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SEC Response Letter

 September 16, 2005

 Mail Stop 7010

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Attention: Rufus Decker, Accounting Branch Chief

Re:

NATCO Group Inc. – File No. 1-15603

 Form 10-K/A for the Fiscal Year Ended December 31, 2004;

 Forms 10-Q for the Quarters Ended March 31 and June 30, 2005

 Ladies and Gentlemen:

 On behalf of NATCO Group Inc., we enclose a memorandum in response to the
comments of the Securities and Exchange Commission in its letter of August 19, 2005. In submitting its response, the Company acknowledges that:

•

The Company is responsible for the adequacy and accuracy of the disclosure in its filings under the Securities Exchange Act of 1934;

•

Staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to such filings; and

•

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.

 If you have any questions regarding these comments, please
direct them to Richard W. FitzGerald, Senior Vice President and Chief Financial Officer (713-685-8082) or, in his absence, Katherine Ellis, Senior Vice President & General Counsel (713-685-6183).

Sincerely,

 /s/ John U. Clarke

 /s/ Richard W. FitzGerald

John U. Clarke

Richard W. FitzGerald

Chairman & Chief Executive Officer

Senior Vice President & Chief Financial Officer

 Enclosures

Brookhollow Central III

Telephone: (713) 683-9292

2950 North Loop West, 7th Floor

Facsimile: (713) 812-6654

Houston, Texas 77092

 US Securities & Exchange Commission

 September 16, 2005

 Page 2 of 2

cc:

Scott Watkinson, Staff Accountant

Stop 7010

Jeanne Baker, Assistant Chief Accountant

Stop 7010

Bill Swanstrom

Locke, Liddell & Sapp

Eric Johnson

Locke, Liddell & Sapp

Al Kekish

KPMG LLP

RE:

Form 10-K/A for the Fiscal Year Ended December 31, 2004

Forms 10-Q for the Quarters Ended March 31 and June 30, 2005

File No. 1-15603

 September 16, 2005

 Memorandum of NATCO Group Inc. in Response to Comments of

 The Securities and Exchange Commission dated August 19, 2005

 Form 10-K/A for the Year Ended December 31, 2004

 General

1.
Where a comment below requests additional disclosures or other revisions please show us in your response what the revisions will look like. Such revisions may be included in your
future filings, including your interim filings where appropriate.

 Response: We have provided proposed additional or revised disclosures as appropriate below. New language in the proposed revised disclosures is underlined and in bold to aid review.

 Item 7. – Management’s Discussion and Analysis
of Financial Condition and Results of Operations, page 23

 Critical Accounting Policies and Estimates, page 24

2.
Your reference to your significant accounting policies within your historical financial statements does not provide the level of detail required by SEC Interpretive Release No.
33-8350, SEC Other Release No. 33-8040 and SEC Proposed Release No. 33-8098, all of which you can find on our website at www.sec.gov. Your critical accounting policies and estimates section is to focus on those estimates that are critical to
your consolidated financial statements. The discussion is to include a discussion of the material assumptions you made in arriving at the critical estimate and to also advise an investor the financial statement impact if actual results differ from
the estimate made by management. Please identify all of your critical policies and estimates and expand your discussion to address the following areas:

•

Types of assumptions underlying the most significant and subjective estimates;

•

Sensitivity of those estimates to deviations of actual results from management’s assumptions; and

•

Circumstances that have resulted in revised assumptions in the past.

 Response: We review our critical accounting policies each quarter to confirm we are identifying those policies as required. We believe the critical
accounting policies identified in the Form 10-K/A and Forms 10-Q filed in 2005 are the critical accounting policies of the Company for the periods reported. In future filings, we will expand our disclosure regarding revenue recognition, goodwill
impairment and deferred income tax assets. Our proposed revised disclosure is set forth below.

