SEC Company Response from THERMADYNE HOLDINGS — Sep 1, 2005
THERMADYNE HOLDINGS CORP /DE (CIK 0000850660)
Date: Sept. 1, 2005 · CIK: 0000850660 · Accession: 0001104659-05-042575
AI Filing Summary & Sentiment
Referenced dates: August 19, 2005
Letter
VIA EDGAR SUBMISSION Securities and Exchange Commission Division of Corporation Finance Attention: Traci A. Hornfeck Re: Thermadyne Holdings Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2004 Quarterly Report on Form 10-Q for the period ended March 31, 2005 Form 8-K dated August 9, 2005
Dear Ms. Hornfeck:
This letter responds to comments by the staff of the Securities and Exchange Commission (the “Commission”) contained in the letter (the “Comment Letter”) dated August 29, 2005 from Lynn Dicker, Reviewing Accountant, to David L. Dyckman, Executive Vice President and Chief Financial Officer of Thermadyne Holdings Corporation (“Thermadyne”). The comments (in bold type) and responses set forth below are keyed to the numbering of the comments and the headings used in the Comment Letter.
We advise you as follows:
Form 10-K for the year ended December 31, 2004
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Statements, page F-1
Consolidated Statements of Cash Flows, page F-6
1. We note your response to prior comment 3. Please tell us what the impact would be to the statement of cash flows as of December 31, 2004, if you prepared the statement in accordance with Example 2 to Appendix C of SFAS 95. If the amount is material, please tell us why you believe that you should not amend your December 31, 2004 10-K.
Response:
In our statement of cash flows as of December 31, 2004, we included $581,000 related to exchange rate impacts as a component of net cash provided by financing activities for the twelve months then ended. The presentation of the exchange rate impacts amount had no impact to net cash used in operating activities, net cash used in investing activities, net decrease in cash and cash equivalents at the end of period. We believe this amount is not material to the consolidated statement of cash flows due to these factors and, additionally, that it is 3.2% of net cash provided by financing activities and equates to 0.1%, 0.1% and 0.4% of 2004 net sales, December 31, 2004
total assets and total shareholders’ equity, respectively. Additionally, we do not believe that if this amount were presented differently, it would influence or change the judgment of a reasonable person.
Additionally, as we noted in our response to the staff dated August 19, 2005, effective with our March 31, 2005 Quarterly Report on From 10-Q, we have included the effect of exchange rate changes as an item on the cash flow statement for both the current and prior periods presented.
For the staff’s convenience, the data below, derived from our consolidated statement of cash flows, provides the quantitative impact of the $581,000 to net cash provided by financing activities for the twelve months ended December 31, 2004.
(In thousands)
As filed
December 31, 2004
Form 10-K
Effect of
exchange rate
changes separated
$ change
% change
Net cash used in operating activities:
$
(13,383
)
$
(13,383
)
—
—
Net cash used in investing activities:
(14,755
)
(14,755
)
—
—
Net cash provided by financing activities:
18,004
17,423
(581
)
(3.2
)%
Effect of exchange rate changes
—
—
Net decrease in cash and cash equivalents
(10,134
)
(10,134
)
—
—
Cash and cash equivalents at end of period
6,650
6,650
—
—
Note 2. Significant Accounting Policies, page F-9
Revenue Recognition, page F-9
2. We note your response to prior comment 5. Please confirm to us in future filings you will disclose, similar to that of your response, the specific details as to how you account for your distributor sales programs.
Response:
We confirm that, in future filings, we will disclose, similar to that provided in our August 19, 2005 response to the staff, how we account for our distributor sales programs.
For the staff’s convenience, a sample disclosure as provided in our August 19, 2005 response is as follows:
We generally sell our products through distributor networks and sponsor a number of incentive programs to augment distributor sales efforts. Included in our incentive programs are certain rebate programs and sales and market share growth incentive programs. The costs associated with our sales programs are recorded as a reduction of revenue.
Terms of sale generally include our standard FOB shipping point terms, 60-day payment terms and standard warranties for which reserves, based upon estimated warranty liabilities, have been
recorded. For product that is returned due to issues outside the scope of our warranty agreements, restocking charges will generally be assessed.
