| June 11, 2009 |
VIA EDGAR
Lyn Shenk, 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 | |
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 May 29, 2009 to the undersigned. Our responses are numbered to correspond with the numbered comments contained in the May 29th 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 |
Management’s Discussion and Analysis page 12 |
- Refer to your response to prior comment number 4 and 23. You state “This increase is primarily the result of the fact that several contracts that had lower than average margins” and “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.” When you make such a or similar statements, please expand upon the underlying factors that contributed to the lower than average margins, or conversely, why you were able to experience higher margins in the corresponding period, or both, as appropriate, to the extent that your overall gross profit margin was impacted. We believe it would aid investors to more fully understand the reasons for variances between comparative periods if you provide insight as to which or the combination of the four general factors that influence the profitability of individual contracts cited in your response to prior comment number 1 impacted the comparability of your results. In particular, if margins on contracts were determined because you incurred more costs than expected, citing this and discussing the underlying reasons would appear to be useful information.
| In future filings, the Company will expand on the underlying factors that contribute to either lower or higher than average margins in the corresponding period. The Company will provide more detail about the variance between comparative periods and provide more detail as to the underlying reasons for the changing margins. | |
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Notes to Consolidated Financial Statements, page 32
Note 1. Summary of Significant Accounting Policies, page 32
Revenue Recognition and Cost
2. |
| Refer to your response to prior comment number 11. You state that (i) gross profit during a period is equal to the revenue for the period multiplied by the estimated contract gross profit margin, (ii) this procedure is consistent with Alternative A in paragraph 80 of SOP 81-1, and (iii) if no changes to estimates are made, the methodology results in every dollar or revenue having the same cost of sales and gross profit margins. It is not clear to us how your method is consistent with Alternative A of SOP 81-1 on a cumulative basis through the current periods or for the current period on a stand-alone basis in periods when changes in estimates are made. Under Alternative A, gross profit for a period is the excess of earned revenue over the cost of earned revenue, with period earned revenue and cost of earned revenue based on the difference in the respective cumulative amounts computed through the current period and cumulative amounts recognized in previous periods. In essence, the cumulative gross profit margin (on a percentage basis) through the current period should be equal to the expected gross profit margin over the contract with any cumulative catch up adjustment effectively booked in the period of change, thereby causing the gross profit margin for the period to differ from the expected gross profit margin. Alternative A acknowledges that a consistent gross profit percentage is rarely obtained in practice, so it is reasonable to assume that changes to estimates would be expected that would affect the expected gross profit margin over the term of the contract. Under your method, it appears that in a period in which the gross profit margin changes, the gross profit margin for the current period would equal the expected gross profit margin over the contract term. The effect of this is that the full cumulative effect of the change is not reflected in the period of the change, which distorts the current period and cumulative gross profit margin through the current period, thereby smoothing the cumulative effect of the change over future periods. Please advise. | ||
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Response: |
| The response to prior comment number 11 in LaBarge’s letter dated May 5, 2009 did not include a discussion of the Company’s treatment of cumulative catch up adjustments. The gross profit margin in the period of a change in estimate includes:
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3. |
| In your response to prior comment number 11, we note your reference to “services” in regards to your application of SOP 81-1, and in particular those pertaining to system integration and testing. Note 1 to paragraph 11 of SOP 81-1 states that the statement is not intended to apply to “service transactions.” Further, paragraph 12 of SOP 81-1 states “The service may consist of designing, engineering, fabricating, constructing, or manufacturing related to the construction of the production of tangible assets. Please tell us the types of services you perform that you account for under SOP 81-1 and why you believe your accounting is appropriate. In particular, explain to us your accounting for system integration and testing services and the basis for your accounting. Also, explain to us your consideration of EITF 00-21 in regard to the potential for separate elements represented by the system integration and testing services you provide. |
Response: |