 Proposed revised disclosure:

 Revenue Recognition; Percentage-of-Completion Method. We recognize revenues and related costs when products are shipped or services are rendered for (1) time and materials and service contracts, (2)
manufactured goods produced in standard manufacturing operations and sold in the ordinary course of business through regular marketing channels and (3) certain customized manufactured goods that are smaller jobs with less customization, making them
similar to such standard manufactured goods (that is, contracts valued at $250,000 or less having contract durations of four months or less). We recognize revenues using the percentage of completion method on contracts

 1

greater than $250,000 and having contract durations in excess of four months that represent customized, engineered orders of our products and qualify
for such treatment in accordance with the requirements of AICPA Statement of Position 81-1, “Accounting for Performance of Certain Production-Type Contracts” (SOP 81-1). In addition, we use the percentage of completion method on all
Automation & Controls segment equipment fabrication and sales projects that qualify for such treatment in accordance with the requirements of SOP 81-1. The Automation & Controls segment sells customized products fabricated to order pursuant
to a large number of smaller contracts with durations of two to three months, with occasional large systems projects of longer duration. The segment does not produce standard units or maintain an inventory of products for sale. Due to the nature of
the segment’s equipment fabrication and sales operations, and the potential for wide variations in our results of operations that could occur from applying the as shipped methodology to smaller contracts for these customized, fabricated goods,
this segment recognizes revenues, regardless of contract value or duration, applying the percentage of completion method. In 2004, approximately 54% of total company revenues were recorded on an as shipped or as performed basis, and approximately
46% were recorded using the percentage of completion method.

 With respect to contract revenues recorded utilizing the percentage of completion method, earned revenue is based on the percentage that costs incurred to date relate to total estimated costs of the project, after giving
effect to the most recent estimates of total cost. Total estimated contract cost is a critical accounting estimate because it can materially affect revenue and net income and it requires us to make judgments about matters that are uncertain.
Total costs expected to be incurred, and therefore recognition of revenue, could be affected by various internal or external factors including, but not limited to: changes in project scope (change orders), changes in productivity,
scheduling, the cost and availability of labor, the cost and availability of raw materials, the weather, client delays in providing approvals at benchmark stages of the project and the timing of deliveries from third-party providers of key
components. The cumulative impact of revisions in total cost estimates during the progress of work is reflected in the period in which these changes become known. Earned revenue reflects the original contract price adjusted for agreed claims and
change order revenues, if applicable. Losses expected to be incurred on the jobs in progress, after consideration of estimated probable minimum recoveries from claims and change orders, are charged to income as soon as such losses are known. Claims
for additional contract revenue are recognized if it is probable the claim will result in additional revenue and the amount can be reliably estimated. We generally recognize revenue and earnings to which the percentage-of-completion method applies
over a period of two to six quarters. In the event a project is terminated by our customer before completion, our customer is liable for costs incurred under the contract. We believe our operating results should be evaluated over a term of one
to three years to evaluate our performance under long-term contracts, after all change orders, scope changes and cost recoveries have been negotiated and realized.

 Estimates are subjective in nature and it is possible that we could have used different estimates of total contract
costs in our calculation of revenue recognized using the percentage of completion method. As of December 31, 2004, the Company had $72.7 million in revenues attributable to open percentage completion projects having an aggregate gross margin of 15%.
If we had used a different estimate of total contract costs for each contract in progress at December 31, 2004, a 1% increase or decrease in the estimated margin earned on each contract would have increased or decreased total revenue and pre-tax
income for the year ended December 31, 2004, by approximately $0.9 million. At December 31, 2004, the Company had one contract in a loss position, with an estimated loss of $150,000.

 Impairment Testing: Goodwill. As required by Statement of Financial
Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” we evaluate goodwill annually for impairment by comparing the fair value of operating assets to the carrying value of those assets, including any
related goodwill. As required by SFAS No. 142, we identified separate reportable units for purposes of this evaluation. We used our segments as the reporting units, and tested both the segments as existed during 2004 and as restructured in 2005. In
determining carrying value, we segregated assets and liabilities that, to the extent possible, are clearly identifiable by specific reportable unit. Certain corporate and other assets and liabilities, that are not clearly identifiable by specific
reportable unit, are allocated as permitted by the standard. Fair value is determined by discounting projected future cash flows at our cost of capital rate, as

 2

calculated. In determining projected future cash flows for each segment, we make assumptions regarding the following key indicators: future market and
sales growth rates (domestic and international), cost inflation, margin expectations, capital expenditure levels and tax levels. The fair value is then compared to the carrying value of the reporting unit to determine whether or not
impairment has occurred at the reportable unit level. In the event an impairment is indicated, an additional test is performed whereby an implied fair value of goodwill is determined through an allocation of the fair value to the reporting
unit’s assets and liabilities, whether recognized or unrecognized, in a manner similar to a purchase price allocation, in accordance with SFAS No. 141, “Business Combinations.” Any residual fair value after this purchase price
allocation would be assumed to relate to goodwill. If the carrying value of the goodwill exceeded the residual fair value, we would record an impairment charge for that amount.

