Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION****Washington,D.C. 20549**

 

----

 

**Form 10-K**

 

**(MarkOne)**

| **x** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

** **

**For the fiscal year ended December 31,2009**

** **

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

** **

**For the transition period from                to             **

** **

**Commission file number 001-14775**

 

----

 

**DYNAMIC MATERIALS CORPORATION**

(Exact name ofRegistrant as specified in its charter)

 

| **Delaware**                                                     | ** ** | **84-0608431**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or  organization) |       | (I.R.S. Employer  Identification No.) |

 

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

(Address ofprincipal executive offices, including zip code)

 

**(303)665-5700**

(Registrant’stelephone number, including area code)

 

Securities registered pursuant to Section 12(b) ofthe Act:

 

| **Title of each class**          | ** ** | **Name of each exchange on which registered** |
|----------------------------------|------------|-----------------------------------------------|
| **Common Stock, $.05 Par Value** | ** ** | **The Nasdaq National Market**                |

 

Securities registered pursuant to Section 12(g) ofthe Act:  **None**

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act. Yes o No x

 

Indicate by check mark if the registrant is not required to filereports pursuant to Section 13 or 15(d) of the Act from theirobligations under those sections. Yes o No x

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x Noo

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files). Yes o No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K (§229.405 of this chapter) is not contained herein,and will not be contained, to the best of the registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeraccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12-b2of 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) |   |                         |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Act). Yes o No x

 

The approximate aggregate market value of the voting stock held bynon-affiliates of the registrant was $239,476,167 as of June 30, 2009.

 

The number of shares of Common Stock outstanding was 12,959,363 as of March 12,2010.

 

Certain information required by Items 10, 11, 12, 13 and 14 of Form 10-Kis incorporated by reference into Part III hereof from the registrant’sproxy statement for its 2010 Annual Meeting of Shareholders, which is expectedto be filed with the Securities and Exchange Commission (“SEC”) within 120 daysof the close of the registrant’s fiscal year ended December 31, 2009.

 

 

 

----

Tableof Contents

 

**PART I**

 

**ITEM****1****.****                  Business**

 

**Overview**

 

DynamicMaterials Corporation is an industrial manufacturer focusing on niche marketsrelated to the building of equipment and materials to support theinfrastructure of the process and energy industries. Built upon specializedtechnologies, the company seeks to establish a global presence through aninternational network of manufacturing facilities and sales offices.  Today, the Company operates in three businesssegments: Explosive Metalworking, Oilfield Products, and AMK Welding.

 

We are aleading provider of explosion-welded clad metal plates.  Explosion-weld cladding uses an explosivecharge to bond together plates of different metals that do not bond easily withtraditional welding techniques.  We referto this part of our business as “DMC Clad” or the “Explosive Metalworking”segment.  DMC Clad markets itsexplosion-welded clad products under the Detacladâ trade name.  DMC Clad’s products are used in criticalapplications in a variety of industries, including oil and gas, alternative energy,chemical and petrochemical, hydrometallurgy, aluminum production, shipbuilding,power generation and industrial refrigeration. DMC Clad’s market leadership for explosion-welded clad metal plates is aresult of its state-of-the-art manufacturing facilities, technologicalleadership, and production expertise.  Webelieve our customers select us for our high quality product, speed andreliability of delivery, and cost effectiveness.  We have a global sales force through which wesell our products in international markets. Our Explosive Metalworking operations, which were recently expandedthrough our 2007 acquisition of DYNAenergetics, are located in the UnitedStates, Germany, France, and Sweden.

 

Through ourOilfield Products segment, which we also refer to as “DYNAenergetics,” weprovide a range of proprietary and nonproprietary products for the global oiland gas industries.  These productsrelate primarily to oil and gas well perforation, which is a process ofpunching holes in the casing of a well to enable easier and more preciserecovery of oil or gas from a targeted formation.  Manufactured products include shaped charges,detonators and detonating cords, bidirectional boosters, and perforating gunsfor the perforation of oil and gas wells. DYNAenergetics also distributes aline of seismic products that support oil and gas exploration activities.  DYNAenergetics’ primary manufacturing andsales operations are located in Germany.

 

Our AMKWelding segment (“AMK Welding”) provides advanced welding services, primarilyto the power turbine and aircraft engine manufacturing industries.  AMK Welding is a highly specialized weldingsubcontracting shop for complex shapes used principally in gas turbines andaircraft engines.  AMK Welding’soperations are conducted at its Connecticut facility.

 

**Clad Metal Industry**

 

Cladmetal plates are typically used in the construction of heavy, corrosionresistant pressure vessels and heat exchangers for oil and gas, alternativeenergy, chemical and petrochemical, hydrometallurgy, power generation,industrial refrigeration, and similar industries. Clad metal plates consist ofa thin layer of an expensive, corrosion resistant metal, such as titanium orstainless steel, which is metallurgically combined with a less expensive structuralbase metal, such as steel.  For heavyequipment, clad generally provides a cost savings alternative to building theequipment of solely the corrosion resistant alloy.

 

Thereare three major industrial clad plate manufacturing technologies:

·              Explosionwelding

·              HotRollbonding

·              Weldoverlay

 

Explosionwelding is the most versatile clad plate manufacturing technology. Being arobust cold welding technology, explosion-welded clad products exhibit highbond strength combined with the unaltered corrosion resistance and mechanicalproperties of the pre-clad components. The explosion-welded clad process is suitable for joining virtually anycombination of common engineering metals. Explosion-welded clad metal is produced as flat plates or concentric cylinderswhich can be further formed and fabricated as needed. When fabricated properly,the two metals will not come apart, The dimensional capabilities of the processare broad; cladding metal layers can range from a few thousandths of an inch toseveral inches; base metal thickness and lateral dimensions are primarilylimited by the size capabilities of the world’s metal production mills.  Explosion welding is used to clad a verybroad range of metals to steel including 

 

1

----

Table of Contents

 

aluminum, titanium, zirconium, nickel alloys, andstainless steels.  The alternativetechnologies are typically limited to the latter two.  In addition to use as clad plates, theexplosion welded components can be used as transition pieces, facilitatingconventional welding of dissimilar metals. DMC clad transition Joints are used in the aluminum production andshipbuilding industries.

 

Hotrollbonding is performed by a small group of the world’s heavy plate rollingmills.  In this process, the clad metaland base metal are bonded together during the hot rolling operation in whichthe metal slab is converted to plate. Being a high temperature process, hotrollbond is limited to joining similar metals, such as stainless steel andnickel alloys to steel.  Rollbond’s nicheis production of large quantities of light to medium gauge clad plates; it isfrequently lower cost than explosion clad when total metal thickness is under 1to 2 inches (dependent upon alloy and a number of other factors.)  Rollbond products are generally suitable formost vessel applications but have lower bond shear strength and may have inferiorcorrosion resistance.

 

Inweld overlay cladding, the clad metal layer is deposited on the base metalusing arc-welding type processes.  Weldoverlay is a cost-effective technology for complicated shapes, for fieldservice jobs, and for production of heavy-wall pressure vessel reactors.  During overlay welding, the cladding metaland base metal are melted together at their interface, the resulting dilutionof the cladding metal chemistry may compromise corrosion performance and limituse in certain applications.  Weld metalshrinkage during cooling potentially causes distortion when the base layer isthin; consequently, overlay is rarely the technically preferred solution forconstruction of new equipment when thicknesses are under 3 to 4 inches.  As with rollbond, weld overlay is limited tometallurgically similar metals, primarily stainless steels and nickel alloysjoined to steel.  Weld overlay istypically performed in conventional metal fabrication shops.

 

**Clad Metals End Use Markets**

 

Explosion-weldedclad metal is primarily used in construction of large industrial equipmentinvolving high pressures and temperatures and needs to be corrosionresistant.  The eight broad industrialsectors discussed below comprise the bulk of demand for DMC Clad’sbusiness.  The demand for clad metal isdriven by the underlying demand for new equipment and facility maintenance inthese primary market sectors.  Overall,the market for explosion-welded clad metal has continuously grown since itsinception, with demand dependent upon the underlying needs of the variousmarket sectors.  There has beensignificant capital investment in many of these markets.

 

*Oil and Gas*:  Oil and gas end use markets include both oiland gas production and petroleum refining. Oil and gas production covers a broad scope of operations related torecovering oil and/or gas for subsequent processing in refineries.  Clad metal is used in separators, glycolcontactors, piping, heat exchangers and other related equipment.  The increase in oil and gas production fromdeep, hot, and corrosive fields has significantly increased the demand for cladequipment.  Many non-traditional energyproduction methods are potentially commercially viable for bringing natural gasto the market.  Clad is commonly used inthese facilities.  The primary clad metalsfor this market are stainless steel and nickel alloys clad to steel, with someuse of reactive metals.

 

 Petroleum refining processes frequently arecorrosive, are hot, and operate at high pressures.  Clad metal is extensively used in a broadrange of equipment including desulfurization hydrotreaters, coke drums,distillation columns, separators and heat exchangers.  In the United States, refineries are runningnear their full capacity; and adding capacity and reducing costly down-time area high priority.  The increasing relianceupon low quality, high sulfur crude further drives additional demand for newcorrosion resistant equipment.  Worldwidetrends in regulatory control of sulfur emissions in gas, diesel and jet fuelare also increasing the need for clad equipment.  Like the upstream oil and gas sector, theclad metals are primarily stainless steel and nickel alloys.

 

*Alternative Energy*:  Today’s oiland gas prices and increasing climate concerns are driving significant upwarddemand for capital equipment in the alternative energy sector.  Frequently, alternative energy technologiesinvolve conditions which necessitate clad metals.  Solar panels predominantly incorporate highpurity silicon. Processes for manufacture of high purity silicon utilize abroad range of highly corrosion resistant clad alloys. Many geothermal fieldsare corrosive, requiring high alloy clad separators to clean the hotsteam.  Cellulosic ethanol technologiesmay require corrosion resistant metals such as titanium and zirconium.

 

2

----

Table of Contents

 

*Chemical and Petrochemical*:  Many common products, ranging from plasticsto drugs to electronic materials, are produced by chemical processes.  Because the production of these items ofteninvolves corrosive agents and is conducted under high pressures ortemperatures, corrosion resistant equipment is needed, equipment which is bestand most cost-effectively produced using clad construction.  One of the larger applications fortitanium-clad equipment is in the manufacture of Purified Terephthalic Acid (“PTA”),a precursor product for polyester, which is used in everything from carpets toplastic bottles.  This market requiresextensive use of stainless steel and nickel alloys, but also uses titanium and,to a lesser extent, zirconium and tantalum.

 

*Hydrometallurgy*:  The conversion of raw ore to metal generallyinvolves high energy and/or corrosive processes.  Traditionally, most metals have been producedby high temperature smelting.  Over thepast two decades there has been an increasing trend toward acid leachingprocesses.  These hydrometallurgyprocesses are more environmentally friendly and more energy efficient. Theprocesses for production of nickel, gold, and copper involve acids, highpressures, and high temperatures. Titanium is the metal of choice. Titanium-clad plates are used extensively for construction of autoclavesand peripheral equipment.

 

*Aluminum Production*:  Aluminum is reduced from its oxide in largeelectric smelters called potlines.  Theelectric current is carried via aluminum conductors.  The electricity must be transmitted intosteel components for the high temperature smelting operations.  Aluminum cannot be welded to steelconventionally.  Explosion-weldedaluminum-steel transition joints provide an energy efficient and highly durablesolution for making these connections. Modern potlines use a large number of transition joints.  Transition joints are typically replacedafter approximately five years in service. Although aluminum production is the major electrochemical applicationfor DMC Clad products, there are a number of other electrochemical applicationsincluding production of magnesium, chlorine and chlorate.

 

*Shipbuilding*:  The combined problems of corrosion andtop-side weight drive significant demand for our aluminum-steel transitionjoints.  Top-side weight is often asignificant problem with tall ships, including cruise ships, naval vessels,ferries and yachts.  Use of aluminum inthe upper structure and steel in the lower structure provides stability.  Bolted joints between aluminum and steelcorrode quickly in seawater.  Aluminumcannot be welded directly to steel using traditional welding processes. Weldedjoints can only be made using transition joints.  DMC Clad products can be found on many wellknown ships, including the QE II and modern U.S. Navy aircraft carriers.

 

*Power Generation*:  Fossil fuel and nuclear power generationplants require extensive use of heat exchangers, many of which requirecorrosion resistant alloys to handle low quality cooling water.  Our clad plates are used extensively for heatexchanger tubesheets.  The largest cladtubesheets are used in the final low pressure condensers.  For most coastal and brackish water cooledplants, titanium is the metal of choice technically, and titanium-cladtubesheets are the low cost solution for power plant condensers.

 

*Industrial Refrigeration*:  Heat exchangers are a core component ofrefrigeration systems.  When the coolingwater is seawater, brackish, or even slightly polluted, corrosion resistantmetals are necessary.  Metal selection canrange from stainless steel to copper alloy to titanium.  Explosion-welded clad metal is often the lowcost solution for making the tubesheets. Applications range from refrigeration chillers on fishing boats tomassive air conditioning units for skyscrapers, airports, and deep underground mines.

 

**Oil and Gas Field Perforating Industry**

 

Theoil and gas industry utilizes perforating products in oil and gas fields topunch holes in the casing or liner of an oil well to connect it to thereservoir.  The operator runs a casing orliner into the well and then inserts the perforating guns, which contain aseries of specialized shaped charges. Once fired, the perforating guns provide access to the specifiedsections of the desired areas of the targeted formations.  Completing wells though the use ofperforation guns can provide more control over the well.

 

**DYNAenergeticsEnd Use Markets**

 

DYNAenergetics products are utilized to perform both perforatingservices—which require shaped charges, detonators, boosters, detonating cords,and perforating guns—and seismic prospecting. DYNAenergetics manufactures and distributes a comprehensive array ofperforating products.  Our DYNAenergeticsproducts are generally purchased by 

 

3

----

Table ofContents

 

oilfield servicecompanies who utilize our perforating products for oil and gas recovery and ourseismic products for oil and gas exploration activities.

 

**AMK Welding End Use Markets**

 

Parts forpower turbines and aircraft engines must be machined to exacting tolerances andwelded according to exacting specifications. Many of those parts have complex shapes, the welding of which requiressignificant expertise.  AMK Welding is aspecialized operation that welds complex, shaped parts for machining companiesthat, in turn, supply the manufacturers of power turbines and aircraftengines.  Some machining companies alsohave their own welding facilities, which compete with AMK Welding for business.

 

**BusinessSegments**

 

We operatethree business segments: Explosive Metalworking (which we also refer to as DMCClad), Oilfield Products (which we also refer to as DYNAenergetics), and AMKWelding. The Explosive Metalworking segment uses proprietary explosiveprocesses to fuse dissimilar metals and alloys and has more than 40 years ofexperience.  We are the largestexplosion-welded clad metal manufacturer in both North America and Europe.  DYNAenergetics produces special shapedcharges, detonators, detonating cords, bidirectional boosters, and perforatingguns for the perforation of oil and gas wells and has more than a decade ofexperience providing specialized products to the oil and gas industry.  AMK Welding utilizes various specializedtechnologies to weld components for use in power-generation turbines as well ascommercial and military jet engines and has 40 years of experience.

 

**Explosive Metalworking**

 

The ExplosiveMetalworking segment seeks to build on its leadership position in itsmarkets.  During the year ended December 31,2009, the Explosive Metalworking segment represented approximately 81% of ourrevenue.  The four manufacturing plantsand their respective shooting sites in Pennsylvania, Germany, France and Swedenprovide the production capacity to address concurrent projects for DMC Clad’scurrent domestic and international customer base.

 

The primaryproduct of the Explosive Metalworking segment is explosion-welded clad metalplate. Clad metal plates are used in the construction of heavy, corrosionresistant pressure vessels and heat exchangers for oil and gas, alternativeenergy, chemical and petrochemical, hydrometallurgy, aluminum production,shipbuilding, power generation, industrial refrigeration, and similarindustries.  The characteristics of DMCClad’s explosive metalworking processes may enable the development of newproducts in a variety of industries and DMC Clad continues to explore suchdevelopment opportunities.

 

The principalproduct of metal cladding, regardless of the process used, is a metal platecomposed of two or more dissimilar metals, usually a corrosion resistant metaland steel, bonded together. Prior to the explosion-welded clad process, thematerials are inspected, the mating surfaces are ground, and the metal platesare assembled for cladding. The process involves placing a sheet of the cladderover a parallel plate of backer material and then covering the cladder materialwith a layer of specifically formulated explosive. A small gap or “standoffspace” is maintained between the alloy cladder and the backer substrate. Theexplosion is then initiated on one side of the cladder and travels across thesurface of the cladder forcing it down onto the backer. The explosion happensin approximately one-thousandth of a second. The collision conditions cause a thin layer of the mating surfaces to bespalled away in a jet.  This actionremoves oxides and surface contaminants immediately ahead of the collisionpoint.  The extreme pressures force thetwo metal components together, creating a metallurgical bond between them.  The explosion-welded clad process produces a strong,ductile, continuous metallurgical weld over the clad surface.  After the explosion iscompleted, the resulting clad plates are flattened and cut, and then undergotesting and inspection to assure conformance with internationally acceptedproduct specifications.

 

4

----

Table ofContents

 

**EXPLOSION-WELDINGPROCESS**

 

 

Explosion-weldedcladding technology is a method to weld metals that cannot be welded byconventional processes, such as titanium-steel, aluminum-steel, andaluminum-copper. It can also be used to weld compatible metals, such asstainless steels and nickel alloys to steel. The cladding metals are typically titanium, stainless steel, aluminum,copper alloys, nickel alloys, tantalum, and zirconium. The base metals aretypically carbon steel, alloy steel, stainless steel and aluminum.  Although the patents for the explosion-weldedcladding process have expired, DMC Clad has proprietary knowledge thatdistinguishes it from its competitors. The entire explosion-welding process involves significant precision inall stages, and any errors can be extremely costly as they result in thediscarding of the expensive raw material metals.  DMC Clad’s technological expertise is asignificant advantage in preventing costly waste.

 

Explosion-weldedclad metal is used in critical applications in a variety of industries,including oil and gas, alternative energy, chemical and petrochemical,hydrometallurgy, aluminum production, shipbuilding, power generation,industrial refrigeration and other industries where corrosion, temperature andpressure combine to produce demanding environments.  Explosion-welded clad metal is also used toproduce bimetal transition joints or other components which are used in shipconstruction, and in a variety of electrochemical industries including aluminumproduction.

 

DMC Clad’smetal products are primarily produced on a project-by-project basis conformingto requirements set forth in customers’ purchase orders. Upon receipt of anorder, DMC Clad obtains the component materials from a variety of sources basedon quality, availability and cost and then produces the order in one of itsfour manufacturing plants.  Finalproducts are processed to meet contract specific requirements for productconfiguration and quality/inspection level.

 

5

----

Tableof Contents

 

**DYNAenergetics**

 

DYNAenergetics manufactures, markets, and sells perforating explosivesand associated hardware and seismic explosives, for the international oil andgas industry.  While DYNAenergetics hasbeen producing detonating cords and detonators and selling these and seismicexplosives systems for decades, since 1994 significant emphasis has been placedon enhancing its oilfield product offerings by improving existing products andadding new products.  In recent years,various types of detonating cords and detonators have been added as well asbi-directional boosters, a wide range of shaped charges, and corresponding gunsystems. Within the last year, DYNAenergetics began manufacturing detonatorsfor seismic exploration systems. Additionally, DYNAenergetics now designs and manufactures custom-orderedperforating products for third-party customers according to their designs andspecifications.

 

The kinds of perforating products manufactured by DYNAenergetics areessential to certain types of modern oil and gas recovery.  The products are sold to large, mid-sized,and small oilfield service companies in the U.S., Europe, Africa, the MiddleEast, and Asia, including direct sales to end users.  The market for perforating products isgrowing.  Rising worldwide demand for oilincreases the demand for perforating products as oil exploration and recoveryexpands, leading to increased investment in the oil and gas productionindustry. Higher levels of exploration (seismic prospecting) and increasedproduction activities in the global oil and gas industry are expected tocontinue.  Increased exploration has ledto increasingly complex completion operations, which raise the demand for highquality perforating products.

 

**AMK Welding**

 

AMK Weldingemploys a variety of sophisticated processes and equipment to providespecialized welding services principally to a power turbine manufacturer and tocommercial and military aircraft engine manufacturers.  AMK Welding is located in South Windsor,Connecticut.

 

Weldingservices are provided on a project-by-project basis based on specifications setforth in customers’ purchase orders. Upon receipt of an order for weldedassemblies, AMK Welding performs welding services using customer specificwelding procedures.

 

Weldingprocesses utilized by AMK Welding include electron beam and gas tungsten arcwelding processes.  AMK Welding also hasconsiderable expertise in vacuum chamber welding, which is a criticalcapability when welding titanium, high temperature nickel alloys and otherspecialty alloys.  These weldingtechniques are used for the welding of blades and vanes and other turbine partstypically located in the hot gas path of aircraft engines.  In addition to its welding capabilities, AMKWelding also uses various heat treatment and non-destructive examinationprocesses, such as radiographic inspection, in support of its weldingoperations.

 

**Suppliers, Competition, CustomerProfile, Marketing and Research and Development**

 

**DMC Clad**

 

*Suppliersand Raw Materials*

 

DMC Clad usesa range of alloys, steels and other materials for its operations, such asstainless steel, copper alloys, nickel alloys, titanium, zirconium, tantalum,aluminum and other metals.  DMC Cladsources its raw materials from a number of different producers and suppliers.DMC Clad holds a limited metal inventory and purchases its raw materials basedon contract specifications. Under most contracts, any raw material priceincreases are passed on to DMC Clad’s customers.  DMC Clad closely monitors the quality of itssupplies and inspects the type, dimensions, markings, and certification of allincoming metals to ensure that the materials will satisfy applicableconstruction codes. DMC Clad also manufactures a majority of its own explosivesfrom standard raw materials, thus achieving higher quality and lower cost.

 

*Competition*

 

*Metal Cladding. *DMC Clad facescompetition from alternative technologies such as rollbond and weld overlay.Usually the three processes do not compete directly against each other, eachhaving its own preferential domain of application relating to metal used andthicknesses required.  However, due tospecific project considerations such as technical specifications, price anddelivery time, explosion-welding may have the opportunity to competesuccessfully 

 

6

----

Table of Contents

 

against these technologies. Rollbond is only produced by a few steel mills in the world.  The weld overlay process, which is producedamong the many vessel fabricators who are often also DMC Clad customers, is aslow and labor intensive process that requires a large amount of floor spacefor the equipment.

 

*Explosion-Welded Metal Cladding.* Competition in the explosion-welded clad metalbusiness is fragmented.  DMC Clad holds astrong market position in the clad metal industry. DMC Clad is the leadingproducer of explosion-welded clad products in North America, and it has astrong position in Europe against smaller competitors. The main competitor inAsia is a division of Asahi Kasei, which has competitive technology and arecognized local brand name.  There areseveral explosion-welded clad producers in China, most of whom are technicallylimited and are currently not exporters outside of their domestic market. Anumber of additional small competitors operate throughout the world.  To remain competitive, DMC Clad intends tocontinue developing and providing technologically advanced manufacturingservices, maintain quality levels, offer flexible delivery schedules, deliverfinished products on a reliable basis and compete favorably on the basis ofprice.

 

*Customer Profile*

 

DMC Clad’sproducts are used in critical applications in a variety of industries,including upstream oil and gas, oil refinery, chemical and petrochemical,hydrometallurgy, aluminum production, shipbuilding, power generation,industrial refrigeration and other similar industries.  DMC Clad’s customers in these industriesrequire metal products that can withstand exposure to corrosive materials, hightemperatures and high pressures.  DMCClad’s customers can be divided into three tiers: the product end users (e.g.,operators of chemical processing plants), the engineering contractors whodesign and construct plants for end users, and the metal fabricators whomanufacture the products or equipment that utilize DMC Clad’s metalproducts.  It is typically the fabricatorthat places the purchase order with DMC Clad and pays the correspondinginvoice.  DMC Clad has developed strongrelationships over the years with the engineering contractors (relatively largecompanies) who sometimes act as prescriptor to fabricators.

 

*Marketing, Sales, Distribution*

 

DMC Cladconducts its selling efforts by marketing its services to potential customersthrough senior management, direct sales personnel, program managers, andindependent sales representatives. Prospective customers in specific industriesare identified through networking in the industry, cooperative relationshipswith suppliers, public relations, customer references, inquiries from technicalarticles and seminars and trade shows. DMC Clad markets its clad metal productsto three tiers of customers: end-user owner companies, engineering contractors,and metal fabricators.  DMC Clad’s salesoffice in the United States covers the Americas and East Asia.  Its sales offices in Europe cover the fullEuropean continent, Africa, the Middle East, India, and Southeast Asia.  These sales teams are further supported bylocal sales offices in Italy, the Middle East, and India, with contract agentsin most other developed countries, including China, Korea, Russia and Brazil.  Contract agents typically work undermulti-year agreements which are subject to sales performance as well ascompliance with DMC Clad quality and customer service expectations.  Members of the global sales team may becalled to work on projects located outside their usual territory.  By maintaining relationships with itsexisting customers, developing new relationship with prospective customers, andeducating all its customers as to the technical benefits of DMC Clad’sproducts, DMC Clad endeavors to have its products specified as early as possiblein the design process.

 

DMC Clad’ssales are generally shipped from the manufacturing locations in the UnitedStates, Germany, France, and Sweden. Generally, any shipping costs or duties for which DMC Clad isresponsible will be included in the price paid by the customer.  Regardless of where the sale is booked (inEurope or the U.S.), DMC Clad will produce it, capacity permitting, at thelocation closest to the delivery place. In the event that there is a short termcapacity issue, DMC Clad produces the order at any of its production sites,prioritizing timing.  The variousproduction sites allow DMC Clad to meet customer production needs in a timelymanner.

 

*Research and Development*

 

We prepare aformal research and development plan annually. It is implemented at the French,German, and U.S. cladding sites and is supervised by a Technical Committee,chaired by our Chief Executive Officer, that reviews progress quarterly andmeets once a year to establish the plan for the following 12 months.  The research and development projects concernprocess support, new products, and special customer-paid projects.

 

7

----

Table ofContents

 

**Oilfield Products**

 

*Suppliersand Raw Materials*

 

DYNAenergetics utilizes a variety of raw materials for the productionof oilfield perforating and seismic products, including high quality steeltubes, steel and copper, explosives (RDX, HMX, HNS), granulates, plastics andancillary plastic product components. DYNAenergetics’ product line consists of complex products which requirenumerous high quality components. DYNAenergetics obtains its raw materialsprimarily from a number of different producers in Germany and other Europeancountries, but also purchases materials from North American, Chinese, and otherinternational suppliers.

 

*Competition*

 

DYNAenergeticsfaces competition from independent producers of perforating products who arenot committed to the large service companies and from large oil and gas servicecompanies, such as Halliburton and Schlumberger, who produce most of their ownneeds for shaped charges but buy other components from suppliers.  DYNAenergetics competes for sales primarilyon price and customer service as well as the quality and performance of itsproducts.

 

*Customer Profile*

 

Onshore andoffshore oilfield service companies use our DYNAenergetics products. Ourcustomers desire perforating products that satisfy both their specific needs andexpectations and difficult geological realities, such as high pressures andtemperatures in the bore hole, which exist in areas where perforating productsand services are used. We believe that our customers must balance costs andrisks for every job and that our typical DYNAenergetics customer possesses aconservative risk tolerance. Consequently, we believe that our customers will be more likely to trustproducts with proven reliability in the field and will be cautious regardingnew product innovation.

 

The customers foroilfield products can be divided into four broad categories: buying centers oflarge service companies, service companies worldwide, oil companies with andwithout their own service companies, and local resellers.  DYNAenergetics’ customer base includesclients from each of these categories.

 

*Marketing, Sales, Distribution*

 

DYNAenergetics’worldwide marketing and sales efforts for its oilfield and seismic products arebased in Laatzen, Germany. DYNAenergetics’ sales concept focuses on direct selling, distributionthrough licensed distributors and independent sales representatives, theestablishment of international distribution centers to better manage highinternational transport costs, and educating current and potential customers aboutits products and technologies. Currently, DYNAenergetics sells its oilfield and seismic productsthrough a U.S. distributor, Austin Explosives, and through trading jointventures that are located in Russia (DYNAenergetics RUS), Kazakhstan(KazDYNAenergetics) and Canada (Canada Ltd.), ventures in which DYNAenergeticsholds a majority interest.

 

*Research and Development*

 

DYNAenergeticsattaches great importance to its research and development capabilities and hasdevoted substantial resources to its R&D programs.  The R&D staff works closely with salesand operations management teams to establish priorities and effectively manageindividual projects.  DYNAenergetics wonthe important Spotlight on New Technology Award at the 2007 Offshore TechnologyConference in Houston, Texas, for its newly developed No-Debris-Gun technology.  Through this success, DYNAenergetics hasincreased its profile in the oil and gas industry.  An R&D Project Plan, which focuses on newproducts, process support and customer paid projects, is prepared and reviewedat least annually in cooperation with the Sales, Operations and Qualitydepartments.

 

**AMKWelding**

 

At AMKWelding, the materials welded are a function of the type of parts supplied bythe customers and include many steel varieties, various nickel alloys andcustomer-created proprietary alloys typically used in the aerospace and

 

8

----

Table ofContents

 

ground turbine industries.  Otherthan metal wire used in the welding process, AMK Welding does not purchasemetals, and it receives the parts to be welded from the customer.

 

AMK Weldingrelies on a few key customers for the majority of its business, including GEEnergy, General Electric Aircraft Engines and their first tier subcontractors,such as Barnes Aerospace, and divisions of United Technology, such as HamiltonStandard, Sikorsky Aircraft and Pratt and Whitney.  AMK Welding generally competes against asmall number of welding companies that are typically privately owned.  AMK Welding competes successfully based on areputation for uncompromising quality and rapid responsiveness to customerneeds.

 

**CorporateHistory and Recent Developments**

 

The genesis of the Company was an unincorporated business called “ExplosiveFabricators,” which was formed in Colorado in 1965.  The business was incorporated in Colorado in1971 under the name “E. F. Industries, Inc.,” which was later changed to “ExplosiveFabricators, Inc.” or “EFI”.  TheCompany became a public company in 1977. In 1994, the Company changed its name to “Dynamic Materials Corporation.”  The Company reincorporated in Delaware in1997 and its stock is currently listed on NASDAQ under the ticker symbol BOOM.

 

In 1976, the Company became a licensee of Detaclad®, the explosion-weld clad processdeveloped by DuPont in 1959.  In 1996,the Company purchased the Detaclad® operating business from Dupont.

 

Through a series of transactions culminating in June 2000, SNPE, Inc.(“SNPE”), a US corporation indirectly wholly owned by the French Government,acquired approximately 56% of the Company’s outstanding common stock throughopen market purchases as well as direct investment in the Company. SNPE alsoloaned the Company approximately $1.2 million using a convertible subordinatednote.  On May 15, 2006, SNPE soldall of the shares it had previously purchased, as well as those receivedthrough the conversion of the note, in an underwritten public offering.

 

During its history, the Company has acquired a number ofbusinesses.  In 1998, the Companyacquired AMK Welding, currently an operating division of the Company.  Also in 1998, the Company acquired PMP andSpin Forge,   businesses which weresubsequently sold in 2003 and 2004, respectively.

 

In 2001, the Company acquired substantially all of the stock ofNobelclad Europe SA (a French company) (“Nobelclad”); Nobelclad had previouslyacquired the stock of Nitro Metall AB (a Swedish company) (“Nitro Metall”).  The stock of Nobelclad was acquired from anaffiliate of our parent company at the time, SNPE.  Early in its history, Nobelclad was alicensee of the Detaclad® technology.  The acquisition ofNobelclad expanded the Company’s explosive metalworking operations to Europe.

 

In November 2007, the Company acquired the German companyDYNAenergetics GmbH and Co. KG (“DYNAenergetics”) and certain affiliates.  DYNAenergetics was comprised of two primarybusinesses: explosive metalworking and oilfield products.  This acquisition expanded the Company’sexplosive metalworking operations in Europe and added a complimentary businesssegment, oilfield products.  During 2008and with an effective date of January 1, 2008, the explosive metalworkingassets and business operations of DYNAenergetics were transferred into DynaplatGmbH & Co KG (“Dynaplat”), a newly formed 100% owned operatingsubsidiary of the Company. DYNAenergetics retained the assets, operations and joint ventureinvestments of the oilfield products business.

 

On October 1, 2009, the Company acquired all of the stock ofAlberta, Canada based LRI Oil Tools Inc. (“LRI”) which is now operating underthe name of DYNAenergetics Canada. DYNAenergetics Canada produces and distributes perforating equipment foruse 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.

