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** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**Form 10-Q**

 

**(MarkOne)**

 

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934**

 

**For thequarterly period ended June 30, 2010**

 

**OR**

 

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

 

**FOR THETRANSITION PERIOD FROM                  TO                   .**

 

**Commission file number 001-14775**

 

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**DYNAMIC MATERIALS CORPORATION**

(Exact name of Registrant as Specified in its Charter)

 

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

 

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

(Address of principal executive offices, including zip code)

 

**(303) 665-5700**

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

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

 

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

 

Thenumber of shares of Common Stock outstanding was 13,202,177 as of July 30,2010.

 

 

 

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CAUTIONARY NOTE ABOUTFORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Qcontains “forward-looking statements” within the meaning of section 27A of theSecurities Act of 1933 and section 21E of the Securities Exchange Act of 1934.In particular, we direct your attention to Part I, Item 1- CondensedConsolidated Financial Statements; Item 2 - Management’s Discussion andAnalysis of Financial Condition and Results of Operations; Item 3 - Quantitativeand Qualitative Disclosures About Market Risk; and Part II, Item 1A —Risk Factors. We intend the forward-looking statements throughout thisquarterly report on Form 10-Q and the information incorporated byreference herein to be covered by the safe harbor provisions forforward-looking statements. Statements contained in this report which are nothistorical facts are forward-looking statements that involve risks anduncertainties that could cause actual results to differ materially from projectedresults. All projections, guidance and other statements regarding our expectedfinancial position and operating results, our business strategy, our financingplans and the outcome of any contingencies are forward-looking statements.These statements can sometimes be identified by our use of forward-lookingwords such as “may,” “believe,” “plan,” “anticipate,” “estimate,” “expect,” “intend,”and other phrases of similar meaning. The forward-looking information is basedon information available as of the date of this quarterly report and onnumerous assumptions and developments that are not within our control. Althoughwe believe that our expectations as expressed in these forward-lookingstatements are reasonable, we cannot assure you that our expectations will turnout to be correct. Factors that could cause actual results to differ materiallyinclude, but are not limited to, the following: changes in global economicconditions; the ability to obtain new contracts at attractive prices; the sizeand timing of customer orders and shipment; our ability to realize sales fromour backlog; fluctuations in customer demand; fluctuations in foreigncurrencies; competitive factors; the timely completion of contracts; the timingand size of expenditures; the timely receipt of government approvals andpermits; the price and availability of metal and other raw material; theadequacy of local labor supplies at our facilities; current or future limits onmanufacturing capacity at our various operations; our ability to successfullyintegrate acquired businesses; the availability and cost of funds; and generaleconomic conditions, both domestic and foreign, impacting our business and thebusiness of the end-market users we serve. Readers are cautioned not to placeundue reliance on these forward-looking statements, which reflect management’sanalysis only as of the date hereof. We undertake no obligation to publiclyrelease the results of any revision to these forward-looking statements thatmay be made to reflect events or circumstances after the date hereof or toreflect the occurrence of unanticipated events.

 

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** **

**INDEX**

 
| PART I -  FINANCIAL INFORMATION                                                                              |
|-------------------------------------------------------------------------------------------------------------------|
|                                                                                                              |   |   |
| Item  1 — Condensed Consolidated Financial Statements                                                        |   | 4 |
|                                                                                                              |   |   |
| Consolidated  Balance Sheets as of June 30, 2010 (unaudited) and December 31,  2009                     |   | 4 |
| Consolidated Statements of Operations for the three  and six months ended June 30, 2010 and 2009 (unaudited) |   | 6 |
| Consolidated Statement of Stockholders’ Equity for the  six months ended June 30, 2010 (unaudited)      |   | 7 |
| Consolidated Statements of Cash Flows for the six  months ended June 30, 2010 and 2009 (unaudited)           |   | 8 |
| Notes to Condensed Consolidated Financial Statements  (unaudited)                                                 |   | 10 |
|                                                                                                              |   |   |
| Item 2 — Management’s Discussion and Analysis of  Financial Condition and Resultsof Operations          |   | 25 |
|                                                                                                              |   |   |
| Item 3 — Quantitative and Qualitative Disclosure about  Market Risk                                          |   | 42 |
|                                                                                                              |   |   |
| Item 4 — Controls and Procedures                                                                             |   | 42 |
|                                                                                                              |   |   |
| PART II  - OTHER INFORMATION                                                                                 |
|                                                                                                              |
| Item  1 — Legal Proceedings                                                                                  |   | 43 |
|                                                                                                              |   |   |
| Item  1A — Risk Factors                                                                                      |   | 43 |
|                                                                                                              |   |   |
| Item 2 — Unregistered Sales of Equity Securities and  Use of Proceeds                                        |   | 43 |
|                                                                                                              |   |   |
| Item 3 — Defaults Upon Senior Securities                                                                     |   | 43 |
|                                                                                                              |   |   |
| Item  4 — Removed and Reserved                                                                               |   | 43 |
|                                                                                                              |   |   |
| Item  5 — Other Information                                                                                  |   | 43 |
|                                                                                                              |   |   |
| Item 6 — Exhibits                                                                                            |   | 43 |
|                                                                                                              |   |   |
| Signatures                                                                                                        |   | 44 |

 

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**Part I - FINANCIALINFORMATION**

 

**ITEM 1.  Condensed ConsolidatedFinancial Statements**

 

DYNAMIC MATERIALS CORPORATION &SUBSIDIARIES

CONDENSED CONSOLIDATEDBALANCE SHEETS

(Dollars in Thousands)

 
| ** **                                                                                  | ** ** | **June 30,** | ** ** | ** **            | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                  | ** ** | **2010**          | ** ** | **December 31,** | ** ** |
| ** **                                                                                  | ** ** | **(unaudited)**   | ** ** | **2009**              | ** ** |
| ASSETS                                                                                      |       |              |       |                  |       |
|                                                                                        |       |              |       |                  |       |
| CURRENT ASSETS:                                                                             |       |              |       |                  |       |
| Cash and cash equivalents                                                                   |       | $                 | 9,794      |                  | $          | 22,411 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $271 and $390, respectively |       | 23,108            |       | 25,807                |       |
| Inventories                                                                                 |       | 37,850            |       | 32,501                |       |
| Prepaid expenses and other                                                                  |       | 3,462             |       | 2,397                 |       |
| Related party receivables and loans                                                         |       | —            |       | 2,806                 |       |
| Current deferred tax assets                                                                 |       | 1,232             |       | 2,052                 |       |
|                                                                                        |       |              |       |                  |       |
| Total current assets                                                                        |       | 75,446            |       | 87,974                |       |
|                                                                                        |       |              |       |                  |       |
| PROPERTY, PLANT AND EQUIPMENT                                                               |       | 63,357            |       | 64,944                |       |
| Less - accumulated depreciation                                                             |       | (24,091           | )          | (22,892               | )          |
|                                                                                        |       |              |       |                  |       |
| Property, plant and equipment, net                                                          |       | 39,266            |       | 42,052                |       |
|                                                                                        |       |              |       |                  |       |
| GOODWILL, net                                                                               |       | 36,517            |       | 43,164                |       |
|                                                                                        |       |              |       |                  |       |
| PURCHASED INTANGIBLE ASSETS, net                                                            |       | 47,768            |       | 49,079                |       |
|                                                                                        |       |              |       |                  |       |
| DEFERRED TAX ASSETS                                                                         |       | 5,928             |       | 332                   |       |
|                                                                                        |       |              |       |                  |       |
| OTHER ASSETS, net                                                                           |       | 1,206             |       | 1,443                 |       |
|                                                                                        |       |              |       |                  |       |
| INVESTMENT IN JOINT VENTURES                                                                |       | —            |       | 1,132                 |       |
|                                                                                        |       |              |       |                  |       |
| TOTAL ASSETS                                                                                |       | $                 | 206,131    |                  | $          | 225,176 |   |

 

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

 

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATEDBALANCE SHEETS

(Dollars in Thousands, Except Share Data)

 
| ** **                                                                                                                           | ** ** | **June 30,** | ** ** | ** **            | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                           | ** ** | **2010**          | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                           | ** ** | **(unaudited)**   | ** ** | **2009**              | ** ** |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                           |       |              |       |                  |       |
|                                                                                                                                 |       |              |       |                  |       |
| CURRENT LIABILITIES:                                                                                                                 |       |              |       |                  |       |
| Accounts payable                                                                                                                     |       | $                 | 13,281     |                  | $          | 9,183 |   |
| Accrued expenses                                                                                                                     |       | 4,034             |       | 4,808                 |       |
| Dividend payable                                                                                                                     |       | 528               |       | 515                   |       |
| Accrued income taxes                                                                                                                 |       | 211               |       | 1,485                 |       |
| Accrued employee compensation and benefits                                                                                           |       | 2,756             |       | 4,048                 |       |
| Customer advances                                                                                                                    |       | 7,817             |       | 6,528                 |       |
| Lines of credit                                                                                                                      |       | 3,560             |       | 1,777                 |       |
| Current maturities on long-term debt                                                                                                 |       | 7,483             |       | 13,485                |       |
| Current portion of capital lease obligations                                                                                         |       | 283               |       | 306                   |       |
| Current deferred tax liabilities                                                                                                     |       | 23                |       | —                |       |
| Total current liabilities                                                                                                            |       | 39,976            |       | 42,135                |       |
|                                                                                                                                 |       |              |       |                  |       |
| LONG-TERM DEBT                                                                                                                       |       | 23,701            |       | 34,120                |       |
|                                                                                                                                 |       |              |       |                  |       |
| CAPITAL LEASE OBLIGATIONS                                                                                                            |       | 269               |       | 436                   |       |
|                                                                                                                                 |       |              |       |                  |       |
| DEFERRED TAX LIABILITIES                                                                                                             |       | 17,700            |       | 15,217                |       |
|                                                                                                                                 |       |              |       |                  |       |
| OTHER LONG-TERM LIABILITIES                                                                                                          |       | 1,051             |       | 1,157                 |       |
| Total liabilities                                                                                                                    |       | 82,697            |       | 93,065                |       |
|                                                                                                                                 |       |              |       |                  |       |
| COMMITMENTS AND CONTINGENT LIABILITIES                                                                                               |       |              |       |                  |       |
|                                                                                                                                 |       |              |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                                           |       |              |       |                  |       |
| Preferred stock, $0.05 par value; 4,000,000 shares  authorized; no issued and outstanding shares                                     |       | —            |       | —                |       |
| Common stock, $0.05 par value; 25,000,000 shares  authorized; 13,199,177 and 12,870,363 shares issued and outstanding,  respectively |       | 660               |       | 643                   |       |
| Additional paid-in capital                                                                                                           |       | 51,138            |       | 46,080                |       |
| Retained earnings                                                                                                                    |       | 86,627            |       | 85,048                |       |
| Other cumulative comprehensive income (loss)                                                                                         |       | (14,991           | )          | 340                   |       |
| Total stockholders’ equity                                                                                                      |       | 123,434           |       | 132,111               |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                      |       | $                 | 206,131    |                  | $          | 225,176 |   |

 

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

 

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHSENDED JUNE 30, 2010 AND 2009

(Dollars in Thousands,Except Share Data)