 Net goodwill was $80.7 million at December 31, 2004. We tested goodwill for impairment as required by SFAS No. 142 at
December 31, 2004, and we did not record an impairment charge as a result of this testing. If the estimated fair values (discounted cash flow) for the three segments, North America Operations, Engineered Systems and Automation and Control
Systems, were reduced by 50%,10% or 75% respectively, we would have been required to perform the second step of goodwill impairment as prescribed by SFAS No. 142.

 Deferred Income Tax Assets: Valuation Allowance. We account for income taxes in accordance with SFAS No. 109,
“Accounting for Income Taxes.” SFAS No. 109 requires us to provide a valuation allowance for any net deferred income tax assets we believe may not be utilized through future operations. Deferred tax assets, not requiring tax
allowances, were $6.2 million as of December 31, 2004. We have a $258,000 valuation allowance related to the realizability of certain US tax attributes related to Axsia and another $176,000 related to other foreign operations. At year
end 2004, an additional valuation allowance of $2.5 million related to Axsia’s UK entities was recorded, due to a severance and restructuring accrual of approximately $1 million and continuing losses on contracts in the quarter, which resulted
in cumulative pre-tax losses for the past three years. The balance of the deferred tax assets largely relates to US post-retirement obligations. Based upon the level of historical taxable income and projected future taxable income
over the periods to which our deferred tax assets are deductible in the US tax jurisdiction, we believe it is more likely than not we will realize the benefits of these deductible differences and carryforwards, net of the existing valuation
allowances at December 31, 2004, in the US tax jurisdiction. However, the amount of the deferred tax asset considered realizable, and thus the amount of these valuation allowances, could change if future taxable income differs from our projections
in the US tax jurisdiction. In our foreign tax jurisdictions we are currently not considering projections of future taxable income to determine the realizability of our deductible differences and carryforwards.

 Results of Operations, page 27

3.
In circumstances where there is more than one business reason identified as contributing to a change between periods, please quantify the incremental impact of each individual
business reason discussed if practicable.

 Response: We will quantify the incremental impact of each material business reason identified as contributing to a change between periods in our future filings. We have revised the MD&A discussion of the Year Ended December 31,
2004 Compared to the Year Ended December 31, 2003 below to provide an example of how we will quantify such reasons in the future.

 Proposed revised disclosure:

 Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 Revenues. Revenues for the year ended December 31, 2004 increased $40.0 million, or 14%, to $321.5 million, from
$281.5 million for the year ended December 31, 2003. The increase in revenues was primarily attributable to our North American Operations segment. The following table summarizes revenues by business segment for the years ended December 31, 2004 and
2003, respectively:

 3

For the Year Ended
December 31,

 Change

 Revenues:

2004

2003

Dollars

Percentage

(in thousands, except percentages)

 North American Operations

$
184,559

$
132,670

$
51,889

39
%

 Engineered Systems

93,395

98,280

(4,885
)

(5
)%

 Automation & Control Systems

49,717

56,679

(6,962
)

(12
)%

 Corporate and Inter-segment Eliminations

(6,220
)

(6,167
)

(53
)

(1
)%

 Total

$
321,451

$
281,462

$
39,989

14
%

 Revenues from our
North American Operations segment for the year ended December 31, 2004 increased $51.9 million, or 39%, to $184.6 million from $132.7 million for the year ended December 31, 2003. This increase was related primarily to increased oilfield activity
with much of the increase occurring in our US and Canadian traditional equipment and service onshore activities. Rig count increased significantly in North America during the year. The average US rotary rig count increased from 1,030 for the year
ended December 31, 2003 to 1,190 for the year ended December 31, 2004, per Baker Hughes Incorporated. Canadian rotary rig counts remained stable, with averages of 372 for the year ended December 31, 2003 a