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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 March 31,2009**

 

**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  Acceleratedfiler  x  Non-acceleratedfiler  o  (Donot check if smaller reporting company)   Smaller reportingcompany  o

 

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

 

Thenumber of shares of Common Stock outstanding was 12,851,377 as of April 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:the ability to obtain new contracts at attractive prices; the size and timingof customer orders and shipment; our ability to realize sales from our backlog;fluctuations in customer demand; fluctuations in foreign currencies;competitive factors; the timely completion of contracts; the timing and size ofexpenditures; the timely receipt of government approvals and permits; the priceand availability of metal and other raw material; the adequacy of local laborsupplies at our facilities; current or future limits on manufacturing capacityat our various operations; the availability and cost of funds; and generaleconomic conditions, both domestic and foreign, impacting our business and thebusiness of the end-market users we serve. Readers are cautioned not to placeundue reliance on these forward-looking statements, which reflect management’sanalysis only as of the date hereof. We undertake no obligation to publiclyrelease the results of any revision to these forward-looking statements thatmay be made to reflect events or circumstances after the date hereof or toreflect the occurrence of unanticipated events.

 

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**INDEX**

 
| PART I -  FINANCIAL INFORMATION                                                                           |                                                                                                             |
|-----------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------|
|                                                                                                      |                                                                                                             |
| Item  1 – Condensed Consolidated Financial Statements                                                | 4                                                                                                                |
|                                                                                                      |                                                                                                             |   |
|                                                                                                      | Consolidated  Balance Sheets as of March 31, 2009 (unaudited) and December 31,  2008                   | 4 |
|                                                                                                      |                                                                                                             |   |
|                                                                                                      | Consolidated  Statements of Operations for the three months ended March 31, 2009 and  2008 (unaudited)      | 6 |
|                                                                                                      |                                                                                                             |   |
|                                                                                                      | Consolidated  Statement of Stockholders’ Equity for the three months ended March 31,  2009 (unaudited) | 7 |
|                                                                                                      |                                                                                                             |   |
|                                                                                                      | Consolidated  Statements of Cash flows for the three months ended March 31, 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 | 19                                                                                                               |
|                                                                                                      |                                                                                                             |   |
| Item 3 – Quantitative and Qualitative Disclosure about  Market Risk                                  | 30                                                                                                               |
|                                                                                                      |                                                                                                             |   |
| Item 4 – Controls and Procedures                                                                     | 30                                                                                                               |
|                                                                                                      |                                                                                                             |   |
| PART II - OTHER  INFORMATION                                                                         |
|                                                                                                      |                                                                                                             |   |
| Item  1 – Legal Proceedings                                                                          | 31                                                                                                               |
|                                                                                                      |                                                                                                             |   |
| Item  1A – Risk Factors                                                                              | 31                                                                                                               |
|                                                                                                      |                                                                                                             |   |
| Item 2 – Unregistered Sales of Equity Securities and  Use of Proceeds                                | 31                                                                                                               |
|                                                                                                      |                                                                                                             |   |
| Item 3 – Defaults Upon Senior Securities                                                             | 31                                                                                                               |
|                                                                                                      |                                                                                                             |   |
| Item 4 – Submission of Matters to a Vote of Security  Holders                                        | 31                                                                                                               |
|                                                                                                      |                                                                                                             |   |
| Item  5 – Other Information                                                                          | 32                                                                                                               |
|                                                                                                      |                                                                                                             |   |
| Item 6 – Exhibits                                                                                    | 32                                                                                                               |
|                                                                                                      |                                                                                                             |   |
|                                                                                                      | Signatures                                                                                                       | 33 |

 

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**Part I- FINANCIAL INFORMATION**

 

**ITEM 1. Condensed Consolidated Financial Statements**

 

DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATEDBALANCE SHEETS

(Dollars in Thousands)

 
| ** **                                                                                  | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                  | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                                                                                  | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| ASSETS                                                                                      |       |               |       |                  |       |
|                                                                                        |       |               |       |                  |       |
| CURRENT ASSETS:                                                                             |       |               |       |                  |       |
| Cash and cash equivalents                                                                   |       | $                  | 16,278     |                  | $          | 14,360 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $493 and $614, respectively |       | 36,545             |       | 34,719                |       |
| Inventories                                                                                 |       | 36,497             |       | 35,300                |       |
| Prepaid expenses and other                                                                  |       | 2,289              |       | 2,956                 |       |
| Related party receivable and loan                                                           |       | 2,370              |       | 2,611                 |       |
| Current deferred tax assets                                                                 |       | 1,012              |       | 1,103                 |       |
|                                                                                        |       |               |       |                  |       |
| Total current assets                                                                        |       | 94,991             |       | 91,049                |       |
|                                                                                        |       |               |       |                  |       |
| PROPERTY, PLANT AND EQUIPMENT                                                               |       | 58,194             |       | 58,454                |       |
| Less - Accumulated depreciation                                                             |       | (18,938            | )          | (17,997               | )          |
|                                                                                        |       |               |       |                  |       |
| Property, plant and equipment, net                                                          |       | 39,256             |       | 40,457                |       |
|                                                                                        |       |               |       |                  |       |
| GOODWILL, net                                                                               |       | 40,176             |       | 43,066                |       |
|                                                                                        |       |               |       |                  |       |
| PURCHASED INTANGIBLE ASSETS, net                                                            |       | 47,773             |       | 52,264                |       |
|                                                                                        |       |               |       |                  |       |
| DEFERRED TAX ASSETS                                                                         |       | 535                |       | 331                   |       |
|                                                                                        |       |               |       |                  |       |
| OTHER ASSETS, net                                                                           |       | 1,372              |       | 1,449                 |       |
|                                                                                        |       |               |       |                  |       |
| INVESTMENT IN JOINT VENTURES                                                                |       | 744                |       | 970                   |       |
|                                                                                        |       |               |       |                  |       |
| TOTAL ASSETS                                                                                |       | $                  | 224,847    |                  | $          | 229,586 |   |

 

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

 

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DYNAMICMATERIALS CORPORATION & SUBSIDIARIES

CONDENSEDCONSOLIDATED BALANCE SHEETS

(Dollarsin Thousands, Except Share Data)

 
| ** **                                                                                                                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                          | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                                                                                                                          | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                          |       |               |       |                  |       |
|                                                                                                                                |       |               |       |                  |       |
| CURRENT LIABILITIES:                                                                                                                |       |               |       |                  |       |
| Accounts payable                                                                                                                    |       | $                  | 16,863     |                  | $          | 15,402 |   |
| Accrued expenses                                                                                                                    |       | 4,884              |       | 6,605                 |       |
| Accrued income taxes                                                                                                                |       | 2,026              |       | 846                   |       |
| Accrued employee compensation and benefits                                                                                          |       | 3,866              |       | 5,579                 |       |
| Customer advances                                                                                                                   |       | 1,620              |       | 2,685                 |       |
| Related party accounts payable                                                                                                      |       | 21                 |       | 17                    |       |
| Lines of credit - current                                                                                                           |       | 1,429              |       | —                |       |
| Current maturities on long-term debt                                                                                                |       | 10,316             |       | 14,450                |       |
| Current portion of capital lease  obligations                                                                                       |       | 81                 |       | 163                   |       |
|                                                                                                                                |       |               |       |                  |       |
| Total current liabilities                                                                                                           |       | 41,106             |       | 45,747                |       |
|                                                                                                                                |       |               |       |                  |       |
| LINES OF CREDIT                                                                                                                     |       | 2,800              |       | —                |       |
|                                                                                                                                |       |               |       |                  |       |
| LONG-TERM DEBT                                                                                                                      |       | 44,935             |       | 46,178                |       |
|                                                                                                                                |       |               |       |                  |       |
| CAPITAL LEASE OBLIGATIONS                                                                                                           |       | 315                |       | 336                   |       |
|                                                                                                                                |       |               |       |                  |       |
| DEFERRED TAX LIABILITIES                                                                                                            |       | 15,292             |       | 16,833                |       |
|                                                                                                                                |       |               |       |                  |       |
| OTHER LONG-TERM LIABILITIES - RELATED PARTY                                                                                         |       | 318                |       | 303                   |       |
|                                                                                                                                |       |               |       |                  |       |
| OTHER LONG-TERM LIABILITIES                                                                                                         |       | 1,452              |       | 1,687                 |       |
|                                                                                                                                |       |               |       |                  |       |
| COMMITMENTS AND CONTINGENT LIABILITIES                                                                                              |       | —             |       | —                |       |
|                                                                                                                                |       |               |       |                  |       |
| Total liabilities                                                                                                                   |       | 106,218            |       | 111,084               |       |
|                                                                                                                                |       |               |       |                  |       |
| 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; 12,851,377 and 12,780,877 shares issued and outstanding,  respectively |       | 643                |       | 639                   |       |
| Additional paid-in capital                                                                                                          |       | 43,137             |       | 42,050                |       |
| Retained earnings                                                                                                                   |       | 82,958             |       | 78,042                |       |
| Other cumulative comprehensive income  (loss)                                                                                       |       | (8,109             | )          | (2,229                | )          |
|                                                                                                                                |       |               |       |                  |       |
| Total stockholders’ equity                                                                                                     |       | 118,629            |       | 118,502               |       |
|                                                                                                                                |       |               |       |                  |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                     |       | $                  | 224,847    |                  | $          | 229,586 |   |

