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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 – K
☒ANNUAL REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2016
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
ARC Group Worldwide, Inc.
(Exact name of registrant as specified in its charter)
Utah
(State or other jurisdiction of incorporation or organization)
001-33400
(Commission File Number)
87-0454148
(IRS Employer Identification Number)
810 Flightline Blvd.
Deland, FL 32724
(Address of principal executive offices including zip code)
(303) 467-5236
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
$.0005 par value common stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at
least the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10 K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
☐
☐
(Do not check if a smaller reporting company)
Large accelerated filer
Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of December 27, 2015, the aggregate market value of the voting common stock held by non-affiliates of the registrant was approximately $14.8 million,
based on the closing sale price of the registrant’s common stock on such date as reported on the NASDAQ Capital Market Exchange.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
As of September 1, 2016, there were 18,795,509 shares of the registrant’s $0.0005 par value common stock outstanding.
Portions of the registrant’s Proxy Statement for the 2016 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report
on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s
fiscal year ended June 30, 2016.
Accelerated filer
Smaller reporting company
☐
☒
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ARC Group Worldwide, Inc.
Table of Contents
PART I
Page No.
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
PART II
of Equity Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits, Financial Statement Schedules
Signatures
Part IV
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Cautionary Statement Concerning Forward-Looking Statements
PART I
The information contained in this Annual Report (this “Report”) may contain certain statements about ARC Group
Worldwide, Inc. (the “Company” or “ARC”) that are or may be “forward-looking statements,” that is, statements
related to future, not past, events, including forward-looking statements within the meaning of the U.S. Private
Securities Litigation Reform Act of 1995. These statements are based on the current expectations of the management
of ARC and are subject to uncertainty and changes in circumstances and involve risks and uncertainties that could
cause actual results to differ materially from those expressed or implied in such forward-looking statements. Factors
that could cause our results to differ materially from current expectations include, but are not limited to factors
detailed in our reports filed with the U.S. Securities and Exchange Commission (“SEC”), including but not limited to
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Cautionary Statement Concerning Forward-Looking Statements
PART I
The information contained in this Annual Report (this “Report”) may contain certain statements about ARC Group
Worldwide, Inc. (the “Company” or “ARC”) that are or may be “forward-looking statements,” that is, statements
related to future, not past, events, including forward-looking statements within the meaning of the U.S. Private
Securities Litigation Reform Act of 1995. These statements are based on the current expectations of the management
of ARC and are subject to uncertainty and changes in circumstances and involve risks and uncertainties that could
cause actual results to differ materially from those expressed or implied in such forward-looking statements. Factors
that could cause our results to differ materially from current expectations include, but are not limited to factors
detailed in our reports filed with the U.S. Securities and Exchange Commission (“SEC”), including but not limited to
those under the caption “Risk Factors” contained herein. In addition, these statements are based on a number of
assumptions that are subject to change. The forward-looking statements contained in this Report may include all
other statements in this document other than historical facts. Without limitation, any statements preceded or followed
by, or that include the words “targets,” “plans,” “believes,” “expects,” “aims,” “intends,” “will,” “may,”
“anticipates,” “estimates,” “approximates,” “projects,” “seeks,” “sees,” “should,” “would,” “expect,” “positioned,”
“strategy,” or words or terms of similar substance or derivative variation or the negative thereof, are forward-looking
statements. Forward-looking statements include statements relating to the following: (i) future capital expenditures,
expenses, revenues, earnings, synergies, economic performance, indebtedness, financial condition, losses and future
prospects; (ii) business and management strategies and the expansion and growth of ARC; (iii) the effects of
government regulation on ARC’s business; and (iv) our plans, objectives, expectations and intentions generally.
There are a number of factors that could cause actual results and developments to differ materially from those
expressed or implied by such forward-looking statements. Additional particular uncertainties that could cause our
actual results to be materially different than those expressed in forward-looking statements include: risks associated
with our international operations; significant movements in foreign currency exchange rates; changes in the general
economy, as well as the cyclical nature of our markets; availability and cost of raw materials, parts and components
used in our products; the competitive environment in the areas of our planned industrial activities; our ability to
identify, finance, acquire and successfully integrate attractive acquisition targets; expected earnings of ARC; the
amount of and our ability to estimate known and unknown liabilities; material disruption at any of our significant
manufacturing facilities; the solvency of our insurers and the likelihood of their payment for losses; our ability to
manage and grow our business and execution of our business and growth strategies; our ability and the ability of our
customers to access required capital at a reasonable cost; our ability to expand our business in our targeted markets;
the level of capital investment and expenditures by our customers in our strategic markets; our financial performance;
our ability to identify, address and remediate any material weakness in our internal control over financial reporting;
our ability to achieve or maintain credit ratings and the impact on our funding costs and competitive position if we do
not do so; and other risk factors as disclosed herein under the caption “Risk Factors.” Other unknown or
unpredictable factors could also cause actual results to differ materially from those in any forward-looking statement.
Due to such uncertainties and risks, readers are cautioned not to place undue reliance on any forward-looking
statements, which speak only as of the date hereof. ARC undertakes no obligation to publicly update or revise
forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent
legally required. Nothing contained herein shall be deemed to be a forecast, projection or estimate of the future
financial performance of ARC unless otherwise expressly stated.
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ITEM 1. BUSINESS
Overview
ARC Group Worldwide, Inc. (referred to herein with all of its subsidiaries as the “Company” or “ARC”) is a leading,
global advanced manufacturer offering a full suite of products and services to our customers, including: (i) metal
injection molding (“MIM”); (ii) 3D metal and plastic printing (also referred to as “Additive Manufacturing”); (iii)
precision metal stamping; (iv) traditional and clean room plastic injection molding; and (v) advanced rapid and
conformal tooling. Through our diverse product offering, we provide our customers with a holistic prototyping and
full-run production solution for both precision metal and plastic fabrication. We further differentiate ourselves from
our competitors by providing innovative, custom capabilities, which improve high-precision manufacturing efficiency
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ITEM 1. BUSINESS
Overview
ARC Group Worldwide, Inc. (referred to herein with all of its subsidiaries as the “Company” or “ARC”) is a leading,
global advanced manufacturer offering a full suite of products and services to our customers, including: (i) metal
injection molding (“MIM”); (ii) 3D metal and plastic printing (also referred to as “Additive Manufacturing”); (iii)
precision metal stamping; (iv) traditional and clean room plastic injection molding; and (v) advanced rapid and
conformal tooling. Through our diverse product offering, we provide our customers with a holistic prototyping and
full-run production solution for both precision metal and plastic fabrication. We further differentiate ourselves from
our competitors by providing innovative, custom capabilities, which improve high-precision manufacturing efficiency
and speed-to-market for our customers.
