**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

**Form 10-Q**

**(MarkOne)**

**x**                                 QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF1934

**Forthe quarterly period ended March 31, 2007**

**OR**

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

**Commissionfile 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**

(Addressof principal executive offices, including zip code)

**(303) 665-5700**

(Registrant’stelephone number, including area code)

Indicate by check mark whether theregistrant:  (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x  No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer.

| Large accelerated  filer o |   | Accelerated  filer x |   | Non-accelerated  filer o |
|---------------------------------|--------|---------------------------|--------|-------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 under the Act). Yes o  No x

Thenumber of shares of Common Stock outstanding was 12,097,499 as of April 20,2007.

 

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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 offorward-looking words such as “may”, “believe”, “plan”, “anticipate”, “estimate”,“expect”, “intend” and other phrases of similar meaning. The forward-lookinginformation is based on information available as of the date of this quarterlyreport and on numerous assumptions and developments that are not within ourcontrol. Although we believe that our expectations as expressed in theseforward-looking statements are reasonable, we cannot assure you that ourexpectations will turn out to be correct. Factors that could cause actualresults to differ materially include, but are not limited to, the following:the ability to obtain new contracts at attractive prices; the size and timingof customer orders and shipment; fluctuations in customer demand; competitivefactors; the timely completion of contracts; the timing and size ofexpenditures; the timely receipt of government approvals and permits; theadequacy of local labor supplies at our facilities; current or future limits onmanufacturing capacity at our various operations; the availability and cost offunds; and general economic conditions, both domestic and foreign, impactingour business and the business of the end-market users we serve. Readers arecautioned not to place undue reliance on these forward-looking statements,which reflect management’s analysis only as of the date hereof. We undertake noobligation to publicly release the results of any revision to theseforward-looking statements that may be made to reflect events or circumstancesafter the date hereof or to reflect the occurrence of unanticipated events.

** **

1

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**INDEX**

PART I - FINANCIALINFORMATION
| Item 1 -  |   | Condensed Consolidated Financial Statements                                                                |   | 3      |
|-----------|--------|------------------------------------------------------------------------------------------------------------|--------|--------|
|      |   |                                                                                                       |   |   |
|      |   | Consolidated Balance Sheets as of March 31, 2007  (unaudited) and December 31, 2006                        |   | 3      |
|      |   |                                                                                                       |   |   |
|      |   | Consolidated Statements of Operations for the three  months ended March 31, 2007 and 2006 (unaudited)      |   | 5      |
|      |   |                                                                                                       |   |   |
|      |   | Consolidated Statement of Stockholders’ Equity for the  three months ended March 31, 2007 (unaudited) |   | 6      |
|      |   |                                                                                                       |   |   |
|      |   | Consolidated Statements of Cash Flows for the three  months ended March 31, 2007 and 2006 (unaudited)      |   | 7      |
|      |   |                                                                                                       |   |   |
|      |   | Notes to Condensed Consolidated Financial Statements  (unaudited)                                          |   | 9      |
|      |   |                                                                                                       |   |   |
| Item 2 -  |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                |   | 16     |
|      |   |                                                                                                       |   |   |
| Item 3 -  |   | Quantitative and Qualitative Disclosures about Market  Risk                                                |   | 25     |
|      |   |                                                                                                       |   |   |
| Item 4 -  |   | Controls and Procedures                                                                                    |   | 25     |
|      |   |                                                                                                       |   |   |
|      |   | PART II - OTHER  INFORMATION                                                                               |   |   |
|      |   |                                                                                                       |   |   |
| Item  1 - |   | Legal  Proceedings                                                                                         |   | 26     |
|      |   |                                                                                                       |   |   |
| Item 1A - |   | Risk Factors                                                                                               |   | 26     |
|      |   |                                                                                                       |   |   |
| Item 2 -  |   | Unregistered Sales of Equity Securities and Use of  Proceeds                                               |   | 26     |
|      |   |                                                                                                       |   |   |
| Item 3 -  |   | Defaults Upon Senior Securities                                                                            |   | 26     |
|      |   |                                                                                                       |   |   |
| Item 4 -  |   | Submission of Matters to a Vote of Security Holders                                                        |   | 26     |
|      |   |                                                                                                       |   |   |
| Item  5 - |   | Other  Information                                                                                         |   | 26     |
|      |   |                                                                                                       |   |   |
| Item 6 -  |   | Exhibits                                                                                                   |   | 26     |
|      |   |                                                                                                       |   |   |
|      |   | Signatures                                                                                                 |   | 28     |

 

2

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**Part I - FINANCIALINFORMATION**

**ITEM 1.  Condensed Consolidated Financial Statements**

 

**DYNAMIC MATERIALSCORPORATION & SUBSIDIARYCONSOLIDATED BALANCE SHEETS(Dollars in Thousands)**
| ** **                                                                                   | **ASSETS** | ** **      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                   | ** ** | **2007**        | ** ** | **2006**           | ** ** |
| ** **                                                                                   | ** ** | **(unaudited)** | ** ** | ** **         | ** ** |
|                                                                                         |       |            |       |               |       |
| CURRENT ASSETS:                                                                              |       |            |       |               |       |
| Cash and cash  equivalents                                                                   |       | $               | 19,779     |               | $          | 17,886                |       |
| Restricted cash                                                                              |       | —          |       | 3,059              |       |
| Accounts  receivable, net of allowance for doubtful accounts of $368 and $260,  respectively |       | 20,999          |       | 21,549             |       |
| Inventories                                                                                  |       | 21,723          |       | 19,226             |       |
| Prepaid expenses  and other                                                                  |       | 1,413           |       | 1,419              |       |
| Current deferred  tax assets                                                                 |       | 701             |       | 708                |       |
|                                                                                         |       |            |       |               |       |
| Total current  assets                                                                        |       | 64,615          |       | 63,847             |       |
|                                                                                         |       |            |       |               |       |
| PROPERTY, PLANT AND  EQUIPMENT                                                               |       | 35,253          |       | 31,963             |       |
| Less - Accumulated  depreciation                                                             |       | (12,108         | )          | (11,703            | )          |
|                                                                                         |       |            |       |               |       |
| Property, plant  and equipment, net                                                          |       | 23,145          |       | 20,260             |       |
|                                                                                         |       |            |       |               |       |
| GOODWILL, net                                                                                |       | 847             |       | 847                |       |
|                                                                                         |       |            |       |               |       |
| OTHER ASSETS, net                                                                            |       | 15              |       | 19                 |       |
|                                                                                         |       |            |       |               |       |
| TOTAL ASSETS                                                                                 |       | $               | 88,622     |               | $          | 84,973                |       |

 

The accompanying notes are an integral part of theseCondensed Consolidated Financial Statements.