 

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

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(Dollars in Thousands, Except Share Data)

(unaudited)

 
| ** **                                           | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **March 31,**     | ** ** |
| ** **                                           | ** ** | **2009**               | ** ** | **2008** | ** ** |
| NET SALES                                            |       | $                      | 49,759     |   | $ | 58,393 |   |
|                                                 |       |                   |       |   |   |
| COST OF PRODUCTS SOLD                                |       | 34,431                 |       | 40,682 |   |
|                                                 |       |                   |       |   |   |
| Gross profit                                         |       | 15,328                 |       | 17,711 |   |
|                                                 |       |                   |       |   |   |
| COSTS AND EXPENSES:                                  |       |                   |       |   |   |
| General and administrative expenses                  |       | 3,526                  |       | 3,119 |   |
| Selling expenses                                     |       | 2,324                  |       | 2,841 |   |
| Amortization expense of purchased  intangible assets |       | 1,183                  |       | 2,361 |   |
|                                                 |       |                   |       |   |   |
| Total costs and expenses                             |       | 7,033                  |       | 8,321 |   |
|                                                 |       |                   |       |   |   |
| INCOME FROM OPERATIONS                               |       | 8,295                  |       | 9,390 |   |
|                                                 |       |                   |       |   |   |
| OTHER INCOME (EXPENSE):                              |       |                   |       |   |   |
| Other expense                                        |       | (117                   | )          | (149 | ) |
| Interest expense                                     |       | (902                   | )          | (1,279 | ) |
| Interest income                                      |       | 65                     |       | 239 |   |
| Equity in earnings (losses) of joint  ventures       |       | (49                    | )          | 16 |   |
|                                                 |       |                   |       |   |   |
| INCOME BEFORE INCOME TAXES                           |       | 7,292                  |       | 8,217 |   |
|                                                 |       |                   |       |   |   |
| INCOME TAX PROVISION                                 |       | 2,376                  |       | 2,972 |   |
|                                                 |       |                   |       |   |   |
| NET INCOME                                           |       | $                      | 4,916      |   | $ | 5,245 |   |
|                                                 |       |                   |       |   |   |
| INCOME PER SHARE:                                    |       |                   |       |   |   |
| Basic                                                |       | $                      | 0.38       |   | $ | 0.42 |   |
| Diluted                                              |       | $                      | 0.38       |   | $ | 0.41 |   |
|                                                 |       |                   |       |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING  -     |       |                   |       |   |   |
| Basic                                                |       | 12,527,452             |       | 12,377,019 |   |
| Diluted                                              |       | 12,569,879             |       | 12,521,736 |   |

 

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

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2009

(Amounts in Thousands)

(unaudited)

 
| ** **                                                   | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Other**      | ** ** | ** ** | ** ** | ** **         | ** ** |
|--------------------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|-------------------|------------|----------------|------------|------------|------------|--------------------|------------|
| ** **                                                   | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Cumulative** | ** ** | ** ** | ** ** | **Comprehensive**  | ** ** |
| ** **                                                   | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | ** **     | ** ** | **Loss**   | ** ** |
| ** **                                                   | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **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              |       | 70               |       | 4           |       | 232            |       | —            |       | —         |       | 236        |       |               |       |
| Excess tax benefit related to stock options                  |       | —           |       | —      |       | 57             |       | —            |       | —         |       | 57         |       |               |       |
| Stock-based compensation                                     |       | —           |       | —      |       | 798            |       | —            |       | —         |       | 798        |       |               |       |
| Net income                                                   |       | —           |       | —      |       | —         |       | 4,916             |       | —         |       | 4,916      |       | 4,916              |       |
| Derivative valuation adjustment, net of tax of $22           |       | —           |       | —      |       | —         |       | —            |       | 38             |       | 38         |       | 38                 |       |
| Change in cumulative foreign currency translation adjustment |       | —           |       | —      |       | —         |       | —            |       | (5,918         | )          | (5,918     | )          | (5,918             | )          |
| Balances, March 31, 2009                                |       | 12,851           |       | $           | 643        |           | $          | 43,137            |       | $              | 82,958     |       | $          | (8,109             | )          | $ | 118,629 |   | $ | (964 | ) |
|                                                              |            |                  |            |             |            |                |            |                   |            |                |            |            |            |                    |            |  |  |  |  |  |  |

 

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

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(Dollars in Thousands)

(unaudited)

 
| ** **                                                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                               |       |     |       |     |       |
| Net income                                                                          |       | $        | 4,916      |     | $          | 5,245 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities - |       |     |       |     |       |
| Depreciation (including capital lease  amortization)                                |       | 1,267    |       | 1,113    |       |
| Amortization of purchased intangible assets                                         |       | 1,183    |       | 2,361    |       |
| Amortization of capitalized debt issuance  costs                                    |       | 69       |       | 60       |       |
| Stock-based compensation                                                            |       | 798      |       | 664      |       |
| Deferred income tax benefit                                                         |       | (605     | )          | (1,174   | )          |
| Equity in (earnings) losses of joint  ventures                                      |       | 49       |       | (16      | )          |
| Change in -                                                                         |       |     |       |     |       |
| Restricted cash                                                                     |       | —   |       | 377      |       |
| Accounts receivable, net                                                            |       | (2,702   | )          | 5,968    |       |
| Inventories                                                                         |       | (2,721   | )          | (670     | )          |
| Prepaid expenses and other                                                          |       | 460      |       | (580     | )          |
| Accounts payable                                                                    |       | 2,388    |       | (3,837   | )          |
| Customer advances                                                                   |       | (961     | )          | (2,144   | )          |
| Accrued expenses and other liabilities                                              |       | (904     | )          | (118     | )          |
|                                                                                |       |     |       |     |       |
| Net cash provided by operating activities                                           |       | 3,237    |       | 7,249    |       |
|                                                                                |       |     |       |     |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                               |       |     |       |     |       |
| Acquisition of property, plant and  equipment                                       |       | (1,170   | )          | (2,361   | )          |
| Change in other non-current assets                                                  |       | 8        |       | 15       |       |
|                                                                                |       |     |       |     |       |
| Net cash used in investing activities                                               |       | (1,162   | )          | (2,346   | )          |
|                                                                                     |            |          |            |          |            |  |  |

 

