| May 5, 2009 |
VIA EDGAR
Lyn Schenk, Branch Chief
United States
Securities and Exchange Commission
100 F Street, NE
Washington D.C. 20549-3561
Re: |
| LaBarge, Inc. |
| Form 10-K for the Year Ended June 29, 2008 | |
Form 10-Q for the Quarterly Period Ended December 28, 2008 | ||
Schedule 14A dated October 16, 2008 | ||
File Number: 001-05761 | ||
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Dear Mr. Shenk:
On behalf of LaBarge, Inc. (the “Company” or “LaBarge”), we are responding to the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “Commission”) with respect to the above-referenced filings, as required by your letter of April 8, 2009 to the undersigned. Our responses are numbered to correspond with the numbered comments contained in the April 8, 2009 letter. For your convenience, we have repeated the Commission’s comments below before each of our responses.
Form 10-K for the Year Ended June 29, 2008 |
Item 1. Business, page 3 |
- Please confirm that in future filings you will disclose the name of each party, which accounts for 10% or more of your revenues.
| Future filings will disclose this information. Please refer to the proposed revision to Comment 3. | |
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Management’s Discussion and Analysis, page 12
Overview, page 12
2. |
| We believe your disclosure of the various markets indicated could be enhanced by including an analysis of how your business with each contributes to your overall results. For example, discuss the significant factors impacting each market’s gross profit margin and related margin and their proportionate impact on the associated consolidated amounts. Another example would be to discuss the proportionate share of selling and administrative expense devoted to each market, and how such devotion and attention to each market affects your consolidated results. An example of this latter point might be that a certain market or markets may require a disproportionate amount of selling, marketing and/or administrative expense to generate sales associated with that market or markets. Please provide us with a copy of any revised disclosure you intend. | ||
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Response: |
| The Company proposes the following addition to the overview section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations: | ||
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Results of Operations, page 12
Net Sales
3. |
| We note the sales markets disclosed here vary between the Form 10-K and the subsequent Form 10-Qs. For example, in the Form 10-K you state the amount of net sales for government systems, which appears to be a component of the remaining 5.4% of your consolidated net sales as indicated under the “Sales and Marketing” section of the Form 10-K, but do not state the amount associated with medical that comprises 7.1% of net sales according to the referenced section. Yet, in the Form 10-Qs you disclose the amount for medical but not for government systems. Similarly, you disclose the amount for commercial aerospace in the Form 10-K but not in the Form 10-Qs. To provide consistent presentation of net sales from period to period from which to better discern the contributions to and trends in your net sales, please revise to include a table that presents net sales for each market served to account for your total consolidated net sales. |
Response: |
| The Company will include the following disclosure in its Form 10-Q for the quarter ended March 29, 2009 and will provide similar disclosure in future filings, as applicable: |
Net Sales
(in thousands)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||
| March 29, | March 30, |
| March 29, |
| March 30, | ||||||||||||||
| 2009 |
| 2008 | 2009 | 2008 | |||||||||||||||
Net sales: | ||||||||||||||||||||
Defense | $ | 32,302 | $ | 27,793 | $ | 96,609 | $ | 74,243 | ||||||||||||
Natural resources | 14,059 | 17,886 | 38,978 | 52,020 | ||||||||||||||||
Industrial | 11,635 | 14,225 | 38,601 | 36,762 | ||||||||||||||||
Medical | 8,150 | 5,474 | 17,066 | 12,998 | ||||||||||||||||
Government systems | 497 | 2,757 | 4,087 | 6,951 | ||||||||||||||||
Commercial aerospace | 2,028 | 6,096 | 7,420 | 15,290 | ||||||||||||||||
All other | 3,545 | 1,211 | 5,854 | 3,420 | ||||||||||||||||
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Total net sales |
| $ | 72,216 |
| $ | 75,442 |
| $ | 208,615 |
| $ | 201,684 |
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| The Pensar acquisition contributed $13.6 million and $13.8 million of sales to the three and nine months ended March 29, 2009, respectively. |
Gross Profit
4. |
| We note that cost of sales is material to your results, but you have not provided an analysis of this expense. Also, it appears that cost of sales contributed to the variance in the gross profit and associated margin to some degree, but there is no discussion of its relative impact. Please expand your disclosure to include an analysis of the significant factors, quantified as appropriate, affecting the amount of cost of sales and associated impact on gross profit margin between comparable periods. Provide us with your proposed revised disclosure. |
Response: |
| The Company will include the following proposed disclosure to be included in the Company’s Form 10-Q for the quarter ended March 29, 2009 and similar disclosure in future filings, as applicable, as follows: |
Cost of Sales and Gross Profit
