June 17, 2005
United States Securities and Exchange Commission
Division of Corporation Finance
Washington. D.C. 20549-0510
Re: Dynamic Materials
Form 10-K for the year ended December 31, 2004
File No. 1-14775
Dear Mr. Cash:
Thank you for your comment letter dated May 4, 2005 relating to your review of
the above-referenced filing. We have carefully considered your comments and
provide you with the following responses that are keyed to the comments in your
letter. In making these responses, the Company acknowledges that:
o The Company is responsible for the adequacy and accuracy of the
disclosure in its filings;
o Staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filing; and
o The Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004
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Financial Statements for the Year Ended December 21, 2004
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Consolidated Statements of Cash Flows, page 34
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1. Please tell us where the amortization of your capitalized debt
issuance costs and intangible assets which are included in Other
Assets appear on your cash flow statement. Also tell us what is being
captured in you investing activity labeled "change in other
non-current assets".
Response to Comment 1
---------------------
In our cash flow statement, the amortization of our capitalized debt
service cost is included in investing activities under the caption
labeled "change in other non-
current assets" in the approximate amounts of $73 thousand, $85
thousand and $60 thousand for the for years ended December 31, 2004,
2003 and 2002, respectively. Amortization of our intangible assets is
included in cash flow from operating activities under the caption
labeled "amortization".
We will revise future filings to classify the amortization of
capitalized debt service cost as an operating activity.
Note 2 - Summary of Significant Accounting Policies
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Revenue Recognition, page 39
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2. We read in the description of your business that your clad metal
products are produced, and your welding services are provided, on a
project-by-project basis based on specifications set forth in
customers' purchase orders. Given this disclosure, it is not clear if
your sales have customer acceptance provisions. Please tell us and
revise future filings to describe the nature of any customer
acceptance provisions and address how they impact your revenue
recognition.
Response to Comment 2
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Sales of clad metal products are generally based upon customer
specifications set forth in customer purchase orders and require us to
provide certifications relative to the metals used and the results of
any non-destructive testing that the customer has requested be
performed on clad plates. Any non-conformance issues with respect to
metal specification and non-destructive testing are resolved before
the product is shipped and billed. The welding services provided by
AMK Welding are performed based upon welding specifications provided
by its customers. AMK supplies its customers with certifications
regarding the proper application of customer-specified welding
procedures. In the rare circumstances in which a customer requires its
own inspection or third-party inspection services before clad metal
products or welding services are accepted, such inspections are
completed and customer acceptance criteria are satisfied before
products are shipped and the customer is billed. We will revise future
filings to clarify these matters.
3. We read that you recognize revenue using the completed contract
method. Based on your description of this method, it is not clear to
us how your revenue recognition policy differs from a policy of
recognizing revenue as it is realizable and earned as indicated by the
four criteria specified in SAB Topic 13A. Furthermore, based on your
description of the business and the contracts into which you enter, it
is not clear to us that your sales qualify for the use of the
completed contract method of revenue recognition as that method is
defined in SOP 81-1. Please educate us further on your revenue
recognition policy and revise future filings to clarify this issue.
Response to Comment 3
---------------------
The contracts that we refer to in our revenue recognition policy are
customer purchase orders that generally contain several line items for
the specific clad plates being ordered and/or a line item for several
units of an identical clad plate. Each individual item specified in a
customer purchase order has a fixed unit price. As individual items from
purchase orders are shipped, revenue is recognized only for the units
included in each individual shipment. In evaluating revenue recognition
decisions with respect to individual customer orders, we carefully
consider the four criteria specified in SAB Topic 13A and recognize
revenue only when all four criteria are met. We agree that our customer
orders are not long-term construction-type contracts under SOP 81-1 and
are thus of the opinion that the completed contract method of revenue
recognition as defined in SOP 81-1 does not apply to our sales. We will
revise future filings clarify our revenue recognition policy.
