** **

**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**Form 10-Q**

 

| **(Mark One)**                                                                                                                                                                                                                                                                                                              |   |                                                                                             |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                        |   |                                                                                             |
| **ý**                                                                                                                                                                                                                                                                                                                  |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                        |   |                                                                                             |
| **For  the quarterly period ended March 31, 2006**                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                        |   |                                                                                             |
| **OR**                                                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                        |   |                                                                                             |
| **o**                                                                                                                                                                                                                                                                                                                       |   | **TRANSITION REPORT UNDER SECTION  13 OR 15(d) OF THE SECURITIES ACT OF 1934**                   |
| ** **                                                                                                                                                                                                                                                                                                                  |   | ** **                                                                                       |
| **FOR  THE TRANSITION PERIOD  FROM                       TO                       .** |
|                                                                                                                                                                                                                                                                                                                        |   |                                                                                             |
| **Commission  file number 0-8328**                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                             |        |                                                                                                  |  |  |

 

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**DYNAMIC MATERIALS CORPORATION**(Exactname of Registrant as Specified in its Charter)

 

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

 

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

(Address of principalexecutive offices, including zip code)

 

**(303) 665-5700**

(Registrant’s telephonenumber, including area code)

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes  ý    No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.    Large accelerated filer o Acceleratedfiler ý Non-acceleratedfiler  o

 

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

 

The number of shares ofCommon Stock outstanding was 11,788,670 as of April 25, 2006.

 

 

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CAUTIONARY NOTE ABOUTFORWARD-LOOKING STATEMENTS

 

Thisquarterly report on Form 10-Q contains “forward-looking statements” within themeaning of section 27A of the Securities Act of 1933 and section 21E of theSecurities Exchange Act of 1934. In particular, we direct your attention toPart I Item 1- Financial Statements, Item 2 - Management’s Discussion andAnalysis of Financial Condition and Results of Operations and Item 3 -Quantitative and Qualitative Disclosures About Market Risk. We intend theforward-looking statements throughout this quarterly report on Form 10-Q andthe information incorporated by reference herein to be covered by the safeharbor provisions for forward-looking statements. Statements contained in thisreport which are not historical facts are forward-looking statements thatinvolve risks and uncertainties that could cause actual results to differmaterially from projected results. All projections and 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 of forward-lookingwords such as “may”, “believe”, “plan”, “anticipate”, “estimate”, “expect”, “intend”and other phrases of similar meaning. The forward-looking information is basedon information available as of the date of this quarterly report and onnumerous assumptions and developments that are not within our control. Althoughwe believe that our expectations as expressed in these forward-lookingstatements are reasonable, we cannot assure you that our expectations will turnout to be correct. Factors that could cause actual results to differ materiallyinclude, but are not limited to, the following: the ability to obtain newcontracts at attractive prices; the size and timing of customer orders andshipment; fluctuations in customer demand; competitive factors; the timely completionof contracts; any actions which may be taken by SNPE as the controllingshareholder of Dynamic Materials Corporation (“DMC” or the “Company”) withrespect to the Company and our businesses; the timing and size of expenditures;the timely receipt of government approvals and permits; the adequacy of locallabor supplies at our facilities; current or future limits on manufacturingcapacity at our various operations; the availability and cost of funds; andgeneral economic conditions, both domestic and foreign, impacting our businessand the business of the end-market users we serve. Readers are cautioned not toplace undue reliance on these forward-looking statements, which reflectmanagement’s analysis only as of the date hereof. We undertake no obligation topublicly release the results of any revision to these forward-lookingstatements that may be made to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events.

 

2

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**INDEX**

 
| PART I - FINANCIAL INFORMATION                                                                            |
|-----------------------------------------------------------------------------------------------------------|
|                                                                                                      |   |
| Item 1 - Condensed Consolidated Financial Statements                                                      |   |
|                                                                                                      |   |   |   |
|                                                                                                      |   | Consolidated Balance Sheets as of March 31, 2006 (unaudited) and December  31, 2005 |   |
|                                                                                                      |   | Consolidated Statements of Operations for the three months ended March  31, 2006 and 2005 (unaudited) |   |
|                                                                                                      |   | Consolidated Statement of Stockholders’ Equity for the three months ended  March 31, 2006 (unaudited) |   |
|                                                                                                      |   | Consolidated Statements of Cash Flows for the three months ended March  31, 2006 and 2005 (unaudited) |   |
|                                                                                                      |   | Notes to Condensed Consolidated Financial Statements (unaudited) |   |
|                                                                                                      |   |   |   |
| Item 2 - Management’s Discussion and Analysis of Financial Condition and Results  of Operations |   |
|                                                                                                      |   |   |   |
| Item 3 - Quantitative and Qualitative Disclosures about Market Risk                                       |   |
|                                                                                                      |   |   |   |
| Item 4 - Controls and Procedures                                                                     |   |
|                                                                                                      |   |   |   |
| PART II - OTHER INFORMATION                                                                               |
|                                                                                                      |   |   |   |
| Item 1 - Legal Proceedings                                                                                |   |
|                                                                                                      |   |   |   |
| Item 1A -  Risk Factors                                                                                   |   |
|                                                                                                      |   |   |   |
| Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds                                      |   |
|                                                                                                      |   |   |   |
| Item 3 - Defaults Upon Senior Securities                                                                  |   |
|                                                                                                      |   |   |   |
| Item 4 - Submission of Matters to a Vote of Security Holders                                              |   |
|                                                                                                      |   |   |   |
| Item 5 - Other Information                                                                                |   |
|                                                                                                      |   |   |   |   |
| Item 6 -  Exhibits                                                                                        |   |
|                                                                                                      |   |   |   |
| Signatures                                                                                                |   |
|                                                                                                           |  |  |  |  |

 

3

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**Part I - FINANCIAL INFORMATION**

 

**ITEM 1.Condensed Consolidated Financial Statements**

 

DYNAMICMATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATEDBALANCE SHEETS

(Dollars inThousands)

 
| ** **                                                                                   | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                                                                         |       | **(unaudited)**          |       |                        |       |
| ASSETS                                                                                       |       |                     |       |                        |       |
| CURRENT ASSETS:                                                                              |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                   |       | $                        | 13,114     |                        | $          | 5,763 |   |
| Marketable  securities                                                                       |       | —                   |       | 1,950                       |       |
| Loan to related  party                                                                       |       | 1,211                    |       | —                      |       |
| Accounts  receivable, net of allowance for doubtful accounts of $329 and $301,  respectively |       | 15,002                   |       | 15,576                      |       |
| Inventories                                                                                  |       | 12,644                   |       | 11,869                      |       |
| Prepaid expenses  and other                                                                  |       | 1,820                    |       | 822                         |       |
| Current portion  of other receivables related to discontinued operations                     |       | 678                      |       | —                      |       |
| Current deferred  tax assets                                                                 |       | 597                      |       | 572                         |       |
|                                                                                         |       |                     |       |                        |       |
| Total current  assets                                                                        |       | 45,066                   |       | 36,552                      |       |
|                                                                                         |       |                     |       |                        |       |
| PROPERTY, PLANT  AND EQUIPMENT                                                               |       | 23,205                   |       | 22,635                      |       |
| Less -  Accumulated depreciation                                                             |       | (10,415                  | )          | (10,063                     | )          |
|                                                                                         |       |                     |       |                        |       |
| Property, plant  and equipment, net                                                          |       | 12,790                   |       | 12,572                      |       |
|                                                                                         |       |                     |       |                        |       |
| GOODWILL, net                                                                                |       | 847                      |       | 847                         |       |
|                                                                                         |       |                     |       |                        |       |
| DEFERRED TAX  ASSETS                                                                         |       | 1,824                    |       | 819                         |       |
|                                                                                         |       |                     |       |                        |       |
| OTHER ASSETS,  net                                                                           |       | 79                       |       | 101                         |       |
|                                                                                         |       |                     |       |                        |       |
| OTHER  RECEIVABLES RELATED TO DISCONTINUED OPERATIONS                                        |       | —                   |       | 681                         |       |
|                                                                                         |       |                     |       |                        |       |
| ASSETS OF  DISCONTINUED OPERATIONS                                                           |       | 789                      |       | 3,739                       |       |
|                                                                                         |       |                     |       |                        |       |
| TOTAL ASSETS                                                                                 |       | $                        | 61,395     |                        | $          | 55,311 |   |

 

The accompanying notes are an integralpart of these Condensed Consolidated Financial Statements.