(dollars in thousands)
| Gross profit margins vary significantly by contract. The most significant factors influencing profitability in a particular period are: the mix of contracts and orders with deliveries in that period; and, the volume of sales in relation to the Company’s fixed costs. Delivery schedules are generally determined by the Company’s customers. The significant factors that influence the profitability of the individual contracts include: (i) the competitive environment in which the contract was bid; (ii) the experience level of the Company in manufacturing the customer’s particular product(s); and (iii) the stability of the design of the customer’s product(s). | |
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5. |
| Please expand your disclosure to describe the factors that cause gross profit margins to vary significantly from contract to contract and why. |
Response: |
| Please see the first paragraph of the revised disclosure in response to Comment 4. |
Liquidity and Capital Resources, page 15
6. |
| Please revise to cite factors that explain a substantial majority of the variance in cash flows of operating activities between comparable periods and to discuss material changes between all periods. Specifically, operating cash flow increased in 2008 but the factors cited depict a decrease. In addition, the significant variance between 2007 and 2006 is not explained. In providing your analysis, please note that the factors cited should be in terms of cash, quantified as appropriate, accompanied by the reasons and associated underlying drivers contributing to the variance. References to changes in line items in the statement of cash flows and to results of operations prepared on the accrual basis of accounting may not provide a sufficient basis for a reader to analyze the impact in terms of cash. Refer to section IV.B.1 of “Interpretation: Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations” available on our website at http://www.sec.gov/rules/interp/33-8350.htm for guidance. Provide us with your proposed revised disclosure. |
7. |
| Please explain to us and revise to disclose the reason for the 13.5% increase in the days sales outstanding, its impact on your cash flows, and whether this is the start of a continuing trend. Discuss whether the number of days outstanding increased or decreased in subsequent interim periods, and the reason for the change. |
Response: |
| Days sales outstanding increased to 48.3 days from 42.5 days during fiscal year 2008, primarily as a result of slower payments from two significant customers, Eclipse Aviation and Owens-Illinois. Eclipse payments slowed as they attempted to conserve cash in anticipation of obtaining additional financing. Starting in January 2008, Owens-Illinois elected to forego early payment discounts and began to pay invoices based on the net 60-day terms in their purchase agreement. These customer changes reduced cash flow between fiscal year 2007 and 2008 by $9.6 million. The Company disclosed the customer’s decision to stop taking early payment discounts in the “Liquidity and Capital Resources” section of its Form 10-Q for the quarter ended December 30, 2007. The Company does not believe this is the start of a continuing trend of increasing days sales outstanding. In the period ended March 29, 2009, days sales outstanding was reduced to 47.0 days, reflecting the impact of the write down of the Eclipse accounts receivable. The Company will include this disclosure in future filings, as applicable. |
Contractual Obligations, page 16
8. |
| Please confirm that in future filings you will disclose long-term debt and capital lease obligations separately rather than combining them as you have done in your current 10-K. |
| The Company will disclose long-term debt and capital lease obligations separately in future filings. The relevant disclosure provided in the Form 10-K for the year ended June 29, 2008, if revised, would state the following: |
| Payment Due by Period | ||||||||||||||||||
Contractual |
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| Less than |
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| More than | |||||||||||||
Total | 1 year | 1 – 3 years | 3 – 5 years | 5 years | |||||||||||||||
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Long-term debt | $ | 4,794 | $ | 4,544 | $ | --- | $ | 250 | $ | --- | |||||||||
Capital lease obligations | 335 | 138 | 197 | --- | --- | ||||||||||||||
Operating lease obligations | 11,505 | 2,947 | 4,385 | 1,950 |
| 2,223 |
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Total | $ | 16,634 | $ | 7,629 | $ | 4,582 | $ | 2,200 | $ | 2,223 | |||||||||
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Critical Accounting Policies, page 16
9. |
| We note your disclosure essentially repeats information reported in the notes to the financial statements. The disclosure here should provide greater insight into the quality, sensitivity and variability regarding the factors that have or may materially affect financial condition and operating performance. Your disclosure should be explicit as to which of the identified factors are most sensitive to change, deviations of estimates and assumptions from actual results, and the circumstances that resulted in revised assumptions in the past or could lead to material changes in the future. For example, it appears that the existence of potentially uncollectible accounts receivable from Eclipse Aviation Corporation (and related potentially impaired inventory) should have been discussed as part of your disclosure of critical accounting estimates, with specific attention given to the judgments involved in concluding that no impairments existed at June 29, 2008 for amounts associated with a customer that was dependent on receiving additional external financing. |