Our mission is to accelerate the adoption of key technologies, such as automation, robotics, production software, and
3D printing, in traditional manufacturing, thereby benefiting from the elimination of inefficiencies currently present
in the global supply chain. Further, we seek to create innovative ways to streamline and improve the overall
manufacturing process, including offering instant online quoting, in-house rapid and advanced conformal tooling, and
a full suite of prototype-to-production capabilities.
More specifically, the two key pillars of our business strategy are centered on the following areas:
· Holistic Manufacturing Solution. The metal and plastic fabrication industries are highly fragmented
sectors with numerous single-solution providers. Given the inefficiencies associated with working with
these disjointed groups, many manufacturers seek to improve their supplier base by working with more
scaled, holistic providers. Our strategy is to facilitate the consolidation and streamlining of global supply
chains by offering a holistic solution to our customers’ manufacturing needs. In particular, ARC provides a
“one-stop shop” solution to our customers by offering a spectrum of highly advanced products, processes,
and services, thereby delivering highly-engineered precision components at efficient production yields.
· Accelerating Speed-to-Market. The traditional prototype-to-production process is often subject to lengthy
bottlenecks and is characterized by inefficient price quoting delays, time-consuming tooling procedures, and
outdated production methodologies. To differentiate itself from competitors, ARC focuses on reducing
inefficiencies in the development cycle by offering the seamless integration of a wide-variety of proprietary
technologies in order to dramatically reduce the time and cost associated with new product
development. Specifically, the Company has developed rapid and instant online quoting solutions, rapid
prototype solutions, short-run production services, in-house rapid and advanced conformal tooling, and rapid
full production capabilities.
Separately, we believe that U.S. manufacturing is poised for a rejuvenation as global wage disparities mitigate and
traditional labor-intensive processes are displaced by technology. We believe these macroeconomic trends may aid in
the adoption of our business strategy.
Our key fundamental strengths are built upon core capabilities, including:
· Metal Injection Molding. We are a large and well-respected MIM provider. As a pioneer of MIM
technology, and driven by our material science understanding, powder metallurgy experience, and
established global facilities, we are one of the most advanced MIM operators in the marketplace. ARC
provides high-quality, complex, precise net-shape metal components to market-leading companies in
numerous sectors, including the medical and dental, firearm and defense, automotive, aerospace, consumer
durable, and electronic device industries. Further, our process is highly automated, utilizing advanced
robotics and automation to ensure high levels of quality and efficiency.
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·
3D Printing. We offer a variety of 3D printing solutions, with an emphasis on: (i) metal 3D printing; and
(ii) rapid and advanced conformal tooling. In general, given promising signs of growth and related barriers
to entry, we believe the metal 3D printing sector to be one of the more attractive segments of the overall
Additive Manufacturing industry. Furthermore, metal 3D printing, while a complex technology still in its
early stages, shares several fundamental similarities with our MIM business, thereby helping to accelerate
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·
3D Printing. We offer a variety of 3D printing solutions, with an emphasis on: (i) metal 3D printing; and
(ii) rapid and advanced conformal tooling. In general, given promising signs of growth and related barriers
to entry, we believe the metal 3D printing sector to be one of the more attractive segments of the overall
Additive Manufacturing industry. Furthermore, metal 3D printing, while a complex technology still in its
early stages, shares several fundamental similarities with our MIM business, thereby helping to accelerate
our research and development. Separately, our metal 3D printing capabilities enable ARC to offer a variety
of new services, including rapid prototyping, rapid tooling and short-run production, helping our customers
improve their product speed-to-market. Given our established customer base, diverse metallurgy
background, and scalable injection molding capabilities, we believe we are well-positioned in the industrial
metal 3D printing market.
· Additional Metal and Plastic Fabrication Capabilities. We offer a number of additional specialty metal
and plastic fabrication capabilities that enable us to provide our customers with a full suite of custom-
component products. Our specialty capabilities include precision stamping, magnesium injection molding,
computer numerical control machining, plastic injection molding (including medical clean room
applications), hermetic seal assemblies, and fitting and flange manufacturing.
· Wireless. Our wireless business designs and develops hardware, including antennas, radios, and related
accessories, used in broadband and other wireless networks. Products are sold to public and private carriers,
wireless infrastructure providers, wireless equipment distributors, value-added resellers, and other original
equipment manufacturers (“OEM”). Further, we believe there is an opportunity to increase utilization of our
wireless technology to wirelessly connect the manufacturing floor and industrial products/applications, as
the world moves to a more wireless based framework.
Our overall growth strategy is centered on:
·
·
·
·
driving organic improvement through the expansion and cross-selling of our core services to existing clients;
accelerating the adoption of our technology by new customers in traditional manufacturing markets;
expanding our holistic service offerings through strategic vertical and horizontal acquisitions; and
improving financial and operational results from the implementation of operational best practices.
Accordingly, all of our business divisions are managed consistently with this strategy in order to drive organic sales
growth and operational efficiencies, while improving quality, speed, and service to our customers.
