** ** |
|---------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                | ** ** | **September 30, 2009** | ** ** | **September 30, 2008** | ** ** |
| ** **                | ** ** | ** **                  | ** ** | **Interest**                | ** ** | ** ** | ** ** | **Interest** | ** ** |
| ** **                | ** ** | **Sales to**                | ** ** | **income from**             | ** ** | **Sales to** | ** ** | **income from** | ** ** |
| Perfoline                 |       | $                           | 59         |                        | $          | 31 |   | $ | 162 |   | $ | 37 |   |
| DYNAenergetics RUS        |       | 1,100                       |       | —                      |       | 2,145 |   | — |   |
| Minority Interest Partner |       | 745                         |       | —                      |       | 1,531 |   | — |   |
|                      |       |                        |       |                        |       |   |   |   |   |
| Total                     |       | $                           | 1,904      |                        | $          | 31 |   | $ | 3,838 |   | $ | 37 |   |

 

**EarningsPer Share**

** **

**Unvestedawards of share-based payments with rights to receive dividends or dividendequivalents, such as our restricted stock awards (RSAs), are consideredparticipating securities for purposes of calculating earnings per share (“EPS”)and require the use of the two class method for calculating EPS.  Under this method a portion of net income isallocated to these participating securities and therefore is excluded from thecalculation of EPS allocated to common stock, as**

 

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**shown in the table below.  The Company was required to adopt this methodon January 1, 2009 retrospectively for periods prior to the adoption dateand as a result, all prior period earnings per share data presented herein havebeen adjusted to conform to these provisions. The Company’s adoption of this method resulted in a $.01 per sharereduction to the previously reported basic EPS and no change to the diluted EPSfor the three months ended September 30, 2008.  The adoption of this method resulted in a$.02 per share reduction to the previously reported basic EPS and diluted EPSfor the nine months ended September 30, 2008.**

** **

**Computationand reconciliation of earnings per common share are as follows:**

 
| ** **                                                | ** ** | **For the Three Months Ended** | ** ** | **For the Three Months Ended** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                | ** ** | **September 30, 2009**    | ** ** | **September 30, 2008**    | ** ** |
| ** **                                                | ** ** | **Income**                     | ** ** | **Shares**                     | ** ** | **EPS** | ** ** | **Income** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Basic  earnings per share:                                |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Net  income                                               |       | $                              | 1,096      |                           |       |   |   |   | $ | 7,223 |   |   |   |   |   |
| Less  income allocated to RSAs                            |       | 22                             |       |                           |       |   |   | 112 |   |   |   |   |   |
|                                                      |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Net  income allocated to common stock for EPS calculation |       | $                              | 1,074      |                           | 12,632,406 |   | $ | 0.09 |   | $ | 7,111 |   | 12,463,060 |   | $ | 0.57 |   |
|                                                      |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Adjust  shares for Dilutives:                             |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Stock-based  compensation plans                           |       |                           |       | 13,094                         |       |   |   |   |   | 93,260 |   |   |   |
|                                                      |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Diluted  earnings per share:                              |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Net  income                                               |       | $                              | 1,096      |                           |       |   |   |   | $ | 7,223 |   |   |   |   |   |
| Less  income allocated to RSAs                            |       | 22                             |       |                           |       |   |   | 112 |   |   |   |   |   |
|                                                      |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Net  income allocated to common stock for EPS calculation |       | $                              | 1,074      |                           | 12,645,500 |   | $ | 0.08 |   | $ | 7,111 |   | 12,556,320 |   | $ | 0.57 |   |

** **
| ** **                                                | ** ** | **For the Nine Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                                | ** ** | **September 30, 2009**   | ** ** | **September 30, 2008**   | ** ** |
| ** **                                                | ** ** | **Income**                    | ** ** | **Shares**                    | ** ** | **EPS** | ** ** | **Income** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Basic  earnings per share:                                |       |                          |       |                          |       |   |   |   |   |   |   |   |   |
| Net  income                                               |       | $                             | 7,527      |                          |       |   |   |   | $ | 18,683 |   |   |   |   |   |
| Less  income allocated to RSAs                            |       | 148                           |       |                          |       |   |   | 295 |   |   |   |   |   |
|                                                      |       |                          |       |                          |       |   |   |   |   |   |   |   |   |
| Net  income allocated to common stock for EPS calculation |       | $                             | 7,379      |                          | 12,597,023 |   | $ | 0.59 |   | $ | 18,388 |   | 12,426,369 |   | $ | 1.48 |   |
|                                                      |       |                          |       |                          |       |   |   |   |   |   |   |   |   |
| Adjust  shares for Dilutives:                             |       |                          |       |                          |       |   |   |   |   |   |   |   |   |
| Stock-based  compensation plans                           |       |                          |       | 24,947                        |       |   |   |   |   | 120,374 |   |   |   |
|                                                      |       |                          |       |                          |       |   |   |   |   |   |   |   |   |
| Diluted  earnings per share:                              |       |                          |       |                          |       |   |   |   |   |   |   |   |   |
| Net  income                                               |       | $                             | 7,527      |                          |       |   |   |   | $ | 18,683 |   |   |   |   |   |
| Less  income allocated to RSAs                            |       | 148                           |       |                          |       |   |   | 292 |   |   |   |   |   |
|                                                      |       |                          |       |                          |       |   |   |   |   |   |   |   |   |
| Net  income allocated to common stock for EPS calculation |       | $                             | 7,379      |                          | 12,621,970 |   | $ | 0.58 |   | $ | 18,391 |   | 12,546,743 |   | $ | 1.47 |   |

 

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** **

**RecentAccounting Pronouncements**

** **

**In December 2007, the Financial AccountingStandards Board (“FASB”) issued authoritative guidance on business combinationsand the accounting for noncontrolling interests.  This new guidance significantly changed theaccounting for and reporting of business combination transactions andnoncontrolling (minority) interests in consolidated financial statements on January 1,2009.  The adoption of this guidance in2009 did not have a significant impact on the Company’s results of operationsor financial position.**

** **

**In March 2008, the FASB issued authoritativeguidance on the disclosures about derivative instruments and hedging activities.  This guidance requires additional disclosuresrelated to the use of derivative instruments, the accounting for derivativesand how derivatives impact financial statements on January 1, 2009. The adoption of this guidance in 2009 did not have any impact on theCompany’s results of operations or financial position.**

** **

In April 2009, the FASB issuedauthoritative guidance requiring disclosures about the fair value of financialinstruments for interim financial statements of publicly traded companies.  This guidance became effective for interimreporting periods ending after June 15, 2009 and the adoption of it in the second quarter of 2009 did not have any impact on theCompany’s results of operations or financial position.

 

In May 2009, the FASB issued authoritativeguidance that provides general standards of accounting for and disclosure ofevents that occur after the balance sheet date but before financial statementsare issued or are available to be issued. Specifically, this standard setsforth the period after the balance sheet date during which management of areporting entity should evaluate events or transactions that may occur forpotential recognition or disclosure in the financial statements, thecircumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financial statements, and thedisclosures that an entity should make about events or transactions thatoccurred after the balance sheet date.  This guidance is effective for financialstatements issued for fiscal years and interim periods beginning after June 15,2009 and will be applied prospectively. The Company adopted this guidance in the periods ended June 30,2009 and has evaluated for subsequent events through October 30, 2009, theissuance date of the Company’s September 30, 2009 consolidated financialstatements.  Besides the amendment to ourcredit agreement and the acquisition of a Canadian-based LRI Oil Tools companydiscussed in Notes 6 and 9, respectively, no other recognized or non-recognizedsubsequent events were noted.