Response: |
| The Company’s proposed revised disclosure to include in future filings, as applicable, is as follows: |
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Item 9A. Controls and Procedures, page 18
10. |
| Your disclosure here and in the subsequent Form 10-Qs specifically refers to only a portion of the disclosure controls and procedures as defined in Exchange Act rules 13a-15(e) and 15d-15(e). That is, you did not also indicate the portion of the disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed or submitted under the Act is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure. Although there is no requirement to disclose the full definition, specific reference to only a portion of the definition gives the appearance of limiting management’s conclusion solely to the portion referred to. Please represent to us and in future filings management’s conclusion in regard to the company’s disclosure controls and procedures as fully defined in Exchange Act rules 13a-15(e) and 15d-14(c). |
Response: |
| The Company will include in future filings, as applicable, management’s conclusions regarding the effectiveness of the Company’s disclosure controls and procedures with reference to the complete definition of disclosure controls and procedures in Rules 13a-15(e) and1 5d-15(e) of the Securities Exchange Act of 1934, as amended. |
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Notes to Consolidated Financial Statements, page 32
Note 1. Summary of Significant Accounting Policies, page 32
Revenue Recognition and Cost of Sales, page 32
11. |
| In regard to your accounting for contracts using the percentage-of-completion method, please explain to us, with a view toward disclosing (1) why this method is appropriate in your circumstances, (2) the method of measuring the extent of progress toward completion pursuant to the paragraph 45 of SOP 81-1, and why the measure is appropriate in your circumstances and (3) the basis upon which revenue, cost of revenue and profit are recognized, specifically whether Alternative A or B specified in paragraphs 80 and 81 or SOP 81-1 is used. Additionally, clarify for us and in your disclosure the statement “The percentage-of-completion method give effect to the most recent contract value and estimates of cost at completion.” Also, specifically state those costs considered to be contract costs. In connection with this, disclose your policy in regard to selling and administrative costs, that is, expensed as incurred and if included in contract costs, the basis for inclusion as such. |
Response: |
| As noted in response to Comment 9, the Company’s contracts with our customers include contracts that are within the scope of SOP-81-1 and contracts that are not within the scope of SOP 81-1. The following discussion applies only to contracts that are within the scope of SOP 81-1. | |
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(1) |
| SOP 81-1 provides guidance on the application of generally accepted accounting principles in accounting for the performance of contracts for which specifications are provided by the customer for the construction of facilities or the production of goods or for the provision of related services. The Company is a contract manufacturer that enters into contracts with the following characteristics: | |
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a. | The Company enters into binding legally enforceable agreements with customers to build product to the customers’ specifications. The contracts are for the production of tangible assets and can include related design support and engineering services, system integration and testing. The Company does not own the design for the product, nor market the end product. | ||
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b. | Performance on the contracts will often extend over long periods of time, and the Company’s right to receive payment is dependent on performing to the terms of the contract. | ||
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c. | These contracts are to manufacture complex electronic systems and devices and complex interconnect systems, custom designed for each customer’s specific application. In most instances the Company will set up customized production cells or lines that will manufacture this product only. | ||
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d. | While these contracts may have provisions for contract options and additions, they are entered into for a specific quantity with a specific performance period. In some instances, once the contract is complete the Company may not produce that particular product again, or an extended period may pass before it is produced again. | ||
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(i) | The Company produces goods and services that are being delivered over time. The Company and the customer obtain enforceable rights as the goods are produced and the services provided. | ||