 

4

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DYNAMIC MATERIALS CORPORATION &SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Share Data)

 
| ** **                                                                                                                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                          | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| ** **                                                                                                                          | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                            |       |               |       |                  |       |
| CURRENT  LIABILITIES:                                                                                                               |       |               |       |                  |       |
| Accounts payable                                                                                                                    |       | $                  | 7,486      |                  | $          | 7,278 |   |
| Accrued expenses                                                                                                                    |       | 1,833              |       | 1,615                 |       |
| Accrued income  taxes                                                                                                               |       | 4,109              |       | 979                   |       |
| Accrued employee  compensation and benefits                                                                                         |       | 2,164              |       | 2,508                 |       |
| Customer  advances                                                                                                                  |       | 2,033              |       | 1,885                 |       |
| Related party  debt                                                                                                                 |       | —             |       | 45                    |       |
| Current  maturities on long-term debt                                                                                               |       | 540                |       | 528                   |       |
|                                                                                                                                |       |               |       |                  |       |
| Total current  liabilities                                                                                                          |       | 18,165             |       | 14,838                |       |
|                                                                                                                                |       |               |       |                  |       |
| LONG-TERM DEBT                                                                                                                      |       | 2,185              |       | 2,221                 |       |
|                                                                                                                                |       |               |       |                  |       |
| DEFERRED TAX  LIABILITIES                                                                                                           |       | 1,525              |       | 195                   |       |
|                                                                                                                                |       |               |       |                  |       |
| OTHER LONG-TERM  LIABILITIES                                                                                                        |       | 231                |       | 222                   |       |
|                                                                                                                                |       |               |       |                  |       |
| LIABILITIES OF  DISCONTINUED OPERATIONS                                                                                             |       | —             |       | 2,880                 |       |
|                                                                                                                                |       |               |       |                  |       |
| COMMITMENTS AND  CONTINGENT LIABILITIES                                                                                             |       | —             |       | —                |       |
| Total  liabilities                                                                                                                  |       | 22,106             |       | 20,356                |       |
|                                                                                                                                |       |               |       |                  |       |
| STOCKHOLDERS’  EQUITY:                                                                                                         |       |               |       |                  |       |
| Preferred stock,  $.05 par value; 4,000,000 shares authorized; no issued and outstanding shares                                     |       | —             |       | —                |       |
| Common stock,  $.05 par value; 15,000,000 shares authorized; 11,782,420 and 11,758,920  shares issued and outstanding, respectively |       | 589                |       | 588                   |       |
| Additional  paid-in capital                                                                                                         |       | 20,241             |       | 19,778                |       |
| Retained  earnings                                                                                                                  |       | 17,834             |       | 14,104                |       |
| Other cumulative  comprehensive income                                                                                              |       | 625                |       | 485                   |       |
|                                                                                                                                |       |               |       |                  |       |
| Total  stockholders’ equity                                                                                                    |       | 39,289             |       | 34,955                |       |
|                                                                                                                                |       |               |       |                  |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                    |       | $                  | 61,395     |                  | $          | 55,311 |   |

 

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

 

5

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DYNAMICMATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF OPERATIONS

FOR THE THREEMONTHS ENDED MARCH 31, 2006 AND 2005

(Dollars inThousands, Except Share Data)

(unaudited)

 
| ** **                                                        | ** ** | **2006**   | ** **   | **2005**   | ** ** |
|-------------------------------------------------------------------|------------|------------|--------------|------------|------------|
| NET SALES                                                    |       | $          |  25,175 |       | $          |  17,510 |   |
| COST OF PRODUCTS  SOLD                                            |       | 15,894     |         | 12,860     |       |
| Gross profit                                                      |       | 9,281      |         | 4,650      |       |
| COSTS AND  EXPENSES:                                              |       |       |         |       |       |
| General and administrative  expenses                              |       | 1,527      |         | 809        |       |
| Selling expenses                                                  |       | 1,324      |         | 1,126      |       |
| Total costs and  expenses                                         |       | 2,851      |         | 1,935      |       |
| INCOME FROM  OPERATIONS OF CONTINUING OPERATIONS                  |       | 6,430      |         | 2,715      |       |
| OTHER INCOME  (EXPENSE):                                          |       |       |         |       |       |
| Other income  (expense), net                                      |       | (6         | )            | 5          |       |
| Interest expense                                                  |       | (29        | )            | (86        | )          |
| Interest income                                                   |       | 123        |         | 4          |       |
| INCOME BEFORE  INCOME TAXES AND DISCONTINUED OPERATIONS           |       | 6,518      |         | 2,638      |       |
| INCOME TAX  PROVISION                                             |       | 2,379      |         | 990        |       |
| INCOME FROM  CONTINUING OPERATIONS BEFORE DISCONTINUED OPERATIONS |       | 4,139      |         | 1,648      |       |
| DISCONTINUED  OPERATIONS:                                         |       |       |         |       |       |
| Income from  discontinued operations, net of tax                  |       | 1,357      |         | —     |       |
| Income from  discontinued operations                              |       | 1,357      |         | —     |       |
| NET INCOME                                                        |       | $          | 5,496        |       | $          | 1,648 |   |
| INCOME PER SHARE  - BASIC:                                        |       |       |         |       |       |
| Continuing  operations                                            |       | $          | 0.35         |       | $          | 0.15 |   |
| Discontinued  operations                                          |       | 0.12       |         | —     |       |
| Net income                                                        |       | $          | 0.47         |       | $          | 0.15 |   |
| INCOME PER SHARE  - DILUTED:                                      |       |       |         |       |       |
| Continuing  operations                                            |       | $          | 0.34         |       | $          | 0.14 |   |
| Discontinued  operations                                          |       | 0.11       |         | —     |       |
| Net income                                                        |       | $          | 0.45         |       | $          | 0.14 |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING -                  |       |       |         |       |       |
| Basic                                                             |       | 11,768,098 |         | 10,694,260 |       |
| Diluted                                                           |       | 12,217,547 |         | 11,861,100 |       |
|                                                              |       |       |         |       |       |
| ANNUAL DIVIDENDS  DECLARED PER COMMON SHARE                       |       | $          | 0.15         |       | $          | — |   |

 

The accompanying notes are an integralpart of these Condensed Consolidated Financial Statements

 

6

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DYNAMICMATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREEMONTHS ENDED MARCH 31, 2006

(Amounts inThousands)

(unaudited)

 
| ** **                                                    | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Retained** | ** ** | **Other  Cumulative  Comprehensive** | ** ** | ** ** | ** ** | **Comprehensive  Income** | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|--------------------------------------|------------|------------|------------|---------------------------|------------|
|                                                          |       | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Earnings**                         | ** ** | **Income** | ** ** | **Total**                 | ** ** | **for the  Period** | ** ** |
|                                                          |       |                  |       |                    |       |         |       |                                 |       |       |       |                      |       |   |   |
| Balances,  December 31, 2005                                  |       | 11,759                |       | $                       | 588        |         | $          | 19,778                               |       | $          | 14,104     |                      | $          | 485 |   | $ | 34,955 |   |   |   |
|                                                          |       |                  |       |                    |       |         |       |                                 |       |       |       |                      |       |   |   |
| Shares issued  for stock option exercises                     |       | 23                    |       | 1                       |       | 73           |       | —                               |       | —     |       | 74                        |       |   |   |
|                                                          |       |                  |       |                    |       |         |       |                                 |       |       |       |                      |       |   |   |
| Tax benefit  related to stock options                         |       | —                |       | —                  |       | 54           |       | —                               |       | —     |       | 54                        |       |   |   |
|                                                          |       |                  |       |                    |       |         |       |                                 |       |       |       |                      |       |   |   |
| Stock-based  compensation                                     |       | —                |       | —                  |       | 336          |       | —                               |       | —     |       | 336                       |       |   |   |
|                                                          |       |                  |       |                    |       |         |       |                                 |       |       |       |                      |       |   |   |
| Dividends paid                                                |       | —                |       | —                  |       | —       |       | (1,766                               | )          | —     |       | (1,766                    | )          |   |   |
|                                                          |       |                  |       |                    |       |         |       |                                 |       |       |       |                      |       |   |   |
| Net income                                                    |       | —                |       | —                  |       | —       |       | 5,496                                |       | —     |       | 5,496                     |       | 5,496 |   |
|                                                          |       |                  |       |                    |       |         |       |                                 |       |       |       |                      |       |   |   |
| Change in  cumulative foreign currency translation adjustment |       | —                |       | —                  |       | —       |       | —                               |       | 140        |       | 140                       |       | 140 |   |
| Balances, March  31, 2006                                     |       | 11,782                |       | 589                     |       | 20,241       |       | 17,834                               |       | 625        |       | 39,289                    |       | 5,636 |   |
|                                                               |            |                       |            |                         |            |              |            |                                      |            |            |            |                           |            |  |  |  |  |  |  |  |

 

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

 

7

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DYNAMICMATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

FOR THE THREEMONTHS ENDED MARCH 31, 2006 AND 2005

(Dollars inThousands)