 

**3.      INVESTMENT IN JOINTVENTURES**

 

Operating results include the Company’sproportionate share of income from unconsolidated joint ventures, which areaccounted for under the equity method. These investments (all of which resulted from the acquisition ofDYNAenergetics and pertain to the Company’s Oilfield Products business segment)include the following: (1) 65.19% interest in Perfoline, which is aRussian manufacturer of perforating gun systems and (2) 55% interest inDYNAenergetics RUS which is a Russian trading company that sells the Company’soilfield products.  Due to certainnoncontrolling interest veto rights that allow the noncontrolling interestshareholders to participate in ordinary course of business decisions, thesejoint ventures have been accounted for under the equity method instead of beingconsolidated in these financial statements. Investments in these joint ventures totaled $1,182 and $970 as of September 30,2009 and December 31, 2008, respectively.

 

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Summarized unaudited financial information for thejoint ventures accounted for under the equity method as of September 30,2009 and December 31, 2008 and for the three and nine months ended September 30,2009 and 2008 is as follows:

 
| ** **                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Current assets               |       | $                      | 4,070      |                  | $          | 4,667 |   |
| Noncurrent assets            |       | 672                    |       | 714                   |       |
| Total assets                 |       | $                      | 4,742      |                  | $          | 5,381 |   |
|                         |       |                   |       |                  |       |
| Current liabilities          |       | $                      | 1,531      |                  | $          | 2,064 |   |
| Noncurrent liabilities       |       | 651                    |       | 830                   |       |
| Equity                       |       | 2,560                  |       | 2,487                 |       |
| Total liabilities and equity |       | $                      | 4,742      |                  | $          | 5,381 |   |

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                    | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net sales                                     |       | $                      | 1,645      |                   | $          | 1,875 |   | $ | 4,427 |   | $ | 6,600 |   |
| Operating income                              |       | $                      | 233        |                   | $          | 120 |   | $ | 596 |   | $ | 908 |   |
| Net income                                    |       | $                      | 168        |                   | $          | 60 |   | $ | 310 |   | $ | 595 |   |
| Equity in earnings (losses) of joint ventures |       | $                      | 91         |                   | $          | (19 | ) | $ | 170 |   | $ | 270 |   |

 

**4.      INVENTORY**

 

**Thecomponents of inventory are as follows at September 30, 2009 and December 31,2008:**

** **
| ** **      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|------------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Raw materials   |       | $                      | 10,671     |                  | $          | 11,610 |   |
| Work-in-process |       | 16,154                 |       | 18,950                |       |
| Finished goods  |       | 4,913                  |       | 3,903                 |       |
| Supplies        |       | 827                    |       | 837                   |       |
|            |       |                   |       |                  |       |
|            |       | $                      | 32,565     |                  | $          | 35,300 |   |

 

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**5.      PURCHASED INTANGIBLE ASSETS**

 

The following tablepresents details of our purchased intangible assets, other than goodwill, as ofSeptember 30, 2009:

 
| ** **               | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|--------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **               | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
| Core technology          |       | $          | 24,424     |             | $          | (2,290     | )          | $ | 22,134 |   |
| Customer relationships   |       | 32,955     |       | (6,866           | )          | 26,089     |       |
| Trademarks / Trade names |       | 2,660      |       | (746             | )          | 1,914      |       |
|                     |       |       |       |             |       |       |       |
| Total intangible assets  |       | $          | 60,039     |             | $          | (9,902     | )          | $ | 50,137 |   |

 

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

 
| ** **               | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|--------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **               | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
| Core technology          |       | $          | 23,596     |             | $          | (1,327     | )          | $ | 22,269 |   |
| Customer relationships   |       | 31,837     |       | (3,980           | )          | 27,857     |       |
| Trademarks / Trade names |       | 2,570      |       | (432             | )          | 2,138      |       |
|                     |       |       |       |             |       |       |       |
| Total intangible assets  |       | $          | 58,003     |             | $          | (5,739     | )          | $ | 52,264 |   |

 

Theincrease in the gross value of our purchased intangible assets from December 31,2008 to September 30, 2009 is due solely to the impact of foreign currencytranslation.  The increase in goodwillfrom $43,066 at December 31, 2008 to $44,045 at September 30, 2009 isalso due solely to the impact of foreign currency translation.

 

**6.      DEBT**

 

**Long-term debt consists of thefollowing at September 30, 2009 and December 31, 2008:**

** **
| ** **                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Syndicated credit agreement term loan      |       | $                      | 37,756     |                  | $          | 40,500 |   |
| Syndicated credit agreement Euro term loan |       | 17,140                 |       | 17,763                |       |
| Nord LB 3,000 Euro term loan               |       | 1,751                  |       | 2,326                 |       |
| Nord LB 500 Euro term loan                 |       | —                 |       | 39                    |       |
|                                       |       | 56,647                 |       | 60,628                |       |
| Less current maturities                    |       | (10,690                | )          | (14,450               | )          |
|                                       |       |                   |       |                  |       |
| Long-term debt                             |       | $                      | 45,957     |                  | $          | 46,178 |   |

** **

LoanCovenants and Restrictions

 

The Company’s existing loan agreements includevarious covenants and restrictions, certain of which relate to the incurrenceof additional indebtedness; mortgaging, pledging or disposition of 

 

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major assets; limits on capital expenditures; andmaintenance of specified financial ratios. As of September 30, 2009, the Company was in compliance with allfinancial covenants and other provisions of its debt agreements.

 

On October 21, 2009, the Company’s syndicatedcredit agreement (“credit facility”) was amended, effective September 30,2009, to revise the leverage ratios and fixed charge coverage ratios that theCompany is required to satisfy on a quarterly basis throughout the term of thecredit facility, which expires on November 16, 2012.  These revised ratios will ease the Company’sability to comply with certain covenants of the credit agreement. The pricinggrid applicable to drawn and undrawn amounts under the credit facility was alsoamended and will increase our going forward effective interest rate onoutstanding borrowings by 1.5% per annum.

 

SwapAgreement

 

On November 17, 2008, the Company enteredinto a two-year interest rate swap agreement with an initial notional amount of$40,500 (decreasing to $33,750 in November 2009) that effectivelyconverted the LIBOR based variable rate US borrowings under the syndicatedcredit agreement to a fixed rate of 4.87% (4.62% effective May 15, 2009due to an improvement in the Company’s leverage ratio).  The Company had designated the swap agreementas an effective cash flow hedge with matched terms and, as a result,changes in the fair value of the swap agreement were recorded in othercomprehensive income with the offset as a swap agreement asset or liability. During the quarter ended June 30, 2009, the Company made anunanticipated repayment of $2,744 on its variable rate US borrowings andelected to de-designate this portion of the cash flow hedge.  Settlements and changes in the fair value relatedto the de-designated portion of the cash flow hedge are recorded as realizedand unrealized gains/losses on swap agreement within other income in theCompany’s statement of operations.   TheCompany recorded an immaterial loss of less than $100 during the quarter ended June 30,2009 and less than $10 during the quarter ended September 30, 2009.

 

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

 
| ** **                       | ** ** | **September 30, 2009**  | ** ** | **December 31, 2008** | ** ** |
|----------------------------------|------------|------------------------------|------------|----------------------------|------------|
| **Interest rate swap liability** | ** ** | **Balance sheet location**   | ** ** | **Fair value**             | ** ** | **Balance sheet location** | ** ** | **Fair value** | ** ** |
|                             |       |                         |       |                       |       |   |   |   |   |
| Current  portion                 |       | Accrued expenses             |       | $                          | 894        |   | Accrued expenses |   | $ | 759 |   |
| Long-term  portion               |       | Other long-term  liabilities |       | 136                        |       | Other long-term  liabilities |   | 647 |   |
|                             |       |                         |       | $                          | 1,030      |   |   |   | $ | 1,406 |   |

** **

**7.      BUSINESS SEGMENTS**

 

TheCompany is organized in the following three segments:  Explosive Metalworking, Oilfield Products,and AMK Welding. The Explosive Metalworking segment uses explosives to performmetal cladding and shock synthesis of industrial diamonds. The most significantproducts of this group are clad metal plates which are used by customers in thefabrication of pressure vessels, heat exchangers and other equipment forvarious industries, including upstream oil and gas, oil refinery,petrochemicals, alternative energy, hydrometallurgy, power generation,industrial refrigeration, and similar industries and internally to producetransition joints for use in the aluminum production and shipbuildingindustries.  The Oilfield Products segmentmanufactures, markets and sells oilfield perforating equipment and explosives,including detonating cords, detonators, bi-

 

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directionalboosters and shaped charges, and seismic related explosives andaccessories.  AMK Welding utilizes anumber of welding technologies to weld components for manufacturers of jetengine and ground-based turbines.

