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CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. In particular, we direct your attention to Part I, Item 1- Condensed Consolidated Financial Statements; Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations; Item 3 - Quantitative and Qualitative Disclosures About Market Risk; and Part II, Item 1A — Risk Factors. We intend the forward-looking statements throughout this quarterly report on Form 10-Q and the information incorporated by reference herein to be covered by the safe harbor provisions for forward-looking statements. Statements contained in this report which are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from projected results. All projections, guidance and other statements regarding our expected financial position and operating results, our business strategy, our financing plans and the outcome of any contingencies are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as “may,” “believe,” “plan,” “anticipate,” “estimate,” “expect,” “intend,” and other phrases of similar meaning. The forward-looking information is based on information available as of the date of this quarterly report and on numerous assumptions and developments that are not within our control. Although we believe that our expectations as expressed in these forward-looking statements are reasonable, we cannot assure you that our expectations will turn out to be correct. Factors that could cause actual results to differ materially include, but are not limited to, the following: changes in global economic conditions; the ability to obtain new contracts at attractive prices; the size and timing of customer orders and shipment; our ability to realize sales from our backlog; fluctuations in customer demand; fluctuations in foreign currencies; competitive factors; the timely completion of contracts; the timing and size of expenditures; the timely receipt of government approvals and permits; the price and availability of metal and other raw material; the adequacy of local labor supplies at our facilities; current or future limits on manufacturing capacity at our various operations; our ability to successfully integrate acquired businesses; the availability and cost of funds; and general economic conditions, both domestic and foreign, impacting our business and the business of the end-market users we serve. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

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INDEX

PART I - FINANCIAL INFORMATION

PART II - OTHER INFORMATION

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Part I - - FINANCIAL INFORMATION

ITEM 1.  Condensed Consolidated Financial Statements

DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

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

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Share Data)

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

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009

(Dollars in Thousands, Except Share Data)

(unaudited)

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

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2010

(Amounts in Thousands)

(unaudited)

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

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009

(Dollars in Thousands)

(unaudited)

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

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009

(Dollars in Thousands)

(unaudited)

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

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DYNAMIC MATERIALS CORPORATION & SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

1.      BASIS OF PRESENTATION

The information included in the Condensed Consolidated Financial Statements is unaudited but includes all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the interim periods presented. These Condensed Consolidated Financial Statements should be read in conjunction with the financial statements that are included in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2009.  Certain prior year balances in the consolidated financial statements and notes have been reclassified to conform to the 2010 presentation.

2.      SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Foreign Operations and Foreign Exchange Rate Risk

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

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Revenue Recognition

Sales of clad metal products and welding services are generally based upon customer specifications set forth in customer purchase orders and require us to provide certifications relative to metals used, services performed, and the results of any non-destructive testing that the customer has requested be performed.  All issues of conformity of the product to specifications are resolved before the product is shipped and billed.  Products related to the oilfield products segment, which include detonating cords, detonators, bi-directional boosters, and shaped charges, as well as seismic related explosives and accessories, are standard in nature.  In all cases, revenue is recognized only when all four of the following criteria have been satisfied: persuasive evidence of an arrangement exists; the price is fixed or determinable; delivery has occurred; and collection is reasonably assured.  For contracts that require multiple shipments, revenue is 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, the Company will account for such anticipated loss.

Fair Value of Financial Instruments

The carrying values of cash and cash equivalents, trade accounts receivable and payable, and accrued expenses are considered to approximate fair value due to the short-term nature of these instruments.  Based upon the 150 basis point increase in our LIBOR/EURIBOR basis borrowing spread negotiated in the October 21, 2009 amendment to our syndicated credit agreement, we believe the fair value of our long-term debt approximates its carrying value at March 31, 2010.  The majority of the Company’s debt was incurred in connection with the acquisition of DYNAenergetics.