Our History
ARC was incorporated in the State of Utah on September 30, 1987. On August 8, 2012, we acquired Advanced
Forming Technologies (“AFT”), a leading provider of MIM components to a variety of industries. AFT is comprised
of two operating units, AFT-U.S. and AFT-Hungary. Concurrently, we acquired all of the shares of Quadrant Metals
Technology, LLC (“QMT”), whose subsidiaries, TeknaSeal LLC (“TeknaSeal”), FloMet LLC (“FloMet”) and
General Flange & Forge (“GF&F”) provided high-quality fabricated metal components to diverse industries, among
them medical and dental device, firearm and defense industries, electronic device, and the fluid handling industries,
including energy.
On April 7, 2014, we acquired two companies, Advance Tooling Concepts, LLC (“ATC”) and Thixoforming LLC
(“Thixoforming”). ATC is a leading plastic injection molding company, offering complete, turnkey plastic injection
molding capabilities, as well as fully-staffed and equipped in-house molding and tooling for diverse markets,
including the medical and dental device, electronic, consumer, and defense industries. Thixoforming is a leading
provider of magnesium injection molding, producing complex, high-density injection molding components from
magnesium alloys.
On June 25, 2014, we acquired substantially all of the assets of Kecy Corporation (“Kecy”) and 411 Munson Holding
(“Munson”). Kecy is a precision metal stamping company that also offers value-added secondary design and
production processing. The Kecy acquisition, along with the purchase of certain real property from Munson used in
Kecy operations, allows ARC to provide its customers with metal stamping applications in order to offer a more
holistic solution and improve the speed-to-market.
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Everest Hill Group Inc. (“Everest Hill Group”) has been our major stockholder since 2008. Over its 35 year
investment history, Everest Hill Group and its affiliated investment vehicles have invested in over 75 companies,
including approximately 40+ active portfolio companies. We believe that Everest Hill Group’s successful investment
track record and long-term investment horizon provides value to our Company and its shareholders.
Industry Overview
We serve the global manufacturing industry as a provider of holistic prototype development and production
solutions. In particular, we manufacture highly-engineered, precision components for OEMs in the medical and
dental device, defense and firearm, automotive, aerospace, and defense industries among others. While our
manufacturing technologies continue to gain market acceptance, they currently represent a fractional share of the
global manufacturing market.
The global manufacturing industries we compete in are generally highly fragmented, consisting of many privately-
held production companies and some publicly traded companies. We believe the industry offers opportunities for
consolidation, as many small, privately-held companies lack the financial resources to invest in the emerging
technologies that are necessary to remain competitive.
Further, manufacturing technology in our industry has been rapidly evolving, creating improvements in accuracy,
complexity, and the development of an increasing variety of feedstock alternatives. We expect these trends to
continue, and believe new technologies, including processing capabilities, advanced materials, and Additive
Manufacturing advancements will enable us to create new and more efficient parts and services, thereby providing an
excellent opportunity for long-term, future growth.
Key Industry Trends
The global manufacturing industry is evolving as characterized by a number of key trends, including:
· On-shoring of Global Manufacturing to the United States and the Developed World. U.S. manufacturing
may capture a growing portion of global manufacturing revenue as technological improvements, lower
domestic energy prices, and the equalization of developing country wage disparity reestablishes the United
States as a desirable location for select manufacturing operations.
· Growth Opportunity in Industrial 3D Printing. The Additive Manufacturing industry has begun to displace
certain traditional manufacturing technologies, and we believe this trend may continue. In particular, the
industrial metal 3D printing service sector could outpace growth in the overall Additive Manufacturing
industry given associated cost and production efficiencies, particularly in the aerospace, firearm and defense,
and medical and dental industries.
· Accelerating Pace of New Product Development. As the landscape for global OEMs becomes increasingly
competitive, our OEM customers face increasing pressure to launch both new products and new versions of
existing products with greater frequency. In order to meet these objectives, our OEM customers seek to
improve and accelerate the supply of highly-engineered, high-quality parts and components, enabling them
to increase speed-to-market. These customers are increasingly selecting suppliers on the basis of quality and
speed of execution.
· Demand for Efficient and Consolidated Supply Chain. The existing supply chain offers opportunities for
improvement as OEMs procure parts, components, and sub-assemblies from many suppliers. A large
supplier base requires OEM customers to invest substantial time and capital in the coordination and
management of their supply chains, with OEMs maintaining large numbers of employees devoted solely to
procurement and supply chain management. Additionally, the lead times necessary to fulfill OEM purchase
orders often require several weeks-to-months due to the time associated with tooling, testing, manufacturing,
and shipping complex parts. Consequently, our OEM customers are seeking solutions that will achieve the
following goals:
· Reduced Lead Times. Our OEM customers experience production bottlenecks in the quoting and
quick-turn/prototyping phases of the production cycle. In order to reduce overall lead times, our
customers are seeking technologically-enabled solutions that eliminate inefficiencies in their
procurement process.
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· Rationalization of Suppliers. Many of our customers have implemented company-wide initiatives
to reduce the complexity of their respective supply chains. In selecting their ongoing supply
partners, these customers are seeking industry leaders that offer an established market presence,
financial flexibility and stability, the ability to supply multiple parts/components and an established
track record of supplying technologically-advanced, highly-engineered parts/components with
rapid turnaround times.
Competitive Strengths
We believe our competitive strengths include:
·
Leading Market Position in MIM, with High Barriers to Entry. We believe we are one of the largest
companies in the fragmented global MIM industry. Further, we believe our unique, proprietary production
processes, longstanding customer relationships, well-established industry reputation, investments in
sophisticated technologies, including robotics, 3D printing, plastic injection molding, RapidMIM, and
prototyping, and track record for quality products and services provide us with a competitive advantage over
other market participants. Additionally, we have made a sizeable capital investment in MIM machinery, as
well as the software and other complementary services necessary to maintain and grow our business. We
believe there are a limited number of other market participants of comparable size and experience, with the
vast majority of competitors substantially smaller in size, scale, capabilities, and expertise. We believe that
the development of high-quality, commercially scalable MIM production would require any new competitors
to invest significant capital and years of research and development before being able to commercially
compete with us, thereby resulting in high barriers to entry for any new participants in the industry.