Note 4. Plan of Reorganization
3. We note your response to prior comments 2 and 6. Please confirm to us in future filings you will disclose, similar to that of your response, why your actual results are not consistent with those projected in your fresh start valuation, and why you believe that an impairment has not occurred. Additionally, please confirm to us in future filings you will disclose the detail, similar to that of your response, explaining the significant assumptions applied to determine the reorganization value.
Response:
We confirm that, in future filings, we will disclose, similar to that provided in our August 19, 2005 response to the staff, why our actual results are not consistent with those projected in our fresh start valuation, and why we believe that an impairment has not occurred. Additionally, we will disclose the detail, similar to that provided in our August 19, 2005 response to the staff, explaining the significant assumptions applied to determine the reorganization value.
For the staff’s convenience, a sample disclosure as provided in our August 19, 2005 response is as follows:
In accordance with AICPA Statement of Position 90-7, we adopted fresh-start accounting whereby our assets, liabilities and new capital structure were adjusted to reflect estimated fair value at May 31, 2003. We determined the reorganization value through consultation with our financial advisors, by developing a range of values using both comparable companies and net present value approaches. The reorganization value was based in part on financial projections prepared by us for the period 2003 through 2012. These projections assume a compound annual growth rate for sales of approximately 3.3% with domestic sales growing at a slightly faster pace than international. The projections also assume improved profitability from continued efforts to reduce cost. We made an allocation of the reorganization value to our various asset classes which included certain estimates and judgments. Significant assumptions and estimates used in determining the reorganization value and in the allocation of the reorganization value to our various asset classes are as follows:
• In determining the $518 million reorganization value we applied the income approach in order to determine return and growth rate assumptions for the identifiable intangible assets. The income approach is predicated on developing either cash flow or income projections over the useful lives of the assets, which are then discounted for risk and time value. Our income approach began with the same assumptions that were used in bankruptcy court proceedings regarding Company revenues, earnings before interest, taxes, depreciation and amortization and capital expenditures. These forecasts for cash flow and income were for 2003 through 2006; for years beyond 2006, we assumed a 3% terminal growth rate. The resulting net cash flows were then discounted to a present value with a discount rate of approximately 26%.
• Work-in-process and finished goods inventories were recorded at their respective selling prices less costs to complete, costs of disposal and a reasonable profit on the selling effort, as applicable.
• Fixed assets were recorded at their estimated fair value based upon management estimates and third party appraisals. Our estimates were based upon the market or cost approaches which estimate value based upon market prices in actual transactions or replacement value, respectively.
• Identifiable intangible assets were recorded at their estimated fair value based upon management estimates and third party appraisals. Our estimates were based upon the income approach. Forecasts for cash flow and income were for 2003 through 2006; for years beyond 2006, we assumed a 3% terminal growth rate. The resulting net cash flows were then discounted to a present value with a discount rate of approximately 26%. For our trademarks and patents, we assumed that 80% and 12%, respectively, of the company’s revenue is derived with the benefit of the trademark and patent portfolios. With regards to our customer relationships we assumed a 20 year life for the domestic relationships and a ten year life for international relationships and a straight line estimate for customer attrition. The resulting net revenue was attributed to the customer relationships as of the valuation date.
• The excess of the reorganization value over identifiable assets was recorded as goodwill.
We have provided below selected financial data derived from our audited consolidated financial statements at December 31, 2004 (“Actual”) and selected projected financial data from our January 17, 2003 disclosure statement (“Projected”). While we have provided additional discussion related to the early years of our turnaround efforts below, the more significant items adversely impacting our 2004 loss before income tax provision where we anticipate improvements in future periods and their approximate impacts are as follows: sales and marketing programs of $13 million, including rebates; price decreases and material inflation of $11 million; process improvement, including facility rationalization and restructuring costs of $13 million; amortization of intangibles of $3 million; and interest expense of $5 million.