3

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**DYNAMIC MATERIALSCORPORATION & SUBSIDIARYCONSOLIDATED BALANCE SHEETS(Dollars in Thousands, Except Share Data)**
| ** **                                                                                                                          | **LIABILITIES AND STOCKHOLDERS’ EQUITY** | ** **      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------|-----------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                          | ** **                                                   | **2007**        | ** ** | **2006**           | ** ** |
| ** **                                                                                                                          | ** **                                                   | **(unaudited)** | ** ** | ** **         | ** ** |
|                                                                                                                                |                                                         |            |       |               |       |
| CURRENT LIABILITIES:                                                                                                                |                                                         |            |       |               |       |
| Accounts payable                                                                                                                    |                                                         | $               | 11,552     |               | $          | 13,572                |       |
| Accrued expenses                                                                                                                    |                                                         | 2,179           |       | 3,347              |       |
| Accrued income  taxes                                                                                                               |                                                         | 3,909           |       | 1,892              |       |
| Accrued employee  compensation and benefits                                                                                         |                                                         | 3,156           |       | 3,710              |       |
| Customer  advances                                                                                                                  |                                                         | 2,369           |       | 2,394              |       |
| Current  maturities on long-term debt                                                                                               |                                                         | 386             |       | 382                |       |
|                                                                                                                                |                                                         |            |       |               |       |
| Total current  liabilities                                                                                                          |                                                         | 23,551          |       | 25,297             |       |
|                                                                                                                                |                                                         |            |       |               |       |
| LONG-TERM DEBT                                                                                                                      |                                                         | 386             |       | 382                |       |
|                                                                                                                                |                                                         |            |       |               |       |
| DEFERRED TAX  LIABILITIES                                                                                                           |                                                         | 1,451           |       | 1,512              |       |
|                                                                                                                                |                                                         |            |       |               |       |
| OTHER LONG-TERM  LIABILITIES                                                                                                        |                                                         | 209             |       | 202                |       |
|                                                                                                                                |                                                         |            |       |               |       |
| COMMITMENTS AND  CONTINGENT LIABILITIES                                                                                             |                                                         | —          |       | —             |       |
|                                                                                                                                |                                                         |            |       |               |       |
| Total  liabilities                                                                                                                  |                                                         | 25,597          |       | 27,393             |       |
|                                                                                                                                |                                                         |            |       |               |       |
| 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; 12,093,999 and 11,981,999  shares issued and outstanding, respectively |                                                         | 605             |       | 599                |       |
| Additional  paid-in capital                                                                                                         |                                                         | 22,662          |       | 22,166             |       |
| Retained  earnings                                                                                                                  |                                                         | 37,984          |       | 33,102             |       |
| Other cumulative  comprehensive income                                                                                              |                                                         | 1,774           |       | 1,713              |       |
|                                                                                                                                |                                                         |            |       |               |       |
| Total  stockholders’ equity                                                                                                    |                                                         | 63,025          |       | 57,580             |       |
|                                                                                                                                |                                                         |            |       |               |       |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                    |                                                         | $               | 88,622     |               | $          | 84,973                |       |

 

The accompanying notes are an integral part of theseCondensed Consolidated Financial Statements.

4

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**DYNAMIC MATERIALSCORPORATION & SUBSIDIARYCONSOLIDATED STATEMENTS OF OPERATIONSFOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006(Dollars in Thousands, Except Share Data)(unaudited)**
| ** **                                              | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **March 31,**               | ** ** |
| ** **                                              | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| NET SALES                                               |       | $                                | 33,094     |   | $ | 25,175 |   |
|                                                    |       |                             |       |   |   |
| COST OF PRODUCTS SOLD                                   |       | 22,243                           |       | 15,894 |   |
|                                                    |       |                             |       |   |   |
| Gross profit                                            |       | 10,851                           |       | 9,281 |   |
|                                                    |       |                             |       |   |   |
| COSTS AND EXPENSES:                                     |       |                             |       |   |   |
| General and  administrative expenses                    |       | 1,662                            |       | 1,527 |   |
| Selling expenses                                        |       | 1,647                            |       | 1,324 |   |
|                                                    |       |                             |       |   |   |
| Total costs and  expenses                               |       | 3,309                            |       | 2,851 |   |
|                                                    |       |                             |       |   |   |
| INCOME FROM OPERATIONS  OF CONTINUING OPERATIONS        |       | 7,542                            |       | 6,430 |   |
|                                                    |       |                             |       |   |   |
| OTHER INCOME (EXPENSE):                                 |       |                             |       |   |   |
| Interest income,  net                                   |       | 188                              |       | 94 |   |
| Other income  (expense), net                            |       | (7                               | )          | (6 | ) |
|                                                    |       |                             |       |   |   |
| INCOME BEFORE  INCOME TAXES AND DISCONTINUED OPERATIONS |       | 7,723                            |       | 6,518 |   |
|                                                    |       |                             |       |   |   |
| INCOME TAX PROVISION                                    |       | 2,841                            |       | 2,379 |   |
|                                                    |       |                             |       |   |   |
| INCOME FROM CONTINUING  OPERATIONS                      |       | 4,882                            |       | 4,139 |   |
|                                                    |       |                             |       |   |   |
| INCOME FROM  DISCONTINUED OPERATIONS, net of tax        |       | —                           |       | 1,357 |   |
|                                                    |       |                             |       |   |   |
| NET INCOME                                              |       | $                                | 4,882      |   | $ | 5,496 |   |
|                                                    |       |                             |       |   |   |
| INCOME PER SHARE -  BASIC:                              |       |                             |       |   |   |
| Continuing  operations                                  |       | $                                | 0.41       |   | $ | 0.35 |   |
| Discontinued  operations                                |       | —                           |       | 0.12 |   |
|                                                    |       |                             |       |   |   |
| Net income                                              |       | $                                | 0.41       |   | $ | 0.47 |   |
|                                                    |       |                             |       |   |   |
| INCOME PER SHARE -  DILUTED:                            |       |                             |       |   |   |
| Continuing  operations                                  |       | $                                | 0.40       |   | $ | 0.34 |   |
| Discontinued  operations                                |       | —                           |       | 0.11 |   |
|                                                    |       |                             |       |   |   |
| Net income                                              |       | $                                | 0.40       |   | $ | 0.45 |   |
|                                                    |       |                             |       |   |   |
| WEIGHTED AVERAGE NUMBER  OF SHARES                      |       |                             |       |   |   |
| OUTSTANDING -                                           |       |                             |       |   |   |
| Basic                                                   |       | 12,009,577                       |       | 11,768,098 |   |
| Diluted                                                 |       | 12,222,601                       |       | 12,217,547 |   |
|                                                    |       |                             |       |   |   |
| ANNUAL DIVIDENDS  DECLARED PER COMMON SHARE             |       | $                                | —     |   | $ | 0.15 |   |