(unaudited)

 
| ** **                                                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                              |       |     |       |     |       |
| Net income                                                                          |       | $        | 5,496      |     | $          | 1,648 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities - |       |     |       |     |       |
| Income from  discontinued operations, net of tax                                    |       | (1,357   | )          | —   |       |
| Depreciation                                                                        |       | 313      |       | 362      |       |
| Amortization                                                                        |       | 4        |       | 4        |       |
| Amortization of  capitalized debt issuance costs                                    |       | 7        |       | 13       |       |
| Stock-based  compensation                                                           |       | 336      |       | —   |       |
| Provision for  deferred income taxes                                                |       | 320      |       | (14      | )          |
| Tax benefit  related to exercise of stock options                                   |       | —   |       | 214      |       |
| Change in -                                                                         |       |     |       |     |       |
| Accounts  receivable, net                                                           |       | 689      |       | 852      |       |
| Inventories                                                                         |       | (531     | )          | (283     | )          |
| Prepaid expenses  and other                                                         |       | (803     | )          | (218     | )          |
| Accounts payable                                                                    |       | 120      |       | 145      |       |
| Accrued expenses  and other liabilities                                             |       | 1,899    |       | (469     | )          |
| Net cash  provided by operating activities                                          |       | 6,493    |       | 2,254    |       |
|                                                                                |       |     |       |     |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                              |       |     |       |     |       |
| Acquisition of  property, plant and equipment                                       |       | (469     | )          | (577     | )          |
| Sale of  marketable securities                                                      |       | 1,950    |       | —   |       |
| Loan to related  party                                                              |       | (1,206   | )          | —   |       |
| Change in other  non-current assets                                                 |       | 79       |       | 78       |       |
| Payment received  on other receivables related to discontinued operations           |       | 3        |       | 874      |       |
| Cash flows  provided by investing activities of discontinued operations             |       | 2,197    |       | —   |       |
|                                                                                |       |     |       |     |       |
| Net cash flows  provided by investing activities                                    |       | 2,554    |       | 375      |       |
|                                                                                     |            |          |            |          |            |  |  |

 

The accompanying notes are an integralpart of these Condensed Consolidated Financial Statements.

 

8

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| ** **                                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                 |       |     |       |     |       |
| Repayments on  bank lines of credit, net                               |       | —   |       | (3,041   | )          |
| Repayments on  related party lines of credit, net                      |       | (45      | )          | (129     | )          |
| Payment on SNPE,  Inc. term loan                                       |       | —   |       | (667     | )          |
| Payment on  industrial development revenue bond                        |       | (45      | )          | (240     | )          |
| Payment of  dividends                                                  |       | (1,766   | )          | —   |       |
| Change in other  long-tem liabilities                                  |       | 7        |       | 4        |       |
| Net proceeds  from issuance of common stock to employees and directors |       | 74       |       | 620      |       |
| Tax benefit  related to exercise of stock options                      |       | 54       |       | —   |       |
|                                                                   |       |     |       |     |       |
| Net cash flows  used in financing activities                           |       | (1,721   | )          | (3,453   | )          |
|                                                                   |       |     |       |     |       |
| EFFECTS OF  EXCHANGE RATES ON CASH                                     |       | 25       |       | (57      | )          |
|                                                                   |       |     |       |     |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                  |       | 7,351    |       | (881     | )          |
|                                                                   |       |     |       |     |       |
| CASH AND CASH  EQUIVALENTS, beginning of the period                    |       | 5,763    |       | 2,404    |       |
|                                                                   |       |     |       |     |       |
| CASH AND CASH  EQUIVALENTS, end of the period                          |       | $        | 13,114     |     | $          | 1,523 |   |
|                                                                        |            |          |            |          |            |  |  |

 

The accompanying notes are an integralpart of these Condensed Consolidated Financial Statements.

 

9

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##### **DYNAMICMATERIALS CORPORATION & SUBSIDIARY**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**(Dollarsin Thousands, Except Share and Per Share Data)**

 

**(unaudited)**

 

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

 

The information included in the Condensed ConsolidatedFinancial Statements is unaudited but includes all normal and recurringadjustments which, in the opinion of management, are necessary for a fairpresentation of the interim periods presented. These Condensed ConsolidatedFinancial Statements should be read in conjunction with the financialstatements that are included in the Company’s Annual Report filed on Form 10-Kfor the year ended December 31, 2005.

 

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

 

Principles of Consolidation

** **

**The Condensed Consolidated Financial Statements include theaccounts of the Company and a subsidiary in which it has a greater than 50%interest. All significant intercompany accounts, profits and transactions havebeen eliminated in consolidation.**

** **

ForeignOperations and Foreign Exchange Rate Risk

** **

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

** **

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**

** **

**10**

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** **

**relative to metals used, servicesperformed and the results of any non-destructive testing that the customer hasrequested be performed. Any non-conformance issues are resolved before theproduct is shipped and billed. Revenue is recognized only when all four of thefollowing criteria have been satisfied: persuasive evidence of an arrangementexists; the price is fixed or determinable; delivery has occurred; andcollection is reasonably assured. For contracts that require multipleshipments, revenue is recorded only for the units included in each individualshipment. If, as a contract proceeds toward completion, projected total cost onan individual contract indicates a potential loss, we provide currently forsuch anticipated loss.**

** **

Loanto Related Party

** **

**Nobelclad Europe, S.A. (“Nobelclad”) has a Euro-denominatedcash management agreement with SNPE that provides for loans to or from eitherparty of up to approximately $3.4 million, based on the December 31, 2005exchange rates. Amounts outstanding under this agreement bear interest atEURIBOR plus 1.5% annually. Due to Nobelclad’s excess cash position during thefirst quarter of 2006, it began advancing cash to Groupe SNPE through thisintercompany cash agreement. At March 31, 2006, these advances to Groupe SNPEtotaled 1,003 Euros ($1,211). The interest rate earned on these advances exceededthe interest rate that Nobelclad could earn on excess cash and cash equivalentsheld at its local bank. The agreement allowed Nobelclad to request repayment onthe advances at any time. The balance outstanding at March 31, 2006 wassubsequently repaid in full.**

** **

EarningsPer Share

** **

**Basic earnings per share (“EPS”)is computed by dividing net income by the weighted average number of shares ofcommon stock outstanding during the period. Diluted EPS recognizes thepotential dilutive effects of dilutive securities. The following represents areconciliation of the numerator and denominator used in the calculation ofbasic and diluted EPS:**

** **
| ** **                                           | ** ** | **For the three months ended March 31, 2006** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                                                       | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                           | ** ** | **Net Income**                                                              | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|                                                 |       |                                                                             |       |   |   |   |   |
| Basic earnings  per share                            |       | $                                                                                | 5,496      |   | 11,768,098 |   | $ | 0.47 |   |
|                                                 |       |                                                                             |       |   |   |   |   |
| Dilutive effect  of options to purchase common stock |       | —                                                                           |       | 449,449 |   |   |   |
|                                                 |       |                                                                             |       |   |   |   |   |
| Dilutive  earnings per share                         |       | $                                                                                | 5,496      |   | 12,217,547 |   | $ | 0.45 |   |

 

11

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| ** **                                                    | ** ** | **For the three months ended March 31, 2005** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **Net Income**                                                              | ** ** | **Shares** | ** ** | **Per share  Amount** | ** ** |
|                                                          |       |                                                                             |       |   |   |   |   |
| Basic earnings  per share                                     |       | $                                                                                | 1,648      |   | 10,694,260 |   | $ | 0.15 |   |
|                                                          |       |                                                                             |       |   |   |   |   |
| Dilutive effect  of options to purchase common stock          |       | —                                                                           |       | 766,840 |   |   |   |
| Dilutive effect  of convertible subordinated note, net of tax |       | 12                                                                               |       | 400,000 |   |   |   |
|                                                          |       |                                                                             |       |   |   |   |   |
| Dilutive  earnings per share                                  |       | $                                                                                | 1,660      |   | 11,861,100 |   | $ | 0.14 |   |

 

RecentAccounting Pronouncements

** **

**In December 2004, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards No. 123 (revised 2004), *Share-BasedPayment*(“SFAS 123R”), which is a revision of Statement of FinancialAccounting Standards No. 123, *Accounting forStock-Based Compensation*(“SFAS 123”). SFAS 123R requiresmeasurement of all employee stock-based compensation awards using a fair-valuemethod and the recording of such expense in the consolidated financialstatements. In addition, the adoption of SFAS 123R requires additionalaccounting related to the income tax effects and disclosure regarding the cashflow effects resulting from share-based payment arrangements. In January 2005,the SEC issued Staff Accounting Bulletin No. 107, which provides supplementalimplementation guidance for SFAS 123R. We selected the Black-Scholesoption-pricing model as the most appropriate fair-value method for our awardsand will recognize compensation cost on a straight-line basis over our awards’vesting periods. We adopted SFAS 123R in the first quarter of 2006. See Note 3for further detail.**

** **

**In November 2004, the FASB issuedStatement of Financial Accounting Standards No. 151, *Inventory Costs*(“SFAS 151”), which amends the guidance inAccounting Research Bulletin No. 43, Chapter 4, *Inventory Pricing*. This statement requires abnormal amountsof idle facility expense, freight, handling costs and wasted material to beexcluded from inventory costing and instead included as period expenses. Inaddition, this standard requires the allocation of fixed production overhead tobe based on normal capacity of the production facilities. We adopted thestandard on January 1, 2006 and it did not have an impact on our CondensedConsolidated Financial Statements.**

** **

**In May 2005, the FASB issuedStatement of Financial Accounting Standards No. 154, *Accounting Changes and Error Corrections*(“SFAS 154”), whichrequires the direct effects of voluntary accounting principle changes to beretrospectively applied to prior periods’ financial statements. This Statementdoes not change the transition provisions of any existing accountingpronouncements, but would apply in the unusual instance that a pronouncementdoes not include specific transition provisions. SFAS 154 maintains existingguidance with respect to accounting estimate changes and corrections of errors.**The Statement was effective on January 1,2006. Our adoption of this Statement on January 1, 2006 did not have an impacton our Condensed Consolidated Financial Statements.