 

The accounting policies of all the segments are the same as thosedescribed in the summary of significant accounting policies.  The Company’s reportable segments areseparately managed strategic business units that offer different products andservices. Each segment’s products are marketed to different customer types andrequire different manufacturing processes and technologies.

 

Segment information ispresented for the three and nine months ended September 30, 2009 and 2008as follows:

 
| ** **                                           | ** ** | **Explosive**    | ** ** | ** **   | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------------|------------|--------------|------------|-------------|------------|------------|------------|
| ** **                                           | ** ** | **Metalworking** | ** ** | **Oilfield** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Group**        | ** ** | **Products** | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For  the three months ended September 30, 2009: |       |             |       |         |       |        |       |       |       |
| Net  sales                                           |       | $                | 27,327     |         | $          | 5,123       |       | $          | 2,240      |   | $ | 34,690 |   |
| Depreciation  and amortization                       |       | $                | 1,527      |         | $          | 912         |       | $          | 114        |   | $ | 2,553 |   |
| Income  from operations                              |       | $                | 3,370      |         | $          | (414        | )          | $          | 441        |   | $ | 3,397 |   |
| Equity  in earnings of joint ventures                |       | $                | —     |         | $          | 91          |       | $          | —     |   | 91 |   |
| Unallocated  amounts:                                |       |             |       |         |       |        |       |       |       |
| Stock-based  compensation                            |       |             |       |         |       |        |       | (897       | )          |
| Other  expense                                       |       |             |       |         |       |        |       | (633       | )          |
| Interest  expense                                    |       |             |       |         |       |        |       | (752       | )          |
| Interest  income                                     |       |             |       |         |       |        |       | 41         |       |
| Consolidated  income before income taxes             |       |             |       |         |       |        |       | $          | 1,247      |   |

 
| ** **                                           | ** ** | **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 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      |   |

 

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| ** **                                          | ** ** | **Explosive**    | ** ** | ** **   | ** ** | ** **  | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|------------------|------------|--------------|------------|-------------|------------|------------|------------|
| ** **                                          | ** ** | **Metalworking** | ** ** | **Oilfield** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **Group**        | ** ** | **Products** | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For  the nine months ended September 30, 2009: |       |             |       |         |       |        |       |       |       |
| Net  sales                                          |       | $                | 102,403    |         | $          | 13,171      |       | $          | 6,694      |   | $ | 122,268 |   |
| Depreciation  and amortization                      |       | $                | 4,452      |         | $          | 2,616       |       | $          | 342        |   | $ | 7,410 |   |
| Income  from operations                             |       | $                | 17,381     |         | $          | (2,013      | )          | $          | 1,122      |   | $ | 16,490 |   |
| Equity  in earnings of joint ventures               |       | $                | —     |         | $          | 170         |       | $          | —     |   | 170 |   |
| Unallocated  amounts:                               |       |             |       |         |       |        |       |       |       |
| Stock-based  compensation                           |       |             |       |         |       |        |       | (2,657     | )          |
| Other  expense                                      |       |             |       |         |       |        |       | (560       | )          |
| Interest  expense                                   |       |             |       |         |       |        |       | (2,521     | )          |
| Interest  income                                    |       |             |       |         |       |        |       | 145        |       |
| Consolidated  income before income taxes            |       |             |       |         |       |        |       | $          | 11,067     |   |

 
| ** **                                          | ** ** | **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     |   |

 

**During the three months ended September 30,2009, sales to one customer represented approximately $4,033 (11.6%) of totalnet sales.  During the nine months ended September 30,2009, no sales to any one customer accounted for more than 10% of totalsales.  During the three and nine monthsended September 30, 2008, no sales to any one customer accounted for morethan 10% of total net sales.**

 

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**8.      COMPREHENSIVE INCOME**

 

**The Company’s comprehensive incomefor the three and nine months ended September 30, 2009 and 2008 was asfollows:**

** **
| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                           | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net income for the period                            |       | $                      | 1,096      |                   | $          | 7,223 |   | $ | 7,527 |   | $ | 18,683 |   |
| Interest rate swap valuation adjustment, net of  tax |       | 104                    |       | 167                    |       | 301 |   | 77 |   |
| Foreign currency translation adjustment              |       | 3,942                  |       | (9,117                 | )          | 3,747 |   | (2,010 | ) |
| Comprehensive income                                 |       | $                      | 5,142      |                   | $          | (1,727 | ) | $ | 11,575 |   | $ | 16,750 |   |

** **

Other cumulativecomprehensive income (loss) as of September 30, 2009 and December 31,2008 consisted of the following:

 
| ** **                                                                          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                          | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Currency translation adjustment                                                     |       | $                      | 2,404      |                  | $          | (1,343 | ) |
| Interest rate swap valuation adjustment, net of  tax of $335 and $520, respectively |       | (585                   | )          | (886                  | )          |
|                                                                                |       | $                      | 1,819      |                  | $          | (2,229 | ) |

 

**9.      SUBSEQUENT EVENT**

 

OnOctober 1, 2009, the Company acquired all of the stock of Alberta, Canadabased LRI Oil Tools Inc. (“LRI”).  Thepurchase price was comprised of cash of $500 Canadian dollars (“CAD”), 9,584shares of the Company’s restricted common stock (valued at approximately $200CAD) and the assumption of approximately $8,400 CAD of LRI’s liabilities.  Immediately following the closing of the transaction,the Company repaid $1,200 CAD of loans payable to the former shareholders ofLRI.  These loans were included in thedebt assumed by the Company.

 

LRIproduces and distributes perforating equipment for use by the oil and gasexploration and production industry.  Thebusiness has had a long-term strategic relationship with the Company’s OilfieldProducts segment, and has served for several years as its sole Canadiandistributor.

 

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

 

The following discussion should be read in conjunction with our historicalconsolidated financial statements and notes, as well as the selected historicalconsolidated financial data that are included in the Company’s Annual Reportfiled on Form 10-K for the year ended December 31, 2008.

 

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

 

**Executive Overview**

 

Our business isorganized into three segments:  ExplosiveMetalworking, Oilfield Products, and AMK Welding.  For the nine months ended September 30,2009, Explosive Metalworking accounted for 84% of our net sales and 105% of ourincome from continuing operations before consideration of stock-basedcompensation expense, which is not allocated to our business segments.  Our Oilfield Products and AMK Weldingsegments accounted for 11% and 5%, respectively, of our year-to-date 2009 netsales.

 

Our net sales for thenine months ended September 30, 2009 decreased by $51,689 (29.7%) comparedto the same period of 2008, reflecting year-to-year net sales decreases of$44,941 (30.5%), $5,957 (31.1%), and $791 (10.6%) for our ExplosiveMetalworking, Oilfield Products, and AMK Welding segments, respectively.  The sales decrease of approximately $51.7million includes a sales volume decrease of approximately $42.8 million and anunfavorable foreign exchange translation adjustment of approximately $8.9million on our European sales as a result of the increased value of the U.S.dollar against the Euro.  Income fromoperations decreased 52.1% to $13,833 in the nine months ended September 30,2009 from $28,901 in the same period of 2008. This $15,068 decrease reflects declines in Explosive Metalworking’s,Oilfield Products’, and AMK Welding’s operating income of $11,012, $2,788, and$974, respectively, and a $294 increase in stock-based compensationexpense.  Our net income decreased by59.7% to $7,527 for the nine months ended September 30, 2009 from $18,683for the same period of 2008.