 

The accompanying notes are an integral part of theseCondensed Consolidated Financial Statements

5

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**DYNAMIC MATERIALSCORPORATION & SUBSIDIARYCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYFOR THE THREE MONTHS ENDED MARCH 31, 2007(Amounts in Thousands)(unaudited)**
| ** **                                                    | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Other**      | ** ** | ** ** | ** ** | ** **                   | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|-------------------|------------|----------------|------------|------------|------------|------------------------------|------------|
| ** **                                                    | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Cumulative** | ** ** | ** ** | ** ** | **Comprehensive**            | ** ** |
| ** **                                                    | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | ** **     | ** ** | **Income** | ** ** |
| ** **                                                    | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Income**     | ** ** | **Total**  | ** ** | **for the Period** | ** ** |
| Balances, December 31,  2006                                  |       | 11,982                |       | $           | 599        |           | $          | 22,166            |       | $              | 33,102     |       | $          | 1,713                        |       | $ | 57,580 |   |   |   |
|                                                          |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Shares  issued for stock option exercises                     |       | 112                   |       | 6           |       | 272            |       | —            |       | —         |       | 278        |       |                         |       |
|                                                          |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Stock-based  compensation                                     |       | —                |       | —      |       | 224            |       | —            |       | —         |       | 224        |       |                         |       |
|                                                          |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Net  income                                                   |       | —                |       | —      |       | —         |       | 4,882             |       | —         |       | 4,882      |       | 4,882                        |       |
|                                                          |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Change  in cumulative foreign currency translation adjustment |       | —                |       | —      |       | —         |       | —            |       | 61             |       | 61         |       | 61                           |       |
|                                                          |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Balances, March 31, 2007                                      |       | 12,094                |       | $           | 605        |           | $          | 22,662            |       | $              | 37,984     |       | $          | 1,774                        |       | $ | 63,025 |   | $ | 4,943 |   |
|                                                               |            |                       |            |             |            |                |            |                   |            |                |            |            |            |                              |            |  |  |  |  |  |  |

 

The accompanying notes are an integral part of theseCondensed Consolidated Financial Statements.

6

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**DYNAMIC MATERIALSCORPORATION & SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006(Dollars in Thousands)(unaudited)**

 
| ** **                                                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                              |       |     |       |     |       |
| Net income                                                                          |       | $        | 4,882      |     | $          | 5,496 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities - |       |     |       |     |       |
| Income from  discontinued operations, net of tax                                    |       | —   |       | (1,357   | )          |
| Depreciation                                                                        |       | 395      |       | 317      |       |
| Amortization of  capitalized debt issuance costs                                    |       | —   |       | 7        |       |
| Stock-based  compensation                                                           |       | 224      |       | 336      |       |
| Deferred income  tax provision (benefit)                                            |       | (46      | )          | 320      |       |
| Change in -                                                                         |       |     |       |     |       |
| Restricted cash                                                                     |       | 3,059    |       | —   |       |
| Accounts  receivable, net                                                           |       | 553      |       | 689      |       |
| Inventories                                                                         |       | (2,487   | )          | (531     | )          |
| Prepaid expenses  and other                                                         |       | 6        |       | (803     | )          |
| Accounts payable                                                                    |       | (2,011   | )          | 120      |       |
| Customer  advances                                                                  |       | 46       |       | 124      |       |
| Accrued expenses  and other liabilities                                             |       | 212      |       | 1,775    |       |
|                                                                                |       |     |       |     |       |
| Net cash  provided by operating activities                                          |       | 4,833    |       | 6,493    |       |
|                                                                                |       |     |       |     |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                              |       |     |       |     |       |
| Acquisition of  property, plant and equipment                                       |       | (3,257   | )          | (469     | )          |
| Sale of  marketable securities                                                      |       | —   |       | 1,950    |       |
| Loan to related  party                                                              |       | —   |       | (1,206   | )          |
| Change in other  non-current assets                                                 |       | —   |       | 79       |       |
| Payment received  on other receivables related to discontinued operations           |       | —   |       | 3        |       |
| Cash flows  provided by investing activities of discontinued operations             |       | —   |       | 2,197    |       |
| Net cash flows provided  by (used in) investing activities                          |       | (3,257   | )          | 2,554    |       |
|                                                                                     |            |          |            |          |            |  |  |

 

The accompanying notes are an integral part of theseCondensed Consolidated Financial Statements.

7

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**DYNAMIC MATERIALSCORPORATION & SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006(Dollars in Thousands)(unaudited)**
| ** **                                                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                 |       |     |       |     |       |
| Repayments on  related party lines of credit, net                      |       | —   |       | (45      | )          |
| Payment on  industrial development revenue bond                        |       | —   |       | (45      | )          |
| Payment of  dividends                                                  |       | —   |       | (1,766   | )          |
| Change in other  long-tem liabilities                                  |       | 5        |       | 7        |       |
| Net proceeds  from issuance of common stock to employees and directors |       | 278      |       | 74       |       |
| Tax benefit  related to exercise of stock options                      |       | —   |       | 54       |       |
|                                                                   |       |     |       |     |       |
| Net cash flows  provided by (used in) financing activities             |       | 283      |       | (1,721   | )          |
|                                                                   |       |     |       |     |       |
| EFFECTS OF EXCHANGE  RATES ON CASH                                     |       | 34       |       | 25       |       |
|                                                                   |       |     |       |     |       |
| NET INCREASE IN CASH  AND CASH EQUIVALENTS                             |       | 1,893    |       | 7,351    |       |
|                                                                   |       |     |       |     |       |
| CASH AND CASH  EQUIVALENTS, beginning of the period                    |       | 17,886   |       | 5,763    |       |
|                                                                   |       |     |       |     |       |
| CASH AND CASH EQUIVALENTS, end of the period                           |       | $        | 19,779     |     | $          | 13,114 |   |
|                                                                        |            |          |            |          |            |  |  |

 

The accompanying notes are an integral part of theseCondensed Consolidated Financial Statements.