Additionally, the Company has an interest rate swap agreement (see Note 9), which is recorded at fair value.  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company is required to use an established hierarchy for fair value measurements based upon the inputs to the valuation and the degree to which they are observable or not observable in the market. The three levels in the hierarchy are as follows:

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

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

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

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

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

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Related Party Transactions

The Company has related party transactions with its unconsolidated joint ventures and the former owners of LRI.  We also had transactions in the period of January 1 through March 31 2009 with LRI, who, at the time, was the minority interest partner of one of our consolidated joint ventures.  A summary of related party balances as of March 31, 2010 and December 31, 2009 is summarized below:

A summary of related party transactions for the three months ended March 31, 2010 and 2009 is summarized below:

Earnings Per Share

Unvested awards of share-based payments with rights to receive dividends or dividend equivalents, such as our restricted stock awards (“RSAs”), are considered participating securities for purposes of calculating earnings per share (“EPS”) and require the use of the two class method for calculating EPS.  Under this method a portion of net income is allocated to these participating securities and therefore is excluded from the calculation of EPS allocated to common stock, as shown in the table below.

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Computation and reconciliation of earnings per common share are as follows:

3.      ACQUISITIONS

LRI Oil Tools Inc.

On October 1, 2009, the Company completed its acquisition of LRI Oil Tools Inc. (“LRI”) which is part of the Oilfield Products business.  LRI produces and distributes perforating equipment for use by the oil and gas exploration and production industry.  The business had a long-term strategic relationship with the Company’s Oilfield Products segment and had served for several years as its sole Canadian distributor.

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

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

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

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The following table presents the pro-forma combined results of operations for the three months ended March 31, 2009 assuming (i) the acquisition had occurred on January 1, 2009; (ii) pro-forma amortization expense of the purchased intangible assets; (iii) pro-forma depreciation expense of the appraised value of the property, plant and equipment; and (iv) reduction of interest expense assuming the Company paid down LRI’s debt by 2,200 CAD (1,200 CAD for the loans to former owners of LRI and 1,000 CAD for the line of credit) immediately following the acquisition:

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

Austin Explosives

On March 3, 2010, the Company entered into a definitive agreement to acquire the assets of Texas-based Austin Explosives Company, 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 which is payable in shares of the Company’s stock, cash or a combination of both, at our election.  The acquisition is expected to close during the second quarter of 2010.

4.      INVESTMENT IN JOINT VENTURES

Operating results include the Company’s proportionate share of income from unconsolidated joint ventures, which are accounted for under the equity method.  These investments (all of which resulted from the acquisition of DYNAenergetics and pertain to the Company’s Oilfield Products business segment) include the following: (1) 65.19% interest in Perfoline, which is a Russian manufacturer of perforating gun systems and (2) 55% interest in DYNAenergetics RUS which is a Russian trading company that sells the Company’s oilfield products.  Due to certain noncontrolling interest veto rights that allow the minority interest shareholders to participate in ordinary course of business decisions, these joint ventures have been accounted for under the equity method instead of being consolidated in these financial statements.  Investments in these joint ventures totaled $1,376 and $1,132 as of March 31, 2010 and December 31, 2009, respectively.

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Summarized unaudited financial information for the joint ventures accounted for under the equity method as of March 31, 2010 and December 31, 2009 and for the three months ended March 31, 2010 and 2009 is as follows:

5.      INVENTORY

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

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6.      GOODWILL

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

7.      PURCHASED INTANGIBLE ASSETS

The following table presents details of our purchased intangible assets, other than goodwill, as of March 31, 2010:

The following table presents details of our purchased intangible assets, other than goodwill, as of December 31, 2009:

The decrease in the gross value of our purchased intangible assets from December 31, 2009 to March 31, 2010 is due solely to the impact of foreign currency translation.

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8.      CUSTOMER ADVANCES

On occasion, customers make advance payments prior to the shipment of their orders in order to help finance the Company’s inventory investment on large orders or to keep credit limits at acceptable levels.  As of March 31, 2010 and December 31, 2009, customer advances totaled $12,502 and $6,528 respectively, with $10,258 of the March 31 balance relating to two large orders which are scheduled to ship during the remaining three quarters of 2010.

9.      DEBT

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

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

In March of 2010, the Company made required prepayments of principal under the U.S. Dollar and Euro term loans in the amounts of $2,007 and 626 Euros ($868), respectively, from excess cash flow generated in 2009. Additionally, the Company made a March payment of 9,020 Euros ($12,498) to retire the remaining principal balance outstanding under the Euro term loan, which was scheduled to mature on November 16, 2012.