 

*Impact of Current EconomicSituation on the Company*

 

TheCompany was only minimally impacted in 2008 by the global economicslowdown.    However, during the firstnine months of 2009, we have seen a significant slowdown in ExplosiveMetalworking sales to some of the markets we serve.  The explosion-weld clad plate market isdependent upon sales of products for use by customers in a number of heavyindustries, including oil and gas, alternative energy, chemicals andpetrochemicals, hydrometallurgy, aluminum production, shipbuilding, powergeneration, and industrial refrigeration. These industries tend to be cyclical in nature and the current worldwideeconomic downturn has affected many of these markets.    Despite the slowdown we have already seenin certain sectors, including chemical, petrochemical and hydrometallurgy,quoting activity in other end markets remains healthy and we continue to trackan extensive list of large infrastructure projects. While timing of new orderinflow remains difficult to predict, we believe that our Explosive Metalworkingsegment is well-positioned to benefit as global economic conditions improve.

 

Asa result of the 29.7% decline in our net sales during the nine months ended September 30,2009 and the decrease in our Explosive Metalworking backlog from $97,247 at December 31,2008 to $62,912 at September 30, 2009, we now expect our consolidated netsales in 2009 to decrease approximately 29% to 31% from the amount we achievedin 2008.  In light of the 

 

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slowdown in orderinflow that we are experiencing, we are continuing to carefully manageexpenses.  We generated cash flow fromoperations of $23,414 during the nine months ended September 30, 2009 andexpect to generate additional positive cash flow from operations over the nextseveral quarters.

 

*Net sales*

 

ExplosiveMetalworking’s revenues are generated principally from sales of clad metalplates and sales of transition joints, which are made from clad plates, tocustomers that fabricate industrial equipment for various industries, includingoil and gas, petrochemicals, alternative energy, hydrometallurgy, aluminumproduction, shipbuilding, power generation, industrial refrigeration, andsimilar industries.  While a largeportion of the demand for our clad metal products is driven by new plantconstruction and large plant expansion projects, maintenance and retrofitprojects at existing chemical processing, petrochemical processing, oilrefining, and aluminum smelting facilities also account for a significantportion of total demand.

 

OilfieldProducts’ revenues are generated principally from sales of shaped charges,detonators and detonating cord, 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 for customersprimarily involved in the power generation industry and aircraft enginemarkets.

 

*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 increased to 32% for the nine monthsended September 30, 2009 from 25.9% for the same period of 2008.  Going forward, based upon existing taxregulations and current federal, state and foreign statutory tax rates, weexpect our full year 2009 effective tax rate on our projected consolidatedpre-tax income to range between 32% and 33%.

 

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*Backlog*

 

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

 

Ourbacklog with respect to the Explosive Metalworking segment decreased to $62,912at September 30, 2009 from $97,247 at December 31, 2008 but increasedslightly from the $57,090 in backlog that we reported at June 30,2009.  As a result of the lower salesthat we reported during the first nine months of 2009 and shipments that weexpect to make in the fourth quarter from our September 30 backlog, we arenow forecasting that our consolidated net sales for fiscal 2009 will declineapproximately 29% to 31% from those reported for fiscal 2008.

 

**Three and Nine Months Ended September 30, 2009Compared to Three and Nine Months Ended September 30, 2008**

 

*Net sales*

 
| ** ** | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                      | 34,690     |       | $          | 52,380         |       | $ | (17,690 | ) | (33.8 | )% |
|            |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** ** | ** ** | **Nine Months Ended**  | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                      | 122,268    |       | $          | 173,957        |       | $ | (51,689 | ) | (29.7 | )% |
|            |            |                        |            |            |            |                |            |  |  |  |  |  |

 

Net sales for the thirdquarter of 2009 decreased 33.8% to $34,690 from $52,380 for the third quarterof 2008.  Explosive Metalworking salesdecreased 36.0% to $27,327 for the three months ended September 30, 2009(79% of total sales) from $42,703 for the same period of 2008 (81% of totalsales).  The decrease in ExplosiveMetalworking sales reflects a business slowdown in several of the industriesthat this business segment serves and includes approximately $1.0 million ofunfavorable foreign exchange translation adjustments.

 

Oilfield Productscontributed $5,123 to third quarter 2009 sales (15% of total sales), which representsa 24.2% decrease from sales of $6,756 for the third quarter of 2008 (13% oftotal sales).  The $1,633 decline insales reflects a significant volume decrease as well as approximately $300,000in unfavorable foreign exchange adjustments.

 

AMKWelding contributed $2,240 to third quarter 2009 sales (6% of total sales),which represents a 23.3% decrease from sales of $2,921 for the third quarter of2008 (6% of total sales).

 

Net sales for the ninemonths ended September 30, 2009 decreased 29.7% to $122,268 from $173,957for the same period of 2008.  ExplosiveMetalworking sales decreased 30.5% to $102,403 for the nine months ended September 30,2009 (84% of total sales) from $147,344 for the same period of 2008 (85% oftotal sales).  The decrease in ExplosiveMetalworking sales reflects a business slowdown in several of the industriesthat this business segment serves and includes approximately $7.0 million ofunfavorable foreign exchange translation adjustments.

 

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Oilfield Productscontributed $13,171 to the nine months ended September 30, 2009 sales (11%of total sales), which represents a 31.1% decrease from sales of $19,128 forthe same period of 2008 (11% of total sales). The $5,957 decline in sales reflects both a volume decrease and anegative impact of approximately $1.9 million from unfavorable foreign exchangeadjustments.

 

AMKWelding contributed $6,694 to the nine month ended September 30, 2009sales (5% of total sales), which represents a 10.6% decrease from sales of$7,485 for the same period of 2008 (4% of total sales).

 

*Gross profit*

* *
| ** **                            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | **September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit                          |       | $                      | 8,754      |       | $          | 17,025         |       | $ | (8,271 | ) | (48.6 | )% |
| Consolidated gross profit margin rate |       | 25.2                   | %          | 32.5       | %          |           |       |   |   |
|                                       |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** **                            | ** ** | **Nine Months Ended**  | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | **September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit                          |       | $                      | 33,236     |       | $          | 53,786         |       | $ | (20,550 | ) | (38.2 | )% |
| Consolidated gross profit margin rate |       | 27.2                   | %          | 30.9       | %          |           |       |   |   |
|                                       |            |                        |            |            |            |                |            |  |  |  |  |  |

 

Grossprofit decreased by 48.6% to $8,754 for the three months ended September 30,2009 from $17,025 for the three months ended September 30, 2008. Our thirdquarter 2009 consolidated gross profit margin rate decreased to 25.2% from32.5% for the third quarter of 2008.  Forthe nine months ended September 30, 2009, gross profit decreased to$33,236 from $53,786 for the same period of 2008.  Our year to date consolidated gross profitmargin rate decreased to 27.2% from 30.9% for the same period of 2008.

 

Thegross profit margin rate for Explosive Metalworking decreased from 31.9% forthe third quarter of 2008 to 25.8% for the third quarter of 2009.  The decreased third quarter 2009 gross profitmargin rate for Explosive Metalworking relates entirely to our Europeancladding operations where the gross margin rate for the quarter was 59% lowerthan the gross margin rate reported for the third quarter of 2008 on a year toyear sales decline of 53%.  Our U.S. claddivision reported only a slightly lower gross margin rate (32% vs. 33%) for thethird quarter of 2009 versus the comparable period of 2008 despite a 24% dropin sales.  Our year to date gross profitmargin rate for Explosive Metalworking decreased to 28.3% from 30.6%.  Historically, gross margins for our Europeanexplosion welding divisions have been lower than those reported by our U.S.division due to less efficient fixed manufacturing cost structures associatedwith our smaller European facilities.  Weare taking steps to reduce fixed manufacturing overhead costs at all of ourfacilities but the benefit of these actions will not be fully reflected in ourgross margin performance until 2010 and will likely be muted by the expectedcontinuation of a very competitive pricing environment.  As has been the case historically, we expectto see continued fluctuations in Explosive Metalworking’s quarterly grossmargin rates in the fourth quarter of 2009 and throughout 2010 that result fromanticipated fluctuations in quarterly sales volume and changes in product mix.Based upon the volume and mix of product that we expect to ship in the fourthquarter of 2009, we currently expect fourth quarter gross margins for ExplosiveMetalworking to be in a range of 23% to 25% and full year gross margins to bein a range of 26% to 27%.

