SecProbe.io

CORRESP
1
filename1.htm

corresp

Oilgear

August 22, 2005

VIA EDGAR

U.S. Securities and Exchange Commission

100 F Street, NE

Washington, D.C. 20549-7010

Attn: Mr. Nili Shah

Dear Mr. Shah:

We have received your letter dated July 6, 2005 regarding our Form 10-K for the fiscal year ended
December 31, 2004 and our Form 10-Q for the quarter ended March 31, 2005 (SEC File No. 0-0082).
The Company’s responses to your comments are provided below. For your convenience we have
reproduced the section headings and comments from the letter in italicized text.

Form 10-K for the year ended December 31, 2004

Business, page 1

    1.

    We note that you apply the percentage-of-completion method to your construction
contracts. In future filings, please disclose the nature of your contracts that are
subject to the percentage-of-completion method, the basis for your application of the
percentage-of-completion method, and a discussion of how these contracts differ from
products where revenue is recognized upon shipment to customer.

RESPONSE: We will include additional information in this regard in future filings. With respect
to our Form 10-Q for the quarter ended June 30, 2005 (filed on
August 22, 2005), we have modified
the second paragraph of Notes to Consolidated Financial Statements No. 2 — Business Description and
Operations, as follows (bolded text reflects additions made in response to your request):

The individual subsidiaries of the Company operate predominantly in the fluid
power industry. The Company provides advanced technology in the design and
production of unique fluid power components. Products include piston pumps,
motors, valves, controls, manifolds, electrohydraulic components, cylinders,
reservoirs, skids and meters. Industries that use these products are primary
metals, machine tool, automobile, aerospace, petroleum, construction equipment,
chemical, plastic, glass, lumber, rubber and food. The products are sold as
individual components or integrated into high performance
applications. Standard components, such as our hydraulic pumps, are sold direct
to users through our distribution network. These items can be inventoried as
finished goods, have short delivery times and do not have progress billings. We
recognize revenue on these products as they are shipped to our customers. The
contracts for high performance applications typically require custom engineered
solutions that meet customer specified requirements. These construction type
contracts take months and sometimes years to engineer, manufacture, assemble and
install at the customer’s specified location. These contracts require progress
payments. The revenue for these contracts is recognized on a
percentage-of-completion

    2300 S. 51st Street

    Telephone:

    414/327-1700

    Post Office Box 343924

    Fax:

    414/327-0532

    Milwaukee, WI 53234-3924

Oilgear

Mr. Nili Shah

U.S. Securities and Exchange Commission

August 22, 2005

Page 2

method of accounting. which compares actual costs incurred on a contract
to the estimated total contract cost developed at contract proposal and reviewed
and updated monthly by our engineers and financial staff until the contract is
closed.

    2.

    We note that you changed the expected useful lives to calculate depreciation on your
fixed assets. Please tell us, and, if material, please disclose in future filings, the
year in which you changed the useful lives and the effect on your net earnings and
earnings per share. See paragraph 33 of APB No. 20.

RESPONSE: As noted in your comment, in connection with our restatement we changed the economic
useful lives for certain depreciable assets on the books of our Italian subsidiary, Oilgear Towler
Srl. The effect of changing the lives for depreciable assets on the books of our Italian
subsidiary was to increase the depreciation expense by approximately
$16,000 in 2002 and by less than $1,000 in each of 2003 and 2004. We
have concluded that these amounts are not material.

We included disclosure of the restatement at the beginning of our Item 1, “Description of Business”
because we believe it important for readers to understand that we restated certain historical
financial information as a result of errors in the accounts of our Italian subsidiary. In addition to a
general description of the restatement in Item 1, we also refer the reader to Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” for additional
information and indicate that information regarding the effect of the restatement on the Company’s
financial position and results can be found in the Notes to the Consolidated Financial Statements -
Note 2, and in Item 6, “Selected Financial Data.”

The
earliest year affected by the correction of the estimated lives was
2001. Because the amounts of depreciation expense in all years have
been restated, we do not believe that it is necessary to disclose the
year.

Management’s Discussion and Analysis, page 16

    3.