Loan Covenants and Restrictions

The Company’s existing loan agreements include various covenants and restrictions, certain of which relate to the incurrence of additional indebtedness; mortgaging, pledging or disposition of major assets; limits on capital expenditures; and maintenance of specified financial ratios.  As of March 31, 2010, the Company was in compliance with all financial covenants and other provisions of its debt agreements.

Swap Agreement

On November 17, 2008, the Company entered into a two-year interest rate swap agreement with an initial notional amount of $40,500 (decreasing to $33,750 in November 2009) that

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Segment information is presented for the three months ended March 31, 2010 and 2009 as follows:

During the three months ended March 31, 2010 and 2009, no sales to any one customer accounted for more than 10% of total net sales.

11.    COMPREHENSIVE LOSS

The Company’s comprehensive loss for the three months ended March 31, 2010 and 2009 was as follows:

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Other cumulative comprehensive income (loss) as of March 31, 2010 and December 31, 2009 consisted of the following:

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

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

Unless stated otherwise, all currency amounts in this discussion are presented in thousands (000’s).

Executive Overview

Our business is organized into three segments:  Explosive Metalworking, Oilfield Products, and AMK Welding.  For the three months ended March 31, 2010, Explosive Metalworking accounted for 70% of our net sales and 117% of our income from operations before consideration of stock-based compensation expense, which is not allocated to our business segments.  Our Oilfield Products and AMK Welding segments accounted for 23% and 7%, respectively, of our first quarter 2010 net sales.

Our net sales for the three months ended March 31, 2010 decreased by $19,402 (39.0%) compared to the same period of 2009, reflecting year-to-year net sales decreases of $22,166 (51.0%) and $208 (9.2%) for our Explosive Metalworking and AMK Welding segments, respectively, which were partially offset by a sales increase of $2,972 (73.7%) for Oilfield Products.  Excluding incremental sales of $2,816 from our October 1, 2009 acquisition of LRI, our Oilfield Products segment reported a modest first quarter 2010 net sales increase of $156 or 3.9%.  Our consolidated income from operations decreased to $245 in the three months ended March 31, 2010 from $8,295 in the same period of 2009.  This $8,050 decrease reflects declines in Explosive Metalworking’s and AMK Welding’s operating income of $8,195 and $151, respectively, which were slightly offset by a $290 decrease in the operating loss reported by our Oilfield Products segment and a $6 decrease in stock-based compensation expense.  We recorded a net loss of $412 for the three months ended March 31, 2010 compared to net income of $4,916 for the same period of 2009.

Impact of Current Economic Situation on the Company

The Company was only minimally impacted in 2008 by the global economic slowdown.  However, during 2009 and the first quarter of 2010, we experienced a significant slowdown in Explosive Metalworking sales to some of the markets we serve.  The explosion-welded clad plate market is dependent upon sales of products for use by customers in a number of heavy industries, including oil and gas, alternative energy, chemicals and petrochemicals, hydrometallurgy, aluminum production, shipbuilding, power generation, and industrial refrigeration.  These industries tend to be cyclical in nature and the current worldwide economic downturn has affected many of these markets.  Despite the slowdown we have already seen in certain sectors, including chemical, petrochemical and hydrometallurgy, quoting activity in other end markets remains relatively healthy, and we continue to track an extensive list of projects. While timing of new order inflow remains difficult to predict, we believe that our Explosive Metalworking segment is well-positioned to benefit as global economic conditions improve.

As a result of our Explosive Metalworking backlog decreasing from $97,247 at December 31, 2008 to $49,584 at December 31, 2009 and relatively low booking activity during the first quarter of 2010 which led to only a slight increase in our backlog to $51,417 at March 31, 2010,

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we believe that our 2010 consolidated net sales could decline by as much as 5% from consolidated net sales that we reported in 2009.  However, if booking activity for both our Explosive Metalworking and Oilfield Products business segments improves during the middle quarters of 2010, our 2010 consolidated net sales could approach those of 2009.  In light of the slowdown in order inflow that we have experienced, we continue to manage expenses carefully.  Despite the significant sales and net income declines that we reported in the first quarter of 2010, we generated cash flow from operations of $13,808 and expect to generate positive cash flow from operations for the full year 2010.