4. We note that you provide services through both a long-term contract
for shock synthesis of industrial diamonds and your AMK Welding
segment. Please tell us and revise future filings to describe your
revenue recognition policy for these services. Supplementally tell us
the revenues generated by the long-term contract for shock synthesis
for each year presented on your operating statement. Also tell us how
you determined that you did not need to provide the disclosures
related to receivables and inventories associated with long-term
contracts as required by Rule 5-02(3) and (6) of Regulation S-X.
Response to Comment 4
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AMK Welding provides welding services principally to the commercial
and military aircraft engine markets and to the power generation
industry and is not involved in any long-term contracts. AMK's welding
services are provided on a project-by-project basis based on
specifications set forth in customer purchase orders. Upon receipt of
an order for welded assemblies, AMK performs welding services on
customer-owned and supplied parts using customer-specified welding
procedures. In addition to its welding services, AMK also provides
various special stress relief and non-destructive examination
processes such as radiographic inspection in support of its welding
operations. Upon completion of all required welding, stress relief and
non-destructive testing services, welded assemblies are shipped to the
customer and revenue is recognized.
With respect to services relating to the shock synthesis of industrial
diamonds, the Company provides such services under a "Tolling/Services
Agreement for Industrial Diamonds", which is cancelable by either
party upon nine months written notice. Under this service agreement,
the Company is required to manufacture high-density ammonium nitrate
explosives and detonate such explosives around industrial diamond
assemblies provided by the customer. The terms of the agreement
require the customer to pay a "Service Fee" for the
services provided on each assembly and a "Raw Material Fee" in the
amount of the Company's reasonable cost of the explosives and other
raw materials directly related to the services provided on each
assembly. As monthly services are rendered, the Service Fee and Raw
Material Fee for each diamond assembly are billed and recorded as
revenue only after the services have been completed for that assembly
and the assembly has been shipped to the customer. For the years ended
December 31, 2004, 2003 and 2003, the Company recognized aggregate
revenues of approximately $744 thousand, $314 thousand $661 thousand,
respectively, for industrial diamond shock synthesis services.
Based upon the nature of the above-described services provided by AMK
Welding to its customers under individual purchase orders and the
industrial diamond shock synthesis services provided by our Explosive
Metalworking Group under the service contract as described above, we
do not believe that disclosures related to receivables and inventories
associated with long-term contracts as required by Rule 5-02(3) and
(6) of Regulation S-X are applicable to any of the Company's
contracts.
We will revise future filings to more fully describe our revenue
recognition policy and to eliminate the use of the term "long-term
contracts".
Net Income (Loss) Per Share, page 39
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5. In future filings please disclose any securities that were not
included in your computation of diluted EPS because to do so would
have been antidilutive for the periods presented. Refer to paragraph
40(c) of SFAS 128.
Response to Comment 5
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In future filings, we will disclose any securities that are not
included in our computation of diluted EPS because to do so would be
antidilutive for any of the period presented.
Note 3 - Debt, page 44
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6. We read that your French bank term loan allows the bank to demand
early repayment of any outstanding loans if Groupe SNPE's indirect
ownership of Nobelclad falls below 50%. Please explain to us in more
detail why this is a clause in your loan agreement. Please tell us if
Groupe SNPE has guaranteed your repayment of this loan to the French
bank.
Response to Comment 6
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The term loan provided to Nobelclad Europe ("Nobelclad") by a French
bank relates to Nobelclad's acquisition of Nitro Metall AB in June of
2001 from Nobel Explosifs France ("NEF"), a wholly owned subsidiary of
Groupe SNPE. At the time the loan was issued, Noblelclad, a former
division of NEF, had operated as a
stand-alone legal entity for less than a year and the French bank was
aware of NEF's intent to sell Nobelclad to DMC within a few weeks of
the loan being issued. Based on these considerations and the fact that
the loan agreement contains no financial covenants, it is our
understanding that the French bank requested that the loan agreement
include a provision allowing it to demand early repayment of any
outstanding loans if Groupe SNPE's indirect ownership of Nobelclad
were to fall below 50%. Groupe SNPE, which holds four of seven seats
on the DMC Board of Directors and owns approximately 52% of DMC, has
clearly communicated its intent to retain its controlling interest in
DMC for the indefinite future. To the best of our knowledge, Groupe
SNPE has not formally guaranteed repayment of this loan.