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(ii) | As the units are physically delivered, title to and the risk of loss transfers to the customer, whose acceptance of the items indicates that the Company has met its contractual obligations. | ||
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(iii) | The Company’s estimating procedures produce reasonably dependable estimates of the contract revenues and costs. | ||
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(iv) | The Company’s estimating procedures allow for a reasonable assessment of business risks and the Company knows of no inherent hazards that would call into question the Company’s ability to make reasonable estimates. | ||
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The percentage-of-completion method presents the economic substance of the Company’s transactions more clearly than the completed contract method would. Accounting Research Bulletin, No. 45, paragraph 15 indicates a preference for the percentage-of-completion method when reasonable estimates are available. | |||
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(2) | As noted in paragraph 4 of SOP 81-1, the units-of-delivery method is a modification of the percentage-of-completion method of accounting for contracts that recognizes as revenue the contract price of units delivered during a period, and as the cost of revenue, the costs allocable to the delivered units. Costs allocable to undelivered units are reported in the balance sheet as inventory. The method is used in circumstances in which an entity produces units of a basic product under production-type contracts in a continuous or sequential production process to buyers' specifications. Given the fact that the Company is producing discrete units for delivery to its customers, the Company believes this method is the most accurate measure of the revenue. | ||
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(3) | At LaBarge, revenue is calculated as the number of units shipped multiplied by the sales price per unit. The Company determines the total revenue of the contract and the total contract costs and calculates the contract cost percentage and gross profit margin. The gross profit during a period is equal to the revenue for the period multiplied by the estimated contract gross profit margin. This procedure is consistent with Alternative A in paragraph 80 of SOP 81-1. If no changes to estimates are made, the methodology results in every dollar of revenue having the same cost of sales and gross profit margins. This method is applied consistently on all of the contracts that are under the scope of SOP 81-1. | ||
To clarify, the Company’s statement “The percentage-of-completion method gives effect to the most recent contract value and estimates of cost at completion” indicates that contract estimates are impacted by both the revenue expected to be earned under the contract and the estimated total cost of the units or services to be produced. The contract costs do not include any allocation of selling and administrative costs. | |||
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Revenue Recognition and Cost of Sales | |||
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12. |
| Tell us and disclose if you apply the completed contract method to any contracts, and if so, why this method is appropriate in your circumstances. If so, tell us and disclose the specific criteria used to determine when a contract is substantially completed pursuant to paragraph 52 of SOP 81-1. |
Response: |
| The Company does not apply the completed contract method to any contracts. Therefore, the Company does not believe any disclosure is necessary. |
13. |
| If you apply both the completed contracted method and percentage-of-completion method, tell us and disclose the nature of the contracts to which each method is applied. |
Response: |
| The Company does not apply the completed contract method to any contracts. |
14. |
| In regard to the new significant agreement with the industrial customer entered into in 2007 in which you netted the cost of supplied parts against the invoice price to determine net sales, please explain to us why net accounting pursuant to EITF 99-19 is appropriate. Tell us the significant terms and conditions of this contract and how such differ from those of other contracts in which net accounting is not applied. Tell us the gross sale amount and costs incurred with respect to this agreement in each year presented. |
Response: |
| During fiscal year 2007, a major customer of LaBarge approached the Company with an opportunity to significantly expand the relationship. The customer was closing down a major manufacturing facility and wished to outsource the production of completed assemblies to LaBarge. In addition, the customer’s facility was a consolidated purchasing location for components used at the customer’s other manufacturing locations and for service and repair inventory. The customer wished to have LaBarge provide the purchasing function as well and provide raw material parts to the customer’s other manufacturing locations and service centers. | |
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| * Normal value added production – material overhead was at a 6.5% of materials | ||
| and the total mark-up on cost of 21%. | ||
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* “Pass through” items – material overhead was at 6.5%, and margin was at 4.18% | |||
(total mark-up on the material pricing is 11%). | |||