 

On March 3, 2010, we signed a definitive agreement to acquire theassets of Texas-based Austin Explosives Company, which has been a long-timedistributor of DYNAenergetics shaped charges. The purchase price for Austin’s assets is $7.0 million, $3.5 million ofwhich is payable in cash and the balance of which is payable in shares of ourstock, cash or a combination of both, at our selection.  The acquisition is expected to close duringthe second quarter of 2010.

 

Our current explosive metalworking segment is comprised of the Company’sUS Clad operations as well as the assets and operations purchased in theNobelclad and Dynaplat acquisitions.  Theoilfield products segment is comprised entirely of DYNAenergetics and itssubsidiaries and joint ventures.  Ourthird segment is AMK Welding.  Propertylocations for these operations are listed in detail in Item 2.

 

9

----

Table of Contents

 

**Employees**

 

As of December 31,2009, we employed 377 permanent employees, the majority of whom are engaged inmanufacturing operations, with the remainder being engaged in sales andmarketing or corporate functions.

 

The majorityof our manufacturing employees are not unionized.** **Of the 377 permanentemployees, 167 are U.S. based, 115 are based in Germany at the Dynaplat andDYNAenergetics facilities, 59 are based in France at the Nobelclad facility, 28are based in Canada at the DYNAenergetics Canada facilities and 8 are based inSweden at Nitro Metall.  Approximately60% of our German-based employees are members of trade unions.  About 45% of Nobelclad’s employees and allNitro Metall employees are members of trade unions.  In addition, we also use a number oftemporary workers at any given time, depending on the workload.

 

In the lastthree years, the Company has not experienced any strikes or workstoppages.  We believe that employeerelations are good.

 

**Insurance**

 

Our operationsexpose us to potential liabilities for personal injury or death as a result ofthe failure of a component that has been designed, manufactured, or serviced byus, or the irregularity or failure of products we have processed or distributed.  We believe that we maintain liabilityinsurance adequate to protect us from future product liability claims.

 

**ProprietaryKnowledge, Permits and Patents**

 

*Protection of Proprietary Information*.  We hold patents related to the business ofexplosive metalworking and metallic processes and also own certain registeredtrademarks, including Detaclad®, Detacouple®, Dynalock®, EFTEK®, ETJ 2000® andNOBELCLAD®. Although the patents for the explosion-welded cladding process haveexpired, our current product application patents expire on various datesthrough 2020.  Since individual patentsrelate to specific product applications and not to core technology, we do notbelieve that such patents are material to our business, and the expiration ofany single patent is not expected to have a material adverse effect on ouroperations.  Much of the manufacturingexpertise lies in the knowledge of the factors that affect the quality of thefinished clad product, including the types of metals to be explosion-welded,the setting of the explosion, the composition of the explosive, and thepreparation of the plates to be bonded. We have developed this specialized knowledge over our 40 years ofexperience in the explosive metalworking business.  We are very careful in protecting ourproprietary know-how and manufacturing expertise, and we have implementedmeasures and procedures to ensure that the information remains confidential. Wehold various patents and licenses through our DYNAenergetics perforatingbusiness, but some of the patents are not yet registered. As with the explosivemetalworking business segment, since individual patents relate to specificproduct applications and not to core technology, we do not believe that suchpatents are material to our business, and the expiration of any single patentis not expected to have a material adverse effect on our currentoperations.  The Dynaplat division of DMCClad is protected through business secrets not through patents.

 

*Permits*.  Explosive metalworking and the production ofperforation products involve the use of explosives, making safety a criticalfactor in our operations.  In addition,explosive metalworking and the production of oilfield products are highlyregulated industries for which detailed permits are required.  These permits require renewal every three orfour years, depending on the permit.  SeeItem 1A — Risk Factors — *Risk Factors Related tothe Dynamic Materials Corporation — We are subject to extensive governmentregulation and failure to comply could subject us to future liabilities andcould adversely affect our ability to conduct or to expand our business*fora more detailed discussion of these permits.

 

10

----

Table of Contents

 

**Foreign and Domestic Operations and ExportSales**

 

All ofour sales are shipped from the manufacturing facilities located in the UnitedStates, Germany, France and Sweden. The following chart represents our net salesbased on the geographic location of the customer.  The sales recorded for each country are basedon the country to which we shipped the product, regardless of the country ofthe actual end user.  ExplosionMetalworking products are usually shipped to the fabricator before being passedon to the end user.

 
| ** **               | ** ** | (Dollars in Thousands)                     | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | **For  the years ended December 31,** | ** ** |
| ** **               | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| United  States           |       | $                                          | 62,955     |   | $ | 82,036 |   | $ | 64,734 |   |
| India                    |       | 14,395                                     |       | 7,237 |   | 2,355 |   |
| Canada                   |       | 12,991                                     |       | 11,685 |   | 12,588 |   |
| Germany                  |       | 11,702                                     |       | 24,449 |   | 8,626 |   |
| China                    |       | 7,122                                      |       | 8,203 |   | 10,790 |   |
| Italy                    |       | 6,570                                      |       | 9,517 |   | 5,461 |   |
| France                   |       | 5,788                                      |       | 10,447 |   | 5,280 |   |
| South  Korea             |       | 5,424                                      |       | 12,938 |   | 16,904 |   |
| Russia                   |       | 4,649                                      |       | 3,604 |   | 607 |   |
| Switzerland              |       | 3,252                                      |       | 1,922 |   | 665 |   |
| Australia                |       | 3,229                                      |       | 11,307 |   | 1,039 |   |
| Spain                    |       | 3,001                                      |       | 7,208 |   | 3,492 |   |
| Kazakhstan               |       | 2,889                                      |       | 2,418 |   | 151 |   |
| Netherlands              |       | 2,736                                      |       | 4,093 |   | 3,033 |   |
| United  Arab Emirates    |       | 2,227                                      |       | 600 |   | 377 |   |
| Malaysia                 |       | 1,872                                      |       | 1,914 |   | 2,154 |   |
| Sweden                   |       | 1,345                                      |       | 1,388 |   | 1,378 |   |
| United  Kingdom          |       | 1,275                                      |       | 3,184 |   | 1,278 |   |
| Mexico                   |       | 1,073                                      |       | 2,396 |   | 1,082 |   |
| Other  foreign countries |       | 10,403                                     |       | 26,031 |   | 23,181 |   |
|                     |       |                                       |       |   |   |   |   |
| Total                    |       | $                                          | 164,898    |   | $ | 232,577 |   | $ | 165,175 |   |

 

**Company Information**

 

We are subject to the informational requirements of the SecuritiesExchange Act of 1934.  We therefore fileperiodic reports, proxy statements and other information with the SecuritiesExchange Commission (the “SEC”).  Suchreports may be obtained by visiting the Public Reference Room of the SECat 100 F Street, N.E., Washington, D.C. 20549, or by calling the SEC at1-800-SEC-0330.  In addition, the SECmaintains an internet site at www.sec.gov that contains reports, proxy andinformation statements and other information regarding issuers that fileelectronically.

 

Our Internet address is www.dynamicmaterials.com. Information containedon our website does not constitute part of this Annual Report on Form 10-K.  Our annual report on SEC Form 10-K,quarterly reports on Forms 10-Q, current reports on Forms 8-K, and amendmentsto those reports filed or furnished pursuant to Section 13(a) or 15(d) ofthe Exchange Act are available free of charge on our website as soon asreasonably practicable after we electronically file such material with orfurnish it to the SEC.  We also regularlypost information about our Company on our website under the Investors tab.

 

11

----

Table ofContents

 

**ITEM1A.               Risk Factors**

 

***RiskFactors Related to the Explosive Metalworking Industry***

** **

**We have seen arecent slow down in some of our markets and experienced a significant declinein 2009 sales and backlog.**

** **

During thefourth quarter of 2008, we began to see a slowdown in DMC Clad sales to some ofthe markets we serve which continued into 2009 and contributed to a 31.2%decline in our 2009 sales.  Our orderbacklog has decreased to $49.6 million at December 31, 2009 from $97.2million at December 31, 2008.  Theexplosion-weld cladding market is dependent upon sales of products for use bycustomers in a limited number of heavy industries, including oil and gas,alternative energy, chemicals and petrochemicals, hydrometallurgy, aluminumproduction, shipbuilding, power generation, and industrial refrigeration.  These industries tend to be cyclical innature and the current worldwide economic downturn has affected many of thesemarkets.  We have already seen a slowdownin the chemical, petrochemical and hydrometallurgy sectors.  A further economic slowdown in one or all ofthese industries—whether due to traditional cyclicality, general economicconditions or other factors—could impact capital expenditures within thatindustry.  If demand from such industrieswere to decline further or to experience reduced growth rates, our sales wouldbe expected to be affected proportionately, which may have a material adverseeffect on our business, financial condition, and results of operations.

 

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

** **

Wedefine “backlog” at any given point in time to consist of all firm, unfulfilledpurchase orders and commitments at that time. Generally speaking, we expect to fill most items of backlog within thefollowing 12 months.  However, sinceorders may be rescheduled or canceled and a significant portion of our netsales is derived from a small number of customers, backlog is not necessarilyindicative of future sales levels. Moreover, we cannot be sure of when during the future 12-month period wewill be able to recognize revenue corresponding to our backlog; nor can we becertain that revenues corresponding to our backlog will not fall into periodsbeyond the 12-month horizon.

 

**There is alimited availability of sites suitable for cladding operations.**

** **

Our claddingprocess involves the detonation of large amounts of explosives. As a result,the sites where we perform cladding must meet certain criteria, including lackof proximity to a densely populated area, the specific geologicalcharacteristics of the site, and the ability to comply with local noise andvibration abatement regulations in conducting the process. The efforts toidentify suitable sites and obtain permits for using the sites from localgovernment agencies can be time-consuming and may not be successful.  In addition, we could experience difficulty inobtaining or renewing permits because of resistance from residents in thevicinity of proposed sites.  The failureto obtain required governmental approvals or permits could limit our ability toexpand our cladding business in the future, and the failure to maintain suchpermits would have a material adverse effect on our business, financialcondition and results of operations.

 

**The use ofexplosives subjects us to additional regulation, and any accidents or injuriescould subject us to significant liabilities.**

** **

Our operationsinvolve the detonation of large amounts of explosives.  As a result, we are required to use specificsafety precautions under U.S. Occupational Safety and Health Administrationguidelines and guidelines of similar entities in Germany, France andSweden.  These include precautions whichmust be taken to protect employees from exposure to sound and ground vibrationor falling debris associated with the detonation of explosives.  There is a risk that an accident or deathcould occur in one of our facilities. Any accident could result in significant manufacturing delays,disruption of operations or claims for damages resulting from death orinjuries, which could result in decreased sales and increased expenses. Todate, we have not incurred any significant delays, disruptions or claimsresulting from accidents at our facilities. The potential liability resulting from any accident or death, to theextent not covered by insurance, may require us to use other funds to satisfyour obligations and could cause our business to suffer.  See “Our use of explosives is an inherentlydangerous activity that could lead to temporary or permanent closure of ourshooting sites” below.

 

12

----

**Tableof Contents**

** **

**Our use ofexplosives is an inherently dangerous activity that could lead to temporary orpermanent closure of our shooting sites.**

** **

We use a largeamount of explosives in connection with the creation of clad metals.  The use of explosives is an inherentlydangerous activity.  Explosions, even ifoccurring as intended, can lead to damage to the shooting facility or toequipment used at the facility or injury to persons at the facility. If aperson were injured or killed in connection with such explosives, or ifequipment at the mine or either of the outdoor locations were damaged ordestroyed, we might be required to suspend our operations for a period of timewhile an investigation is undertaken or repairs are made.  Such a delay might impact our ability to meetthe demand for our products.  Inaddition, if the mine were seriously damaged, we might not be able to locate asuitable replacement site to continue our operations.

 

**Certain rawmaterials we use are subject to supply shortages due to general economicconditions.**

** **

Although wegenerally use standard metals and other materials in manufacturing ourproducts, certain materials such as specific grades of carbon steel, titanium,zirconium and nickel can be subject to supply shortages due to general economicconditions or problems with individual suppliers.  While we seek to maintain sufficientalternative supply sources for these materials, we may not always be able toobtain sufficient supplies or obtain supplies at acceptable prices withoutproduction delays, additional costs, or a loss of product quality.  If we were to fail to obtain sufficientsupplies on a timely basis or at acceptable prices, such loss or failure couldhave a material adverse effect on our business, financial condition, andresults of operations.

 

**Certain rawmaterials we use are subject to price increases due to general economicconditions.**

** **

The marketsfor certain metals and other raw materials used in our business are highlyvariable and are characterized by periods of increasing prices.  While prices for much of the raw materials weuse have recently decreased, we may again experience increasing prices.  We generally do not hedge commodity prices orenter into forward supply contracts; instead we endeavor to pass along pricevariations to our customers.  We may seea general downturn in business if the price of raw materials increases enoughfor our customers to delay planned projects or use alternative materials tocomplete their projects.

 

***RiskFactors Related to DYNAenergetics***

 

**Potentialdownturns in the oil and gas industry and related services industry could havea negative impact on DYNAenergetics’s economic success.**

 

The oil and gas industry is unpredictable and has historically beensubject to occasional downturns.  Demandfor DYNAenergetics’ products is linked to the financial success of the oil andgas industry as a whole, and downturns in the oil and gas industry, especiallyin the rate of well drilling, could negatively impact DYNAenergetics’ economicsuccess.  Demand for oil and gas drivesoil and gas field production and exploration, and with it the demand forservices and products produced by DYNAenergetics as recently decreased. Salesof our DYNAenergetics products in 2009 were down by approximately 22% from our2008 sales. A variety of factors affect the demand for DYNAenergetics products,including governmental regulation of oil and gas industry and markets,international and domestic prices for oil and gas, weather conditions, thefinancial condition of DYNAenergetics’ clients, and consumption patterns of oiland gas.

 

**Themanufacturing of explosives subjects DYNAenergetics to various environmental,health and safety laws.**

 

DYNAenergetics is subject to a number of environmental, health, andsafety laws and regulations, the violation of which could result in significantpenalties.  DYNAenergetics’ continuedsuccess depends on continued compliance with applicable laws andregulations.  In addition, newenvironmental, health and safety laws and regulations could be passed whichcould create costly compliance issues. While DYNAenergetics endeavors to comply with all applicable laws andregulations, compliance with future laws and regulations may not be economicallyfeasible or even possible.

 

13

----

Table ofContents

 

**DYNAenergetics’ continued economic success depends onremaining at the forefront of innovation in the perforating industry.**

 

DYNAenergetics’ position in the perforation market depends in part onits ability to remain an innovative leader in the field.  The ability to remain competitive depends inpart on the retention of talented personnel. DYNAenergetics may be unable to remain an innovative leader in theperforation market segment or may be unable to retain top talent in the field.

 

***Risk Factors Relatedto Dynamic Materials Corporation***

 

**Continuedweakness in the general global economy may adversely affect certain segments ofour end market customers and reduce our sales and results of operations.**

** **

**We supply products to customers that fabricate industrialequipment for various capital-intensive industries.  Continuation of the current weakness in thegeneral global economy may adversely affect our end market customers, causingthem to cancel or postpone new plant or infrastructure construction, expansion,maintenance, or retrofitting projects that use our DMC Clad products.  Similarly, decreased oil and gas welldrilling will reduce the sales of our DYNAenergetics products.  Any decrease in the demand for gas turbinesand airplane engines will reduce the demand for the work performed by our AMKdivision.  The global general economicclimate may lessen demand for our products and reduce our sales and results ofoperations.**

** **

**Our operatingresults fluctuate from quarter to quarter.**

** **

We have experienced, andexpect to continue to experience, fluctuations in annual and quarterly operatingresults caused by various factors, including the timing and size of orders bymajor customers, customer inventory levels, shifts in product mix, acquisitionsand divestitures, and general economic conditions.  The upstream oil andgas, oil refinery, chemical and petrochemical, hydrometallurgy, aluminumproduction, shipbuilding, power generation, industrial refrigeration and otherdiversified industries to which we sell our products are, to varying degrees,cyclical and tend to decline in response to overall declines in industrialproduction.  As a result, our business isalso cyclical, and the demand for our products by these customers depends, inpart, on overall levels of industrial production. Any future material weaknessin demand in any of these industries could materially reduce our revenues andprofitability. In addition, the threat of terrorism and other geopoliticaluncertainty could have a negative impact on the global economy, the industrieswe serve and our operating results.

 

We typically do not obtainlong-term volume purchase contracts from our customers. Quarterly sales andoperating results, therefore, depend on the volume and timing of the orders inour backlog as well as bookings received during the quarter.  Significant portions of our operatingexpenses are fixed, and planned expenditures are based primarily on salesforecasts and product development programs. If sales do not meet ourexpectations in any given period, the adverse impact on operating results maybe magnified by our inability to adjust operating expenses sufficiently orquickly enough to compensate for such a shortfall. Results of operations in anyperiod should not be considered indicative of the results for any futureperiod. Fluctuations in operating results may also result in fluctuations inthe price of our common stock.  See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

 

**The terms of our indebtedness contain a number of restrictivecovenants, the breach of any of which could result in acceleration of paymentof our credit facilities.**

 

We are parties to a syndicated credit agreement that, as of December 31,2009, had an outstanding balance of approximately $44.8 million.  Our credit agreement includes variouscovenants and restrictions, certain of which relate to the incurrence ofadditional indebtedness; mortgaging, pledging or disposition of major assets;and limits on capital expenditures and other investments.  We are also required to maintain certainfinancial ratios on a quarterly basis**. **A breach of any of these covenantscould result in acceleration of our obligations to repay our debt.  On October 21, 2009, we and our lendersamended the credit agreement to revise the leverage ratios and fixed chargecoverage ratios that we are required to satisfy on a quarterly basis throughoutthe term of the credit facility, which expires on November 16, 2012.  These revised ratios eased the Company’sability to comply with certain covenants of the credit agreement.  As of 

 

14

----

Table ofContents

 

December 31,2009, we were in compliance with all financial covenants and other provisionsof the credit agreement and our other loan agreements.

 

As a result of the slowdown in our business during 2009 which hascontinued into the early part of 2010, our ability to comply with these amendedfinancial covenants as of March 31, 2010 and subsequent quarters in 2010could be challenged.  Furthermore, ourability to comply with these covenants and ratios may be affected by eventsbeyond our control, including prevailing economic, financial and industryconditions. Any failure to remain in compliance with any material provision orcovenant of our credit agreement could result in a default which would, absenta waiver or amendment, require immediate repayment of outstanding indebtednessunder our credit facilities. Obtaining a waiver or amendment may be costly orimpracticable. It would be difficult to liquidate assets sufficient toimmediately repay our outstanding indebtedness under our credit facility.

 

**Customers havethe right to change orders until products are completed.**

** **

Customers have the right tochange orders after they have been placed. If orders are changed, the extra expenses associated with the changewill be passed on to the customer. However, because a change in an order may delay completion of theproject, recognition of income for the project may also be delayed.

 

**There is noassurance that we will continue to compete successfully against other clad,perforating, and welding companies.**

** **

Our explosion-welded cladproducts compete with explosion-welded clad products made by othermanufacturers in the clad metal business located throughout the world and withclad products manufactured using other technologies. Our combined NorthAmerican and European operations typically supply explosion-welded clad to theworldwide market. There is one other well-known explosion-welded clad supplierworldwide, a division of Asahi-Kasei Corporation of Japan. There are also anumber of smaller companies worldwide with explosion-welded clad manufacturingcapability, including several companies in China.  There are currently no other significantNorth American based explosion-welded clad suppliers. We focus strongly onreliability, product quality, on-time delivery performance, and low costmanufacturing to minimize the potential of future competitive threats.  However, there is no guarantee we will beable to maintain our competitive position.

 

Explosion-welded cladproducts also compete with those manufactured by rollbond and weld overlaycladding processes. In rollbond technology, the clad and base metal are bondedtogether during a hot rolling process in which slab is converted to plate. Inweld overlay, which is typically performed by our fabricator customers, thecladding layer is deposited on the base metal through a fusion welding process.The technical and commercial niches of each cladding process are wellunderstood within the industry and vary from one world market location toanother.  Our products compete with weldoverlay clad products manufactured by a significant number of our fabricatorcustomers.

 

DYNAenergetics competes principallywith perforating companies based in North and South America who produce andmarket perforating services and products. DYNAenergetics also competes with oil and gas service companies who areable to satisfy a portion of their perforating needs through in-houseproduction.  To remain competitive,DYNAenergetics must continue to provide innovative products and maintain anexcellent reputation for quality, safety, and value.  There can be no assurances that we willcontinue to compete successfully against these companies.

 

AMK Welding competesprincipally with other domestic companies that provide welding services to theaircraft engine and power generation industries.  Some of these competitors have establishedpositions in the market and long standing relationships with customers. Toremain competitive, we must continue to develop and provide technologicallyadvanced welding, heat-treat and inspection services, maintain quality levels,offer flexible delivery schedules, and compete favorably on the basis of price.We compete against other welding companies on the basis of quality, performanceand cost. There can be no assurance that we will continue to competesuccessfully against these companies.

 

15

----

Table of Contents

 

**We aredependent on a relatively small number of customers for a significant portionof our net sales.**

** **

A significant portion of ournet sales is derived from a relatively small number of customers although salesto no one customer exceeded 10% during any of the last three years. We expectto continue to depend upon our principal customers for a significant portion ofour sales, although our principal customers may not continue to purchaseproducts and services from us at current levels, if at all. The loss of one ormore major customers or a change in their buying patterns could have a materialadverse effect on our business, financial condition, and results of operations.In past years, the majority of DMC Clad’s revenues have been derived fromcustomers in the oil and gas, alternative energy, chemicals and petrochemicals,hydrometallurgy, aluminum production, shipbuilding, power generation andindustrial refrigeration industries and the majority of AMK Welding’s revenueshave been derived from customers in the aircraft engine and power generationindustries. Economic downturns in these industries could have a materialadverse effect on our business, financial condition, and results of operations.

 

DYNAenergetics, whichcontributed approximately 13% to our 2009 sales, has customers throughout theworld.  The Russian market is currentlyDYNAenergetics’ largest market with more than 30% of its sales coming from thatmarket.  Economic or politicalinstability in Russia could have a material adverse affect on DYNAenergetics’business and operating results.

 

AMK Welding, contributedapproximately 6% to our 2009 sales, continues to rely primarily on one customerfor the majority of its sales. This customer and AMK Welding have entered intoa long-term supply agreement for certain of the services provided to thiscustomer.  Any termination of orsignificant reduction in AMK Welding’s business relationship with this customercould have a material adverse effect on AMK Welding’s business and operatingresults.

 

**Failure toattract and retain key personnel could adversely affect our current operations.**

** **

Our continued successdepends to a large extent upon the efforts and abilities of key managerial andtechnical employees. The loss of services of certain of these key personnelcould have a material adverse effect on our business, results of operations,and financial condition. There can be no assurance that we will be able to attractand retain such individuals on acceptable terms, if at all; and the failure todo so could have a material adverse effect on our business, financialcondition, and results of operations.

 

**Liabilitiesunder environmental and safety laws could result in restrictions orprohibitions on our facilities, substantial civil or criminal liabilities, aswell as the assessment of strict liability and/or joint and several liability.**

** **

We are subjectto extensive environmental and safety regulation in the United States andEurope. Any failure to comply with current and future environmental and safetyregulations could subject us to significant liabilities. In particular, anyfailure to control the discharge of hazardous materials and wastes couldsubject us to significant liabilities, which could adversely affect ourbusiness, results of operations or financial condition.

 

We and all ouractivities in the United States are subject to federal, state and localenvironmental and safety laws and regulations, including but not limited to,noise abatement and air emissions regulations, the Comprehensive EnvironmentalResponse, Compensation and Liability Act of 1980, regulations issued and lawsenforced by the labor and employment departments of the U.S. and the states inwhich we conduct business, by the U.S. Department of Commerce, the U.S.Environmental Protection Agency, and by state and local health and safetyagencies.  In Germany, we and all ouractivities are subject to various safety and environmental regulations of the federalstate which are enforced by the local authorities, including the Federal Act onEmission Control (Bundesimmissionsschutzgesetz).  The Federal Act on Emission Control permitsare held by companies jointly owned by DYNAenergetics and the other companiesthat are located at the Würgendorf and Troisdorf manufacturing sites and arefor an indefinite period of time.  InFrance, we and all our activities are subject to state environmental and safetyregulations established by various departments of the French Government,including the Ministry of Labor, the Ministry of Ecology and the Ministry ofIndustry, and to local environmental and safety regulations and administrativeprocedures established by DRIRE (Direction Régionale de l’Industrie, de laRecherche et de l’Environnement) and the Préfecture des PyrénéesOrientales.  In Sweden, we and all ouractivities are subject to various safety and environmental regulations,including those established by the Work Environment Authority of Sweden in itsWork Environment Act.  In addition, ourshooting operations in Germany, 

 

16

----

Table of Contents

 

France and Sweden may be particularly vulnerable to noise abatementregulations because these operations are primarily conducted outdoors. TheDillenburg facility is operated based on a mountain plan (“Bergplan”), which isa specific permit granted by the local mountain authority. This permit must berenewed every three years.

 

Changes in orcompliance with environmental and safety laws and regulations could inhibit orinterrupt our operations, or require modifications to our facilities. Anyactual or alleged violations of environmental and safety laws could result inrestrictions or prohibitions on our facilities, substantial civil or criminalsanctions, as well as the assessment of strict liability and/or joint andseveral liability under applicable law. Under certain environmental laws, we could be held responsible for allof the costs relating to any contamination at our or our predecessor’s past orpresent facilities and at third party waste disposal sites.  We could also be held liable for any and allconsequences arising out of human exposure to hazardous substances or otherenvironmental damage.  Accordingly,environmental, health or safety matters may result in significant unanticipatedcosts or liabilities.

 

**We are subjectto extensive government regulation and failure to comply could subject us tofuture liabilities and could adversely affect our ability to conduct or toexpand our business.**

** **

We are subjectto extensive government regulation in the United States, Germany, France andSweden, including guidelines and regulations for the safe manufacture,handling, transport and storage of explosives issued by the U.S. Bureau ofAlcohol, Tobacco and Firearms; the Federal Motor Carrier Safety Regulations setforth by the U.S. Department of Transportation; the Safety Library Publicationsof the Institute of Makers of Explosive; and similar guidelines of theirEuropean counterparts.  In Germany, thetransport, storage and use of explosives is governed by a permit issued underthe Explosives Act (Sprengstoffgesetz). In Sweden, our purchase, transport, storage and use of explosives isgoverned by a permit issued to us by the Police Authority of the County ofVarmland.  In France, the manufacture andtransportation of explosives is subcontracted to a third party which isresponsible for compliance with regulations established by various State andlocal governmental agencies concerning the handling and transportation ofexplosives.  Our French operations couldbe adversely affected if the third party does not comply with theseregulations.  We must comply withlicensing and regulations for the purchase, transport, storage, manufacture,handling and use of explosives. In addition, while our shooting facilities inWürgendorf and Troisdorf, Germany, France and Sweden are located outdoors, ourshooting facilities located in Pennsylvania and in Dillenburg, Germany arelocated in mines, which subjects us to certain regulations and oversight ofgovernmental agencies that oversee mines.

 

We are alsosubject to extensive environmental and occupational safety regulation, asdescribed below under “Liabilities under environmental and safety laws couldresult in restrictions or prohibitions on our facilities, substantial civil orcriminal liabilities, as well as the assessment of strict liability and/orjoint and several liability” and “The use of explosives subjects us toadditional regulation, and any accidents or injuries could subject us tosignificant liabilities.”

 

The export ofcertain products from the United States or from foreign subsidiaries of U.S.companies is restricted by U.S. and similar foreign export regulations.  These regulations generally prevent theexport of products that could be used by certain end users, such as those inthe nuclear or biochemical industries. In addition, the use and handling of explosives may be subject toincreased regulation due to heightened concerns about security and terrorism.Such regulations could restrict our ability to access and use explosives andincrease costs associated with the use of such explosives, which could have amaterial adverse effect on our business, financial condition, and results ofoperations.

 

Any failure to comply withcurrent and future regulations in the U.S. and Europe could subject us tofuture liabilities. In addition, such regulations could restrict our ability toexpand our facilities, construct new facilities, or compete in certain marketsor could require us to incur other significant expenses in order to maintaincompliance. Accordingly, our business, results of operations or financialcondition could be adversely affected by our non-compliance with applicableregulations, by any significant limitations on our business as a result of ourinability to comply with applicable regulations, or by any requirement that wespend substantial amounts of capital to comply with such regulations.

 

**Work stoppages andother labor relations matters may make it substantially more difficult orexpensive for us to produce our products, which could result in decreased salesor increased costs, either of which would negatively impact our financialcondition and results of operations.**

** **

We are subject to the riskof work stoppages and other labor relations matters, particularly inGermany, France, and Sweden, where some of our employees are unionized. Theemployees at our U.S. facilities, where the majority of 

 

17

----

Table of Contents

 

productsare manufactured, are not unionized. While we believe our relations withemployees are satisfactory, any prolonged work stoppage or strike at anyone of our principal facilities could have a negative impact on our business,financial condition or results of operations. We have not experienced a strikeor work stoppage in the last 3 years. However, if a work stoppage occurs at one or more of ourfacilities, it may materially impair our ability to operate our business in thefuture.

 

**As we regularly test the value of goodwill associated with our recentacquisitions, economic conditions may lead to an impairment of such goodwill.**

 

We review the carrying value of goodwill at least annually to assessimpairment because it is not amortized. Additionally, we review the carrying value of any intangible asset orgoodwill whenever events or changes in circumstances indicate that its carryingamount may not be recoverable.  Ourimpairment testing in the fourth quarter of 2009 did not result in adetermination that any of our goodwill was impaired.  However, future impairment is possible andcould occur if (i) the operating results underperform what we haveestimated or (ii) additional volatility of the capital markets shouldcause us to raise the percent discount rate utilized in our discounted cashflow 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.

 

**We are exposedto potentially volatile fluctuations of the U.S. dollar (our reportingcurrency) against the currencies of many of our operating subsidiaries.**

** **

Many of our operatingsubsidiaries conduct business in Euros or other foreign currency.  Any increase (decrease) in the value of theU.S. dollar against any foreign currency that is the functional currencyof any of our operating subsidiaries will cause us to experience unrealizedforeign currency translation losses (gains) with respect to amounts alreadyinvested in such foreign currencies. In addition, our company and our operatingsubsidiaries are exposed to foreign currency risk to the extent that we or theyenter into transactions denominated in currencies other than our or theirrespective functional currencies. For example DYNAenergetics’ functionalcurrency is Euros, but its sales often occur in U.S. dollars.  Changes in exchange rates with respect tothese items will result in unrealized (based upon period-end exchange rates) orrealized foreign currency transaction gains and losses upon settlement of thetransactions. In addition, we are exposed to foreign exchange rate fluctuationsrelated to our operating subsidiaries’ assets and liabilities and to thefinancial results of foreign subsidiaries and affiliates when their respectivefinancial statements are translated into U.S. dollars for inclusion in ourconsolidated financial statements. Cumulative translation adjustments arerecorded in accumulated other comprehensive income (loss) as a separatecomponent of equity. As a result of foreign currency risk, we may experienceeconomic loss and a negative impact on earnings and equity with respect to ourholdings solely as a result of foreign currency exchange rate fluctuations. Theprimary exposure to foreign currency risk for us is to the Euro due to thepercentage of our U.S. dollar revenue that is derived from countries wherethe Euro is the functional currency.

 

**Theunsuccessful integration of a business we acquire could have a material adverseeffect on operating results.**

** **

We continue to considerpossible acquisitions as part of our growth strategy. Any potential acquisitionmay require additional debt or equity financing, resulting in additionalleverage and dilution to existing stockholders. We may be unable to consummateany future acquisition.  If anyacquisition is made, we may not be able to integrate such acquisitionsuccessfully without a material adverse effect on our financial condition orresults of operations.

 

18

----

Tableof Contents

 

**ITEM 1B.               UnresolvedStaff Comments**

 

None.

 

**ITEM 2.                  Properties**

 

Our corporateheadquarters are located in Boulder, Colorado. The term of the lease for the office space is through November 30,2015, with renewal options through November 30, 2021.