· Metal 3D Printing Part Production. Due to the complementary nature of the MIM process and metal 3D
printing, in the second quarter of fiscal 2014, we established our 3DMT Group segment, which consists of
our legacy tooling product line, Advance Tooling Concepts that was acquired in April 2014, and greenfield
3D printing and scanning operations. We believe we are one of the few companies well-positioned to utilize
technologies associated with the emerging metal 3D printing industry. Further, while Additive
Manufacturing is still in its infancy, barriers to entry remain high, principally due to the demands of properly
understanding and applying associated technology, as well as scaling and building such a
business. Experience working with metal powder and producing complex metal components is critical to
making quality, production-capable metal 3D parts. 3D printing services are a relatively new offering for us
and currently represents a small portion of our business; however, we believe our experience and ancillary
know-how are material competitive advantages to significantly grow this area of our operations during the
foreseeable future.
· Early Adoption of Advanced Manufacturing Technologies. In addition to our 3D printing initiatives, we
believe our adoption and implementation of other advanced manufacturing technologies, such as robotics,
RapidMIM, rapid tooling, and instant online quoting, are key competitive advantages in the fragmented
market in which we operate. These technologies provide our customers with reduced order turnaround times
and customized engineering solutions, while strengthening our customer relationships and enhancing our
ability to market a broader and differentiated suite of products. We believe our capital investment and
collective experience with these technologies would be difficult to replicate for smaller or limited-product-
suite competitors.
· Differentiated Business Model. We believe that our business model is highly differentiated from many of
our competitors. Historically, we generally manufactured some of the most critical and difficult-to-produce
components for our customers’ products. As such, we have been able to expand the scope of products we
offer to our customers to include other value-added services including 3D printing, plastic injection molding,
and rapid tool making, among others. We believe our full-service solution represents a distinct competitive
advantage in the marketplace and will increasingly become an even more important value differentiator
going forward.
·
Lean Manufacturing Technology and Operating Best Practices. We manage our manufacturing operation
on a decentralized basis, whereby each of our operating subsidiaries is run by a general manager. Our
general managers are often recognized experts in lean manufacturing, six sigma, automation, and general
operating best
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practices. We have an orientation process whereby lean-manufacturing leaders groom our rising managers
and mentor them on operating efficiency and excellence. These internal best practices are shared among our
facilities and implemented when we acquire or initiate new operations.
· Experienced Management Team. Our Chief Executive Officer, Jason T. Young, has been integral to the
strategic direction and growth of our business since he joined our Company in 2008. Among other
achievements, Mr. Young led the turnaround of the Company, taking it from an unprofitable business to the
growing and profitable business it is today. Additionally, our Chief Financial Officer, Drew M. Kelley, who
joined the Company in 2013 after a longstanding tenure in the financial services industry, contributes
valuable expertise by providing our Company with financial oversight, strategic direction, and complex
corporate finance experience.
Business Strategy
Our business strategy focuses on growing revenues through the addition of new customers, organically increasing our
“wallet share” from existing customers, developing technology to improve the manufacturing process and making
strategic acquisitions to further consolidate the industry. In order to achieve this, we are implementing the following
strategic initiatives:
·
Provide Customers with Faster and Higher Quality Solutions. We believe that a key competitive
differentiator in our business is utilizing technological solutions to increase customers’ speed-to-market. We
believe our technology-enhanced service offerings, which include 3D printing, rapid tooling, online quoting,
and RapidMIM, can reduce lead times and produce greater manufacturing efficiency. We also focus on
utilizing our team of engineers and production experts to engage with customers at the design phase of their
product development and endeavor to have them adopt our solutions throughout the entire manufacturing
process, from prototype through large-scale commercial production, in order to create a more long term
partnership.
· Cross-Sell Products and Services Across Our Customer Base. We are able to gain greater access and better
serve our customers by cross-selling our full suite of products and services. We believe our customers are
interested in new and complementary products and services our Company can offer, while at the same time
valuing the simplification of their supply chains. Consequently, we have found cross-selling provides us
with a compelling symbiotic strategy for revenue growth, and we plan to continue to capitalize on cross-
selling opportunities as we add products and services to our existing capabilities.
· Expand Sales Force and Marketing. We have a highly skilled, technically focused sales force. Each ARC
sales representative is responsible for selling our complete suite of solutions to target customers. Traditional
sales methodologies are supported and complemented by our online initiatives, as we have invested
resources for improving our search engine optimization and marketing solutions. Further, we believe that
international markets present a compelling growth opportunity for our business, and we have been exploring
those opportunities.
·
Increase Market Penetration of 3D Technology. We believe Additive Manufacturing, and in particular,
metal 3D printing, can create growth opportunities in traditional manufacturing. Over the next several years,
metal 3D printing could continue to displace traditional forms of metal fabrication. Given this opportunity,
ARC has made, and will continue to make, material investments in research and development in order to
further develop and expand this capability. At the same time, given their complementary attributes to our
MIM business, these metal 3D printing capabilities provide opportunities to further integrate with the
Company’s traditional fabrication processes.
· Continue to Pursue Strategic Acquisitions. We intend to continue to pursue acquisitions that meet our core
strategic and financial criteria. In particular, we seek companies that offer complementary products and
services to our existing portfolio, while at the same time, provide us with access to new customer bases to
cross-sell our existing solutions. We believe there are numerous potential acquisition targets that meet our
targeted criteria, and we intend to continue to pursue such acquisitions in the future.
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Reporting Segments
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Reporting Segments
Our operations are classified into four reportable business segments: Precision Components Group, 3DMT Group,
Flanges and Fittings Group, and Wireless Group.
·
·
·
·
The Precision Components Group companies provide highly engineered fabricated metal components using
processes consisting of metal injection molding, precision metal stamping, and hermetic sealing. Industries
served include medical and dental device, firearm and defense, automotive, aerospace, consumer durable,
and electronic device.
The 3DMT Group was established in the second quarter of fiscal year 2014 to meet customer needs of
reducing costs and accelerating “speed-to-market” through rapid prototyping, short-run production, and
rapid tooling. The segment consists of our legacy tooling product line, 3D Material Technologies (our
Additive Manufacturing operations), and Advance Tooling Concepts, LLC.