8

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**DYNAMIC MATERIALSCORPORATION & SUBSIDIARY**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Dollars inThousands, Except Share and Per Share Data)**

**(unaudited)**

**1.      BASIS OF PRESENTATION**

Theinformation included in the Condensed Consolidated Financial Statements isunaudited but includes all normal and recurring adjustments which, in theopinion of management, are necessary for a fair presentation of the interimperiods presented. These Condensed Consolidated Financial Statements should beread in conjunction with the financial statements that are included in theCompany’s Annual Report filed on Form 10-K for the year ended December 31,2006.

**2.      SIGNIFICANT ACCOUNTING POLICIES**

**Principles ofConsolidation**

**The CondensedConsolidated Financial Statements include the accounts of the Company and itssubsidiaries, all of which are wholly-owned. All significant intercompanyaccounts, profits and transactions have been eliminated in consolidation.**

**Foreign Operations and Foreign Exchange Rate Risk**

**The**functionalcurrency for the Company’s foreign operations is the applicable local currencyfor each affiliate company. Assets and liabilities of foreign subsidiaries forwhich the functional currency is the local currency are translated at exchangerates in effect at period-end, and the statements of operations are translatedat the average exchange rates during the period.  Exchange rate fluctuations on translatingforeign currency financial statements into U.S. dollars that result inunrealized gains or losses are referred to as translation adjustments.Cumulative translation adjustments are recorded as a separate component ofstockholders’ equity and are included in other cumulative comprehensive income.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.

9

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** **

**Revenue Recognition**

**Sales of cladmetal products and welding services are generally based upon customerspecifications set forth in customer purchase orders and require the Company toprovide certifications relative to metals used, services performed and theresults of any non-destructive testing that the customer has requested beperformed.  All issues of conformity ofthe product to specifications are resolved before the product is shipped andbilled.  Revenue is recognized only whenall four of the following criteria have been satisfied: persuasive evidence ofan arrangement exists; the price is fixed or determinable; delivery hasoccurred; and collection is reasonably assured. For contracts that require multiple shipments, revenue is recorded onlyfor the units included in each individual shipment.  If, as a contract proceeds toward completion,projected total cost on an individual contract indicates a potential loss, theCompany recognizes such anticipated loss at such time.**

**Loan to Related Party**

**Nobelclad Europe, S.A. (“Nobelclad”)had a Euro-denominated cash management agreement with SNPE, the parent companyof SNPE, Inc., the Company’s former majority stockholder, which provided forloans to or from either party of up to approximately $3,400, based on theDecember 31, 2005 exchange rates. Amounts outstanding under this agreement boreinterest at EURIBOR plus 1.5% annually. Due to Nobelclad’s excess cash positionduring the first quarter of 2006, it began advancing cash to SNPE through thisintercompany cash agreement. At March 31, 2006, these advances to SNPE totaled1,003 Euros ($1,211). The interest rate earned on these advances exceeded theinterest 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 was repaidin full in April 2006 and the agreement was terminated upon the sale of ourcommon stock by SNPE.**

**Earnings Per 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 the potential dilutive effects of dilutivesecurities.  The following represents areconciliation of the numerator and denominator used in the calculation ofbasic and diluted EPS:**
| ** **                                           | ** ** | **For the three months ended March 31, 2007** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                                                       | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                           | ** ** | **Income**                                                                       | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings  per share:                           |       |                                                                             |       |   |   |   |   |
| Net income                                           |       | $                                                                                | 4,882      |   | 12,009,577 |   | $ | 0.41 |   |
|                                                 |       |                                                                             |       |   |   |   |   |
| Dilutive effect  of options to purchase common stock |       | —                                                                           |       | 209,141 |   |   |   |
| Dilutive effect  of restricted stock awards          |       | —                                                                           |       | 3,883 |   |   |   |
|                                                 |       |                                                                             |       |   |   |   |   |
| Dilutive  earnings per share:                        |       |                                                                             |       |   |   |   |   |
| Net income                                           |       | $                                                                                | 4,882      |   | 12,222,601 |   | $ | 0.40 |   |

 

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

 

**3.      INCOME TAXES**

The Company adopted the provisions of FinancialAccounting Standards Board Interpretation No. 48, Accounting for Uncertainty inIncome Taxes — an interpretation of FASB No. 109 (“FIN 48”), which clarifies the accounting and disclosure foruncertainty in tax positions, on January 1, 2007.  FIN 48 seeks to harmonize certain accountingpractices associated with the recognition and measurement of income taxes.  As a result of the implementation of FIN 48, theCompany recognized no material adjustment in the liability for unrecognizedincome tax benefits.  On the adoptiondate of January 1, 2007, the Company had $394 of unrecognized tax benefits, allof which would affect our effective tax rate if recognized.  At March 31, 2007, the balance ofunrecognized tax benefits remains at $394, and primarily relates to uncertainU.S. Federal tax positions. The Company has identified no uncertain taxposition for which it is reasonably possible that the total amount ofunrecognized tax benefits will significantly increase or decrease within the12 months following the date of adoption of FIN 48.

TheCompany recognizes interest and penalties related to uncertain tax positions inoperating expense.  As of March 31, 2007,the Company’s accrual for interest and penalties related to uncertain taxpositions is insignificant.

TheCompany’s U.S. Federal tax returns for the tax years 2003-2006 remain open toexamination while most of the Company’s state tax returns remain open toexamination for the tax years 2002-2006. The Company’s foreign tax returns remain open to examination for the taxyears 2003-2006 in France and 2001-2006 in Sweden.

11

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**4.      INVENTORY**

**The components of inventory areas follows at March 31, 2007 and December 31, 2006:**

|                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|--------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **      | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| Raw materials   |       | $                  | 7,353      |                  | $          | 6,282 |   |
| Work-in-process |       | 13,625             |       | 12,314                |       |
| Supplies        |       | 745                |       | 630                   |       |
|            |       | $                  | 21,723     |                  | $          | 19,226 |   |

 

**5.      DEBT**

**Long-term debt consists of thefollowing at March 31, 2007 and December 31, 2006:**

|                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **               | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| Term loan -  French bank |       | $                  | 772        |                  | $          | 764 |   |
| Less current  maturities |       | (386               | )          | (382                  | )          |
| Long-term debt           |       | $                  | 386        |                  | $          | 382 |   |

 

Loan Covenants andRestrictions

TheCompany’s existing loan agreements include various covenants and restrictions,certain of which relate to the incurrence of additional indebtedness,mortgaging, pledging or disposition of major assets, limits on capitalexpenditures and maintenance of specified financial ratios.  As of March 31, 2007, the Company was incompliance with all financial covenants and other provisions of its debtagreements.