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The customer provides an annual business plan of items to be purchased and is required to approve in writing all purchases of minimum buys. The customer releases firm purchase orders and is obligated to purchase any inventory related to firm purchase orders. The Company buys inventory for firm purchase orders. | |||
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Indicators of Gross Revenue Reporting | |||
a. | The company is the primary obligor in the arrangement. In substance, the primary obligor is the party the customer will look to for fulfillment and for ensuring its satisfaction. If this party is the company, and not the supplier, the company has significant risks and rewards in the transaction that indicate it is at risk for the full amount of the contract, not just a commission. (EITF 99-19, paragraph 7). The risk and reward profile in the “pass through” transactions is significantly different than the profile for a normal transaction with the customer. LaBarge does not have the same risks and as a result the reward (expected gross profit margin) is significantly lower than our normal margins. LaBarge does not warrant materials or workmanship provided to the customer by either a directed source or a listed source. If a returned product is defective due to material from a directed or listed source, LaBarge will return the item to the supplier for repair and replacement and will charge the customer for this time and costs related to this service. | ||
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b. | The company has general inventory risk. General inventory risk is the risk normally taken on by a company that buys inventory in the hopes of reselling it at a profit. Front-end general inventory risk exists if a reseller maintains an inventory of a product by taking title to and assuming all risks and rewards of ownership of the product before that product is ordered by a customer. Back-end general inventory risk exists if the customer has a right of return and the reseller will take title to and assume the risks and rewards of ownership of the product if it is returned. General inventory risk not mitigated by terms of the arrangement between the reseller and the supplier is a strong indicator that the reseller should record revenue gross. However, factors that mitigate general inventory risk must be considered as well. For example, a company’s risk may be reduced significantly or essentially eliminated if the company has the right to return unsold products to the supplier or receives inventory price protection from the supplier. Similarly, back-end inventory risk is mitigated if the company has the right to return to the supplier any products returned by the customer (EITF 99-19, paragraph 8). | ||
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c. | The company has the ability to determine the price at which it sells the product or service.When a company has reasonable latitude to establish prices for the products and services, it is an indication that the company is acting as a principal, rather than as another company’s agent (EITF 99-19, paragraph 9). | ||
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d. | The company changes the product or performs part of the service.If a company physically changes the product (beyond its packaging) or performs part of the service ordered by a customer, the company does not appear to be acting solely as an agent. In addition, this fact may indicate that the company is partially or fully responsible for fulfillment, potentially making it the primary obligor in the arrangement (EITF 99-19, paragraph 10). | ||
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e. | The company has discretion in supplier selection.When a company has multiple suppliers for a product or service ordered by a customer and discretion to select the supplier that will provide the product or service ordered by a customer, it is an indication that the company is acting as a principal (EITF 99-19, paragraph 11). | ||
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f. | The company is involved in the determination of product or service specifications. If a company must determine the nature, type, characteristics, or specifications of the product or service ordered by the customer, that fact might indicate that the company is primarily responsible for fulfillment (EITF 99-19, paragraph 12). | ||
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g. | The company has physical loss inventory risk (after customer order or during shipping). Physical loss inventory risk exists if the reseller holds title to the product at some point between the time a customer order is placed and the product is delivered to the customer. The amount of risk inherent in taking title during this time is so low, that physical loss inventory risk is a weak indicator of gross reporting (EITF 99-19, paragraph 13). | ||
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h. | The company has credit risk.If a company assumes credit risk for the amount billed to the customer, that fact may provide evidence that the company has risks and rewards as a principal in the transaction. Credit risk exists if a company is responsible for collecting the sales price from a customer but must pay the supplier regardless of whether the sales price is fully collected. A requirement that the company returns or refunds only the net amount it earned in the transaction if the transaction is cancelled or reversed is not evidence of credit risk for the gross transaction. In some cases, credit risk may be mitigated to such an extent that this indicator is virtually meaningless—for example, if a customer pays by credit card and a company obtains authorization for the charge in advance of product shipment or service performance, credit risk has been substantially mitigated (EITF 99-19, paragraph 14). | ||