 

We own ourprincipal domestic manufacturing site, which is located in Mount Braddock,Pennsylvania.  We currently lease ourprimary domestic shooting site, which is located in Dunbar, Pennsylvania, andhave entered into new license and risk allocation agreements relating to theuse of a secondary shooting site that is located within a few miles of ourMount Braddock, Pennsylvania manufacturing facility. The shooting site inDunbar and the nearby secondary shooting site support our Mount Braddockmanufacturing facility. The lease for the Dunbar property will expire on December 15,2010, but we have options to renew the lease which extend through December 15,2029.  The license and risk allocationagreements will expire on December 31, 2018, but we have options to renewthese agreements through December 31, 2028.  Our German subsidiary, DYNAenergetics, has amanufacturing site in Troisdorf, Germany, and leases space for a sales officein Laatzen, Germany.  Our Germansubsidiary, Dynaplat, has a manufacturing site in Würgendorf and a shootingsite in Dillenburg, Germany.  Portions ofthese sites are leased and portions are owned. The lease expiration dates for our Troisdorf, Würgendorf, and Dillenburgmanufacturing sites are February 28, 2011; December 31, 2010; and August 31,2011, respectively.  Our Frenchsubsidiary, Nobelclad, owns the land and the buildings housing its operationsin Rivesaltes, France, and Tautavel, France (except for a small portion inTautavel that is leased).  This leaseexpires on December 31, 2011, and may be extended.  Our Swedish subsidiary, Nitro Metall, ownsthe land and buildings housing its manufacturing operations in Likenas,Sweden.  The buildings and land at theNitro Metall shooting site in Likenas, Sweden, and the sales office inFilipstad, Sweden are leased. The lease in Filipstad is automatically renewedevery year.  The sites in Pennsylvania;Würgendorf, Germany; France; and Sweden are part of the Explosive Metalworkingsegment.  The DYNAenergeticsmanufacturing sites are leased.  Theseleases expire on February 28, 2011. In addition, we own the land and buildings housing the operations of AMKWelding in South Windsor, Connecticut. Our Canadian subsidiary, DYNAenergetics Canada leases office andwarehouse space in various cities throughout Alberta, Canada.  They also lease bunkers for storage of theirexplosives in various locations throughout Alberta, Canada.  These agreements are on a month to monthbasis.

 

Below is achart summarizing our properties, including their location, type, size, whetherowned or leased and lease terms, if applicable.

 
| **Location**                | ** ** | **Facility Type**                                                           | ** ** | **Facility Size** | ** ** | **Owned/Leased**                 | ** ** | **Expiration Date of Lease  (if applicable)**                                |
|-----------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------------------------------------------------------------|
| Boulder,  Colorado          |       | Corporate and  Sales Office                                                 |       | 14,630 sq. ft.    |       | Leased                           |       | November 30,  2015, with renewal options through November 30, 2021 |
|                        |       |                                                                        |       |              |       |                             |       |                                                                         |
| Mt. Braddock,  Pennsylvania |       | Clad Plate  Manufacturing                                                   |       | 48,000 sq. ft.    |       | Owned                            |       |                                                                         |
|                        |       |                                                                        |       |              |       |                             |       |                                                                         |
| Dunbar,  Pennsylvania       |       | Clad Plate  Shooting Site                                                   |       | 322 acres         |       | Leased                           |       | December 15,  2010, with renewal options through December 15, 2029 |
|                        |       |                                                                        |       |              |       |                             |       |                                                                         |
| Rivesaltes,  France         |       | Clad Plate  Manufacturing, Nobelclad Europe Sales and Administration Office |       | 53,000 sq. ft.    |       | Owned                            |       |                                                                         |
|                        |       |                                                                        |       |              |       |                             |       |                                                                         |
| Tautavel, France            |       | Clad Shooting  Site                                                         |       | 114 acres         |       | 107 acres owned,  7 acres leased |       | December 31,  2011                                                      |
|                        |       |                                                                        |       |              |       |                             |       |                                                                         |
| Likenas, Sweden             |       | Clad Plate  Manufacturing                                                   |       | 26,000 sq. ft.    |       | Owned                            |       |                                                                         |

 

19

----

Table of Contents

 
| **Location**                | ** ** | **Facility Type**                                 | ** ** | **Facility Size**                        | ** ** | **Owned/Leased** | ** ** | **Expiration Date of Lease  (if applicable)**                                 |
|-----------------------------|------------|---------------------------------------------------|------------|------------------------------------------|------------|------------------|------------|-------------------------------------------------------------------------------|
| Likenas, Sweden             |       | Clad Plate  Shooting Site                         |       | 15 acres                                 |       | Leased           |       | January 1,  2016                                                         |
|                        |       |                                              |       |                                     |       |             |       |                                                                          |
| Filipstad,  Sweden          |       | Nitro Metall  Sales Office                        |       | 850 sq. ft.                              |       | Leased           |       | January 1,  2010 (renews annually)                                       |
|                        |       |                                              |       |                                     |       |             |       |                                                                          |
| South Windsor,  Connecticut |       | AMK Welding                                       |       | 33,850 sq. ft.                           |       | Owned            |       |                                                                          |
|                        |       |                                              |       |                                     |       |             |       |                                                                          |
| Troisdorf,  Germany         |       | DYNAENERGETICS,  Manufacturing                    |       | 263,201 sq. ft.                          |       | Leased           |       | December 31,  2015                                                       |
|                        |       |                                              |       |                                     |       |             |       |                                                                          |
| Würgendorf,  Germany   |       | Dynaplat,  Manufacturing                          |       | Land: 25 acres  Building: 20,312 sq. ft. |       | Owned            |       |                                                                          |
|                        |       |                                              |       |                                     |       |             |       |                                                                          |
|                        |       |                                              |       | 2,756 sq. ft.                            |       | Leased           |       | August 31, 2011, with renewal options through  August 31, 2016      |
|                        |       |                                              |       |                                     |       |             |       |                                                                          |
| DillenburgGermany           |       | DynaplatShooting site                             |       | 7 acres                                  |       | Owned            |       |                                                                          |
|                        |       |                                              |       |                                     |       |             |       |                                                                          |
|                        |       |                                              |       | 9,849  sq. ft.                      |       | Leased           |       | August 31, 2011, with renewal options through  August 31, 2021      |
|                        |       |                                              |       |                                     |       |             |       |                                                                          |
| Würgendorf,Germany     |       | DynaplatSales                                     |       | 1,572 sq. ft.                            |       | Leased           |       | January 31, 2011, with renewal options through  January 31, 2014    |
|                        |       |                                              |       |                                     |       |             |       |                                                                          |
| Würgendorf,Germany     |       | DYNAenergetics Administration                     |       | 2,799 sq. ft.                            |       | Leased           |       | January 31, 2011, with renewal options through  January 31, 2014    |
|                        |       |                                              |       |                                     |       |             |       |                                                                          |
| Laatzen,Germany             |       | DYNAENERGETICSSales                               |       | 2,314  sq. ft.                      |       | Leased           |       | Open terms, but can be cancelled with a six month  notice                     |
|                        |       |                                              |       |                                     |       |             |       |                                                                          |
| Alberta, Canada             |       | DYNAenergetics Canada, Manufacturing              |       | 160 acres                                |       | Owned            |       |                                                                          |
|                        |       |                                              |       |                                     |       |             |       |                                                                          |
| Edmonton, Alberta           |       | DYNAenergetics Canada, Storage magazines          |       | 45.56 acres                              |       | Leased           |       | Month to month agreement                                                      |
|                        |       |                                              |       |                                     |       |             |       |                                                                          |
| Alberta, Canada             |       | Various storage magazines                         |       |                                     |       | Leased           |       | Month to month agreement                                                      |
|                        |       |                                              |       |                                     |       |             |       |                                                                          |
| Edmonton, Alberta           |       | DYNAenergetics Canada, Sales office and warehouse |       | 24,000 sq. ft.                           |       | Leased           |       | January 31, 2014                                                         |
|                        |       |                                              |       |                                     |       |             |       |                                                                          |
| Grande Prairie, Alberta     |       | DYNAenergetics Canada, Sales office and warehouse |       | 6,000 sq. ft.                            |       | Leased           |       | March 31, 2012, with renewal options through  March 31, 2017        |
|                        |       |                                              |       |                                     |       |             |       |                                                                          |
| Lloydminster, Alberta       |       | DYNAenergetics Canada, Sales office and warehouse |       | 5,460 sq. ft                             |       | Leased           |       | October 31, 2011                                                         |
|                        |       |                                              |       |                                     |       |             |       |                                                                          |
| Red Deer, Alberta           |       | DYNAenergetics Canada, Sales office and warehouse |       | 3,313 sq. ft.                            |       | Leased           |       | November 30, 2010, with options to renew  through November 30, 2013 |
|                        |       |                                              |       |                                     |       |             |       |                                                                          |
| Calgary, Alberta            |       | DYNAenergetics Canada, Sales office               |       | 200 sq. ft                               |       | Leased           |       | December 31, 2010                                                        |

 

20

----

Table of Contents

 

**ITEM****3****.****                  Legal Proceedings**

 

Although we may in the future become a party to litigation, there areno pending legal proceedings against us.

 

**ITEM4.                  Reserved**

 

21

----

Table ofContents

 

**PART II**

 

**ITEM 5.              Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities**

 

Our common stock is publicly traded on The Nasdaq National Market (“Nasdaq”)under the symbol “BOOM.”  The followingtable sets forth quarterly high and low sales prices for the common stockduring our last two fiscal years, as reported by Nasdaq.

 
| ** **      | ** ** | **High**   | ** ** | **Low**    | ** ** |
|-----------------|------------|------------|------------|------------|------------|
| **2009**        | ** ** | ** ** | ** ** | ** ** | ** ** |
|            |       |       |       |       |       |
| First  Quarter  |       | $          | 21.40      |       | $          | 4.95 |   |
| Second  Quarter |       | $          | 23.17      |       | $          | 8.94 |   |
| Third  Quarter  |       | $          | 20.63      |       | $          | 14.18 |   |
| Fourth  Quarter |       | $          | 21.00      |       | $          | 17.51 |   |
|            |       |       |       |       |       |
| **2008**        |       |       |       |       |       |
|            |       |       |       |       |       |
| First  Quarter  |       | $          | 62.50      |       | $          | 38.97 |   |
| Second  Quarter |       | $          | 49.85      |       | $          | 32.57 |   |
| Third  Quarter  |       | $          | 33.94      |       | $          | 22.12 |   |
| Fourth  Quarter |       | $          | 23.40      |       | $          | 10.82 |   |

 

As of February 28, 2010, there were approximately382 holders of record of our common stock.

 

We declaredand paid a $0.12 and $0.15 per share dividend in 2009 and 2008respectively.  We may pay quarterlydividends subject to capital availability and periodic determinations that cashdividends are in the best interests of our stockholders, but we cannot assureyou that such payments will continue. Future dividends may be affected by, among other items, our views onpotential future capital requirements, future business prospects, debt covenantcompliance considerations, changes in income tax laws, and any other factorsthat our Board of Directors deems relevant. Any determination to pay cash dividends will be at the discretion of theBoard of Directors.

 

22

----

# **Table of Contents**

 

# **FINANCIAL PERFORMANCE**

# ** **

The following graph compares the performance of the common stock withthe Nasdaq Non-Financial Stocks Index and the Nasdaq Composite (US) Index. Thecomparison of total return (change in year end stock price plus reinvesteddividends) for each of the years assumes that $100 was invested on December 31,2004, in each of the Company, Nasdaq Non-Financial Stocks Index and the NasdaqComposite (US) Index with investment weighted on the basis of marketcapitalization.  Historical results arenot necessarily indicative of future performance.

 

 
| **Total Return Analysis**         | ** ** | **12/31/04** | ** ** | **12/30/05** | ** ** | **12/29/06** | ** ** | **12/31/07** | ** ** | **12/31/08** | ** ** | **12/31/09** | ** ** |
|-----------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|
| **Dynamic Materials Corporation** |       | $            | 100        |         | $          | 496.83       |       | $            | 467.28     |         | $          | 978.80       |       | $ | 322.37 |   | $ | 334.72 |   |
| **Nasdaq Non-Financial Stocks**   |       | $            | 100        |         | $          | 102.26       |       | $            | 112.14     |         | $          | 127.21       |       | $ | 58.25 |   | $ | 87.83 |   |
| **Nasdaq Composite (US)**         |       | $            | 100        |         | $          | 102.13       |       | $            | 112.19     |         | $          | 121.68       |       | $ | 58.64 |   | $ | 84.28 |   |

 

23

----

Table of Contents

 

**ITEM 6.**                  **Selected Financial Data**

 

The following selected financial data should be read in conjunctionwith the Consolidated Financial Statements, including the related Notes, and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”  The 2007 selected financial data include theoperating results of DYNAenergetics from the November 15, 2007,acquisition date through December 31, 2007, and balance sheet informationas of December 31, 2007.  The 2009selected financial data includes the operating results of LRI from the October 1,2009, acquisition date through December 31, 2009, and balance sheetinformation as of December 31, 2009.

 
| ** **                                      | ** ** | (Dollars in Thousands,  Except Per Share Data) | ** ** |
|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                      | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Year  Ended December 31,**              | ** ** |
| ** **                                      | ** ** | **2009**                                       | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Statement of Operations**                     |       |                                           |       |   |   |   |   |   |   |   |   |
| Net  sales                                      |       | $                                              | 164,898    |   | $ | 232,577 |   | $ | 165,175 |   | $ | 113,472 |   | $ | 79,291 |   |
| Cost  of products sold                          |       | 121,779                                        |       | 161,732 |   | 110,168 |   | 71,439 |   | 55,856 |   |
|                                            |       |                                           |       |   |   |   |   |   |   |   |   |
| Gross  profit                                   |       | 43,119                                         |       | 70,845 |   | 55,007 |   | 42,033 |   | 23,435 |   |
| Cost  and expenses                              |       | 26,881                                         |       | 32,793 |   | 16,115 |   | 11,930 |   | 7,667 |   |
|                                            |       |                                           |       |   |   |   |   |   |   |   |   |
| Income  from operations                         |       | 16,238                                         |       | 38,052 |   | 38,892 |   | 30,103 |   | 15,768 |   |
| Other  (income) expense, net                    |       | 3,311                                          |       | 4,778 |   | 158 |   | (505 | ) | 163 |   |
|                                            |       |                                           |       |   |   |   |   |   |   |   |   |
| Income  before income taxes                     |       | 12,927                                         |       | 33,274 |   | 38,734 |   | 30,608 |   | 15,605 |   |
| Income  tax provision                           |       | 4,378                                          |       | 9,206 |   | 14,147 |   | 11,341 |   | 5,233 |   |
|                                            |       |                                           |       |   |   |   |   |   |   |   |   |
| Income  from continuing operations              |       | 8,549                                          |       | 24,068 |   | 24,587 |   | 19,267 |   | 10,372 |   |
| Discontinued  operations, net of tax            |       | —                                         |       | — |   | — |   | 1,497 |   | — |   |
|                                            |       |                                           |       |   |   |   |   |   |   |   |   |
| Net  income                                     |       | $                                              | 8,549      |   | $ | 24,068 |   | $ | 24,587 |   | $ | 20,764 |   | $ | 10,372 |   |
|                                            |       |                                           |       |   |   |   |   |   |   |   |   |
| Income  from continuing operations per share:   |       |                                           |       |   |   |   |   |   |   |   |   |
| Basic                                           |       | $                                              | 0.67       |   | $ | 1.89 |   | $ | 2.02 |   | $ | 1.62 |   | $ | 0.92 |   |
| Diluted                                         |       | $                                              | 0.66       |   | $ | 1.87 |   | $ | 1.99 |   | $ | 1.57 |   | $ | 0.86 |   |
| Net  income per share:                          |       |                                           |       |   |   |   |   |   |   |   |   |
| Basic                                           |       | $                                              | 0.67       |   | $ | 1.89 |   | $ | 2.02 |   | $ | 1.75 |   | $ | 0.92 |   |
| Diluted                                         |       | $                                              | 0.66       |   | $ | 1.87 |   | $ | 1.99 |   | $ | 1.69 |   | $ | 0.86 |   |
| Weighted  average number of shares outstanding: |       |                                           |       |   |   |   |   |   |   |   |   |
| Basic                                           |       | 12,640,069                                     |       | 12,445,685 |   | 12,083,851 |   | 11,841,373 |   | 11,290,053 |   |
| Diluted                                         |       | 12,662,440                                     |       | 12,554,402 |   | 12,273,135 |   | 12,213,075 |   | 12,086,884 |   |
|                                            |       |                                           |       |   |   |   |   |   |   |   |   |
| DIVIDENDS DECLARED PER COMMON SHARE             |       | $                                              | 0.12       |   | $ | 0.15 |   | $ | 0.15 |   | $ | 0.15 |   | $ | 0.10 |   |
|                                            |       |                                           |       |   |   |   |   |   |   |   |   |
| **Financial Position**                          |       |                                           |       |   |   |   |   |   |   |   |   |
| Current  assets                                 |       | $                                              | 87,974     |   | $ | 91,049 |   | $ | 94,730 |   | $ | 63,847 |   | $ | 36,552 |   |
| Total  assets                                   |       | 225,176                                        |       | 229,586 |   | 240,899 |   | 84,973 |   | 55,311 |   |
| Current  liabilities                            |       | 42,135                                         |       | 45,747 |   | 58,818 |   | 25,297 |   | 14,838 |   |
| Long-term  debt                                 |       | 34,556                                         |       | 46,514 |   | 62,051 |   | 382 |   | 2,221 |   |
| Other  non-current liabilities                  |       | 16,374                                         |       | 18,823 |   | 21,751 |   | 1,714 |   | 3,297 |   |
| Stockholders’  equity                      |       | 132,111                                        |       | 118,502 |   | 98,279 |   | 57,580 |   | 34,955 |   |

 

24

----

Table ofContents

 

Selected unaudited quarterly financial data for the years ended December 31,2009 and 2008 are presented below:

 
| ** **                      | ** ** | (Dollars in Thousands,  Except Per Share Data) | ** ** |
|---------------------------------|------------|------------------------------------------------|------------|
| ** **                      | ** ** | ** **                                     | ** ** |
| ** **                      | ** ** | **Year  ended December 31, 2009**         | ** ** |
| ** **                      | ** ** | **Quarter ended  March 31,**         | ** ** | **Quarter ended  June 30,** | ** ** | **Quarter ended  September 30,** | ** ** | **Quarter ended  December 31,** | ** ** |
| Net  sales                      |       | $                                              | 49,759     |   | $ | 37,819 |   | $ | 34,690 |   | $ | 42,630 |   |
|                            |       |                                           |       |   |   |   |   |   |   |
| Gross  profit                   |       | $                                              | 15,328     |   | $ | 9,154 |   | $ | 8,754 |   | $ | 9,883 |   |
|                            |       |                                           |       |   |   |   |   |   |   |
| Net income                      |       | $                                              | 4,916      |   | $ | 1,515 |   | $ | 1,096 |   | $ | 1,022 |   |
|                            |       |                                           |       |   |   |   |   |   |   |
| Net  income per share - basic   |       | $                                              | 0.38       |   | $ | 0.12 |   | $ | 0.09 |   | $ | 0.08 |   |
|                            |       |                                           |       |   |   |   |   |   |   |
| Net  income per share - diluted |       | $                                              | 0.38       |   | $ | 0.12 |   | $ | 0.08 |   | $ | 0.08 |   |

 
| ** **                      | ** ** | **Year  ended December 31, 2008** | ** ** |
|---------------------------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **Quarter ended  March 31,** | ** ** | **Quarter ended  June 30,** | ** ** | **Quarter ended  September 30,** | ** ** | **Quarter ended  December 31,** | ** ** |
| Net  sales                      |       | $                                      | 58,393     |   | $ | 63,183 |   | $ | 52,380 |   | $ | 58,621 |   |
|                            |       |                                   |       |   |   |   |   |   |   |
| Gross  profit                   |       | $                                      | 17,711     |   | $ | 19,049 |   | $ | 17,025 |   | $ | 17,060 |   |
|                            |       |                                   |       |   |   |   |   |   |   |
| Net  income                     |       | $                                      | 5,245      |   | $ | 6,210 |   | $ | 7,223 |   | $ | 5,390 |   |
|                            |       |                                   |       |   |   |   |   |   |   |
| Net  income per share - basic   |       | $                                      | 0.42       |   | $ | 0.49 |   | $ | 0.57 |   | $ | 0.42 |   |
|                            |       |                                   |       |   |   |   |   |   |   |
| Net  income per share - diluted |       | $                                      | 0.41       |   | $ | 0.49 |   | $ | 0.57 |   | $ | 0.42 |   |

 

The net income per share for the 2009 and 2008quarters, when totaled, does not equal net income per share for the respectiveyears as the per share amounts for each quarter and for each year are computedbased on their respective discrete periods.

 

25

----

Table of Contents

 

**ITEM 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

The following discussion should be read in conjunction with our historicalconsolidated financial statements and notes, as well as the selected historicalconsolidated financial data included elsewhere in this annual report.

 

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

 

**Executive Overview**

 

Prior to late 2007, our business had been organizedinto two segments:  ExplosiveMetalworking (which we also refer to as DMC Clad) and AMK Welding.  On November 15, 2007, we acquired 100%ownership of a German company, DYNAenergetics. DYNAenergetics operates two distinct businesses which have historicallybeen known as Dynaplat and DYNAenergetics. Dynaplat is a manufacturer of explosion clad products similar to thosemanufactured by DMC Clad, and its operating results from the date ofacquisition are included in our Explosive Metalworking segment.  DYNAenergetics manufactures a number ofproducts for the perforation of oil and gas wells and also distributes a lineof seismic products for oil and gas exploration activities.  DYNAenergetcs’ operating results from thedate of acquisition are reported under a new segment that we have named “OilfieldProducts.”

 

In 2009, Explosive Metalworking accounted for 81% ofour net sales and 106% of our income from operations before consideration ofstock-based compensation expense, which is not allocated to our businesssegments.  Our Oilfield Products and AMKWelding segments accounted for 13% and 6%, respectively, of our 2009 net sales.  In 2008 and 2007, Explosive Metalworkingaccounted for more than 84% and 94% of our net sales, respectively, and 91% and97% of income from operations, respectively.

 

Our 2009 net sales decreased by $67,679, or 29.1%,compared to 2008 net sales.  Theyear-to-year consolidated net sales decrease reflects sales decreases of$60,903 (31.2%) for our Explosive Metalworking segment, $6,069 (21.8%) for ourOilfield Products segment and $707 (7.3%) for AMK Welding.  Income from operations decreased 57.3% to$16,238 in 2009 from $38,052 in 2008. This $21,814 decrease reflects declines in the operating income reportedby our Explosive Metalworking, Oilfield Products and AMK Welding segments of$16,619, $4,214 and $793, respectively, and an increase in stock-basedcompensation expense of $188.  Reportedconsolidated operating income for 2009 and for 2008 includes amortizationexpense of $5,064 and $7,382, respectively, relating to purchased intangibleassets associated principally with our acquisition of DYNAenergetics.  Our net income decreased by 64.5% to $8,549in 2009 from $24,068 in 2008.

 

*Impact of Current Economic Situation on the Company*.

 

The Company was only minimally impacted in 2008 by theglobal economic slowdown.  However,during 2009, we have seen a significant slowdown in Explosive Metalworkingsales to some of the markets we serve. The explosion-welded clad plate market is dependent upon sales ofproducts for use by customers in a number of heavy industries, including oiland gas, alternative energy, chemicals and petrochemicals, hydrometallurgy,aluminum production, shipbuilding, power generation, and industrialrefrigeration.  These industries tend tobe cyclical in nature and the current worldwide economic downturn has affectedmany of these markets.  Despite theslowdown we have already seen in certain sectors, including chemical,petrochemical and hydrometallurgy, quoting activity in other end marketsremains healthy, and we continue to track an extensive list of largeinfrastructure projects. While timing of new order inflow remains difficult topredict, we believe that our Explosive Metalworking segment is well-positionedto benefit as global economic conditions improve.

 

As a result of our Explosive Metalworking backlogdecreasing from $97,247 at December 31, 2008 to $49,584 at December 31,2009 and relatively low booking activity during the first two months of 2010,we believe that our 2010 consolidated net sales could decline by as much as 10%from consolidated net sales that we reported in 2009.  However, if booking activity for both ourExplosive Metalworking and Oilfield Products business segments improves duringthe middle quarters of 2010, our 2010 consolidated net sales could approachthose of 2009.  In light of the slowdownin order inflow that we have experienced, we continue to manage expenses carefully.  Despite the significant sales and net incomedeclines that we reported in 2009, we generated cash flow from operations of$29,540 in 2009 and expect to generate positive cash flow from operations forthe full year 2010.

 

26

----

Table of Contents

 

*Net sales*

 

Explosive Metalworking’s revenues are generatedprincipally from sales of clad metal plates and sales of transition joints,which are made from clad plates, to customers that fabricate industrialequipment for various industries, including oil and gas, petrochemicals,alternative energy, hydrometallurgy, aluminum production, shipbuilding, powergeneration, industrial refrigeration, and similar industries.  While a large portion of thedemand for our clad metal products is driven by new plant construction andlarge plant expansion projects, maintenance and retrofit projects at existingchemical processing, petrochemical processing, oil refining, and aluminumsmelting facilities also account for a significant portion of total demand.

 

Oilfield Products’ revenues are generated principallyfrom sales of shaped charges, detonators and detonating cord, and bidirectionalbooster sand perforating guns to customers who perform the perforation of oiland gas wells and from sales of seismic products to customers involved in oiland gas exploration activities.

 

AMK Welding’s revenues are generated from welding,heat treatment, and inspection services that are provided with respect tocustomer-supplied parts for customers primarily involved in the powergeneration industry and aircraft engine markets.

 

A significant portion of our revenue is derived from arelatively small number of customers; therefore, the failure to completeexisting contracts on a timely basis, to receive payment for such services in atimely manner, or to enter into future contracts at projected volumes andprofitability levels could adversely affect our ability to meet cashrequirements exclusively through operating activities. We attempt to minimizethe risk of losing customers or specific contracts by continually improvingproduct quality, delivering product on time and competing aggressively on thebasis of price.

 

*Gross profit and cost of products sold*

 

Cost of products sold for Explosive Metalworkingincludes the cost of metals and alloys used to manufacture clad metal plates,the cost of explosives, employee compensation and benefits, freight, outsideprocessing costs, depreciation of manufacturing facilities and equipment,manufacturing supplies and other manufacturing overhead expenses.

 

Cost of products sold for Oilfield Products includesthe cost of metals, explosives and other raw materials used to manufacture shapedcharges, detonating products and perforating guns as well as employeecompensation and benefits, depreciation of manufacturing facilities andequipment, manufacturing supplies and other manufacturing overhead expenses.

 

AMK Welding’s cost of products sold consistsprincipally of employee compensation and benefits, welding supplies (wire andgas), depreciation of manufacturing facilities and equipment, outside servicesand other manufacturing overhead expenses.

 

*Income taxes*

 

Our effective income tax rate increased to 33.9% in2009 from 27.7% in 2008.  Income taxprovisions on the earnings of Nobelclad, Nitro Metall, Dynaplat,DYNAenergetics, DYNAenergetics Canada, and our German and Luxembourg holdingcompanies have been provided based upon the respective French, Swedish, German,Canadian, and Luxembourg statutory tax rates for the applicable years.  Going forward, based upon existing taxregulations and current federal, state and foreign statutory tax rates, we expectour effective tax rate on our projected consolidated pre-tax income to rangebetween 33% and 35%**.**

 

27

----

Table of Contents

 

*Backlog*

 

Weuse backlog as a primary means of measuringthe immediate outlook for our business. We define “backlog” at any given point in time as consisting of allfirm, unfulfilled purchase orders and commitments at that time.  Generally speaking, we expect to fill mostbacklog orders within the following 12 months.  From experience, most firmpurchase orders and commitments are realized.

 

Our backlog with respect to the Explosive Metalworkingsegment decreased to $49,584 at December 31, 2009, from $97,247 at December 31,2008.  In light of the slowdown in orderinflow and decrease in backlog that we have experienced, we are currentlyanticipating that our consolidated net sales for fiscal 2010 will be in a rangeof flat to down 10% from the consolidated net sales that we reported in 2009.

 

**Year ended December 31, 2009 compared to YearEnded December 31, 2008**

 

*Net sales*

* *
| ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **2009**   | ** ** | **2008**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Net sales  |       | $          | 164,898    |       | $          | 232,577    |       | $              | (67,679    | ) | (29.1 | )% |
|            |            |            |            |            |            |            |            |                |            |  |  |  |

 

Net sales for 2009 decreased 29.1% to $164,898 from$232,577 in 2008. Explosive Metalworking sales decreased 31.2% to $134,096 in2009 (81.3% of total sales) from $194,999 in 2008 (83.8% of total sales).  The decrease in Explosive Metalworking salesreflects a business slowdown in several of the industries that this businesssegment serves and includes approximately $5.0 million of unfavorable foreignexchange translation adjustments.

 

Oilfield Products contributed $21,764 to sales in 2009(13.2% of total sales) compared to $27,833 in 2008 (12.0% of total sales).  The $6,069 or 21.8% decline in sales, whichincludes incremental sales of $1,544 from the LRI acquisition, reflects both avolume decrease and a negative impact of approximately $900 from unfavorableforeign exchange adjustments.

 

AMK Welding contributed $9,038 to 2009 sales (5.5% oftotal sales) versus sales of $9,745 in 2008 (4.2% of total sales), a decline of7.3%.

 

*Gross profit*

* *
| ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | **2009**   | ** ** | **2008**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Gross profit                          |       | $          | 43,119     |       | $          | 70,845     |       | $              | (27,726    | ) | (39.1 | )% |
| Consolidated gross profit margin rate |       | 26.1       | %          | 30.5       | %          |       |       |           |       |
|                                       |            |            |            |            |            |            |            |                |            |  |  |  |

 

Gross profit decreasedby 39.1% to $43,119 in 2009 from $70,845 in 2008.  Our 2009 consolidated gross profit marginrate decreased to 26.1% from 30.5% in 2008. The gross profit margin for Explosive Metalworking decreased 10.9% from30.3% in 2008 to 27.0% in 2009.  OilfieldProducts reported a gross margin of 22.3% in 2009 compared to a gross margin of31.9% in 2008.  The gross profit marginfor AMK Welding decreased to 27.0% in 2009 from 32.9% in 2008.

 

The decreased 2009 grossprofit margin rate for Explosive Metalworking relates almost entirely to ourEuropean cladding operations where the gross margin rate for the year was 36%lower than the gross margin rate reported in 2008 on a year-to-year salesdecline of 37%.  Our U.S. clad divisionreported only a slightly lower gross margin rate of 34.3% in 2009 compared to34.8% in 2008 despite a 27% drop in sales. Historically, gross margins for our European explosion welding divisionshave been lower than those reported by our U.S. division due to less efficientfixed manufacturing cost structures associated with our smaller Europeanfacilities.  We have taken steps toreduce fixed manufacturing overhead costs at all of our facilities, but thebenefit of these actions on our 2010 gross margin performance will likely beoffset by the expected continuation of a very competitive pricingenvironment.  During 2009 the grossmargins that we reported in our quarterly financial statements ranged from alow of 22.8% in the fourth quarter to a high of 31.8% in the firstquarter.   We expect to see continuedfluctuations in our quarterly gross margin rates during 2010 that result fromanticipated fluctuations in quarterly sales volume and changes in product mix.Based upon the composition of our December 31, 2009 backlog and thecurrent competitive pricing environment, we expect full year 2010 gross marginsto be in a range of 22% to 24% for our Explosive Metalworking segment.

 

28

----

Table of Contents

 

The large decrease inOilfield Products’ 2009 gross margin relates principally to the 21.8% salesdecline discussed above and resultant less favorable absorption of fixedmanufacturing overhead expenses but also includes the impact of non-recurringcosts associated with the relocation of certain production activities duringthe second quarter of 2009 and year-to-year changes in product/customermix.  Based upon expected improvement inthis segment’s sequential quarterly sales performance during 2010, we expectOilfield Products to report gross margins in the range of 28% to 30% for thefull year 2010 with gradual improvement in quarter-to-quarter gross margins ifexpected sales increases are realized.

 

The decrease in the AMKWelding gross margin relates principally to an increase in manufacturingoverhead associated with engineering and product development expenses as AMKseeks to expand both its service offerings and customer base.  AMK Welding sales and gross margins for thefull year 2010 are expected to be comparable to those reported in 2009.

 

*Generaland administrative expenses*

 
| ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                 | ** ** | **2009**   | ** ** | **2008**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| General & administrative expenses |       | $          | 12,980     |       | $          | 14,256     |       | $              | (1,276     | ) | (9.0 | )% |
| Percentage of net sales                    |       | 7.9        | %          | 6.1        | %          |       |       |           |       |
|                                            |            |            |            |            |            |            |            |                |            |  |  |  |

 

General and administrative expenses decreased by$1,276, or 9.0%, to $12,980 in 2009 from $14,256 in 2008.  Excluding incremental fourth quarter 2009general and administrative expenses of $374 relating to the October 1,2009 acquisition of LRI which included $177 of transaction related expenses,our general and administrative expenses decreased by $1,650 or 11.6%.  General and administrative expenses of ourEuropean divisions decreased by $467, or 8.2%, as a result of a 1.9% decreasein net expenses as measured in Euros and $309 in favorable foreign exchangetranslation adjustments.  Our U.S.general and administrative expenses decreased by $1,183 or 13.9%. The U.S.decrease reflects a $231 increase in stock-based compensation expense offset bya $632 decrease in accrued incentive compensation, a reduction of $354 in legaland consulting expenses, and a net decrease of $428 in other spendingcategories. As a percentage of net sales, general and administrative expensesincreased to 7.9% in 2009 from 6.1% in 2008.

