View:
January
13, 2010
VIA EDGAR
TRANSMISSION
Mr. Jay
Mumford
Senior
Attorney
U.S.
Securities and Exchange Commission
Division
of Corporation Finance
100 F
Street, N.E.
Washington,
D.C. 20549-4561
Re: Kadant Inc.
Form 10-K for the Fiscal Year Ended
January 3, 2009
Filed
March 10, 2009
File
No. 001-11406
Dear Mr.
Mumford:
On behalf
of Kadant Inc. (the Company), we hereby respond to the comments set forth in
your letter dated December 29, 2009. The comments in the letter are reproduced
below, together with our responses thereto.
Form 10-K for the Fiscal
Year Ended January 3, 2009
Management’s Discussion and
Analysis of Financial Condition and Results of Operations, page 20 Results of
Operations, page 26
1.
Comment:
Please
provide a detailed discussion about the reasons for changes in your cash flows,
results of operations and other financial statement line items in your future
filings. For example, we see you indicate “excluding the effects of currency
translation, revenues in 2008 decreased $47.0 million, or 13%, primarily due to
a $43.1 million, or 26%, decrease in stock-preparation equipment sales. This
significant decrease was due to a reduction in orders.” Your statement that
revenues decreased due to a reduction in orders is too general to be helpful to
investors. We also see in your “Liquidity and Capital Resource” disclosures you
indicate that one of the factors offsetting the cash provided by your operating
cash flows during 2008 was “The decrease in accounts payable and the increase in
inventories primarily related to our stock-preparation equipment product line.”
The referenced disclosures do not inform investors why accounts payable
decreased or inventory increased. Please note that the objective of Management’s
Discussion and Analysis is to enable investors and other users to see the
company through eyes of management to provide information about the quality and
potential variability of a company’s earnings and cash flow, so that investors
can judge the likelihood that past performance is indicative of future
performance. The discussion that is provided with respect to the results of
operations should not consist merely of numeric dollar and percentage changes
measured from period to period of various line items on the income statement.
The focus should be on an analysis of the factors that caused these changes to
occur. In providing this analysis, registrants may find it helpful to include a
discussion of key variables and financial measures management is utilizing in
managing the business. For further guidance, please refer to Item 303 and the
related instructions in Regulations S-K as well as SEC Interpretive Release No.
33-8350.
Response:
We will
enhance our discussion of the reasons for changes in our cash flows, results of
operations and other financial statement line items in our future filings,
focusing on the key factors influencing the changes being analyzed.
Item 11. Executive
Compensation, page 41
Compensation Discussion and
Analysis, Page 10 of the Definitive Proxy Statement on Schedule
14A
2.
Comment:
We note
from your discussion under “Cash Incentive Compensation” on page 12 of the proxy
statement that you have incorporated by reference into your Form 10-K that you
determined cash incentive compensation in 2008 by “measur[ing] actual
performance against a scale of performance that yields a bonus factor from zero
to four, in the case of earnings per share growth of up to 30%, and from zero to
two, in the case of return on shareholders’ equity up to 16%.” Please disclose
to us with greater detail how the scales of performance were used to determine
the bonus factors, as how this calculation is performed is unclear. For example,
it appears the company does not use a linear progression for measuring actual
performance against the scale.
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Response:
As noted
in our proxy statement, we use two separate performance measures that yield two
bonus factors, which are weighted differently and multiplied against the
reference or target bonus to determine annual cash incentive compensation. Our
compensation committee uses a scale that assigns a bonus factor to a level of
actual performance for each measure. The scales have been used consistently for
several years by our compensation committee to determine annual cash incentive
compensation.
The scale for our first
performance measure, growth in earnings per share (as defined in our plan), is
measured as a linear progression between zero and 30%, yielding a bonus factor
of between zero and four. For example, no growth
yields a bonus factor of zero; growth of 10% yields a bonus factor of 1.33;
growth of 15% yields a bonus factor of 2.00; growth of 20% yields a bonus factor
of 2.67; growth of 25% yields a bonus factor of 3.33;
and growth of
30% and greater earns the maximum bonus factor of 4.00.
The scale
for our second performance measure, return on shareholders’ equity, is measured
as two linear progressions. Performance from zero to 12% is measured by a linear
progression yielding a bonus factor of between zero and
1.75 and performance between 12% and 16% is measured by a linear progression
yielding a bonus factor of between 1.75 and 2.0. For example, zero or a negative
return on shareholders’ equity yields a bonus factor of
zero; 2% return on shareholders’ equity yields a bonus factor of 0.29; 4% return
on shareholders’ equity yields a bonus factor of 0.58; 8% return on
shareholders’ equity yields a bonus factor of 1.17; 12% return on shareholders’
equity yields a bonus factor of 1.75; 13% return on shareholders’ equity yields
a bonus factor of 1.81; 14% return on shareholders’ equity yields a bonus factor
of 1.88; and 16% return on shareholders’ equity yields
the maximum bonus factor of 2.00.
In future filings, we will
clarify that we use linear progressions for measuring actual performance against
the scale.
Financial Statements, page
F-1
Note 1. Nature of Operations
and Summary of Significant Accounting Policies, page F-8
Goodwill, page
F-15
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3.