Note 7 - Commitments and Contingencies, page 53
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7. We note that you took you insurance coverage into account when
concluding that the outcome of any pending actions will not have a
material adverse effect on your financial statements. We have the
following comments:
o We remind you that SFAS 5 does not allow you to record any
expected insurance recoveries until they have been realized.
Refer to paragraph 17. Please confirm to us that you are not
netting any expected insurance recoveries against liabilities for
pending claims. Also confirm to us that, regardless of the
expected impact on your insurance coverage, you have disclosed
pending actions that are reasonably possible and recorded an
accrual for pending actions that are probable and reasonably
estimable.
o In future filings, please disclose your accounting policy for
recording insurance recoveries.
Response to Comment 7
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The referenced disclosure is a general disclosure that we have made in
our commitments and contingencies note for a number of years. We
hereby confirm that we do not net expected insurance recoveries
against liabilities for pending claims. We also confirm that there
were no pending actions that required disclosure and that it is our
practice to record accruals for pending actions that are probable and
reasonably estimable in accordance with SFAS 5.
In future filings, we will disclose our accounting policy for
recording insurance recoveries if it becomes material.
Note 8 - Discontinued Operations, page 53
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8. We note your discussion of the divestiture of your Spin Forge division
in 2004 and that you have reclassified the assets, liabilities, and
results of this division as discontinued operations in your financial
statements. We read that you sold the
inventory related to this division, that you are leasing to a third
party the manufacturing equipment and tooling related to this division
through an initial lease term of January 1, 2007, and that you are
also subleasing to this third party the real estate associated with
this division. Given that the majority of your Spin Forge division's
assets were leased or subleased to a third party at December 31, 2004,
and are recorded as assets on your books at December 31, 2004, it does
not appear that the assets of this division were disposed of during
2004. Based on our review of the related leases, your Spin Forge
division does not appear to qualify as held for sale as defined in
paragraph 30 of SFAS 144. As indicated in paragraph 42 of SFAS 144,
the classification of a component of an entity as discontinued
operations is only appropriate if that component has been disposed of
or is classified as held for sale. Please help us to understand how
you determined that it was appropriate to classify this division as a
discontinued operation at December 31, 2004, and tell us the
accounting guidance that you relied upon.
Response to Comment 8
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On September 17, 2004, the Company completed the divestiture of its
Spin Forge business ("Spin Forge"), which manufactures certain rocket
motor cases and pressure tanks. The divestiture was made pursuant to
an Agreement, dated as of September 17, 2004 (the "Master Agreement"),
between DMC and Aerojet-General Corporation ("Aerojet"). Pursuant to
the Master Agreement, DMC sold the assets that constitute Spin Forge,
excluding certain equipment and real estate, which are being leased or
subleased to Aerojet, for a sales price of approximately $1,665,000.
It is important to note that all of the Spin Forge employees became
employees of Aerojet on the closing date and that Aerojet assumed
total responsibility for all going forward business operations and
related liabilities.
In connection with the Master Agreement, DMC agreed to lease all of
the Spin Forge manufacturing equipment and tooling to Aerojet pursuant
to a separate Equipment Lease Agreement (the "Equipment Lease"), dated
as of September 17, 2004, between DMC and Aerojet. Aerojet pays DMC
monthly rental installments of $21,921 under the Equipment Lease,
which will terminate on January 1, 2007 unless extended at Aerojet's
option until September 17, 2012. At the end of the initial term,
Aerojet has the option to purchase all or a portion of the equipment
being leased at its net book value as of the lease commencement date,
less any rental installments paid pursuant to the Equipment Lease. The
Equipment Lease is considered to be a financing vehicle that enabled
DMC to obtain the best price possible for the divestiture of a
business that was incurring significant operating losses.