 

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OilfieldProducts reported a gross profit margin rate of 22.4% for the third quarter of2009 compared to a gross profit margin rate of 35.6% for the third quarter of2008.  Oilfield Products reported a grossprofit margin rate of 21.7% for the nine months ended September 30, 2009compared to a gross profit margin rate of 32.4% for the same period of 2008.The large decrease in Oilfield Products’ third quarter and year to date grossmargin relate principally to third quarter and year to date sales declines of24.2% and 31.1%, respectively, and resultant less favorable absorption of fixedmanufacturing overhead expenses but also include the impact of non-recurringcosts associated with the relocation of certain production activities duringthe second quarter and changes in product/customer mix. Based upon the expectedimprovement in this segment’s sequential quarterly sales and gross marginperformance during the fourth quarter of 2009, we expect Oilfield Products toreport a gross margin in the range of 23% to 25% for the full year 2009.

 

Thegross profit margin rate for AMK Welding decreased to 29.7% for the thirdquarter of 2009 from 37.9% for the third quarter of 2008. The gross profitmargin rate for AMK Welding decreased to 26.5% for the nine months ended September 30,2009 from 36.3% for the same period of 2008. The decrease in AMK Welding’s gross margin relates principally to anincrease in manufacturing overhead associated with engineering and productdevelopment expenses as AMK seeks to expand both its service offerings andcustomer base.  We expect AMK Welding’sfourth quarter sales and gross margins to be comparable to those reported inthe third quarter of 2009.

 

*Generaland administrative expenses*

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                                 | ** ** | **September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                 | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General & administrative expenses |       | $                      | 2,749      |       | $          | 3,679          |       | $ | (930 | ) | (25.3 | )% |
| Percentage of net sales                    |       | 7.9                    | %          | 7.0        | %          |           |       |   |   |
|                                            |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** **                                 | ** ** | **Nine Months Ended**  | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                                 | ** ** | **September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                 | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General & administrative expenses |       | $                      | 9,318      |       | $          | 10,612         |       | $ | (1,294 | ) | (12.2 | )% |
| Percentage of net sales                    |       | 7.6                    | %          | 6.1        | %          |           |       |   |   |
|                                            |            |                        |            |            |            |                |            |  |  |  |  |  |

 

General andadministrative expenses decreased by $930, or 25.3%, to $2,749 in the thirdquarter of 2009 from $3,679 in the third quarter of 2008.  This decrease includes a $199 decrease inaccrued incentive compensation, a decrease of $331 in legal, audit andconsulting expenses, and a net decrease of $399 in all other expensescategories that reflects the impact of tight controls over discretionaryspending as well as certain non-recurring professional service fees that weincurred in 2008 relating to the integration of DYNAenergetics. The $930decrease in total general and administrative expenses also reflects thepositive effect of $70 in favorable foreign exchange translationadjustments.  As a percentage of netsales, general and administrative expenses increased to 7.9% in the thirdquarter of 2009 from 7.0% in the third quarter of 2008.

 

General andadministrative expenses for the nine months ended September 30, 2009totaled $9,318 compared to $10,612 for the same period of 2008. General andadministrative expenses of our European divisions decreased by $687, or 15.5%,as a result of a 5.2% decrease in net expenses as measured in Euros and $463 infavorable foreign exchange translation adjustments.  Our U.S. general and administrative expensesdecreased by $607 or 9.8%. The U.S. decrease reflects a $367 decrease inaccrued incentive compensation and a $307 decrease in legal, audit and 

 

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consulting expenses.  As a percentage of net sales, general andadministrative expenses increased to 7.6% in the nine months ended September 30,2009 from 6.1% in the same period of 2008.

 

*Sellingexpenses*

 
| ** **              | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **              | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses        |       | $                      | 2,212      |       | $          | 2,611          |       | $ | (399 | ) | (15.3 | )% |
| Percentage of net sales |       | 6.4                    | %          | 5.0        | %          |           |       |   |   |
|                         |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** **              | ** ** | **Nine Months Ended**  | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **              | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses        |       | $                      | 6,376      |       | $          | 8,085          |       | $ | (1,709 | ) | (21.1 | )% |
| Percentage of net sales |       | 5.2                    | %          | 4.6        | %          |           |       |   |   |
|                         |            |                        |            |            |            |                |            |  |  |  |  |  |

 

Sellingexpenses, which include sales commissions of $237 in 2009 and $157 in 2008,decreased by 15.3% to $2,212 in the third quarter of 2009 from $2,611 in thethird quarter of 2008.  The $399 decreasein our consolidated selling expenses includes decreased selling expenses of$219 and $180 at our European and U.S. divisions, respectively.  The decrease in European selling expensesrelates principally to staff reductions within our European explosion weldingdivisions and also includes $81 of favorable foreign exchange translation adjustments.The $180 decrease in our U.S. selling expenses reflects decreased salescommissions of $36, a $68 decrease in bad debt expense, a $68 decrease inaccrued incentive compensation and a net decrease of $8 in other spendingcategories. As a percentage of net sales, selling expenses increased to 6.4% inthe third quarter of 2009 from 5.0% in the third quarter of 2008.

 

Selling expenses decreasedby 21.1% to $6,376 in the nine months ended September 30, 2009 from $8,085in the same period of 2008.  Theseselling expenses include sales commissions of $1,045 and $1,209 for 2009 and2008, respectively.  The $1,709decrease in our consolidated selling expenses includes decreased year to dateselling expenses of $1,320 and $389 at our European and U.S. divisions,respectively. The decrease in European selling expenses relates principally tostaff reductions within our European explosion welding divisions andnon-recurring expenses in the first quarter of 2008 relating to the terminationof contracts with former sales agents and also includes $478 of favorableforeign exchange translation adjustments. The $389 decrease in our U.S. selling expenses reflects decreasedsales commissions of $103, a $120 decrease in bad debt expense, a $166 decreasein accrued incentive compensation, a $109 decrease in travel expenses and a$141 reduction in business development, advertising and promotional expensesthat were partially offset by a $100 increase in salary expense, a $68 increasein stock-based compensation and a net increase of $82 in other spending categories.  As apercentage of net sales, selling expenses increased to 5.2% in the nine monthsended September 30, 2009 from 4.6% in the same period of 2008.

 

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*Amortization expenses*

 
| ** **                                          | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                                          | ** ** | **September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                          | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Amortization expense of purchased intangible assets |       | $                      | 1,293      |       | $          | 1,363          |       | $ | (70 | ) | (5.1 | )% |
| Percentage of net sales                             |       | 3.7                    | %          | 2.6        | %          |           |       |   |   |
|                                                     |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** **                                           | ** ** | **Nine Months Ended**  | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------------------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                                           | ** ** | **September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                           | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Amortization expense of purchased intangible  assets |       | $                      | 3,709      |       | $          | 6,188          |       | $ | (2,479 | ) | (40.1 | )% |
| Percentage of net sales                              |       | 3.0                    | %          | 3.6        | %          |           |       |   |   |
|                                                      |            |                        |            |            |            |                |            |  |  |  |  |  |

 

Amortization expense relates entirely to the amortization of valuesassigned to intangible assets in connection with the November 15, 2007acquisition of DYNAenergetics. Amortization expense for the three months ended September 30, 2009includes $897, $299 and $97 relating to values assigned to customerrelationships, core technology and trademarks/trade names, respectively.  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, 2009includes $2,572, $858 and $279 relating to values assigned to customerrelationships, core technology and trademarks/trade names, respectively.  Amortization expense for the nine monthsended September 30, 2008 includes $2,055, $2,866, $956 and $311 relatingto values assigned to order backlog, customer relationships, core technologyand trademarks/trade names, respectively. The value assigned to order backlog was fully amortized during the firstsix months of 2008.  Amortization expensevariances for the other categories of purchased intangible assets relate toforeign exchange translation adjustments. Amortization expense for 2009 (as measured in Euros) is expected toapproximate €905 for the remaining quarter of 2009 and is expected to remain atthis level for most of calendar year 2010.