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

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(Dollars in Thousands)

 
| ** **                                                             | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM FINANCING ACTIVITIES:                                  |       |     |       |     |       |
| Payment on syndicated term loans                                       |       | (3,862   | )          | —   |       |
| Payment on Nord LB term loans                                          |       | (233     | )          | (265     | )          |
| Borrowings on bank lines of credit, net                                |       | 4,215    |       | 3,665    |       |
| Payment of capital lease obligations                                   |       | (71      | )          | (105     | )          |
| Payment of deferred debt issuance costs                                |       | (19      | )          | (125     | )          |
| Change in other long-tem liabilities                                   |       | —   |       | 16       |       |
| Net proceeds from issuance of common stock  to employees and directors |       | 236      |       | 93       |       |
| Excess tax benefit related to exercise of  stock options               |       | 57       |       | —   |       |
|                                                                   |       |     |       |     |       |
| Net cash provided by financing activities                              |       | 323      |       | 3,279    |       |
|                                                                   |       |     |       |     |       |
| EFFECTS OF EXCHANGE RATES ON CASH                                      |       | (480     | )          | 383      |       |
|                                                                   |       |     |       |     |       |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                              |       | 1,918    |       | 8,565    |       |
|                                                                   |       |     |       |     |       |
| CASH AND CASH EQUIVALENTS, beginning of the  period                    |       | 14,360   |       | 9,045    |       |
|                                                                   |       |     |       |     |       |
| CASH AND CASH EQUIVALENTS, end of the period                           |       | $        | 16,278     |     | $          | 17,610 |   |
|                                                                        |            |          |            |          |            |  |  |

 

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

 

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

##### ** **

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

**(unaudited)**

 

**1.      BASIS OF PRESENTATION**

 

The information included in the Condensed Consolidated FinancialStatements is unaudited but includes all normal and recurring adjustmentswhich, in the opinion of management, are necessary for a fair presentation ofthe interim periods presented. These Condensed Consolidated FinancialStatements should be read in conjunction with the financial statements that areincluded in the Company’s Annual Report filed on Form 10-K for the yearended December 31, 2008.  Certainprior year balances in the consolidated financial statements and notes havebeen reclassified to conform to the 2009 presentation.

 

**2.      SIGNIFICANT ACCOUNTINGPOLICIES**

 

Principles of Consolidation

** **

**The Consolidated Financial Statements include the accountsof the Company and its controlled subsidiaries. Only subsidiaries 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

** **

**The functional currency for the Company’s foreignoperations is the applicable local currency for each affiliate company. Assetsand liabilities of foreign subsidiaries are translated at exchange rates ineffect at period-end, and the statements of operations are translated at theaverage exchange rates during the period. Exchange rate fluctuations on translating foreign currency financialstatements into U.S. dollars that result in unrealized gains or losses arereferred to as translation adjustments. Cumulative translation adjustments arerecorded as a separate component of stockholders’ equity and are included inother cumulative comprehensive income (loss). Transactions denominated incurrencies other than the local currency are recorded based on exchange ratesat the time such transactions arise. Subsequent changes in exchange ratesresult in transaction gains and losses which are reflected in income asunrealized (based on period-end translations) or realized upon settlement ofthe transactions. Cash flows from the Company’s operations in foreign countriesare translated at actual exchange rates when known, or at the average rate forthe period. As a result, amounts related to assets and liabilities reported inthe consolidated statements of cash flows will not agree to changes in thecorresponding balances in the consolidated balance sheets. The effects ofexchange rate changes on cash balances held in foreign currencies are reportedas a separate line item below cash flows from financing activities.**

 

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Revenue Recognition

** **

**Sales of clad metal products andwelding services are generally based upon customer specifications set forth incustomer purchase orders and require the Company to provide certificationsrelative to metals used, services performed, and the results of anynon-destructive testing that the customer has requested be performed.  All issues of conformity of the product tospecifications are resolved before the product is shipped and billed.  Products related to the oilfield productssegment, which include detonating cords, detonators, bi-directional boosters,and shaped charges, as well as, seismic related explosives and accessories, arestandard in nature.  In all cases, revenueis recognized only when all four of the following criteria have been satisfied:persuasive evidence of an arrangement exists; the price is fixed ordeterminable; delivery has occurred; and collection is reasonably assured.  For contracts that require multipleshipments, revenue is recorded only for the units included in each individualshipment.  If, as a contract proceedstoward completion, projected total cost on an individual contract indicates aprobable loss, the Company will account for such anticipated loss.**

** **

Fair Value of Financial Instruments

** **

In September 2006, the Financial AccountingStandards Boards (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 157, *Fair Value Measurements* (“SFAS157”). Although this statement does not require any new fair value measurements,in certain cases its application has changed previous practice in determiningfair value. SFAS 157 became effective for the Company beginning January 1,2008 as it relates to fair value measurements of financial assets andliabilities and non-financial assets and liabilities that are recognized atfair value in its financial statements on a recurring basis (at leastannually).

 

On January 1, 2009, the Company adopted thedeferred provisions of SFAS 157 as defined by FASB Staff Position (“FSP”) No. 157-2,*Effective Date of FASB Statement No. 157,*(“FSP No. 157-2”). FSP No. 157-2 deferred the adoption date forcertain non-financial assets and liabilities that are recognized or disclosedat fair value on a non-recurring basis.  The adoption in 2009 of SFAS 157for certain non-financial assets and liabilities did not have any impact on theCompany’s results of operations or financial position.

 

SFAS 157 defines fair value as theprice that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants at the measurement date.It establishes a hierarchy for fair value measurements based upon the inputs tothe valuation and the degree to which they are observable or not observable inthe market. 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 areaccessible as of the measurement date.

 

·              Level 2 – Inputs to the valuation include quoted prices ineither markets that are not active, or in active markets for similar assets orliabilities, inputs other than quoted prices that are observable, and inputsthat are derived principally from or corroborated by observable market data.

 

·              Level 3 – Inputs to the valuation that are unobservableinputs for the asset or liability.

 

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SFAS 157 assigns the highest priority toLevel 1 inputs and the lowest priority to Level 3 inputs.

 

As discussed in Note 6, the Company uses an interest rate swapagreement to mitigate interest rate risk on portions of its variable rate termloan debt.   The swap agreement is notexchange listed and is therefore valued with models that use Level 2inputs.  The degree to which the Company’scredit worthiness impacts the value does require some management judgment butas of March 31, 2009 and December 31, 2008, the impact of thisassessment on the overall value of the outstanding interest rate swap was notsignificant and the Company’s valuation of the agreement is classified withinLevel 2 of the hierarchy.

 

Related Party Transactions

** **

**The Company has related party transactions with itsunconsolidated joint ventures, as well as with the minority shareholder of oneof its consolidated joint ventures.  Asummary of related party balances as of March 31, 2009 and December 31,2008 is summarized below:**

 
| ** **                | ** ** | **As of March 31, 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                 |       | $                             | 461        |                             | $          | 16 |   | $ | — |   | $ | 449 |   | $ | 17 |   | $ | — |   |
| DYNAenergetics RUS        |       | 1,419                         |       | —                           |       | — |   | 1,582 |   | — |   | — |   |
| Minority Interest Partner |       | 490                           |       | 5                                |       | 318 |   | 580 |   | — |   | 303 |   |
|                      |       |                          |       |                             |       |   |   |   |   |   |   |   |   |
| Total                     |       | $                             | 2,370      |                             | $          | 21 |   | $ | 318 |   | $ | 2,611 |   | $ | 17 |   | $ | 303 |   |

 

A summary of those transactions for the three monthsended March 31, 2009 and 2008 is summarized below:

 
| ** **                | ** ** | **3 months ended**      | ** ** | **3 months ended**      | ** ** |
|---------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **March 31, 2009** | ** ** | **March 31, 2008** | ** ** |
| ** **                | ** ** | ** **              | ** ** | **Interest**            | ** ** | ** ** | ** ** | **Interest** | ** ** |
| ** **                | ** ** | **Sales to**            | ** ** | **income from**         | ** ** | **Sales to** | ** ** | **income from** | ** ** |
| Perfoline                 |       | $                       | 40         |                    | $          | 10 |   | $ | 33 |   | $ | 13 |   |
| DYNAenergetics RUS        |       | 42                      |       | —                  |       | — |   | — |   |
| Minority Interest Partner |       | 298                     |       | —                  |       | 524 |   | — |   |
|                      |       |                    |       |                    |       |   |   |   |   |
| Total                     |       | $                       | 380        |                    | $          | 10 |   | $ | 557 |   | $ | 13 |   |