 

*Selling expenses*

* *
| ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|-------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **2009**   | ** ** | **2008**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Selling expenses        |       | $          | 8,837      |       | $          | 11,155     |       | $              | (2,318     | ) | (20.8 | )% |
| Percentage of net sales |       | 5.4        | %          | 4.8        | %          |       |       |           |       |
|                         |            |            |            |            |            |            |            |                |            |  |  |  |

 

Sellingexpenses, which include sales commissions of $1,387 in 2009 and $2,351 in 2008,decreased by 20.8% to $8,837 in 2009 from $11,155 in 2008.  Excluding incremental selling expenses of$422 associated with the LRI acquisition, our selling expenses decreased by$2,740 or 24.6%.  The $2,740 decrease inour consolidated selling expenses includes decreased selling expenses of $1,643and $1,097 at our European and U.S. divisions, respectively. The decrease inEuropean selling expenses relates principally to staff reductions within ourEuropean explosion welding divisions and lower sales commissions and alsoincludes $327 of favorable foreign exchange translation adjustments. The $1,097decrease in our U.S. selling expenses reflects decreased sales commissions of$427, a $298 decrease in accrued incentive compensation, a $214 decrease intravel expenses, a $144 decrease in bad debt expense and a $194 reduction inbusiness development, advertising and promotional expenses that were partiallyoffset by a net increase of $180 in other spending categories.  As a percentage of net sales, sellingexpenses increased to 5.4% in 2009 from 4.8% in 2008.

 

*Amortization expenses*

* *
| ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                          | ** ** | **2009**   | ** ** | **2008**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Amortization expense of purchased intangible assets |       | $          | 5,064      |       | $          | 7,382      |       | $              | (2,318     | ) | (31.4 | )% |
| Percentage of net sales                             |       | 3.1        | %          | 3.2        | %          |       |       |           |       |
|                                                     |            |            |            |            |            |            |            |                |            |  |  |  |

 

29

----

Table of Contents

 

Amortizationexpense relates entirely to the amortization of values assigned to intangibleassets in connection with our November 15, 2007 acquisition ofDYNAenergetics and our October 1, 2009 acquisition of LRI.  Amortization expense for 2009 includes$3,511, $1,173, and $380 relating to values assigned to customer relationships,core technology, and trademarks/trade names, respectively.  Amortization expense for 2008 includes$2,055, $3,694, $1,232, and $401 relating to values assigned to order backlog,customer relationships, core technology, and trademarks/trade names,respectively. The value assigned to order backlog was fully amortized duringthe first six months of 2008. Amortization expense (as measured in Euros) associated with theDYNAenergetics acquisition is expected to approximate €3,603 in 2010, and 2010amortization expense (as measured in Canadian dollars) associated with the LRIacquisition is expected to approximate 80 CAD.

 

*Operating income*

* *
| ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **       | ** ** | **2009**   | ** ** | **2008**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Operating income |       | $          | 16,238     |       | $          | 38,052     |       | $              | (21,814    | ) | (57.3 | )% |
|                  |            |            |            |            |            |            |            |                |            |  |  |  |

 

Income from operations (“Operating Income”) decreasedby 57.3% to $16,238 in 2009 from $38,052 in 2008.  Explosive Metalworking reported operatingincome of $20,835 in 2009 as compared to $37,454 in 2008.  This 44.4% decrease is largely attributableto the 31.2% decrease in net sales and 10.9% decline in the 2009 gross marginrate as discussed above. Operating results of Explosive Metalworking for 2009and 2008 include $2,407 and $4,596, respectively, of amortization expense ofpurchased intangible assets.

 

Oilfield products reported an operating loss of $2,742in 2009 as compared to operating income of $1,472 in 2008.  This $4,214 decline is largely attributableto the 21.8% decrease in net sales and 30.1% decline in the 2009 gross marginrate as discussed above.  Operatingresults of Oilfield Products for 2009 and 2008 include $2,657 and $2,786,respectively, of amortization expense of purchased intangible assets.

 

AMK Welding reportedoperating income of $1,570 in 2009, a decrease of 33.6% from the $2,363 that itreported in 2008.  This decline islargely attributable to the 7.3% decrease in net sales and 17.9% decline in the2009 gross margin rate as discussed above.

 

Operating income in 2009and 2008 includes $3,425 and $3,237, respectively, of stock-based compensationexpense.  This expense is not allocatedto our business segments and thus is not included in the above 2009 and 2008operating income totals for Explosive Metalworking, Oilfield Products, and AMKWelding.  Stock-based compensationexpense in 2010 is expected to approximate $3,400.

 

*Interestincome (expense), net*

* *
| ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                     | ** ** | **2009**   | ** ** | **2008**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Interest income (expense), net |       | $          | (3,257     | )          | $          | (4,783     | )          | $              | 1,526      |   | (31.9 | )% |
|                                |            |            |            |            |            |            |            |                |            |  |  |  |

 

We recordednet interest expense of $3,257 in 2009 compared to net interest expense of$4,783 in 2008.  This decrease in netinterest expense reflects repayments on term loans with our bank syndicate anda German bank of $13,614 and $876, respectively, and lower average interest rateson our European borrowings.

 

*Income tax provision*

* *
| ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|----------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **           | ** ** | **2009**   | ** ** | **2008**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Income tax provision |       | $          | 4,378      |       | $          | 9,206      |       | $              | (4,828     | ) | (52.4 | )% |
| Effective tax rate   |       | 33.9       | %          | 27.7       | %          |       |       |           |       |
|                      |            |            |            |            |            |            |            |                |            |  |  |  |

 

We recorded an income tax provision of $4,378 in 2009 compared to$9,206 in 2008.  The effective tax rateincreased to 33.9% in 2009 from 27.7% in 2008. The 2009 and 2008 income tax provisions include $5,659 and $7,656, respectively,related to U.S. taxes, with the remainder relating to net foreign tax benefitsin 2009 and net foreign taxes in 2008 associated with the operations ofNobelclad and its Swedish subsidiary, Nitro Metall, as well as DYNAenergeticsand Dynaplat and their related holding companies in Germany and Luxembourg.  The 2009 effective tax rate of 33.9% is

 

30

----

Table of Contents

 

slightly higher than the full year expected tax rate of 32% to 33% thatwas disclosed at the end of the third quarter and relates to a higher thanpreviously expected contribution to 2009 consolidated pre-tax income by ourU.S. operations.  Our U.S. tax rate ishigher than the average tax rate for our European subsidiaries.

 

The 2008 effective tax rate of 27.7% was much lower than our 2009effective tax rate of 33.9%.  Thisdeviation arose primarily from the completion during the third quarter of 2008of an Internal Revenue Service examination and from adjustments that wereidentified during the third quarter 2008 preparation and filing of our 2007federal and state tax returns.  Theclosure of the Internal Revenue Service examination enabled us to recordpreviously unrecognized tax benefits of approximately $300 (net) in 2008.  The “book-to-return” adjustments favorablyimpacted our third quarter 2008 tax provision by approximately $1,100 andrelated primarily to apportionment factors utilized to compute state incometaxes.  Largely as a result of thesethird quarter 2008 tax provision adjustments, our full year 2008 blendedeffective tax rate was reduced to 27.7%.

 

Our blended effective tax rate for 2010 is expected to range from 33%to 35% based on projected pre-tax income.

 

*Adjusted EBITDA*

* *
| ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|-----------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **      | ** ** | **2009**   | ** ** | **2008**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Adjusted EBITDA |       | $          | 29,769     |       | $          | 53,202     |       | $              | (23,433    | ) | (44.0 | )% |
|                 |            |            |            |            |            |            |            |                |            |  |  |  |

 

Adjusted EBITDA is a non-GAAP measure that we use asan indicator of the ongoing operating performance and the cash generatingability of the Company.  The following isa reconciliation of the most directly comparable GAAP measure to AdjustedEBIDTA.

 
| ** **                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Income from operations                |       | $        | 16,238     |     | $          | 38,052 |   |
| Adjustments:                          |       |     |       |     |       |
| Stock-based compensation              |       | 3,425    |       | 3,237    |       |
| Depreciation                          |       | 5,042    |       | 4,531    |       |
| Amortization of purchased intangibles |       | 5,064    |       | 7,382    |       |
|                                  |       |     |       |     |       |
| Adjusted EBITDA                       |       | $        | 29,769     |     | $          | 53,202 |   |

 

Adjusted EBITDA decreased 44.0% to $29,769 in 2009from $53,202 in 2008 primarily due to the decrease in operating income of$21,814 and the decrease in amortization expense of $2,318.

 

**Year ended December 31, 2008 compared to YearEnded December 31, 2007**

 

*Net sales*

* *
| ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **2008**   | ** ** | **2007**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Net sales  |       | $          | 232,577    |       | $          | 165,175    |       | $              | 67,402     |   | 40.8 | % |
|            |            |            |            |            |            |            |            |                |            |  |  |  |

 

Net sales for 2008 increased 40.8% to $232,577 from$165,175 in 2007. Explosive Metalworking sales increased 25.5% to $194,999 in2008 (83.8% of total sales) from $155,438 in 2007 (94.1% of total sales).  The year-to-year increase in worldwideExplosive Metalworking sales is principally attributable to incremental salesfrom Dynaplat who contributed $30,763 to 2008 sales as compared to $4,357 forthe period from November 15 through December 31, 2007.  Sales from our legacy explosive metalworkingbusinesses increased by 8.7% to $164,236 in 2008 from $151,081 in 2007, withthis lower than expected increase reflecting slowing growth rates in several ofthe industries that this business segment serves.

 

Oilfield Products contributed $27,833 to sales in 2008(12.0% of total sales) compared to $2,545 in 2007 (1.5% of total sales), with2007 sales reflecting sales for the November 15 through December 31,2007 time period.

 

31

----

Table of Contents

 

AMK Welding contributed $9,745 to 2008 sales (4.2% oftotal sales) versus sales of $7,192 in 2007 (4.4% of total sales).  The 35.5% increase in AMK Welding’s salesreflects an increase of more than 60% in ground-based gas turbine sales. Groundpower sales, which include a mix of production and development work, comprisedmore than 80% of AMK’s 2008 sales as compared to approximately 66% in2007.  AMK’s commercial and militaryaircraft sales, which represented approximately 15% of 2008 sales andapproximately 32% of 2007 sales, decreased by more than 35% in 2008.

 

*Gross profit*

* *
| ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | **2008**   | ** ** | **2007**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Gross profit                          |       | $          | 70,845     |       | $          | 55,007     |       | $              | 15,838     |   | 28.8 | % |
| Consolidated gross profit margin rate |       | 30.5       | %          | 33.3       | %          |       |       |           |       |
|                                       |            |            |            |            |            |            |            |                |            |  |  |  |

 

Gross profit increasedby 28.8% to $70,845 in 2008 from $55,007 in 2007.  Our 2008 consolidated gross profit marginrate decreased to 30.5% from 33.3% in 2007. The gross profit margin for Explosive Metalworking decreased from 33.6%in 2007 to 30.3% in 2008.  The grossprofit margin for AMK Welding increased to 32.9% in 2008 from 30.8% in 2007,with this improvement being largely attributable to the 35.5% increase in AMK’ssales volume as discussed above. Oilfield Products reported a gross margin of 31.9% on 2008 sales of$27,833 as compared to a gross margin of 26.6% on its 2007 sales of $2,545.

 

The decreasedyear-to-date 2008 gross profit margin rates for Explosive Metalworking relatesprimarily to a higher proportion of sales by our European divisions in 2008than in 2007 as a result of the DYNAenergetics acquisition.  As mentioned above, Dynaplat contributed$30,763 and $4,357 to 2008 and 2007 sales, respectively.  Historically, gross margins for our Europeanexplosion welding divisions, including those of the Dynaplat division, havegenerally been lower than those reported by our U.S. division. Sales by ourEuropean divisions in 2008 and 2007 represented 42.0% and 27.6%, respectively,of total Explosive Metalworking sales. During 2008 the gross margins that wereported in our quarterly financial statements ranged from a low of 29.4% inthe fourth quarter to a high of 31.9% in the third quarter.

 

*Generaland administrative expenses*

* *
| ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                 | ** ** | **2008**   | ** ** | **2007**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| General & administrative expenses |       | $          | 14,256     |       | $          | 8,049      |       | $              | 6,207      |   | 77.1 | % |
| Percentage of net sales                    |       | 6.1        | %          | 4.9        | %          |       |       |           |       |
|                                            |            |            |            |            |            |            |            |                |            |  |  |  |

 

General and administrative expenses increased by$6,207, or 77.1%, to $14,256 in 2008 from $8,049 in 2007.  Excluding incremental DYNAenergetics’ generaland administrative expenses of $4,448 in 2008 and $338 for the period from November 15through December 31, 2007, our general and administrative expensesincreased by $2,097.  This increaseincludes an increase of $1,161 in stock-based compensation expense and animpact of $467 from annual salary adjustments and staffing changes.  As a percentage of net sales, general andadministrative expenses increased to 6.1% in 2008 from 4.9% in 2007.

 

*Selling expenses*

* *
| ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|-------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **2008**   | ** ** | **2007**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Selling expenses        |       | $          | 11,155     |       | $          | 6,875      |       | $              | 4,280      |   | 62.3 | % |
| Percentage of net sales |       | 4.8        | %          | 4.2        | %          |       |       |           |       |
|                         |            |            |            |            |            |            |            |                |            |  |  |  |

 

Sellingexpenses, which include sales commissions of $1,515 in 2008 and $1,692 in 2007,increased by 62.3% to $11,155 in 2008 from $6,875 in 2007.  Excluding incremental DYNAenergetics’ sellingexpenses of $3,669 in 2008 and $527 for the period from November 15through December 31, 2007, selling expenses increased by $1,138.  This increase reflects an increase instock-based compensation expense of $550, an impact of $380 from annual salaryadjustments and staffing changes and an increase in travel expenses of $344that were partially offset by a decrease in commissions of $177.  As a percentage of net sales, sellingexpenses increased to 4.8% in 2008 from 4.2% in 2007.

 

32

----

Table of Contents

 

*Amortization expenses*

* *
| ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                          | ** ** | **2008**   | ** ** | **2007**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Amortization expense of purchased intangible assets |       | $          | 7,382      |       | $          | 1,191      |       | $              | 6,191      |   | 519.8 | % |
| Percentage of net sales                             |       | 3.2        | %          | 0.7        | %          |       |       |           |       |
|                                                     |            |            |            |            |            |            |            |                |            |  |  |  |

 

Amortizationexpense relates entirely to the amortization of values assigned to intangibleassets in connection with the November 15, 2007 acquisition ofDYNAenergetics.  Amortization expense for2008 includes $2,055, $3,694, $1,232, and $401 relating to values assigned toorder backlog, customer relationships, core technology, and trademarks/tradenames, respectively.  Amortizationexpense for the period from November 15 through December 31, 2007,includes $526, $461, $154, and $50 relating to values assigned to orderbacklog, customer relationships, core technology and trademarks/trade names,respectively.

 

*Operating income*

* *
| ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **       | ** ** | **2008**   | ** ** | **2007**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Operating income |       | $          | 38,052     |       | $          | 38,892     |       | $              | (840       | ) | (2.2 | )% |
|                  |            |            |            |            |            |            |            |                |            |  |  |  |

 

Income from operations of continuing operations (“OperatingIncome”) decreased by 2.2% to $38,052 in 2008 from $38,892 in 2007.  Explosive Metalworking reported operatingincome of $37,454 in 2008 as compared to $38,902 in 2007.  This 3.7% decrease is largely attributable tothe decline in gross margin rates from 33.6% in 2007 to 30.3% in 2008 andincreased operating expenses of $6,839 relating to the acquired Dynaplatbusiness, including an increase of $3,751 in amortization expense of purchasedintangible assets. Operating results of Explosive Metalworking for 2008 and2007 include $4,596 and $845, respectively, of amortization expense ofpurchased intangible assets.

 

Oilfield products reported operating income of $1,472in 2008 as compared to a loss from operations of $126 for the period from November 15through December 31, 2007. Operating results of Oilfield Products for 2008 and 2007 include $2,786and $346, respectively, of amortization expense of purchased intangible assets.

 

AMK Welding reportedoperating income of $2,363 in 2008, an increase of 66.8% from the $1,417 thatit reported in 2007, which increase follows the 35.5% sales increase.

 

Operating income in 2008and 2007 includes $3,237 and $1,301, respectively, of stock-based compensationexpense.  This expense is not allocatedto our business segments and thus is not included in the above 2008 and 2007operating income totals for Explosive Metalworking, Oilfield Products, and AMKWelding.

 

*Interestincome (expense), net*

* *
| ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                     | ** ** | **2008**   | ** ** | **2007**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Interest income (expense), net |       | $          | (4,783     | )          | $          | (24        | )          | $              | (4,759     | ) | NM |   |
|                                |            |            |            |            |            |            |            |                |            |  |  |  |

 

We recordednet interest expense of $4,783 in 2008 compared to net interest expense of $24in 2007.   Net interest expense in 2007reflects interest expense of $722 offset by interest income of $698.  During the first ten and one-half months of2007, we were in a positive cash position and earned interest on investment ofexcess cash balances.  In connection withacquisition of DYNAenergetics, we borrowed approximately $65,000 under our new$100,000 five-year credit facility, assumed approximately $12,000 ofDYNAenergetics’ debt outstanding as of the acquisition date, and usedapproximately $16,000 of our existing cash balances to finance the acquisition.As a result of this new indebtedness and a decrease in our cash position, wereported a significant amount of interest expense during the last six weeks of2007 and throughout 2008.

 

*Income tax provision*

* *
| ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|----------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **           | ** ** | **2008**   | ** ** | **2007**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Income tax provision |       | $          | 9,206      |       | $          | 14,147     |       | $              | (4,941     | ) | (34.9 | )% |
| Effective tax rate   |       | 27.7       | %          | 36.5       | %          |       |       |           |       |
|                      |            |            |            |            |            |            |            |                |            |  |  |  |

 

33

----

Table of Contents

 

We recorded an income tax provision of $9,206 in 2008compared to $14,147 in 2007.  Theeffective tax rate decreased to 27.7% in 2008 from 36.5% in 2007.  The 2008 and 2007 income tax provisionsinclude $7,656 and $12,105, respectively, related to U.S. taxes, with theremainder relating to foreign taxes associated with the operations of Nobelcladand its Swedish subsidiary, Nitro Metall, as well as the newly acquiredDYNAenergetics operations. The deviation in the effective rate arose primarilyfrom the completion during the 2008 third quarter of an Internal RevenueService examination and from adjustments that were identified during the thirdquarter 2008 preparation and filing of our 2007 federal and state taxreturns.  The closure of the InternalRevenue Service examination enabled the Company to record previouslyunrecognized tax benefits of approximately $300 (net) in 2008.  The “book-to-return” adjustments favorablyimpacted the third quarter 2008 tax provision by approximately $1,100 andrelated primarily to apportionment factors utilized to compute state incometaxes.  Largely as a result of thesethird quarter tax provision adjustments, our full year 2008 blended effectivetax rate was reduced to 27.7%.

 

*Adjusted EBITDA*

 
| ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|-----------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **      | ** ** | **2008**   | ** ** | **2007**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Adjusted EBITDA |       | $          | 53,202     |       | $          | 43,540     |       | $              | 9,662      |   | 22.2 | % |
|                 |            |            |            |            |            |            |            |                |            |  |  |  |

 

Adjusted EBITDA is a non-GAAP measure that we use asan indicator of the ongoing operating performance and the cash generatingability of the Company.  The following isa reconciliation of the most directly comparable GAAP measure to AdjustedEBIDTA.

 
| ** **                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Income from operations                |       | $        | 38,052     |     | $          | 38,892 |   |
| Adjustments:                          |       |     |       |     |       |
| Stock-based compensation              |       | 3,237    |       | 1,301    |       |
| Depreciation                          |       | 4,531    |       | 2,156    |       |
| Amortization of purchased intangibles |       | 7,382    |       | 1,191    |       |
|                                  |       |     |       |     |       |
| Adjusted EBITDA                       |       | $        | 53,202     |     | $          | 43,540 |   |

 

Adjusted EBITDA increased 22.2% to $53,202 in 2008from $43,540 in 2007 primarily due to an increase in amortization expense of$6,191, an increase in depreciation expense of $2,375, and an increase in stockbased compensation expense of $1,936.

 

34

----

Table of Contents

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

We have historically financed our operations from acombination of internally generated cash flow, revolving credit borrowings, variouslong-term debt 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.  On October 21, 2009, the creditagreement was amended to revise the leverage ratios and fixed charge coverageratios that we are required to satisfy on a quarterly basis throughout the termof the credit facility, which expires on November 16, 2012.  The pricing grid applicable to drawn andundrawn amounts under the credit facility was also amended and will increaseour going forward effective interest rate on outstanding borrowings by 1.5% perannum.

 

As mentioned above, two significant financialcovenants under our credit facility, the leverage ratio and fixed chargecoverage ratio requirements, were recently amended to ease the Company’sability to comply with these covenants. The leverage ratio is defined in the credit facility as ConsolidatedFunded Indebtedness at the balance sheet date as compared to ConsolidatedEBITDA, which is defined as earnings before provisions for income taxes,interest expense, depreciation and amortization, extraordinary, non-recurringcharges and other non-cash charges, for the previous twelve months.  For the years ended December 31, 2008and 2009, Consolidated EBITDA approximated the “Adjusted EBITDA” that we reportedfor the respective periods.  As of December 31,2009, the maximum leverage ratio permitted by our credit facility was 2.0 to1.0. The actual leverage ratio as of December 31, 2009 was 1.69 to 1.0.The maximum leverage ratio permitted as of March 31, June 30, September 30and December 31, 2010 is 2.25 to 1.0, 2.25 to 1.0, 2.0 to 1.0 and 1.5 to1.0, respectively.

 

The fixed charge ratio, as defined in the creditfacility, means, for any period, the ratio of Earnings Available for FixedCharges to Fixed Charges.  EarningsAvailable for Fixed Charges equals Consolidated EBITDA plus lease expensesminus cash income taxes and non-financed capital expenditures.  Fixed Charges equals the sum of cash interestexpense, lease expense, scheduled principal payments and cash dividends.  As of December 31, 2009, the minimumfixed charge ratio permitted by our credit facility was 1.1 to 1.0. The actualfixed charge ratio as of December 31, 2009 was 1.31 to 1.0. The minimumfixed charge coverage ratio permitted for the twelve month periods ending March 31,June 30, September 30 and December 31, 2010 is 0.8 to 1.0, 0.8to 1.0, 1.0 to 1.0 and 1.0 to 1.0, respectively.

 

As a result of the slowdown in our business during2009 which has continued into the early part of 2010, our ability to complywith amended financial covenants as of March 31, 2010 and subsequentquarters in 2010 could be challenged. However, we believe that our strong December 31,2009 cash position combined with our ability to generate additional operatingcash flow during 2010 will enable us to work successfully with our lenders tofurther amend the credit facility if the Company’s ability to comply withcurrent financial covenants comes into question.

 

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

 

As of December 31, 2009, term loans of $31,005and 9,646 Euros ($13,826) were outstanding under the credit facility, $1,505was outstanding under term loan obligations of DYNAenergetics and $1,269 wasoutstanding under loan agreements with the former owners of LRI.  We had no outstanding revolving creditborrowings under our syndicated credit agreement or under our separateDYNAenergetics’ line of credit agreements. We had $1,774 outstanding under the line of credit assumed with theacquisition of LRI.  While we hadapproximately $44,800 of unutilized revolving credit loan capacity as of December 31,2009 under our various credit facilities, future borrowings are subject tocompliance with financial covenants that could significantly limitavailability.

 

We believe that cash flow from operations and fundsavailable under our current credit facilities and any future replacementthereof will be sufficient to fund the working capital, debt service, andcapital expenditure requirements of our current business operations for theforeseeable future.  Nevertheless, ourability to generate sufficient cash flows from operations will depend upon oursuccess in executing our strategies. If we are unable to (i) realize salesfrom our backlog; (ii) secure new customer orders at attractive prices;and (iii) continue to implement cost-effective internal processes, ourability to meet cash requirements through operating activities could beimpacted.  Furthermore, any restrictionon the availability of borrowings under our credit facilities could negativelyaffect our ability to meet future cash requirements.

 

35

----

Table of Contents

 

*Debt and other contractual obligations andcommitments*

 

Our existing loan agreements include various covenantsand restrictions, 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 December 31, 2009, we were in compliance with all financialcovenants and other provisions of our debt agreements.

 

The table below presents principal cash flows by expectedmaturity dates for our debt obligations and other contractual obligations andcommitments as of December 31, 2009:

 
| ** **                           | ** ** | **Payment  Due by Period**        | ** ** |
|--------------------------------------|------------|-----------------------------------|------------|
| ** **                           | ** ** | **As of  December 31, 2009** | ** ** |
| ** **                           | ** ** | **Less  than**                    | ** ** | ** ** | ** ** | ** ** | ** ** | **More  than** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **1  Year**                       | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **5  Years** | ** ** | **Total** | ** ** |
| Total long-term debt obligations (1) |       | $                                 | 15,262     |   | $ | 33,322 |   | $ | 798 |   | $ | — |   | $ | 49,382 |   |
|                                 |       |                              |       |   |   |   |   |   |   |   |   |
| Interest expense (2)                 |       | 2,393                             |       | 1,779 |   | 25 |   | — |   | 4,196 |   |
|                                 |       |                              |       |   |   |   |   |   |   |   |   |
| Capital lease obligations (3)        |       | 336                               |       | 388 |   | 84 |   | — |   | 808 |   |
|                                 |       |                              |       |   |   |   |   |   |   |   |   |
| Operating lease obligations (4)      |       | 1,356                             |       | 1,217 |   | 590 |   | 160 |   | 3,323 |   |
|                                 |       |                              |       |   |   |   |   |   |   |   |   |
| License agreements obligations (5)   |       | 232                               |       | 464 |   | 464 |   | 928 |   | 2,088 |   |
|                                 |       |                              |       |   |   |   |   |   |   |   |   |
| Purchase obligations (6)             |       | 8,493                             |       | — |   | — |   | — |   | 8,493 |   |
|                                 |       |                              |       |   |   |   |   |   |   |   |   |
| Total                                |       | $                                 | 28,072     |   | $ | 37,170 |   | $ | 1,961 |   | $ | 1,088 |   | $ | 68,290 |   |

 

----

(1)  Amountsrepresent future cash payments on our debt obligations and are reflected inaccompanying Consolidated Balance Sheets.

(2)  Amountsrepresent future cash payments of interest expense on our debtobligations.  December 31, 2009interest rates assumed for variable rate debt.

(3)  The presentvalue of these capital lease obligations are included in our ConsolidatedBalance Sheets.  See Note 9 of the Notesto Consolidated Financial Statements for additional information.

(4)  The operatinglease obligations presented reflect future minimum lease payments due undernon-cancelable portions of our leases as of December 31, 2009.  Our operating lease obligations are describedin Note 9 of the Notes to Consolidated Financial Statements.

(5)  The licenseagreements obligations presented reflect future minimum payments due undernon-cancelable portions of our agreements as of December 31, 2009.  Our license agreements obligations aredescribed in Note 9 of the Notes to Consolidated Financial Statements.

(6)  Amounts representcommitments to purchase goods or services to be utilized in the normal courseof business.  These amounts are notreflected in accompanying Consolidated Balance Sheets.

 

For more information about our debt obligations, seeNote 5 to our consolidated financial statements elsewhere in this annualreport.

 

*Cash flows from operating activities*

 

Net cash flows provided by operating activities for2009 totaled $29,540.  Significantsources of operating cash flow included net income of $8,549, non-cash depreciationand amortization expense of $10,403, stock-based compensation of $3,425 and netpositive changes in working capital of $10,168. Deferred income tax benefits of $2,784 partly offset these sources ofoperating cash flows.  Positive cashflows from changes in working capital included decreases in accountsreceivables and inventories and increases in customer advances of $11,891,$6,604, and $3,813,

 

36

----

Table of Contents

 

respectively.  These were partly offset by increases inprepaid expenses of $571 and decreases in accounts payables and accruedexpenses and other liabilities of $8,045 and $3,524, respectively.

 

Net cash flows provided by operating activities for2008 totaled $34,003.  Significantsources of operating cash flow included net income of $24,068, non-cashdepreciation and amortization expense of $12,192 and stock-based compensationof $3,237.  Deferred income tax benefitsof $2,079 and negative net changes in working capital of $3,141 partly offsetthese sources of operating cash flows. Negative cash flows from changes in working capital included increasesin prepaid expenses and decreases in accounts payable, customer advances, andaccrued expenses and other liabilities of $2,802, $6,706, $1,833 and $1,143,respectively.  These were partly offsetby decreases in restricted cash, accounts receivables, and inventories of $371,$4,061 and $4,911, respectively.

 

Net cash flows provided by operating activities for2007 totaled $18,684.  Significantsources of operating cash flow included net income of $24,587, non-cashdepreciation and amortization expense of $3,377 and stock-based compensation of$1,301.  Negative net changes in workingcapital of $10,200 partly offset these sources of operating cash flows.  Negative cash flows from changes in workingcapital included increases in accounts receivable and inventories and decreasesin accrued expenses and other liabilities of $9,670, $6,386 and $1,072,respectively, which were partly offset by decreases in restricted cash andincreases in accounts payable and customer advances of $3,059, $1,429 and$1,916, respectively.

 

*Cash flows from investing activities*

 

Net cash flows used in investing activities for 2009totaled $4,142 and consisted primarily of $3,917 in capital expenditures and$284 of cash paid in connection with the acquisition of LRI.

 

Net cash flows used in investing activities for 2008totaled $10,464 and consisted primarily of $9,925 in capital expenditures and$559 of cash paid for additional acquisition costs in connection with theacquisition of DYNAenergetics.

 

Net cash flows used in investing activities for 2007totaled $90,290 and consisted primarily of $81,224 of cash paid in connectionwith the acquisition of DYNAenergetics (net of cash acquired) and $8,979 incapital expenditures.

 

*Cash flows from financing activities*

 

Net cash flows used in financing activities for 2009totaled $17,730.  Significant uses ofcash for financing activities included $9,760 for scheduled term loan principalpayments under our syndicated credit agreement, $3,854 in required prepaymentsof term loans under our syndicated credit agreement from excess cash flow wegenerated in 2008, payments on loans with their former LRI owners of $1,231,repayments of LRI’s bank line of credit of $952, payment of annual dividends of$1,028 and $876 in principal payments on our Nord LB term loans.  Sources of cash flow from financingactivities included $425 in net proceeds from the issuance of common stockrelating to the exercise of stock options and $90 for excess tax benefitsrelated to stock option exercises.

 

Net cash flows used in financing activities for 2008totaled $17,249.  Significant uses ofcash for financing activities included repayments of DYNAenergetics’ bank linesof credit of $7,579, $6,282 for scheduled term loan principal payments underour syndicated credit agreement, payment of annual dividends of $1,894, $1,045in principal payments on our Nord LB term loans and $426 on a final principalpayment on a term loan with a French bank. Sources of cash flow from financing activities included $441 in netproceeds from the issuance of common stock relating to the exercise of stockoptions and $143 for excess tax benefits related to stock option exercises.

 

Net cash flows provided by financing activities for2007 totaled $62,292 and consisted primarily of $65,480 borrowed under thesyndicated credit agreement to help fund the acquisition ofDYNAenergetics.  Additional sources ofcash flow from financing activities included $891 in net proceeds from theissuance of common stock relating to the exercise of stock options and $402 forexcess tax benefits related to stock option exercises.  These sources of cash flow were partiallyoffset by a payment of annual dividends of $1,821, a payment of deferred debtissuance costs of $1,534, principal payment of $397 on a term loan with aFrench bank, a $258 principal payment on a Nord LB term loan and net repaymentson bank lines of credit of $524.

 

37

----

Table of Contents

 

**CriticalAccounting Policies**

 

Our historical consolidated financial statements andnotes to our historical consolidated financial statements contain informationthat is pertinent to our management’s discussion and analysis of financialcondition and results of operations. Preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires that our managementmake estimates, judgments and assumptions that affect the reported amounts ofassets, liabilities, revenues and expenses, and the disclosure of contingentassets and liabilities.  However, theaccounting principles used by us generally do not change our reported cashflows or liquidity.  Interpretation ofthe existing rules must be done and judgments made on how the specifics ofa given rule apply to us.

 

In management’s opinion, the more significantreporting areas impacted by management’s judgments and estimates are revenuerecognition, asset impairments,  impactof foreign currency exchange rate risks and income taxes.  Management’s judgments and estimates in theseareas are based on information available from both internal and externalsources, and actual results could differ from the estimates, as additionalinformation becomes known.   We believethe following to be our most critical accounting policies.