(unaudited)

 
| ** **                                     | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                     | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                     | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| NET SALES                                      |       | $                      | 38,258     |                 | $          | 37,819 |   | $ | 68,615 |   | $ | 87,578 |   |
| COST OF PRODUCTS SOLD                          |       | 29,000                 |       | 28,665               |       | 52,373 |   | 63,096 |   |
| Gross profit                                   |       | 9,258                  |       | 9,154                |       | 16,242 |   | 24,482 |   |
| COSTS AND EXPENSES:                            |       |                   |       |                 |       |   |   |   |   |
| General and administrative expenses            |       | 3,358                  |       | 3,043                |       | 6,503 |   | 6,569 |   |
| Selling expenses                               |       | 2,550                  |       | 1,840                |       | 4,871 |   | 4,164 |   |
| Amortization of purchased intangible assets    |       | 1,264                  |       | 1,232                |       | 2,537 |   | 2,416 |   |
| Total costs and expenses                       |       | 7,172                  |       | 6,115                |       | 13,911 |   | 13,149 |   |
| INCOME FROM OPERATIONS                         |       | 2,086                  |       | 3,039                |       | 2,331 |   | 11,333 |   |
| OTHER INCOME (EXPENSE):                        |       |                   |       |                 |       |   |   |   |   |
| Gain on step acquisition of joint ventures     |       | 2,117                  |       | —               |       | 2,117 |   | — |   |
| Other income (expense), net                    |       | (115                   | )          | 191                  |       | 14 |   | 74 |   |
| Interest expense                               |       | (662                   | )          | (867                 | )          | (1,806 | ) | (1,769 | ) |
| Interest income                                |       | 29                     |       | 38                   |       | 65 |   | 104 |   |
| Equity in earnings of joint ventures           |       | 86                     |       | 127                  |       | 255 |   | 79 |   |
| INCOME BEFORE INCOME TAXES                     |       | 3,541                  |       | 2,528                |       | 2,976 |   | 9,821 |   |
| INCOME TAX PROVISION                           |       | 505                    |       | 1,013                |       | 351 |   | 3,389 |   |
| NET INCOME                                     |       | $                      | 3,036      |                 | $          | 1,515 |   | $ | 2,625 |   | $ | 6,432 |   |
| INCOME PER SHARE:                              |       |                   |       |                 |       |   |   |   |   |
| Basic                                          |       | $                      | 0.23       |                 | $          | 0.12 |   | $ | 0.20 |   | $ | 0.50 |   |
| Diluted                                        |       | $                      | 0.23       |                 | $          | 0.12 |   | $ | 0.20 |   | $ | 0.50 |   |
|                                           |       |                   |       |                 |       |   |   |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: |       |                   |       |                 |       |   |   |   |   |
| Basic                                          |       | 12,774,316             |       | 12,595,551           |       | 12,742,589 |   | 12,570,640 |   |
| Diluted                                        |       | 12,786,976             |       | 12,611,430           |       | 12,755,565 |   | 12,601,160 |   |
|                                           |       |                   |       |                 |       |   |   |   |   |
| DIVIDENDS DECLARED PER COMMON SHARE            |       | $                      | 0.04       |                 | $          | 0.04 |   | $ | 0.08 |   | $ | 0.04 |   |

 

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

 

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2010

(Amounts in Thousands)

(unaudited)

 
| ** **                                                    | ** ** | ** **        | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Other**         | ** ** | ** ** | ** ** | ** **          | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|-------------|------------|----------------|------------|-------------------|------------|-------------------|------------|------------|------------|---------------------|------------|
| ** **                                                    | ** ** | ** **        | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Cumulative**    | ** ** | ** ** | ** ** | **Comprehensive**   | ** ** |
| ** **                                                    | ** ** | **Common  Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | ** **        | ** ** | **Loss**   | ** ** |
| ** **                                                    | ** ** | **Shares**        | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Income/(loss)** | ** ** | **Total**  | ** ** | **for the  Period** | ** ** |
| Balances,  December 31, 2009                             |       | 12,870            |       | $           | 643        |           | $          | 46,080            |       | $                 | 85,048     |       | $          | 340                 |       | $ | 132,111 |   |   |   |
| Shares  issued for AECO acquisition                           |       | 222               |       | 11          |       | 3,290          |       | —            |       | —            |       | 3,301      |       |                |       |
| Shares  issued in connection with stock compensation plans    |       | 107               |       | 6           |       | 64             |       | —            |       | —            |       | 70         |       |                |       |
| Excess  tax benefit related to stock options                  |       | —            |       | —      |       | 2              |       | —            |       | —            |       | 2          |       |                |       |
| Stock-based  compensation                                     |       | —            |       | —      |       | 1,702          |       | —            |       | —            |       | 1,702      |       |                |       |
| Dividends                                                     |       | —            |       | —      |       | —         |       | (1,046            | )          | —            |       | (1,046     | )          |                |       |
| Net  income                                                   |       | —            |       | —      |       | —         |       | 2,625             |       | —            |       | 2,625      |       | 2,625               |       |
| Derivative  valuation, net of tax of $177                     |       | —            |       | —      |       | —         |       | —            |       | 242               |       | 242        |       | 242                 |       |
| Change  in cumulative foreign currency translation adjustment |       | —            |       | —      |       | —         |       | —            |       | (15,573           | )          | (15,573    | )          | (15,573             | )          |
| Balances,  June 30, 2010                                 |       | 13,199            |       | $           | 660        |           | $          | 51,138            |       | $                 | 86,627     |       | $          | (14,991             | )          | $ | 123,434 |   | $ | (12,706 | ) |
|                                                               |            |                   |            |             |            |                |            |                   |            |                   |            |            |            |                     |            |  |  |  |  |  |  |

 

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

 

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDEDJUNE 30, 2010 AND 2009

(Dollars in Thousands)

(unaudited)

 
| ** **                                                                         | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |     |       |     |       |
| Net income                                                                         |       | $        | 2,625      |     | $          | 6,432 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities: |       |     |       |     |       |
| Depreciation (including capital lease  amortization)                               |       | 2,404    |       | 2,441    |       |
| Amortization of purchased intangible assets                                        |       | 2,537    |       | 2,416    |       |
| Amortization of capitalized debt issuance costs                                    |       | 383      |       | 141      |       |
| Stock-based compensation                                                           |       | 1,702    |       | 1,760    |       |
| Deferred income tax benefit                                                        |       | (961     | )          | (954     | )          |
| Equity in earnings of joint ventures                                               |       | (255     | )          | (79      | )          |
| Gain on step acquisition of joint ventures                                         |       | (2,117   | )          | —   |       |
| Change in (excluding assets acquired):                                             |       |     |       |     |       |
| Accounts receivable, net                                                           |       | 8,142    |       | 4,374    |       |
| Inventories                                                                        |       | (1,841   | )          | 2,475    |       |
| Prepaid expenses and other                                                         |       | (880     | )          | 1,540    |       |
| Accounts payable                                                                   |       | (1,494   | )          | (4,407   | )          |
| Customer advances                                                                  |       | 1,565    |       | 1,029    |       |
| Accrued expenses and other liabilities                                             |       | (2,115   | )          | (4,797   | )          |
| Net cash provided by operating activities                                          |       | 9,695    |       | 12,371   |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |     |       |     |       |
| Acquisition of Austin Explosives Company                                           |       | (3,544   | )          | —   |       |
| Step acquisition of joint ventures, net of cash  acquired                          |       | (2,065   | )          | —   |       |
| Acquisition of property, plant and equipment                                       |       | (1,445   | )          | (2,231   | )          |
| Change in other non-current assets                                                 |       | (125     | )          | 23       |       |
| Net cash used in investing activities                                              |       | (7,179   | )          | (2,208   | )          |
|                                                                                    |            |          |            |          |            |  |  |

 

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

 

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDEDJUNE 30, 2010 AND 2009

(Dollars in Thousands)

(unaudited)

 
| ** **                                                             | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM FINANCING ACTIVITIES:                                  |       |     |       |     |       |
| Payment on syndicated term loans                                       |       | (15,374  | )          | (3,885   | )          |
| Payment on Nord LB term loans                                          |       | (399     | )          | (438     | )          |
| Borrowings on bank lines of credit, net                                |       | 1,998    |       | 143      |       |
| Payment on capital lease obligations                                   |       | (146     | )          | (102     | )          |
| Payment of dividends                                                   |       | (1,033   | )          | —   |       |
| Payment of deferred debt issuance costs                                |       | —   |       | (19      | )          |
| Net proceeds from issuance of common stock to employees  and directors |       | 70       |       | 373      |       |
| Excess tax benefit related to exercise of stock  options               |       | 2        |       | 93       |       |
| Net cash used in financing activities                                  |       | (14,882  | )          | (3,835   | )          |
| EFFECTS OF EXCHANGE RATES ON CASH                                      |       | (251     | )          | 106      |       |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                   |       | (12,617  | )          | 6,434    |       |
|                                                                   |       |     |       |     |       |
| CASH AND CASH EQUIVALENTS, beginning of the period                     |       | 22,411   |       | 14,360   |       |
| CASH AND CASH EQUIVALENTS, end of the period                           |       | $        | 9,794      |     | $          | 20,794 |   |
|                                                                        |            |          |            |          |            |  |  |

 

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

 

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**DYNAMIC MATERIALS CORPORATION &SUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**(Currency Amounts in Thousands, Except Share and Per Share Data)**

 

**(unaudited)**

 

**1.****                  ****BASISOF 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 31,2009.

 

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

 

Principlesof Consolidation

 

TheCondensed Consolidated Financial Statements include the accounts of the Companyand its controlled subsidiaries.  Onlysubsidiaries in which controlling interests are maintained are consolidated.  The equity method is used to account for ourownership in subsidiaries where we do not have a controlling interest.  All significant intercompany accounts,profits, and transactions have been eliminated in consolidation.

 

Foreign Operations and Foreign Exchange Rate Risk

 

Thefunctional currency for the Company’s foreign operations is the applicablelocal currency for each affiliate company. Assets and liabilities of foreignsubsidiaries for which the functional currency is the local currency are translatedat exchange rates in effect at period-end, and the statements of operations aretranslated at the average exchange rates during the period.  Exchange rate fluctuations on translatingforeign currency financial statements into U.S. dollars that result inunrealized gains or losses are referred to as translation adjustments.Cumulative translation adjustments are recorded as a separate component ofstockholders’ equity and are included in other cumulative comprehensive income(loss). Transactions denominated in currencies other than the local currencyare recorded based on exchange rates at the time such transactions arise.Subsequent changes in exchange rates result in transaction gains and 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 agree to changes in the corresponding balances in the consolidatedbalance sheets. The effects of exchange rate changes on cash balances held inforeign currencies are reported as a separate line item below cash flows fromfinancing activities.

 

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Revenue Recognition

 

Sales of clad metal products and welding servicesare generally based upon customer specifications set forth in customer purchaseorders and require us to provide certifications relative to metals used,services performed, and the results of any non-destructive testing that thecustomer has requested be performed.  Allissues of conformity of the product to specifications are resolved before theproduct is shipped and billed.  Productsrelated to the oilfield products segment, which include detonating cords,detonators, bi-directional boosters, and shaped charges, as well as seismicrelated explosives and accessories, are standard in nature.  In all cases, revenue is recognized only whenall four of the 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 probable loss, theCompany will account for such anticipated loss.

 

Fair Value of Financial Instruments

 

The carrying values of cash and cashequivalents, trade accounts receivable and payable, and accrued expenses areconsidered to approximate fair value due to the short-term nature of theseinstruments.  Based upon the 150 basispoint increase in our LIBOR/EURIBOR basis borrowing spread negotiated in the October 21,2009 amendment to our syndicated credit agreement, we believe the fair value ofour long-term debt approximates its carrying value at June 30, 2010.  The majority of the Company’s debt wasincurred in connection with the acquisition of DYNAenergetics.

 

Additionally, the Company has an interestrate swap agreement (see Note 9), which is recorded at fair value.  Fair value is defined as the price that wouldbe received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date. The Company isrequired to use an established hierarchy for fair value measurements based uponthe inputs to the valuation and the degree to which they are observable or notobservable in the market. The three levels in the hierarchy are as follows:

 

·                       Level 1 —Inputs to the valuation based upon quoted prices (unadjusted) for identicalassets or liabilities in active markets that are accessible as of themeasurement date.

 

·                       Level 2 —Inputs to the valuation include quoted prices in either markets that are notactive, or in active markets for similar assets or liabilities, inputs otherthan quoted prices that are observable, and inputs that are derived principallyfrom or corroborated by observable market data. 

 

·                       Level 3 —Inputs to the valuation that are unobservable inputs for the asset orliability.

 

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

 

The Company’s interest rate swap agreement is not exchange listed andis therefore valued with models that use Level 2 inputs.  The degree to which the Company’s creditworthiness impacts the value requires management judgment but as of June 30,2010 and December 31, 2009, the impact of this assessment on the overallvalue of the outstanding interest rate swap was not significant and the Company’svaluation of the agreement is classified within Level 2 of the hierarchy.