** **

**12**

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** **

**3.****             STOCK-BASEDCOMPENSATION**

 

**The Company maintains a stockoption plan that provides for grants of both incentive stock options andnon-statutory stock options. Incentive stock options are granted at exerciseprices that equal the fair market value of the stock at date of grant basedupon the closing sales price of the Company’s common stock on that date.Incentive stock options generally vest 25% annually and expire ten years fromthe date of grant. Non-statutory stock options are generally granted atexercise prices that equal the fair market value of the stock at date of grant.These options vest over periods ranging from one to four years and haveexpiration dates ten years from the date of grant.**

** **

**Prior to January 1, 2006, theCompany accounted for its stock-based compensation plan under the recognitionand measurement provisions of Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*(“APB25”) and related interpretations, as permitted by SFAS 123. Accordingly, nostock-based compensation expense was recognized in the Consolidated Statementsof Operations for the three months ended March 31, 2005 as the options grantedunder the Company’s stock option plan had exercise prices equal to the marketvalue of the underlying common stock on the date of grant. Effective January 1,2006, the Company adopted the fair value recognition provisions of SFAS 123Rusing the modified prospective transition method. Under that transition method,compensation cost recognized in the three months ended March 31, 2006 includes:(a) compensation cost for all share-based payments granted prior to, but notyet vested as of January 1, 2006, based on the grant date fair value estimatedin accordance with the original provisions of SFAS 123, and (b) compensationcost for all share-based payments granted subsequent to January 1, 2006, basedon grant date fair value estimated in accordance with SFAS 123R.**

** **

**The fair value for each optionwas estimated on the date of grant using a Black-Scholes option-pricing modelwith the following assumptions used for the single grant during the threemonths ended March 31, 2006: a risk free interest rate of 4.35%; an expectedvolatility factor of 86.6%; an expected dividend yield of .375%; and anexpected life of 4 years. Our computation of expected volatility for thequarter ended March 31, 2006 is based on historical**volatility from the past four years, based on the current expected lifeof outstanding options. Our computation of expected life is based on historical exercise patterns. Theinterest rate for periods within the contractual life of the award is based onthe U.S. Treasury yield curve in effect at the time of grant. The fair value ofthe options granted during the three months ended March 31, 2006 was $22.30 perunderlying share. Each grant is valued as a single award and compensationexpense is recognized on a straight-line basis over the vesting period. Inaccordance with the modified prospective transition method, results for priorperiods have not been restated.

** **

**13**

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** **

**As a result of adopting SFAS 123Ron January 1, 2006, the Company’s pretax income and net income for the threemonths ended March 31, 2006 were $336 and $240 lower, respectively, than if ithad continued to account for stock-based compensation under APB 25. Basic anddiluted earnings per share for the three months ended March 31, 2006 would havebeen $0.49 and $0.47, respectively, if the Company had not adopted SFAS 123R,compared to reporting basic and diluted earnings per share of $0.47 and $0.45,respectively. The following table sets forth the total stock-based compensationexpense included in the Consolidated Statements of Operations:**

** **
| ** **                                              | ** ** | **Three Months Ended  March 31, 2006** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Cost of products  sold                                  |       | $                                                          | 11         |   |
| General and  administrative expense                     |       | 307                                                        |       |
| Selling expense                                         |       | 18                                                         |       |
| Stock-based  compensation expense before  income taxes  |       |                                                       | 336        |   |
| Income tax  benefit                                     |       | (96                                                        | )          |
| Stock-based  compensation expense, net of  income taxes |       | $                                                          | 240        |   |

 

**Prior to the adoption of SFAS123R, the Company presented all tax benefits of deductions resulting from theexercise of stock options as operating cash flows in the ConsolidatedStatements of Cash Flows. SFAS 123R requires the tax benefits resulting fromdeductions in excess of the compensation cost recognized for those options (“excesstax benefits”) to be classified as financing cash flows. The $54 excess taxbenefit classified as a financing cash inflow in the Consolidated Statements ofCash Flows for the three months ended March 31, 2006 would have been classifiedas an operating cash inflow if the Company had not adopted SFAS 123R.**

** **

**14**

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** **

**The following table illustratesthe effect on net income and basic and diluted earnings per share if theCompany had applied the fair value recognition provisions of SFAS 123R tostock-based compensation for the three months ended March 31, 2005. Forpurposes of this pro forma disclosure, the value of the options is estimatedusing a Black-Scholes option-pricing model and amortized to expense over theoptions’ vesting periods. The following assumptions were used in the optionspricing model: a risk free interest rate of 3.6%; an expected volatility factorof 89.4%; an expected dividend yield of 0.0%; and an expected life of 4 years.**

** **
| ** **                                                                                               | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                               | ** ** | **March 31, 2005**     | ** ** |
|                                                                                                     |       |                             |       |
| Net income-as  reported                                                                                  |       | $                                | 1,648      |   |
| Deduct  stock-based compensation expense determined under fair value method, net of  related tax effects |       | (81                              | )          |
| Pro forma net  income                                                                                    |       | $                                | 1,567      |   |
|                                                                                                     |       |                             |       |
| Earnings per  share:                                                                                     |       |                             |       |
| Basic-as  reported                                                                                       |       | $                                | 0.15       |   |
| Basic-pro forma                                                                                          |       | $                                | 0.15       |   |
| Diluted-as  reported                                                                                     |       | $                                | 0.14       |   |
| Diluted-pro  forma                                                                                       |       | $                                | 0.13       |   |

 

**The following table summarizesthe stock options outstanding as of March 31, 2006 as well as activity for thethree months then ended:**

** **
| ** **                          | ** ** | **Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------|------------|-------------|------------|----------------------------------------|------------|----------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  beginning of period |       | 588,426     |       | $                                      | 4.77       |                                               |       |                            |       |   |
| Granted                             |       | 20,000      |       | 35.21                                  |       |                                               |       |                            |       |
| Exercised                           |       | (23,500     | )          | 3.16                                   |       |                                               |       |                            |       |
| Outstanding at  end of period       |       | 584,926     |       | $                                      | 5.88       |                                               | 7.87       |                            | $          | 17,409 |   |
|                                |       |        |       |                                   |       |                                               |       |                            |       |
| Exercisable at  end of period       |       | 228,672     |       | $                                      | 1.94       |                                               | 7.35       |                            | $          | 7,705 |   |

 

**The intrinsic value of optionsexercised for the three months ended March 31, 2006 was $713. As of March 31,2006, there was $1,052 of total unrecognized stock-based compensation costrelated to unvested stock options. The cost is expected to be recognized over aweighted average period of 1.09 years.**

** **

**15**

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** **

**4.****             INVENTORY**

 

The components ofinventory are as follows at March 31, 2006 and December 31, 2005:

 
| ** **      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|--------------------|------------|-----------------------|------------|
|            |       | **2006**           | ** ** | **2005**              | ** ** |
| ** **      |       | **(unaudited)**    | ** ** | ** **            | ** ** |
| Raw materials   |       | $                  | 5,565      |                  | $          | 5,767 |   |
| Work-in-process |       | 6,683              |       | 5,878                 |       |
| Supplies        |       | 396                |       | 224                   |       |
|            |       |               |       |                  |       |
|            |       | $                  | 12,644     |                  | $          | 11,869 |   |

 

**5.****             DEBT**

 

Long-term debt consistsof the following at March 31, 2006 and December 31, 2005:

 
| ** **                            | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| ** **                            | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| Term loan -  French bank              |       | $                  | 1,050      |                  | $          | 1,029 |   |
| Industrial  development revenue bonds |       | 1,675              |       | 1,720                 |       |
|                                  |       |               |       |                  |       |
|                                  |       | 2,725              |       | 2,749                 |       |
| Less current  maturities              |       | (540               | )          | (528                  | )          |
|                                  |       |               |       |                  |       |
| Long-term debt                        |       | $                  | 2,185      |                  | $          | 2,221 |   |

 

Loan Covenants andRestrictions

 

The Company’s existingloan agreements include various covenants and restrictions, certain of whichrelate to the incurrence of additional indebtedness, mortgaging, pledging ordisposition of major assets, limits on capital expenditures and maintenance ofspecified financial ratios. As of March 31, 2006, the Company was in compliancewith all financial covenants and other provisions of its debt agreements.