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Indicators of Net Revenue Reporting | |||
a. | The supplier is the primary obligor in the arrangement. If the supplier is responsible for fulfillment and customer satisfaction, that may be an indication that the company does not have risks and rewards as a principal in the transaction and therefore should recognize only its net fee as revenue. Representations made by a company during marketing and the terms of the sales contract will generally provide evidence as to a customer’s understanding of whether the company or the supplier is responsible for fulfillment (EITF 99-19, paragraph 15). | ||
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b. | The amount the company earns per transaction is fixed (in dollars or as a percentage of the arrangement fee).When a company earns a fixed dollar amount per customer transaction or a stated percentage of the amount billed to a customer, it appears to be acting as an agent of the supplier (EITF 99-19, paragraph 16). | ||
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c. | The supplier has credit risk.If credit risk exists (that is, the sales price has not been fully collected prior to delivering the product or service) but the supplier assumes that risk, the company appears to be acting as an agent of the supplier (EITF 99-19, paragraph 17). | ||
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| The historical sales and costs associated with this contract are as follows: | ||
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Mechanical Assemblies Activity
(dollars in thousands)
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| “Pass Through” Parts |
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| FY07 | FY08 |
| FY09 Mar |
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Sales |
| $ | 563 | $ | 9,478 |
| $ | 4,904 |
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Cost of sales | 546 | 8,957 | 4,584 |
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Margins on units (1) | $ | 18 | $ | 521 | $ | 320 |
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3.2 | % | 5.5 | % | 6.5 | % |
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Start up costs (2) | $ | 106 | $ | 143 | $ | --- |
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| Value Added Parts |
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| FY07 | FY08 |
| FY09 Mar |
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Sales (1) |
| $ | 2,636 | $ | 11,496 |
| $ | 10,945 |
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Cost of sales (2) | 2,346 | 10,047 | 9,087 |
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Margins on units | $ | 290 | $ | 1,449 | $ | 1,858 |
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11.0 | % | 12.6 | % | 17.0 | % |
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Start up costs | $ | 318 | $ | 428 | $ | --- |
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| (1) |
| Represents the amount of revenue recognized in the “Net Sales” line item in the Statement of Income. |
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(2) | Recorded as cost of sales in the Statement of Income. | ||
| The Company had to expand its facility and ramp up staff starting in the third quarter of fiscal 2007. The value added units delivered in fiscal year 2007 and at the start of fiscal 2008 were qualification units and first-time builds. Normal run rate production was not achieved until the third quarter of fiscal year 2008. The Company incurred significant start-up costs at the beginning of the contract, which were expensed as incurred. |
Accounts Receivable, page 33
15. |
| You state that your allowance for uncollectible accounts receivable is based primarily on management’s evaluation of the financial condition of the company’s customers. Given that collection of receivables from Eclipse Aviation was dependent on them raising additional capital, please explain to us in detail how management evaluates the financial condition of customers and what financial conditions result in a judgment that accounts receivable are or are not collectible. |
| Management’s evaluation of the financial condition of customers, as it relates to the collectability of accounts receivable, is based primarily on payment history of that particular customer. The large majority of accounts receivable are from customers that have long-standing relationships with the Company. Payment history has proven a strong indicator of future payment practice. |
Inventories, page 33
16. |
| We note your disclosure that costs under contracts are determined by the average cost method based on the estimated average cost of all units expected to be produced under the contract. In this regard, explain to us your consideration of Rule 5-02.6(b) and (d)(i) of Regulation S-X, and provide disclosure indicated therein as appropriate. |
Response: |