 

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RelatedParty Transactions

 

Priorto acquiring the remaining outstanding interests in  its unconsolidated joint ventures on April 30,2010 (See Note 3), the Company had related party transactions with these jointventures.  Additionally the Company had relatedparty transactions with the former owners of LRI Oil Tools Inc. (“LRI”).  The Company also had transactions in theperiod from  January 1 through June 30,2009 with LRI who, at the time, was the non-controlling interest partnerin  one of the Company’s consolidatedjoint ventures.  A summary of relatedparty balances as of June 30, 2010 and December 31, 2009 issummarized below:

 
| ** **           | ** ** | **As of**                         | ** ** | **As of**                  | ** ** |
|----------------------|------------|----------------------------------------|------------|---------------------------------|------------|
| ** **           | ** ** | **June 30, 2010**            | ** ** | **December 31, 2009** | ** ** |
| ** **           | ** ** | **Accounts receivable from** | ** ** |
| ** **           | ** ** | **and loan to**              | ** ** |
| DYNAenergetics RUS   |       | $                                      | —     |                            | $          | 2,265 |   |
| Perfoline            |       | —                                 |       | 466                             |       |
| Former owners of LRI |       | —                                 |       | 75                              |       |
| Total                |       | $                                      | —     |                            | $          | 2,806 |   |

 

Asummary of related party transactions for the three and six months ended June 30,2010 and 2009 is summarized below:

 
| ** **                | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|---------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                | ** ** | **June 30, 2010** | ** ** | **June 30, 2009** | ** ** |
| ** **                | ** ** | ** **             | ** ** | **Interest**           | ** ** | ** ** | ** ** | **Interest** | ** ** |
| ** **                | ** ** | **Sales to**           | ** ** | **income from**        | ** ** | **Sales to** | ** ** | **income from** | ** ** |
| DYNAenergetics RUS        |       | $                      | 161        |                   | $          | — |   | $ | 692 |   | $ | — |   |
| Perfoline                 |       | —                 |       | 3                      |       | 17 |   | 10 |   |
| Minority Interest Partner |       | —                 |       | —                 |       | 146 |   | — |   |
| Total                     |       | $                      | 161        |                   | $          | 3 |   | $ | 855 |   | $ | 10 |   |

 
| ** **                | ** ** | **Six Months Ended**  | ** ** | **Six Months Ended**  | ** ** |
|---------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                | ** ** | **June 30,2010** | ** ** | **June 30,2009** | ** ** |
| ** **                | ** ** | ** **            | ** ** | **Interest**          | ** ** | ** ** | ** ** | **Interest** | ** ** |
| ** **                | ** ** | **Sales to**          | ** ** | **income from**       | ** ** | **Sales to** | ** ** | **income from** | ** ** |
| DYNAenergetics RUS        |       | $                     | 663        |                  | $          | — |   | $ | 734 |   | $ | — |   |
| Perfoline                 |       | 19                    |       | 13                    |       | 57 |   | 20 |   |
| Minority Interest Partner |       | —                |       | —                |       | 444 |   | — |   |
| Total                     |       | $                     | 682        |                  | $          | 13 |   | $ | 1,235 |   | $ | 20 |   |

 

Earnings Per Share

 

Unvested awards of share-based payments with rightsto receive dividends or dividend equivalents, such as the Company’s restrictedstock awards (“RSAs”), are considered participating securities for purposes ofcalculating earnings per share (“EPS”) and require the use of the two 

 

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class method for calculating EPS.  Under this method, a portion of net income isallocated to these participating securities and therefore is excluded from thecalculation of EPS allocated to common stock, as shown in the table below.

 

Computation and reconciliation of earnings per commonshare are as follows:

 
| ** **                                                | ** ** | **For the Three Months Ended** | ** ** | **For the Three Months Ended** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                | ** ** | **June 30, 2010**         | ** ** | **June 30, 2009**         | ** ** |
| ** **                                                | ** ** | **Income**                     | ** ** | **Shares**                     | ** ** | **EPS** | ** ** | **Income** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Basic earnings per share:                                 |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Net income                                                |       | $                              | 3,036      |                           |       |   |   |   | $ | 1,515 |   |   |   |   |   |
| Less income allocated to RSAs                             |       | (61                            | )          |                           |       |   |   | (31 | ) |   |   |   |   |
| Net income allocated to common stock for EPS  calculation |       | $                              | 2,975      |                           | 12,774,316 |   | $ | 0.23 |   | $ | 1,484 |   | 12,595,551 |   | $ | 0.12 |   |
|                                                      |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Adjust shares for Dilutives:                              |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Stock-based compensation plans                            |       |                           |       | 12,660                         |       |   |   |   |   | 15,879 |   |   |   |
|                                                      |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Diluted earnings per share:                               |       |                           |       |                           |       |   |   |   |   |   |   |   |   |
| Net income                                                |       | $                              | 3,036      |                           |       |   |   |   | $ | 1,515 |   |   |   |   |   |
| Less income allocated to RSAs                             |       | (61                            | )          |                           |       |   |   | (31 | ) |   |   |   |   |
| Net income allocated to common stock for EPS  calculation |       | $                              | 2,975      |                           | 12,786,976 |   | $ | 0.23 |   | $ | 1,484 |   | 12,611,430 |   | $ | 0.12 |   |

 
| ** **                                                | ** ** | **For the Six Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                | ** ** | **June 30, 2010**       | ** ** | **June 30, 2009**       | ** ** |
| ** **                                                | ** ** | **Income**                   | ** ** | **Shares**                   | ** ** | **EPS** | ** ** | **Income** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Basic earnings per share:                                 |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
| Net income                                                |       | $                            | 2,625      |                         |       |   |   |   | $ | 6,432 |   |   |   |   |   |
| Less income allocated to RSAs                             |       | (54                          | )          |                         |       |   |   | (132 | ) |   |   |   |   |
| Net income allocated to common stock for EPS  calculation |       | $                            | 2,571      |                         | 12,742,589 |   | $ | 0.20 |   | $ | 6,300 |   | 12,570,640 |   | $ | 0.50 |   |
|                                                      |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
| Adjust shares for Dilutives:                              |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
| Stock-based compensation plans                            |       |                         |       | 12,976                       |       |   |   |   |   | 30,520 |   |   |   |
|                                                      |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
| Diluted earnings per share:                               |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
| Net income                                                |       | $                            | 2,625      |                         |       |   |   |   | $ | 6,432 |   |   |   |   |   |
| Less income allocated to RSAs                             |       | (54                          | )          |                         |       |   |   | (132 | ) |   |   |   |   |
| Net income allocated to common stock for EPS  calculation |       | $                            | 2,571      |                         | 12,755,565 |   | $ | 0.20 |   | $ | 6,300 |   | 12,601,160 |   | $ | 0.50 |   |

 

**3.****                  ****ACQUISITIONS**

 

Austin Explosives

 

On June 4, 2010, the Company completed its acquisition ofTexas-based, Austin Explosives Company (“AECO”), which is now operating underthe name DYNAenergetics US, Inc. This business is now part of the Company’s Oilfield Products businesssegment.  AECO has been a long-timedistributor of DYNAenergetics shaped charges. This acquisition, along with the 

 

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acquisition of the outstanding interests in our Russian joint ventures(discussed below), further expands our Oilfield Products business, andpositions the segment to capitalize on the long-term demand from the oil andgas industry.  From June 5, 2010through June 30, 2010, DYNAenergetics US, Inc. contributed net salesof $1,376 and a net loss of $20.

 

The acquisition was structured as an asset purchase valued at $6,845which was financed by (i) the payment of $3,544 in cash and the issuanceof 222,445 shares of common stock of the Company (valued at $3,301).

 

The purchase price of the acquisition was allocated to the Company’stangible and identifiable intangible assets based on their fair values asdetermined by appraisals performed as of the acquisition date.  The allocation of the purchase price to theassets of AECO was as follows:

 
| Current assets                |   | $      | 5,792  |   |
|-------------------------------|--------|--------|--------|--------|
| Property, plant and equipment |   | 368    |   |
| Intangible assets             |   | 4,698  |   |
| Deferred tax assets           |   | 7      |   |
| Other assets                  |   | 80     |   |
| Total assets acquired         |   | 10,945 |   |
|                          |   |   |   |
| Current liabilities           |   | 4,100  |   |
| Total liabilities assumed     |   | 4,100  |   |
| Net assets acquired           |   | $      | 6,845  |   |

 

The Company acquired identifiable finite-lived intangible assets as aresult of the acquisition of AECO.  Thefinite-lived intangible assets acquired were classified as customerrelationships and were valued at $4,698 which will be amortized over 11 years.  These amounts are included in IntangibleAssets and are further discussed in Note 7.

 

Russian Joint Ventures

 

On April 30, 2010 the Company purchased the outstandingminority-owned interests in its two Russian joint ventures that were previouslymajority-owned by the Company’s Oilfield Products business segment.  These joint ventures include DYNAenergeticsRUS, which is a Russian trading companythat sells the Company’s oilfield products, and Perfoline, which is a Russianmanufacturer of perforating gun systems. The Company paid a combined $2,065 for the respective 45% and34.81% outstanding stakes in DYNAenergetics RUS and Perfoline.  From April 30, 2010 through June 30,2010, DYNAenergetics RUS and Perfoline contributed net sales of $1,323 and netincome of $447.

 

Prior to the acquisition date, the Company accounted for its 55% and65.19% interest in DYNAenergetics RUS and Perfoline, respectively, asequity-method investments (See Note 4). The acquisition date fair value of the previous equity interest was$3,533.  The Company recognized a gain of$2,117 as a result of revaluing its prior equity interest held before theacquisition.  The gain is included in theline item “gain on step acquisition of joint ventures” in the consolidatedstatement of operations.

 

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Appraisals performed as of the acquisition date resulted in a new fairvalue of the combined entities of $5,598 which was allocated to the Company’stangible and identifiable intangible assets as follows:

 
| Current assets                                       |   | $      | 5,243  |   |
|------------------------------------------------------|--------|--------|--------|--------|
| Property, plant and equipment                        |   | 411    |   |
| Intangible assets                                    |   | 3,669  |   |
| Deferred tax assets                                  |   | 12     |   |
| Other assets                                         |   | 56     |   |
| Total assets acquired                                |   | 9,391  |   |
|                                                 |   |   |   |
| Line of credit                                       |   | 36     |   |
| Other current liabilities                            |   | 2,547  |   |
| Deferred tax liabilities                             |   | 813    |   |
| Other long term liabilities                          |   | 397    |   |
| Total liabilities assumed                            |   | 3,793  |   |
| Fair value of net assets following step  acquisition |   | $      | 5,598  |   |

 

The Company acquired identifiable finite-lived intangible assets as aresult of acquiring the remaining interests of DYNAenergetics RUS andPerfoline.  The finite-lived intangibleassets acquired were classified as customer relationships and were valued at$3,669 which will be amortized over 11 years. These amounts are included in Intangible Assets and are furtherdiscussed in Note 7.

 

LRIOil Tools Inc.

 

OnOctober 1, 2009, the Company completed its acquisition of LRI Oil ToolsInc. (“LRI”), which is part of the Oilfield Products business.  LRI produces and distributes perforatingequipment for use by the oil and gas exploration and production industry.  The business had a long-term strategicrelationship with the Company’s Oilfield Products segment and had served forseveral years as its sole Canadian distributor. From January 1, 2010 through June 30, 2010, LRI contributednet sales of $4,241 and net income of $247.

 

Theacquisition was valued at $5,946 and was financed by (i) the payment of$284 in cash, net of cash acquired of $15, (ii) the issuance of 4,875shares of common stock of the Company (valued at $94), and (iii) theassumption of $5,553 (5,982 Canadian Dollars (“CAD”)) of LRI’s debt.  The assumed debt consisted of $2,676 (2,883CAD) for a line of credit, $2,445 (2,634 CAD) for loans with the former ownersof LRI and $432 (465 CAD) for capital lease obligations.

 

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The purchase price of the acquisition was allocated to the Company’stangible and identifiable intangible assets based on their fair values asdetermined by appraisals performed as of the acquisition date.  The allocation of the purchase price to theassets and liabilities of LRI was as follows:

 
| Current assets                |   | $      | 5,430  |   |
|-------------------------------|--------|--------|--------|--------|
| Property, plant and equipment |   | 2,191  |   |
| Intangible assets             |   | 1,117  |   |
| Deferred tax assets           |   | 298    |   |
| Other assets                  |   | 1      |   |
| Total assets acquired         |   | 9,037  |   |
|                          |   |   |   |
| Line of credit                |   | 2,676  |   |
| Other current liabilities     |   | 2,448  |   |
| Long term debt                |   | 2,877  |   |
| Deferred tax liabilities      |   | 643    |   |
| Total liabilities assumed     |   | 8,644  |   |
| Net assets acquired           |   | $      | 393    |   |

 

The Company acquired identifiable finite-lived intangible assets as aresult of the acquisition of LRI.  Thefinite-lived intangible assets acquired are classified and valued as follows:

 
| ** **              | ** ** | ** ** | ** ** | **Amortization** | ** ** |
|-------------------------|------------|------------|------------|------------------|------------|
| ** **              | ** ** | **Value**  | ** ** | **Period**       | ** ** |
| Core technology         |       | $          | 347        |             | 15 years   |   |
| Customer relationships  |       | 770        |       | 15 years         |       |
| Total intangible assets |       | $          | 1,117      |             |       |   |

 

These amounts are included in Intangible Assets and are furtherdiscussed in Note 7.