    We note that your cash flows provided by operating activities continue to decrease,
despite the increases in your net earnings, primarily as a result of changes in your
working capital. In future filings, please provide greater insight into the reasons for
the changes in each period, the reasonably likely impact of the changes on future cash
flows and cash management decisions, and any material trends and uncertainties. For
example:

    •

    We note that your accounts payable and accrued compensation provided $2.6
million of operating cash inflow in 2004. However, your disclosures did not include
discussion of your plans to use the new credit facility to pay approximately $1.9
million to make accounts payable and accrued compensation current in the first
quarter of 2005. In future filings, please disclose your expectations regarding
changes in operating cash flows when known.

    2300 S. 51st Street

    Telephone:

    414/327-1700

    Post Office Box 343924

    Fax:

    414/327-0532

    Milwaukee, WI 53234-3924

Oilgear

Mr. Nili Shah

U.S. Securities and Exchange Commission

August 22, 2005

Page 3

    •

    We note that the amounts related to your percentage-of-completion
contracts continue to increase. To the extent known, please clarify when in 2005 and
2006 you expect to bill and receive payments on your large contracts.

RESPONSE: In future filings we will provide greater insight into the reasons for changes to cash
flows in each period and will make an assessment as to whether we have sufficient information to
provide commentary on the impact that certain trends and uncertainties may have on future cash
flows and cash management decisions.

Additionally, we have expanded our discussion of cash flows from operations in our Form 10-Q for
the quarter ended June 30, 2005 by adding the following information:

For
the six months ended June 30, 2005, approximately $531,000 of cash was
used by operations compared to approximately $1,557,000 of cash provided by
operations during the same period in 2004. The largest use of cash was the
approximately $2,828,000 increase in trade accounts receivable resulting from
the increase in net sales. The increase in the backlog of orders in process has
increased inventory, which used approximately $660,000 of cash. The new credit
facility made it possible to make significant payments to vendor accounts
payable, which used approximately $1,073,000 of cash. The catch-up of the
delinquent defined benefit pension contributions are the primary reason for the
approximately $806,000 use of cash in accrued compensation. Approximately
$1,780,000 of defined benefit pension contributions are planned to be paid in the
last six months of 2005. The transaction costs of the new banking arrangement
were approximately $1,581,000 of which approximately $1,059,000 were capitalized
in 2005 and after applying $250,000 of amortization in the first six months of
2005, it was the primary cause for the use of cash in Other, net. An
approximately $2,000,000 progress payment received on the large French ADH contract
in the second quarter of 2005 caused billings, costs and estimated earnings on
uncompleted contracts to provide approximately $847,000 of cash. The balance
due on the ADH contract, approximately $2,250,000, is expected to be
received in 2006. The
Company expects to receive cash payments on the remaining contracts
under
percentage of completion accounting of approximately $5,630,000 and $4,500,000
in the last six months of 2005 and in 2006, respectively. An increase in customer deposits provided
approximately $1,274,000 of cash. Inventory turns were 3.02 at June 30, 2005
compared to 2.86 at June 30, 2004.

    4.

    In future filings, please revise your table of contractual obligations as follows:

    •

    Include your interest commitments under your interest-bearing debt in
this table, or provide textual discussion of this obligation below the table. If you
provide a textual discussion, the

    2300 S. 51st Street

    Telephone:

    414/327-1700

    Post Office Box 343924

    Fax:

    414/327-0532

    Milwaukee, WI 53234-3924

Oilgear

Mr. Nili Shah

U.S. Securities and Exchange Commission

August 22, 2005

Page 4

    discussion should quantify the interest payments
using the same time frames stipulated in the table. Regardless of whether you decide
to include interest payments in the table or in textual discussion below the table,
you should provide appropriate disclosure with respect to your assumptions of your
estimated variable rate in interest payments.

    •

    Present in this table funding contributions to your pension plans for at
least the following year and, if known, for subsequent years. Include a footnote to
the table that (1) discusses the basis for inclusion or exclusion of these
obligations and (2) explicitly states the periods for which no amounts have been
included in the table.

RESPONSE:
We will revise the contractual obligations table (or the text
following such table) in response to
your requested disclosure in future 10-K filings.

Financial Statements

(1) Summary of Significant Accounting Policies, page 24

(A) Consolidation, page 24

    5.

    If material, please tell us why you consolidate your joint venture in India, despite
what appears to be a non-controlling interest of 49%. If this joint venture is immaterial
to your operations, please provide us with your quantitative and qualitative
considerations of materiality with respect to this joint venture.