**6.      BUSINESS SEGMENTS**

The Company is organizedin the following two segments:  theExplosive Metalworking segment and AMK Welding. The Explosive Metalworkingsegment uses explosives to perform metal cladding and shock synthesis ofindustrial diamonds. The most significant product of this group is clad metalwhich is used in the fabrication of pressure vessels, heat exchangers andtransition joints for various industries, including upstream oil and gas, oilrefinery, petrochemicals, hydrometallurgy, aluminum production, shipbuilding,power generation, industrial refrigeration and similar industries. AMK Weldingutilizes a number of welding technologies to weld components for manufacturersof jet engines and ground-based turbines.

The accounting policies of both segmentsare the same as those described in the summary of significant accountingpolicies.  The Company’s reportablesegments are strategic business units that offer different products andservices and are separately managed. Each segment is marketed to differentcustomer types and requires different manufacturing processes andtechnologies.  Segment information ispresented for the three months ended March 31, 2007 and 2006 as follows:

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| ** **                                       | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| ** **                                       | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the three  months ended March 31, 2007:      |       |             |       |        |       |       |       |
| Net sales                                        |       | $                | 31,495     |        | $          | 1,599      |       | $ | 33,094 |   |
| Depreciation                                     |       | $                | 335        |        | $          | 60         |       | $ | 395 |   |
| Income from  operations of continuing operations |       | $                | 7,502      |        | $          | 264        |       | $ | 7,766 |   |
| Unallocated amounts:                             |       |             |       |        |       |       |       |
| Stock-based compensation                         |       |             |       |        |       | (224       | )          |
| Interest income, net                             |       |             |       |        |       | 188        |       |
| Other expense                                    |       |             |       |        |       | (7         | )          |
| Consolidated  income before income taxes         |       |             |       |        |       | $          | 7,723      |   |

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

 

**During the three months endedMarch 31, 2007, sales to one customer represented approximately $5,417 (16%) oftotal net sales.  During the three monthsended March 31, 2006, sales to one customer represented approximately $3,665 (15%)of total net sales.**

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**7.               COMPREHENSIVEINCOME**

**The Company**’s comprehensive income for the three months ended March 31, 2007 and2006 was as follows:

|                                          | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **March 31,**               | ** ** |
| ** **                               | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Net income for the  period               |       | $                                | 4,882      |   | $ | 5,496 |   |
| Foreign currency  translation adjustment |       | 61                               |       | 140 |   |
| Comprehensive income                     |       | $                                | 4,943      |   | $ | 5,636 |   |

 

As of March 31, 2007 and December 31, 2006 other cumulativecomprehensive income of $1,774 and $1,713, respectively, consists entirely ofcumulative foreign currency translation adjustment.

**8.      DISCONTINUEDOPERATIONS**

On September 17, 2004, DMC completed the divestitureof its Spin Forge division under an agreement that involved subleasing the SpinForge real estate and leasing the manufacturing equipment and tooling to athird party.  Under the master agreementrelating to this divestiture transaction, the Company sold all inventory, booksand records, intangible personal property, business information and technology,customer contracts, and licenses and permits relating to the Spin Forgebusiness to this third party for a sales price of approximately $1,700.  The third party also assumed fullresponsibility for Spin Forge business activities 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 had nointent to ever again operate any of the leased assets.  In December 2006, the third party purchaserof the Spin Forge business purchased the majority of these leased assets whilethe remainder of the leased assets was liquidated by the Company.  This transaction resulted in a pretax gain of$228, which was recorded as discontinued operations in the fourth quarter of2006.   The Company had received rent of$23 per month on these leased assets until the date of their sale.

On January10, 2006, the Company sold its purchase option on the Spin Forge real estate tothe property owner for $2,300.  Thecompletion of this transaction resulted in a pretax gain of $2,197, which wasrecorded as discontinued operations in the first quarter of 2006.  In connection with the sale of the purchaseoption, the underlying lease agreement was terminated.  Accordingly, the capital lease asset of$2,880 and the related lease obligation of the same amount were removed fromthe Company’s balance sheet in the first quarter of 2006.

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Discontinued operations for the three months endedMarch 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’sDiscussion and Analysis of Financial Condition and Results of Operations**

The following discussion shouldbe read in conjunction with our historical consolidated financial statementsand notes, as well as the selected historical consolidated financial data thatare included in the Company’s Annual Report filed on Form 10-K for the yearended December 31, 2006.

Unless stated otherwise, all dollar figures in thisdiscussion are presented in thousands (000’s).

**ExecutiveOverview**

Our business is organized into twosegments:  Explosive Metalworking and AMKWelding.  For the three months endedMarch 31, 2007, Explosive Metalworking accounted for 95% of our net sales and97% of our income from operations of continuing operations before considerationof stock-based compensation expense, which is not allocated to our businesssegments.

For the three months ended March 31, 2007, netsales increased by $7,919 (31.5%) compared to the first three months of 2006,reflecting year-to-year net sales increases of $7,319 (30.3%) and $600 (60.1%)for our Explosive Metalworking and AMK Welding segments, respectively.  Our operating income from continuingoperations increased by 17.3% to $7,542 in the first three months of 2007 from$6,430 in the first three months of 2006, reflecting an $844 improvement inExplosive Metalworking’s operating income and a $156 improvement in AMK Welding’soperating income.  Income from continuingoperations increased by 18.0% to $4,882 for the three months ended March 31,2007 from $4,139 in the same period of 2006. Our net income decreased to $4,882 in the first three months of 2007from $5,496 in the first three months of 2006. For the three months ended March 31, 2006, net income included $1,357 ofincome from discontinued operations, net of tax, relating to the sale of theSpin Forge real estate option as further 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 customers thatfabricate industrial equipment for various industries, including upstream oiland gas, oil refinery, petrochemicals, hydrometallurgy, aluminum production,shipbuilding, power generation, industrial refrigeration and similarindustries.  While demand for our cladmetal products in the United States is largely driven by new plant constructionand large plant expansion projects, maintenance and retrofit projects atexisting chemical processing, petrochemical processing and oil refiningfacilities account for a significant portion of total demand.  In contrast to the U.S. market, demand forour clad products in Europe and Asia is more dependent on new constructionprojects, such as the building of new purified terephthalic acid (“PTA”) plantsin different parts of the world, including China, and on sales of electricaltransition joints that are used in the aluminum production industry.

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

A significant portionof our 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

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and profitability levels could adverselyaffect our ability to meet cash requirements exclusively through operatingactivities. We attempt to minimize the risk of losing customers or specificcontracts by continually improving product quality, delivering product on timeand competing favorably on the basis of price.