 

**6.****             BUSINESSSEGMENTS**

 

The Company is organizedin the following two segments: the Explosive Metalworking segment and AMKWelding. The Explosive Metalworking segment uses explosives to perform metalcladding and shock synthesis. The most significant product of this group isclad metal, which is used in the fabrication of pressure vessels, heatexchangers and transition joints for various industries, including upstream oiland gas, oil refinery, petrochemicals, hydrometallurgy, aluminum production,shipbuilding, power generation, industrial refrigeration and similar industries.AMK Welding utilizes a number of welding technologies to weld components formanufacturers of jet engine and ground-based turbines.

 

The accounting policiesof both segments are the same as those described in the summary of significantaccounting policies. The Company’s reportable segments are strategic business

 

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unitsthat offer different products and services and are separately managed. Eachsegment is marketed to different customer types and requires differentmanufacturing processes and technologies. Segment information is presented forthe three months ended March 31, 2006 and 2005 as follows:

 
| ** **                                                           | ** ** | **Explosive  Metalworking  Group** | ** ** | **AMK  Welding** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------|------------|------------------|------------|-----------|------------|
| For the three  months ended March 31, 2006:                          |       |                               |       |             |       |      |       |
| Net sales                                                            |       | $                                  | 24,176     |             | $          | 999       |       | $ | 25,175 |   |
| Depreciation and  amortization                                       |       | $                                  | 262        |             | $          | 55        |       | $ | 317 |   |
| Segment income  from operations of continuing operations             |       | $                                  | 6,658      |             | $          | 108       |       | $ | 6,766 |   |
| Unallocated  amounts:                                                |       |                               |       |             |       |      |       |
| Stock-based  compensation                                            |       |                               |       |             |       | (336      | )          |
| Other expense                                                        |       |                               |       |             |       | (6        | )          |
| Interest income,  net                                                |       |                               |       |             |       | 94        |       |
| Consolidated  income before income taxes and discontinued operations |       |                               |       |             |       | $         | 6,518      |   |

 
| ** **                                                           | ** ** | **Explosive  Metalworking  Group** | ** ** | **AMK  Welding** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------|------------|------------------|------------|-----------|------------|
| For the three  months ended March 31, 2005:                          |       |                               |       |             |       |      |       |
| Net sales                                                            |       | $                                  | 16,967     |             | $          | 543       |       | $ | 17,510 |   |
| Depreciation and  amortization                                       |       | $                                  | 320        |             | $          | 46        |       | $ | 366 |   |
| Segment income  (loss) from operations of continuing operations      |       | $                                  | 2,830      |             | $          | (115      | )          | $ | 2,715 |   |
| Unallocated  amounts:                                                |       |                               |       |             |       |      |       |
| Other income                                                         |       |                               |       |             |       | 5         |       |
| Interest  expense, net                                               |       |                               |       |             |       | (82       | )          |
| Consolidated  income before income taxes and discontinued operations |       |                               |       |             |       | $         | 2,638      |   |

 

During the three monthsended March 31, 2006, sales to one customer represented approximately $3,665(15%) of total net sales. During the three months ended March 31, 2005, salesto no one customer accounted for more than 10% of total net sales.

 

17

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**7.****                   COMPREHENSIVE INCOME**

 

DMC’s comprehensiveincome for the three months ended March 31, 2006 and 2005 was as follows:

 
| ** **                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Net income for  the period               |       | $                                                | 5,496      |   | $ | 1,648 |   |
| Foreign currency  translation adjustment |       | 140                                              |       | (284 | ) |
| Comprehensive  income                    |       | $                                                | 5,636      |   | $ | 1,364 |   |

 

As of March 31, 2006 andDecember 31, 2005 other cumulative comprehensive income of $625 and $485,respectively, consists entirely of cumulative foreign currency translationadjustment.

 

**8.****                   DISCONTINUED OPERATIONS**

 

On September 17, 2004,DMC completed the divestiture of its Spin Forge division under an agreementthat involved subleasing the Spin Forge real estate and leasing themanufacturing equipment and tooling to a third party. Under the masteragreement relating to this divestiture transaction, DMC sold all inventory,books and records, intangible personal property, business information andtechnology, customer contracts, and licenses and permits relating to the SpinForge business to this third party for a sales price of approximately $1,700. Thethird party also assumed full responsibility for the Spin Forge businessactivities and operating expenses. Despite the fact that the Company retainedownership of the equipment and continued to carry a capital lease asset of$2,880 on its books, the Company concluded that the Spin Forge divestituretransaction qualified for treatment as discontinued operations since theCompany had completely exited the Spin Forge operating business and has nointent to ever again operate any of the leased assets. To the extent that thethird party purchaser of the Spin Forge business does not exercise its optionto purchase all or a portion of the leased equipment and tooling when the leaseterm expires on January 1, 2007, DMC plans to immediately liquidate suchequipment.

 

On January 10, 2006, the Companysold its purchase option on the Spin Forge real estate to the property ownerfor $2,300. The completion of this transaction resulted in a pretax gain of$2,197, which was recorded as discontinued operations in the first quarter of2006. In connection with the sale of the purchase option, the underlying leaseagreement was terminated. Accordingly, the capital lease asset of $2,880 andthe related lease obligation of the same amount were removed from the Company’sbalance sheet in the first quarter of 2006.

 

18

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Assets of discontinuedoperations are comprised of the following:

 
| ** **                               | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                               | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| Leased  manufacturing equipment          |       | 789                      |       | 859                         |       |
| Capital lease  asset - real estate       |       | —                   |       | 2,880                       |       |
| Total assets of  discontinued operations |       | $                        | 789        |                        | $          | 3,739 |   |
|                                          |            |                          |            |                             |            |  |  |

 

The Company is receivingrent of $23 per month on the leased manufacturing equipment through the end ofthe initial lease term, which expires in December 2006. As part of theSeptember 17, 2004 divestiture of Spin Forge, the Company sold inventorytotaling $1,697 and the sale of this inventory was reflected in otherreceivables. As of March 31, 2006, the unpaid balance of this receivable, whichis due no later than January 1, 2007, is $678 and is classified as short-termbased on the payment schedule specified in the divestiture agreement. As ofDecember 31, 2005, this receivable totaled $681 and was classified aslong-term.

 

Discontinued operationsfor the three months ended March 31, 2006 is summarized as follows:

 
| ** **                                       | ** ** | **Three Months Ended  March 31, 2006** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------|------------|
| Gain on sale of  real estate purchase option     |       | $                                                          | 2,197      |   |
| Related income  tax expense                      |       | (840                                                       | )          |
| Income from  discontinued operations, net of tax |       | $                                                          | 1,357      |   |

 

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**ITEM 2.****               ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

Thefollowing 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, 2005.

 

Unless stated otherwise, alldollar figures in this discussion are presented in thousands (000’s).

 

**ExecutiveOverview**

 

Our business isorganized into two segments: Explosive Metalworking (which we also refer to asDMC Clad) and AMK Welding. For the three months ended March 31, 2006, ExplosiveMetalworking accounted for 96% of our net sales and 98% of our income fromoperations of continuing operations before consideration of stock-basedcompensation expense, which is not allocated to our business segments.

 

Our first quarter 2006net sales increased 43.8% compared to the first quarter of 2005, reflectingExplosive Metalworking quarter-to-quarter net sales increases in our U.S.-basedand European operations of 50.3% and 27.6%, respectively. Our operating incomefrom continuing operations increased 136.8%, to $6,430 in the first quarter of2006 from $2,715 in the first quarter of 2005, reflecting a $3,828 improvementin Explosive Metalworking’s operating income and a $223 improvement in AMKWelding’s operating income. Income from continuing operations beforediscontinued operations increased 151.2%, to $4,139 in the first quarter of2006 from $1,648 in the first quarter of 2005. Our net income increased to$5,496 in the first quarter of 2006 from $1,648 in the first quarter of 2005. Firstquarter 2006 net income included $1,357 of income from discontinued operations,net of tax, relating to the sale of the Spin Forge real estate option asfurther discussed below.

 

*Net sales*

 

Explosive Metalworking’snet sales are generated principally from sales of clad metal plates and salesof transition joints, which are made from clad plates, to fabricator customersthat fabricate industrial equipment for various industries, including upstreamoil and gas, oil refinery, petrochemicals, hydrometallurgy, aluminumproduction, shipbuilding, power generation, industrial refrigeration andsimilar industries. Demand for our clad metal products in the United States isdriven by plant maintenance and retrofit projects at existing chemicalprocessing, petrochemical processing and oil refining facilities, as well as newplants and large plant expansion projects. In contrast to the U.S. market,demand for our clad products in Europe and Asia is more dependent on newconstruction projects, such as the building of new purified terephthalic acid (“PTA”)plants in different parts of the world, including China, and on sales ofelectrical transition joints that are used in the aluminum production industry.

 

AMK Welding’s net salesare generated from welding, heat treatment and inspection services that areprovided with respect to customer-supplied parts for customers primarilyinvolved in the power generation industry and aircraft engine markets.