Net sales

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

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

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

A significant portion of our revenue is derived from a relatively small number of customers; therefore, the failure to complete existing contracts on a timely basis, to receive payment for such services in a timely manner, or to enter into future contracts at projected volumes and profitability levels could adversely affect our ability to meet cash requirements exclusively through operating activities. We attempt to minimize the risk of losing customers or specific contracts by continually improving product quality, delivering product on time and competing aggressively on the basis of price.

Gross profit and cost of products sold

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

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

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

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Income taxes

Our effective income tax rate decreased to 27.2% for the three months ended March 31, 2010 from 32.6% for the same period of 2009.  Based upon existing tax regulations and current federal, state and foreign statutory tax rates, an expected reduction in our 2010 consolidated pre-tax income from that reported in 2009, and the amount of our projected 2010 consolidated pre-tax income that we expect to be generated by our U.S. and foreign operations, respectively, we expect our blended effective tax rate for 2010 to range between 25% and 28%.  Our full year 2009 effective tax rate was 33.9% and, subsequent to 2010, we expect that our blended effective tax rate will to return to a normalized level of 33% to 35%.

Backlog

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

Our backlog with respect to the Explosive Metalworking segment increased slightly to $51,417 at March 31, 2010 from $49,584 at December 31, 2009 but was well below the backlog of $97,247 that we reported at December 31, 2008.  In light of the slowdown in order inflow and decrease in backlog that we have experienced, we are currently anticipating that our consolidated net sales for fiscal 2010 will be in a range of flat to down 5% from the consolidated net sales that we reported in 2009.

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

Net sales

Net sales for the first quarter of 2010 decreased 39.0% to $30,357 from $49,759 for the first quarter of 2009.  Explosive Metalworking sales decreased 51.0% to $21,306 for the three months ended March 31, 2010 (70% of total sales) from $43,472 for the same period of 2009 (87% of total sales).  The decrease in Explosive Metalworking sales reflects a business slowdown in several of the industries that this business segment serves.

Oilfield Products contributed $7,006 to first quarter 2010 sales (23% of total sales), which represents a 73.7% increase from sales of $4,034 for the first quarter of 2009 (8% of total sales). Excluding incremental sales of $2,816 from our October 1, 2009 acquisition of LRI, the first quarter 2010 sales increase for Oilfield Products was $156 or 3.9%.

AMK Welding contributed $2,045 to first quarter 2010 sales (7% of total sales), which represents a 9.2% decrease from sales of $2,253 for the first quarter of 2009 (5% of total sales).

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Gross profit

Gross profit decreased by 54.4% to $6,984 for the three months ended March 31, 2010 from $15,328 for the three months ended March 31, 2009. Our first quarter 2010 consolidated gross profit margin rate decreased to 23.0% from 30.8% for the first quarter of 2009.

The gross profit margin rate for Explosive Metalworking decreased from 31.8% for the first quarter of 2009 to 21.9% for the first quarter of 2010.  This 31.3% decrease in the Explosive Metalworking gross margin rate relates almost entirely to our European cladding operations where the gross margin rate for the quarter was 81% lower than the gross margin rate reported for the first quarter of 2009 on a year-to-year sales decline of 48%.  The significant year-to-year decline in our European gross margin performance is attributable to negative changes in product mix as well as less favorable absorption of fixed manufacturing overhead expenses resulting from the 48% sales decline.  Our U.S. clad division reported only a slightly lower gross margin rate (35.2% vs. 36.1%) for the first quarter of 2010 versus the comparable period of 2009 despite a 53% drop in sales.  The strong first quarter 2010 gross margin performance by our U.S. clad division reflects the positive impact of a sizeable order that shipped during the quarter and that involved customer-supplied metal. U.S. gross margin rates are expected to be substantially lower during the remaining three quarters of 2010 than the rate reported in the first quarter. Historically, gross margins for our European explosion welding divisions have been lower than those reported by our U.S. division due to less efficient fixed manufacturing cost structures associated with our smaller European facilities.  While we have taken steps to reduce fixed manufacturing overhead costs at all of our facilities, the benefit of these actions on our 2010 gross margin performance will likely be offset by the expected continuation of a very competitive pricing environment.  As has been the case historically, we expect to see continued fluctuations in Explosive Metalworking’s quarterly gross margin rates throughout 2010 that result from anticipated fluctuations in quarterly sales volume and changes in product mix. Based upon the reported first quarter gross margin rate, the composition of our March 31, 2010 backlog and the current competitive pricing environment, we expect full year 2010 gross margins to be in the range of 22% to 24%.