 

*Operating income*

 
| ** **       | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **       | ** ** | **September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **       | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Operating income |       | $                      | 2,500      |       | $          | 9,372          |       | $ | (6,872 | ) | (73.3 | )% |
|                  |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** **       | ** ** | **Nine Months Ended**  | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **       | ** ** | **September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **       | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Operating income |       | $                      | 13,833     |       | $          | 28,901         |       | $ | (15,068 | ) | (52.1 | )% |
|                  |            |                        |            |            |            |                |            |  |  |  |  |  |

 

Income from operations (“operatingincome”) decreased by 73.3% to $2,500 in the third quarter of 2009 from $9,372in the third quarter of 2008.  For thenine months ended September 30, 2009 operating income decreased by 52.1%to $13,833 from $28,901 for the same period of 2008.

 

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Explosive Metalworkingreported operating income of $3,370 in the third quarter of 2009 as compared to$8,593 in the third quarter of 2008. This 60.8% decrease in Explosive Metalworking operating income islargely attributable to the 36% decrease in net sales discussed above.  Explosive Metalworking reported operatingincome of $17,381 in the nine months ended September 30, 2009 as comparedto $28,393 in the same period of 2008. This 38.8% decrease in Explosive Metalworking operating income islargely attributable to the 30.5% decrease in net sales discussed above.

 

Oilfield Productsreported an operating loss of $414 for the third quarter of 2009 as compared tooperating income of $725 for the third quarter of 2008.  For the nine months ended September 30,2009, Oilfield Products reported an operating loss of $2,013 as compared tooperating income of $775 for the same period of 2008.

 

AMK Welding reportedoperating income of $441 for the three months ended September 30, 2009 ascompared to $874 for the same period of 2008. AMK Welding reported operating income of $1,122 for the nine monthsended September 30, 2009 as compared to $2,096 for the same period of2008.

 

Operating income for thethree and nine months ended September 30, 2009 includes $897 and $2,657,respectively, of stock-based compensation compared to stock-based compensationexpense for the three and nine months ended September 30, 2008 of $820 and$2,363, respectively.  This expense isnot allocated to our business segments and thus is not included in the abovefirst quarter operating income or loss totals for Explosive Metalworking,Oilfield Products and AMK Welding.

 

*Other income (expense), net*

* *
| ** **                  | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                  | ** ** | **September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                  | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Other income (expense), net |       | $                      | (633       | )          | $          | (268           | )          | $ | (365 | ) | 136.2 | % |
|                             |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** **                  | ** ** | **Nine Months Ended**  | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                  | ** ** | **September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                  | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Other income (expense), net |       | $                      | (560       | )          | $          | (227           | )          | $ | (333 | ) | 146.7 | % |
|                             |            |                        |            |            |            |                |            |  |  |  |  |  |

 

Net other expense for the three months ended September 30, 2009was $633 compared to net other expense of $268 for the same period of2008.  For year to date 2009, we recordednet other expense of $560 compared to net other expense of $227 for the sameperiod of 2008. The large increase in net other expense for the three and ninemonth periods relates principally to realized and unrealized foreign exchangelosses recognized in the third quarter of 2009 by consolidated subsidiariesthat prepare their financial statements in functional currencies other than theU.S. dollar. The foreign exchange losses recorded by our Swedish, German andKazakhstan subsidiaries during the third quarter reflect the weakening of the Euroagainst the Swedish Krona, the weakening of the U.S. Dollar against the Euroand weakening of the Kazakhstan Tenge against the Euro, respectively.

 

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*Interest income (expense), net*

* *
| ** **                     | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                     | ** ** | **September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                     | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income (expense), net |       | $                      | (711       | )          | $          | (1,316         | )          | $ | 605 |   | (46.0 | )% |
|                                |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** **                     | ** ** | **Nine Months Ended**  | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                     | ** ** | **September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                     | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income (expense), net |       | $                      | (2,376     | )          | $          | (3,726         | )          | $ | 1,350 |   | (36.2 | )% |
|                                |            |                        |            |            |            |                |            |  |  |  |  |  |

 

We recordednet interest expense of $711 in the three months ended September 30, 2009compared to net interest expense of $1,316 in the same time period of2008.  We recorded net interest expenseof $2,376 in the nine months ended September 30, 2009 compared to netinterest expense of $3,726 in the same period of 2008.  This decrease in net interest expensereflects term debt reductions and lower interest rates.

 

*Income tax provision*

 
| ** **           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **           | ** ** | **September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **           | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax provision |       | $                      | 151        |       | $          | 546            |       | $ | (395 | ) | (72.3 | )% |
| Effective tax rate   |       | 12.1                   | %          | 7.0        | %          |           |       |   |   |
|                      |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** **           | ** ** | **Nine Months Ended**  | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **           | ** ** | **September 30,** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **           | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax provision |       | $                      | 3,540      |       | $          | 6,535          |       | $ | (2,995 | ) | (45.8 | )% |
| Effective tax rate   |       | 32.0                   | %          | 25.9       | %          |           |       |   |   |
|                      |            |                        |            |            |            |                |            |  |  |  |  |  |

 

We recorded an income tax provision of $151 in the third quarter of 2009compared to $546 in the third quarter of 2008. The effective tax rate increased to 12.1% in the third quarter of 2009from 7.0% in the third quarter of 2008. The income tax provisions for the three months ended September 30,2009 and 2008 include $1,079 and $83, respectively, related to U.S. taxes, withthe remainder relating to foreign taxes and foreign tax benefits associatedwith the operations of Nobelclad and its Swedish subsidiary, Nitro Metall, aswell as the DYNAenergetics and Dynaplat divisions and related holding companiesin Germany and Luxembourg.

 

The third quarter 2009 effective tax rate of 12.1% represents asignificant deviation from the expected full year 2009 effective tax rate of34% to 35% that was disclosed at the end of the second quarter.  The deviation arose primarily fromadjustments that were identified during the third quarter 2009 preparation andfiling of our 2008 income tax returns and from a more tax-favorable blend of2009 pre-tax income expected in foreign jurisdictions relative to that expectedin the U.S.  The “book-to-return”adjustments favorably impacted the third quarter tax provision by approximately$200 and related primarily to federal and state tax credits and changes inGerman law on interest expense. The third quarter 2008 effective tax rate of7.0% represented a 

 

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significant deviation from the then expected full year 2008 effectivetax rate of 32% to 33% that was disclosed at the end of the second quarter of2008.  The deviation arose primarily fromthe completion during the third quarter of an Internal Revenue Serviceexamination and from adjustments that were identified during the third quarter2008 preparation and filing of our 2007 federal and state tax returns.  The closure of the Internal Revenue Serviceexamination enabled the Company to record previously unrecognized tax benefitsof approximately $300.  The “book-to-return”adjustments favorably impacted the third quarter tax provision by approximately$1,100 and related primarily to apportionment factors utilized to compute stateincome taxes.  As a result of these thirdquarter tax provision adjustments, we then expected our full year 2008 blendedeffective tax rate on our consolidated pre-tax income to approximate 27%.  Our blended effective tax rate for 2009 isexpected to increase to a range from 32% to 33%.