 

*Revenue recognition*

 

Sales of clad metal products and welding services aregenerally 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 ofan arrangement exists; the price is fixed or determinable; delivery hasoccurred; and collection is reasonably assured. For contracts that require multiple shipments, revenue is recorded onlyfor the units included in each individual shipment.  If, as a contract proceeds toward completion,projected total cost on an individual contract indicates a probable loss, theCompany will account for such anticipated loss.

 

*Asset impairments*

 

We review our long-lived assets to be held and used byus for impairment whenever events or changes in circumstances indicate theircarrying amount may not be recoverable. In so doing, we estimate the future netcash flows expected to result from the use of these assets and their eventualdisposition. If the sum of the expected future net cash flows (undiscounted andwithout interest 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.

 

*BusinessCombinations*

 

We account for our business acquisitions using thepurchase method of accounting. We allocate the total cost of the acquisition tothe underlying net assets based on their respective estimated fair values. Aspart of this allocation process, we identify and attribute values and estimatedlives to the intangible assets acquired. These determinations involvesignificant estimates and assumptions regarding multiple, highly subjectivevariables, including those with respect to future cash flows, discount rates,asset lives, and the use of different valuation models and therefore requireconsiderable judgment. Our estimates and assumptions are based, in part, on theavailability of listed market prices or other transparent market data. Thesedeterminations affect the amount of amortization expense recognized in futureperiods. We base our fair value estimates on assumptions we believe to bereasonable but are inherently uncertain.

 

Effective January 1, 2009 we account for businessacquisitions in accordance with new Financial Accounting Standards Board (“FASB”)guidance which applies prospectively to business acquisitions with a closingdate following the effective date.  Thisnew guidance significantly changed the accounting for and reporting of businesscombination transactions and noncontrolling (minority) interests inconsolidated financial statements.  Theadoption of this guidance in 2009 did not have a significant impact on ourresults of operations or financial position including the impact of theacquisition of LRI.

 

38

----

Table of Contents

 

*Goodwilland Other Intangible Assets*

 

We review the carrying value of goodwill at leastannually to assess impairment because it is not amortized.  Additionally, we review the carrying value ofany intangible asset or goodwill whenever events or changes in circumstancesindicate that its carrying amount may not be recoverable. Examples of suchevents or changes in circumstances, many of which are subjective in nature,include significant negative industry or economic trends, significant changesin the manner of our use of the acquired assets or our strategy, a significantdecrease in the market value of the asset, and a significant change in legalfactors or in the business climate that could affect the value of the asset. Weassess impairment by comparing the fair value of an identifiable intangibleasset or goodwill with its carrying value. The determination of fair valueinvolves significant management judgment as described further below.Impairments are expensed when incurred. Specifically, we test for impairment asfollows:

 

*Goodwill*

 

We test goodwill for impairment on a “reporting unit”level on at least an annual basis. A reporting unit is a group of businesses (i) forwhich discrete financial information is available and (ii) that havesimilar economic characteristics. We test goodwill for impairment using thefollowing two-step approach:

 

The first step is a comparison of each reporting unit’sfair value to its carrying value. We estimate fair value using the bestinformation available, including market information and discounted cash flowprojections, also referred to as the income approach. The income approach usesa reporting unit’s projection of estimated operating results and cash flowsthat is discounted using a weighted-average cost of capital that reflectscurrent market conditions. The projections incorporate our best estimates ofeconomic and market conditions over the projected period including growth ratesin sales and estimates of future expected changes in operating margins and cashexpenditures. Other significant estimates and assumptions include terminalvalue growth rates, future estimates of capital expenditures and changes infuture working capital requirements.  Wevalidate our estimates of fair value under the income approach by comparing thevalues to fair value estimates using a market approach.

 

If the carrying value of the reporting unit is higherthan its fair value, there is an indication that impairment may exist, and thesecond step must be performed to measure the amount of impairment loss.  In the second step, we allocate the fairvalue of the reporting unit to the assets and liabilities of the reporting unitas if it had just been acquired in a business combination and as if thepurchase price was equivalent to the fair value of the reporting unit.  The excess of the fair value of the reportingunit over the amounts assigned to its assets and liabilities is referred to asthe implied fair value of goodwill. We then compare that implied fair value ofthe reporting unit’s goodwill to the carrying value of that goodwill. If theimplied fair value is less than the carrying value, we recognize an impairmentloss for the excess.

 

Our impairment testing in the fourth quarter of 2009did not result in a determination that any of our goodwill was impaired.  The fair value of the Oilfield Productsreporting unit was $74.2 million at December 31, 2009 compared to itscarrying value of $63.6 million.  Adiscount rate of 17% was utilized in the income approach component of the modelused to measure fair value.  A futureimpairment is possible and could occur if (i) the unit’s operating resultsunderperform what we have estimated or (ii) additional volatility of thecapital markets or other factors should cause us to raise the percent discountrate utilized in our discounted cash flow analysis or decrease the multiplesutilized in our market-based analysis. The use of different estimates or assumptions within our discounted cashflow model when determining the fair value of our reporting units or usingmethodologies other than as described above could result in different valuesfor reporting units and could result in an impairment charge.

 

*Intangible assets subject to amortization*

 

An intangible asset that is subject to amortization isreviewed when impairment indicators are present. We compare the expectedundiscounted future operating cash flows associated with finite-lived assets totheir respective carrying values to determine if the asset is fullyrecoverable. If the expected future operating cash flows are not sufficient torecover the carrying value, we estimate the fair value of the asset. Impairmentis recognized when the carrying amount of the asset is not recoverable and whenthe carrying value exceeds fair value. The projected cash flows require severalassumptions related to, among other things, relevant market factors, revenuegrowth, if any, and operating margins.

 

39

----

Table of Contents

 

*Impact of foreign currency exchange rate risks*

 

The functional currency for our foreign operations isthe applicable local currency for each affiliate company. Assets andliabilities of foreign subsidiaries for which the functional currency is thelocal currency are translated at exchange rates in effect at period-end, andthe statements of operations are translated at the average exchange ratesduring the period.  Exchange ratefluctuations on translating foreign currency financial statements into U.S.dollars that result in unrealized gains or losses are referred to astranslation adjustments. Cumulative translation adjustments are recorded as aseparate component of stockholders’ equity and are included in other cumulativecomprehensive income (loss). Transactions denominated in currencies other thanthe local currency are recorded based on exchange rates at the time suchtransactions arise. Subsequent changes in exchange rates result in transactiongains and losses, which are reflected in income as unrealized (based onperiod-end translations) or realized upon settlement of the transactions. Cashflows from our operations in foreign countries are translated at actualexchange rates when known, or at the average rate for the period. As a result,amounts related to assets and liabilities reported in the consolidatedstatements of cash flows will not agree to changes in the correspondingbalances in the consolidated balance sheets. The effects of exchange ratechanges on cash balances held in foreign currencies are reported as a separateline item below cash flows from financing activities.

 

*Income taxes*

 

We are required to recognize the recognition ofdeferred tax assets and deferred tax liabilities for the expected future incometax consequences of transactions that have been included in our financialstatements but not our tax returns. Deferred tax assets and liabilities are determined based on income taxcredits and on the temporary differences between the Consolidated FinancialStatement basis and the tax basis of assets and liabilities using enacted taxrates in effect for the year in which the differences are expected to reverse.  We routinely evaluate deferred tax assets todetermine if they will, more likely than not, be recovered from futureprojected taxable income; if not, we record an appropriate valuation allowance.

 

*Stock-Based Compensation Expense*

 

We are required to account for stock-based compensationunder fair value recognition provisions. The stock-based compensation cost is estimated at the grant date basedon the value of the award and is recognized as expense ratably over therequisite service period of the award. The fair value of restricted stock awards is based on the fair value ofthe Company’s stock on the date of grant. Determining the appropriate fair value model and calculating the fairvalue of stock options at the grant date requires judgment, includingestimating stock price volatility, forfeiture rates, and expected option life.

 

**OffBalance Sheet Arrangements**

 

We have noobligations, assets or liabilities other than those appearing or disclosed inour financial statements forming part of this annual report; no tradingactivities involving non-exchange traded contracts accounted for at fair value;and no relationships and transactions with persons or entities that derivebenefits from their non-independent relationship with us or our relatedparties.

 

40

----

Table of Contents

 

**Forward-LookingStatements**

 

This annual report and thedocuments incorporated by reference into it contain certain forward-lookingstatements within the safe harbor provisions of the Private SecuritiesLitigations Reform Act of 1995.  Thesestatements include information with respect to our financial condition and itsresults of operations and businesses. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,”“estimates,” “may,” “will,” “continue,” “project,” “forecast,” and similarexpressions, as well as statements in the future tense, identifyforward-looking statements.

 

These forward-lookingstatements are not guarantees of our future performance and are subject torisks and uncertainties that could cause actual results to differ materiallyfrom the results contemplated by the forward-looking statements.  These risks and uncertainties include:

 

·                  The ability toobtain new contracts at attractive prices;

 

·                  The size andtiming of customer orders;

 

·                  Fluctuations incustomer demand;

 

·                  Generaleconomic conditions, both domestically and abroad, and their effect on us andour customers;

 

·                  Competitivefactors;

 

·                  The timelycompletion of contracts;

 

·                  The timing andsize of expenditures;

 

·                  The timelyreceipt of government approvals and permits;

 

·                  The adequacy oflocal labor supplies at our facilities;

 

·                  Theavailability and cost of funds; and

 

·                  Fluctuations inforeign currencies.

 

The effects ofthese factors are difficult to predict. New factors emerge from time to time and we cannot assess the potentialimpact of any such factor on the business or the extent to which any factor, orcombination of factors, may causeresults to differ materially from those contained in any forward-lookingstatement.  Any forward-looking statementspeaks only as of the date of this annual report, and we do not undertake anyobligation to update any forward-looking statement to reflect events or circumstances after the date of suchstatement or to reflect the occurrenceof unanticipated events.  Inaddition, see “Risk Factors” for a discussion of these and other factors**.**

 

**ITEM 7A.       Quantitative and Qualitative Disclosure about Market Risk**

 

*Interest Rate Risk*

 

Our interest rate risk management policies aredesigned to reduce the potential earnings volatility that could arise fromchanges in interest rates.  Through theuse of interest rate swaps, we aim to stabilize funding costs by managing theexposure created by the differing maturities and interest rate structures ofour assets and liabilities.  See Note 2to the Consolidated Financial Statements for further information on interestrate risk management.

 

*Foreign Currency Risk*

 

Our consolidated financial statements are expressed inU.S. dollars, but a portion of our business is conducted in currencies otherthan U.S. dollars.  Changes in theexchange rates for such currencies into U.S. dollars can affect our revenues,earnings, and the carrying value of our assets and liabilities in ourconsolidated balance sheet, either positively or negatively.  Sales made in currencies other than U.S.dollars accounted for 45%, 47%, and 28% of total sales for the years ended2009, 2008, and 2007, respectively.

 

41

----

Table of Contents

 

**ITEM 8.           FinancialStatements and Supplementary Data**

 

**DYNAMIC MATERIALS CORPORATION AND SUBSIDIARIES**

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**As of December 31, 2009 and 2008 and for Eachof the Three Years Ended**

**December 31, 2009, 2008 and 2007**

 
| ** **                                               | ** ** | **Page** |
|----------------------------------------------------------|------------|----------|
| Report  of Independent Registered Public Accounting Firm |       | 43       |
| Financial  Statements:                                   |       |     |
| Consolidated Balance Sheets                              |       | 44       |
| Consolidated Statements of Operations                    |       | 46       |
| Consolidated Statements of Stockholders’ Equity     |       | 47       |
| Consolidated Statements of Cash Flows                    |       | 48       |
| Notes to Consolidated Financial Statements               |       | 50       |

 

The consolidatedfinancial statement schedules required by Regulation S-X are filed under Item15 “Exhibits and Financial Statement Schedules”.

 

42

----

Table of Contents

 

**Report of Independent Registered Public AccountingFirm**

 

The Stockholdersand the

Board of Directors of Dynamic Materials Corporation:

 

We have auditedthe accompanying consolidated balance sheets of Dynamic Materials Corporationand subsidiaries as of December 31, 2009 and 2008, and the relatedconsolidated statements of operations, stockholders’ equity, and cash flows foreach of the three years in the period ended December 31, 2009. Our auditsalso included the financial statement schedules listed in the Index at Item15(a).  These financial statements andschedules are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements andschedules based on our audits.

 

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Dynamic Materials Corporationand subsidiaries at December 31, 2009 and 2008, and the consolidatedresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2009, in conformity with U.S. generallyaccepted accounting principles.  Also, inour opinion, the related financial statement schedules, when considered inrelation to the basic financial statements taken as a whole, present fairly inall material respects the information set forth therein.

 

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), Dynamic Materials Corporation and subsidiaries’internal control over financial reporting as of December 31, 2009, basedon criteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our reportdated March 12, 2010 expressed an unqualified opinion thereon.

 

 

/s/ Ernst & Young LLP

 

Denver, Colorado

March 12,2010

 

43

----

Table ofContents

 

DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONSOLIDATEDBALANCE SHEETS

AS OF DECEMBER 31, 2009AND 2008

(Dollars in Thousands)

 
| ** **                                                                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS                                                                                       |       |     |       |     |       |
|                                                                                         |       |     |       |     |       |
| CURRENT  ASSETS:                                                                             |       |     |       |     |       |
| Cash  and cash equivalents                                                                   |       | $        | 22,411     |     | $          | 14,360 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $390 and $614,  respectively |       | 25,807   |       | 34,719   |       |
| Inventories                                                                                  |       | 32,501   |       | 35,300   |       |
| Prepaid  expenses and other                                                                  |       | 2,397    |       | 2,956    |       |
| Related  party receivable and loan                                                           |       | 2,806    |       | 2,611    |       |
| Current  deferred tax assets                                                                 |       | 2,052    |       | 1,103    |       |
|                                                                                         |       |     |       |     |       |
| Total  current assets                                                                        |       | 87,974   |       | 91,049   |       |
|                                                                                         |       |     |       |     |       |
| PROPERTY,  PLANT AND EQUIPMENT                                                               |       | 64,944   |       | 58,454   |       |
| Less  - Accumulated depreciation                                                             |       | (22,892  | )          | (17,997  | )          |
|                                                                                         |       |     |       |     |       |
| Property,  plant and equipment, net                                                          |       | 42,052   |       | 40,457   |       |
|                                                                                         |       |     |       |     |       |
| GOODWILL,  net                                                                               |       | 43,164   |       | 43,066   |       |
|                                                                                         |       |     |       |     |       |
| PURCHASED  INTANGIBLE ASSETS, net                                                            |       | 49,079   |       | 52,264   |       |
|                                                                                         |       |     |       |     |       |
| DEFERRED  TAX ASSETS                                                                         |       | 332      |       | 331      |       |
|                                                                                         |       |     |       |     |       |
| OTHER  ASSETS, net                                                                           |       | 1,443    |       | 1,449    |       |
|                                                                                         |       |     |       |     |       |
| INVESTMENT  IN JOINT VENTURES                                                                |       | 1,132    |       | 970      |       |
|                                                                                         |       |     |       |     |       |
| TOTAL  ASSETS                                                                                |       | $        | 225,176    |     | $          | 229,586 |   |

 

The accompanying notesare an integral part of these Consolidated Financial Statements.

 

44

----

Table of Contents

 

DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATEDBALANCE SHEETS

AS OF DECEMBER 31, 2009AND 2008

(Dollars in Thousands,Except Share Data)

 
| ** **                                                                                                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                           |       |     |       |     |       |
|                                                                                                                                 |       |     |       |     |       |
| CURRENT  LIABILITIES:                                                                                                                |       |     |       |     |       |
| Accounts  payable                                                                                                                    |       | $        | 9,183      |     | $          | 15,402 |   |
| Accrued  expenses                                                                                                                    |       | 4,808    |       | 6,605    |       |
| Dividend  payable                                                                                                                    |       | 515      |       | —   |       |
| Accrued  income taxes                                                                                                                |       | 1,485    |       | 846      |       |
| Accrued  employee compensation and benefits                                                                                          |       | 4,048    |       | 5,579    |       |
| Customer  advances                                                                                                                   |       | 6,528    |       | 2,685    |       |
| Related  party accounts payable                                                                                                      |       | —   |       | 17       |       |
| Lines  of credit                                                                                                                     |       | 1,777    |       | —   |       |
| Current  maturities on long-term debt                                                                                                |       | 13,485   |       | 14,450   |       |
| Current  portion of capital lease obligations                                                                                        |       | 306      |       | 163      |       |
|                                                                                                                                 |       |     |       |     |       |
| Total  current liabilities                                                                                                           |       | 42,135   |       | 45,747   |       |
|                                                                                                                                 |       |     |       |     |       |
| LONG-TERM  DEBT                                                                                                                      |       | 34,120   |       | 46,178   |       |
|                                                                                                                                 |       |     |       |     |       |
| CAPITAL  LEASE OBLIGATIONS                                                                                                           |       | 436      |       | 336      |       |
|                                                                                                                                 |       |     |       |     |       |
| DEFERRED  TAX LIABILITIES                                                                                                            |       | 15,217   |       | 16,833   |       |
|                                                                                                                                 |       |     |       |     |       |
| OTHER  LONG-TERM LIABILITIES - RELATED PARTY                                                                                         |       | —   |       | 303      |       |
|                                                                                                                                 |       |     |       |     |       |
| OTHER  LONG-TERM LIABILITIES                                                                                                         |       | 1,157    |       | 1,687    |       |
|                                                                                                                                 |       |     |       |     |       |
| Total  liabilities                                                                                                                   |       | 93,065   |       | 111,084  |       |
|                                                                                                                                 |       |     |       |     |       |
| 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; 12,870,363 and  12,780,877 shares issued and outstanding, respectively |       | 643      |       | 639      |       |
| Additional  paid-in capital                                                                                                          |       | 46,080   |       | 42,050   |       |
| Retained  earnings                                                                                                                   |       | 85,048   |       | 78,042   |       |
| Other  cumulative comprehensive income (loss)                                                                                        |       | 340      |       | (2,229   | )          |
|                                                                                                                                 |       |     |       |     |       |
| Total  stockholders’ equity                                                                                                     |       | 132,111  |       | 118,502  |       |
|                                                                                                                                 |       |     |       |     |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                     |       | $        | 225,176    |     | $          | 229,586 |   |

 

The accompanyingnotes are an integral part of these Consolidated Financial Statements.

 

45

----

Table of Contents

 

DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF OPERATIONS

FOR THE YEARS ENDEDDECEMBER 31, 2009, 2008 AND 2007

(Dollars in Thousands, ExceptShare Data)

 
| ** **                                           | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| NET  SALES                                           |       | $          | 164,898    |       | $          | 232,577    |       | $ | 165,175 |   |
|                                                 |       |       |       |       |       |       |       |
| COST  OF PRODUCTS SOLD                               |       | 121,779    |       | 161,732    |       | 110,168    |       |
|                                                 |       |       |       |       |       |       |       |
| Gross  profit                                        |       | 43,119     |       | 70,845     |       | 55,007     |       |
|                                                 |       |       |       |       |       |       |       |
| COSTS  AND EXPENSES:                                 |       |       |       |       |       |       |       |
| General  and administrative expenses                 |       | 12,980     |       | 14,256     |       | 8,049      |       |
| Selling  expenses                                    |       | 8,837      |       | 11,155     |       | 6,875      |       |
| Amortization  expense of purchased intangible assets |       | 5,064      |       | 7,382      |       | 1,191      |       |
|                                                 |       |       |       |       |       |       |       |
| Total  costs and expenses                            |       | 26,881     |       | 32,793     |       | 16,115     |       |
|                                                 |       |       |       |       |       |       |       |
| INCOME  FROM OPERATIONS                              |       | 16,238     |       | 38,052     |       | 38,892     |       |
|                                                 |       |       |       |       |       |       |       |
| OTHER  INCOME (EXPENSE):                             |       |       |       |       |       |       |       |
| Other  expense, net                                  |       | (275       | )          | (269       | )          | (158       | )          |
| Interest  expense                                    |       | (3,473     | )          | (5,472     | )          | (722       | )          |
| Interest  income                                     |       | 173        |       | 642        |       | 692        |       |
| Related  party interest income                       |       | 43         |       | 47         |       | 6          |       |
| Equity  in earnings of joint ventures                |       | 221        |       | 274        |       | 24         |       |
|                                                 |       |       |       |       |       |       |       |
| INCOME  BEFORE INCOME TAXES                          |       | 12,927     |       | 33,274     |       | 38,734     |       |
|                                                 |       |       |       |       |       |       |       |
| INCOME  TAX PROVISION                                |       | 4,378      |       | 9,206      |       | 14,147     |       |
|                                                 |       |       |       |       |       |       |       |
| NET  INCOME                                          |       | $          | 8,549      |       | $          | 24,068     |       | $ | 24,587 |   |
|                                                 |       |       |       |       |       |       |       |
| INCOME  PER SHARE:                                   |       |       |       |       |       |       |       |
| Basic                                                |       | $          | 0.67       |       | $          | 1.89       |       | $ | 2.02 |   |
| Diluted                                              |       | $          | 0.66       |       | $          | 1.87       |       | $ | 1.99 |   |
|                                                 |       |       |       |       |       |       |       |
| WEIGHTED  AVERAGE NUMBER OF SHARES OUTSTANDING -     |       |       |       |       |       |       |       |
| Basic                                                |       | 12,640,069 |       | 12,445,685 |       | 12,083,851 |       |
| Diluted                                              |       | 12,662,440 |       | 12,554,402 |       | 12,273,135 |       |
|                                                 |       |       |       |       |       |       |       |
| DIVIDENDS  DECLARED PER COMMON SHARE                 |       | $          | 0.12       |       | $          | 0.15       |       | $ | 0.15 |   |

 

The accompanying notesare in integral part of these Consolidated Financial Statements.

 

46

----

Table of Contents

 

DYNAMICMATERIALS CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FORTHE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

(Amountsin Thousands)

 
| ** **                                                    | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Other**         | ** ** | ** ** | ** ** | ** **         | ** ** |
|---------------------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|-------------------|------------|-------------------|------------|------------|------------|--------------------|------------|
| ** **                                                    | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Cumulative**    | ** ** | ** ** | ** ** | **Comprehensive**  | ** ** |
| ** **                                                    | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | ** **        | ** ** | **Income** | ** ** |
| ** **                                                    | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Income/(loss)** | ** ** | **Total**  | ** ** | **for the Period** | ** ** |
| Balances,  December 31, 2006                             |       | 11,982           |       | $           | 599        |           | $          | 22,166            |       | $                 | 33,102     |       | $          | 1,713              |       | $ | 57,580 |   |   |   |
| Shares  issued for DYNAenergetics acquisition                 |       | 251              |       | 13          |       | 13,496         |       | —            |       | —            |       | 13,509     |       |               |       |
| Shares  issued in connection with stock compensation plans    |       | 201              |       | 10          |       | 881            |       | —            |       | —            |       | 891        |       |               |       |
| Excess  tax benefit related to stock options                  |       | —           |       | —      |       | 402            |       | —            |       | —            |       | 402        |       |               |       |
| Stock-based  compensation                                     |       | —           |       | —      |       | 1,301          |       | —            |       | —            |       | 1,301      |       |               |       |
| Dividends                                                     |       | —           |       | —      |       | —         |       | (1,821            | )          | —            |       | (1,821     | )          |               |       |
| Net  income                                                   |       | —           |       | —      |       | —         |       | 24,587            |       | —            |       | 24,587     |       | 24,587             |       |
| Derivative  valuation, net of tax of $90                      |       | —           |       | —      |       | —         |       | —            |       | (147              | )          | (147       | )          | (147               | )          |
| Change  in cumulative foreign currency translation adjustment |       | —           |       | —      |       | —         |       | —            |       | 1,977             |       | 1,977      |       | 1,977              |       |
| Balances,  December 31, 2007                             |       | 12,434           |       | 622         |       | 38,246         |       | 55,868            |       | 3,543             |       | 98,279     |       | 26,417             |       |
| Shares  issued in connection with stock compensation plans    |       | 347              |       | 17          |       | 424            |       | —            |       | —            |       | 441        |       |               |       |
| Excess  tax benefit related to stock options                  |       | —           |       | —      |       | 143            |       | —            |       | —            |       | 143        |       |               |       |
| Stock-based  compensation                                     |       | —           |       | —      |       | 3,237          |       | —            |       | —            |       | 3,237      |       |               |       |
| Dividends                                                     |       | —           |       | —      |       | —         |       | (1,894            | )          | —            |       | (1,894     | )          |               |       |
| Net  income                                                   |       | —           |       | —      |       | —         |       | 24,068            |       | —            |       | 24,068     |       | 24,068             |       |
| Derivative  valuation, net of tax of $430                     |       | —           |       | —      |       | —         |       | —            |       | (739              | )          | (739       | )          | (739               | )          |
| Change  in cumulative foreign currency translation adjustment |       | —           |       | —      |       | —         |       | —            |       | (5,033            | )          | (5,033     | )          | (5,033             | )          |
| Balances,  December 31, 2008                             |       | 12,781           |       | 639         |       | 42,050         |       | 78,042            |       | (2,229            | )          | 118,502    |       | 18,296             |       |
| Shares  issued for LRI acquisition                            |       | 5                |       | —      |       | 94             |       | —            |       | —            |       | 94         |       |               |       |
| Shares  issued in connection with stock compensation plans    |       | 84               |       | 4           |       | 421            |       | —            |       | —            |       | 425        |       |               |       |
| Excess  tax benefit related to stock options                  |       | —           |       | —      |       | 90             |       | —            |       | —            |       | 90         |       |               |       |
| Stock-based  compensation                                     |       | —           |       | —      |       | 3,425          |       | —            |       | —            |       | 3,425      |       |               |       |
| Dividends                                                     |       | —           |       | —      |       | —         |       | (1,543            | )          | —            |       | (1,543     | )          |               |       |
| Net  income                                                   |       | —           |       | —      |       | —         |       | 8,549             |       | —            |       | 8,549      |       | 8,549              |       |
| Derivative  valuation, net of tax of $221                     |       | —           |       | —      |       | —         |       | —            |       | 432               |       | 432        |       | 432                |       |
| Change  in cumulative foreign currency translation adjustment |       | —           |       | —      |       | —         |       | —            |       | 2,137             |       | 2,137      |       | 2,137              |       |
| Balances,  December 31, 2009                             |       | 12,870           |       | $           | 643        |           | $          | 46,080            |       | $                 | 85,048     |       | $          | 340                |       | $ | 132,111 |   | $ | 11,118 |   |
|                                                               |            |                  |            |             |            |                |            |                   |            |                   |            |            |            |                    |            |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these Consolidated FinancialStatements.

 

47

----

Table of Contents

 

DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

FOR THE YEARS ENDEDDECEMBER 31, 2009, 2008 AND 2007

(Dollars in Thousands)

 
| ** **                                                                         | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                             |       |     |       |     |       |     |       |
| Net  income                                                                        |       | $        | 8,549      |     | $          | 24,068   |       | $ | 24,587 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |     |       |     |       |     |       |
| Depreciation  (including capital lease amortization)                               |       | 5,042    |       | 4,531    |       | 2,156    |       |
| Amortization  of purchased intangible assets                                       |       | 5,064    |       | 7,382    |       | 1,191    |       |
| Amortization  of capitalized debt issuance costs                                   |       | 297      |       | 279      |       | 30       |       |
| Stock-based  compensation                                                          |       | 3,425    |       | 3,237    |       | 1,301    |       |
| Deferred  income tax benefit                                                       |       | (2,784   | )          | (2,079   | )          | (357     | )          |
| Equity  in earnings of joint ventures                                              |       | (221     | )          | (274     | )          | (24      | )          |
| Change  in (excluding assets acquired):                                            |       |     |       |     |       |     |       |
| Restricted  cash                                                                   |       | —   |       | 371      |       | 3,059    |       |
| Accounts  receivable, net                                                          |       | 11,891   |       | 4,061    |       | (9,670   | )          |
| Inventories                                                                        |       | 6,604    |       | 4,911    |       | (6,386   | )          |
| Prepaid  expenses and other                                                        |       | (571     | )          | (2,802   | )          | 524      |       |
| Accounts  payable                                                                  |       | (8,045   | )          | (6,706   | )          | 1,429    |       |
| Customer  advances                                                                 |       | 3,813    |       | (1,833   | )          | 1,916    |       |
| Accrued  expenses and other liabilities                                            |       | (3,524   | )          | (1,143   | )          | (1,072   | )          |
|                                                                               |       |     |       |     |       |     |       |
| Net  cash provided by operating activities                                         |       | 29,540   |       | 34,003   |       | 18,684   |       |
|                                                                               |       |     |       |     |       |     |       |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                             |       |     |       |     |       |     |       |
| Acquisition  of LRI, net of cash acquired                                          |       | (284     | )          | —   |       | —   |       |
| Acquisition  of DYNAenergetics, net of cash acquired                               |       | —   |       | (559     | )          | (81,224  | )          |
| Acquisition  of property, plant and equipment                                      |       | (3,917   | )          | (9,925   | )          | (8,979   | )          |
| Change  in other non-current assets                                                |       | 59       |       | 20       |       | (87      | )          |
|                                                                               |       |     |       |     |       |     |       |
| Net  cash used in investing activities                                             |       | (4,142   | )          | (10,464  | )          | (90,290  | )          |
|                                                                                    |            |          |            |          |            |          |            |  |  |  |

 

Theaccompanying notes are an integral part of these Consolidated FinancialStatements.

 

48

----

Table ofContents

 

DYNAMIC MATERIALSCORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTSOF CASH FLOWS

FOR THE YEARS ENDEDDECEMBER 31, 2009, 2008 AND 2007

(Dollars in Thousands)

 
| ** **                                                              | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM FINANCING ACTIVITIES:                                   |       |     |       |     |       |     |       |
| Borrowed under syndicated credit agreement                              |       | —   |       | —   |       | 65,480   |       |
| Payment on syndicated term loans                                        |       | (13,614  | )          | (6,282   | )          | —   |       |
| Payments on loans with former owners of LRI                             |       | (1,231   | )          | —   |       | —   |       |
| Payment on term loan with French bank                                   |       | —   |       | (426     | )          | (397     | )          |
| Payment on Nord LB term loans                                           |       | (876     | )          | (1,045   | )          | (258     | )          |
| Payments on bank lines of credit, net                                   |       | (952     | )          | (7,579   | )          | (524     | )          |
| Payment on capital lease obligations                                    |       | (203     | )          | (389     | )          | (34      | )          |
| Payment of dividends                                                    |       | (1,028   | )          | (1,894   | )          | (1,821   | )          |
| Payment of deferred debt issuance costs                                 |       | (341     | )          | (218     | )          | (1,534   | )          |
| Change in other long-tem liabilities                                    |       | —   |       | —   |       | 87       |       |
| Net proceeds from issuance of common stock to emplolyees  and directors |       | 425      |       | 441      |       | 891      |       |
| Excess tax benefit related to exercise of stock  options                |       | 90       |       | 143      |       | 402      |       |
|                                                                    |       |     |       |     |       |     |       |
| Net cash provided by (used in) financing activities                     |       | (17,730  | )          | (17,249  | )          | 62,292   |       |
|                                                                    |       |     |       |     |       |     |       |
| EFFECTS OF EXCHANGE RATES ON CASH                                       |       | 383      |       | (975     | )          | 473      |       |
|                                                                    |       |     |       |     |       |     |       |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                    |       | 8,051    |       | 5,315    |       | (8,841   | )          |
|                                                                    |       |     |       |     |       |     |       |
| CASH AND CASH EQUIVALENTS, beginning of the period                      |       | 14,360   |       | 9,045    |       | 17,886   |       |
|                                                                    |       |     |       |     |       |     |       |
| CASH AND CASH EQUIVALENTS, end of the period                            |       | $        | 22,411     |     | $          | 14,360   |       | $ | 9,045 |   |
|                                                                    |       |     |       |     |       |     |       |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                       |       |     |       |     |       |     |       |
| Cash paid during the period for -                                       |       |     |       |     |       |     |       |
| Interest                                                                |       | $        | 3,017      |     | $          | 5,037    |       | $ | 454 |   |
| Income taxes, net                                                       |       | $        | 6,132      |     | $          | 11,838   |       | $ | 14,960 |   |
|                                                                    |       |     |       |     |       |     |       |
| NON-CASH FINANCING ACTIVITY:                                            |       |     |       |     |       |     |       |
| Common stock issued for acquisitions                                    |       | $        | 94         |     | $          | —   |       | $ | 13,509 |   |
| Debt assumed in acquisitions                                            |       | $        | 5,553      |     | $          | —   |       | $ | 11,833 |   |

 

The accompanying notesare an integral part of these Condensed Consolidated Financial Statements.