| Rule 5-02.6(b) requires the Company to provide the basis for determining the value reflected in the financial statements for the components of inventory. The Company has revised its disclosure related to cost of sales as indicated in the response to Comment 9 to help clarify this issue. |
Inventories consist of the following:
(in thousands)
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| March 29, |
| June 29, |
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2009 | 2008 | ||||||||||||||
Raw materials |
| $ | 41,267 |
| $ | 47,221 | |||||||||
Work in progress | 5,820 |
| 2,307 | ||||||||||||
Inventoried costs relating to long term | |||||||||||||||
contracts, net of amounts attributable to | |||||||||||||||
revenues recognized to date | 8,904 | 14,278 | |||||||||||||
Finished goods | 6,159 | 3,321 | |||||||||||||
| Total |
| $ | 62,150 |
| $ | 66,927 | ||||||||
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| March 29, |
| June 29, |
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2009 | 2008 | ||||||||||||
Production costs of goods currently in process (1) | $ | 8,784 | $ | 9,9977 | |||||||||
Excess of production costs of delivered units | |||||||||||||
| over the estimated average cost of all units | ||||||||||||
expected to be produced including tooling | |||||||||||||
and non-recurring costs | 412 | 3,954 | |||||||||||
Unrecovered costs subject to future | |||||||||||||
negotiation | 165 | 387 | |||||||||||
Reserve for contracts with estimated costs in | |||||||||||||
excess of contract revenues | (457 | ) | (240 | ) | |||||||||
$ | 8,904 | $ | 14,078 | ||||||||||
| (1) | Selling and administrative expenses are not included in inventory costs. |
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Note 2. Sales and Net Sales, page 35
17. |
| Please report revenues from external customers for each product and service or each group of similar products and services, in accordance with paragraph 37 of FAS 131. From information provided on your web site and in regard to financial presentations made as indicated in Form 8-K filings, it appears that “interconnect systems,” “printed circuit card assemblies,” “higher-level assemblies” and systems integration” may be suitable and meaningful product groups for this disclosure. |
Response: |
| The Company’s revenues are all derived from contract manufacturing services. References in our Current Report on Form 8-K to various product groups are illustrations of the Company’s capabilities and are not intended to represent products. As a contract manufacturer, the Company has no products. The items noted above are different end products manufactured by the Company based on specific contracts with customers. The Company uses similar production processes to manufacture the many different types of products it manufactures for its customers. The material and labor content varies based on the end product being manufactured. Generally, the Company targets high-end product and systems designers and manufacturers. |
Note 3. Accounts and Other Receivables, page 36
18. |
| We note your disclosure that progress payments are recognized as revenue when the completed units are shipped. Please clarify for us how this treatment correlates to the contract accounting applied to the contracts to which such progress payments relate. If such progress payments are representative of deferred revenue, explain to us why such is not presented separately as a liability in the balance sheet. |
Response: |
| For certain contracts, the Company receives progress payments from customers. The Company did not receive progress payments during fiscal year 2006 through fiscal year 2008. Therefore, the disclosure related to progress payment in the Form 10-K for the fiscal year ended July 29, 2008 was not applicable. |
19. |
| Please explain to us and disclose whether receivables include amounts unbilled. If so, explain to us and disclose the basis for recording such, and disclose the unbilled amount and the basis for billing such amounts pursuant to Rule 5-02.3(c)(2) of Regulation S-X. In connection with this, tell us if you have recorded any amounts billed in excess of revenue recognized, and if so, where such is reported in the balance sheet. If receivables include amounts associated with retainages, disclose the amount of such pursuant to Rule 5-02(c)(1) of Regulation S-X. Also, explain to us your consideration of Rule 5-02.3(c)(4) of Regulation S-X in regard to unbilled amount and retainages. |
Response: |
| The Company does not have unbilled receivables. This disclosure was revised in the Form 10-Q for the quarter ended December 28, 2008. The trade receivables are billed receivables only. The Company does not have any contracts with retainages. The Company does bill for cash advance payments from customers, which are recorded as either a current or long-term liability based on the expected liquidation of the cash advance. The Company did not have any customers that were making progress payments during the periods covered by the Form 10-K for the fiscal year ended June 29, 2008, the Form 10-K for the fiscal year ended July 2, 2007 or the Form 10-Q for the quarter ended December 28, 2008. Any billed receivables for cash advances that are on the books at the fiscal quarter end represent cash advances billed but not yet paid by the customer. These cash advances are reclassed and netted against the cash advance account so that the balance sheet reflects the liability for actual cash advances received. |
20. |