 

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Earnings Per Share

 

**In 2008, the FASB issued FSP EITF03-6-1, *Determining Whether Instruments Granted inShare-Based Payment Transactions Are Participating Securities,* andit became effective for the Company beginning January 1, 2009.  Under this standard, unvested awards ofshare-based payments with rights to receive dividends or dividend equivalents,such as our restricted stock awards (RSAs), are considered participatingsecurities for purposes of calculating earnings per share (“EPS”).  Under the two-class method required by EITF03-6-1, a portion of net income is allocated to these participating securitiesand therefore is excluded from the calculation of EPS allocated to commonstock, as shown in the table below.  ThisFSP requires retrospective applications for periods prior to the effective 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 FSP resulted in a $.01 per sharereduction to the previously reported basic EPS and diluted EPS for the threemonths ended March 31, 2008.**

 

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

 
| ** **                                                   | ** ** | **For the Three Months Ended** | ** ** | **For the Three Months Ended** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                   | ** ** | **March 31, 2009**        | ** ** | **March 31, 2008**        | ** ** |
| ** **                                                   | ** ** | **Income**                     | ** ** | **Shares**                     | ** ** | **EPS** | ** ** | **Income** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Basic earnings per share:                                    |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Net income                                                   |       | $                              | 4,916      |                           |       |   |   |   | $ | 5,245 |   |   |   |   |   |
| Less income allocated to RSAs                                |       | 103                            |       |                           |       |   |   | 89 |   |   |   |   |   |
|                                                         |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Net income allocated to common stock for  EPS calculation    |       | $                              | 4,813      |                           | 12,527,452 |   | $ | 0.38 |   | $ | 5,156 |   | 12,377,019 |   | $ | 0.42 |   |
|                                                         |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Adjust shares for Dilutives:  Stock-based compensation plans |       |                           |       | 42,427                         |       |   |   |   |   | 144,717 |   |   |   |
|                                                         |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Diluted earnings per share:                                  |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Net income                                                   |       | $                              | 4,916      |                           |       |   |   |   | $ | 5,245 |   |   |   |   |   |
| Less income allocated to RSAs                                |       | 103                            |       |                           |       |   |   | 88 |   |   |   |   |   |
|                                                         |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Net income allocated to common stock for  EPS calculation    |       | $                              | 4,813      |                           | 12,569,879 |   | $ | 0.38 |   | $ | 5,157 |   | 12,521,736 |   | $ | 0.41 |   |

** **

Recent Accounting Pronouncements

** **

**In December 2007,the FASB issued SFAS No. 141(R), *Business Combinations*and SFAS No. 160, *Accounting and Reportingof Noncontrolling Interest in Consolidated Financial Statements*, anamendment of ARB No. 51. These new standards will significantly change theaccounting for and reporting of business combination transactions andnoncontrolling (minority) interests in consolidated financial statements. SFASNos. 141(R) and 160 are required to be adopted simultaneously and areeffective for the first annual reporting period beginning on or after December 15,2008.  The adoption of these standards in2009 did not have any impact on the Company’s results of operations orfinancial position.**

** **

**In March 2008,the FASB issued SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities*.  SFAS 161requires additional disclosures related to the use of derivative instruments,the accounting for derivatives and how derivatives impact financial statements. SFAS No. 161 is effective for fiscal years and interim periodsbeginning after November 15, 2008.  The**

 

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**adoption of SFAS No. 161 in the first quarterof 2009 did not have any impact on the Company’s results of operations orfinancial position.**

** **

**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 certainminority interest veto rights that allow the minority interest shareholders toparticipate in ordinary course of business decisions, these joint ventures havebeen accounted for under the equity method instead of being consolidated inthese financial statements.  Investmentsin these joint ventures totaled $744 and $970 as of March 31, 2009 and December 31,2008, respectively.

 

Summarized unaudited financial informationfor the joint ventures accounted for under the equity method as of March 31,2009 and December 31, 2008 and for the three months ended March 31,2009 and 2008 is as follows:

 
| ** **                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| Current assets               |       | $                  | 3,756      |                  | $          | 4,667 |   |
| Noncurrent assets            |       | 622                |       | 714                   |       |
| Total assets                 |       | $                  | 4,378      |                  | $          | 5,381 |   |
|                         |       |               |       |                  |       |
| Current liabilities          |       | $                  | 1,730      |                  | $          | 2,064 |   |
| Noncurrent liabilities       |       | 748                |       | 830                   |       |
| Equity                       |       | 1,900              |       | 2,487                 |       |
| Total liabilities and equity |       | $                  | 4,378      |                  | $          | 5,381 |   |

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **March 31,**     | ** ** |
| ** **                                     | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Net sales                                      |       | $                      | 1,106      |   | $ | 2,203 |   |
| Operating income                               |       | $                      | 79         |   | $ | 171 |   |
| Net loss                                       |       | $                      | (90        | ) | $ | (14 | ) |
| Equity in earnings (losses) of joint  ventures |       | $                      | (49        | ) | $ | 16 |   |

 

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**4.      INVENTORY**

 

**The components of inventory areas follows at March 31, 2009 and December 31, 2008:**

 
| ** **      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | ** ** | ** ** | ** ** |
|-----------------|------------|--------------------|------------|-----------------------|------------|------------|------------|------------|
| ** **      | ** ** | **2009**           | ** ** | **2008**              | ** ** | ** ** | ** ** | ** ** |
| Raw materials   |       | $                  | 12,862     |                  | $          | 11,610     |       |       |   |   |
| Work-in-process |       | 18,536             |       | 18,950                |       |       |       |       |
| Finished goods  |       | 4,372              |       | 3,903                 |       |       |       |       |
| Supplies        |       | 727                |       | 837                   |       |       |       |       |
|            |       | $                  | 36,497     |                  | $          | 35,300     |       |       |   |   |

 

**5.      PURCHASED INTANGIBLEASSETS**

 

Thefollowing table presents details of our purchased intangible assets, other thangoodwill, as of March 31, 2009:

 
| ** **               | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|--------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **               | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
| Core technology          |       | $          | 22,108     |             | $          | (1,520     | )          | $ | 20,588 |   |
| Customer relationships   |       | 29,830     |       | (4,558           | )          | 25,272     |       |
| Trademarks / Trade names |       | 2,408      |       | (495             | )          | 1,913      |       |
|                     |       |       |       |             |       |       |       |
| Total intangible assets  |       | $          | 54,346     |             | $          | (6,573     | )          | $ | 47,773 |   |

 

Thefollowing table presents details of our purchased intangible assets, other thangoodwill, as of December 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 |   |

 

The decrease in the gross value of our purchased intangible assets fromDecember 31, 2008 to March 31, 2009 is due to the impact of foreigncurrency translation.  The decrease ingoodwill from $43,066 at December 31, 2008 to $40,176 at March 31,2009 is also due to the impact of foreign currency translation.

 

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**6.      DEBT**

 

**Lines of credit consist of thefollowing at March 31, 2009 and December 31, 2008:**

** **
| ** **                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| Syndicated credit agreement revolving loan |       | $                  | 2,800      |                  | $          | — |   |
| Commerzbank line of credit                 |       | 428                |       | —                |       |
| Nord LB line of credit                     |       | 1,001              |       | —                |       |
|                                       |       |               |       |                  |       |
|                                       |       | 4,229              |       | —                |       |
| Less current portion                       |       | (1,429             | )          | —                |       |
|                                       |       |               |       |                  |       |
| Long-term lines of credit                  |       | $                  | 2,800      |                  | $          | — |   |

 

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

** **
| ** **                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| Syndicated credit agreement term loan      |       | $                  | 37,756     |                  | $          | 40,500 |   |
| Syndicated credit agreement Euro term loan |       | 15,514             |       | 17,763                |       |
| Nord LB 3,000 Euro term loan               |       | 1,981              |       | 2,326                 |       |
| Nord LB 500 Euro term loan                 |       | —             |       | 39                    |       |
|                                       |       |               |       |                  |       |
|                                       |       | 55,251             |       | 60,628                |       |
| Less current maturities                    |       | (10,316            | )          | (14,450               | )          |
|                                       |       |               |       |                  |       |
| Long-term debt                             |       | $                  | 44,935     |                  | $          | 46,178 |   |

 

Loan Covenants and Restrictions

 

The Company’s existing loan agreementsinclude various covenants and restrictions, certain of which relate to theincurrence of additional indebtedness; mortgaging, pledging or disposition ofmajor assets; limits on capital expenditures; and maintenance of specifiedfinancial ratios.  As of March 31,2009, the Company was in compliance with all financial covenants and otherprovisions of its debt agreements.