 

49

----

Table ofContents

 

DYNAMIC MATERIALSCORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2009

 

(Currency Amounts in Thousands, Except Per Share Data)

 

(1)       ORGANIZATION ANDBUSINESS

 

Dynamic Materials Corporation (the “Company”) wasincorporated in the state of Colorado in 1971 and reincorporated in the stateof Delaware during 1997. The Company is headquartered in Boulder, Colorado andhas manufacturing facilities in the United States, Germany, France, Canada, andSweden. Customers are located throughout the world. The Company currentlyoperates under three business segments — Explosive Metalworking, in whichmetals are metallurgically joined or altered by using explosives; OilfieldProducts, which manufactures, markets, and sells oil field perforatingequipment and explosives; and AMK Welding, which utilizes a number of weldingtechnologies to weld components for manufacturers of jet engines andground-based turbines. The Company has five wholly-owned operating subsidiaries,Nobelclad Europe S.A. (“Nobelclad”), Nitro Metall Aktiebolag (“Nitro Metall”),DYNAenergetics GmbH and Co. KG (“DYNAenergetics”), Dynaplat GmbH and Co. KG (“Dynaplat”)and DYNAenergetics Canada. DYNAenergetics and Dynaplat were acquired in 2007 as described below andDYNAenergetics Canada was acquired in 2009 (as LRI Oil Tools, Inc.) whichis also described below.  In addition,the Company has four wholly owned holding companies.  Dynamic Materials Luxembourg S.ar.l 1,Dynamic Materials Luxembourg S.ar.l 2 and DYNAenergetics Holding GmbH wereestablished in connection with the acquisition of DYNAenergetics andDYNAenergetics NA was established in the connection with the acquisition of LRIOil Tools, Inc.

 

2007 Acquisition

 

On November 15, 2007, the Company and anewly-formed subsidiary, DYNAenergetics Holding GmbH (the “Purchaser”), enteredinto a Purchase, Sale and Assignment Agreement (the “Purchase Agreement”) withRolf Rospek, Patrick Xylander, Uwe Gessel, and Oag Beteiligungs-GmbH, a Germanlimited liability company (collectively the “Sellers”).  Pursuant to the terms of the PurchaseAgreement, on November 15, 2007, the Purchaser acquired 100% of the issuedand outstanding shares of DYNAenergetics Beteiligungs-GmbH and all of theinterests in DYNAenergetics GmbH and Co. KG (collectively, “DYNAenergetics”)from the Sellers.  The Company’sstatement of operations includes the effect of the DYNAenergetics acquisitionfrom the November 15, 2007, closing date. Effective January 1, 2008, the explosive metalworking business ofDYNAenergetics was transferred into Dynaplat GmbH & Co KG (“Dynaplat”),a newly formed 100% owned operating subsidiary of the Company.  DYNAenergetics retains the operations of theoilfield products business.

 

2009 Acquisition

 

On October 1, 2009, the Company acquired all ofthe stock of Alberta, Canada based LRI Oil Tools Inc (“LRI”), which is nowoperating under the name DYNAenergetics Canada Inc.  DYNAenergetics Canada produces anddistributes perforating equipment for use by the oil and gas exploration andproduction industry.  The business had along-term strategic relationship with the Company’s Oilfield Products segmentand had served for several years as its sole Canadian distributor.  The Company’s statement of operations includesthe effect of the LRI acquisition from the October 1, 2009 closingdate.  See Note 3 for additionaldisclosures regarding this acquisition.

 

50

----

Table ofContents

 

(2)                      SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES

 

Principles of Consolidation

 

The Consolidated Financial Statements include theaccounts of the Company and its controlled subsidiaries.  Only subsidiaries in which controllinginterests are maintained are consolidated. The equity method is used to account for our ownership in subsidiarieswhere we do not have a controlling interest. All significant intercompany accounts, profits, and transactions havebeen eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from these estimates.

 

Foreign Operations and ForeignExchange Rate Risk

 

The functional currency for our foreign operations isthe applicable local currency for each affiliate company. Assets andliabilities of foreign subsidiaries for which the functional currency is thelocal currency are translated at exchange rates in effect at period-end, andthe statements of operations are translated at the average exchange ratesduring the period.  Exchange ratefluctuations on translating foreign currency financial statements into U.S.dollars that result in unrealized gains or losses are referred to astranslation adjustments. Cumulative translation adjustments are recorded as aseparate component of stockholders’ equity and are included in other cumulativecomprehensive income (loss). Transactions denominated in currencies other thanthe local currency are recorded based on exchange rates at the time suchtransactions arise. Subsequent changes in exchange rates result in transactiongains and losses, which are reflected in income as unrealized (based on period-endtranslations) or realized upon settlement of the transactions. Cash flows fromour operations in foreign countries are translated at actual exchange rateswhen known, or at the average rate for the period. As a result, amounts relatedto assets 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.

 

Cash and Cash Equivalentsand Restricted Cash

 

For purposes of the financial statements, the Companyconsiders highly liquid investments purchased with an original maturity ofthree months or less to be cash equivalents.

 

Allowance for Doubtful Accounts

 

The Company estimates its allowance for doubtfulaccounts based on historical rates of write-offs of uncollectible receivablesand its evaluation of the year end composition of accounts receivable.

 

51

----

Table of Contents

 

Inventories

 

Inventories are stated at the lower-of-cost (first-in,first-out) or market value.  Cost elementsincluded in inventory are material, labor, subcontract costs, and factoryoverhead.  Inventories consist of thefollowing at December 31, 2009 and 2008:

 
| ** **      | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Raw materials   |       | $        | 10,321     |     | $          | 11,610 |   |
| Work-in-process |       | 15,963   |       | 18,950   |       |
| Finished goods  |       | 5,526    |       | 3,903    |       |
| Supplies        |       | 691      |       | 837      |       |
|            |       |     |       |     |       |
|            |       | $        | 32,501     |     | $          | 35,300 |   |

 

Shipping and handling costs incurred by the Companyupon shipment to customers are included in cost of products sold in theaccompanying Consolidated Statements of Operations.

 

Property, Plant and Equipment

 

Property, plant and equipment are recorded at cost.Additions, improvements, and betterments are capitalized. Maintenance andrepairs are charged to operations as the costs are incurred.  Depreciation is computed using thestraight-line method over the estimated useful life of the related asset(except leasehold improvements which are depreciated over the shorter of theirestimated useful life or their lease term of the asset) as follows:

 
| Buildings and improvements                  |   | 15-30 years |   |
|---------------------------------------------|--------|-------------|--------|
| Manufacturing equipment and tooling         |   | 3-15 years  |   |
| Furniture, fixtures, and computer equipment |   | 3-10 years  |   |
| Other                                       |   | 3-10 years  |   |

 

Property, plant andequipment consist of the following at December 31, 2009 and 2008:

 
| ** **                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Land                                       |       | $        | 2,424      |     | $          | 2,164 |   |
| Buildings and improvements                 |       | 20,621   |       | 17,265   |       |
| Manufacturing equipment and tooling        |       | 32,671   |       | 26,673   |       |
| Furniture, fixtures and computer equipment |       | 5,177    |       | 4,956    |       |
| Other                                      |       | 2,064    |       | 2,658    |       |
| Construction in process                    |       | 1,987    |       | 4,738    |       |
|                                       |       |     |       |     |       |
|                                       |       | $        | 64,944     |     | $          | 58,454 |   |

 

Asset Impairments

 

The Company reviews its long-lived assets to be heldand used by the Company for impairment whenever events or changes incircumstances indicate their carrying amount may not be recoverable.  In so doing, the Company estimates the futurenet cash flows expected to result from the use of these assets and theireventual disposition.  If the sum of theexpected future net cash flows (undiscounted and without interest charges) isless than the carrying amount of these assets, an impairment loss is recognizedto reduce these assets to their estimated fair values.  Otherwise, an impairment loss is notrecognized.  Long-lived assets to bedisposed of, if any, are reported at the lower of carrying amount or fair valueless cost to sell.

 

52

----

Table of Contents

 

Goodwill

 

Goodwill represents the excess of acquisition costsover the fair value of net assets of businesses acquired.  Goodwill is not amortized; however, thecarrying value of goodwill must be tested annually for impairment on areporting unit level.   The Company’spolicy is to test goodwill in the fourth quarter of each year unlesscircumstances indicate impairment during an intervening period.  The Company tests goodwill for impairmentusing the following two-step approach:

 

The first step is a comparison of each reporting unit’sfair value to its carrying value. The Company estimates fair value using thebest information available, including market information and discounted cashflow projections, also referred to as the income approach. The income approachuses a reporting unit’s projection of estimated operating results and cashflows that is discounted using a weighted-average cost of capital that reflectscurrent market conditions. The projections incorporate management’s bestestimates of economic and market conditions over the projected period includinggrowth rates in sales and estimates of future expected changes in operatingmargins and cash expenditures. Other significant estimates and assumptionsinclude terminal value growth rates, future estimates of capital expendituresand changes in future working capital requirements. Management validates itsestimates of fair value under the income approach by comparing the values tofair value estimates using a market approach.

 

If the carrying value of the reporting unit is higherthan its fair value, there is an indication that impairment may exist, and thesecond step must be performed to measure the amount of impairment loss.  In the second step, the fair value of thereporting unit is allocated to the assets and liabilities of the reporting unitas if it had just been acquired in a business combination and as if thepurchase price was equivalent to the fair value of the reporting unit.  The excess of the fair value of the reportingunit over the amounts assigned to its assets and liabilities is referred to asthe implied fair value of goodwill. Management then compares that implied fairvalue of the reporting unit’s goodwill to the carrying value of that goodwill.If the implied fair value is less than the carrying value, the Companyrecognizes an impairment loss for the excess.

 

The Company’s impairment testing has not resulted in adetermination that any of its goodwill is impaired.  The fair value of the Oilfield Productsreporting unit was $74.2 million at December 31, 2009 compared to itscarrying value of $63.6 million.  Adiscount rate of 17% was utilized in the income approach component of the modelused to measure fair value.  A futureimpairment is possible and could occur if (i) the unit’s operating resultsunderperform what the Company has estimated or (ii) additional volatilityof the capital markets should cause the Company to raise the discount rateutilized in its discounted cash flow analysis or decrease the multiplesutilized in its market-based analysis. The use of different estimates or assumptions within the discounted cashflow model when determining the fair value of the Company’s reporting units orusing methodologies other than as described above could result in differentvalues for reporting units and could result in an impairment charge.

 

53

----

Table of Contents

 

The changes to thecarrying amount of goodwill during the period are summarized below:

 
| ** **                                                                            | ** ** | **Explosive**    | ** ** | ** **   | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------|------------|--------------|------------|------------|------------|
| ** **                                                                            | ** ** | **Metalworking** | ** ** | **Oilfield** | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | **Group**        | ** ** | **Products** | ** ** | **Total**  | ** ** |
| Goodwill balance at December 31, 2007                                            |       | $                | 25,445     |         | $          | 20,417     |       | $ | 45,862 |   |
| Purchase price adjustment                                                             |       | 499              |       | (290         | )          | 209        |       |
| Adjustment due to recognition of tax benefit of tax  amortization of certain goodwill |       | (445             | )          | (628         | )          | (1,073     | )          |
| Adjustment due to exchange rate differences                                           |       | (1,055           | )          | (877         | )          | (1,932     | )          |
|                                                                                  |       |             |       |         |       |       |       |
| Goodwill balance at December 31, 2008                                            |       | $                | 24,444     |         | $          | 18,622     |       | $ | 43,066 |   |
| Adjustment due to recognition of tax benefit of tax  amortization of certain goodwill |       | (262             | )          | (347         | )          | (609       | )          |
| Adjustment due to exchange rate differences                                           |       | 395              |       | 312          |       | 707        |       |
|                                                                                  |       |             |       |         |       |       |       |
| Goodwill balance at December 31, 2009                                            |       | $                | 24,577     |         | $          | 18,587     |       | $ | 43,164 |   |

 

Purchased IntangibleAssets

 

The Company’s purchased intangible assets include coretechnology, customer relationships, order backlog and trademarks/trade names.  Impairment, if any, is calculated based uponmanagement evaluation whereby, estimated undiscounted future cash flowsassociated with these assets or operations are compared with their carryingvalue to determine if a write-down to fair value is required.  Finite lived intangible assets are amortizedover the estimated useful life of the related assets which have a weightedaverage amortization period of 13 years in total.

 

The weighted average amortization period of theintangible assets by asset category are as follows:

 
| Core technology          |   | 20 years |   |
|--------------------------|--------|----------|--------|
| Customer relationships   |   | 10 years |   |
| Trademarks / Trade names |   | 9 years  |   |

 

The following table presents details of intangibleassets 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 |   |

 

54

----

Table of Contents

 

The following table presents details of intangibleassets as of December 31, 2008:

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

 

The increase in the gross value of our purchasedintangible assets from December 31, 2008 to December 31, 2009 ispartly due to the additional intangible assets associated with the acquisitionof LRI (see Note 3) with the remaining difference due to the impact of foreigncurrency translation.

 

Expected future amortization of intangible assets isas follows:

 
| For the years ended December 31 - |   |   |   |
|----------------------------------------|--------|--------|--------|
| 2010                                   |   | $      | 5,240  |   |
| 2011                                   |   | 5,079  |   |
| 2012                                   |   | 5,079  |   |
| 2013                                   |   | 5,079  |   |
| 2014                                   |   | 5,079  |   |
| Thereafter                             |   | 23,523 |   |
|                                   |   |   |   |
|                                   |   | $      | 49,079 |   |

 

Other Assets

 

Included in other assetsare net deferred debt issuance costs of $1,344 and $1,360 as of December 31,2009 and 2008, respectively, which relate to the syndicated credit agreementthe Company entered into for the acquisition of DYNAenergetics.  Additional costs of $341 were paid in 2009 inconnection with an amendment to the syndicated credit agreement.  The deferred debt issuance costs are beingamortized over the five-year term of the syndicated credit agreement.

 

Customer Advances

 

On occasion, theCompany requires customers to make advance payments prior to the shipment oftheir orders in order to keep customers’ credit at acceptable levels and toreduce the Company’s inventory investment on large orders.  As of December 31, 2009 and 2008,customer advances totaled $6,528 and $2,685, respectively, and originated fromseveral customers.

 

Revenue Recognition

 

Sales of clad metal products and welding services aregenerally 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 ofan arrangement exists; the price is fixed or determinable; delivery hasoccurred; and collection is reasonably assured. For contracts that require multiple shipments, revenue is

 

55

----

Table ofContents

 

recorded only for 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.

 

Net Income Per Share

 

Basic earnings per share (“EPS”) is computed bydividing net income by the weighted average number of shares of common stockoutstanding during the period.  DilutedEPS recognizes the potential dilutive effects of dilutive securities. Thefollowing represents a reconciliation of the numerator and denominator used inthe calculation of basic and diluted EPS:

 
| ** **                                                           | ** ** | **For  the year ended  December 31, 2009** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                           | ** ** | **Income**                                      | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Basic  earnings per share:                                           |       |                                            |       |   |   |   |   |
| Net  income                                                          |       | $                                               | 8,549      |   |   |   |   |   |
| Less  income allocated to Restricted Stock Awards (“RSAs”) |       | (132                                            | )          |   |   |   |   |
|                                                                 |       |                                            |       |   |   |   |   |
| Net  income allocated to common stock for EPS calculation            |       | $                                               | 8,417      |   | 12,640,069 |   | $ | 0.67 |   |
|                                                                 |       |                                            |       |   |   |   |   |
| Adjust  shares for Dilutives:                                        |       |                                            |       |   |   |   |   |
| Stock-based  compensation plans                                      |       |                                            |       | 22,371 |   |   |   |
|                                                                 |       |                                            |       |   |   |   |   |
| Diluted  earnings per share:                                         |       |                                            |       |   |   |   |   |
| Net  income                                                          |       | $                                               | 8,549      |   |   |   |   |   |
| Less  income allocated to RSAs                                       |       | (132                                            | )          |   |   |   |   |
|                                                                 |       |                                            |       |   |   |   |   |
| Net  income allocated to common stock for EPS calculation            |       | $                                               | 8,417      |   | 12,662,440 |   | $ | 0.66 |   |

 
| ** **                                                | ** ** | **For  the year ended  December 31, 2008** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                | ** ** | **Income**                                      | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Basic  earnings per share:                                |       |                                            |       |   |   |   |   |
| Net  income                                               |       | $                                               | 24,068     |   |   |   |   |   |
| Less  income allocated to RSAs                            |       | (548                                            | )          |   |   |   |   |
|                                                      |       |                                            |       |   |   |   |   |
| Net  income allocated to common stock for EPS calculation |       | $                                               | 23,520     |   | 12,445,685 |   | $ | 1.89 |   |
|                                                      |       |                                            |       |   |   |   |   |
| Adjust  shares for Dilutives:                             |       |                                            |       |   |   |   |   |
| Stock-based  compensation plans                           |       |                                            |       | 108,717 |   |   |   |
|                                                      |       |                                            |       |   |   |   |   |
| Diluted  earnings per share:                              |       |                                            |       |   |   |   |   |
| Net  income                                               |       | $                                               | 24,068     |   |   |   |   |   |
| Less  income allocated to RSAs                            |       | (544                                            | )          |   |   |   |   |
|                                                      |       |                                            |       |   |   |   |   |
| Net  income allocated to common stock for EPS calculation |       | $                                               | 23,524     |   | 12,554,402 |   | $ | 1.87 |   |

 

56

----

Table of Contents

 
| ** **                                                | ** ** | **For  the year ended**     | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                | ** ** | **December 31,  2007** | ** ** |
| ** **                                                | ** ** | **Income**                  | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Basic  earnings per share:                                |       |                        |       |   |   |   |   |
| Net  income                                               |       | $                           | 24,587     |   |   |   |   |   |
| Less  income allocated to RSAs                            |       | (141                        | )          |   |   |   |   |
|                                                      |       |                        |       |   |   |   |   |
| Net  income allocated to common stock for EPS calculation |       | $                           | 24,446     |   | 12,083,851 |   | $ | 2.02 |   |
|                                                      |       |                        |       |   |   |   |   |
| Adjust  shares for Dilutives:                             |       |                        |       |   |   |   |   |
| Stock-based  compensation plans                           |       |                        |       | 189,284 |   |   |   |
|                                                      |       |                        |       |   |   |   |   |
| Diluted  earnings per share:                              |       |                        |       |   |   |   |   |
| Net  income                                               |       | $                           | 24,587     |   |   |   |   |   |
| Less  income allocated to RSAs                            |       | (139                        | )          |   |   |   |   |
|                                                      |       |                        |       |   |   |   |   |
| Net  income allocated to common stock for EPS calculation |       | $                           | 24,448     |   | 12,273,135 |   | $ | 1.99 |   |

 

Derivative Financial Instruments

 

The Company uses interest rate swap agreements tomanage its interest rate risk on significant portions of its variable rate termloan debt.  The Company’s accounting methodfor its interest rate swap agreements involves designating the derivativearrangements as hedges in accordance with accounting principals generallyaccepted in the United States and as aresult, changes in the fair value of the swap agreement are recorded in othercomprehensive income with the offset as a swap agreement asset or liability.  It is the Company’s policy to execute sucharrangements with creditworthy banks.

 

On November 15, 2007, the Company entered into aninterest rate swap agreement that effectively converted the LIBOR basedvariable rate borrowings under the $45,000 term loan to a fixed rate of6.34%.  The Company had designated theswap agreement as an effective cash flow hedge with matched terms and, as a result, changes in the fair valueof the swap agreement are recorded in other comprehensive income with theoffset as a swap agreement asset or liability. As of December 31, 2007, the fair value of the swap agreement was aliability of $147, net of tax of $90. The swap agreement expired on November 16, 2008.

 

On November 17, 2008, the Company entered into atwo-year interest rate swap agreement with an initial notional amount of$40,500 (decreasing to $33,750 in November 2009).  Similar to the interest rate swap agreementdescribed above, this agreement effectively converted the LIBOR based variablerate US borrowings under the syndicated credit agreement to a fixed rate of4.87% (6.37% effective October 21, 2009 due to an amendment in the Company’ssyndicated credit facility and the Company’s current leverage ratio).  The Company also designated the swapagreement as an effective cash flow hedge with matched terms and, as a result,changes in the fair value of the swap agreement were recorded in other comprehensiveincome with the offset as a swap agreement asset or liability.  During 2009, the Company made anunanticipated repayment of $2,744 on its variable rate US borrowings andelected to de-designate this portion of the cash flow hedge.  The unanticipated principal payment was requiredunder the terms of the Company’s syndicated credit agreement facility sincecertain annually calculated cash flow measures were met.  Settlements and changes in the fair valuerelated to the de-designated portion of the cash flow hedge are recorded asrealized and unrealized gains/losses on swap agreement within other income inthe Company’s statement of operations.  The Company recorded an immaterial loss of less than $100 in 2009.

 

57

----

Table of Contents

 

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

 
| ** **                        | ** ** | **December 31,  2009**  | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Interest  rate swap liability** | ** ** | **Balance  sheet location**  | ** ** | **Fair  value**             | ** ** | **Balance  sheet location** | ** ** | **Fair  value** | ** ** |
|                              |       |                         |       |                        |       |   |   |   |   |
| Current  portion                  |       | Accrued expenses             |       | $                           | 820        |   | Accrued expenses |   | $ | 759 |   |
| Long-term  portion                |       | Other long-term  liabilities |       | —                      |       | Other long-term  liabilities |   | 647 |   |
|                              |       |                         |       |                        |       |   |   |   |   |
|                              |       |                         |       | $                           | 820        |   |   |   | $ | 1,406 |   |

 

FairValue of Financial Instruments

 

The carrying values of cash and cash equivalents,trade accounts receivable and payable, and accrued expenses are considered toapproximate fair value due to the short-term nature of these instruments.  Based upon the 150 basis point increase inour LIBOR/EURIBOR basis borrowing spread negotiated in the October 21,2009 amendment to our credit agreement (see Note 5), we believe the fair valueof our long-term debt is approximately 3% less than its carrying value at December 31,2009.  The majority of the Company’s debtwas incurred in connection with the acquisition of DYNAenergetics.

 

Additionally, the Companyhas an interest rate swap agreement (see above), which is recorded at fairvalue.  Fair value is defined as the pricethat would be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date. TheCompany is required to use an established hierarchy for fair value measurementsbased upon the inputs to the valuation and the degree to which they areobservable or not observable in the market. The three levels in the hierarchyare as follows:

 

·                  Level1 — Inputs to the valuation based upon quoted prices (unadjusted) for identicalassets or liabilities in active markets that are accessible as of themeasurement date. 

 

·                  Level2 — Inputs to the valuation include quoted prices in either markets that arenot active, or in active markets for similar assets or liabilities, inputsother than quoted prices that are observable, and inputs that are derivedprincipally from or corroborated by observable market data. 

 

·                  Level3 — Inputs to the valuation that are unobservable inputs for the asset orliability.

 

The highest priority isassigned to Level 1 inputs and the lowest priority to Level 3 inputs.

 

The Company’s interest rate swap agreement is notexchange listed and is therefore valued with models that use Level 2inputs.  The degree to which the Company’scredit worthiness impacts the value requires management judgment but as of December 31,2009 and December 31, 2008, 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.

 

Income Taxes

 

The Company recognizes deferred tax assets andliabilities for the expected future income tax consequences of temporarydifferences between the financial reporting and tax bases of assets andliabilities based on enacted tax laws and for tax credits. The Companyrecognizes deferred tax assets for the expected future effects of alldeductible temporary differences. Deferred tax assets are then reduced, if deemed necessary, by avaluation allowance for the amount of any tax benefits which, more likely thannot based on current circumstances, are not expected to be realized (see Note7).

 

58

----

Table of Contents

 

Related PartyTransactions

 

The Company has related party transactions with itsunconsolidated joint ventures and the former owners of LRI.  We also had transactions in the period of November 16,2007 through December 31, 2007, in 2008 and January through September 30,2009 with LRI who, at the time, was the minority interest partner of one of ourconsolidated joint ventures.  A summaryof related party balances as of December 31, 2009 and 2008 is summarizedbelow:

 
| ** **                | ** ** | **As of  December 31, 2009** | ** ** | **As of  December 31, 2008** | ** ** |
|---------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                | ** ** | **Accounts**                      | ** ** | **Accounts**                      | ** ** | **Other** | ** ** | **Accounts** | ** ** | **Accounts** | ** ** | **Other** | ** ** |
| ** **                | ** ** | **receivable  from**              | ** ** | **payable  to**                   | ** ** | **long-term** | ** ** | **receivable  from** | ** ** | **payable  to** | ** ** | **long-term** | ** ** |
| ** **                | ** ** | **and  loan to**                  | ** ** | **and  loan from**                | ** ** | **loan  from** | ** ** | **and  loan to** | ** ** | **and  loan from** | ** ** | **loan  from** | ** ** |
| DYNAenergetics RUS        |       | $                                 | 2,265      |                              | $          | — |   | $ | — |   | $ | 1,582 |   | $ | — |   | $ | — |   |
| Perfoline                 |       | 466                               |       | —                            |       | — |   | 449 |   | 17 |   | — |   |
| Former owners of LRI      |       | 75                                |       | —                            |       | — |   | — |   | — |   | — |   |
| Minority Interest Partner |       | —                            |       | —                            |       | — |   | 580 |   | — |   | 303 |   |
|                      |       |                              |       |                              |       |   |   |   |   |   |   |   |   |
| Total                     |       | $                                 | 2,806      |                              | $          | — |   | $ | — |   | $ | 2,611 |   | $ | 17 |   | $ | 303 |   |

 

A summary of thosetransactions for 2009, 2008 and for the period of November 16, 2007through December 31, 2007 is summarized below:

 
| ** **                 | ** ** | **2009**      | ** ** | **2008**         | ** ** | **2007**      | ** ** |
|----------------------------|------------|---------------|------------|------------------|------------|---------------|------------|
| ** **                 | ** ** | ** **    | ** ** | **Interest**     | ** ** | ** **    | ** ** | **Interest** | ** ** | ** ** | ** ** | **Interest** | ** ** |
| ** **                 | ** ** | **Sales  to** | ** ** | **income  from** | ** ** | **Sales  to** | ** ** | **income  from** | ** ** | **Sales  to** | ** ** | **income  from** | ** ** |
| DYNAenergetics  RUS        |       | $             | 2,353      |             | $          | —        |       | $ | 3,453 |   | $ | — |   | $ | 445 |   | $ | — |   |
| Perfoline                  |       | 86            |       | 43               |       | 166           |       | 47 |   | — |   | 6 |   |
| KazDYNAenergetics          |       | —        |       | —           |       | —        |       | — |   | 58 |   | — |   |
| Minority  Interest Partner |       | 745           |       | —           |       | 2,728         |       | — |   | 176 |   | — |   |
|                       |       |          |       |             |       |          |       |   |   |   |   |   |   |
| Total                      |       | $             | 3,184      |             | $          | 43            |       | $ | 6,347 |   | $ | 47 |   | $ | 679 |   | $ | 6 |   |

 

Concentration of CreditRisk

 

Financial instruments,which potentially subject the Company to a concentration of credit risk,consist primarily of cash, restricted cash, cash equivalents, and accountsreceivable. Generally, the Company does not require collateral to secure receivables.  At December 31, 2009, the Company has nosignificant financial instruments with off-balance sheet risk of accountinglosses, such as options contracts or other foreign currency hedgingarrangements.

 

Other CumulativeComprehensive Income

 

Other cumulativecomprehensive income (loss) as of December 31, 2009, 2008, and 2007consisted of the following:

 
| ** **                                                                                | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Currency  translation adjustment                                                          |       | $        | 794        |     | $          | (1,343   | )          | $ | 3,690 |   |
| Interest  rate swap valuation adjustment, net of tax of $299, $520 and $90,  respectively |       | (454     | )          | (886     | )          | (147     | )          |
|                                                                                      |       |     |       |     |       |     |       |
|                                                                                      |       | $        | 340        |     | $          | (2,229   | )          | $ | 3,543 |   |

 

59

----

Table of Contents

 

Recent Accounting Pronouncements

 

In December 2007, theFinancial Accounting Standards Board (“FASB”) issued authoritative guidance onbusiness combinations and the accounting for noncontrolling interests.  This new guidance significantly changed theaccounting for and reporting of business combination transactions andnoncontrolling (minority) interests in consolidated financial statements on January 1,2009.  The adoption of this guidance in2009 did not have a significant impact on the Company’s results of operationsor financial position.  See Note 3 fordisclosures regarding the 2009 acquisition of LRI.

 

In March 2008, the FASBissued authoritative guidance on the disclosures about derivative instrumentsand hedging activities.  This guidancerequires additional disclosures related to the use of derivative instruments,the accounting for derivatives and how derivatives impact financial statementson January 1, 2009.  The adoption of this guidance in 2009 did nothave any impact on the Company’s results of operations or financial position;however, the Company has incorporated the required new disclosures in theseconsolidated financial statements.

 

In May 2009,the FASB issued authoritative guidance that provides general standards ofaccounting for and disclosure of events that occur after the balance sheet datebut before financial statements are issued or are available to be issued.Specifically, this standard sets forth the period after the balance sheet dateduring which management of a reporting entity should evaluate events ortransactions that may occur for potential recognition or disclosure in thefinancial statements, the circumstances under which an entity should recognizeevents or transactions occurring after the balance sheet date in its financialstatements, and the disclosures that an entity should make about events ortransactions that occurred after the balance sheet date.  This guidancewas effective for financial statements issued for fiscal years and interimperiods beginning after June 15, 2009 and the Company’s adoption of thisguidance in 2009 did not have a significant impact on the Company’s results ofoperations or financial position.

 

Reclassifications

 

Certain prior year balances in the consolidatedfinancial statements and notes have been reclassified to conform to the 2009presentation.

 

(3)       ACQUISITION

 

As discussed in Note 1, the Company completed itsacquisition of LRI on October 1, 2009, which is part of the OilfieldProducts business.  LRI produces anddistributes perforating equipment for use by the oil and gas exploration andproduction industry.  The business had along-term strategic relationship with the Company’s Oilfield Products segmentand had served for several years as its sole Canadian distributor.  From October 1, 2009 through December 31,2009, LRI contributed net sales of $1,544 and a net operating loss of $36.  The operating loss excludes $165 ofnon-recurring transaction costs related to the acquisition.

 

The acquisition was valued at $5,946 and was financedby (i)  the payment of $284 in cash, net of cash acquired of $15, (ii) theissuance of 4,875 shares of common stock of the Company (valued at $94), and (iii) theassumption of $5,553 (5,982 Canadian Dollars (“CAD”)) of LIR’s debt.  The assumed debt consists 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.

 

60

----

Table of Contents

 

The purchase price of the acquisition was allocated tothe Company’s tangible and identifiable intangible assets based on their fairvalues as determined 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 acquired    |   | 8,644  |   |
|                           |   |   |   |
| Net  assets acquired           |   | $      | 393    |   |

 

The Company acquired identifiable finite-livedintangible assets as a result of the acquisition of LRI.  The finite-lived intangible assets acquiredare classified and valued as follows:

 
| ** **               | ** ** | ** ** | ** ** | **Weighted  Average** | ** ** |
|--------------------------|------------|------------|------------|-----------------------|------------|
| ** **               | ** ** | ** ** | ** ** | **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 andfurther discussed in Note 2.

 

The following tablepresents the pro-forma combined results of operations assuming (i) theacquisition had occurred on January 1 of the year represented; (ii) pro-formaamortization expense of the purchased intangible assets; (iii) pro-formadepreciation expense of the appraised value of the property, plant andequipment; and (iv) reduction of interest expense assuming the Companypaid down LRI’s debt by 2,200 CAD (1,200 CAD for the loans to former owners ofLRI and 1,000 CAD for the line of credit) immediately following theacquisition:

 
| ** **              | ** ** | **(Unaudited)**                           | ** ** |
|-------------------------|------------|-------------------------------------------|------------|
| ** **              | ** ** | **For  the year ended December 31,** | ** ** |
| ** **              | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| Net  sales              |       | $                                         | 167,853    |   | $ | 240,068 |   |
| Income  from operations |       | $                                         | 14,966     |   | $ | 37,346 |   |
| Net  income             |       | $                                         | 7,448      |   | $ | 23,356 |   |
|                    |       |                                      |       |   |   |
| Net  income per share:  |       |                                      |       |   |   |
| Basic                   |       | $                                         | 0.58       |   | $ | 1.83 |   |
| Diluted                 |       | $                                         | 0.58       |   | $ | 1.82 |   |

 

61

----

Table of Contents

 

The pro-forma results above are not necessarilyindicative of the operating results that would have actually occurred if theacquisition had been in effect on the dates indicated, nor are they necessarilyindicative of future results of the combined companies.