The Flange and Fittings Group consists of General Flange & Forge which provides custom machining
solutions and special flange facings.
The Wireless Group focuses on wireless broadband technology related to propagation and optimization. It
designs and develops hardware, including antennas, radios, and related accessories, used in broadband,
industrial and other wireless networks. Products are sold to public and private carriers, wireless
infrastructure providers, wireless equipment distributors, value-added resellers and other original equipment
manufacturers.
See Note 13, Segment Information, of the accompanying Notes to Consolidated Financial Statements in Part II, Item
8 for further information on our segments.
Research and Development
Research and development (“R&D”) costs are charged to operations when incurred and are included in operating
expenses. We spent $0.3 million and $1.2 million on R&D in fiscal years 2016 and 2015, respectively. Our R&D
personnel develop products to meet specific customer, industry, and market needs that we believe compete effectively
against products distributed by other companies.
Employees
As of June 30, 2016, our global workforce, excluding contractors, totaled approximately 560 employees. None of our
U.S. employees are covered by a collective bargaining agreement. Substantially all of our international employees
are members of unions or subject to workers’ councils or similar statutory arrangements. Management considers its
relations with all of its employees to be good.
Customer Base
Our largest customers accounted for approximately 42.4% and 30.5% of our 2016 and 2015 revenue,
respectively. The concentration of our business with a relatively small number of customers may expose us to a
material adverse effect if one or more of these large customers were to experience financial difficulty or were to cease
being a customer for non-financial related issues.
Suppliers
We have good working relationships with our suppliers. Given our volume of purchases, we are able to secure
certain volume purchase discounts from our vendors. Each of our manufacturing facilities has a network of local
partners that work very closely with us to deliver additional value-added services for manufactured components.
For certain of our raw material and component purchases, including certain polymers, copper rod, copper and
aluminum tapes, fine aluminum wire, steel wire, carbon steel, optical fiber, circuit boards and other components, we
are dependent on key suppliers. While we rely upon long-term relationships, we generally do not enter into long-term
contracts with our key suppliers. The timely procurement of necessary raw materials is critical to each of our
operations.
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Consequently, poor supply capacity amid tight demand for these materials, as well as natural disasters or accidents, or
other events that negatively impact our suppliers, could adversely affect their timely procurement and harm our
business.
Regulation
Our operations are regulated under various federal, state, local and international laws governing the environment,
including laws governing the discharge of pollutants into the soil, air and water, the management and disposal of
hazardous substances and wastes, and the cleanup of contaminated sites. We have infrastructures in place to ensure
that our operations are in compliance with all applicable environmental regulations. The costs of compliance with
these laws and regulations have not had a material adverse effect on our financial condition, results of operations or
competitive position, and we do not believe that they will in the future. The imposition of more stringent standards or
requirements under environmental laws or regulations or a determination that we are responsible for the release of
hazardous substances at our sites could result in expenditures in excess of amounts currently estimated to be required
for such matters. While no material exposures have been identified to date that we are aware of, there can be no
assurance that additional environmental matters will not arise in the future or that costs will not be incurred with
respect to sites as to which no problem is currently known.
As an exporter, we must comply with various laws and regulations relating to the export of products, services and
technology from the U.S. and other countries having jurisdiction over our operations. In the U.S., these laws include,
among others, the U.S. Export Administration Regulations (“EAR”) administered by the U.S. Department of
Commerce, Bureau of Industry and Security, the International Traffic in Arms Regulations (“ITAR”) administered by
the U.S. Department of State, Directorate of Defense Trade Controls, and trade sanctions, regulations and embargoes
administered by the U.S. Department of Treasury, Office of Foreign Assets Control. Certain of our products have
military or strategic applications and are on the munitions list of the ITAR or represent so-called “dual use” items
governed by the EAR. As a result, these products require individual validated licenses in order to be exported to
certain jurisdictions. Any failures to comply with these laws and regulations could result in civil or criminal
penalties, fines, investigations, adverse publicity and restrictions on our ability to export our products, and repeat
failures could carry more significant penalties. Any changes in export regulations may further restrict the export of
our products. The length of time required by the licensing processes can vary, potentially delaying the shipment of
products and the recognition of the corresponding revenue. Any restrictions on the export of our products or product
lines could have a material adverse effect on our competitive position, results of operations, cash flows, or financial
condition.
ARC Wireless, a wholly-owned subsidiary of the Company, is also subject to regulation by federal, state, and local
regulatory and governmental agencies as a telecommunications company. Under current laws and the regulations
administered by the Federal Communications Commission, there are no federal requirements for licensing antennas
that only receive (and do not transmit) signals. We believe that our antennas that are also used to transmit signals are
in compliance with current laws and regulations. Current laws and regulations are subject to change and our
operations may become subject to additional regulation by governmental authorities. We may be significantly
impacted by a change in either statutes or rules.
Intellectual Property
We actively pursue development of intellectual property. We have registered and applied for the registration of U.S.
and international trademarks, service marks, domain names and copyrights. Additionally, we have filed U.S. and
international patent applications covering certain of our proprietary technology and processes. However, most of the
technology used in our business is unpatented, but is protected by trade secrets and nondisclosure and confidentiality
agreements. We are not currently engaged in any intellectual property litigation, nor are there any intellectual
property claims pending either by or against us.
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Available Information
Our corporate website address is http://www.arcgroupworldwide.com. Our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), are filed with the SEC. Such reports and
other information filed by ARC with the SEC are available free of charge on our website when such reports are
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Available Information
Our corporate website address is http://www.arcgroupworldwide.com. Our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), are filed with the SEC. Such reports and
other information filed by ARC with the SEC are available free of charge on our website when such reports are
available on the SEC's website. We intend to use our website as a regular means of disclosing material non-public
information and for complying with disclosure obligations under Regulation FD promulgated by the SEC. Such
disclosures will be included on the website under the heading “News” or “Investor Relations.”