RESPONSE: We consolidate our joint venture in India because Oilgear owns 49% and Oilgear’s Vice
President of International Operations and Director owns 2% of this entity, and because Oilgear has
the controlling vote on entity’s board of directors. As a result of the ownership by the director
and our controlling vote on the board of directors, we believe that we control the venture and as
such consolidation is appropriate.

(8) Other Non-Operating Income, Net, page 36

    6.

    Please tell us the nature and amounts of the items comprising “miscellaneous, net”
included within other non-operating income, net in your consolidated statement of
operations.

RESPONSE: Items included in the miscellaneous, net caption within “Other Non-Operating Income
(Loss), Net” are items that are not part of our core operations that we consider non-operating in
nature. The majority of the balance in each of the three years 2002 through 2004 and the first
quarter of 2005 relate to gains on the sale of assets and rental income from the leasing of our
Longview, TX facility. Amounts included in this caption have represented less than 0.14% of
consolidated net sales (i.e., 0.03%

    2300 S. 51st Street

    Telephone:

    414/327-1700

    Post Office Box 343924

    Fax:

    414/327-0532

    Milwaukee, WI 53234-3924

Oilgear

Mr. Nili Shah

U.S. Securities and Exchange Commission

August 22, 2005

Page 5

for the first quarter of 2005, 0.02% for the first quarter of
2004; and 0.004%, 0.13% 0.14% for the fiscal years ending December 31, 2002, 2003 and 2004,
respectively), and as such we have not considered these amounts as significant to our financial
statements.

(12) Commitments and Contingencies, page 46

    7.

    You state you are a defendant in several product liability actions, for which you
believe you are adequately covered by insurance. Please tell us, and disclose in future
filings as appropriate:

    •

    The information required by paragraphs 9-10 of SFAS No. 5.

    •

    The nature of any uncertainties related to the recovery of these amounts
from insurance. To the extent you have recognized an asset related to amounts where
recovery is not probable, please tell us your basis for doing so.

In addition, for any amounts accrued on your balance sheet, please confirm to us that you have
not offset the asset representing your insurance recovery against your product liabilities.

RESPONSE: There are six open product liability lawsuits and one auto accident related lawsuit.
Each lawsuit has been reported to, and is being defended by, our insurance carriers.

The date of these lawsuits range between 1987 and 2001. The auto accident related lawsuit was filed
in 1999 and the claim has been settled by the insurance company for the property damage and two
adult claimants have signed release statements. A third claimant, a minor, had her complaint
dismissed without prejudice and can have her complaint refiled at any time between now and 2 years
beyond her eighteenth birthday (which will be 04/21/07). Two of the insured product liability
lawsuits, one in France and the second in England are active. On April 12, 2005 a French court
ordered the Company’s subsidiary, Oilgear Towler S.A., to pay approximately EUR 1,255,000 plus
interest to the claimant. Our insurance company is reviewing the facts prior to deciding whether
to appeal that decision. There is no deductible in the insurance
policy that covers this claim. The claim in England is being processed through the English judicial
system but no decision has been made by a court at this time. The remaining four product liability
claims have been inactive for many years.

While the deductibles are small, a retrospective premium scheme for three of the inactive
product liability claims made in 1987, 1988 and 1989 could cost the Company a maximum of
approximately $250,000 before it reaches the maximum premium limit, we believe we have substantial
defenses against these claims, that each claim is being handled by competent legal defense teams
hired by the insurance companies and that we have adequate insurance contracts in place to protect
us against losses. Therefore, we do not believe that these claims meet the definition of a
liability under SFAS No. 5 and we have not set up any accruals for these contingent liabilities.

    2300 S. 51st Street

    Telephone:

    414/327-1700

    Post Office Box 343924

    Fax:

    414/327-0532

    Milwaukee, WI 53234-3924

Oilgear

Mr. Nili Shah

U.S. Securities and Exchange Commission

August 22, 2005

Page 6

Item 9A. Controls and Procedures, page 50

    8.

    We note your disclosure that your principal executive officer and principal financial
officer concluded that the Company’s disclosure controls and procedures were not effective
to ensure that information required to be disclosed by the Company in reports that it
files under the Securities Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the SEC. Revise your future
filings to clarify, if true, that your officers concluded that your disclosure controls
and procedures are also not effective to ensure that information required to be disclosed
in the reports that you file or submit under the Exchange Act is accumulated and
communicated to your management, including your chief executive officer and chief
financial officer, to allow ti