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

*Gross profit and cost of products sold*

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, we completed the sale of ourSpin Forge division.  On January 10,2006, we sold our option rights to purchase the Spin Forge real estate to theproperty owner for $2,300.  We recorded apre-tax gain of approximately $2,197 on this transaction, which was reported asdiscontinued operations, net of related taxes, in the first quarter of 2006.

*Income taxes*

Our effective income tax rate increased to 36.8% forthe first three months of 2007 from 36.5% for the first three months of2006.  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.  Going forward, based upon existing taxregulations and current federal, state and foreign statutory tax rates, weexpect our effective tax rate on our consolidated pre-tax income to rangebetween 36% and 38%.

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*Backlog*

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

Our backlog with respect to the ExplosiveMetalworking segment decreased slightly to approximately $67.9 million at March31, 2007 from approximately $68.8 million at December 31, 2006.

**Three Months Ended March 31, 2007Compared to Three Months Ended March 31, 2006**

*Net sales*
| ** ** | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                                | 33,094     |       | $          | 25,175         |       | $ | 7,919 |   | 31.5 | % |
|            |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

Netsales for the first quarter of 2007 increased 31.5% to $33,094 from $25,175 inthe first quarter of 2006. Explosive Metalworking sales increased 30.3% to$31,495 in the three months ended March 31, 2007 (95% of total sales) from$24,176 in the same period of 2006 (96% of total sales).  The significant increase in ExplosiveMetalworking sales is principally attributable to the continued economicstrength of the industries that this business segment serves.

AMKWelding contributed $1,599 to first quarter 2007 sales (5% of total sales)which represented a 60.1% increase versus sales of $999 in the first quarter of2006 (4% of total sales).

*Grossprofit*
| ** **                             | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                             | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit                           |       | $                                | 10,851     |       | $          | 9,281          |       | $ | 1,570 |   | 16.9 | % |
| Consolidated gross  profit margin rate |       | 32.8                             | %          | 36.9       | %          |           |       |   |   |
|                                        |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

Gross profit increased by 16.9% to $10,851 forthe three months ended March 31, 2007 from $9,281 for the three months endedMarch 31, 2006. Our first quarter 2007 consolidated gross profit margin ratedecreased to 32.8% from 36.9% in the first quarter of 2006. The gross profitmargin for Explosive Metalworking decreased from 37.4% in the first quarter of2006 to 33.1% in the first quarter of 2007 and the gross profit margin for AMKWelding increased to 28.8% in the first quarter of 2007 from 24.9% in the firstquarter of 2006.

The decreased gross margin rate for ExplosiveMetalworking relates primarily to changes in product mix during the firstquarter of 2007 as compared that for the first quarter of 2006. AMK

18

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Welding’sgross margin improvement relates principally to the sales increase discussedabove and the resultant more favorable absorption of fixed manufacturingoverhead expenses.  Gross profit marginstypically fluctuate from one quarter to the next for various reasons, includingchanges in sales volume and product mix. Our gross margins are likely tocontinue to fluctuate from quarter-to-quarter.

*Generaland administrative expenses*
| ** **                             | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                             | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General &  administrative expenses |       | $                                | 1,662      |       | $          | 1,527          |       | $ | 135 |   | 8.8 | % |
| Percentage of net sales                |       | 5.0                              | %          | 6.1        | %          |           |       |   |   |
|                                        |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

General and administrative expenses increased by$135, or 8.8%, to $1,662 in the first quarter of 2007 from $1,527 in the firstquarter of 2006.  Expense increasesreflect an impact of $138 from annual salary adjustments and staffing changes,a $46 increase in accrued incentive compensation expense, a $30 increase indirectors and officers’ insurance premiums and minor net increases of $91 in anumber of other expense categories. These increases were partially offset by a decrease of $170 instock-based compensation expense.  As apercentage of net sales, general and administrative expenses decreased to 5.0%in the first quarter of 2007 from 6.1% in the first quarter of 2006.

*Selling expenses*
| ** **              | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **              | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses        |       | $                                | 1,647      |       | $          | 1,324          |       | $ | 323 |   | 24.4 | % |
| Percentage of net sales |       | 5.0                              | %          | 5.3        | %          |           |       |   |   |
|                         |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

Selling expenses, which include sales commissions of$423 in 2007 and $472 in 2006, increased by 24.4% to $1,647 in the firstquarter of 2007 from $1,324 in the first quarter of 2006.  The $323 increase in selling expensesreflects an impact of $105 from annual salary adjustments and staffing changes,an increase of $81 in the provision for doubtful accounts, a $53 increase inaccrued incentive compensation expense and a $31 increase in stock-based compensationexpense.  As a percentage of net sales,selling expenses decreased to 5.0% in the first quarter of 2007 from 5.3% inthe first quarter of 2006.

*Income from operations of continuingoperations*
| ** **                                       | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                                       | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                       | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from  operations of continuing operations |       | $                                | 7,542      |       | $          | 6,430          |       | $ | 1,112 |   | 17.3 | % |
|                                                  |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

Income from operations increased by 17.3% to$7,542 in the first quarter of 2007 from $6,430 in the first quarter of2006.  Explosive Metalworking reportedincome from operations of $7,502 in the first quarter of 2007 as compared to$6,658 in the first quarter of 2006. This 12.7%

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increaseis largely attributable to the 30.3% sales increase discussed above.  AMK Welding reported income from operationsof $264 for the three months ended March 31, 2007 as compared to $108 for thesame period of 2006.

Income from operations of continuing operationsfor the three months ended March 31, 2007 and 2006 includes $224 and $336,respectively, of stock-based compensation expense. This expense is notallocated to our two business segments and thus is not included in the abovefirst quarter operating income totals for Explosive Metalworking and AMKWelding.

*Interest income (expense), net*
| ** **                      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                      | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                      | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income  (expense), net |       | $                                | 188        |       | $          | 94             |       | $ | 94 |   | NM |   |
|                                 |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

Net interest income (expense) improved by $94, to anet of $188 in interest income for the first quarter 2007 from a net of $94 ininterest income in the first quarter of 2006. This change in net interest income (expense) reflects investmentearnings on the large cash balances that we are currently carrying.

*Income tax provision*
| ** **            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **            | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **            | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax  provision |       | $                                | 2,841      |       | $          | 2,379          |       | $ | 462 |   | 19.4 | % |
| Effective tax rate    |       | 36.8                             | %          | 36.5       | %          |           |       |   |   |
|                       |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

We recorded an income tax provision of $2,841 in thefirst quarter of 2007 compared to $2,379 in the first quarter of 2006.  The effective tax rate increased to 36.8% inthe first quarter of 2007 from 36.5% in the first quarter of 2006.  The income tax provisions for the threemonths ended March 31, 2007 and 2006 include $2,102 and $1,844, respectively,related to U.S. taxes, with the remainder relating to foreign taxes associatedwith the operations of Nobelclad and its Swedish subsidiary, Nitro Metall.  We expect our full year 2007 effective taxrate on consolidated pre-tax income to be in the 36% to 38% range.