 

As discussed in Note 1, the Company completed its acquisition ofDYNAenergetics on November 15, 2007. From the date of acquisition through December 31, 2007,DYNAenergetics manufactured clad metal plates and various explosives-relatedoilfield products and operated under two business segments: ExplosiveMetalworking and Oilfield Products. Effective January 1, 2008, the Company split off the ExplosiveMetalworking business of DYNAenergetics into its newly formed subsidiary,Dynaplat.  DYNAenergetics retained theOilfield Products business.  Theacquisition enhanced the Company’s ability to address growing worldwide demandfor clad metal plates and expands the Company’s position in the globalexplosion welding market.  The additionof the Oilfield Products business segment augments the Company’s involvement inspecialized explosive manufacturing processes and positions the Company withinthe growing international oil and gas services industry.

 

As part of the Oilfield Products business segment, the Company hasseveral joint ventures, some of which are unconsolidated and accounted forunder the equity method (see Note 4).

 

The acquisition was valued at $112,703 and was financed by (i) thepayment of $81,783 in cash, net of cash acquired of $1,870 and transactionrelated taxes of $3,708 (2,530 Euros) due from one of the sellers and withheldby the Purchaser, (ii) the issuance of 251,041 shares of common stock ofthe Company (valued at $13,509), and (iii) the assumption of approximately$11,833 (8,074 Euros) of DYNAenergetics debt. The cash portion of the purchase price was financed using proceeds fromthe new syndicated credit agreement (see Note 5) and existing available cash.

 

The purchase price of the acquisition was allocated tothe Company’s tangible and identifiable intangible assets based on their fairvalues as determined by appraisals performed as of the acquisition date.  The excess of the purchase price over thetangible and identifiable intangible assets was recorded as goodwill.  The allocation of the purchase price to theassets and liabilities of DYNAenergetics was as follows:

 
| Current  assets                |   | $       | 30,222  |   |
|--------------------------------|--------|---------|---------|--------|
| Property,  plant and equipment |   | 8,139   |    |
| Intangible  assets             |   | 62,794  |    |
| Goodwill                       |   | 45,360  |    |
| Investment  in joint ventures  |   | 1,324   |    |
| Other  assets                  |   | 14      |    |
|                           |   |    |    |
| Total  assets acquired         |   | 147,853 |    |
|                           |   |    |    |
| Current  liabilities           |   | 14,524  |    |
| Long  term debt                |   | 11,833  |    |
| Deferred  tax liabilities      |   | 19,520  |    |
| Other  long term liabilities   |   | 1,096   |    |
| Minority  interest             |   | 10      |    |
|                           |   |    |    |
| Total  liabilities acquired    |   | 46,983  |    |
|                           |   |    |    |
| Net  assets acquired           |   | $       | 100,870 |   |

 

62

----

Table of Contents

 

The Company acquired identifiable finite-lived intangibleassets as a result of the acquisition of DYNAenergetics.  The finite-lived intangible assets acquiredare classified and valued as follows:

 
| ** **                | ** ** | ** ** | ** ** | **Weighted  Average** | ** ** |
|---------------------------|------------|------------|------------|-----------------------|------------|
| ** **                | ** ** | ** ** | ** ** | **Amortization**      | ** ** |
| ** **                | ** ** | **Value**  | ** ** | **Period**            | ** ** |
| Core  technology          |       | $          | 24,531     |                  | 20 years   |   |
| Customer  relationships   |       | 33,099     |       | 9 years               |       |
| Trademarks  / Trade names |       | 2,672      |       | 9 years               |       |
| Order  backlog Dynaplat   |       | 2,492      |       | Within 1 year         |       |
|                      |       |       |       |                  |       |
| Total  intangible assets  |       | $          | 62,794     |                  |       |   |

 

These amounts are included in Intangible Assets andfurther discussed in Note 2.

 

The Company acquiredGoodwill in the amount of $45,360 as a result of the acquisition ofDYNAenergetics.  The amount of goodwillassigned to each reportable segment is as follows:

 
| ** **              | ** ** | **Value** | ** ** |
|-------------------------|------------|-----------|------------|
| Explosive  Metalworking |       | $         | 25,187     |   |
| Oilfield  Products      |       | 20,173    |       |
|                    |       |      |       |
| Total  goodwill         |       | $         | 45,360     |   |

 

Goodwill as of December 31, 2008 amounts to $43,066; and thechange from December 31, 2007, reflects the impact of foreign currencytranslation and subsequent purchase price adjustments resulting from thecompilation of additional acquisition related expenses.

 

The following table presents the pro-forma combinedresults of operations assuming (i) the acquisition had occurred on January 1,2007; (ii) pro-forma amortization expense of the purchased intangibleassets; and (iii) pro-forma interest expense assuming the Company utilizedits syndicated credit agreement to finance the acquisition:

 
| ** **                                       | ** ** | **(Unaudited)**         | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|
| ** **                                       | ** ** | **For  the year ended** | ** ** |
| ** **                                       | ** ** | **December 31,**   | ** ** |
| ** **                                       | ** ** | **2007**                | ** ** |
| Net  sales                                       |       | $                       | 222,004    |   |
| Income  from operations of continuing operations |       | $                       | 43,229     |   |
| Net  income                                      |       | $                       | 24,676     |   |
|                                             |       |                    |       |
| Net  income per share:                           |       |                    |       |
| Basic                                            |       | $                       | 2.01       |   |
| Diluted                                          |       | $                       | 1.97       |   |

 

The pro-forma results above are not necessarilyindicative of the operating results that would have actually occurred if theacquisition had been in effect on the dates indicated, nor are they necessarilyindicative of future results of the combined companies.

 

63

----

Table of Contents

 

(4)       INVESTMENT IN JOINTVENTURES

 

Operating results include the Company’s proportionateshare of income from unconsolidated joint ventures, accounted for under theequity method.  These investments (all ofwhich resulted from the acquisition of DYNAenergetics and pertain to theCompany’s Oilfield Products business segment) include the following: (1) 65.19%interest in Perfoline, which is a Russian manufacturer of perforating gunsystems and (2) 55% interest in DYNAenergetics RUS which is a Russiantrading company that sells the Company’s oilfield products.  Due to certain minority interest veto rightsthat allow the minority interest shareholders to participate in ordinary courseof business decisions, these joint ventures have been accounted for under theequity method instead of being consolidated in these financial statements.  Investments in these joint ventures totaled$1,132 and $970 as of December 31, 2009 and 2008.

 

Summarized unauditedfinancial information for the joint ventures accounted for under the equity methodas of December 31, 2009 and 2008 and for the years ended 2009, 2008 andthe period from November 15, 2007 through December 31, 2007 is asfollows:

 
| ** **                    | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2009**              | ** ** | **2008**              | ** ** |
| Current  assets               |       | $                     | 5,350      |                  | $          | 4,667 |   |
| Noncurrent  assets            |       | 655                   |       | 714                   |       |
| Total  assets                 |       | $                     | 6,005      |                  | $          | 5,381 |   |
|                          |       |                  |       |                  |       |
| Current  liabilities          |       | $                     | 2,892      |                  | $          | 2,064 |   |
| Noncurrent  liabilities       |       | 555                   |       | 830                   |       |
| Equity                        |       | 2,558                 |       | 2,487                 |       |
| Total  liabilities and equity |       | $                     | 6,005      |                  | $          | 5,381 |   |

 
| ** **                            | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net  sales                            |       | $        | 6,517      |     | $          | 8,535    |       | $ | 1,377 |   |
| Operating  income                     |       | $        | 900        |     | $          | 1,154    |       | $ | 199 |   |
| Net  income                           |       | $        | 404        |     | $          | 606      |       | $ | 135 |   |
| Equity  in earnings of joint ventures |       | $        | 221        |     | $          | 274      |       | $ | 24 |   |

 

(5)       DEBT

 

Lines of credit consistof the following at December 31, 2009 and 2008:

 
| ** **                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| HSBC  line of credit        |       | $        | 1,774      |     | $          | — |   |
| Commerzbank  line of credit |       | 3        |       | —   |       |
|                        |       |     |       |     |       |
|                        |       | $        | 1,777      |     | $          | — |   |

 

64

----

Table of Contents

 

Long-term debt consistsof the following at December 31, 2009 and 2008:

 
| ** **                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Syndicated  credit agreement term loan      |       | $        | 31,005     |     | $          | 40,500 |   |
| Syndicated  credit agreement Euro term loan |       | 13,826   |       | 17,763   |       |
| Nord  LB 3,000 Euro term loan               |       | 1,505    |       | 2,326    |       |
| Loans  with former owners of LRI            |       | 1,269    |       | —   |       |
| Nord  LB 500 Euro term loan                 |       | —   |       | 39       |       |
|                                        |       |     |       |     |       |
|                                        |       | 47,605   |       | 60,628   |       |
| Less  current maturities                    |       | (13,485  | )          | (14,450  | )          |
|                                        |       |     |       |     |       |
| Long-term  debt                             |       | $        | 34,120     |     | $          | 46,178 |   |

 

HSBC Line of Credit

 

In connection with its October 1, 2009acquisition of LRI, the Company assumed a line of credit with HSBC Bank Canada(“HSBC”) with a total borrowing capacity of 2,500 CAD.  As of December 31, 2009, borrowingsunder this line of credit totaled 1,862 CAD ($1,774 based upon the December 31,2009 exchange rate).  At the Company’s option,this line of credit bears interest at HSBC’s prime rate plus 2.25% (all in rateof 4.5% as of December 31, 2009). Borrowings under the line of credit are secured by the assets ofLRI.   The line of credit has open-endedterms, is subject to periodic reviews, and HSBC can demand repayment at anytime.

 

Lines of Credit with German Banks

 

In connection with its November 15,2007 acquisition of DYNAenergetics, the Company assumed four lines of creditwith three German banks.  These lines of credit provided a total borrowingcapacity of 7,500 Euros and were also used by the Company to issue bankguarantees to its customers to secure advance payments made by them. During 2008, two of these lines of credit (with a total borrowing capacity of1,500 Euros) expired.  The remaining twolines of credit had outstanding borrowings of only $3 as of December 31,2009.  As of December 31, 2009, Bank guarantees secured by the linesof credit totaled 1,526 Euros ($2,187 based upon the December 31, 2009exchange rate).  The remaining two lines of credit, which each have aborrowing capacity of 3,000 Euros, bear interest at EURIBOR based variablerates with a weighted average interest rate at December 31, 2009 of2.025%.  Both lines of credit have open-ended terms and can be cancelledby the banks at any time.

 

Swedish Bank Line of Credit

 

The Company maintains a 4,000 Swedish Krona line ofcredit ($557 based upon the December 31, 2009 exchange rate) with aSwedish bank for its Nitro Metall operations. As of December 31, 2009 and 2008, there were no outstandingborrowings under this line of credit. Borrowings under the line of credit are secured by real estate used inNitro Metall’s operations.  This line ofcredit carries an interest rate equal to the basic rate stipulated by theCentral Bank of Sweden (“Repo Rate”), which was .25% as of December 31,2009.  Consistent with previous years,the line of credit expired on December 31, 2009, and was renewed on January 1,2010, for an additional one year term.

 

Syndicated Credit Agreement

 

The Company entered into a five-year syndicated creditagreement (“credit facility”) on November 15, 2007.  The credit facility, which provides for termloans of $45,000 and 14,000 Euros and revolving loans of $25,000 and 7,000Euros, is through a syndicate of seven banks, with JP Morgan Chase Bank, N.A.acting as administrative agent for the U.S. Dollar loans and JP Morgan EuropeLtd. acting as administrative agent for the Euro loans.  The credit facility expires on November 16,2012.

 

65

----

Tableof Contents

 

U.S. Dollar Loans: At the Company’s option, borrowings under the $45,000 term loan and the$25,000 revolving loan can be in the form of Alternate Base Rate loans (“ABR”borrowings are based on the greater of adjusted Prime rates, adjusted CD rates,or adjusted Federal Funds rates) or one, two, three, or six month LIBORloans.  ABR loans bear interest at thedefined ABR rate plus 1.75% (at the Company’s current leverage ratio) and LIBORloans bear interest at the applicable LIBOR rate plus 3.25% (at the Company’scurrent leverage ratio).  As of December 31,2009, all borrowings under the $45,000 term loan are set with the one monthLIBOR option bearing interest at an all-in rate of 6.37% (reflects the impactof the Company’s interest rate swap agreement). The $45,000 term loan requires annual minimum principal paymentsbeginning with $4,500 paid on November 16, 2008, and ending with $18,000due on November 16, 2012.  As of December 31,2009, there were no borrowings under the $25,000 revolving loan.

 

Euro Loans:  Atthe Company’s option, borrowings under the 14,000 Euro term loan and 7,000 Eurorevolving loan can be based on one, two, three, or six month EURIBOR rates andbear interest at the applicable EURIBOR rate plus 3.25% (at the Company’scurrent leverage ratio).  As of December 31,2009, the borrowings under the Euro term loan are based on the three monthEURIBOR option bearing interest at an all-in rate of 3.688%.  The Euro term loan requires annual minimumprincipal payments beginning with 1,400 Euros paid on November 16, 2008with a final payment of 5,600 Euros due on November 16, 2012.  As of December 31, 2009, there were noborrowings under the 7,000 Euro revolving loan.

 

The $45,000 and 14,000 Euro term loans are bothsubject to additional formula-based annual principal payments if certain excesscash flow measures are met.  As of December 31,2009 and 2008, the Company had classified $2,865 and $3,854, respectively, ascurrent in accordance with this provision of the agreement.  The $3,854 classified as current as of December 31,2008 was paid in March 2009.

 

The syndicated credit facility is secured by theassets of the Company including accounts receivable, inventory, and fixedassets.

 

Loans with Former Owners of LRI

 

In connection with its October 1, 2009acquisition of LRI, the Company assumed loans with the former owners of LRItotaling 2,634 CAD.  Following theacquisition, the Company repaid 1,302 CAD of the loans leaving a balance of1,332 CAD ($1,269 based on the December 31, 2009 exchange rate).  The balance of these loans require principalpayments in 35 equal installments beginning on December 1, 2011 with thefinal payment on October 1, 2014.  Theseloans bear interest at the prime rate plus 1.25% (3.5% at December 31,2009).

 

Term Loan — French Bank

 

In June 2001, Nobelclad obtained a term loan froma French bank that provided for borrowings of 1,448 Euros which was paid infull in June 2008.

 

Nord LB Euro Term Loans

 

In connection with its November 15,2007, acquisition of DYNAenergetics, the Company assumed two Euro term loanswith Nord LB.  The first is a 3,000 Euro($4,300 based on the December 31, 2009 exchange rate) term loan that DYNAenergeticsobtained in September 2006.  Thisloan, which bears interest at a fixed rate of 5.375%, requires quarterlyprincipal payments of 150 Euros ($215 based on the December 31, 2009exchange rate) plus interest and matures with the final payment in September 2011.  Borrowings outstanding under this term loanagreement totaled $1,505 as of December 31, 2009.  DYNAenergetics obtained a second term loanfrom Nord LB for 500 Euros in February 2003 which was paid in full in February 2009.

 

Loan Covenants and Restrictions

 

The Company’s existing loan agreements include variouscovenants and restrictions, certain of which relate to the incurrence ofadditional indebtedness; mortgaging, pledging or disposition of major assets;limits on capital expenditures; and maintenance of specified financialratios.  On October 21, 2009, theCompany’s credit facility was

 

66

----

Table of Contents

 

amended, effective September 30, 2009, to revise the leverageratios and fixed charge coverage ratios that the Company is required to satisfyon a quarterly basis throughout the term of the credit facility.  These revised ratios will ease the Company’sability to comply with certain covenants of the credit agreement. The pricinggrid applicable to drawn and undrawn amounts under the credit facility was alsoamended and will increase the Company’s effective interest rate on outstandingborrowings by 1.5% per annum.  As of December 31, 2009, theCompany was in compliance with all financial covenants and other provisions ofits debt agreements.

 

Scheduled Debt Maturity

 

The Company’s debtmatures as follows:

 
| **Year ended December 31-** |   |   |   |
|----------------------------------|--------|--------|--------|
| 2010                             |   | 15,262 |   |
| 2011                             |   | 13,694 |   |
| 2012                             |   | 19,628 |   |
| 2013                             |   | 435    |   |
| 2014                             |   | 363    |   |
| Thereafter                       |   | — |   |
|                             |   |   |   |
|                             |   | $      | 49,382 |   |
|                                  |        |        |        |  |

 

(6)       STOCK OWNERSHIP AND BENEFIT PLANS

 

Through its 1997 EquityIncentive Plan (“1997 Plan”), the Company had provided for grants of bothincentive stock options and non-statutory stock options. On September 21,2006, the Company’s stockholders approved, and the Company adopted, the 2006Stock Incentive Plan (“2006 Plan”).  Uponthe adoption of the 2006 Plan, the 1997 Plan was terminated with respect to newgrants of stock options; however, all unexercised options previously grantedunder the 1997 Plan remain outstanding. The 2006 Plan provides for the grant of various types of equity-basedincentives, including stock options, restricted stock, restricted stock units,stock appreciation rights, performance shares, performance units and otherstock-based awards.  There are a total of942,500 shares available for grant under the 2006 Plan (which includes 92,500rolled over from the 1997 Plan).  As of December 31,2009, the only awards granted under the 2006 Plan were 357,750 shares ofrestricted stock and restricted stock units leaving 584,750 shares availablefor future grant.

 

The following table setsforth the total stock-based compensation expense included in the ConsolidatedStatements of Operations:

 
| ** **                                             | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cost  of products sold                                 |       | $        | 339        |     | $          | 393      |       | $ | 168 |   |
| General  and administrative expense                    |       | 2,280    |       | 2,049    |       | 888      |       |
| Selling  expense                                       |       | 806      |       | 795      |       | 245      |       |
|                                                   |       |     |       |     |       |     |       |
| Stock-based  compensation expense before income taxes  |       | 3,425    |       | 3,237    |       | 1,301    |       |
| Income  tax benefit                                    |       | (1,117   | )          | (1,213   | )          | (232     | )          |
|                                                   |       |     |       |     |       |     |       |
| Stock-based  compensation expense, net of income taxes |       | $        | 2,308      |     | $          | 2,024    |       | $ | 1,069 |   |
|                                                   |       |     |       |     |       |     |       |
| Earnings  per share impact:                            |       |     |       |     |       |     |       |
| Basic  - net income                                    |       | $        | 0.18       |     | $          | 0.16     |       | $ | 0.09 |   |
| Diluted  - net income                                  |       | $        | 0.18       |     | $          | 0.16     |       | $ | 0.09 |   |

 

67

----

Table of Contents

 

TheCompany’s stock-based compensation expense results from stock option grants,restricted stock awards, restricted stock units and stock issued under theEmployee Stock Purchase Plan.

 

StockOptions:  The Company’s incentive stockoptions were granted at exercise prices that equaled the fair market value ofthe stock at the date of grant based upon the closing sales price of theCompany’s common stock on that date. Incentive stock options generally vested25% annually and expired ten years from the date of grant. Non-statutory stockoptions were generally granted at exercise prices that equaled the fair marketvalue of the stock at the date of grant.

 

Asummary of stock option activity for the years ended December 31, 2009,2008, and 2007 is as follows:

 
| ** **                             | ** ** | **Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------|------------|-------------|------------|----------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------|------------|
|                                   |       |        |       |                                   |       |                                                    |       |                            |       |
| Balance  at December 31, 2006     |       | 366,600     |       | $                                      | 5.76       |                                                    |       |                            |       |   |
| Exercised                              |       | (160,600    | )          | 4.65                                   |       |                                                    |       |                            |       |
| Cancelled                              |       | (15,000     | )          | 35.21                                  |       |                                                    |       |                            |       |
|                                   |       |        |       |                                   |       |                                                    |       |                            |       |
| Balance  at December 31, 2007     |       | 191,000     |       | $                                      | 4.39       |                                                    |       |                            |       |   |
| Exercised                              |       | (82,250     | )          | 3.27                                   |       |                                                    |       |                            |       |
| Cancelled                              |       | (3,000      | )          | 4.87                                   |       |                                                    |       |                            |       |
|                                   |       |        |       |                                   |       |                                                    |       |                            |       |
| Balance  at December 31, 2008     |       | 105,750     |       | $                                      | 5.24       |                                                    |       |                            |       |   |
| Exercised                              |       | (77,750     | )          | 3.39                                   |       |                                                    |       |                            |       |
|                                   |       |        |       |                                   |       |                                                    |       |                            |       |
| Balance  at December 31, 2009     |       | 28,000      |       | $                                      | 10.37      |                                                    | 5.15       |                            | $          | 276,690 |   |
|                                   |       |        |       |                                   |       |                                                    |       |                            |       |
| Exercisable  at December 31, 2009 |       | 28,000      |       | $                                      | 10.37      |                                                    | 5.15       |                            | $          | 276,690 |   |

 

Theintrinsic value of options exercised for the years ended December 31,2009, 2008, and 2007 was $367, $2,628 and $5,220, respectively.  As of December 31, 2009, there was nounrecognized stock-based compensation cost related to unvested stock options.

 

Thefollowing table summarizes information about employee stock options outstandingand exercisable at December 31, 2009:

 
| ** **                          | ** ** | **Options  Outstanding**                                                  | ** ** | **Options  Exercisable**                                               | ** ** |
|-------------------------------------|------------|---------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| **Range of  Exercise  Prices** | ** ** | **Number of  Options  Outstanding at  December 31,  2009** | ** ** | **Weighted  Average  Remaining  Contractual Life  in Years** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Exercisable at  December 31,  2009** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|                                |       |                                                                      |       |                                                                   |       |   |   |   |   |   |   |
| $1.42  - $1.42                      |       | 1,000                                                                     |       | 3.96                                                                   |       | $ | 1.42 |   | 1,000 |   | $ | 1.42 |   |
| $4.87  - $4.87                      |       | 17,000                                                                    |       | 5.06                                                                   |       | $ | 4.87 |   | 17,000 |   | $ | 4.87 |   |
| $20.62  - $20.62                    |       | 10,000                                                                    |       | 5.42                                                                   |       | $ | 20.62 |   | 10,000 |   | $ | 20.62 |   |
|                                |       |                                                                      |       |                                                                   |       |   |   |   |   |   |   |
|                                |       | 28,000                                                                    |       | 5.15                                                                   |       | $ | 10.37 |   | 28,000 |   | $ | 10.37 |   |

 

RestrictedStock Awards and Units:  Restricted stockand restricted stock units granted to the executive officers and employees ofthe Company generally vest in one-third increments on the first, second, andthird anniversary of the grant. Restricted stock granted to directors of the Company vests on the firstanniversary of the date of grant.  In2008,

 

68

----

Table of Contents

 

the Company granted 90,000restricted stock awards under a supplemental executive retirement plan.  100% of these awards vest on the fifthanniversary of the date of grant.  Thefair value of the restricted stock awards and restricted stock units are basedon the fair value of the Company’s stock on the date of grant and is amortizedto compensation expense over the vesting period on a straight line basis.

 

Asummary of the activity of our nonvested shares of restricted stock for theyears ended December 31, 2009, 2008, and 2007 is as follows:

 
| ** **                         | ** ** | **Shares** | ** ** | **Weighted Average  Grant Date  Fair Value** | ** ** |
|------------------------------------|------------|------------|------------|-------------------------------------------------------------|------------|
| Balance  at December 31, 2006 |       | 52,250     |       | $                                                           | 33.27      |   |
| Granted                            |       | 34,500     |       | 35.92                                                       |       |
| Vested                             |       | (15,094    | )          | 33.19                                                       |       |
| Forfeited                          |       | (2,000     | )          | 32.24                                                       |       |
|                               |       |       |       |                                                        |       |
| Balance  at December 31, 2007 |       | 69,656     |       | $                                                           | 34.63      |   |
| Granted                            |       | 236,250    |       | 37.83                                                       |       |
| Vested                             |       | (38,831    | )          | 34.64                                                       |       |
|                               |       |       |       |                                                        |       |
| Balance  at December 31, 2008 |       | 267,075    |       | $                                                           | 37.46      |   |
| Granted                            |       | 12,000     |       | 21.88                                                       |       |
| Vested                             |       | (80,425    | )          | 32.84                                                       |       |
|                               |       |       |       |                                                        |       |
| Balance  at December 31, 2009 |       | 198,650    |       | $                                                           | 38.39      |   |

 

Asummary of the activity of our nonvested restricted stock units for the yearsended December 31, 2009 and 2008 is as follows:

 
| ** **                         | ** ** | **Share  Units** | ** ** | **Weighted  Average  Purchase  Price** | ** ** | **Weighted  Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------------|------------|------------------|------------|----------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------|------------|
|                               |       |             |       |                                   |       |                                                    |       |                            |       |
| Balance  at December 31, 2007 |       | —           |       | $                                      | —     |                                                    |       |                            |       |   |
| Granted                            |       | 22,750           |       | —                                 |       |                                                    |       |                            |       |
|                               |       |             |       |                                   |       |                                                    |       |                            |       |
| Balance  at December 31, 2008 |       | 22,750           |       | $                                      | —     |                                                    |       |                            |       |   |
| Vested                             |       | (7,584           | )          | —                                 |       |                                                    |       |                            |       |
|                               |       |             |       |                                   |       |                                                    |       |                            |       |
| Balance  at December 31, 2009 |       | 15,166           |       | $                                      | —     |                                                    | 1.38       |                            | $          | 304,078 |   |
|                                    |            |                  |            |                                        |            |                                                         |            |                                 |            |  |  |

 

Asof December 31, 2009, there was $4,678 and $204 of total unrecognizedstock-based compensation related to unvested restricted stock awards andrestricted stock units, respectively. The cost is expected to be recognized over a weighted average period of2.11 years and 1.95 years for the restricted stock awards and restricted stockunits, respectively.

 

Employee Stock Purchase Plan

 

The Company has an Employee Stock Purchase Plan (“ESPP”)which is authorized to issue up to 450,000 shares of which 42,465 shares remainavailable for future purchases. The offerings begin on the first day followingeach previous offering (“Offering Date”) and end six months from the offeringdate (“Purchase Date”).  The ESPPprovides that full time employees may authorize the Company to withhold up to15% of their earnings, subject to certain

 

69

----

Table of Contents

 

limitations, to be used to purchase common stock of the Company at thelesser of 85% of the fair market value of the Company’s common stock on theOffering Date or the Purchase Date. In connection with the ESPP, 10,027; 7,859;and 5,628 shares of the Company’s stock were purchased during the years ended December 31,2009, 2008, and 2007, respectively.  TheCompany’s total stock-based compensation expense for 2009, 2008, and 2007includes $72, $76, and $46 respectively, in compensation expense associatedwith the ESPP.

 

401(k) Plan

 

The Company offers a contributory 401(k) plan toits employees. The Company makes matching contributions equal to 100% of eachemployee’s contribution up to 3% and 50% of the next 2% contributed by eachemployee.  Total Company contributionswere $316, $323, and $287 for the years ended December 31, 2009, 2008 and2007, respectively.

 

(7)       INCOME TAXES

 

The domestic and foreign components of income beforetax for the Company’s operations for the years ended December 31 aresummarized below:

 
| ** ** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic   |       | $        | 16,451     |     | $          | 25,861   |       | $ | 32,551 |   |
| Foreign    |       | (3,524   | )          | 7,413    |       | 6,183    |       |
|       |       |     |       |     |       |     |       |
|       |       | $        | 12,927     |     | $          | 33,274   |       | $ | 38,734 |   |

 

The components of the provision for income taxes forthe years ended December 31 are as follows:

 
| ** **                        | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current  - Federal                |       | $        | 5,707      |     | $          | 8,600    |       | $ | 10,641 |   |
| Current  - State                  |       | 282      |       | (139     | )          | 1,592    |       |
| Current  - Foreign                |       | 1,173    |       | 3,315    |       | 2,271    |       |
|                              |       |     |       |     |       |     |       |
|                              |       | 7,162    |       | 11,776   |       | 14,504   |       |
|                              |       |     |       |     |       |     |       |
| Deferred  - Federal               |       | (238     | )          | (767     | )          | (105     | )          |
| Deferred  - State                 |       | (92      | )          | (38      | )          | (23      | )          |
| Deferred  - Foreign               |       |     |       |     |       |     |       |
| Tax  benefits allocated to reduce |       |     |       |     |       |     |       |
| Goodwill                          |       | 592      |       | 569      |       | 353      |       |
| Net  operating losses             |       | (4,867   | )          | (256     | )          | (351     | )          |
| Other                             |       | 1,821    |       | (2,078   | )          | (231     | )          |
|                              |       |     |       |     |       |     |       |
|                              |       | (2,784   | )          | (2,570   | )          | (357     | )          |
|                              |       |     |       |     |       |     |       |
|                              |       | $        | 4,378      |     | $          | 9,206    |       | $ | 14,147 |   |

 

70

----

Tableof Contents

 

A reconciliation of the Company’s income tax provisioncomputed by applying the Federal statutory income tax rate of 35% in 2009,2008, and 2007 to income before taxes for the years ended December 31 isas follows:

 
| ** **                                                               | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal  income tax at statutory rate                                    |       | $        | 4,525      |     | $          | 11,646   |       | $ | 13,557 |   |
| State  and local tax items not included below, net                       |       | (854     | )          | (238     | )          | 1,030    |       |
| Effect  of difference between U.S. Federal and Foreign Federal tax rates |       | 2,883    |       | 720      |       | 131      |       |
| Permanent  differences                                                   |       | (1,963   | )          | (546     | )          | (198     | )          |
| Tax  credits resulting from examination of federal tax returns           |       | —   |       | 79       |       | —   |       |
| Current  year tax credits                                                |       | (163     | )          | (1,716   | )          | (177     | )          |
| Changes  in valuation allowance                                          |       | —   |       | (170     | )          | (82      | )          |
| Recognition  of previously unrecognized tax benefits                     |       | (9       | )          | (380     | )          | —   |       |
| Other                                                                    |       | (41      | )          | (189     | )          | (114     | )          |
|                                                                     |       |     |       |     |       |     |       |
| Provision  for income taxes                                              |       | $        | 4,378      |     | $          | 9,206    |       | $ | 14,147 |   |

 

71

----

Tableof Contents

 

The Company’s deferredtax assets and liabilities at December 31, 2009 and 2008 consist of thefollowing:

 
| ** **                                         | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred  tax assets:                              |       |     |       |     |       |
| Income  tax credit carryforward                    |       | $        | 1,022      |     | $          | 1,073 |   |
| Net  operating loss carryforward                   |       | 5,483    |       | 616      |       |
| Inventory  differences                             |       | 156      |       | 309      |       |
| Allowance  for doubtful accounts                   |       | 92       |       | 127      |       |
| Equity  compensation                               |       | 1,363    |       | 811      |       |
| Vacation  and other compensation accrual           |       | 283      |       | 361      |       |
| Capital  lease obligations                         |       | 106      |       | 104      |       |
| Other,  net                                        |       | 471      |       | 1,264    |       |
|                                               |       |     |       |     |       |
| Deferred  tax assets                               |       | 8,976    |       | 4,665    |       |
|                                               |       |     |       |     |       |
| Deferred  tax liabilities:                         |       |     |       |     |       |
| Purchased  intangible assets                       |       | (16,735  | )          | (16,834  | )          |
| Depreciation  and amortization                     |       | (2,351   | )          | (2,011   | )          |
| Investment  in partnerships and joint ventures     |       | (2,114   | )          | (1,219   | )          |
| Deferred  profit                                   |       | (609     | )          | —   |       |
|                                               |       |     |       |     |       |
| Deferred  tax liabilities                          |       | (21,809  | )          | (20,064  | )          |
|                                               |       |     |       |     |       |
| Net  deferred tax assets / (liabilities)           |       | $        | (12,833    | )        | $          | (15,399 | ) |
|                                               |       |     |       |     |       |
| Net  current deferred tax assets / (liabilities)   |       | $        | 2,052      |     | $          | 1,103 |   |
| Net  long-term deferred tax assets / (liabilities) |       | (14,885  | )          | (16,502  | )          |
|                                               |       |     |       |     |       |
| Net  deferred tax assets / (liabilities)           |       | $        | (12,833    | )        | $          | (15,399 | ) |

 

As a result of stock option activity in 2009, 2008,and 2007, the Company recorded tax benefits of $90, $143, and $402,respectively, directly to additional paid in capital.  Thus, these tax benefits, which reduce taxescurrently payable, are not reflected in the current income tax provision forthose years.

 

As of December 31, 2009, 2008 and 2007, incomeconsidered to be permanently reinvested in non-U.S. subsidiaries totaledapproximately $15,883, $14,969 and $9,709, respectively.  Deferred income taxes have not been providedon this undistributed income, as the Company does not plan to initiate anyaction that would require the payment of U. S. income taxes on theseearnings.  It is not practical toestimate the amount of additional taxes that might be payable on these amountsof undistributed foreign income.  As aresult of providing current Federal and state income taxes on other remainingundistributed foreign earnings as of December 31, 2007, $43 was includedin permanent differences reported in the above income tax rate reconciliationsfor 2007.  As of December 31, 2009and 2008, there is no other remaining undistributed foreign income; thus, thepermanent differences reported in the above rate reconciliation for 2009and2008 include a benefit of $147 from reversing the prior provisions for thisincome.