We also encourage investors, the media, and others interested in ARC to review the information posted on the
Company’s Facebook site (https://www.facebook.com/ArcGroupWorldwide) and the Company’s LinkedIn account
(https://www.linkedin.com/company/arc-group-worldwide-inc-). Any updates to the list of social media channels
ARC will use to announce material information will be posted on the “News” or “Investor Relations” page of the
Company’s website at http://www.arcgroupworldwide.com/. Accordingly, investors should monitor such portions of
our website and social media channels, in addition to following our press releases, SEC filings, public conference
calls, and webcasts.
The public may read and copy any materials filed by ARC with the SEC at the SEC's Public Reference Room at 100
F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that file electronically with the SEC at
www.sec.gov.
The information on the websites referred above are not incorporated by reference and are not part of this
Report. Further, our references to the URLs for these websites are intended to be inactive textual references only.
ITEM 1A. RISK FACTORS
In addition to the other information provided in this Report, the following risk factors should be considered when
evaluating the results of our operations, future prospects and an investment in shares of our common stock
(“Common Stock”). Any of these factors could cause our actual financial results to differ materially from our
historical results and could give rise to events that might have a material adverse effect on our business, financial
condition, and results of operations.
Risks Related to Our Business
The traditional manufacturing, advanced manufacturing, and 3D printing markets in which we compete are
highly competitive and some of our competitors may have superior resources. Responding to this competition
could reduce our sales and operating margins.
We sell most of our products in highly fragmented and competitive prototyping and production manufacturing and
3D printing markets, including those serviced by traditional and Additive Manufacturing suppliers. We believe that
our principal challenges of competition in these markets are:
·
·
·
·
·
ability to meet customer specifications and quantities within competitive time periods responsive to high
customization demands from our customers;
application expertise and engineering capabilities using novel materials that vary widely according to our
customers’ requirements;
product quality and brand name in different industrial manufacturing areas, which may take years to
develop;
timeliness of delivery of raw materials to our plants and finished products to our customers;
competitive pricing of our products at levels sufficient to attract and retain customers;
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·
·
·
·
quality of our aftermarket sales and support for customers utilizing our products in widely variable physical
and environmental conditions;
our ability to develop new advanced materials or related capabilities;
our applied research and development capabilities that rely mainly on individual initiatives and experience
of our employees; and
our relatively new 3D printing services, which currently constitute only a small portion of our overall
business.
In each of our major traditional manufacturing, advanced manufacturing, and 3D printing product lines, we compete
with a substantial number of foreign and domestic companies, some of which have greater resources (financial or
otherwise) or lower operating costs than we have. Competitors’ actions, such as price reductions or introduction of
new innovative products, may have a material adverse impact on our sales and profitability. In addition, the rapid
technological changes occurring in the design and engineering industry could lead to the entry of new competitors in
traditional manufacturing and 3D printing. We cannot provide assurance that we will continue to compete
successfully with our existing competitors or with new competitors.
Some of our traditional manufacturing, advanced manufacturing and 3D printing competitors are larger than us and
have greater financial, technical, marketing, and other resources than we have. These larger competitors may be in a
better position to withstand any significant reduction in capital spending by customers in our markets. They may
have broader product lines and greater market focus and may not be as susceptible to downturns in a single
market. These competitors may also be able to bundle their products together to meet the needs of a particular
customer and may be capable of delivering more complete solutions than we are able to provide. To the extent large
enterprises that currently do not compete directly with us choose to enter our markets by acquisition or otherwise,
competition would likely intensify.
Further, some of our competitors that have greater financial resources have offered, and in the future may offer, their
products at lower prices than we offer for our competing products or on more attractive financing or payment terms,
which may cause us to lose sales opportunities and the resulting revenue or to reduce our prices in response to that
competition. Reductions in prices for any of our products could have a material adverse effect on our operating
margins and revenue. In addition, many of our competitors have been in operation longer than we have and,
therefore, have more long-standing and established relationships with domestic and foreign customers, making it
difficult for us to sell to those customers.
If any of our competitors’ traditional manufacturing, advanced manufacturing, and 3D printing products or
technologies were to become the industry standard, our business would be seriously harmed. If our competitors are
successful in bringing their products to market earlier than us, or if these products are more technologically capable
than ours, our revenue could be materially and adversely affected. Our competitors may decide to expand their
presence in this market through mergers and acquisitions. The consolidation of our manufacturing and 3D printing
competitors could have a significant negative impact on our business.
If we are unable to compete in the traditional manufacturing, advanced manufacturing, and 3D printing sectors at the
same level as we have in the past, in any of our markets, or are forced to reduce the prices of our products in order to
continue to be competitive, our operating results, financial condition, and cash flows would be materially and
adversely affected.
In order to maintain and enhance our traditional manufacturing, advanced manufacturing, and 3D printing
competitive position, we intend to continue our investment in technology, marketing, customer service, and support,
and distribution networks. We may not have sufficient resources to continue to make these investments, and we may
not be able to maintain our competitive position. Our competitors may develop products that are superior to our
traditional manufacturing, advanced manufacturing, and 3D printing products, develop methods of more efficiently
and effectively providing products and services, or adapt more quickly than us to new technologies or evolving
customer requirements. We may not be able to compete successfully with our competitors. If we fail to compete
successfully, the failure may have a material adverse effect on our business, financial condition, and results of
operations.
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We rely on a small number of customers for a large percentage of our revenues.
A relatively small number of customers have historically contributed a material percentage of our manufacturing
product sales. Our five largest customers accounted for approximately 42.4% of our fiscal year 2016 revenue. Our
3D printing operations also rely on a small number of customers. The concentration of our business with a relatively
small number of customers may expose us to a material adverse effect if one or more of these large customers were to
experience financial difficulty or were to cease being customer for non-financial related issues. Through acquisitions
and organic growth, we seek to diversify both our offerings and our customer base. Assuming our continued
customer diversification, we do not believe the loss of any one of our core customers would have a long-term material
adverse effect on our results of operations. However, there can be no assurance that the loss of any one or more of
our core customers would not have a material adverse effect on our results of operations, at least in the short term.