Selected year ended December 31, 2004
income statement data (in thousands)
Projected
Actual
Net sales
$
425,000
$
482,619
Operating income
57,526
8,134
Income (loss) before income tax provision
36,262
(18,570
)
Net income (loss)
$
20,294
$
(23,977
)
In the early years of our turnaround efforts, several items adversely influenced our actual results of operations as compared to our projections discussed above. Most notably, while the Company experienced the sales volumes higher than forecasted, the associated benefits of this growth were offset primarily by higher materials costs, increased rebate expense related to a distributor incentive program subsequently established which extend through 2006, increased short-term spending associated with our subsequent decision to consolidate two of our manufacturing operations while also establishing a new national distribution center, unplanned incremental investment in sales, general and administrative expenses funding accelerated new product development as well as incremental expansion and development of international markets, legal
costs associated with patent and trademark matters and information system and organization improvements. Additionally, increased restructuring charges related to severance costs, amortization expense related to intangible assets with definite lives and interest expense as a result of higher debt levels have adversely impacted results.
We believe that these items and market conditions will improve over the next few years and have considered both the initial conditions and incremental expense as well as related anticipated improvements in our annual goodwill impairment analysis and when considering whether an indication of long-lived asset impairment exists. Specifically, while impacting our 2004 and 2005 first half results of operations, we have demonstrated the ability to pass through material cost increases such as commodity based price increases in the form of pricing and surcharge increases, although there is typically a time lag between the impact of the cost increases and the effectiveness of the related price increases to our customers. In addition, the Company anticipates benefiting from cost improvements and growth opportunities associated with the investments in the indicated plant consolidation, national distribution center, incremental new products, markets and our information technology infrastructure.
We conducted our most recent annual goodwill impairment test during the fourth quarter of 2004 with the assistance of an independent, third party valuation service. In doing so, we used comparable market values, market prices and the present value of expected future cash flows to estimate fair value. This required us to make significant judgments and estimates about future conditions in arriving at our estimates of future cash flows. Included in our analysis were actual results for the nine months ended September 30, 2004 and expected results for the twelve months ended December 31, 2004 and 2005. In addition, and as previously discussed, we included judgments and estimates regarding changes and improvements in items and market conditions adversely impacting the early years of our turnaround efforts. As a result of our procedures we estimated a fair value of the business enterprise for Thermadyne and concluded that no adjustment to the carrying value of our goodwill was necessary as of December 31, 2004.
Form 8-K dated August 9, 2005
4. Please revise future filings to include for each measure, specifically, gross margin excluding depreciation and non-cash inventory adjustments and sales, general and administrative expenses excluding depreciation and severance, a separate discussion in accordance with Instruction 2 to Item 2.02 of Form 8-K and paragraph (e)(l)(i) of Item 10 of Regulation S-K and Question 8 of the FAQ Regarding the Use of Non-GAAP Financial Measures dated June 13, 2003. The discussion should include, in sufficient detail, all of the following for each non-GAAP measure:
• The substantive reasons why management believes the non-GAAP measure provides useful information to investors;
• The specific manner in which management uses the non-GAAP measure to conduct or evaluate its business;
• The economic substance behind management’s decision to use the measure; and
• The material limitations associated with the use of the non-GAAP measure as compared to the use of the most directly comparable GAAP measure and the manner in which management compensates for these limitations when using the non-GAAP measure.
Please provide us with a sample of your response.
Response:
For each non-GAAP measure presented, we will revise future filings to include a sufficient detailed discussion that addresses each of the items noted by the staff and in accordance with Instruction 2 to Item 2.02 of Form 8-K and paragraph (e)(l)(i) of Item 10 of Regulation S-K and Question 8 of the FAQ Regarding the Use of Non-GAAP Financial Measures dated June 13, 2003.
With respect to the measures specifically addressed by the staff in comment 4, the following sample res
Show Raw Text
CORRESP
1
filename1.htm
THERMADYNE HOLDINGS CORPORATION
16052
Swingley Ridge Road, Suite 300
Chesterfield,
Missouri 63017
September
1, 2005
VIA EDGAR SUBMISSION
Securities and Exchange
Commission
Division of Corporation
Finance
Judiciary Plaza
450 Fifth Street, N.W.
Washington,
D.C. 20549
Attention: Traci A.