 

The components of the income tax carryforward as of December 31,2009, are U.S. foreign tax credits of $971 (which, if unused, expire between2012 and 2018) and sundry state tax credits of $51 (which, if unused, expirebeginning in 2012).  The components ofthe income tax credit carryforward as of December 31, 2008, are U.S.foreign tax credits of $1,046 (which, if unused, expire between 2012 and 2018)and sundry state tax credits of $27 (which, if unused, expire beginning in2012).

 

72

----

Table of Contents

 

As of December 31, 2009, the Company has no state net operatingloss carryforwards.  The foreign losscarryforwards are primarily from jurisdictions which do not impose a timelimitation on such carryforwards.

 

Beginning January 1, 2007, the Company was required to begindisclosing any uncertain tax positions. On January 1, 2007, the Company had $394 of unrecognized taxbenefits, all of which would affect our effective tax rate if recognized.  At December 31, 2008, the balance ofunrecognized tax benefits was $9 and related to uncertain state taxpositions.  The unrecognized tax benefitshave been included in other long-term liabilities in 2008.  At December 31, 2009, the balance ofunrecognized tax benefits was $0.  Asummary of the movements in the Company’s unrecognized tax benefits for theyears ended December 31, 2009 and 2008 is as follows:

 
| ** **                        | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Balance  at January 1        |       | $        | 9          |     | $          | 389 |   |
|                              |       |     |       |     |       |
| Settlements  with tax authorities |       | (9       | )          | (380     | )          |
|                              |       |     |       |     |       |
| Balance  at December 31      |       | $        | —     |     | $          | 9 |   |

 

The Company recognizes interest and penalties related to uncertain taxpositions in operating expense.  As of December 31,2009, the Company’s accrual for interest and penalties related to uncertain taxpositions is insignificant.

 

The Company’s U.S. Federal tax returns for the tax years 2006-2009remain open to examination while most of the Company’s state tax returns remainopen to examination for the tax years 2004-2008.  The Company’s foreign tax returns remain opento examination for the tax years 2005-2009.

 

(8)       BUSINESS SEGMENTS

 

The Company is organized in the following threesegments:  Explosive Metalworking, OilfieldProducts, and AMK Welding. The Explosive Metalworking segment uses explosivesto perform metal cladding and shock synthesis of industrial diamonds. The mostsignificant product of this group is clad metal which is used in thefabrication of pressure vessels, heat exchangers, and transition joints forvarious industries, including upstream oil and gas, oil refinery,petrochemicals, hydrometallurgy, aluminum production, shipbuilding, powergeneration, 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 thesame as those described in the summary of significant accounting policies.  The Company’s reportable segments areseparately managed strategic business units that offer different products andservices. Each segment’s products are marketed to different customer types andrequire different manufacturing processes and technologies.

 

73

----

Table of Contents

 

Segment information ispresented for the years ended December 31, 2009, 2008 and 2007 as follows:

 
| ** **                                            | ** ** | **Explosive  Metalworking  Group** | ** ** | **Oilfield  Products** | ** ** | **AMK  Welding** | ** ** | **Total** | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|------------------------|------------|------------------|------------|-----------|------------|
| As  of and for the year ended December 31, 2009: |       |                               |       |                   |       |             |       |      |       |
| Net  sales                                            |       | $                                  | 134,096    |                   | $          | 21,764           |       | $         | 9,038      |   | $ | 164,898 |   |
| Depreciation  and amortization                        |       | $                                  | 5,988      |                   | $          | 3,662            |       | $         | 456        |   | $ | 10,106 |   |
| Income  (loss) from operations                        |       | $                                  | 20,835     |                   | $          | (2,742           | )          | $         | 1,570      |   | $ | 19,663 |   |
| Equity  in earnings of joint ventures                 |       | $                                  | —     |                   | $          | 221              |       | $         | —     |   | 221 |   |
| Unallocated  amounts:                                 |       |                               |       |                   |       |             |       |      |       |
| Stock-based  compensation                             |       |                               |       |                   |       |             |       | (3,425    | )          |
| Other  expense                                        |       |                               |       |                   |       |             |       | (275      | )          |
| Interest  expense                                     |       |                               |       |                   |       |             |       | (3,473    | )          |
| Interest  income                                      |       |                               |       |                   |       |             |       | 216       |       |
|                                                  |       |                               |       |                   |       |             |       |      |       |
| Consolidated  income before income taxes              |       |                               |       |                   |       |             |       | $         | 12,927     |   |
|                                                  |       |                               |       |                   |       |             |       |      |       |
| Segment  assets                                       |       | $                                  | 114,501    |                   | $          | 76,325           |       | $         | 5,715      |   | $ | 196,541 |   |
| Assets  not allocated to segments:                    |       |                               |       |                   |       |             |       |      |       |
| Cash  and cash equivalents                            |       |                               |       |                   |       |             |       | 22,411    |       |
| Prepaid  expenses and other assets                    |       |                               |       |                   |       |             |       | 3,840     |       |
| Deferred  tax assets                                  |       |                               |       |                   |       |             |       | 2,384     |       |
|                                                  |       |                               |       |                   |       |             |       |      |       |
| Consolidated  total assets                            |       |                               |       |                   |       |             |       | $         | 225,176    |   |
|                                                  |       |                               |       |                   |       |             |       |      |       |
| Capital  expenditures                                 |       | $                                  | 2,964      |                   | $          | 743              |       | $         | 210        |   | $ | 3,917 |   |

 

74

----

Table ofContents

 
| ** **                                            | ** ** | **Explosive  Metalworking  Group** | ** ** | **Oilfield  Products** | ** ** | **AMK  Welding** | ** ** | **Total** | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|------------------------|------------|------------------|------------|-----------|------------|
| As  of and for the year ended December 31, 2008: |       |                               |       |                   |       |             |       |      |       |
| Net  sales                                            |       | $                                  | 194,999    |                   | $          | 27,833           |       | $         | 9,745      |   | $ | 232,577 |   |
| Depreciation  and amortization                        |       | $                                  | 7,585      |                   | $          | 3,893            |       | $         | 435        |   | $ | 11,913 |   |
| Income  (loss) from operations                        |       | $                                  | 37,454     |                   | $          | 1,472            |       | $         | 2,363      |   | $ | 41,289 |   |
| Equity  in earnings of joint ventures                 |       | $                                  | —     |                   | $          | 274              |       | $         | —     |   | 274 |   |
| Unallocated  amounts:                                 |       |                               |       |                   |       |             |       |      |       |
| Stock-based  compensation                             |       |                               |       |                   |       |             |       | (3,237    | )          |
| Other  expense                                        |       |                               |       |                   |       |             |       | (269      | )          |
| Interest  expense                                     |       |                               |       |                   |       |             |       | (5,472    | )          |
| Interest  income                                      |       |                               |       |                   |       |             |       | 689       |       |
|                                                  |       |                               |       |                   |       |             |       |      |       |
| Consolidated  income before income taxes              |       |                               |       |                   |       |             |       | $         | 33,274     |   |
|                                                  |       |                               |       |                   |       |             |       |      |       |
| Segment  assets                                       |       | $                                  | 134,665    |                   | $          | 69,397           |       | $         | 5,325      |   | $ | 209,387 |   |
| Assets  not allocated to segments:                    |       |                               |       |                   |       |             |       |      |       |
| Cash  and cash equivalents                            |       |                               |       |                   |       |             |       | 14,360    |       |
| Prepaid  expenses and other assets                    |       |                               |       |                   |       |             |       | 4,405     |       |
| Deferred  tax assets                                  |       |                               |       |                   |       |             |       | 1,434     |       |
|                                                  |       |                               |       |                   |       |             |       |      |       |
| Consolidated  total assets                            |       |                               |       |                   |       |             |       | $         | 229,586    |   |
|                                                  |       |                               |       |                   |       |             |       |      |       |
| Capital  expenditures                                 |       | $                                  | 8,859      |                   | $          | 879              |       | $         | 187        |   | $ | 9,925 |   |

 
| ** **                                            | ** ** | **Explosive  Metalworking  Group** | ** ** | **Oilfield  Products** | ** ** | **AMK  Welding** | ** ** | **Total** | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|------------------------|------------|------------------|------------|-----------|------------|
| As  of and for the year ended December 31, 2007: |       |                               |       |                   |       |             |       |      |       |
| Net  sales                                            |       | $                                  | 155,438    |                   | $          | 2,545            |       | $         | 7,192      |   | $ | 165,175 |   |
| Depreciation  and amortization                        |       | $                                  | 2,591      |                   | $          | 451              |       | $         | 305        |   | $ | 3,347 |   |
| Income  (loss) from operations                        |       | $                                  | 38,902     |                   | $          | (126             | )          | $         | 1,417      |   | $ | 40,193 |   |
| Equity  in earnings of joint ventures                 |       | $                                  | —     |                   | $          | 24               |       | $         | —     |   | 24 |   |
| Unallocated  amounts:                                 |       |                               |       |                   |       |             |       |      |       |
| Stock-based  compensation                             |       |                               |       |                   |       |             |       | (1,301    | )          |
| Other  expense                                        |       |                               |       |                   |       |             |       | (158      | )          |
| Interest  expense                                     |       |                               |       |                   |       |             |       | (722      | )          |
| Interest  income                                      |       |                               |       |                   |       |             |       | 698       |       |
|                                                  |       |                               |       |                   |       |             |       |      |       |
| Consolidated  income before income taxes              |       |                               |       |                   |       |             |       | $         | 38,734     |   |
|                                                  |       |                               |       |                   |       |             |       |      |       |
| Segment  assets                                       |       | $                                  | 146,348    |                   | $          | 74,190           |       | $         | 6,031      |   | $ | 226,569 |   |
| Assets  not allocated to segments:                    |       |                               |       |                   |       |             |       |      |       |
| Cash  and cash equivalents                            |       |                               |       |                   |       |             |       | 9,045     |       |
| Restricted  cash                                      |       |                               |       |                   |       |             |       | 371       |       |
| Prepaid  expenses and other assets                    |       |                               |       |                   |       |             |       | 4,144     |       |
| Deferred  tax assets                                  |       |                               |       |                   |       |             |       | 770       |       |
|                                                  |       |                               |       |                   |       |             |       |      |       |
| Consolidated  total assets                            |       |                               |       |                   |       |             |       | $         | 240,899    |   |
|                                                  |       |                               |       |                   |       |             |       |      |       |
| Capital  expenditures                                 |       | $                                  | 7,196      |                   | $          | 92               |       | $         | 1,691      |   | $ | 8,979 |   |

 

75

----

Table of Contents

 

The geographic locationof the Company’s property, plant and equipment, net of accumulateddepreciation, is as follows:

 
| ** **     | ** ** | **As of  December 31,** | ** ** |
|----------------|------------|------------------------------|------------|
| ** **     | ** ** | **2009**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| United  States |       | $                            | 21,393     |   | $ | 22,840 |   | $ | 22,056 |   |
| Germany        |       | 10,388                       |       | 9,465 |   | 7,998 |   |
| France         |       | 6,402                        |       | 6,463 |   | 3,810 |   |
| Sweden         |       | 1,537                        |       | 1,578 |   | 1,499 |   |
| Canada         |       | 2,311                        |       | 76 |   | 83 |   |
| Kazakhstan     |       | 21                           |       | 35 |   | — |   |
| Total          |       | $                            | 42,052     |   | $ | 40,457 |   | $ | 35,446 |   |

 

All of the Company’s sales are shipped from themanufacturing locations located in the United States, France, Sweden, andGermany and Canada. The following represents the Company’s net sales based onthe geographic location of the customer:

 
| ** **               | ** ** | **For  the years ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| United  States           |       | $                                          | 62,955     |   | $ | 82,036 |   | $ | 64,734 |   |
| India                    |       | 14,395                                     |       | 7,237 |   | 2,355 |   |
| Canada                   |       | 12,991                                     |       | 11,685 |   | 12,588 |   |
| Germany                  |       | 11,702                                     |       | 24,449 |   | 8,626 |   |
| China                    |       | 7,122                                      |       | 8,203 |   | 10,790 |   |
| Italy                    |       | 6,570                                      |       | 9,517 |   | 5,461 |   |
| France                   |       | 5,788                                      |       | 10,447 |   | 5,280 |   |
| South  Korea             |       | 5,424                                      |       | 12,938 |   | 16,904 |   |
| Russia                   |       | 4,649                                      |       | 3,604 |   | 607 |   |
| Switzerland              |       | 3,252                                      |       | 1,922 |   | 665 |   |
| Australia                |       | 3,229                                      |       | 11,307 |   | 1,039 |   |
| Spain                    |       | 3,001                                      |       | 7,208 |   | 3,492 |   |
| Kazakhstan               |       | 2,889                                      |       | 2,418 |   | 151 |   |
| Netherlands              |       | 2,736                                      |       | 4,093 |   | 3,033 |   |
| United  Arab Emirates    |       | 2,227                                      |       | 600 |   | 377 |   |
| Malaysia                 |       | 1,872                                      |       | 1,914 |   | 2,154 |   |
| Sweden                   |       | 1,345                                      |       | 1,388 |   | 1,378 |   |
| United  Kingdom          |       | 1,275                                      |       | 3,184 |   | 1,278 |   |
| Mexico                   |       | 1,073                                      |       | 2,396 |   | 1,082 |   |
| Other  foreign countries |       | 10,403                                     |       | 26,031 |   | 23,181 |   |
| Total                    |       | $                                          | 164,898    |   | $ | 232,577 |   | $ | 165,175 |   |

 

During the years ended December 31, 2009, 2008,and 2007, no one customer accounted for more than 10% of total net sales.

 

76

----

Tableof Contents

 

(9)                      COMMITMENTS AND CONTINGENCIES

 

The Company leasescertain office space, equipment, storage space, vehicles and other equipmentunder various non-cancelable lease agreements. Certain of these leases(primarily equipment related) are recorded as capital leases.  Amortization expense associated with thecapital leases is combined with depreciation expense of fixed assets.  Details of the capital leased assets as of December 31,2009 and 2008 are as follows:

 
| ** **                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Manufacturing  equipment and tooling        |       | $        | 1,348      |     | $          | 780 |   |
| Furniture,  fixtures and computer equipment |       | 130      |       | 128      |       |
| Total                                       |       | 1,478    |       | 908      |       |
| Less:  Accumulated amortization             |       | (625     | )          | (429     | )          |
| Net  capitalized leased assets              |       | $        | 853        |     | $          | 479 |   |

 

Future minimum rentalcommitments under non-cancelable leases are as follows:

 
| ** **                                    | ** ** | **Capital  Leases** | ** ** | **Operating  Leases** | ** ** |
|-----------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| Year  ended December 31 -                |       |                |       |                  |       |
| 2010                                          |       | $                   | 336        |                  | $          | 1,356 |   |
| 2011                                          |       | 310                 |       | 762                   |       |
| 2012                                          |       | 78                  |       | 455                   |       |
| 2013                                          |       | 59                  |       | 408                   |       |
| 2014                                          |       | 25                  |       | 182                   |       |
| Therafter                                     |       | —              |       | 160                   |       |
| Total  minimum payments                       |       | 808                 |       | $                     | 3,323      |   |
| Amounts  representing interest                |       | (66                 | )          |                  |       |
| Present  value of net minimum lease payments  |       | 742                 |       |                  |       |
| Current  portion of capital lease obligations |       | (306                | )          |                  |       |
| Capital  lease obligations                    |       | $                   | 436        |                  |       |   |

 

Total rental expenseincluded in operations was $1,713, $1,341, and $687 for the years ended December 31,2009, 2008, and 2007, respectively.

 

77

----

Tableof Contents

 

During 2008, the Company entered into a licenseagreement and a risk allocation agreement related to its U.S. ExplosiveMetalworking business.  These agreementsprovide the Company with the ability to perform its explosive shooting processat a second shooting site in Pennsylvania. Future minimum payments required to be made by the Company under theseagreements are as follows:

 
| Year  ended December 31 - |   |   |   |
|--------------------------------|--------|--------|--------|
| 2010                           |   | $      | 232    |   |
| 2011                           |   | 232    |   |
| 2012                           |   | 232    |   |
| 2013                           |   | 232    |   |
| 2014                           |   | 232    |   |
| Therafter                      |   | 928    |   |
| Total  minimum payments        |   | $      | 2,088  |   |

 

In the normal course of business, the Company is aparty to various contractual disputes and claims. After considering the Company’sevaluations by legal counsel regarding pending actions, management is of theopinion that the outcome of such actions will not have a material adverseeffect on the financial position or results of operations of the Company.

 

(10)                SUBSEQUENT EVENT

 

On March 3, 2010, the Company entered into adefinitive agreement to acquire the assets of Texas-based Austin ExplosivesCompany, which has been a long-time distributor of DYNAenergetics shaped charges.  The purchase price for Austin’s assets is$7.0 million, $3.5 million of which is payable in cash and the balance of whichis payable in shares of the Company’s stock, cash or a combination of both, atour election.  The acquisition isexpected to close during the second quarter of 2010.

 

**ITEM 9.****                                                    ****Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

 

Thereare no changes in or disagreements with accountants on accounting and financialdisclosure for the fiscal year ended December 31, 2009.

 

**ITEM9****A****.****                                           ****Controls and Procedures**

 

**Evaluation of Disclosure Controls andProcedures**

 

Our ChiefExecutive Officer and Chief Financial Officer have evaluated the effectivenessof our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934).  Based on such evaluation, such officers haveconcluded that our disclosure controls and procedures are effective at thereasonable assurance level as of the end of the period covered by this AnnualReport.  There have been no changes ininternal control over financial reporting during the fourth quarter of 2009.

 

78

----

Table ofContents

 

**Management’sReport on Internal Control over Financial Reporting**

 

The managementof Dynamic Materials Corporation (“DMC”) is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Exchange Act Rules 13a-15(f) and 15d-15(f).  Under the supervision and with theparticipation of DMC’s management, including its Chief Executive Officer andChief Financial Officer, management conducted an evaluation of theeffectiveness of DMC’s internal control over financial reporting as of December 31,2009 based on the framework in Internal Control — IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).  In designing andevaluating the internal control over financial reporting, management recognizesthat any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Based on thatevaluation, management concluded that DMC’s internal control over financialreporting was effective as of December 31, 2009.

 

DMC’s internalcontrol over financial reporting as of December 31, 2009, has also beenaudited by Ernst & Young LLP, an independent registered public accountingfirm, as stated in their attestation report which is included elsewhere herein.

 

 
|   | /s/  Yvon Pierre Cariou                  |
|--------|----------------------------------------------------|
|   | Yvon Pierre Cariou                                 |
|   | President and  Chief Executive Officer             |
|   | March 12,  2010                               |
|   |                                               |
|   | /s/ Richard  A. Santa                         |
|   | Richard A. Santa                                   |
|   | Senior Vice  President and Chief Financial Officer |
|   | March 12,  2010                               |

 

79

----

Table ofContents

 

**Report of Independent Registered Public AccountingFirm**

 

The Stockholdersand the

Board of Directorsof Dynamic Materials Corporation:

 

We haveaudited Dynamic Materials Corporation and subsidiaries’ internal control overfinancial reporting as of December 31, 2009, based on criteria establishedin Internal Control — Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (the COSO criteria).Dynamic Materials Corporation and subsidiaries’ management is responsible formaintaining effective internal control over financial reporting, and for itsassessment of the effectiveness of internal control over financial reportingincluded in the accompanying Management’s Report on Internal Control overFinancial Reporting. Our responsibility is to express an opinion on the Company’sinternal control over financial reporting based on our audit.

 

We conductedour audit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, assessing the risk that a material weakness exists,testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

In ouropinion, Dynamic Materials Corporation and subsidiaries maintained, in allmaterial respects, effective internal control over financial reporting as of December 31,2009, based on the COSO criteria**.**

 

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheets of DynamicMaterials Corporation and subsidiaries as of December 31, 2009 and 2008,and the related consolidated statements of operations, stockholders’ equity,and cash flows for each of the three years in the period ended December 31,2009 and our report dated March 12, 2010 expressed an unqualified opinionthereon.

 
|                 | /s/  Ernst & Young LLP |
|----------------------|---------------------------------|
| Denver, Colorado     |                            |
| March 12,  2010 |                            |

 

80

----

Table ofContents

 

**ITEM9****B****.****                                           ****Other Information**

 

Not applicable.

 

81

----

Table of Contents

 

**PART III**

 

**ITEM 10.****                                             ****Directors, Executive Officers andCorporate Governance**

 

Item 10 incorporatesinformation by reference to our 2009 Proxy Statement for the Annual for theAnnual Meeting of Shareholders, which is expected to be filed with theSecurities and Exchange Commission within 120 days of the close of fiscal year2009.

 

**ITEM 11.****                                             ****Executive Compensation**

 

Item 11 incorporatesinformation by reference to our 2009 Proxy Statement for the Annual for theAnnual Meeting of Shareholders, which is expected to be filed with theSecurities and Exchange Commission within 120 days of the close of fiscal year2009.

 

**ITEM 12.****                                             ****Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters**

 

Item 12 incorporatesinformation by reference to our 2009 Proxy Statement for the Annual for theAnnual Meeting of Shareholders, which is expected to be filed with theSecurities and Exchange Commission within 120 days of the close of fiscal year2009.

 

**ITEM 13.****                                             ****Certain Relationships and RelatedTransactions, and Director Independence**

 

Item 13 incorporatesinformation by reference to our 2009 Proxy Statement for the Annual for theAnnual Meeting of Shareholders, which is expected to be filed with theSecurities and Exchange Commission within 120 days of the close of fiscal year2009.

 

**ITEM****14****.****                                             ****Principal AccountantFees and Services**

 

Item 14 incorporatesinformation by reference to our 2009 Proxy Statement for the Annual for theAnnual Meeting of Shareholders, which is expected to be filed with the Securitiesand Exchange Commission within 120 days of the close of fiscal year 2009.

 

**ITEM 15.****                                             ****Exhibits and Financial StatementSchedules**

 

(a)(1)                    **Financial Statements**

 

See Index to Financial Statements in Item 8 of this Annual Report on Form 10-K,which is incorporated herein by reference.

 

(a)(2)                    **Financial Statement Schedules**

 

See Schedule II beginning on page 86 of this Annual Report on Form 10-K.

 

(a)(3)                    **Exhibits**

** **
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Certificate of  Incorporation of the Company (incorporated by reference to the Company’s  Quarterly report on Form 10-Q/A for the quarter ended March 31,  2004).                                                                                                                                                                                                                                                                                                                                                                        |
| 3.2                 |       | Bylaws of the  Company (incorporated by reference to the Company’s Quarterly report on  Form 10-Q/A for the quarter ended March 31, 2004).                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.1                |       | Credit Agreement  dated November 16, 2007, by and among the Company, Dynamic Materials  Luxembourg 2 Sàrl, the guarantors party thereto, the lenders party thereto,  JPMorgan Chase Bank, N.A., as administrative agent for the revolving loan and  the term loan, J.P. Morgan Europe Limited, as administrative agent for  the euro term loan and JPMorgan Securities Inc., as sole bookrunner and lead  arranger (incorporated by reference to the Company’s Form 8-K filed with  the Commission on November 19, 2007). |

 

 

82

----

Table of Contents

 
| 10.2  |   | Purchase, Sale  and Assignment Agreement dated November 15, 2007, by and among the  Company, DYNAenergetics Holding GmbH, Rolf Rospek, Patrick Xylander, Uwe  Gessel, OaG Beteiligungs-GmbH and Volker Mertens (incorporated by reference  to the Company’s Form 8-K filed with the Commission on November 19,  2007). |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.3  |   | Employment  Agreement, dated as of April 23, 2008, by and between the Company and  Yvon Cariou, as amended. *                                                                                                                                                                                                                         |
| 10.4  |   | Employment  Agreement, dated as of April 23, 2008, by and between the Company and  Richard A. Santa, as amended *                                                                                                                                                                                                                     |
| 10.5  |   | Employment  Agreement, dated as of April 23, 2008, by and between the Company and  John G. Banker, as amended *                                                                                                                                                                                                                       |
| 10.6  |   | Managing  Director Agreement dated November 15, 2007, between Dynaenergetics  Beteiligungs-GmbH and Rolf Rospek (incorporated by reference to the Company’s  Form 8-K filed with the Commission on November 19, 2007). *                                                                                               |
| 10.7  |   | Form of  Indemnification Agreement (incorporated by reference to the Company’s  Form 10-Q filed with the Commission on April 28, 2008). *                                                                                                                                                                              |
| 10.8  |   | Dynamic  Materials Corporation 2006 Stock Incentive Plan (incorporated by reference to  the Company’s Form 10-Q filed with the Commission on November 2,  2006). *                                                                                                                                                          |
| 10.9  |   | Form of  Executive Officer Restricted Stock Award Agreement (incorporated by reference  to the Company’s Form 8-K filed with the Commission on June 12,  2007). *                                                                                                                                                      |
| 10.10 |   | Form of  Non-Executive Director Restricted Stock Award Agreement (incorporated by  reference to the Company’s Form 8-K filed with the Commission on  June 12, 2007). *                                                                                                                                                 |
| 10.11 |   | 2008 Dynamic  Materials Corporation Short Term Incentive Plan (incorporated by reference to  Appendix A to the Company’s Proxy Statement filed with the Commission on  April 30, 2008). *                                                                                                                                        |
| 21.1  |   | Subsidiaries of  the Company.                                                                                                                                                                                                                                                                                                              |
| 23.1  |   | Consent of  Ernst & Young LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                     |
| 31.1  |   | Certification of  the President and Chief Executive Officer pursuant to 17 CFR  240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                    |
| 31.2  |   | Certification of  the Vice President and Chief Financial Officer pursuant to 17 CFR  240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                               |
| 32.1  |   | Certification of  the President and Chief Executive Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                          |
| 32.2  |   | Certification of  the Vice President and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                     |

 

----

* Management contract or compensatory plan.

 

83

----

Table ofContents

 

**SIGNATURES**

 

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Company has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 

 
|                 | **DYNAMIC MATERIALS CORPORATION** |
|----------------------|-----------------------------------|
|                 |                              |
|                 |                              |
| March 12,  2010 | By:                               | /s/ Richard A.  Santa |
|                 |                              | Richard A. Santa |
|                 |                              | Senior Vice  President and Chief Financial Officer |

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theCompany and in the capacities and on the dates indicated.

 
| **SIGNATURE**           | ** ** | **TITLE**                                          | ** ** | **DATE**             |
|-------------------------|------------|----------------------------------------------------|------------|----------------------|
|                    |       |                                               |       |                 |
| /s/ Yvon Pierre  Cariou |       | President and  Chief Executive Officer             |       | March 12,  2010 |
| Yvon Pierre  Cariou     |       | (Principal  Executive Officer)                     |       |                 |
|                    |       |                                               |       |                 |
| /s/ Richard A.  Santa   |       | Senior Vice  President and Chief Financial Officer |       | March 12  2010  |
| Richard A. Santa        |       | (Principal  Financial and Accounting Officer)      |       |                 |
|                    |       |                                               |       |                 |
| /s/ John G.  Banker     |       | Senior Vice  President, Customers and Technology   |       | March 12,  2010 |
| John G. Banker          |       | (Executive  Officer)                               |       |                 |
|                    |       |                                               |       |                 |
| /s/ Dean K.  Allen      |       | Chairman and  Director                             |       | March 12,  2010 |
| Dean K. Allen           |       |                                               |       |                 |
|                    |       |                                               |       |                 |
| /s/ Richard P.  Graff   |       | Director                                           |       | March 12  2010  |
| Richard P. Graff        |       |                                               |       |                 |
|                    |       |                                               |       |                 |
| /s/ Bernard  Hueber     |       | Director                                           |       | March 12,  2010 |
| Bernard Hueber          |       |                                               |       |                 |
|                    |       |                                               |       |                 |
| /s/ Gerard  Munera      |       | Director                                           |       | March 12,  2010 |
| Gerard Munera           |       |                                               |       |                 |
|                    |       |                                               |       |                 |
| /s/ Rolf Rospek         |       | Director                                           |       | March 12,  2010 |
| Rolf Rospek             |       |                                               |       |                 |

 

84

----

Table ofContents

 

**DYNAMICMATERIALS CORPORATION**

**INDEX TOSCHEDULE II**

 

**AS OFDECEMBER 31, 2009**

 
| ** **       | **PAGE** |
|------------------|----------|
| Schedule  II (a) | 86       |
| Schedule  II (b) | 86       |
| Schedule  II (c) | 86       |

 

85

----

Table ofContents

 

DYNAMIC MATERIALSCORPORATION

SCHEDULE II(a) -VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

ALLOWANCE FOR DOUBTFULACCOUNTS

 
| ** **              | ** ** | **Balance  at** | ** ** | **Additions**   | ** ** | **Accounts**     | ** ** | ** **      | ** ** | **Balance  at** | ** ** |
|-------------------------|------------|-----------------|------------|-----------------|------------|------------------|------------|-----------------|------------|-----------------|------------|
| ** **              | ** ** | **beginning**   | ** ** | **charged  to** | ** ** | **receivable**   | ** ** | **Other**       | ** ** | **end  of**     | ** ** |
| ** **              | ** ** | **of  period**  | ** ** | **income**      | ** ** | **written  off** | ** ** | **Adjustments** | ** ** | **period**      | ** ** |
| Year  ended -           |       |            |       |            |       |             |       |            |       |            |       |
|                    |       |            |       |            |       |             |       |            |       |            |       |
| December 31,  2007 |       | $               | 260        |            | $          | 62               |       | $               | —     |            | $          | 212 | * | $ | 534 |   |
|                    |       |            |       |            |       |             |       |            |       |            |       |
| December 31,  2008 |       | $               | 534        |            | $          | 80               |       | $               | —     |            | $          | — |   | $ | 614 |   |
|                    |       |            |       |            |       |             |       |            |       |            |       |
| December 31,  2009 |       | $               | 614        |            | $          | —           |       | $               | —     |            | $          | (224 | ) | $ | 390 |   |

 

----

* Resulting from the acquisition of DYNAenergetics

 

DYNAMIC MATERIALS CORPORATION

SCHEDULE II(b) -VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

WARRANTY RESERVE

 
| ** **              | ** ** | **Balance  at** | ** ** | **Additions**   | ** ** | ** **  | ** ** | ** **      | ** ** | **Balance  at** | ** ** |
|-------------------------|------------|-----------------|------------|-----------------|------------|-------------|------------|-----------------|------------|-----------------|------------|
| ** **              | ** ** | **beginning**   | ** ** | **charged  to** | ** ** | **Repairs** | ** ** | **Other**       | ** ** | **end  of**     | ** ** |
| ** **              | ** ** | **of  period**  | ** ** | **income**      | ** ** | **allowed** | ** ** | **Adjustments** | ** ** | **period**      | ** ** |
| Year  ended -           |       |            |       |            |       |        |       |            |       |            |       |
|                    |       |            |       |            |       |        |       |            |       |            |       |
| December 31,  2007 |       | $               | 115        |            | $          | 11          |       | $               | (66        | )               | $          | 353 | * | $ | 413 |   |
|                    |       |            |       |            |       |        |       |            |       |            |       |
| December 31,  2008 |       | $               | 413        |            | $          | 23          |       | $               | (83        | )               | $          | — |   | $ | 353 |   |
|                    |       |            |       |            |       |        |       |            |       |            |       |
| December 31,  2009 |       | $               | 353        |            | $          | 50          |       | $               | (105       | )               | $          | — |   | $ | 298 |   |

 

----

* Resulting from the acquisition of DYNAenergetics

 

DYNAMIC MATERIALS CORPORATION

SCHEDULE II(c) -VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

INVENTORY RESERVE

 
| ** **              | ** ** | **Balance  at** | ** ** | **Additions**   | ** ** | ** **     | ** ** | **Balance  at** | ** ** |
|-------------------------|------------|-----------------|------------|-----------------|------------|----------------|------------|-----------------|------------|
| ** **              | ** ** | **beginning**   | ** ** | **charged  to** | ** ** | **Inventory**  | ** ** | **end  of**     | ** ** |
| ** **              | ** ** | **of  period**  | ** ** | **income**      | ** ** | **write-offs** | ** ** | **period**      | ** ** |
| Year  ended -           |       |            |       |            |       |           |       |            |       |
|                    |       |            |       |            |       |           |       |            |       |
| December 31,  2007 |       | $               | 280        |            | $          | 263            |       | $               | (278       | ) | $ | 265 |   |
|                    |       |            |       |            |       |           |       |            |       |
| December 31,  2008 |       | $               | 265        |            | $          | 235            |       | $               | (310       | ) | $ | 190 |   |
|                    |       |            |       |            |       |           |       |            |       |
| December 31,  2009 |       | $               | 190        |            | $          | 214            |       | $               | (148       | ) | $ | 256 |   |

 

86

----