| The types of services that the Company is referencing in the response are services essential to the production of the physical units under the terms of the contract, such as design and engineering services. The service functions that the Company performs are all integral to the manufacturing of the physical product and are necessary to produce the product to the customer’s specifications. |
Accounts Receivable, page 33
4. |
| We note your response to prior comment number 15. You state that management’s evaluation of the financial condition of a customer is based primarily on the customer’s payment history. At least a portion of Eclipse’s receivable balance was past due and the success of a potential payment plan was contingent on it raising additional capital. These factors appear to indicate that Eclipses’ financial condition was not sound. If Eclipse’s financial condition was not sound and your policy is to base allowance estimates on financial condition, it appears that an allowance was warranted based on your reserve policy. In this regard, you state that you made judgment that Eclipse’s effort to raise additional capital would be successful. We note, however, that this judgment was based on the assertions of the very customer who was delinquent in paying you and its investment banker. Considering the source, it is not clear to us how you deemed these assertions to be reliable, competent evidence that collection was probable sufficient to offset the customer’s known financial condition and payment history. Please advise. In addition, it does not appear that you responded to the last portion of our prior comment. Therefore, please explain to us in detail what financial conditions result in a judgment that accounts receivable are or are not collectible. |
| Response: |
| The Company’s policy on bad debt allowances for accounts receivable is to provide for any invoice not collected in 360 days, and to provide for additional amounts where, in the judgment of management, such an allowance is warranted based on the specific facts and circumstances. Management’s judgment about the collectibility of the Eclipse receivable included an assessment about Eclipse’s ability to raise additional equity to fund its operations. Management’s assessment was impacted by the success that Eclipse and its investment banker, UBS Investment Bank, had achieved in raising additional capital on multiple occasions in Eclipse’s history, both from its current owners and third parties. UBS had completed four previous financing for Eclipse totaling over $500 million from May 2006. LaBarge officers had multiple contacts within the Eclipse organization that provided frequent updates on the Eclipse operations and capital raising efforts spearheaded by UBS. In addition to frequent phone conferences, LaBarge representatives attended a supplier conference wherein UBS and Eclipse projected Eclipse’s plan for additional funding. On August 27, 2008 at a supplier conference and in subsequent conversations, representatives of UBS indicated to Eclipse suppliers that their company was “highly confident that its current financing plan will be successful.” That plan was to raise $200 – $300 million of equity by the close of the fourth calendar quarter. In addition, Eclipse was experiencing improvements in their manufacturing process and was ramping up production. Also, Eclipse had a sustainable backlog of orders.
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| The disclosures in the September 28, 2008 Form 10-Q can be found in the attached Exhibit B. |
| The following discussion addresses the Staff’s request to provide additional information about management’s consideration of a customer’s financial condition when determining whether accounting receivable are or are not collectible. |
Note 3. Accounts and Other Receivables, page 36
5. |
| Refer to your response to prior comment number 20. We note that receivables directly from the U.S. Government were not considered material and that your primary exposure to U.S. Government contracts is as a subcontractor. In this regards, the “Purpose and Applicability” section of the “Preface to the “Audit and Accounting Guide – Federal Government Contractors” states, “This guide has been prepared to assist preparers of financial statements in preparing financial statements in conformity with generally accepted accounting principles… of entities that provide goods and services to the federal government, or to prime contractors or subcontractors at any tier and for which such transactions are material to such entities’ financial statements.” Accordingly, we believe separate footnote disclosure of the amounts of receivables associated with both government and commercial contracts would be useful to investors. Please revise to provide such disclosure in future filings. |
| In future filings, the Company will provide the total of all receivables, which are related to government contracts in the accounts receivable note to the financial statements. |
Schedule 14A
Compensation Determination Process, page 6
6. |
| We note your response to prior comment 24. To the extent that you believe any of your performance targets should remain confidential based upon a claim of competitive harm, please respond to us with a detailed analysis regarding that claim. Please include an analysis of how historical performance target numbers would provide competitive harm on a prospective basis. |
Response: |
| We acknowledge your position regarding this disclosure and will incorporate your comments in our 2009 Schedule 14A. |
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