Due in part to the unpredictability of customer orders, our business is difficult to forecast with accuracy on a
quarterly basis and is subject to variability.
Our manufacturing businesses have a high degree of quarterly variability, given the production lifecycle, success of
our customers’ products, and specific order timing, which is reliant on purchase orders rather than long-term
contracts. Thus, depending on the product shipment dates for orders received, our revenue recognized for each
quarter may experience variability and may vary significantly from our expectations. These potential quarterly
fluctuations could have an adverse effect on our stock price as well as potentially impact our compliance under our
agreements with lenders or other providers of credit to the Company.
We face customer pricing pressures.
Our customers are under pressure to reduce pricing on their products amid intense competition and pressure from
their own cost-conscious customers. Weak revenue growth leads companies to reduce prices in order to boost sales,
which reduces the value of those sales and further affects all participants in the supply chain. Consequently, we also
face these pricing pressures. For example, our sales to the medical industry could be adversely affected by hospitals
that are subject to smaller reimbursements, rising costs and a rapidly changing health-care system, which could result
in hospitals reducing the size of orders and negotiating lower costs for supplies. Such events could result in hospital
suppliers lowering prices in order to win business with an ultimate effect on us that would result in fewer component
orders and pressure to lower our prices. Such order reductions and pricing adjustments could put pressure on our
gross margins, negatively impacting the overall profitability of our businesses. Further, we and our customers also
face pricing pressure from global competition, primarily from Asia and other low-cost areas. Our sales could be
negatively impacted if customers move production of devices offshore.
Our future success depends on our ability to anticipate and to adapt to technological changes and develop,
implement, and market product innovations.
Many of our traditional manufacturing, advanced manufacturing, and 3D printing markets are characterized by fast-
moving advances in design and engineering that require ongoing improvements in our production capabilities and the
competitive quality of our products. The supply chains in which we operate are subject to technological change and
changes in customer requirements. We cannot provide any assurance that we will successfully develop new or
modified types of traditional manufacturing, advanced manufacturing, and 3D printing products or technologies that
may be required by our customers in the future. Should we not be able to maintain or enhance the competitive values
of our traditional manufacturing, advanced manufacturing, and 3D printing products or develop and introduce new
products or technologies successfully, or if new products or technologies fail to generate sufficient revenues to offset
research and development costs, our businesses, financial condition, and operating results could be materially and
adversely affected. We may not be successful in those efforts if, among other things, our traditional manufacturing,
advanced manufacturing, and 3D printing products:
·
·
·
are not cost effective;
are not brought to market in a timely manner;
are not in accordance with evolving traditional manufacturing, advanced manufacturing and 3D printing
industry standards;
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·
·
fail to achieve market acceptance or meet customer requirements; and
are in advance of the needs of their markets.
We may not fully realize anticipated benefits from past or future acquisitions or equity investments, and future
acquisitions may expose us to significant unanticipated liabilities that could adversely affect our business,
financial conditions, and results of operations.
We anticipate that a portion of any future growth of our business might be accomplished by acquiring existing
traditional manufacturing, advanced manufacturing, and 3D printing businesses, products, or ancillary
technologies. The success of any acquisition will depend upon, among other things, our ability to integrate acquired
personnel, operations, products, and technologies into our organization effectively, to retain and motivate key
personnel of acquired businesses and to retain their customers. In addition, we might not be able to identify suitable
acquisition opportunities or obtain any necessary financing on acceptable terms. We might also invest time and
money investigating and negotiating with a potential acquisition or investment target but not complete the transaction.
Our acquisitions could create unforeseen risks and liabilities that may adversely impact our results and
operations. These liabilities could include employment, retirement or severance-related obligations under applicable
law or other benefits arrangements, legal claims, warranty or similar liabilities to customers, and claims made by
vendors. Future acquisitions could also expose us to tax liabilities and other amounts owed by the acquired
companies. The incurrence of such unforeseen or unanticipated liabilities, should they be significant, could have a
material adverse effect on our business, results of operations, and financial condition.
Although we hope to realize strategic, operational, and financial benefits as a result of our past or future acquisitions
and equity investments, we cannot predict whether, and to what extent, such benefits will be achieved. There are
significant challenges to integrating an acquired operation into our business, including, but not limited to:
·
·
·
·
·
successfully managing the operations, manufacturing facilities and technology;
integrating the sales organizations and maintaining and increasing the customer base;
retaining key employees, customers, suppliers, and distributors;
integrating management information, inventory, accounting, and research and development activities; and
addressing operating losses related to individual facilities or product lines.
Any future acquisition could involve other risks, including the assumption of additional liabilities and expenses,
issuances of debt, transaction costs, and diversion of management’s attention from other business concerns, and such
acquisition may be dilutive to our financial results.
A material disruption at any of our manufacturing facilities could adversely affect our ability to generate sales and
meet customer demand.
In case of a disruption of our operations at our manufacturing facilities due to significant equipment failures, natural
disasters, power outages, fires, explosions, terrorism, adverse weather conditions, labor disputes, or other reasons, our
financial performance could be adversely affected as a result of our inability to meet customer demand for our
products. Interruptions in production could increase our cost of sales, harm our reputation, and adversely affect our
ability to attract or retain our customers. Our highly automated manufacturing equipment and 3D printers may take
longer to repair or replace than conventional manufacturing systems. In addition, some of our equipment may be
heavily modified over time with adaptations and customization for specific customers that may make our equipment
more susceptible to malfunctions that cannot be easily repaired. In addition, our business continuity plans may not be
sufficient to address disruptions attributable to all magnitudes of natural disaster risks at our geographically disparate
facilities, such as hurricane risk at our Florida plant, seismic risks at our Colorado facility, and severe winter weather
risks at our Colorado, Michigan, Minnesota, Ohio, and Pennsylvania facilities. Any interruption in production
capability could require us to make substantial capital expenditures to remedy the situation, which could negatively
affect our
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profitability and financial condition. We maintain property damage insurance, which we believe to be adequate to
provide for reconstruction of facilities and equipment, as well as business interruption insurance to mitigate losses
resulting from any production interruption or shutdown caused by an insured loss. However, any recovery under our
insurance policies may not offset the lost sales or increased costs that may be experienced during the disruption of
operations, which could adversely affect our business, financial condition, and results of operations.