 

Swap Agreement

 

On November 17, 2008, theCompany entered into a two-year interest rate swap agreement that effectivelyconverted the LIBOR based variable rate US borrowings under the $45,000 termloan to a fixed rate of 4.87% (4.62% effective April 1, 2009 due to animprovement in the Company’s leverage ratio). The Company has designated the swap agreement as an effective cash flowhedge with matched terms in accordance with SFAS No. 133,*Accounting for Derivative Instruments and Hedging Activities,*and as a result, changes in the fair value of the swap agreement are recordedin other comprehensive income with the offset as a swap agreement asset orliability.

 

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The Company has recorded the fair value ofits interest rate swap agreement as follows:

 
| ** **                       | ** ** | **March 31, 2009**      | ** ** | **December 31, 2008** | ** ** |
|----------------------------------|------------|------------------------------|------------|----------------------------|------------|
| **Interest rate swap liability** | ** ** | **Balance sheet location**   | ** ** | **Fair value**             | ** ** | **Balance sheet location** | ** ** | **Fair value** | ** ** |
|                             |       |                         |       |                       |       |   |   |   |   |
| Current portion                  |       | Accrued  expenses            |       | $                          | 874        |   | Accrued  expenses |   | $ | 759 |   |
| Long-term portion                |       | Other  long-term liabilities |       | 472                        |       | Other  long-term liabilities |   | 647 |   |
|                             |       |                         |       |                       |       |   |   |   |   |
|                             |       |                         |       | $                          | 1,346      |   |   |   | $ | 1,406 |   |

 

**7.      BUSINESS SEGMENTS**

 

The Company 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 shipbuilding industries.  The Oilfield Products segment manufactures,markets and sells oilfield perforating equipment and explosives, includingdetonating cords, detonators, bi-directional boosters and shaped charges, andseismic related explosives and accessories. AMK Welding utilizes a number of welding technologies to weld componentsfor manufacturers of jet engine and ground-based turbines.

 

The accounting policies of all the segmentsare the same as those described in the summary of significant accountingpolicies.  The Company’s reportablesegments are separately managed strategic business units that offer differentproducts and services. Each segment’s products are marketed to differentcustomer types and require different manufacturing processes and technologies.

 

Segment information ispresented for the three months ended March 31, 2009 and 2008 as follows:

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

 

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

 

**During the three months ended March 31,2009, no sales to any one customer accounted for more than 10% of total netsales.  During the three months ended March 31,2008, sales to one customer represented $5,974 (10.2%) of total net sales.**

** **

**8.         COMPREHENSIVEINCOME**

 

**The Company**’scomprehensive income for the three months ended March 31, 2009 and 2008was as follows:

** **
| ** **                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **March 31,**     | ** ** |
| ** **                                           | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Net income for the period                            |       | $4,916                 |       | $5,245 |   |
| Interest rate swap valuation adjustment, net  of tax |       | 38                     |       | (285 | ) |
| Foreign currency translation adjustment              |       | (5,918                 | )          | 7,260 |   |
|                                                 |       |                   |       |   |   |
| Comprehensive income (loss)                          |       | $(964                  | )          | $12,220 |   |

** **

Accumulatedother cumulative comprehensive (loss) as of March 31, 2009 and December 31,2008 consisted of the following:

 
| ** **                                                                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                          | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| Currency translation adjustment                                                     |       | $                  | (7,261     | )                     | $          | (1,343 | ) |
| Interest rate swap valuation adjustment, net  of tax of $498 and $520, respectively |       | (848               | )          | (886                  | )          |
|                                                                                |       |               |       |                  |       |
|                                                                                |       | $                  | (8,109     | )                     | $          | (2,229 | ) |

 

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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 three months ended March 31,2009, Explosive Metalworking accounted for 87% of our net sales and 104% 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 8% and 5%, respectively, of our first quarter 2009 netsales.

 

Our net sales for thethree months ended March 31, 2009 decreased by $8,634 (14.8%) compared tothe first three months of 2008, reflecting year-to-year net sales decreases of$8,172 (15.8%), $416 (9.3%), and $46 (2.0%) for our Explosive Metalworking,Oilfield Products, and AMK Welding segments, respectively.  The sales decrease of approximately $8.6million includes a sales volume decrease of approximately $5.0 million and anunfavorable foreign exchange translation adjustment of approximately $3.6million on our European sales relating to the increased value of the U.S.dollar against the Euro.  Income fromoperations decreased by 11.7% to $8,295 in the first three months of 2009 from$9,390 in the first three months of 2008, reflecting declines in ExplosiveMetalworking’s, Oilfield Products’, and AMK Welding’s operating income of $570,$129, and $262, respectively, and a $134 increase in stock-based compensationexpense.  Our net income decreased by6.3% to $4,916 for the three months ended March 31, 2009 from $5,245 inthe same period of 2008.

 

*Impact of Current EconomicSituation on the Company*

 

TheCompany was only minimally impacted in 2008 by the global economic slowdown.  During the Fourth Quarter of 2008,our sales decreased slightly from historic levels.  As a result of the decline in our ExplosiveMetalworking backlog from $97,247 at December 31, 2008 to $74,174 at March 31,2009, we now expect our net consolidated sales in 2009 to decreaseapproximately 17% to 23% (previous guidance was for a decrease of 12% to 20%)from the amount we achieved in 2008.  Inlight of the slow down in order inflow that we are experiencing, we havedeferred some of our previous planned capital expenditures and are continuingto carefully manage expenses.  Wegenerated cash flow from operations of $3,237 during the first quarter of 2009and expect to generate positive cash flow from operations during the remainingthree quarters of 2009.  As of March 31,2009, we had over $16,000 in cash and cash equivalents as well as approximately$38,000 of borrowing capacity available under our existing credit facilities.

 

*Net sales*

 

ExplosiveMetalworking’s revenues are generated principally from sales of clad metal platesand sales of transition joints, which are made from clad plates, to customersthat fabricate industrial equipment for various industries, including oil andgas, petrochemicals, alternative 

 

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energy, hydrometallurgy,aluminum production, shipbuilding, power generation, industrial refrigeration,and similar industries.  While a largeportion of the demand for our clad metal products is driven by new plantconstruction and large plant expansion projects, maintenance and retrofitprojects at existing chemical processing, petrochemical processing, oilrefining, and aluminum smelting facilities also account for a significantportion of total demand.

 

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

 

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

 

Asignificant portion of our revenue is derived from a relatively small number ofcustomers; therefore, the failure to complete existing contracts on a timely basis,to receive payment for such services in a timely manner, or to enter intofuture contracts at projected volumes and profitability levels could adverselyaffect our ability to meet cash requirements exclusively through operatingactivities. We attempt to minimize the risk of losing customers or specificcontracts by continually improving product quality, delivering products ontime, and competing aggressively on the basis of price.

 

*Gross profit and cost of productssold*

 

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

 

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

 

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

 

*Income taxes*

 

Our effective income tax rate decreased to 32.6% for the first threemonths of 2009 from 36.2% for the same period of 2008.  Income tax provisions on the earnings ofNobelclad, Nitro Metall, DYNAenergetics and our German and Luxembourg holdingcompanies have been provided based upon the respective French, Swedish, Germanand Luxembourg statutory tax rates. Going forward, based upon existing tax regulations and current federal,state and foreign statutory tax rates, we expect our full year 2009 effectivetax rate on our projected consolidated pre-tax income to range between 30% and32%.