 

20

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A significant portion ofour net sales is derived from a relatively small number of customers;therefore, the failure to complete existing contracts on a timely basis, and toreceive payment for such services in a timely manner, or to enter into futurecontracts at projected volumes and profitability levels could adversely affectour ability to meet cash requirements exclusively through operating activities.We attempt to minimize the risk of losing customers or specific contracts bycontinually improving product quality and delivering product on time.

 

DMC Clad’s business is cyclicalsince it is linked to its customers’ end-market activity. The constructioncycle for new manufacturing capacity in the chemical industry has historicallybeen quite pronounced. It is driven both by world economic demand growth andcapacity utilization. As capacity starts to become tight for various chemicalsand prices begin to rise, new manufacturing capacity is added in relativelylarge incremental amounts. Excess capacity drives prices down and capacityutilization drops.

 

*Gross profit and cost of productssold*

 

Cost of products soldfor Explosive Metalworking include the cost of metals and alloys used tomanufacture clad metal plates, the cost of explosives, employee compensationand benefits, freight, outside processing costs, depreciation of manufacturingfacilities and equipment, manufacturing supplies and other manufacturingoverhead expenses.

 

AMK Welding’s cost ofproducts sold consists principally of employee compensation and benefits,welding supplies (wire and gas), depreciation of manufacturing facilities andequipment, outside services and other manufacturing overhead expenses.

 

*Discontinued operations*

 

In September 2004, wecompleted the sale of our Spin Forge division. On January 10, 2006, we sold ouroption rights to purchase the Spin Forge real estate to the property owner for$2,300. We recorded a pre-tax gain of approximately $2,197 on this transaction,which was reported as discontinued operations, net of related taxes, in thefirst quarter of 2006.

 

*Income taxes*

 

Our effective income tax rate decreased to 36.5% in the first quarterof 2006 from 37.5% in the first quarter of 2005. Income tax provisions on theearnings of Nobelclad and Nitro Metall AB (“Nitro Metall”) have been providedbased upon the respective French and Swedish statutory tax rates. Our firstquarter 2006 effective tax rate is higher than the full year 2005 and 2004effective income tax rates of 33.5% and 30.8%, respectively, as a result of therecognition in 2005 and 2004 of U.S. tax benefits relating to research anddevelopment tax credits, extraterritorial income exclusions and foreign taxcredits. Going forward, based upon existing tax regulations and currentfederal, state and foreign statutory tax rates, we expect our effective taxrate on our consolidated pre-tax income to range between 36% and 38%.

 

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*Backlog*

 

We use backlog as aprimary means to measure the immediate outlook for our business. We define “backlog”at any given point in time to consist of all firm, unfulfilled purchase ordersand commitments at that time. Generally speaking, we expect to fill most itemsof backlog within the following 12 months. From experience, most firm purchaseorders and commitments are realized. However, since orders may be rescheduledor canceled, and a significant portion of our net sales is derived from a smallnumber of customers, backlog is not necessarily indicative of future saleslevels. Moreover, we cannot be sure of when during the future 12-month periodwe will be able to recognize revenue corresponding to our backlog; nor can webe sure that revenues corresponding to our backlog will not fall into periodsbeyond the 12-month horizon.

 

Our backlog with respect to the Explosion Metalworking segment wasapproximately $41,966 at December 31, 2005.

 

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**Three Months Ended March 31, 2006 Compared to ThreeMonths Ended March 31, 2005**

 

*Net sales*

 
| ** ** | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                                | 25,175     |       | $          | 17,510         |       | $ | 7,665 |   | 43.8 | % |
|            |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

Net sales for the firstquarter of 2006 increased 43.8% to $25,175 from $17,510 in the first quarter of2005. Explosive Metalworking sales increased 42.5% to $24,176 in the firstthree months of 2006 (96% of total sales) from $16,967 in the same period of2005 (97% of total sales). The Explosive Metalworking sales increase reflects a50.3% increase in sales by our U.S.-based operations and a 27.6% U.S. dollarsales increase at Nobelclad Europe. The year-to-year increase in worldwideExplosive Metalworking sales is principally attributable to the improvedeconomic condition of the industries that this business segment serves. Our netsales are likely to continue to fluctuate from quarter-to-quarter and, in lightof the record results posted in the first quarter of 2006, we expect that ournet sales for the second quarter may be somewhat lower than they were in thefirst quarter.

 

AMK Welding contributed$999 to first quarter 2006 sales (4% of total sales) versus sales of $543 inthe first quarter of 2005 (3% of total sales).

 

*Grossprofit*

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                             | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit                           |       | $                                | 9,281      |       | $          | 4,650          |       | $ | 4,631 |   | 99.6 | % |
| Consolidated  gross profit margin rate |       | 36.9                             | %          | 26.6       | %          |           |       |   |   |
|                                        |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

Gross profit increasedby 99.6% to $9,281 for the three months ended March 31, 2006 from $4,650 forthe three months ended March 31, 2005. Our first quarter 2006 consolidatedgross profit margin rate increased to 36.9% from 26.6% in the first quarter of2005. The gross profit margin for Explosive Metalworking increased from 27.7%in the first three months of 2005 to 37.4% in the first three months of 2006and the gross profit margin for AMK Welding increased to 24.9% in the firstquarter of 2006 from a negative 7.9% in the first quarter of 2005. Theincreased gross profit margin rate for Explosive Metalworking reflects grossmargin rates of 39.1% and 33.5% in the first quarter of 2006 for our U.S.-basedclad operations and Nobelclad Europe, respectively, as compared to gross marginrates of 30.1% and 22.9%, respectively, in 2005. The gross margin improvementsfor both Explosive Metalworking and AMK Welding relate primarily to the salesincreases discussed above and the resultant more favorable absorption of fixedmanufacturing overhead expenses. The Explosive Metalworking gross marginincrease also reflects favorable changes in product mix and higher averageprices in 2006, particularly with respect to our European operations. The grossprofit margin typically fluctuates from one quarter to the next for variousreasons, including a change in product mix. Our gross margins are likely tocontinue to fluctuate from quarter-to-quarter and, in light of the recordresults posted in the first quarter of 2006, we expect that our gross marginsfor the second quarter and the remainder of the year may be somewhat lower thanthey were in the first quarter.

 

23

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*Generaland administrative expenses*

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                             | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General &  administrative expenses |       | $                                | 1,527      |       | $          | 809            |       | $ | 718 |   | 88.8 | % |
| Percentage of  net sales               |       | 6.1                              | %          | 4.6        | %          |           |       |   |   |
|                                        |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

General andadministrative expenses increased by $718, or 88.8%, to $1,527 in the firstquarter of 2006 from $809 in the first quarter of 2005. This increase ingeneral and administrative expenses reflects a $733 increase in our U.S.operations, which was partially offset by a $15 decrease in our European generaland administrative expenses. Increases in our U.S. operations, which currentlyabsorb all corporate headquarters expenses, reflect stock-based compensation of$307, an aggregate increase of $152 in audit, tax consulting and investorrelations expenses, a $116 increase in accrued incentive compensation expense,and the impact of annual salary adjustments. The 2006 increases in audit, taxadvisory, consulting and investor relations expenses relate primarily tocontinued compliance with the Sarbanes-Oxley Act of 2002, tax planninginitiatives and increased investor relations activities. As a percentage of netsales, general and administrative expenses increased to 6.1% in the firstquarter of 2006 from 4.6% in the first quarter of 2005.

 

*Sellingexpenses*

* *
| ** **               | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **               | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **               | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses         |       | $                                | 1,324      |       | $          | 1,126          |       | $ | 198 |   | 17.6 | % |
| Percentage of  net sales |       | 5.3                              | %          | 6.4        | %          |           |       |   |   |
|                          |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

Selling expenses increasedby 17.6% to $1,324 in the first quarter of 2006 from $1,126 in the firstquarter of 2005. The $198 increase in selling expenses reflects increases of$175 and $23 for our U.S. operations and European operations, respectively. Increasedspending in our U.S. operations reflects $145 for sales commissions on a large exportorder, the impact of annual salary adjustments and higher travel expensesduring the first quarter of 2006. As a result of the significant increase in2006 net sales, selling expenses as a percentage of net sales decreased to 5.3%in the first quarter of 2006 from 6.4% in the first quarter of 2005.

 

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*Income from operations of continuing operations*

 
| ** **                                       | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                                       | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                       | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from  operations of continuing operations |       | $                                | 6,430      |       | $          | 2,715          |       | $ | 3,715 |   | 136.8 | % |
|                                                  |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

Income from operationsincreased by 136.8% to $6,430 in the first three months of 2006 from $2,715 inthe first three months of 2005. Explosive Metalworking reported income fromoperations of $6,658 in the first quarter of 2006 as compared to $2,830 in thefirst quarter of 2005. This 135.3% increase is largely attributable to the42.5% sales increase discussed above.

 

AMK Welding reportedincome from operations of $108 in the first three months of 2006, compared tothe loss of $115 that it reported for the first three months of 2005, whichincrease follows the 84.0% sales increase.