Hornfeck
Re: Thermadyne Holdings
Corporation
Annual Report on Form 10-K for the fiscal year ended December 31, 2004
Quarterly Report on Form 10-Q for the period ended March 31, 2005
Form 8-K dated August 9, 2005
Dear Ms. Hornfeck:
This letter responds to comments by the staff of the
Securities and Exchange Commission (the “Commission”) contained in the letter
(the “Comment Letter”) dated August 29, 2005 from Lynn Dicker, Reviewing
Accountant, to David L. Dyckman, Executive Vice President and Chief Financial
Officer of Thermadyne Holdings Corporation (“Thermadyne”). The comments (in bold type) and responses set
forth below are keyed to the numbering of the comments and the headings used in
the Comment Letter.
We advise you as follows:
Form 10-K
for the year ended December 31, 2004
Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
Financial
Statements, page F-1
Consolidated
Statements of Cash Flows, page F-6
1. We note your response to prior comment 3.
Please tell us what the impact would be to the statement of cash flows
as of December 31, 2004, if you prepared the statement in accordance with
Example 2 to Appendix C of SFAS 95. If
the amount is material, please tell us why you believe that you should not
amend your December 31, 2004 10-K.
Response:
In our statement of cash
flows as of December 31, 2004, we included $581,000 related to exchange rate
impacts as a component of net cash provided by financing activities for the twelve
months then ended. The presentation of
the exchange rate impacts amount had no impact to net cash used in operating
activities, net cash used in investing activities, net decrease in cash and
cash equivalents at the end of period.
We believe this amount is not material to the consolidated statement of
cash flows due to these factors and, additionally, that it is 3.2% of net cash
provided by financing activities and equates to 0.1%, 0.1% and 0.4% of 2004 net
sales, December 31, 2004
total assets and
total shareholders’ equity, respectively.
Additionally, we do not believe that if this amount were
presented differently, it would influence or change the judgment of a
reasonable person.
Additionally,
as we noted in our response to the staff dated August 19, 2005, effective with
our March 31, 2005 Quarterly Report on From 10-Q, we have included the effect
of exchange rate changes as an item on the cash flow statement for both the
current and prior periods presented.
For
the staff’s convenience, the data below, derived from our consolidated
statement of cash flows, provides the quantitative impact of the $581,000 to net
cash provided by financing activities for the twelve months ended December 31,
2004.
(In thousands)
As filed
December 31, 2004
Form 10-K
Effect of
exchange rate
changes separated
$ change
% change
Net cash used in operating
activities:
$
(13,383
)
$
(13,383
)
—
—
Net cash used in investing
activities:
(14,755
)
(14,755
)
—
—
Net cash provided by
financing activities:
18,004
17,423
(581
)
(3.2
)%
Effect of exchange rate
changes
—
581
581
—
Net decrease in cash and
cash equivalents
(10,134
)
(10,134
)
—
—
Cash and cash equivalents
at end of period
6,650
6,650
—
—
Note 2. Significant Accounting Policies, page F-9
Revenue
Recognition, page F-9
2. We note your response to prior comment 5.
Please confirm to us in future filings you will disclose, similar to
that of your response, the specific details as to how you account for your
distributor sales programs.
Response:
We confirm that, in future
filings, we will disclose, similar to
that provided in our August 19, 2005 response to the staff, how we account for
our distributor sales programs.
For
the staff’s convenience, a sample disclosure as provided in our August 19, 2005
response is as follows:
We
generally sell our products through distributor networks and sponsor a number
of incentive programs to augment distributor sales efforts. Included in our incentive programs are
certain rebate programs and sales and market share growth incentive
programs. The costs associated with our
sales programs are recorded as a reduction of revenue.
Terms
of sale generally include our standard FOB shipping point terms, 60-day payment
terms and standard warranties for which reserves, based upon estimated warranty
liabilities, have been
2
recorded. For product that is returned due to issues
outside the scope of our warranty agreements, restocking charges will generally
be assessed.