 

For the nine months ended September 30, 2009, we recorded anincome tax provision of $3,540 compared to $6,535 in the same period of2008.  The effective tax rate increasedto 32.0% in the nine months ended September 30, 2009 from 25.9% in thesame period of 2008.  The income taxprovisions for the nine months ended September 30, 2009 and 2008, include$4,250 and $5,643, respectively, related to U.S. taxes, with the remainderrelating to foreign taxes and foreign tax benefits associated with theoperations of Nobelclad and its Swedish subsidiary, Nitro Metall, as well asthe DYNAenergetics and Dynaplat divisions and related holding companies inGermany and Luxembourg.

 

# **Liquidity and Capital Resources**

# ** **

**We havehistorically financed our operations from a combination of internally generatedcash flow, revolving credit borrowings, various long-term debt arrangements,and the issuance of common stock.  Inconnection with the acquisition of DYNAenergetics, we entered into a five-yearsyndicated credit agreement.  The creditagreement, which provided term loans of $45,000 and 14,000 Euros and revolvingcredit loan availability of $25,000 and 7,000 Euros, is through a syndicate ofseven banks.  On October 21, 2009,the credit agreement was amended to revise the leverage ratios and fixed chargecoverage ratios that we are required to satisfy on a quarterly basis throughoutthe term of the credit facility, which expires on November 16, 2012. **These revised ratios will ease the Company’s ability to comply withcertain covenants of the credit agreement. The pricing grid applicable to drawn and undrawn amountsunder the credit facility was also amended and will increase our going forwardeffective interest rate on outstanding borrowings by 1.5% per annum.

** **

**As of September 30,2009, term loans of $37,756 and 11,746 Euros ($17,140) were outstanding underthe credit facility and an additional $1,751 was outstanding under term loanobligations of DYNAenergetics.  We had nooutstanding revolving credit borrowings under our syndicated credit agreementor under our separate DYNAenergetics’ line of credit agreements.  While we had approximately $41,600 ofunutilized revolving credit loan capacity as of September 30, 2009 underour various credit facilities, future borrowings are subject to compliance withfinancial covenants that could limit availability.**

** **

Webelieve that cash flow from operations and funds available under our currentcredit facilities and any future replacement thereof will be sufficient to fundthe working capital, debt service, and capital expenditure requirements of ourcurrent business operations for the foreseeable future.  Nevertheless, our ability to generatesufficient cash flows from operations will depend upon our success in executingour strategies. If we are unable to (i) realize sales from our backlog; (ii) securenew customer orders at attractive prices; and (iii) continue to implementcost-effective internal processes, our ability to meet cash requirementsthrough operating activities could be 

 

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impacted.  Furthermore, any restriction on theavailability of borrowings under our credit facilities could negatively affectour ability to meet future cash requirements.

 

*Debtand other contractual obligations and commitments*

 

**Our existingloan agreements include various covenants and restrictions, certain of whichrelate to the payment of dividends or other distributions to stockholders,redemption of capital stock, incurrence of additional indebtedness, mortgaging,pledging or disposition of major assets, use of cash for acquisitions, andmaintenance of specified financial ratios. As of September 30, 2009, we were in compliance with all financialcovenants and other provisions of our debt agreements.**

** **

The Company’s principal cash flows related to debt obligations and othercontractual obligations and commitments have not materially changed since December 31,2008.

 

***Cash flowsfrom operating activities***

** **

Net cash flows providedby operating activities for the nine months ended September 30, 2009totaled $23,414.  Significant sources ofoperating cash flow included net income of $7,527, non-cash depreciation andamortization expense of $7,625, stock-based compensation of $2,657 and netpositive changes in various components of working capital in the amount of$7,650.  These sources of operating cashflow were partially offset by a deferred income tax benefit of $1,875.  Net positive changes in working capitalincluded decreases in accounts receivable, inventories and prepaid expenses of$13,632, $3,334 and $496, respectively, and an increase in customer advances of$246.  These positive changes in workingcapital were partially offset by decreases in accounts payable and accruedexpenses of $5,980 and $4,078, respectively.

 

Net cash flows providedby operating activities for the nine months ended September 30, 2008totaled $24,805.  Significant sources ofoperating cash flow included net income of $18,683, non-cash depreciation andamortization expense of $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.

 

*Cashflows from investing activities*

 

Net cash flows used byinvesting activities for the nine months ended September 30, 2009 totaled$3,196 and consisted almost entirely of capital expenditures.

 

Net cash flows used byinvesting activities for the nine months ended September 30, 2008 totaled$7,275 and consisted almost entirely of capital expenditures.

 

*Cash flows from financingactivities*

 

Net cash flows used infinancing activities for the nine months ended September 30, 2009 were$4,805, which consisted primarily of $3,912 in required prepayments of termloans under our syndicated credit agreement from excess cash flow that wegenerated in fiscal year 2008, $653 in principal payments on Nord LB termloans, payment of quarterly dividends of $513 and payment 

 

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on capital lease obligations of $132.  These uses of cash flow were slightly offsetby $373 in net proceeds from the issuance of common stock relating to the exerciseof stock options.

 

Net cash flows providedby financing activities for the first nine months of 2008 were $3,969, whichincluded net borrowings on bank lines of credit of $7,247 and $333 in netproceeds from the issuance of common stock relating to the exercise of stockoptions.  These sources of cash flow werepartially offset by payment of annual dividends of $1,894, a final principalpayment on a term loan with French bank of $441, an $810 principal payment on aNord LB term loan, payments of deferred debt issuance costs of $167 and paymenton capital lease obligations of $308.

 

*Payment of Dividends*

 

On June 8, 2009,our board of directors declared a quarterly cash dividend of $.04 per sharewhich was paid on July 15, 2009. The dividend totaled $513 and was payable to shareholders of record asof June 30, 2009. On September 17, 2009, our board of directorsdeclared a quarterly cash dividend of $.04 per share which was paid on October 15,2009.  The dividend totaled $515 and waspayable to shareholders of record as of September 30, 2009. We paid anannual cash dividend in 2008 of $0.15 per share.

 

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

 

**CriticalAccounting Policies**

 

Ourhistorical consolidated financial statements and notes to our historicalconsolidated financial statements contain information that is pertinent to ourmanagement’s discussion and analysis of financial condition and results of operations.  Preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires that our management make estimates, judgments and assumptions thataffect the reported amounts of assets, liabilities, revenues and expenses, andthe disclosure of contingent assets and liabilities.  However, the accounting principles used by usgenerally do not change our reported cash flows or liquidity.  Interpretation of the existing rules mustbe done and judgments made on how the specifics of a given rule apply tous.

 

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

 

*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 resolved**

** **

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** **

**before the product is shipped andbilled.  Products related to the oilfieldproducts segment, which include detonating cords, detonators, bi-directionalboosters and shaped charges, as well as, seismic related explosives andaccessories, are standard in nature.  Inall cases, revenue is recognized only when all four of the following criteriahave been satisfied: persuasive evidence of an arrangement exists; the price isfixed or determinable; delivery has occurred; and collection is reasonablyassured.  For contracts that requiremultiple shipments, revenue is recorded only for the units included in eachindividual shipment.  If, as a contractproceeds toward completion, projected total cost on an individual contractindicates a probable loss, the Company will account for such anticipated loss.**

** **

*Assetimpairments*

 

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

 

*BusinessCombinations*

 

Weaccounted for our business acquisition using the purchase method of accounting.We allocated the total cost of the acquisition to the underlying net assetsbased on their respective estimated fair values. As part of this allocationprocess, we identified and attributed values and estimated lives to theintangible assets acquired. These determinations involved significant estimatesand assumptions regarding multiple, highly subjective variables, includingthose with respect to future cash flows, discount rates, asset lives, and theuse of different valuation models and therefore required considerable judgment.Our estimates and assumptions were based, in part, on the availability oflisted market prices or other transparent market data. These determinationsaffect the amount of amortization expense recognized in future periods. Webased our fair value estimates on assumptions we believe to be reasonable butare inherently uncertain.