 

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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 12 months.  From experience, most firm purchase ordersand commitments are realized.

 

Ourbacklog with respect to the Explosive Metalworking segment decreased to $74,174at March 31, 2009 from $97,247 at December 31, 2007.  As a result of this significant decline inbacklog that reflects a slow down in new order inflow during the first quarterof 2009, we are now forecasting that our consolidated net sales for fiscal 2009will decline between 17% and 23% from those reported in fiscal 2008.  This anticipated sales decline is attributableto uncertainty associated with current global economic conditions, the slowdown we have already seen in the chemical, petrochemical, and hydrometallurgysectors, and the difficulty in predicting the timing of large orders that wecontinue to quote.

 

**Three Months Ended March 31, 2009 Compared toThree Months Ended March 31, 2008**

 

*Net sales*

 
| ** ** | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **March 31,**     | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                      | 49,759     |       | $          | 58,393         |       | $ | (8,634 | ) | (14.8 | )% |
|            |            |                        |            |            |            |                |            |  |  |  |  |  |

 

Net sales for the firstquarter of 2009 decreased 14.8% to $49,759 from $58,393 in the first quarter of2008.  Explosive Metalworking salesdecreased 15.8% to $43,472 in the three months ended March 31, 2009 (87%of total sales) from $51,644 in the same period of 2008 (88% of totalsales).  The decrease in Explosive Metalworkingsales reflects a business slowdown in several of the industries that thisbusiness segment serves and includes approximately $3.0 million of unfavorableforeign exchange translation adjustments.

 

Oilfield Productscontributed $4,034 to first quarter 2009 sales (8% of total sales), whichrepresents a 9.3% decrease from sales of $4,450 in the first quarter of 2008(8% of total sales).  The $416 decline insales reflects a modest volume increase offset by $564 in unfavorable foreignexchange adjustments.

 

AMK Welding contributed $2,253 to first quarter 2009 sales (5% of totalsales), which represents a 2.0% decrease from sales of $2,299 in the firstquarter of 2008 (4% of total sales).

 

*Gross profit*

* *
| ** **                            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | **March 31,**     | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit                          |       | $                      | 15,328     |       | $          | 17,711         |       | $ | (2,383 | ) | (13.5 | )% |
| Consolidated gross profit margin rate |       | 30.8                   | %          | 30.3       | %          |           |       |   |   |
|                                       |            |                        |            |            |            |                |            |  |  |  |  |  |

 

Grossprofit decreased by 13.5% to $15,328 for the three months ended March 31,2009 from $17,711 for the three months ended March 31, 2008. Our firstquarter 2009 consolidated gross profit margin rate slightly increased to 30.8%from 30.3% in the first quarter of 2008. The gross profit margin rate forExplosive Metalworking increased from 30.6% in the first quarter of 

 

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2008 to 31.8% in the firstquarter of 2009.  The increased firstquarter 2009 gross profit margin rate for Explosive Metalworking relatesprimarily to higher proportionate first quarter 2009 sales by our U.S. divisionthan was the case in 2008.  Historically,gross margins for our European explosion welding divisions have generally beenlower than those reported by our U.S. division due to less efficient fixedmanufacturing cost structures associated with our smaller Europeanfacilities.  As has been the casehistorically, we expect to see continued fluctuations in Explosive Metalworking’squarterly gross margin rates during 2009 that result from anticipatedfluctuations in quarterly sales volume and changes in product mix. Due largelyto the expected decline in 2009 sales and resultant less favorable absorptionof fixed manufacturing overhead expenses, we currently expect second quarterand full year 2009 gross margins for Explosive Metalworking to be in a range of27% to 29%.

 

OilfieldProducts reported a gross profit margin rate of 24.7% for the first quarter2009 compared to a gross profit margin rate of 25.3% for the first quarter of2008. For the full year 2009, we expect Oilfield Products’ gross margin to becomparable to the 31.9% gross margin that it reported in 2008.

 

Thegross profit margin rate for AMK Welding decreased to 26.1% in the first quarterof 2009 from 36.4% in the first quarter of 2008.  The decrease in AMK Welding gross marginrelates principally to an increase in manufacturing overhead associated withinternal and external engineering and product development expenses as AMK seeksto expand both its service offerings and customer base.  We expect AMK Welding’s full year 2009 grossmargin to meet or exceed the 32.9% gross margin that it reported in 2008.

 

*Generaland administrative expenses*

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                                 | ** ** | **March 31,**     | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                 | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General & administrative expenses |       | $                      | 3,526      |       | $          | 3,119          |       | $ | 407 |   | 13.0 | % |
| Percentage of net sales                    |       | 7.1                    | %          | 5.3        | %          |           |       |   |   |
|                                            |            |                        |            |            |            |                |            |  |  |  |  |  |

 

General andadministrative expenses increased by $407, or 13.0%, to $3,526 in the firstquarter of 2009 from $3,119 in the first quarter of 2008.  This increase includes $348 from annualsalary adjustments and staffing changes, an $80 increase in stock-basedcompensation, an increase of $56 for incentive compensation and net increasesof $85 in other spending categories.  Theforegoing increases were partially offset by a favorable foreign exchangetranslation adjustment of $162.  As apercentage of net sales, general and administrative expenses increased to 7.1%in the first quarter of 2009 from 5.3% in the first quarter of 2008.

 

*Sellingexpenses*

 
| ** **              | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **March 31,**     | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **              | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses        |       | $                      | 2,324      |       | $          | 2,841          |       | $ | (517 | ) | (18.2 | )% |
| Percentage of net sales |       | 4.7                    | %          | 4.9        | %          |           |       |   |   |
|                         |            |                        |            |            |            |                |            |  |  |  |  |  |

 

Sellingexpenses, which include sales commissions of $383 in 2009 and $454 in 2008,decreased by 18.2% to $2,324 in the first quarter of 2009 from $2,841 in thefirst quarter of 2008.  

 

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The $517 decrease in ourconsolidated selling expenses includes decreased selling expenses of $674 atour European divisions offset by increased selling expenses of $157 in our U.S.divisions. The large decrease in European selling expenses relates principallyto staff 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, but it also includes $222 of favorableforeign exchange translation adjustments. The $157 increase in our U.S. selling expenses includes increasedcommissions of $107, an impact of $75 from annual salary adjustments and a $35increase in stock-based compensation that were offset by net reductions of $60in other spending categories.  As apercentage of net sales, selling expenses decreased to 4.7% in the firstquarter of 2008 from 4.9% in the first quarter of 2008.

 

*Amortization expenses*

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------------------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                                           | ** ** | **March 31,**     | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                           | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Amortization expense of purchased intangible  assets |       | $                      | 1,183      |       | $          | 2,361          |       | $ | (1,178 | ) | (49.9 | )% |
| Percentage of net sales                              |       | 2.4                    | %          | 4.0        | %          |           |       |   |   |
|                                                      |            |                        |            |            |            |                |            |  |  |  |  |  |

 

Amortization expense relates entirely to the amortization of values assignedto intangible assets in connection with the November 15, 2007 acquisitionof DYNAenergetics.  Amortization expensefor the three months ended March 31, 2009 includes $821, $274 and $89relating to values assigned to customer relationships, core technology andtrademarks/trade names, respectively. Amortization expense for the three months ended March 31, 2008includes $1,006, $940, $313 and $102 relating to values assigned to orderbacklog, customer relationships, core technology and trademarks/trade names,respectively.  Amortization expense for2009 (as measured in Euros) is expected to approximate €3,620, a reduction fromthe 2008 amount of €4,962 due to the full amortization in 2008 of the valueassigned to acquired order backlog.