Note 4. Plan of Reorganization
3. We note your response to prior comments 2 and 6. Please confirm to us in future filings you
will disclose, similar to that of your response, why your actual results are
not consistent with those projected in your fresh start valuation, and why you
believe that an impairment has not occurred. Additionally, please confirm to us in future
filings you will disclose the detail, similar to that of your response,
explaining the significant assumptions applied to determine the reorganization
value.
Response:
We confirm that, in future
filings, we will disclose, similar to that provided in our August 19, 2005
response to the staff, why our actual results are not consistent with those
projected in our fresh start valuation, and why we
believe that an impairment has not occurred. Additionally, we will disclose the detail,
similar to that provided in our August 19, 2005 response to the staff,
explaining the significant assumptions applied to determine the reorganization
value.
For
the staff’s convenience, a sample disclosure as provided in our August 19, 2005
response is as follows:
In
accordance with AICPA Statement of Position 90-7, we adopted fresh-start
accounting whereby our assets, liabilities and new capital structure were
adjusted to reflect estimated fair value at May 31, 2003. We determined the reorganization value
through consultation with our financial advisors, by developing a range of
values using both comparable companies and net present value approaches. The
reorganization value was based in part on financial projections prepared by us
for the period 2003 through 2012. These
projections assume a compound annual growth rate for sales of approximately
3.3% with domestic sales growing at a slightly faster pace than
international. The projections also
assume improved profitability from continued efforts to reduce cost. We made an allocation of the reorganization
value to our various asset classes which included certain estimates and
judgments. Significant assumptions and
estimates used in determining the reorganization value and in the allocation of
the reorganization value to our various asset classes are as follows:
• In determining
the $518 million reorganization value we applied the income approach in order
to determine return and growth rate assumptions for the identifiable intangible
assets. The income approach is
predicated on developing either cash flow or income projections over the useful
lives of the assets, which are then discounted for risk and time value. Our income approach began with the same
assumptions that were used in bankruptcy court proceedings regarding Company
revenues, earnings before interest, taxes, depreciation and amortization and
capital expenditures. These forecasts
for cash flow and income were for 2003 through 2006; for years beyond 2006, we
assumed a 3% terminal growth rate. The
resulting net cash flows were then discounted to a present value with a
discount rate of approximately 26%.
3
• Work-in-process
and finished goods inventories were recorded at their respective selling prices
less costs to complete, costs of disposal and a reasonable profit on the
selling effort, as applicable.
• Fixed assets
were recorded at their estimated fair value based upon management estimates and
third party appraisals. Our estimates
were based upon the market or cost approaches which estimate value based upon
market prices in actual transactions or replacement value, respectively.
• Identifiable
intangible assets were recorded at their estimated fair value based upon
management estimates and third party appraisals. Our estimates were based upon the income
approach. Forecasts for cash flow and
income were for 2003 through 2006; for years beyond 2006, we assumed a 3%
terminal growth rate. The resulting net cash flows were then discounted to a
present value with a discount rate of approximately 26%. For our trademarks and patents, we assumed
that 80% and 12%, respectively, of the company’s revenue is derived with the
benefit of the trademark and patent portfolios.
With regards to our customer relationships we assumed a 20 year life for
the domestic relationships and a ten year life for international relationships
and a straight line estimate for customer attrition. The resulting net revenue was attributed to
the customer relationships as of the valuation date.
• The excess of
the reorganization value over identifiable assets was recorded as goodwill.
We
have provided below selected financial data derived from our audited
consolidated financial statements at December 31, 2004 (“Actual”) and selected
projected financial data from our January 17, 2003 disclosure statement (“Projected”). While we have provided additional discussion
related to the early years of our turnaround efforts below, the more
significant items adversely impacting our 2004 loss before income tax provision
where we anticipate improvements in future periods and their approximate
impacts are as follows: sales and marketing programs of $13 million, including
rebates; price decreases and material inflation of $11 million; process
improvement, including facility rationalization and restructuring costs of $13
million; amortization of intangibles of $3 million; and interest expense of $5
million.