 

EffectiveJanuary 1, 2009 we will account for business acquisitions in accordancewith new Financial Accounting Standards Board (“FASB”) guidance which appliesprospectively to business acquisitions with a closing date following theeffective date.  This new guidancesignificantly changes the financial accounting and reporting of businesscombinations.

 

*Goodwilland Other Intangible Assets*

 

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

 

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*Goodwill*

 

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

 

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

 

Ifthe carrying value of the reporting unit is higher than its fair value, thereis an indication that impairment may exist, and the second step must beperformed to measure the amount of impairment loss.  In the second step, we allocate the fairvalue of the reporting unit to the assets and liabilities of the reporting unitas if it had just been acquired in a business combination and as if thepurchase price was equivalent 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.

 

Ourimpairment testing in the fourth quarter of 2008 did not result in adetermination that any of our goodwill was impaired; however, the passingmargin of the first step of our goodwill impairment testing relative to theOilfield Products reporting unit as of December 31, 2008 was minimal(estimated fair value was less than 10% greater than the carrying value).  Future impairment is possible and will occurif (i) the unit’s operating results underperform what we have estimated or(ii) additional volatility of the capital markets cause us to raise the 16percent discount rate utilized in our discounted cash flow analysis or decreasethe multiples utilized in our market-based analysis.  We did not observe any indicators in the ninemonths ended September 30, 2009 that would necessitate interim impairmenttesting of goodwill.

 

Theuse of different estimates or assumptions within our discounted cash flow modelwhen determining the fair value of our reporting units or using methodologiesother than as described above could result in different values for reportingunits and could result in an impairment charge.

 

*Intangible assets subject to amortization*

 

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

 

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*Impactof foreign currency exchange rate risks*

 

Thefunctional currency for our foreign operations is the applicable local currencyfor each affiliate company. Assets and liabilities of foreign subsidiaries forwhich the functional currency is the local currency are translated at exchangerates in effect at period-end, and the statements of operations are translatedat the average exchange rates during the period.  Exchange rate fluctuations on translatingforeign currency financial statements into U.S. dollars that result inunrealized gains or losses are referred to as translation adjustments.Cumulative translation adjustments are recorded as a separate component ofstockholders’ equity and are included in other cumulative comprehensive income(loss). Transactions denominated in currencies other than the local currencyare recorded based on exchange rates at the time such transactions arise.Subsequent changes in exchange rates result in transaction gains and losses,which are reflected in income as unrealized (based on period-end translations)or realized upon settlement of the transactions. Cash flows from our operationsin foreign countries are translated at actual exchange rates when known, or atthe average rate for the period. As a result, amounts related to assets andliabilities reported in the consolidated statements of cash flows will notagree to changes in the corresponding balances in the consolidated balancesheets. The effects of exchange rate changes on cash balances held in foreigncurrencies are reported as a separate line item below cash flows from financingactivities.

 

*Incometaxes*

 

Weare required to recognize the recognition of deferred tax assets and deferredtax liabilities for the expected future income tax consequences of transactionsthat have been included in our financial statements but not our taxreturns.  Deferred tax assets andliabilities are determined based on income tax credits and on the temporarydifferences between the Consolidated Financial Statement basis and the taxbasis of assets and liabilities using enacted tax rates in effect for the yearin which the differences are expected to reverse.  We routinely evaluate deferred tax assets todetermine if they will, more likely than not, be recovered from futureprojected taxable income; if not, we record an appropriate valuation allowance.

 

**Recent Accounting Pronouncements**

 

**In December 2007,the Financial Accounting Standards Board (“FASB”) issued authoritative guidanceon business combinations and the accounting for noncontrolling interests.  This new guidance significantly changed theaccounting for and reporting of business combination transactions andnoncontrolling (minority) interests in consolidated financial statements on January 1,2009.  The adoption of this guidance in2009 did not have a significant impact on the Company’s results of operationsor financial position.**

** **

**In March 2008,the FASB issued authoritative guidance on the disclosures about derivativeinstruments and hedging activities.  Thisguidance requires additional disclosures related to the use of derivativeinstruments, the accounting for derivatives and how derivatives impactfinancial statements on January 1, 2009.  The adoption of thisguidance in 2009 did not have any impact on the Company’s results of operationsor financial position.**

** **

In April 2009, the FASB issuedauthoritative guidance requiring disclosures about the fair value of financialinstruments for interim financial statements of publicly traded companies.  This guidance became effective for interimreporting periods ending after June 15, 2009 and the adoption of it in the second quarter of 2009 did not have any impact on theCompany’s results of operations or financial position.

 

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In May 2009, the FASB issued authoritativeguidance that provides general standards of accounting for and disclosure ofevents that occur after the balance sheet date but before financial statementsare issued or are available to be issued. Specifically, this standard setsforth the period after the balance sheet date during which management of areporting entity should evaluate events or transactions that may occur forpotential recognition or disclosure in the financial statements, thecircumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financial statements, and thedisclosures that an entity should make about events or transactions thatoccurred after the balance sheet date.  This guidance is effective forfinancial statements issued for fiscal years and interim periods beginningafter June 15, 2009 and will be applied prospectively.  The Company adopted this guidance in theperiods ended June 30, 2009 and has evaluated for subsequent eventsthrough October 30, 2009, the issuance date of the Company’s September 30,2009 consolidated financial statements. Besides the amendment to our credit agreement and the acquisition of aCanadian-based LRI Oil Tools company discussed in Note 6 and 9, respectively,no other recognized or non-recognized subsequent events were noted.

 

**ITEM 3.   Quantitative and Qualitative Disclosure aboutMarket 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, 2008.

 

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

 

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

 

As of September 30, 2009, the Company carried out an evaluation,under the supervision and with the participation of the Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures (as defined in Exchange Act Rule 13a-15(e)).  Based on that evaluation, the Company’s ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective at the reasonable assurancelevel.  There have been no changes in theCompany’s internal controls during the quarter ended September 30, 2009 orin other factors that could materially affect the Company’s internal controlsover financial reporting.

 

The Company’s management, including the Company’s Chief ExecutiveOfficer and Chief Financial Officer, does not expect that the Company’sdisclosure controls or its internal controls will prevent all errors and allfraud.  Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs.  As a result of the inherent limitations inall control systems, no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within the 

 

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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 2008 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.

 

**We have seen arecent slowdown in some of our markets and anticipate sales will decline during2009.**

** **

During thefourth quarter of 2008 and first nine months of 2009, we have seen a slowdownin our Explosive Metalworking sales to some of the markets we serve andanticipate our sales to decrease by approximately 29% to 31% for the full yearin 2009 from the amount we achieved in 2008. The explosion-weld cladding market is dependent upon sales of productsfor use by customers in a limited number of heavy industries, including oil andgas, alternative energy, chemicals and petrochemicals, hydrometallurgy,aluminum production, shipbuilding, power generation, and industrialrefrigeration.  These industries tend tobe cyclical in nature and the current worldwide economic downturn has affectedmany of these markets.  Indeed, we havealready seen a slowdown in the chemical, petrochemical and hydrometallurgysectors.  An economic slowdown in one orall of these industries—whether due to traditional cyclicality, generaleconomic conditions or other factors—could impact capital expenditures withinthe industry.  If demand from suchindustries were to decline or to experience reduced growth rates, our saleswould be expected to be affected proportionately, which may have a materialadverse effect on our business, financial condition, and results of operations.

 

**Ourbacklog figures may not accurately predict 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.

 

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

 

None.

 

**Item 3. Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

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**Item 5. Other Information**

 

None.

 

**Item 6. Exhibits**

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

##### ** **

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

 

 
|                         | **DYNAMIC  MATERIALS CORPORATION**                                                                                                             |
|------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------|
|                         | (Registrant)                                                                                                                                   |
|                         |                                                                                                                                           |
|                         |                                                                                                                                           |
| Date:  October 30, 2009 | /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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