 

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Pro Forma Statement of Operations

 

The following table presents the pro-forma combined results ofoperations for the three and six months ended June 30, 2010 and June 30,2009, respectively, assuming (i) the acquisitions of LRI, AECO and theRussian joint ventures had occurred on January 1, 2010 and January 1,2009; (ii) pro-forma amortization expense of the purchased intangibleassets; (iii) pro-forma depreciation expense of the appraised value of theproperty, plant and equipment; (iv) reduction of interest expense assumingthe Company paid down LRI’s debt by 2,200 CAD (1,200 CAD for the loans toformer owners of LRI and 1,000 CAD for the line of credit) immediatelyfollowing the acquisition (net of a related pro forma reduction in interestincome); (v) elimination of intercompany sales; and (vi) increase ininterest expense for borrowing 1,500 Euros to fund the acquisition of theRussian joint ventures:

 
| ** **             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------|------------|------------------------|------------|----------------------|------------|
| ** **             | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **             | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net sales              |       | $                      | 41,713     |                 | $          | 41,371 |   | $ | 75,904 |   | $ | 95,831 |   |
| Income from operations |       | $                      | 2,357      |                 | $          | 2,726 |   | $ | 2,678 |   | $ | 10,616 |   |
| Net income             |       | $                      | 2,947      |                 | $          | 1,134 |   | $ | 2,527 |   | $ | 5,597 |   |
|                   |       |                   |       |                 |       |   |   |   |   |
| Net income per share:  |       |                   |       |                 |       |   |   |   |   |
| Basic                  |       | $                      | 0.22       |                 | $          | 0.09 |   | $ | 0.19 |   | $ | 0.43 |   |
| Diluted                |       | $                      | 0.22       |                 | $          | 0.09 |   | $ | 0.19 |   | $ | 0.43 |   |

 

The pro-forma results above are not necessarily indicative of theoperating results that would have actually occurred if the acquisitions hadbeen in effect on the dates indicated, nor are they necessarily indicative offuture results of the combined companies.

 

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

 

Asdiscussed in Note 2, on April 30, 2010, the Company acquired the remainingminority-owned interests in two joint ventures that were previously majority-ownedby the Company’s Oilfield Product’s business segment.  Prior to the April 30, 2010 stepacquisition, these investments, which include DYNAenergetics RUS and Perfoline, were accounted for under the equitymethod due to certain non-controlling interest veto rights that allowed thenon-controlling interest shareholders to participate in ordinary course ofbusiness decisions.  Operating resultsfrom January 1, 2010 through April 30, 2010 include the Company’sproportionate share of income from these unconsolidated joint ventures.  Investments in these joint ventures totaled$1,132 as of December 31, 2009.  Asa result of the step acquisition, the Company now consolidates the financialstatements of these entities.

 

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Summarized unaudited financial information for thejoint ventures accounted for under the equity method as of December 31,2009 and for the three and six months ended June 30, 2010 and 2009 is asfollows:

 
| ** **                   | ** ** | **December 31,** | ** ** |
|------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2009**              | ** ** |
| Current assets               |       | $                     | 5,350      |   |
| Noncurrent assets            |       | 655                   |       |
| Total assets                 |       | $                     | 6,005      |   |
|                         |       |                  |       |
| Current liabilities          |       | $                     | 2,892      |   |
| Noncurrent liabilities       |       | 555                   |       |
| Equity                       |       | 2,558                 |       |
| Total liabilities and equity |       | $                     | 6,005      |   |

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                           | ** ** | **2010 (a)**           | ** ** | **2009**             | ** ** | **2010 (a)** | ** ** | **2009** | ** ** |
| Net sales                            |       | $                      | 841        |                 | $          | 1,676 |   | $ | 2,575 |   | $ | 2,782 |   |
| Gross Profit                         |       | $                      | 240        |                 | $          | 546 |   | $ | 656 |   | $ | 816 |   |
| Operating income                     |       | $                      | 132        |                 | $          | 284 |   | $ | 302 |   | $ | 363 |   |
| Net income                           |       | $                      | 158        |                 | $          | 232 |   | $ | 468 |   | $ | 142 |   |
| Equity in earnings of joint ventures |       | $                      | 86         |                 | $          | 127 |   | $ | 255 |   | $ | 79 |   |

 

----

(a) Through April 30, 2010

 

**5.****                  ****INVENTORY**

 

The components of inventory are as follows at June 30,2010 and December 31, 2009:

 
| ** **      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|-------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Raw materials   |       | $                 | 10,416     |                  | $          | 10,321 |   |
| Work-in-process |       | 17,507            |       | 15,963                |       |
| Finished goods  |       | 9,135             |       | 5,526                 |       |
| Supplies        |       | 792               |       | 691                   |       |
|            |       | $                 | 37,850     |                  | $          | 32,501 |   |

 

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**6.****                  ****GOODWILL**

 

Thechanges to the carrying amount of goodwill during the period are summarizedbelow:

 
| ** **                                                                            | ** ** | **Explosive**    | ** ** | ** **   | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------|------------|--------------|------------|------------|------------|
| ** **                                                                            | ** ** | **Metalworking** | ** ** | **Oilfield** | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | **Group**        | ** ** | **Products** | ** ** | **Total**  | ** ** |
| Goodwill balance at December 31, 2009                                            |       | $                | 24,577     |         | $          | 18,587     |       | $ | 43,164 |   |
| Adjustment due to recognition of tax benefit of  tax amortization of certain goodwill |       | (155             | )          | (219         | )          | (374       | )          |
| Adjustment due to exchange rate differences                                           |       | (3,518           | )          | (2,755       | )          | (6,273     | )          |
| Goodwill balance at June 30, 2010                                                |       | $                | 20,904     |         | $          | 15,613     |       | $ | 36,517 |   |

 

**7.****                  ****PURCHASEDINTANGIBLE ASSETS**

 

Thefollowing table presents details of our purchased intangible assets, other thangoodwill, as of June 30, 2010:

 
| ** **               | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|--------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **               | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
| Core technology          |       | $          | 20,790     |             | $          | (2,700     | )          | $ | 18,090 |   |
| Customer relationships   |       | 36,496     |       | (8,170           | )          | 28,326     |       |
| Trademarks / Trade names |       | 2,226      |       | (874             | )          | 1,352      |       |
| Total intangible assets  |       | $          | 59,512     |             | $          | (11,744    | )          | $ | 47,768 |   |

 

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

 
| ** **               | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|--------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **               | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
| Core technology          |       | $          | 24,347     |             | $          | (2,555     | )          | $ | 21,792 |   |
| Customer relationships   |       | 33,161     |       | (7,657           | )          | 25,504     |       |
| Trademarks / Trade names |       | 2,613      |       | (830             | )          | 1,783      |       |
| Total intangible assets  |       | $          | 60,121     |             | $          | (11,042    | )          | $ | 49,079 |   |

 

Thechange in the gross value of our purchased intangible assets from December 31,2009 to June 30, 2010 reflects the additional intangible assets associatedwith the acquisitions of AECO and the two Russian joint ventures (see Note 3),which was more than offset by the impact of foreign currency translationadjustments.

 

**8.****                  ****CUSTOMERADVANCES**

 

On occasion, customers makeadvance payments prior to the shipment of their orders in order to help financethe Company’s inventory investment on large orders or to keep credit limits atacceptable levels.  As of June 30,2010 and December 31, 2009, customer advances totaled $7,817 

 

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and $6,528 respectively, with $5,758 of the June 30,2010 balance relating to one large order which is scheduled to ship during theremaining half of 2010.

 

**9.****                  ****DEBT**

 

Lines of credit consisted of the following at June 30,2010 and December 31, 2009:

 
| ** **                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| HSBC line of credit                        |       | $                 | 554        |                  | $          | 1,774 |   |
| Syndicated credit agreement revolving loan |       | 1,830             |       | —                |       |
| Stoicredit line of credit                  |       | 23                |       | —                |       |
| Commerzbank line of credit                 |       | —            |       | 3                     |       |
| Nord LB line of credit                     |       | 1,153             |       | —                |       |
|                                       |       | $                 | 3,560      |                  | $          | 1,777 |   |

 

Long-term debt consists of the following at June 30,2010 and December 31, 2009:

 
| ** **                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Syndicated credit agreement term loan      |       | $                 | 28,997     |                  | $          | 31,005 |   |
| Syndicated credit agreement Euro term loan |       | —            |       | 13,826                |       |
| Nord LB 3,000 Euro term loan               |       | 916               |       | 1,505                 |       |
| Loans with former owners of LRI            |       | 1,271             |       | 1,269                 |       |
|                                       |       | 31,184            |       | 47,605                |       |
| Less current maturities                    |       | (7,483            | )          | (13,485               | )          |
| Long-term debt                             |       | $                 | 23,701     |                  | $          | 34,120 |   |

 

InMarch of 2010, the Company made required prepayments of principal underthe U.S. Dollar and Euro term loans in the amounts of $2,008 and 626 Euros($868), respectively, from excess cash flow generated in 2009. Additionally,the Company made a March payment of 9,020 Euros ($12,498) to retire theremaining principal balance outstanding under the Euro term loan, which wasscheduled to mature on November 16, 2012.

 

LoanCovenants and Restrictions

 

The Company’s existing loan agreements includevarious covenants and restrictions, certain of which relate to the incurrenceof additional indebtedness; mortgaging, pledging or disposition of majorassets; limits on capital expenditures; and maintenance of specified financialratios.  As of June 30, 2010, theCompany was in compliance with all financial covenants and other provisions ofits debt agreements.

 

SwapAgreement

 

On November 17, 2008, the Company enteredinto a two-year interest rate swap agreement with an initial notional amount of$40,500 (decreasing to $33,750 in November 2009) that effectivelyconverted the LIBOR based variable rate US borrowings under the syndicatedcredit agreement to a fixed rate of 4.87% (6.37% effective October 21,2009 due to an amendment in the

 

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Company’s syndicated credit facility and the Company’scurrent leverage ratio).  The Company haddesignated the swap agreement as an effective cash flow hedge with matchedterms and, as a result, changes in the fair value of the swap agreement wererecorded in other comprehensive income with the offset as a swap agreementasset or liability.  During March 2009 and March 2010,the Company made repayments of $2,744 and $2,007, respectively, on its variablerate US borrowings and in both cases elected to de-designate the relatedportion of the cash flow hedge.  Theseprincipal payments were required under the terms of the Company’s syndicatedcredit facility since certain annually calculated cash flow measures weremet.  Settlements and changes in the fairvalue related to the de-designated portion of the cash flow hedge are recordedas realized and unrealized gains/losses on swap agreement within other incomein the Company’s statement of operations.  The Company recorded an immaterial loss of less than $100 during 2009and an immaterial gain of approximately $10 during the first half of 2010.

 

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

 
| ** **                   | ** ** | **June 30, 2010**     | ** ** | **December 31, 2009** | ** ** |
|------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                   | ** ** | **Balance sheet location** | ** ** | **Fair value**             | ** ** | **Balance sheet location** | ** ** | **Fair value** | ** ** |
|                         |       |                       |       |                       |       |   |   |   |   |
| Interest rate swap liability |       | Accrued  expenses          |       | $                          | 388        |   | Accrued  expenses |   | $ | 820 |   |
|                              |            |                            |            |                            |            |  |  |  |  |  |  |

 

**10.****           ****BUSINESSSEGMENTS**

 

TheCompany is organized in the following three segments:  Explosive Metalworking, Oilfield Products,and AMK Welding. The Explosive Metalworking segment uses explosives to performmetal cladding and shock synthesis of industrial diamonds. The most significantproduct of this group is clad metal which is used in the fabrication ofpressure vessels, heat exchangers, and transition joints for variousindustries, including upstream oil and gas, oil refinery, petrochemicals,hydrometallurgy, aluminum production, shipbuilding, power generation,industrial refrigeration, and similar industries.  The Oilfield Products segment manufactures,markets and sells oilfield perforating equipment and explosives, includingdetonating cords, detonators, bi-directional boosters and shaped charges, andseismic related explosives and accessories. AMK Welding utilizes a number of welding technologies to weld componentsfor manufacturers of jet engine and ground-based turbines.