 

Income from operationsof continuing operations for the three months ended March 31, 2006 includes$336 of stock-based compensation expense that is not allocated to our twobusiness segments and thus not included in the above first quarter 2006operating totals for Explosive Metalworking and AMK Welding.

 

*Interest income (expense), net*

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                      | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                      | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income  (expense), net |       | $                                | 94         |       | $          | (82            | )          | $ | 176 |   | NM |   |
|                                 |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

Net interest income (expense)improved by $176, to a net of $94 in interest income for the first quarter 2006from a net of $82 in interest expense in the first quarter of 2005. This changein net interest income (expense) reflects a significant decrease in averageoutstanding borrowings year-to-year and the large cash balances we arecurrently carrying.

 

*Incometax provision*

 
| ** **            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **            | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **            | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax  provision |       | $                                | 2,379      |       | $          | 990            |       | $ | 1,389 |   | 140.3 | % |
| Effective tax  rate   |       | 36.5                             | %          | 37.5       | %          |           |       |   |   |
|                       |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

We recorded an income taxprovision of $2,379 in the first quarter of 2006 compared to $990 in the firstquarter of 2005. The effective tax rate decreased to 36.5% in the first quarterof 2006 from 37.5% in the first quarter of 2005. The income tax provisions forthe three months ended March 31, 2006 and 2005 include $1,844 and $779,respectively, related to U.S. taxes,

 

25

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with the remainder relatingto foreign taxes associated with the operations of Nobelclad and its Swedishsubsidiary, Nitro Metall.

 

*Incomefrom discontinued operations*

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                           | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                           | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from  discontinued operations |       | $                                | 1,357      |       | $          | —         |       | $ | 1,357 |   | NM |   |
|                                      |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

We completed thedivestiture of our Spin Forge division in September 2004. Under the principaldivestiture agreement, we sold the assets of the Spin Forge division to a thirdparty, excluding certain equipment and real estate which were leased orsubleased to the buyer, for a sales price of approximately $1,665 to be paid incash according to the arrangement set forth in the divestiture agreement. Withrespect to the Spin Forge manufacturing equipment and tooling, we recorded anafter tax impairment loss of $619 based upon the difference between thecarrying value of the equipment and the present value of the future minimumequipment lease payments from the lessee plus estimated liquidation proceeds atthe end of the minimum lease term.

 

We held a purchase optionon the Spin Forge real estate that allowed us to purchase the real estate for$2,880, a price that was below the real estate’s appraised value. We completedthe sale of the purchase option on the Spin Forge real estate on January 10,2006. The option rights were sold to the property owner for $2,300. We recordeda pre-tax gain of approximately $2,197 on this transaction, which was reportedin discontinued operations, net of related taxes. We continue to own the SpinForge manufacturing equipment and tooling and lease it to the third partypurchaser of the Spin Forge business. To the extent that this third party doesnot exercise its option to purchase all or a portion of the leased equipmentand tooling when the lease term expires on January 1, 2007, we plan toimmediately liquidate such equipment.

 

# **Liquidityand Capital Resources**

# ** **

We have historicallyfinanced our operations from a combination of internally generated cash flow,revolving credit borrowings, various long-term debt arrangements and theissuance of common stock. We believe that cash flow from operations and fundsavailable under our current credit facilities and any future replacementthereof will be sufficient to fund the working capital, debt service andcapital expenditure requirements of our current business operations for theforeseeable future, including the budgeted $8,000 expansion of our Mount Braddock,Pennsylvania facility. Nevertheless, our ability to generate sufficient cashflows from operations will depend upon our success in executing our strategies,including our ability to secure new customer orders at our operating divisions,and to continue to implement cost-effective internal processes.

 

*Debt and other contractualobligations and commitments*

 

**Any restriction on theavailability of borrowing under our credit facilities could negatively affectour ability to meet future cash requirements. Our existing loan agreementsinclude various covenants and restrictions, certain of which relate to theincurrence of additional indebtedness, mortgaging, pledging or disposition ofmajor assets and maintenance of specified**

 

26

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**financial ratios. As of March 31,2006, we were in compliance with all financial covenants and other provisionsof our debt agreements.**

** **

The Company’s principal cash flows related to debt obligations and othercontractual obligations and commitments have not materially changed sinceDecember 31, 2005.

 

*Cash flows from operatingactivities*

 

Net cash flows providedby operating activities for the first quarter 2006 totaled $6,493. Significantsources of operating cash flow included income from continuing operations of$4,139, non-cash depreciation and amortization expense of $324, stock-basedcompensation of $336, $320 from provision for deferred income taxes andpositive net changes in various components of working capital in the amount of$1,374. Net positive changes in working capital included a decrease in accountsreceivable of $689 and an increase in accounts payable and accrued expenses andother liabilities of $120 and $1,899, respectively. These positive changes inworking capital were partially offset by an increase in inventories and prepaidexpenses of $531 and $803 respectively.

 

Net cash flows providedby operating activities for the first quarter of 2005 totaled $2,254. Significantsources of operating cash flow included net income of $1,648, non-cashdepreciation and amortization expense of $379, and $214 from the tax benefitrelated to stock options exercised during the year. Net positive changes inworking capital during the first quarter of 2005 totaled $27, reflecting thepositive effects of a decrease in accounts receivable of $852 and an increasein accounts payable of $145 that were almost entirely offset by increases ininventory and prepaid expenses of $283 and $218, respectively, and a $469decrease in accrued expenses and other liabilities.

 

*Cash flows from investingactivities*

 

Net cash flows providedby investing activities for the first quarter of 2006 were $2,554 and consistedprimarily of $1,950 from the sale of marketable securities and $2,197 forinvestment activities of discontinued operations that consisted of the sale ofthe Spin Forge real estate purchase option. These cash inflows were partiallyoffset by $469 in capital expenditures and $1,206 for a loan to a relatedparty.

 

Net cash flows providedby investing activities for the first quarter of 2005 totaled $375 andconsisted primarily of an $874 payment received on a portion of the outstandingreceivable relating to the Spin Forge divestiture that was partially offset bythe first quarter capital expenditures in the amount of $577.

 

*Cash flows from financingactivities*

 

Net cash flows used infinancing activities for the first quarter of 2006 were $1,721. Significantuses of cash for financing activities included a $1,766 payment of annualdividends, $45 repayment on related party line of credit and industrialdevelopment revenue bond principal payments of $45. Sources of cash flow fromfinancing activities include $74 in net proceeds from the issuance of commonstock relating to the exercise of stock options and $54 for an excess taxbenefit related to the exercise of stock options.

 

27

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Net cash flows used infinancing activities for the first quarter of 2005 were $3,453. Significantuses of cash for financing activities included net repayments on bank lines ofcredit of $3,041, final principal payments on the SNPE term loan of $667,industrial development revenue bond principal payments of $240 and repayment onrelated party lines of credit of $129. Sources of cash flow from financingactivities included $620 in net proceeds from the issuance of common stockrelating to the exercise of stock options and employee stock purchases underour employee stock purchase plan.

 

*Payment of Dividends*

 

We may pay annualdividends subject to capital availability and periodic determinations that cashdividends are in the best interests of our stockholders, but we cannot assureyou that such payments will continue. Future dividends may be affected by,among other items, our views on potential future capital requirements, futurebusiness prospects, changes in federal income tax law and any other factorsthat our board of directors deems relevant. Any determination to pay cashdividends is and will continue to be at the discretion of the board ofdirectors.

 

**Critical Accounting Policies**

 

Our historicalconsolidated financial statements and notes to our historical consolidatedfinancial statements contain information that is pertinent to our management’sdiscussion and analysis of financial condition and results of operations.Preparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires that our management makeestimates, judgments and assumptions that affect the reported amounts ofassets, liabilities, revenues and expenses, and the disclosure of contingentassets and liabilities. However, the accounting principles used by us generallydo not change our reported cash flows or liquidity. Interpretation of theexisting rules must be done and judgments made on how the specifics of a givenrule apply to us.

 

In management’s opinion,the more significant reporting areas impacted by management’s judgments andestimates are revenue recognition, asset impairments, impact of foreigncurrency exchange rate risks, income taxes and stock-based compensation.Management’s judgments and estimates in these areas are based on informationavailable from both internal and external sources, and actual results coulddiffer from the estimates, as additional information becomes known. We believethe following to be our most critical accounting policies.

 

*Revenue recognition*

 

Sales of clad metalproducts and welding services are generally based upon customer specificationsset forth in customer purchase orders and require us to provide certificationsrelative to metals used, services performed and the results of anynon-destructive testing that the customer has requested be performed. Anynon-conformance issues are resolved before the product is shipped and billed. 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. Forcontracts that require multiple shipments, revenue is recorded only for theunits included in each individual

 

28

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shipment.If, as a contract proceeds toward completion, projected total cost on anindividual contract indicates a potential loss, we provide currently for suchanticipated loss.