 

*Operating income*

 
| ** **       | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **       | ** ** | **March 31,**     | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **       | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Operating income |       | $                      | 8,295      |       | $          | 9,390          |       | $ | (1,095 | ) | (11.7 | )% |
|                  |            |                        |            |            |            |                |            |  |  |  |  |  |

 

Income from operations (“operatingincome”) decreased by 11.7% to $8,295 in the first quarter of 2009 from $9,390in the first quarter of 2008.  ExplosiveMetalworking reported operating income of $9,412 in the first quarter of 2009as compared to $9,982 in the first quarter of 2008.  This 5.7% decrease in Explosive Metalworkingoperating income is largely attributable to the 15.8% decrease in net salesdiscussed above.

 

Oilfield Productsreported an operating loss of $694 for the first quarter of 2009 as compared toa loss from operations of $565 for the first three months of 2008.

 

AMK Welding reportedoperating income of $375 for the three months ended March 31, 2009 ascompared to $637 for the same period of 2008.

 

Operating income for thethree months ended March 31, 2009 and 2008 includes $798 and $664,respectively, of stock-based compensation. This expense is not allocated to our business 

 

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segments and thus is notincluded in the above first quarter operating income or loss totals forExplosive Metalworking, Oilfield Products and AMK Welding.

 

*Interest income (expense), net*

* *
| ** **                     | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                     | ** ** | **March 31,**     | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                     | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income (expense), net |       | $                      | (837       | )          | $          | (1,040         | )          | $ | 203 |   | (19.5 | )% |
|                                |            |                        |            |            |            |                |            |  |  |  |  |  |

 

We recordednet interest expense of $837 in the three months ended March 31, 2009compared to net interest expense of $1,040 in the same time period of2008.  This decrease in net interestexpense reflects term debt reductions and lower interest rates.

 

*Income tax provision*

 
| ** **           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **           | ** ** | **March 31,**     | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **           | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax provision |       | $                      | 2,376      |       | $          | 2,972          |       | $ | (596 | ) | (20.1 | )% |
| Effective tax rate   |       | 32.6                   | %          | 36.2       | %          |           |       |   |   |
|                      |            |                        |            |            |            |                |            |  |  |  |  |  |

 

We recorded an income tax provision of $2,376 in the first quarter of2009 compared to $2,972 in the first quarter of 2008.  The effective tax rate decreased to 32.6% inthe first quarter of 2009 from 36.2% in the first quarter of 2008.  The income tax provisions for the threemonths ended March 31, 2009 and 2008 include $2,122 and $2,951,respectively, related to U.S. taxes, with the remainder relating to foreigntaxes and foreign tax benefits associated with the operations of Nobelclad andits Swedish subsidiary, Nitro Metall, as well as the DYNAenergetics divisionand related holding companies in Germany and Luxembourg.  Our blended effective tax rate for 2009 isexpected to range from 30% to 32% based on projected pre-tax income.

 

# **Liquidity and Capital Resources**

# ** **

**We havehistorically financed our operations from a combination of internally generatedcash flow, revolving credit borrowings, various long-term debt arrangements,and the issuance of common stock.  Inconnection with the acquisition of DYNAenergetics, we entered into a five-yearsyndicated credit agreement.  The creditagreement, which provides for term loans of $45,000 and 14,000 Euros andrevolving loans of $25,000 and 7,000 Euros, is through a syndicate of sevenbanks.  The credit facility in theapproximate amount of $100,000 expires on November 16, 2012.  As of March 31, 2009, term loans of$37,756 and 11,746 Euros ($15,514) were outstanding under the credit facilityand $1,981 was outstanding under term loan obligations of DYNAenergetics.  We also had $2,800 in outstanding borrowingsunder our revolving credit agreement and $1,429 outstanding under our line ofcredit agreements for DYNAenergetics as of March 31, 2009.  We have approximately $38,000 available forborrowing under these facilities.**

** **

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 

 

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upon our success in executingour strategies. If we are unable to (i) realize sales from our backlog; (ii) securenew customer orders at attractive prices; and (iii) continue to implementcost-effective internal processes, our ability to meet cash requirementsthrough operating activities could be impacted. Furthermore, any restriction on the availability of borrowings under ourcredit facilities could negatively affect our ability to meet future cashrequirements.

 

*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 March 31, 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 first quarter of 2009 totaled $3,237.  Significant sources of operating cash flowincluded net income of $4,916, non-cash depreciation and amortization expenseof $2,519 and stock-based compensation of $798. These sources of operating cash flow were partially offset by a deferredincome tax benefit of $605 and net negative changes in various components ofworking capital in the amount of $4,440. Net negative changes in working capital included increases in accountsreceivable and inventories of $2,702 and $2,721, respectively, and decreases incustomer advances and accrued expenses of $961 and $904, respectively.  These negative changes in working capitalwere partially offset by decreases in prepaid expenses of $460 and an increasein accounts payable of $2,388.

 

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

 

*Cashflows from investing activities*

 

Net cash flows used byinvesting activities for the first quarter of 2009 totaled $1,162 and consistedalmost entirely of capital expenditures.

 

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

 

*Cash flows from financingactivities*

 

Net cash flows providedby financing activities for the first quarter of 2009 were $323, whichconsisted primarily of net borrowings on bank lines of credit of $4,215 and$236 in net proceeds from the issuance of common stock relating to the exerciseof stock options.  These sources of cashflow were almost entirely offset by $3,862 in required prepayments of termloans 

 

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under our syndicated creditagreement from excess cash flow that we generated in fiscal year 2008, $233 inprincipal payments on Nord LB term loans, payments of deferred debt issuance costsof $19 and payment on capital lease obligations of $71.

 

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

 

*Payment of Dividends*

 

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

 

**Critical Accounting Policies**

 

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

 

Inmanagement’s opinion, the more significant reporting areas impacted bymanagement’s judgments and estimates are revenue recognition, assetimpairments, inventory valuation and impact of foreign currency exchange raterisks.  Management’s judgments andestimates in these areas are based on information available from both internaland external sources, and actual results could differ from the estimates, asadditional information becomes known.  We believe the following to be our most critical accounting policies.

 

*Revenuerecognition*

 

**Sales of clad metal products andwelding services are generally based upon customer specifications set forth incustomer purchase orders and require us to provide certifications relative tometals used, services performed and the results of any non-destructive testingthat the customer has requested be performed. All issues of conformity of the product to specifications are resolvedbefore the product is shipped and billed. Products related to the oilfield products segment, which includedetonating cords, detonators, bi-directional boosters and shaped charges, aswell as, seismic related explosives and accessories, are standard innature.  In all cases, revenue isrecognized only when all four of the following criteria have been satisfied:persuasive evidence of an arrangement exists; the price is fixed ordeterminable; delivery has occurred; and collection is reasonably assured.  For contracts that require multipleshipments, revenue is recorded only for the**

 

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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*

 

We accounted for our business acquisition in accordance with theprovisions of SFAS No. 141, *Business Combinations*,using the purchase method of accounting. We allocated the total cost of theacquisition to the underlying net assets based on their respective estimatedfair values. As part of this allocation process, we identified and attributedvalues and estimated lives to the intangible assets acquired. These determinationsinvolved significant estimates and assumptions regarding multiple, highlysubjective variables, including those with respect to future cash flows,discount rates, asset lives, and the use of different valuation models andtherefore required considerable judgment. Our estimates and assumptions werebased, in part, on the availability of listed market prices or othertransparent market data. These determinations affect the amount of amortizationexpense recognized in future periods. We based our fair value estimates onassumptions we believe to be reasonable but are inherently uncertain.