 

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

 

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Segmentinformation is presented for the three and six months ended June 30, 2010and 2009 as follows:

 
| ** **                                     | ** ** | **Explosive**    | ** ** | ** **   | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|------------------|------------|--------------|------------|-------------|------------|------------|------------|
| ** **                                     | ** ** | **Metalworking** | ** ** | **Oilfield** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Group**        | ** ** | **Products** | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the three months ended June 30, 2010: |       |             |       |         |       |        |       |       |       |
| Net sales                                      |       | $                | 26,690     |         | $          | 8,654       |       | $          | 2,914      |   | $ | 38,258 |   |
| Depreciation and amortization                  |       | $                | 1,365      |         | $          | 1,034       |       | $          | 115        |   | $ | 2,514 |   |
| Income from operations                         |       | $                | 1,967      |         | $          | 203         |       | $          | 826        |   | $ | 2,996 |   |
| Equity in earnings of joint ventures           |       | $                | —     |         | $          | 86          |       | $          | —     |   | 86 |   |
| Unallocated amounts:                           |       |             |       |         |       |        |       |       |       |
| Stock-based compensation                       |       |             |       |         |       |        |       | (910       | )          |
| Other income                                   |       |             |       |         |       |        |       | 2,002      |       |
| Interest expense                               |       |             |       |         |       |        |       | (662       | )          |
| Interest income                                |       |             |       |         |       |        |       | 29         |       |
| Consolidated income before income taxes        |       |             |       |         |       |        |       | $          | 3,541      |   |

 
| ** **                                     | ** ** | **Explosive**    | ** ** | ** **   | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|------------------|------------|--------------|------------|-------------|------------|------------|------------|
| ** **                                     | ** ** | **Metalworking** | ** ** | **Oilfield** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Group**        | ** ** | **Products** | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the three months ended June 30, 2009: |       |             |       |         |       |        |       |       |       |
| Net sales                                      |       | $                | 31,604     |         | $          | 4,014       |       | $          | 2,201      |   | $ | 37,819 |   |
| Depreciation and amortization                  |       | $                | 1,435      |         | $          | 857         |       | $          | 115        |   | $ | 2,407 |   |
| Income (loss) from operations                  |       | $                | 4,601      |         | $          | (906        | )          | $          | 306        |   | $ | 4,001 |   |
| Equity in earnings of joint ventures           |       | $                | —     |         | $          | 127         |       | $          | —     |   | 127 |   |
| Unallocated amounts:                           |       |             |       |         |       |        |       |       |       |
| Stock-based compensation                       |       |             |       |         |       |        |       | (962       | )          |
| Other income                                   |       |             |       |         |       |        |       | 191        |       |
| Interest expense                               |       |             |       |         |       |        |       | (867       | )          |
| Interest income                                |       |             |       |         |       |        |       | 38         |       |
| Consolidated income before income taxes        |       |             |       |         |       |        |       | $          | 2,528      |   |

 
| ** **                                   | ** ** | **Explosive**    | ** ** | ** **   | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------------|------------|--------------|------------|-------------|------------|------------|------------|
| ** **                                   | ** ** | **Metalworking** | ** ** | **Oilfield** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | **Group**        | ** ** | **Products** | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the six months ended June 30, 2010: |       |             |       |         |       |        |       |       |       |
| Net sales                                    |       | $                | 47,996     |         | $          | 15,660      |       | $          | 4,959      |   | $ | 68,615 |   |
| Depreciation and amortization                |       | $                | 2,732      |         | $          | 1,979       |       | $          | 230        |   | $ | 4,941 |   |
| Income (loss) from operations                |       | $                | 3,184      |         | $          | (201        | )          | $          | 1,050      |   | $ | 4,033 |   |
| Equity in earnings of joint ventures         |       | $                | —     |         | $          | 255         |       | $          | —     |   | 255 |   |
| Unallocated amounts:                         |       |             |       |         |       |        |       |       |       |
| Stock-based compensation                     |       |             |       |         |       |        |       | (1,702     | )          |
| Other income                                 |       |             |       |         |       |        |       | 2,131      |       |
| Interest expense                             |       |             |       |         |       |        |       | (1,806     | )          |
| Interest income                              |       |             |       |         |       |        |       | 65         |       |
| Consolidated income before income taxes      |       |             |       |         |       |        |       | $          | 2,976      |   |

 

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| ** **                                   | ** ** | **Explosive**    | ** ** | ** **   | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------------|------------|--------------|------------|-------------|------------|------------|------------|
| ** **                                   | ** ** | **Metalworking** | ** ** | **Oilfield** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | **Group**        | ** ** | **Products** | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| For the six months ended June 30, 2009: |       |             |       |         |       |        |       |       |       |
| Net sales                                    |       | $                | 75,076     |         | $          | 8,048       |       | $          | 4,454      |   | $ | 87,578 |   |
| Depreciation and amortization                |       | $                | 2,925      |         | $          | 1,704       |       | $          | 228        |   | $ | 4,857 |   |
| Income (loss) from operations                |       | $                | 14,012     |         | $          | (1,600      | )          | $          | 681        |   | $ | 13,093 |   |
| Equity in earnings of joint ventures         |       | $                | —     |         | $          | 79          |       | $          | —     |   | 79 |   |
| Unallocated amounts:                         |       |             |       |         |       |        |       |       |       |
| Stock-based compensation                     |       |             |       |         |       |        |       | (1,760     | )          |
| Other income                                 |       |             |       |         |       |        |       | 74         |       |
| Interest expense                             |       |             |       |         |       |        |       | (1,769     | )          |
| Interest income                              |       |             |       |         |       |        |       | 104        |       |
| Consolidated income before income taxes      |       |             |       |         |       |        |       | $          | 9,821      |   |

 

During the three months ended June 30, 2010,sales to one customer represented approximately $7,813 (20.4%) of total netsales and sales to another customer represented $3,901 (10.2%) of total netsales.  During the six months ended June 30,2010, sales to one customer represented $8,024 (11.7%) of total net sales.  During the three months ended June 30,2009, sales to one customer represented approximately $3,912 (10.3%) of totalnet sales.  During the six months ended June 30,2009, no sales to any one customer accounted for more than 10% of total sales.

 

**11.****           ****COMPREHENSIVELOSS**

 

TheCompany’s comprehensive income (loss) for the three and six months ended June 30,2010 and 2009 was as follows:

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                           | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                           | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income for the period                            |       | $                      | 3,036      |                 | $          | 1,515 |   | $ | 2,625 |   | $ | 6,432 |   |
| Interest rate swap valuation adjustment, net of  tax |       | 137                    |       | 160                  |       | 242 |   | 197 |   |
| Foreign currency translation adjustment              |       | (9,933                 | )          | 5,722                |       | (15,573 | ) | (196 | ) |
| Comprehensive income (loss)                          |       | $                      | (6,760     | )                    | $          | 7,397 |   | $ | (12,706 | ) | $ | 6,433 |   |

 

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Othercumulative comprehensive income (loss) as of June 30, 2010 and December 31,2009 consisted of the following:

 
| ** **                                                                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                          | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Currency translation adjustment                                                     |       | $                 | (14,779    | )                     | $          | 794 |   |
| Interest rate swap valuation adjustment, net of  tax of $122 and $299, respectively |       | (212              | )          | (454                  | )          |
|                                                                                |       | $                 | (14,991    | )                     | $          | 340 |   |

 

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

 

The following discussion should be read in conjunctionwith our historical consolidated financial statements and notes, as well as theselected historical consolidated financial data that are included in theCompany’s Annual Report filed on Form 10-K for the year ended December 31,2009.

 

Unlessstated otherwise, all currency amounts in this discussion are presented inthousands (000’s).

 

**Executive Overview**

 

Ourbusiness is organized into three segments: Explosive Metalworking, Oilfield Products, and AMK Welding.  For the six months ended June 30, 2010,Explosive Metalworking accounted for 70% of our net sales and 79% of our incomefrom operations before consideration of stock-based compensation expense, whichis not allocated to our business segments. Our Oilfield Products and AMK Welding segments accounted for 23% and 7%,respectively, of our first half 2010 net sales.

 

Ournet sales for the six months ended June 30, 2010 decreased by $18,963(21.7%) compared to the same period of 2009, reflecting a year-to-year netsales decrease of $27,080 (36.1%) for our Explosive Metalworking segment, whichwas partially offset by sales increases of $7,612 (94.6%) and $505 (11.3%) forour Oilfield Products and AMK Welding segments, respectively.  Excluding incremental sales of $6,940 fromthe acquisitions of LRI and Austin Explosives on October 1, 2009 and June 4,2010, respectively, and the step acquisition of two Russian joint ventures thatwas completed on April 30, 2010, our Oilfield Products segment reported anet sales increase of $672 or 8.3% for the first half of 2010.  Our consolidated income from operationsdecreased to $2,331 for the six months ended June 30, 2010 from $11,333for the same period of 2009.  This $9,002decrease reflects a decline in Explosive Metalworking’s operating income of$10,828 which was partially offset by a $1,399 decrease in the operating lossreported by our Oilfield Products segment, an increase in operating income forAMK Welding of $369, and a $58 decrease in stock-based compensationexpense.  We recorded net income of$2,625 for the six months ended June 30, 2010 compared to net income of$6,432 for the same period of 2009.

 

*Impact of Current Economic Situation on the Company*

 

TheCompany was only minimally impacted in 2008 by the global economicslowdown.  However, during 2009 and thefirst half of 2010, we experienced a significant slowdown in ExplosiveMetalworking sales to some of the markets we serve.  The explosion-welded clad plate market isdependent upon sales of products for use by customers in a number of heavyindustries, including oil and gas, alternative energy, chemicals andpetrochemicals, hydrometallurgy, aluminum production, shipbuilding, power generation,and industrial refrigeration.  Theseindustries tend to be cyclical in nature and the current worldwide economicdownturn has affected many of these markets. Despite the slowdown we have already seen in certain sectors, includingchemical, petrochemical and hydrometallurgy, quoting activity in other endmarkets remains relatively healthy, and we continue to track an extensive listof projects. While timing of new order inflow remains difficult to predict, webelieve that our Explosive Metalworking segment is well-positioned to benefitas global economic conditions improve.

 

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Asa result of our Explosive Metalworking backlog decreasing from $97,247 at December 31,2008 to $49,584 at December 31, 2009 and relatively low booking activityduring the first half of 2010 which further reduced our backlog amount to$39,913 at June 30, 2010, we currently expect that our 2010 consolidatednet sales will decline by approximately 5% from the consolidated net sales thatwe reported in 2009.  In light of theslowdown in order inflow that we have experienced, we continue to manage expensescarefully.  Despite the significant salesand net income declines that we reported in the first half of 2010, wegenerated cash flow from operations of $9,695 and expect to generate positivecash flow from operations for the full year 2010.

 

*Net sales*

 

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

 

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

 

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

 

Asignificant portion of our revenue is derived from a relatively small number ofcustomers; therefore, the failure to complete existing contracts on a timelybasis, to receive payment for such services in a timely manner, or to enterinto future contracts at projected volumes and profitability levels couldadversely affect our ability to meet cash requirements exclusively throughoperating activities. We attempt to minimize the risk of losing customers orspecific contracts by continually improving product quality, delivering producton time and competing aggressively on the basis of price.

 

*Gross profit and cost of products sold*

 

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

 

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

 

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

 

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*Income taxes*

 

Oureffective income tax rate decreased to 11.8% for the six months ended June 30,2010 from 34.5% for the same period of 2009. After adjusting for the non-recurring gain on the step acquisition oftwo Russian joint ventures, our effective tax rate on the remaining “ordinary”pretax income that we reported for the first six months of 2010 was 34.0%.  Based upon existing tax regulations andcurrent federal, state and foreign statutory tax rates, an expected reductionin our 2010 consolidated pre-tax income from that reported in 2009, and theamount of our projected 2010 consolidated pre-tax income that we expect to begenerated by our U.S. and foreign operations, respectively, we expect ourblended effective tax rate for 2010 to range between 25% and 28%.  Our full year 2009 effective tax rate was33.9% and, for future periods which include the third and fourth quarters of2010, we expect that our blended effective tax rate will to return to anormalized level of 33% to 35%.

 

*Backlog*

 

We use backlog as a primary means of measuringthe immediate outlook for our Explosive Metalworking business.  We define “backlog” at any given point intime as consisting of all firm, unfulfilled purchase orders and commitments atthat time.  Generally speaking, we expectto fill most backlog orders within the following 12 months.  From experience, most firm purchase ordersand commitments are realized.