 

*Asset impairments*

 

We review our long-livedassets and certain identifiable intangibles to be held and used by us forimpairment whenever events or changes in circumstances indicate their carryingamount may not be recoverable. In so doing, we estimate the future net cashflows expected to result from the use of the asset and its eventualdisposition. If the sum of the expected future net cash flows (undiscounted andwithout interest charges) is less than the carrying amount of the asset, animpairment loss is recognized to reduce the asset to its estimated fair value.Otherwise, an impairment loss is not recognized. Long-lived assets and certainidentifiable intangibles to be disposed of, if any, are reported at the lowerof carrying amount or fair value less cost to sell.

 

*Goodwill*

 

Goodwill is tested forimpairment at least annually on reporting units one level below the segment leveland any impairment is based on the reporting unit’s estimated fair value. Fairvalue can be determined based on discounted cash flows, comparable sales orvaluations of similar businesses. Impairment occurs when the carrying amount ofgoodwill exceeds its estimated fair value. Our policy is to test goodwill forimpairment in the fourth quarter of each year unless an indicator of impairmentarises earlier.

 

The entire amount ofgoodwill, which had a carrying value of $847 on our balance sheet as of March31, 2006, relates to our U.S. operations of the Explosive Metalworking segment.Based on the analysis performed in the fourth quarter of 2005, no impairmentwas recorded to the carrying value of goodwill.

 

*Impact of foreign currencyexchange rate risks*

 

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

 

29

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*Income taxes*

 

We account for incometaxes in accordance with Statement of Financial Accounting Standards No. 109, *Accounting for Income Taxes* (“SFAS 109”)which requires the recognition of deferred tax assets and deferred taxliabilities for the expected future income tax consequences of transactionsthat have been included in our financial statements or tax returns. Deferredtax assets and liabilities are determined based on the temporary differencesbetween the Consolidated Financial Statement base and the tax base of assetsand liabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse. We routinely evaluate deferred tax assetsto determine if they will more likely than not be recovered from futureprojected taxable income and record a valuation allowance accordingly.

 

During 2005, we completedan analysis of prior year tax credits and related items. As a result of theanalysis, we filed amended federal and state income tax returns. The amendedstate returns reported additional net operating losses and credits above theamounts we had previously recorded on our books and records. In assessing theseadditional losses and credits, we determined that the utilization of a portionof these was not probable, due to potential changes in the states in which wehave income tax nexus. Thus, we recorded a net valuation allowance ofapproximately $177 against the deferred tax assets during 2005. Due to ourearnings in the first quarter of 2006, our projected utilization of the netoperating losses and tax credits is more favorable and, as a result, thevaluation at March 31, 2006 has been reduced to $105.

 

*Stock-BasedCompensation Expense*

 

We account forstock-based compensation in accordance with the provisions of Statement ofFinancial Accounting Standards No. 123 (revised 2004), *Share-Based Payment*(“SFAS 123R”). Underthe fair value recognition provisions of SFAS 123R, stock-based compensationcost is estimated at the grant date based on the value of the award and isrecognized as expense ratably over the requisite service period of the award. Determiningthe appropriate fair value model and calculating the fair value of stock-basedawards at the grant date requires judgment, including estimating stock pricevolatility, forfeiture rates and expected option life.

 

**Recent Accounting Pronouncements**

 

**In December 2004, the FinancialAccounting Standards Board (“FASB”) issued SFAS 123R, which is a revision ofStatement of Financial Accounting Standards No. 123 (“SFAS 123”). SFAS 123Rrequires measurement of all employee stock-based compensation awards using afair-value method and the recording of such expense in the consolidatedfinancial statements. In addition, the adoption of SFAS 123R requiresadditional accounting related to the income tax effects and disclosureregarding the cash flow effects resulting from share-based payment arrangements.In January 2005, the SEC issued Staff Accounting Bulletin No. 107, whichprovides supplemental implementation guidance for SFAS 123R. We selected theBlack-Scholes option-pricing model as the most appropriate fair-value methodfor our awards and will recognize compensation cost on a straight-line basis overour awards’ vesting periods. We adopted SFAS 123R in the first quarter of 2006,which resulted in an after tax reduction in net income of $240 for the firstquarter of 2006.**

** **

**In November 2004, the FASB issuedStatement of Accounting Standards No. 151, *InventoryCosts*(“SFAS 151”), which amends the guidance in ARB No. 43, Chapter4, Inventory Pricing. This statement requires abnormal amounts of idle facilityexpense, freight, handling**

 

30

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**costs and wasted material to beexcluded from inventory costing and instead included as period expenses. Inaddition, this standard requires the allocation of fixed production overhead tobe based on normal capacity of the production facilities. We adopted thestandard on January 1, 2006 and it did not have an impact on our CondensedConsolidated Financial Statements.**

** **

**In May 2005, the FASB issuedStatement of Accounting Standards No. 154, *AccountingChanges and Error Corrections*(“SFAS 154”), which requires thedirect effects of voluntary accounting principle changes to be retrospectivelyapplied to prior periods’ financial statements. This Statement does not changethe transition provisions of any existing accounting pronouncements, but wouldapply in the unusual instance that a pronouncement does not include specifictransition provisions. SFAS 154 maintains existing guidance with respect toaccounting estimate changes and corrections of errors. The Statement waseffective on January 1, 2006. Our adoption of this Statement on January 1, 2006did not have an impact on our Condensed Consolidated Financial Statements.**

** **

**ITEM 3.**                Quantitative andQualitative Disclosure about Market Risk

** **

There have been noevents that materially affect our quantitative and qualitative disclosure aboutmarket risk from that reported in our Annual Report on Form 10-K for the yearended December 31, 2005.

 

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

 

The Company maintains disclosure controls and procedures that aredesignated to ensure that information required to be disclosed in the Company’sExchange Act reports is accurately recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms, and that suchinformation is accumulated and communicated to the Company’s management,including its Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management necessarily was required to apply itsjudgment in evaluating the cost-benefit relationship of possible controls andprocedures.

 

As of March 31, 2006, the Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, of the effectivenessof the design and operation of the Company’s disclosure controls and procedures(as defined in Exchange Act Rule 13a-15(e)). Based on that evaluation, theCompany’s Chief Executive Officer and Chief Financial Officer concluded thatthe Company’s disclosure controls and procedures were effective. There havebeen no significant changes in the Company’s internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate the Company completed its evaluation.

 

The Company’s management, including the Company’s Chief ExecutiveOfficer and Chief Financial Officer, does not expect that the Company’sdisclosure controls or its internal controls will prevent all errors and allfraud. Further, the design of a control system must reflect the fact that thereare resource constraints, and the benefits of controls must be considered

 

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relative to theircosts. As a result of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple error or mistake.As a result of the inherent limitations in a cost-effective control system,misstatements due to error or fraud may occur and not be detected. Accordingly,the Company’s disclosure controls and procedures are designed to providereasonable, not absolute, assurance that the disclosure controls and proceduresare met.

 

32

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**Part II - OTHER INFORMATION**

 

**Item 1.Legal Proceedings**

 

None.

 

**Item 1A. Risk Factors**

 

Our 2005 Annual Report on Form 10-Kincludes a detailed discussion of our risk factors. The information presentedbelow updates and should be read in conjunction with the risk factors andinformation disclosed in our Form 10-K.

 

**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. Generally speaking, we expect to fill most items ofbacklog within the following 12 months. 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 cannot be sure of when during the future12-month period we will be able to recognize revenue corresponding to ourbacklog; nor can we be sure that revenues corresponding to our backlog will notfall into periods beyond the 12-month horizon.

 

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

 

None.

 

**Item 3.Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**Item 5.Other Information**

 

None.

 

**Item 6.**

 

**Exhibits**

 

10.1        -     Lease,dated September 21, 2000, between the heirs to the Daniel Harper Estate andMypodiamond, Inc.

 

10.2        -     Sublease,dated December 16, 2000, between Mypodiamond, Inc. and the Company.

 

33

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10.3        -     Noticeof intent to exercise the extension option of the Sublease for a firstadditional term of five years, dated July 29, 2004.

 

10.4        -     FirstAmendment to Credit Agreement dated as of March 31, 2006 (incorporated byreference to our Current Report on Form 8-K filed with the Securities andExchange Commission on April 5, 2006.

 

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

 

31.2        -     Certificationof the Vice President and Chief Financial Officer pursuant to 17 CFR240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to Section 302 ofthe Sarbanes-Oxley Act of 2002.

 

32.1        -     Certificationof the President and Chief Executive Officer pursuant to 18 U.S.C. Section1350, 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. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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##### **SIGNATURES**

##### ** **

In accordance with therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                 |   | **DYNAMIC MATERIALS CORPORATION**                                                                                                       |
|----------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|
|                 |   | (Registrant)                                                                                                                            |
|                 |   |                                                                                                                                    |
|                 |   |                                                                                                                                    |
| Date: April 26, 2006 |   | /s/ Richard A. Santa                                                                                                                    |   |
|                 |   | Richard A. Santa, Vice President and Chief Financial  Officer (Duly Authorized Officer and Principal  Financial and Accounting Officer) |

 

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