*Incomefrom discontinued operations*
| ** **                           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|
| ** **                           | ** ** | **March 31,**               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                           | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income from  discontinued operations |       | $                                | —     |       | $          | 1,357          |       | $ | (1,357 | ) | NA |   |
|                                      |            |                                  |            |            |            |                |            |  |  |  |  |  |

 

We completed the divestiture of our Spin Forgedivision in September 2004.  Under theprincipal divestiture agreement, we sold the assets of the Spin Forge divisionto a third party, excluding certain equipment and real estate which were leasedor subleased to the buyer.  We held apurchase option on the Spin Forge real estate that allowed us to purchase thereal estate for

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$2,880,a price that was below the real estate’s appraised value.  On January 10, 2006, we sold our purchaseoption on the Spin Forge real estate to the property owner for $2,300.  We recorded a pre-tax gain of approximately $2,197on this transaction, which was reported in discontinued operations, net ofrelated taxes.

# **Liquidity and 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 believethat cash flow from operations and funds available under our current creditfacilities and any future replacement thereof will be sufficient to fund theworking capital, debt service and capital expenditure requirements of ourcurrent business operations for the foreseeable future.  Nevertheless, our ability to generatesufficient cash flows from operations will depend upon our success in executingour strategies, including our ability to secure new customer orders at ouroperating divisions, and to continue to implement cost-effective internalprocesses.

*Debt and other contractual obligations andcommitments*

**We have a$10,000 credit facility with Wells Fargo Bank, N.A.**Any restrictionon the availability of borrowing under this credit facility could negativelyaffect our ability to meet future cash requirements. Our existing loanagreements include various covenants and restrictions, certain of which relateto the payment of dividends or other distributions to stockholders, redemptionof capital stock, incurrence of additional indebtedness, mortgaging, pledgingor disposition of major assets and maintenance of specified financialratios.  As of March 31, 2007, we were incompliance with all financial covenants and other provisions of our debtagreements.

The Company’sprincipal cash flows related to debt obligations and other contractualobligations and commitments have not materially changed since December 31,2006.

***Cashflows from operating activities***

Net cash flows provided by operating activitiesfor the first quarter of 2007 totaled $4,833. Significant sources of operating cash flow included net income of$4,882, non-cash depreciation and amortization expense of $395 and stock-basedcompensation of $224.  These sources ofoperating cash flow were partially offset by net negative changes in variouscomponents of working capital in the amount of $622.  Net negative changes in working capitalincluded increases in inventories of $2,487 and decreases in accounts payableof $2,011.  These negative changes inworking capital were largely offset by decreases in restricted cash andaccounts receivable of $3,059 and $553, respectively.

Net cash flows provided by operating activitiesfor the first quarter 2006 totaled $6,493. Significant sources of operating cash flow included net income fromcontinuing operations of $4,139, non-cash depreciation and amortization expenseof $324, stock-based compensation of $336, $320 from provision for deferredincome taxes and positive net changes in various components of working capitalin the amount of $1,374.  Net positivechanges in working capital included a decrease in accounts receivable of $689and increases in accounts payable and accrued expenses and other liabilities of$120 and $1,899, respectively.  Thesepositive changes in working capital were partially offset by an increase ininventories and prepaid expenses of $531 and $803 respectively.

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*Cash flows from investing activities*

Net cash flows used by investing activities forthe first quarter of 2007 totaled $3,257 and consisted entirely of capitalexpenditures.

Net cash flows provided by investing activitiesfor the first quarter of 2006 were $2,554 and consisted primarily of $1,950from the sale of marketable securities and $2,197 for investment activities ofdiscontinued operations that consisted of the sale of the Spin Forge realestate purchase option.  These cashinflows were partially offset by $469 in capital expenditures and $1,206 for aloan to a related party.

*Cash flows from financing activities*

Net cash flows provided by financing activitiesfor the first quarter of 2007 were $283, which consisted primarily of netproceeds from the issuance of common stock relating to the exercise of stockoptions.

Net cash flows used in financing activities forthe first quarter of 2006 were $1,721. Significant uses of cash for financing activities included a $1,766payment of annual dividends, $45 repayment on related party line of credit andindustrial development revenue bond principal payments of $45.  Sources of cash flow from financingactivities include $74 in net proceeds from the issuance of common stockrelating to the exercise of stock options and $54 for an excess tax benefitrelated to the exercise of stock options.

*Payment of Dividends*

We may pay annual dividends subject to capitalavailability and periodic determinations that cash dividends are in the bestinterests of our stockholders, but we cannot assure you that such payments willcontinue.  Future dividends may beaffected by, among other items, our views on potential future capitalrequirements, future business prospects, changes in federal income tax law andany other factors that our board of directors deems relevant.  Any decision to pay cash dividends is andwill continue to be at the discretion of the board of directors.

**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’sopinion, the more significant reporting areas impacted by management’sjudgments and estimates are revenue recognition, asset impairments, inventoryvaluation and impact of foreign currency exchange rate risks. Management’sjudgments and estimates in these areas are based on information available fromboth internal and external sources, and actual results could differ from theestimates, as additional information becomes known.  We believe the following to be our mostcritical accounting policies.

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*Revenuerecognition*

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.  All issues of conformity of the product tospecifications are resolved before the product is shipped and billed.  Revenue is recognized only when all four ofthe following criteria have been satisfied: persuasive evidence of anarrangement exists; the price is fixed or determinable; delivery has occurred;and collection is reasonably assured. For contracts that require multiple shipments, revenue is recorded onlyfor the units included in each individual shipment.  If, as a contract proceeds toward completion,projected total cost on an individual contract indicates a potential loss, weprovide currently for such anticipated loss.

*Assetimpairments*

We review ourlong-lived assets held and used by us for impairment whenever events or changesin circumstances indicate their carrying amount may not be recoverable. In sodoing, we estimate the future net cash flows expected to result from the use ofthe asset and its eventual disposition. If the sum of the expected future netcash flows (undiscounted and without interest charges) is less than the carryingamount of the asset, an impairment loss is recognized to reduce the asset toits estimated fair value. Otherwise, an impairment loss is not recognized.  Long-lived assets to be disposed of, if any,are reported at the lower of carrying amount or fair value less cost to sell.