 

Our backlog with respect to the ExplosiveMetalworking segment decreased to $39,913 at June 30, 2010 from $49,584 atDecember 31, 2009 and was well below the backlog of $97,247 that wereported at December 31, 2008.  Inlight of the slowdown in order inflow and decrease in backlog that we haveexperienced for our Explosive Metalworking segment, we are currentlyanticipating that our consolidated net sales for fiscal 2010 will beapproximately 5% lower than the consolidated net sales that we reported in2009.

 

**Three and Six Months Ended June 30, 2010 Compared toThree and Six Months Ended June 30, 2009**

 

*Net sales*

 
| ** ** | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                      | 38,258     |       | $          | 37,819         |       | $ | 439 |   | 1.2 | % |
|            |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** ** | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | **2010**             | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Net sales  |       | $                    | 68,615     |       | $          | 87,578         |       | $ | (18,963 | ) | (21.7 | )% |
|            |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Netsales for the second quarter of 2010 increased 1.2% to $38,258 from $37,819 forthe second quarter of 2009.  ExplosiveMetalworking sales decreased 15.5% to $26,690 for the three months ended June 30,2010 (70% of total sales) from $31,604 for the same period of 2009 (84% oftotal sales).  The decrease in ExplosiveMetalworking sales reflects a business slowdown in several of the industriesthat this business segment serves.

 

OilfieldProducts contributed $8,654 to second quarter 2010 sales (23% of total sales),which represents a 115.6% increase from sales of $4,014 for the second quarterof 2009 (10% of 

 

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totalsales). Excluding incremental sales of $4,124 from our acquisitions of LRI andAustin Explosives and step acquisition of two Russian joint ventures, thesecond quarter 2010 sales increase for Oilfield Products was $516 or 12.9%.

 

AMKWelding contributed $2,914 to second quarter 2010 sales (7% of total sales),which represents a 32.4% increase from sales of $2,201 for the second quarterof 2009 (6% of total sales).

 

Ourconsolidated net sales for the first half of 2010 decreased 21.7% to $68,615from $87,578 in the first half of 2009. Explosive Metalworking sales decreased 36.1% to $47,996 for the sixmonths ended June 30, 2010 (70% of total sales) from $75,076 for the sameperiod of 2009 (86% of total sales).

 

OilfieldProducts contributed $15,660 to first half 2010 sales (23% of total sales),which represents a 94.6% increase from sales of $8,048 for the first half of2009 (9% of total sales).  Excludingincremental sales of $6,940 from our acquisitions of LRI and Austin Explosivesand  step acquisition of two Russianjoint ventures, the first half 2010 sales increase for Oilfield Products was$672 or 8.3%.

 

AMKWelding contributed $4,959 to first half 2010 sales (7% of total sales), whichrepresents an 11.3% increase from sales of $4,454 in the first half of 2009 (5%of total sales).

 

*Gross profit*

* *
| ** **                            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit                          |       | $                      | 9,258      |       | $          | 9,154          |       | $ | 104 |   | 1.1 | % |
| Consolidated gross profit margin rate |       | 24.2                   | %          | 24.2       | %          |           |       |   |   |
|                                       |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** **                            | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **2010**             | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gross profit                          |       | $                    | 16,242     |       | $          | 24,482         |       | $ | (8,240 | ) | (33.7 | )% |
| Consolidated gross profit margin rate |       | 23.7                 | %          | 28.0       | %          |           |       |   |   |
|                                       |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Grossprofit increased by 1.1% to $9,258 for the three months ended June 30,2010 from $9,154 for the three months ended June 30, 2009. Our secondquarter 2010 consolidated gross profit margin rate remained unchanged from the24.2% gross margin that we reported for the second quarter of 2009.  For the six months ended June 30, 2010,gross profit decreased by 33.7% to $16,242 from $24,482 for the same period of2009.  Our year to date consolidatedgross profit margin rate decreased to 23.7% from 28.0% for the first six monthsof 2009.

 

Thegross margin for Explosive Metalworking decreased from 25.5% for the secondquarter of 2009 to 19.7% for the second quarter of 2010.  This 23% decrease in the ExplosiveMetalworking second quarter gross margin relates entirely to our U.S. claddingdivision where the gross margin of 21.3% for the second quarter of 2010 was 39%lower than the gross margin reported for the second quarter of 2009 on ayear-to-year sales decline of 12%. Despite a 46% decline in its second quarter 2010 sales, our Europeancladding divisions reported a gross margin of 16.0% in the second quarter of2010 which was higher than the second quarter 2009 gross margin of 14.8%.  Our gross margin for the ExplosiveMetalworking segment decreased to 20.7% for the first six months of 2010 from29.2% for the same period in 2009.  This29% decrease in the six-month Explosive Metalworking gross margin rate reflectsa 25% decrease in our U.S. gross 

 

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marginfrom 35.7% in 2009 to 26.7% in 2010 and a decrease in our European gross marginfrom 20.7% in 2009 to 10.0% in 2010 on year-to-year sales declines of 27% and47%, respectively. While lower sales and the resultant less favorableabsorption of fixed manufacturing overhead costs have negatively impacted grossmargins reported by all of our cladding divisions, the significant decline inour U.S. gross margin rate for the second quarter and first six months of 2010compared to the same periods in 2009 relates principally to unfavorable changesin product mix and an extremely competitive pricing environment in certain endmarkets that comprise a significant portion of our 2010 sales. Historically,gross margins for our European explosion welding divisions have been lower thanthose reported by our U.S. division due to less efficient fixed manufacturingcost structures associated with our smaller European facilities and this hasagain been the case during the first six months of 2010.  While our European cladding divisions alsoface a competitive pricing environment, the principal reason for the largedecrease in our European gross margin rate for the first six months of 2010compared to the same period in 2009 is the 47% decline in sales.  As has been the case historically, we expectto see continued fluctuations in Explosive Metalworking’s quarterly grossmargin rates during the remaining two quarters of 2010 that result fromanticipated fluctuations in quarterly sales volume and changes in product mix.Based upon the reported first half gross margin, the composition of our June 30,2010 backlog and the anticipated mix of new orders that we expect to shipbefore the end of the year, we expect the full year 2010 gross margin to be inthe range of 19% to 21% for our Explosive Metalworking segment.

 

OilfieldProducts reported a gross margin of 34.7% for the second quarter of 2010compared to a gross margin of 17.7% for the second quarter of 2009.  Oilfield Products reported a gross margin of31.5% for the first half of 2010 compared to a gross margin of 21.2% for thefirst half of 2009.  The increase inOilfield Products’ gross margin for the second quarter and first six months of2010 relates principally to the significant sales increases that are discussedabove and favorable changes in product/customer mix. Gross margins reported bythe Oilfield Products segment also reflect the incremental margin on intercompanysales to recently acquired former distributors in Canada, the U.S. and Russiaas these acquired entities sell products through to the end customer.  We currently expect Oilfield Products toreport full year 2010 sales in excess of $40,000 and a gross margin in therange of 32% to 35%.

 

Thegross margin for AMK Welding increased to 37.4% for the second quarter of 2010from 23.7% for the second quarter of 2009. The gross margin for AMK Welding increased to 31.3% in the first sixmonths of 2010 from 24.9% in the first six months of 2009.  These increases in AMK Welding’s gross marginrelate principally to the sales increases discussed above and resultant morefavorable absorption of fixed manufacturing overhead expenses.  AMK Welding sales for the full year 2010 areexpected to approximate $10,000 and its full year gross margin is expected tobe in the range of 31% to 33%.

 

*General and administrative expenses*

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                                 | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                 | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General & administrative expenses |       | $                      | 3,358      |       | $          | 3,043          |       | $ |  315 |   | 10.4 | % |
| Percentage of net sales                    |       | 8.8                    | %          | 8.0        | %          |           |       |   |   |
|                                            |            |                        |            |            |            |                |            |  |  |  |  |  |

 

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| ** **                                 | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                                 | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                 | ** ** | **2010**             | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| General & administrative expenses |       | $                    | 6,503      |       | $          | 6,569          |       | $ | (66 | ) | (1.0 | )% |
| Percentage of net sales                    |       | 9.5                  | %          | 7.5        | %          |           |       |   |   |
|                                            |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Generaland administrative expenses increased by $315, or 10.4%, to $3,358 in thesecond quarter of 2010 from $3,043 in the second quarter of 2009.  Excluding incremental general andadministrative expenses of $322 that resulted from the acquisitions of LRI,Austin Explosives and the Russian joint ventures, our general andadministrative expenses were essentially the same as those reported in theprior year second quarter. As a percentage of net sales, general andadministrative expenses increased to 8.8% in the second quarter of 2010 from8.0% in the second quarter of 2009.

 

Generaland administrative expenses for the six months ended June 30, 2010 totaled$6,503 compared to $6,569 for the same period of 2009, a decrease of $66 or1.0%.  Excluding incremental general andadministrative expenses of $496 that resulted from the acquisitions of LRI,Austin Explosives and the Russian joint ventures, our general andadministrative expenses decreased by $562 or 8.6%.  This decrease includes an increase of $74 insalaries that was more than offset by a $208 decrease in accrued incentivecompensation and a net decrease of $428 in all other expenses categories thatreflects the impact of tight controls over discretionary spending.  As a percentage of net sales, general andadministrative expenses increased to 9.5% in the first half of 2010 from 7.5%in the first half of 2009.

 

*Selling expenses*

 
| ** **              | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **              | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses        |       | $                      | 2,550      |       | $          | 1,840          |       | $ | 710 |   | 38.6 | % |
| Percentage of net sales |       | 6.7                    | %          | 4.9        | %          |           |       |   |   |
|                         |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** **              | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **              | ** ** | **2010**             | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Selling expenses        |       | $                    | 4,871      |       | $          | 4,164          |       | $ | 707 |   | 17.0 | % |
| Percentage of net sales |       | 7.1                  | %          | 4.8        | %          |           |       |   |   |
|                         |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Sellingexpenses, which include sales commissions of $305 in 2010 and $425 in 2009, increasedby 38.6% to $2,550 in the second quarter of 2010 from $1,840 in the secondquarter of 2009.  Excluding incrementalselling expenses of $747 that resulted from the acquisitions of LRI, AustinExplosives and the Russian joint ventures, our selling expenses decreased by$37 or 2.0%.  This $37 decrease in ourselling expenses includes increased selling expenses of $213 at our U.S.divisions that was offset by decreased selling expenses of $250 at our Europeandivisions.  The decrease in Europeanselling expenses relates principally to staff reductions within our Europeanexplosion welding facilities and lower sales commissions. The $213 increase inour U.S. selling expenses reflects increased sales commissions of $105, a $91increase in bad debt expense and a net increase of $17 in other spendingcategories. As a percentage of net sales, selling expenses increased to 6.7% inthe second quarter of 2010 from 4.9% in the second quarter of 2009.

 

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Sellingexpenses increased by 17.0% to $4,871 in the first half of 2010 from $4,164 inthe first half of 2009.  These sellingexpenses include sales commissions of $571 and $808 for 2010 and 2009,respectively.  Excluding incrementalselling expenses of $1,229 that resulted from the acquisitions of LRI, AustinExplosives and the Russian joint ventures, our selling expenses decreased by $522or 12.6%.  This $522 decrease in ourselling expenses includes decreased selling expenses of $397 and $125 at ourEuropean and U.S. divisions, respectively. The decrease in European selling expenses relates principally to staffreductions within our European explosion welding facilities and lower salescommissions. The $125 decrease in our U.S. selling expenses reflects decreasedsales commissions of $128, a $116 decrease in salaries and accrued incentivecompensation and a net increase of $119 in other spending categories. As apercentage of net sales, selling expenses increased to 7.1% in the first halfof 2010 from 4.8% in the first half of 2009.

 

*Amortization expenses*

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                                  | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                  | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Amortization of purchased intangible assets |       | $                      | 1,264      |       | $          | 1,232          |       | $ | 32 |   | 2.6 | % |
| Percentage of net sales                     |       | 3.3                    | %          | 3.3        | %          |           |       |   |   |
|                                             |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** **                                  | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                                  | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                  | ** ** | **2010**             | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Amortization of purchased intangible assets |       | $                    | 2,537      |       | $          | 2,416          |       | $ | 121 |   | 5.0 | % |
| Percentage of net sales                     |       | 3.7                  | %          | 2.8        | %          |           |       |   |   |
|                                             |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Amortization expense relates to the amortization ofvalues assigned to intangible assets in connection with the November 15,2007 acquisition of DYNAenergetics, our October 1, 2009 acquisition ofLRI, our April 30, 2010 acquisition of the Russian joint ventures and our June 5,2010 acquisition of Austin Explosives. Amortization expense for the three months ended June 30, 2010includes $904, $273 and $87 relating to values assigned to customerrelationships, core technology and trademarks/trade names, respectively.  Amortization expense for the three monthsended June 30, 2009 includes $854, $285 and $93 relating to valuesassigned to customer relationships, core technology and trademarks/trade names,respectively.