 

*Goodwilland Other Intangible Assets*

 

We review the carrying value of goodwill at least annually to assessimpairment because 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 incircumstances, many of which are subjective in nature, include significantnegative industry or economic trends, significant changes in the manner of ouruse of the acquired assets or our strategy, a significant decrease in themarket value of the asset, and a significant change in legal factors or in thebusiness climate that could affect the value of the asset. We assess impairmentby comparing the fair value of an identifiable intangible asset or goodwillwith its carrying value. The determination of fair value involves significantmanagement judgment as described further below. Impairments are expensed whenincurred. Specifically, we test for impairment as follows:

 

*Goodwill*

 

In accordance with Statement of Financial Accounting Standards No. 142,*Goodwill and Other Intangible Assets* (“SFAS142”), we test goodwill for impairment on a “reporting unit” level as definedby reference to SFAS No. 131, *Disclosures about Segmentsof an Enterprise and Related Information*, on at least an annualbasis. A reporting unit is a group of businesses (i) for which discrete financialinformation is available and (ii) that have similar economiccharacteristics. We test goodwill for impairment using the following two-stepapproach:

 

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The first step is a comparison of each reporting unit’s fair value toits carrying value. We estimate fair value using the best informationavailable, including market information and discounted cash flow projections,also referred to as the income approach. The income approach uses a reportingunit’s projection of estimated operating results and cash flows that isdiscounted using a weighted-average cost of capital that reflects currentmarket conditions. The projections incorporate our best estimates of economicand market conditions over the projected period including growth rates in salesand estimates of future expected changes in operating margins and cashexpenditures. Other significant estimates and assumptions include terminalvalue growth rates, future estimates of capital expenditures and changes infuture working capital requirements.  Wevalidate our estimates of fair value under the income approach by comparing thevalues to fair value estimates using a market approach.

 

If the carrying value of the reporting unit is higher than its fairvalue, there is an indication that impairment may exist, and the second stepmust be performed 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.

 

Our impairment testing in the fourth quarter of 2008 had not resultedin a determination that any of our goodwill is impaired; however, the passingmargin of the first step of our goodwill impairment testing relative to theOilfield Products business segment 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 thequarter ended March 31, 2009 that would necessitate interim impairmenttesting of goodwill.

 

The use of different estimates or assumptions within our discountedcash flow model when determining the fair value of our reporting units or usingmethodologies other than as described above could result in different valuesfor reporting units and could result in an impairment charge.

 

*Intangible assets subject to amortization*

 

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

 

*Impactof foreign currency exchange rate risks*

 

Thefunctional currency for our foreign operations is the applicable local currencyfor each affiliate company. Assets and liabilities of foreign subsidiaries forwhich the functional currency is the local currency are translated at exchangerates in effect at period-end, and the statements of 

 

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operations are translated atthe average exchange rates during the period. Exchange rate fluctuations on translating foreign currency financialstatements into U.S. dollars that result in unrealized gains or losses arereferred to as translation adjustments. Cumulative translation adjustments arerecorded as a separate component of stockholders’ equity and are included inother cumulative comprehensive income (loss). Transactions denominated incurrencies other than the local currency are recorded based on exchange ratesat the time such transactions arise. Subsequent changes in exchange ratesresult in transaction gains and losses, which are reflected in income asunrealized (based on period-end translations) or realized upon settlement ofthe transactions. Cash flows from our operations in foreign countries aretranslated at actual exchange rates when known, or at the average rate for theperiod. As a result, amounts related to assets and liabilities reported in theconsolidated statements of cash flows will not agree to changes in thecorresponding balances in the consolidated balance sheets. The effects ofexchange rate changes on cash balances held in foreign currencies are reportedas a separate line item below cash flows from financing activities.

 

*Incometaxes*

 

Weaccount for income taxes in accordance with Statement of Financial AccountingStandards No.  109, *Accounting for IncomeTaxes* (“SFAS 109”), which requires the recognition of deferred taxassets and deferred tax liabilities for the expected future income taxconsequences of transactions that have been included in our financialstatements but not our tax returns. Deferred tax assets and liabilities are determined based on income taxcredits and on the temporary differences between the Consolidated FinancialStatement basis and the tax basis of assets and liabilities using enacted taxrates in effect for the year in which the differences are expected toreverse.  We routinely evaluate deferredtax assets to determine if they will, more likely than not, be recovered fromfuture projected taxable income; if not, we record an appropriate valuationallowance.

 

*Stock-Based Compensation Expense*

 

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

 

**Recent Accounting Pronouncements**

 

**In December 2007,the FASB issued SFAS No. 141(R), *Business Combinations*and SFAS No. 160, *Accounting and Reportingof Noncontrolling Interest in Consolidated Financial Statements*, anamendment of ARB No. 51. These new standards will significantly change theaccounting for and reporting of business combination transactions andnoncontrolling (minority) interests in consolidated financial statements. SFASNos. 141(R) and 160 are required to be adopted simultaneously and areeffective for the first annual reporting period beginning on or after December 15,2008.  The adoption of these standards in2009 did not have any impact on the Company’s results of operations orfinancial position.**

** **

**In March 2008,the FASB issued SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities*.  SFAS 161requires additional disclosures related to the use of derivative**

 

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**instruments, theaccounting for derivatives and how derivatives impact financial statements. SFAS No. 161 is effective for fiscal years and interim periodsbeginning after November 15, 2008.  The adoption of SFAS No. 161in the first quarter of 2009 did not have any impact on the Company’s resultsof operations or financial position.**

** **

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

** **

There have been no events that materially affect our quantitative andqualitative disclosure about market risk from that reported in our AnnualReport on Form 10-K for the year ended December 31, 2008.

 

**ITEM 4.     Controls and Procedures**

 

The Company maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in the Company’s Exchange Act reports is accurately recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicatedto the Company’s management, including its Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.  In designing and evaluatingthe disclosure controls and procedures, management recognized that any controlsand procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily applied its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

As of March 31, 2009, the Company carried out anevaluation, under the supervision and with the participation of the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)).  Based on that evaluation, the Company’s ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective.  There have been no changes in the Company’sinternal controls during the quarter ended March 31, 2009 or in otherfactors that could materially affect the Company’s internal controls overfinancial reporting.

 

The Company’s management, including the Company’sChief Executive Officer and Chief Financial Officer, does not expect that theCompany’s disclosure controls or its internal controls will prevent all errorsand all fraud.  Further, the design of acontrol system must reflect the fact that there are resource constraints, andthe benefits of controls must be considered relative to their costs.  As a result of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues and instances of fraud, if any, within the Company have beendetected.  These inherent limitationsinclude the realities that judgments in decision-making can be faulty, and thatbreakdowns can occur because of simple errors or mistakes.  As a result of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.  Accordingly, theCompany’s disclosure controls and procedures are designed to providereasonable, not absolute, assurance that the disclosure controls and proceduresare met.

 

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**Part II - OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

None.

 

**Item 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.

 

**Wehave seen a recent slowdown in some of our markets and anticipate sales willdecline during 2009.**

 

During thefourth quarter of 2008 and first quarter of 2009, we have seen a slowdown inDMC Clad sales to some of the markets we serve and anticipate our sales todecrease by approximately 17% - 23% for the full year in 2009 from the amountwe achieved in 2008.  The explosion-weldcladding market is dependent upon sales of products for use by customers in alimited number of heavy industries, including oil and gas, alternative energy,chemicals and petrochemicals, hydrometallurgy, aluminum production, shipbuilding,power generation, and industrial refrigeration. These industries tend to be cyclical in nature and the current worldwideeconomic downturn has affected many of these markets.  Indeed, we have already seen a slowdown inthe chemical, petrochemical and hydrometallurgy sectors.  An economic slowdown in one or all of theseindustries—whether due to traditional cyclicality, general economic conditionsor other factors—could impact capital expenditures within the industry.  If demand from such industries were todecline or to experience reduced growth rates, our sales would be expected tobe affected proportionately, which may have a material adverse effect on ourbusiness, financial condition, and results of operations.

 

**Our backlog 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 EquitySecurities and Use of Proceeds**

 

None.

 

**Item 3. Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

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**Item 5. Other Information**

 

None.

 

**Item 6.**

 

**Exhibits**

 

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

 

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

 

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

 

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

 

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##### **SIGNATURES**

 

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

 

 
|                   | **DYNAMIC MATERIALS CORPORATION**                                                                                                              |
|------------------------|------------------------------------------------------------------------------------------------------------------------------------------------|
|                   | (Registrant)                                                                                                                                   |
|                   |                                                                                                                                           |
|                   |                                                                                                                                           |
| Date: May 1, 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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