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Comment:
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We see
that you completed your annual impairment test in the fourth quarter of 2008 and
tested each of your three reporting units for impairment. We also see as a
result of your testing, you determined that the goodwill related to the stock
preparation reporting unit was impaired and you recorded a $40.3 million
impairment charge to write down the goodwill associated with this reporting
unit. Regarding your impairment analysis of goodwill, and in the interest of
providing readers with a better insight into management’s judgments into
accounting for goodwill and intangible assets, please tell us and revise future
filings to disclose the following as necessary:
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Tell
us the last date you assessed each of your reporting unit’s goodwill for
impairment, we note you only disclose you completed the test during the
fourth quarter of 2008,
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Tell
us how much goodwill is allocated to each reporting unit, and whether your
impairment of $40.3 million represented all, or a portion of, the goodwill
related to the stock preparation reporting
unit,
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With
regards to your accessories and water management and fluid handling
reporting units, tell us the percentage by which fair value exceeded the
carrying value as of the date of your most recent test, and discuss
whether these reporting units are at risk of failing step one. In this
regard, provide management’s insight regarding why certain reporting units
have been affected by the economic downturn and others have not
been,
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Provide
a discussion of the degree of uncertainty associated with the key
assumptions used in your discounted cash flow
analysis,
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Provide
a discussion of potential events and/ or changes in circumstances that
could reasonably be expected to negatively affect the key
assumptions.
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Comment:
Tell us
the last date you assessed each of your reporting unit’s goodwill for
impairment, we note you only disclose you completed the test during the fourth
quarter of 2008.
Response:
The last
impairment test of goodwill for each of our reporting units was completed
as of January 3, 2009. We will disclose the actual date of our goodwill
impairment test in our future filings.
Comment:
Tell us
how much goodwill is allocated to each reporting unit, and whether your
impairment of $40.3 million represented all, or a portion of, the goodwill
related to the stock-preparation reporting unit.
2
Response:
The
goodwill impairment of $40.3 million represented a portion of the goodwill
related to the stock-preparation reporting unit. We will enhance the goodwill
disclosure in our future filings by adding the following disclosure
of the goodwill remaining after the impairment charge:
Our goodwill by reporting unit after
the impairment charge was as follows:
Stock-Preparation $14,736,000
Accessories and Water
Management 22,769,000
Fluid-Handling
57,525,000
Total
Goodwill
$95,030,000
Comment:
With
regards to your accessories and water management and fluid handling reporting
units, tell us the percentage by which fair value exceeded the carrying value as
of the date of your most recent test, and discuss whether these
reporting units are at risk of failing step one. In this regard, provide
management’s insight regarding why certain reporting units have been affected by
the economic downturn and others have not been.
Response:
When we
evaluated the recoverability of goodwill in the fourth quarter of 2008,
the accessories and water management and fluid-handling reporting units’
fair values exceeded the carrying values by 82% and 60%, respectively.
Given the amounts by which the fair values exceeded the carrying values, we
believe that there is a low risk of these reporting units failing step one in
2009. All of our reporting units have been negatively affected
by the economic downturn. Although all of the reporting units derive revenue
from the sale of both capital equipment and spare parts and consumables, the
stock-preparation reporting unit is more susceptible to cyclical
trends in the paper industry as a higher portion of its business is dependent on
large capital equipment sales, orders for which declined sharply beginning in
the fourth quarter of 2008. Also, the accessories and water management
and fluid-handling reporting units’ capital equipment sales tend to be smaller
in size as compared to that of the stock-preparation reporting unit and
therefore, we believe will, recover more quickly after a recession.
Comment:
Provide a
discussion of the degree of uncertainty associated with the key assumptions used
in your discounted cash flow analysis.
Response:
In future
filings, we will enhance our disclosure in both Management's Discussion and
Analysis of Financial Condition and Results of Operations and the Footnotes to
the Financial Statements as follows:
The fair
values of the reporting units were determined utilizing a discounted cash flow
methodology and considered such assumptions as weighted average cost of capital,
revenue growth, profitability, capital expenditures,
and working capital requirements.
The
determination of discounted cash flows is based on our long-range forecasts. The
revenue growth rates included in the forecasts are our best estimates based on
current and anticipated market conditions, and the profitability
assumptions are projected based on current and anticipated cost structures.
Long-range forecasting involves uncertainty, which increases with each
successive period. Key assumptions, such as revenue growth
rates and profitability, especially in the outer years, involve a greater degree
of uncertainty.
Comment:
Provide a discussion of potential
events and/ or changes in circumstances that could reasonably be expected to
negatively affect key assumptions.
Response:
In future
filings, we will add the following to both Management's Discussion and Analysis
of Financial Condition and Results of Operations and the Footnotes to the
Financial Statements:
Our
judgments and assumptions regarding the determination of the fair value of an
intangible asset or goodwill associated with an acquired business could change
as future events impact such fair values. The revenue and
growth rates included in the forecasts are our best estimates based on current
and anticipated market conditions, and the profitability assumptions are
projected based on current and anticipated cost structures. A prolonged
continuation of the economic downturn, continued weakness in demand for our
products, especially capital equipment products, or further contraction in
capital spending by paper companies in our key markets, such as
China, could negatively affect the revenue and profitability assumptions used in
our assessment of goodwill and intangible assets, which could result in
additional impairment charges.
3
Acknowledgement by the
Company
We
acknowledge that:
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the
Company is responsible for the adequacy and accuracy of the disclosure in
the filing;
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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
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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.
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Please do
not hesitate to contact me at 978-776-2012 if you have any questions or comments
regarding this response.
Very
truly yours,
/s/ Thomas M.
O’Brien
Thomas M.
O’Brien
Executive
Vice President and Chief Financial Officer
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