Each of the following six criteria must be met in order for a
long-lived asset to be classified as "held for sale":
1. Management, having the authority to approve the action,
commits to a plan to sell the long-lived asset or disposal
group.
2. The asset or disposal group is available for immediate sale
in its present condition subject only to the terms that are
usual or customary for sales of such assets (disposal
groups).
3. An active program to locate a buyer, and other actions
required to complete the plan to sell, have been initiated.
4. The sale of the asset or disposal group is probable and the
transfer is expected to qualify for recognition as a
completed sale within one year, with several exceptions.
5. The long-lived asset or disposal group is being actively
marketed for sale at a price that is reasonable in relation
to its current fair value.
6. Actions necessary to complete the plan indicate that it is
unlikely that significant changes to the plan will be made
or that the plan will be withdrawn.
As mentioned above, DMC's Equipment Lease with Aerojet was viewed as a
financing vehicle that enabled the Company to obtain the best price
possible for Spin Forge. We are not engaged in the commercial leasing
business and have no further use of the property that is being leased
to Aerojet. Additionally, if the Company had not consummated the sale
to Aerojet, Company management and its Board of Directors was
committed to the orderly shutdown of the Spin Forge business
operations, including liquidation of the manufacturing equipment and
tooling. In recording the loss on the Spin Forge sale, we recorded an
impairment loss of $1,015,000 ($619,000, net of tax) in our December
31, 2004 financial statements based upon the difference between the
current carrying value of the equipment and its estimated fair value,
calculated as the present value of the future minimum equipment lease
payments from Aerojet plus estimated liquidation proceeds at the end
of the minimum lease term. In conclusion, we believe that the Spin
Forge operating business rather than the manufacturing equipment and
tooling constitutes the long-lived asset or disposal group. Since DMC
has no continued involvement in the operations of the Spin Forge
business beyond the leasing of equipment and tooling and the sublease
of the real estate, we are of the opinion that the sale of the
disposal group occurred on September 17, 2004 and that all the above
criteria have been met.
Even after a "component of an entity" has been disposed of or has met
the "held for sale" criteria, both of the following two criteria must
be met in order to qualify as a discontinued operation:
1. The operations and cash flows of the "component of an
entity" have been (or will be) eliminated from the ongoing
operations of the entity as a result of the disposal
transaction.
2. The entity will not have any significant continuing
involvement in the operations of the component after the
disposal transaction.
With respect to the first criteria, we believe that the operations and
cash flows of Spin Forge have been eliminated from the ongoing
operations of the Company.
All operating activities of Spin Forge are the responsibility of
Aerojet, including all costs and expenses relating to the Equipment
Lease and the real estate sublease. The sublease rental income is
equal to the rent that the Company pays the landlord under the primary
lease and, as discussed above, the Equipment Lease is considered to be
seller financing of the divestiture transaction. With respect to the
second criteria, DMC's only continuing involvement in the Spin Forge
business relates to the real estate sublease and the equipment
financing transaction. The Company clearly has no control over the
ongoing operations of the disposal group (the Spin Forge operating
business) subsequent to the closing of the divestiture transaction on
September 17, 2004. Based upon the foregoing considerations, we
believe that both of the above criteria for reporting the Spin Forge
divestiture as "discontinued operations" have been met.
* * *
We hope that our responses adequately address the questions that you
raised in your May 4, 2005 comment letter. Please let us know if you
require additional clarification with respect to our responses or have
any additional questions.
Sincerely,
Richard A. Santa
Vice President and Chief Financial Officer