 

Amortization expense for the six months ended June 30,2010 includes $1,787, $569 and $181 relating to values assigned to customerrelationships, core technology and trademarks/trade names, respectively.  Amortization expense for the six months endedJune 30, 2009 includes $1,675, $559 and $182 relating to values assignedto customer relationships, core technology and trademarks/trade names,respectively.   Amortization expense (asmeasured in Euros) associated with the DYNAenergetics acquisition is expectedto approximate €3,603 in 2010, and 2010 amortization expense (as measured inCanadian dollars) associated with the LRI acquisition is expected toapproximate 80 CAD.  Amortization expenseassociated with the acquisition of Austin Explosives is expected to approximate$249 for approximately seven months of 2010 and amortization expense associatedwith the acquisition of the Russian joint ventures is expected to approximate€185 for eight months of 2010.

 

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*Operating income*

 
| ** **       | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **       | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **       | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Operating income |       | $                      | 2,086      |       | $          | 3,039          |       | $ | (953 | ) | (31.4 | )% |
|                  |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** **       | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **       | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **       | ** ** | **2010**             | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Operating income |       | $                    | 2,331      |       | $          | 11,333         |       | $ | (9,002 | ) | (79.4 | )% |
|                  |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Incomefrom operations (“operating income”) decreased by $953 to $2,086 in the secondquarter of 2010 from $3,039 in the second quarter of 2009.  For the six months ended June 30, 2010,operating income decreased by 79.4% to $2,331 from $11,333 for the same periodof 2009.

 

ExplosiveMetalworking reported operating income of $1,967 in the second quarter of 2010compared to $4,601 in the second quarter of 2009.  This 57.2% decrease in Explosive Metalworkingoperating income is largely attributable to the 15.5% decrease in net sales andthe 23% decline in the gross margin rate as discussed above.  Explosive Metalworking reported operatingincome of $3,184 in the first half of 2010 compared to $14,012 in the firsthalf of 2009. This 77.3% decrease in Explosive Metalworking operating income islargely attributable to the 36.1% decrease in net sales and the 29% decline inthe gross margin rate as discussed above.

 

OilfieldProducts reported operating income of $203 for the second quarter of 2010 ascompared to an operating loss of $906 for the second quarter of 2009.  For the first half of 2010, Oilfield Productsreported an operating loss of $201 compared to an operating loss of $1,600 forthe first half of 2009.

 

AMKWelding reported operating income of $826 for the three months ended June 30,2010 as compared to $306 for the same period of 2009.  AMK Welding reporting operating income of $1,050for the first six months of 2010 compared to $681 for the first six months of2009.

 

Operatingincome for the three and six months ended June 30, 2010 includes $910 and$1,702, respectively, of stock-based compensation.  Operating income for the three and six monthsended June 30, 2009 includes $962 and $1,760, respectively, of stock-basedcompensation.  This expense is notallocated to our business segments and thus is not included in the abovesecond  quarter operating income or losstotals for Explosive Metalworking, Oilfield Products and AMK Welding.

 

*Gain on step acquisition of joint ventures*

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                                 | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                 | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gain on step acquisition of joint ventures |       | $                      | 2,117      |       | $          | —         |       | $ | 2,117 |   | N/A |   |
|                                            |            |                        |            |            |            |                |            |  |  |  |  |  |

 

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| ** **                                 | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                                 | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                                 | ** ** | **2010**             | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Gain on step acquisition of joint ventures |       | $                    | 2,117      |       | $          | —         |       | $ | 2,117 |   | N/A |   |
|                                            |            |                      |            |            |            |                |            |  |  |  |  |  |

 

During the second quarter of 2010, we acquired the remainingnon-controlling interests in two Russian joint ventures that were previouslymajority-owned.  Prior to the acquisitiondate, we accounted for the joint ventures as equity investments.  As a result of the acquisition of theremaining non-controlling interests, we now consolidate these entities. Inaccordance with accounting standards applicable to transactions of this nature,we determined the fair value of our interests in these joint venturesimmediately prior to the purchase and recognized a resultant gain of $2,117.

 

*Interest income (expense), net*

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **                     | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                     | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income (expense), net |       | $                      | (633       | )          | $          | (829           | )          | $ | 196 |   | (23.6 | )% |
|                                |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** **                     | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **                     | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                     | ** ** | **2010**             | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Interest income (expense), net |       | $                    | (1,741     | )          | $          | (1,665         | )          | $ | (76 | ) | 4.6 | % |
|                                |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Werecorded net interest expense of $633 in the second quarter of 2010 compared tonet interest expense of $829 in the same period of 2009.  We recorded net interest expense of $1,741 inthe first half of 2010 compared to net interest expense of $1,665 for the firsthalf of 2009.  Interest expense for thefirst half of 2010 included a non-recurring, non-cash charge of $251 related tothe write-off of unamortized debt issuance costs associated with the March prepayment,in the amount of $12,498 (9,020 Euros), of the remaining balance of the Euroterm loan that was outstanding under our bank syndicate credit facility.  This Euro term loan was scheduled to matureon November 16, 2012.  The decreasein interest expense for the comparable three month periods ended June 30is attributable to a significant reduction in average outstanding borrowingsduring the respective quarters that resulted from scheduled term loan paymentsand the March prepayment of the Euro term loan. Interest savings fromthese term loan reductions was partially offset by higher average interestrates in 2010 that relate principally to the October 2009 amendment to ourbank syndicate credit facility which resulted in an increase in the interestrate charged on outstanding borrowings of 1.5% per annum.

 

*Income tax provision*

 
| ** **           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **           | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **           | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax provision |       | $                      | 505        |       | $          | 1,013          |       | $ | (508 | ) | (50.1 | )% |
| Effective tax rate   |       | 14.3                   | %          | 40.1       | %          |           |       |   |   |
|                      |            |                        |            |            |            |                |            |  |  |  |  |  |

 

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| ** **           | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|----------------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **           | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **           | ** ** | **2010**             | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Income tax provision |       | $                    | 351        |       | $          | 3,389          |       | $ | (3,038 | ) | (89.6 | )% |
| Effective tax rate   |       | 11.8                 | %          | 34.5       | %          |           |       |   |   |
|                      |            |                      |            |            |            |                |            |  |  |  |  |  |

 

Werecorded an income tax provision of $505 in the second quarter of 2010 comparedto $1,013 in the second quarter of 2009. Our second quarter 2010 income tax provision included a provision of $59associated with the $2,117 non-recurring gain that we recorded on theacquisition of non-controlling interests in two Russian joint ventures asdiscussed above and a provision of $446 on the remaining “ordinary” pretaxincome of $1,424.  While our overalleffective tax rate decreased to 14.3% in the second quarter of 2010 from 40.1%rate in the prior year second quarter, our second quarter 2010 effective taxrate on ordinary pretax income was 31.3%. Our consolidated income tax provision for the three months ended June 30,2010 and June 30, 2009 included provisions of $463 and $1,054,respectively, related to U.S. taxes, with the remainder relating to a netforeign tax provision of $42 in 2010 and a net foreign tax benefit of $41 in2009 associated with our foreign operations and holding companies located inCanada, France, Germany, Sweden, Russia, Kazakhstan and Luxembourg.

 

Forthe six months ended June 30, 2010, we recorded an income tax provision of$351 compared to $3,389 in the same period of 2009.  The effective tax rate decreased to 11.8% inthe first half of 2010 from 34.5% in the first half of 2009 due principally tothe low tax rate applicable to the non-recurring gain on the acquisition ofnon-controlling interests in two Russian joint ventures as discussedabove.  Our effective tax rate on the$859 of “ordinary” pretax income that we reported in the first half of 2010 was34.0%.  Our consolidated income taxprovision for the six months ended June 30, 2010 and 2009 included $849and $3,176, respectively, related to U.S. taxes, with the remainder relating toa net foreign tax benefit of $498 in 2010 and a net foreign tax provision of$213 in 2009 associated with our foreign operations and holding companies.

 

Weexpect our blended effective tax rate for 2010 to range from 25% to 28% basedupon the low effective tax rate we experienced during the first six months of2010 and our current projection of full year consolidated pre-tax income.  Our full year 2009 effective tax rate was33.9% and, beginning in the third quarter of 2010, we expect that our blendedeffective tax rate will to return to a normalized level of 33% to 35%.

 

*Adjusted EBITDA*

 
| ** **      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------|------------|------------------------|------------|------------|------------|----------------|------------|
| ** **      | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **      | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Adjusted EBITDA |       | $                      | 5,510      |       | $          | 6,408          |       | $ | (898 | ) | (14.0 | )% |
|                 |            |                        |            |            |            |                |            |  |  |  |  |  |

 
| ** **      | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **     | ** ** |
|-----------------|------------|----------------------|------------|------------|------------|----------------|------------|
| ** **      | ** ** | **June 30,**    | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **      | ** ** | **2010**             | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Adjusted EBITDA |       | $                    | 8,974      |       | $          | 17,950         |       | $ | (8,976 | ) | (50.0 | )% |
|                 |            |                      |            |            |            |                |            |  |  |  |  |  |

 

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AdjustedEBITDA is a non-GAAP measure that we use as an indicator of the ongoingoperating performance and the cash generating ability of the Company.  The following is a reconciliation of the mostdirectly comparable GAAP measure to Adjusted EBITDA.

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                            | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                            | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Income from operations                |       | $                      | 2,086      |                 | $          | 3,039 |   | $ | 2,331 |   | $ | 11,333 |   |
| Adjustments:                          |       |                   |       |                 |       |   |   |   |   |
| Stock-based compensation              |       | 910                    |       | 962                  |       | 1,702 |   | 1,760 |   |
| Depreciation                          |       | 1,250                  |       | 1,174                |       | 2,404 |   | 2,441 |   |
| Amortization of purchased intangibles |       | 1,264                  |       | 1,233                |       | 2,537 |   | 2,416 |   |
| Adjusted EBITDA                       |       | $                      | 5,510      |                 | $          | 6,408 |   | $ | 8,974 |   | $ | 17,950 |   |

 

AdjustedEBITDA decreased by 14.0% to $5,510 in the second quarter of 2010 from $6,408in the second quarter of 2009 primarily due to the $953 decrease in operatingincome.  Adjusted EBITDA decreased by50.0% to $8,974 in the first half of 2010 from $17,950 in the first half of2009 primarily due to the $9,002 decrease in operating income.

 

**Liquidity and Capital Resources**

 

We have historically financed our operations from a combination ofinternally generated cash flow, revolving credit borrowings, various long-termdebt arrangements, and the issuance of common stock.  In connection with the acquisition ofDYNAenergetics, we entered into a five-year syndicated credit agreement.  The credit agreement, which provided termloans of $45,000 and 14,000 Euros and revolving credit loan availability of$25,000 and 7,000 Euros, is through a syndicate of seven banks.

 

Thereare two significant financial covenants under our credit facility, the leverageratio and fixed charge coverage ratio requirements.  The leverage ratio is defined in the creditfacility as Consolidated Funded Indebtedness at the balance sheet date ascompared to Consolidated EBITDA, which is defined as earnings before provisionsfor income taxes, interest expense, depreciation and amortization,extraordinary, non-recurring charges and other non-cash charges, for theprevious twelve months.  For the yearended December 31, 2009 and six months ended June 30, 2010,Consolidated EBITDA approximated the “Adjusted EBITDA” that we reported for therespective periods.  As ofDecember 31, 2009, the maximum leverage ratio permitted by our creditfacility was 2.0 to 1.0. The actual leverage ratio as of December 31, 2009was 1.69 to 1.0. The maximum leverage ratio permitted as of March 31, June 30,September 30 and December 31, 2010 is 2.25 to 1.0, 2.25 to 1.0, 2.0to 1.0 and 1.5 to 1.0, respectively.  Theactual leverage ratio as of June 30, 2010 was 1.69 to 1.0.