Selected year ended December 31, 2004
income statement data (in thousands)
Projected
Actual
Net sales
$
425,000
$
482,619
Operating income
57,526
8,134
Income (loss) before
income tax provision
36,262
(18,570
)
Net income (loss)
$
20,294
$
(23,977
)
In
the early years of our turnaround efforts, several items adversely influenced
our actual results of operations as compared to our projections discussed
above. Most notably, while the Company
experienced the sales volumes higher than forecasted, the associated benefits
of this growth were offset primarily by higher materials costs, increased
rebate expense related to a distributor incentive program subsequently
established which extend through 2006, increased short-term spending associated
with our subsequent decision to consolidate two of our manufacturing operations
while also establishing a new national distribution center, unplanned
incremental investment in sales, general and administrative expenses funding accelerated
new product development as well as incremental expansion and development of
international markets, legal
4
costs associated
with patent and trademark matters and information system and organization
improvements. Additionally, increased restructuring charges related to
severance costs, amortization expense related to intangible assets with
definite lives and interest expense as a result of higher debt levels have
adversely impacted results.
We
believe that these items and market conditions will improve over the next few
years and have considered both the initial conditions and incremental expense
as well as related anticipated improvements in our annual goodwill impairment
analysis and when considering whether an indication of long-lived asset
impairment exists. Specifically, while impacting our 2004 and 2005 first half
results of operations, we have demonstrated the ability to pass through
material cost increases such as commodity based price increases in the form of
pricing and surcharge increases, although there is typically a time lag between
the impact of the cost increases and the effectiveness of the related price
increases to our customers. In addition, the Company anticipates benefiting from
cost improvements and growth opportunities associated with the investments in
the indicated plant consolidation, national distribution center, incremental
new products, markets and our information technology infrastructure.
We
conducted our most recent annual goodwill impairment test during the fourth
quarter of 2004 with the assistance of an independent, third party valuation
service. In doing so, we used comparable
market values, market prices and the present value of expected future cash
flows to estimate fair value. This
required us to make significant judgments and estimates about future conditions
in arriving at our estimates of future cash flows. Included in our analysis were actual results
for the nine months ended September 30, 2004 and expected results for the
twelve months ended December 31, 2004 and 2005.
In addition, and as previously discussed, we
included judgments and estimates regarding changes and improvements in items
and market conditions adversely impacting the early years of our turnaround
efforts. As a result of our procedures
we estimated a fair value of the business enterprise for Thermadyne and
concluded that no adjustment to the carrying value of our goodwill was
necessary as of December 31, 2004.
Form 8-K dated August 9, 2005
4. Please revise future filings to include for each measure,
specifically, gross margin excluding depreciation and non-cash inventory
adjustments and sales, general and administrative expenses excluding
depreciation and severance, a separate discussion in accordance with
Instruction 2 to Item 2.02 of Form 8-K and paragraph (e)(l)(i) of Item 10 of
Regulation S-K and Question 8 of the FAQ Regarding the Use of Non-GAAP
Financial Measures dated June 13, 2003.
The discussion should include, in sufficient detail, all of the
following for each non-GAAP measure:
• The substantive reasons why management believes the non-GAAP measure
provides useful information to investors;
• The specific manner in which management uses the non-GAAP measure to
conduct or evaluate its business;
• The economic substance behind management’s decision to use the measure;
and
• The material limitations associated with the use of the non-GAAP measure
as compared to the use of the most directly comparable GAAP measure and the
manner in which management compensates for these limitations when using the
non-GAAP measure.
5
Please
provide us with a sample of your response.
Response:
For each non-GAAP measure
presented, we will revise future filings to include a sufficient detailed
discussion that addresses each of the items noted by the staff and in
accordance with Instruction 2 to Item
2.02 of Form 8-K and paragraph (e)(l)(i) of Item 10 of
Regulation S-K and Question 8 of the FAQ Regarding the Use of Non-GAAP
Financial Measures dated June 13, 2003.
With respect to the measures
specifically addressed by the staff in comment 4, the following sample
res