Oilfield Products reported a gross profit margin rate of 27.5% for the first quarter of 2010 compared to a gross profit margin rate of 24.7% for the first quarter of 2009.  The increase in Oilfield Products’ 2010 gross margin relates principally to favorable changes in product/customer mix.  While the acquisition of LRI, which now operates under the name DYNAenergetics Canada, added $2,816 to first quarter 2010 sales, the gross margin rate reported for these Canadian sales was somewhat lower than the gross margin reported by this segment’s European operations.  We currently expect Oilfield Products to report gross margins in the range of 28% to 30% for the full year 2010.

The gross profit margin rate for AMK Welding decreased to 22.5% for the first quarter of 2010 from 26.1% for the first quarter of 2009.  The decrease in AMK Welding’s gross margin relates principally to the 9.2% sales decrease discussed above and resultant less efficient absorption of fixed manufacturing overhead expenses.  AMK Welding sales and gross margins for the full year 2010 are expected to be comparable to the $9,038 and 27.0%, respectively, reported in 2009.

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General and administrative expenses

General and administrative expenses decreased by $381, or 10.8%, to $3,145 in the first quarter of 2010 from $3,526 in the first quarter of 2009.  Excluding incremental general and administrative expenses of $175 that resulted from the LRI acquisition, our general and administrative expenses decreased by $556 or 15.8%.  This decrease includes a $254 decrease in accrued incentive compensation, a decrease of $42 in legal, audit and consulting expenses, and a net decrease of $260 in all other expenses categories that reflects the impact of tight controls over discretionary spending.  As a percentage of net sales, general and administrative expenses increased to 10.4% in the first quarter of 2010 from 7.1% in the first quarter of 2009.

Selling expenses

Selling expenses, which include sales commissions of $266 in the first quarter of 2010 and $383 in the first quarter of 2009, decreased by 0.1% to $2,321 in the first quarter of 2010 from $2,324 in the first quarter of 2009.  Excluding incremental selling expenses of $482 that resulted from the LRI acquisition, our selling expenses decreased by $485 or 20.9%.  This $485 decrease in our selling expenses includes decreased selling expenses of $172 and $313 at our European and U.S. divisions, respectively.  The decrease in European selling expenses relates principally to staff reductions within our European explosion welding facilities and lower sales commissions. The $313 decrease in our U.S. selling expenses reflects decreased sales commissions of $142, an $88 decrease in bad debt expense, an $88 decrease in accrued incentive compensation and a net increase of $5 in other spending categories. As a percentage of net sales, selling expenses increased to 7.6% in the first quarter of 2010 from 4.7% in the first quarter of 2009.

Amortization expenses

Amortization expense relates entirely to the amortization of values assigned to intangible assets in connection with the November 15, 2007 acquisition of DYNAenergetics and our October 1, 2009 acquisition of LRI.  Amortization expense for the three months ended March 31, 2010

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includes $883, $296 and $94 relating to values assigned to customer relationships, core technology and trademarks/trade names, respectively.  Amortization expense for the three months ended March 31, 2009 includes $820, $274 and $89 relating to values assigned to customer relationships, core technology and trademarks/trade names, respectively.   Amortization expense (as measured in Euros) associated with the DYNAenergetics acquisition is expected to approximate €3,603 in 2010, and 2010 amortization expense (as measured in Canadian dollars) associated with the LRI acquisition is expected to approximate 80 CAD.

Operating income