| It appears from disclosures in your filing that amounts associated with U.S. Government contracts are material to you. To the extent material, separately disclose the amount of receivables associated with such contracts pursuant to paragraph 3.68 of the Audit and Accounting Guide, “Federal Government Contractor,” along with any related unbilled amounts and associated progress payments netted against. |
Response: |
| Receivables directly from the U.S. Government were $327,223 at June 29, 2008 and $206,225 at July 1, 2007. The Company does not consider these amounts to be material, and therefore, did not disclose the amounts. The Company’s primary exposure to U.S. Government contracts is as a subcontractor to prime contractors with U.S. Government contracts. |
Note 4. Inventories, page 37
21. |
| As appropriate, please disclose the amount of progress payments netted against inventories pursuant to paragraph 6.21 of the Audit and Accounting Guide, “Construction Contractors.” |
Response: |
| This statement “Progress payments are payments from customers in accordance with contractual terms for contract costs incurred to date. Such payments are recognized as revenue when the completed units are shipped.” should have been removed from the Form 10-K for the year ended June 29, 2008, as the Company did not receive any progress payments during the two years presented in the balance sheet filed with the Form 10-K for the fiscal year ended June 29, 2008. This disclosure was revised in the Form 10-Q for the quarterly period ended December 28, 2008. |
Form 10-Q for the Quarterly Period Ended December 28, 2008
Management’s Discussion and Analysis, page 15
General, page 15
22. |
| Please disclose the market you serve that is impacted by the Eclipse circumstances. |
Response: |
| The end market for sales to Eclipse Aviation was commercial aerospace. |
Results of Operations, page 16
Gross Profit, page 17
23. |
| It appears that the gross profit percentage for the current period exclusive of the write down associated with Eclipse increased, but there is no explanation of such. Please discuss the reason for the increase. |
Response: |
| Gross profit margin excluding the Pensar acquisition and the Eclipse write-off would have been 21.3% and 21.1% for the three and six months ended December 28, 2008, respectively. This compares with 19.9% and 19.6% for the three and nine months ended March 28, 2008, respectively. The increase in the gross profit margin, compared with the comparable period in the prior year, is primarily due to the mix of shipments to various customers. In the prior years, the Company made shipments to several customers under contracts with gross profit margins that were lower than the Company’s long-term average gross profit margin. As noted in response to Comment 4, the Company proposes to revise our discussion of cost of sales and gross profits prior in future filings. See our response to Comment 4 for an example of our proposed disclosure. |
Schedule 14A dated October 16, 2008
Compensation Determination Process, page 6
24. |
| It appears that the performance level targets for your annual and long-term incentive compensation plans are critical to an understanding of your executive compensation policy. We note, however, your claim that disclosure of these targets is not required because it would result in competitive harm. Pursuant to Instruction 4 to Item 402(b) of Regulation S-K, please confirm that in the future you will provide us with a detailed explanation for such conclusion. Your current disclosure is not sufficient in this regard. You should further discuss, in the future, how difficult it would be for the named executive officers or how likely it will be for you to achieve the undisclosed target levels or other factors. General statements regarding the level of difficulty, or ease, associated with achieving performance goals either as a corporation or for each executive are not sufficient. |
Response: |
| In the future, we will either disclose the performance targets relating to annual and long-term compensation or, if we continue to exclude such targets based on our belief that disclosure would result in competitive harm, we will (i) provide a detailed explanation for such conclusion and (ii) discuss how difficult it would be for named executive officers or the Company to achieve undisclosed target levels, in detail. |
25. |
| We note the use of the Hay Group General Industry Market, which it appears you use for benchmarking. Please confirm that in future filings you will disclose the names of companies that make up this group. |
Response: |
| In future filings, we will provide the names of the companies that comprise the Hay Group General Industry Market. Because this group includes of hundreds of companies, we intend to disclose their names in an appendix to applicable future filings. |
In addition, we acknowledge that:
● |
| the Company is responsible for the adequacy and accuracy of the disclosure in its filings with the Commission; |
| |
● | Staff comments or changes to disclosure in response to Staff comments do not foreclose the Commission from taking any action with respect to the Company’s 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 should have any questions or require any further information regarding this matter, please contact the undersigned at (314) 997-0800.
| Sincerely, |
| Donald H. Nonnenkamp |
cc: Matthew Spitzer/Securities and Exchange Commission
Doug Jones/Securities and Exchange Commission
DHN/mam