*Goodwill*

Goodwill is tested forimpairment at least annually on reporting units one level below the segmentlevel and any impairment is based on the reporting unit’s estimated fairvalue.  Fair value can be determinedbased on discounted cash flows, comparable sales or valuations of similarbusinesses.  Impairment occurs when thecarrying amount of goodwill exceeds its estimated fair value.  Our policy is to test goodwill for impairmentin the fourth quarter of each year unless an indicator of impairment arisesearlier.

The entire amount ofgoodwill, which had a carrying value of $847 on our balance sheet as of March31, 2007, relates to our Explosive Metalworking segment.  Based on the analysis performed in the fourthquarter of 2006, no impairment was recorded to the carrying value of goodwill.

*Impactof foreign currency exchange rate risks*

The functionalcurrency for our 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 on translating foreign currency financialstatements into U.S. dollars that result in unrealized gains or losses arereferred to as translation adjustments. Cumulative translation adjustments arerecorded as a separate component of stockholders’ equity and are included inother cumulative comprehensive income (loss). Transactions denominated incurrencies other than the local currency are recorded based on exchange ratesat the time such transactions arise. Subsequent changes in exchange ratesresult in transaction gains and losses, which are reflected in income asunrealized (based on period-end translations) or realized upon settlement ofthe transactions. Cash flows from our operations in foreign countries aretranslated at actual exchange rates when known, or at the average rate for theperiod. As a result, amounts related to assets and liabilities reported in

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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.

*Incometaxes*

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 but not our taxreturns.  Deferred tax assets andliabilities are determined based on the temporary differences between theConsolidated Financial Statement basis and the tax basis of assets andliabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse.  Weroutinely evaluate deferred tax assets to determine if they will more likelythan not be recovered from future projected taxable income and, if not, werecord an appropriate valuation allowance.

During2005, we completed an analysis of prior year tax credits and relateditems.  As a result of the analysis, wefiled amended federal and state income tax returns.  The amended state returns reported additionalnet operating losses and credits above the amounts we had previously recordedin our books and records.  In assessingthese additional losses and credits, we determined that the utilization of aportion of these did not meet the more likely than not criteria, due to potentialchanges in the states in which we have income tax nexus.  Thus, we recorded a net valuation allowanceof approximately $177 against the deferred tax assets during 2005.  As of March 31, 2007, the balance of thisallowance is $143.

*Stock-Based Compensation Expense*

We account for stock-basedcompensation in accordance with the provisions of Statement of FinancialAccounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”).  Under the fair value recognition provisionsof SFAS 123R, stock-based compensation cost is estimated at the grant datebased on the value of the award and is recognized as expense ratably over therequisite service period of the award. Determining the appropriate fair value model and calculating the fairvalue of stock options at the grant date requires judgment, includingestimating stock price volatility, forfeiture rates and expected option life.

**Recent Accounting Pronouncements**

We adopted the provisions of FinancialAccounting Standards Board Interpretation No. 48, Accounting for Uncertainty inIncome Taxes — an interpretation of SFAS 109 (“FIN 48”), which clarifies the accounting and disclosure foruncertainty in tax positions, on January 1, 2007.  FIN 48 seeks to harmonize certain accountingpractices associated with the recognition and measurement of income taxes.  As a result of the implementation of FIN 48, werecognized no material adjustment in the liability for unrecognized income taxbenefits.  On the adoption date ofJanuary 1, 2007, we had $394 of unrecognized tax benefits, all of which wouldaffect our effective tax rate if recognized. At March 31, 2007, the balance of unrecognized tax benefits remains at$394, and primarily relate to uncertain U.S. Federal tax positions.

Werecognize interest and penalties related to uncertain tax positions inoperating expense.  As of March 31, 2007,our accrual for interest and penalties related to uncertain tax positions isinsignificant.

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**Our U.S. Federaltax returns for the tax years 2003-2006 remain open to examination while mostof our state tax returns remain open to examination for the tax years2002-2006.  Our foreign tax returnsremain open to examination for the tax years 2003-2006 in France and 2001-2006in Sweden.**

**ITEM 3.**                    Quantitativeand Qualitative Disclosure about Market Risk

There have been no events that materially affect our quantitative andqualitative disclosure about market risk from that reported in our AnnualReport on Form 10-K for the year ended December 31, 2006.

**ITEM 4.**                    Controls andProcedures

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

As of March 31, 2007, 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 theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in Exchange Act Rule 13a-15(e)).  Based on that evaluation, the Company’s ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective.  There have been no significant changes in theCompany’s internal controls or in other factors that could significantly affectinternal controls subsequent to the date 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 controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs.  As a result of the inherent limitations inall control systems, no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within the Company havebeen detected.  These inherentlimitations include the realities that judgments in decision-making can befaulty, and that breakdowns can occur because of simple error or mistake.  As a result of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.  Accordingly, theCompany’s disclosure controls and procedures are designed to providereasonable, not absolute, assurance that the disclosure controls and proceduresare met.

** **

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**Part II - OTHER INFORMATION**

**Item 1. LegalProceedings**

None.

**Item 1A. RiskFactors**

Our 2006 Annual Report on Form 10-K includes adetailed discussion of our risk factors. The information presented below updates and should be read inconjunction with the risk factors and information disclosed in our Form 10-K.

**Ourbacklog figures may not accurately predict future sales.**

We define “backlog” at any given point in time to consist of all firm,unfulfilled purchase orders and commitments at that time.  Generally speaking, we expect to fill mostitems of backlog within the following 12 months.  However, since orders may be rescheduled orcanceled, and a significant portion of our net sales is derived from a smallnumber of customers, backlog is not necessarily indicative of future saleslevels.  Moreover, we cannot be sure ofwhen during the future 12-month period we will be able to recognize revenuecorresponding to our backlog; nor can we be sure that revenues corresponding toour backlog will not fall into periods beyond the 12-month horizon.

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

None.

**Item 3. DefaultsUpon Senior Securities**

None.

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

None

**Item 5. OtherInformation**

None.

**Item 6.**

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

 

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| 32.1   |   | — |   | Certification of the President and Chief Executive  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.      |
|--------|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                        |
| 32.2   |   | — |   | Certification of the Vice President and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

** **

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**SIGNATURES**

Inaccordance with the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|                      |   | **DYNAMIC MATERIALS CORPORATION**                                                                                                       |
|----------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|
| ** **           |   | (Registrant)                                                                                                                            |
|                 |   |                                                                                                                                    |
| Date: April 27, 2007 |   | /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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