 

Thefixed charge ratio, as defined in the credit facility, means, for any period,the ratio of Earnings Available for Fixed Charges to Fixed Charges.  Earnings Available for Fixed Charges equalsConsolidated EBITDA plus lease expenses minus cash income taxes andnon-financed capital expenditures.  FixedCharges equals the sum of cash interest expense, lease expense, scheduledprincipal payments and cash dividends. As of December 31, 2009, the minimum fixed charge ratio permittedby our credit facility was 1.1 to 1.0. The actual fixed charge ratio as ofDecember 31, 2009 was 1.31 to 1.0. The minimum fixed charge coverage ratiopermitted for the twelve month periods ending March 31, June 30, September 30and December 31, 2010 is 0.8 to 

 

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1.0,0.8 to 1.0, 1.0 to 1.0 and 1.0 to 1.0, respectively. The actual fixed chargeratio as of June 30, 2010 was 1.07 to 1.0.

 

Asa result of the slowdown in our business during 2009 which has continued intothe early part of 2010, we were concerned about our ability to comply withfinancial covenants as of March 31, 2010 and subsequent quarters of2010.  In an effort to alleviate thisconcern and remain in compliance with financial covenants as of March 31,2010 and in future periods, we made a March prepayment of the remainingprincipal balance due under our bank syndicate Euro term loan in the amount of$12,498 (9,020 Euros) and, on April 19, 2010, amended the credit agreementto exclude scheduled principal payments under the Euro term loan from fixedcharge coverage ratio computations for March 31, 2010 and forward.

 

In connection with the October 1, 2009 acquisition of LRI, weassumed outstanding debt obligations including line of credit loans, loans withthe former owners and capital lease obligations in the amounts of $2,676 (2,883CAD), $2,445 (2,634 CAD) and $432 (465 CAD), respectively.

 

As of June 30, 2010, a U.S. Dollar term loan of $28,997 wasoutstanding under our syndicated credit agreement, $916 was outstanding underterm loan obligations of DYNAenergetics and $1,271 was outstanding under loanagreements with the former owners of LRI. We had $1,830 in outstanding revolving credit borrowings under oursyndicated credit agreement and $1,153 outstanding under our separateDYNAenergetics’ line of credit agreements with German banks.  We also had $554 outstanding under the lineof credit assumed with the acquisition of LRI and $23 outstanding under theline of credit assumed with the acquisition of Perfoline.  While we had approximately $40,230 of unutilizedrevolving credit loan capacity as of June 30, 2010 under our variouscredit facilities, future borrowings are subject to compliance with financialcovenants that could significantly limit availability.

 

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

 

*Debt and other contractual obligations and commitments*

 

Our existing loan agreements include various covenants andrestrictions, certain of which relate to the payment of dividends or otherdistributions to stockholders, redemption of capital stock, incurrence ofadditional indebtedness, mortgaging, pledging or disposition of major assets,and maintenance of specified financial ratios. As of June 30, 2010, we were in compliance with all financialcovenants and other provisions of our debt agreements.

 

Other than the unscheduled $12,498 (9,020 Euros)prepayment of the remaining principal balance on our bank syndicate Euro termloan, the Company’s principal cash flows related to debt obligations and othercontractual obligations and commitments have not materially changed since December 31,2009.

 

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*Cash flows from operating activities*

 

Netcash flows provided by operating activities for the first half of 2010 totaled$9,695.  Significant sources of operatingcash flow included net income of $2,625, non-cash depreciation and amortizationexpense of $5,324, stock-based compensation of $1,702 and net positive changesin various components of working capital in the amount of $3,377.  These sources of operating cash flow werepartially offset by a $2,117 gain on step acquisition of joint ventures and adeferred income tax benefit of $961.  Netpositive changes in working capital included a decrease in accounts receivableof $8,142 and an increase in customer advances of $1,565.  These positive changes in working capitalwere partially offset by increases in inventory and prepaid expenses of $1,841and $880, respectively, and decreases in accounts payable and accrued expensesof $1,494 and $2,115.

 

Netcash flows provided by operating activities for the first half of 2009 totaled$12,371.  Significant sources ofoperating cash flow included net income of $6,432, non-cash depreciation andamortization expense of $4,998, stock-based compensation of $1,760 and netpositive changes in various components of working capital in the amount of$214.  These sources of operating cashflow were partially offset by a deferred income tax benefit of $954.  Net positive changes in working capitalincluded decreases in accounts receivable, inventories and prepaid expenses of$4,374, $2,475 and $1,540, respectively, and an increase in customer advancesof $1,029.  These positive changes inworking capital were almost entirely offset by decreases in accounts payableand accrued expenses of $4,407 and $4,797, respectively.

 

*Cash flows from investing activities*

 

Netcash flows used in investing activities for the first half of 2010 totaled$7,179 which included investments in acquisitions of $5,609 and capitalexpenditures of $1,445.

 

Netcash flows used in investing activities for the first six months of 2009totaled $2,208 and consisted almost entirely of capital expenditures.

 

*Cash flows from financing activities*

 

Netcash flows used in financing activities for the first half of 2010 were$14,882, which included $2,876 in required prepayments of term loans under oursyndicated credit agreement from excess cash flow that we generated in fiscalyear 2009, $12,498 to prepay the remaining principal balance of our Euro termloan under our syndicated credit agreement, $399 in principal payments on NordLB term loans, payment of quarterly dividends of $1,033 and payment on capitallease obligations of $146.  These uses ofcash flows were partially offset by net borrowings on bank lines of credit of$1,998 and $70 in net proceeds from the issuance of common stock relating tothe exercise of stock options.

 

Netcash flows used in financing activities for the first half of 2009 were $3,835,which consisted primarily of $3,885 in required prepayments of term loans underour syndicated credit agreement from excess cash flow that we generated infiscal year 2008, $438 in principal payments on Nord LB term loans and paymenton capital lease obligations of $102. These uses of cash flows were slightly offset by net borrowings on banklines of credit of $143 and $373 in net proceeds from the issuance of commonstock relating to the exercise of stock options.

 

*Payment of Dividends*

 

OnMay 26, 2010, our board of directors declared a quarterly cash dividend of$.04 per share which was paid on July 15, 2010.  The dividend totaled $528 and was payable to 

 

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shareholdersof record as of June 30, 2010.  On March 11,2010, our board of directors declared a quarterly cash dividend of $.04 pershare which was paid on April 15, 2010. The dividend totaled $518 and was payable to shareholders of record asof March 31, 2010.   We paid aquarterly cash dividend of $.04 per share in the second quarter of 2009.

 

Wemay continue to pay quarterly dividends in the future subject to capitalavailability and periodic determinations that cash dividends are in compliancewith our debt covenants and are in the best interests of our stockholders, butwe cannot assure you that such payments will continue.  Future dividends may be affected by, amongother items, our views on potential future capital requirements, futurebusiness prospects, debt covenant compliance, changes in federal income taxlaws, or any other factors that our board of directors deems relevant.  Any decision to pay cash dividends is andwill continue to be at the discretion of board of directors.

 

**CriticalAccounting Policies**

 

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

 

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

 

*Revenue recognition*

 

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

 

*Asset impairments*

 

Wereview our long-lived assets to be held and used by us for impairment wheneverevents or changes in circumstances indicate their carrying amount may not berecoverable. In so doing, we estimate the future net cash flows expected toresult from the use of these assets and their eventual 

 

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disposition.If the sum of the expected future net cash flows (undiscounted and withoutinterest charges) is less than the carrying amount of these assets, animpairment loss is recognized to reduce the asset to its 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 costs to sell.

 

*Business Combinations*

 

Weaccount for our business acquisitions using the purchase method of accounting.We allocate the total cost of the acquisition to the underlying net assetsbased on their respective estimated fair values. As part of this allocationprocess, we identify and attribute values and estimated lives to the intangibleassets acquired. These determinations involve significant estimates andassumptions regarding multiple, highly subjective variables, including thosewith respect to future cash flows, discount rates, asset lives, and the use ofdifferent valuation models and therefore require considerable judgment. Ourestimates and assumptions are based, in part, on the availability of listedmarket prices or other transparent market data. These determinations affect theamount of amortization expense recognized in future periods. We base our fairvalue estimates on assumptions we believe to be reasonable but are inherentlyuncertain.

 

*Goodwill and Other Intangible Assets*

 

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

 

*Goodwill*

 

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

 

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

 

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Ifthe carrying value of the reporting unit is higher than its fair value, thereis an indication that impairment may exist, and the second step must be performedto measure the amount of impairment loss. In the second step, we allocate the fair value of the reporting unit tothe assets and liabilities of the reporting unit as if it had just beenacquired in a business combination and as if the purchase price was equivalentto the fair value of the reporting unit. The excess of the fair value of the reporting unit over the amountsassigned to its assets and liabilities is referred to as the implied fair valueof goodwill. We then compare that implied fair value of the reporting unit’sgoodwill to the carrying value of that goodwill. If the implied fair value isless than the carrying value, we recognize an impairment loss for the excess.

 

Ourimpairment testing in the fourth quarter of 2009 did not result in a determinationthat any of our goodwill was impaired. The fair value of the Oilfield Products reporting unit was $74.2 millionat December 31, 2009 compared to its carrying value of $63.6 million.  A discount rate of 17% was utilized in theincome approach component of the model used to measure fair value.  A future impairment is possible and couldoccur if (i) the unit’s operating results underperform what we haveestimated or (ii) additional volatility of the capital markets or otherfactors should cause us to raise the discount rate utilized in our discountedcash flow analysis or decrease the multiples utilized in our market-basedanalysis.  The use of different estimatesor assumptions within our discounted cash flow model when determining the fairvalue of our reporting units or using methodologies other than as describedabove could result in different values for reporting units and could result inan impairment charge.

 

*Intangible assets subject to amortization*

 

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

 

*Impact of foreign currency exchange rate risks*

 

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

 

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*Income taxes*

 

Weare required to recognize deferred tax assets and deferred tax liabilities forthe expected future income tax consequences of transactions that have beenincluded in our financial statements but not our tax returns.  Deferred tax assets and liabilities aredetermined based on income tax credits and on the temporary differences betweenthe Consolidated Financial Statement basis and the tax basis of assets andliabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse.  Weroutinely evaluate deferred tax assets to determine if they will, more likelythan not, be recovered from future projected taxable income; if not, we recordan appropriate valuation allowance.

 

*Stock-Based Compensation Expense*

 

Weare required to account for stock-based compensation under fair valuerecognition provisions.  The stock-basedcompensation cost is estimated at the grant date based on the value of theaward and is recognized as expense ratably over the requisite service period ofthe award.  The fair value of restrictedstock awards is based on the fair value of the Company’s stock on the date ofgrant.  For the last several years wehave not granted stock options.  Were weto do so, determining the appropriate fair value model and calculating the fairvalue of stock options at the grant date would require judgment, includingestimating stock price volatility, forfeiture rates, and expected option life.

 

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**ITEM 3.  Quantitative and Qualitative Disclosure about Market Risk**

 

Therehave been no events that materially affect our quantitative and qualitativedisclosure about market risk from that reported in our Annual Report on Form 10-Kfor the year ended December 31, 2009.

 

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

 

TheCompany maintains disclosure controls and procedures that are designed toensure that information required to be disclosed in the Company’s Exchange Actreports is accurately recorded, processed, summarized and reported within thetime 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.

 

Asof June 30, 2010, 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 at the reasonable assurancelevel.  There have been no changes in theCompany’s internal controls during the quarter ended June 30, 2010 or inother factors that could materially affect the Company’s internal controls overfinancial reporting.

 

TheCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, does not expect that the Company’s disclosure controls orits internal controls will prevent all errors and all fraud.  Further, the design of a control system mustreflect the fact that there are resource constraints, and the benefits ofcontrols 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 errors ormistakes.  As a result of the inherentlimitations in a cost-effective control system, misstatements due to error orfraud may occur and not be detected. Accordingly, the Company’s disclosure controls and procedures aredesigned to provide reasonable, not absolute, assurance that the disclosurecontrols and procedures are met.

 

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**Part II - OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

None.

 

**Item 1A. Risk Factors**

 

Therehave been no significant changes in the risk factors identified as beingattendant to our business in our Annual Report on Form 10-K for the yearended December 31, 2009.

 

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

 

None.

 

**Item 3. Defaults Upon Senior Securities**

 

None.

 

**Item 4. Removed and Reserved**

 

None.

 

**Item 5. Other Information**

 

None.

 

**Item 6.**

 

**Exhibits**

 

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

 

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

 

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

 

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

 

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**SIGNATURES**

 

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:  July 29, 2010 | /s/  Richard A. Santa                                                                                                                          |
|                      | Richard  A. Santa, Senior Vice President and Chief Financial Officer (Duly Authorized  Officer and Principal Financial and Accounting Officer) |

 

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