A sustained economic downturn could adversely impact our Company.
Demand for our products and components could be adversely impacted by deterioration in general economic
conditions. Furthermore, a recession could result in reduced demand for our traditional manufacturing, advanced
manufacturing, and 3D printing products, which would negatively impact revenues. In addition, a significant
slowdown in the global economy could reduce overall demand for our products. For example, during periods of
sustained economic downturn or significant supply/demand imbalances, new vehicle sales may be negatively
impacted as consumers shift their purchases to used vehicles, which could result in loss of sales to our customers who
supply the automobile manufacturers. The diversified customer base and product applications of our companies may
help mitigate the effects of economic fluctuations, however, many of our customers and suppliers are reliant on
liquidity from global credit markets and, in some cases, require external financing to purchase products or finance
operations. Lack of liquidity or inability to access the credit markets by our customers could adversely affect our
ability to collect the outstanding amounts due to us. The occurrence of any of the foregoing could have a material
and adverse effect on our business, financial condition, and results of operations.
Product liability lawsuits could harm our business.
We face an inherent risk of exposure to product liability claims. We sell components for medical and dental,
aerospace, firearm and defense, automotive, consumer durable, and electronic device industries, any of which may be
susceptible to failure that may cause physical injury or death. We may incur significant losses due to lawsuits,
including potential class actions, resulting from such adverse events. We may also incur losses from lawsuits relating
to the improper use of any of our products and components. In addition, claims or lawsuits related to products that
we sell or the unavailability of insurance for product liability claims, could result in the elimination of these products
from our product line thus reducing revenues, possibly significantly. Although we maintain production quality
controls and procedures, we cannot assure that the products sold will be free from defects. In addition, when
manufacturing our products, we also use components manufactured by third parties, which may have defects. We
maintain insurance coverage for product liability claims. The insurance policies have limits, however, and may not
be sufficient to cover claims made. In addition, this insurance may not continue to be available at a reasonable
cost. With respect to components manufactured by third-party suppliers, the contractual indemnification that we may
seek from our third-party suppliers may be limited and thus insufficient to cover claims made against us. If insurance
coverage or contractual indemnification is insufficient to satisfy product liability claims made against us, the claims
could have an adverse effect on our business and financial condition. Even claims without merit could harm our
reputation, reduce demand for our products, cause us to incur substantial legal costs and distract the attention of our
management. The occurrence of any of the foregoing could have a material and adverse effect on our business,
financial condition, and results of operations.
Our operations are subject to environmental, health, and safety regulations.
Our traditional manufacturing, advanced manufacturing, and 3D printing operations are subject to stringent and
complex federal, state, local, and European Union laws and regulations, governing environmental protection, health
and safety, including the discharge of materials into the environment. These laws and regulations may, among other
things:
·
·
·
·
require the acquisition of various permits before operations commence or to continue ongoing operations;
restrict the types, quantities, and concentrations of various substances that may be employed in
manufacturing operations;
restrict the types, quantities, and concentrations of various substances that may be released into the
environment or otherwise disposed of; and
require remedial measures to mitigate pollution from former and ongoing operations, such as requirements to
remove contamination from real property, whether or not caused by past or ongoing operations.
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The regulatory burden increases the cost of doing business and affects profitability. Additionally, the U.S. Congress
and federal and state agencies, as well as the European Union regulatory authorities, frequently revise environmental,
health and safety laws and regulations, and any changes that result in more stringent and costly health and safety,
pollution control, waste handling, disposal, cleanup, and remediation requirements could have a significant negative
impact on our operating costs.
Some of the existing environmental, health and safety laws and regulations to which we are subject include, among
others:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
regulations by the Environmental Protection Agency (“EPA”) and various state agencies regarding
approved methods of disposal for certain hazardous and nonhazardous wastes;
the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) and
analogous state laws that may require the removal of previously disposed wastes (including wastes
disposed of or released by prior owners or operators of real estate), the cleanup of property
contamination (including groundwater contamination) and remedial plugging operations to prevent
future contamination;
the Clean Air Act and comparable state and local requirements, which establish pollution control
requirements with respect to air emissions from our operations;
the Oil Pollution Act of 1990, which contains numerous requirements relating to the prevention of,
and response to, oil spills into waters of the United States;
the Federal Water Pollution Control Act, or the Clean Water Act, and analogous state laws which
impose restrictions and strict controls with respect to the discharge of pollutants, including heavy
metals and other substances generated by our operations, into waters of the United States, state
waters, or publicly owned treatment works;
the Resource Conservation and Recovery Act, which is the principal federal statute governing the
treatment, storage and disposal of solid and hazardous wastes, and comparable state statutes;
the federal Occupational Safety and Health Act and comparable state statutes, which require worker
protection from raw materials, products, and wastes;
the federal Toxic Substances Control Act and comparable state and local statutes and regulations
requiring that we organize and/or disclose information about hazardous materials stored, used, or
produced in our operations; and
the Arms Export Control Act of 1976 (‘‘AECA’’) and the International Traffic in Arms
Regulations promulgated thereunder that govern the export of firearm and defense products
controlled by the AECA.
Our Company has incurred in the past, and expects to incur in the future, capital and other expenditures related to
environmental compliance. Although we believe our continued compliance with existing requirements will not have
a material adverse impact on our financial condition, and results of operations, there is no assurance that the passage
of more stringent laws or regulations in the future will not have a negative impact on our financial position or results
of operations.
We utilize a hydrogen gas atmosphere in our sintering process and a large liquid hydrogen storage tank at one of
our sites, which create heightened health and safety risks of explosion or fire that could be materially adverse to
our business.
Certain of our subsidiaries utilize a hydrogen gas atmosphere in the sintering process. We also have a large liquid
hydrogen storage tank located in one of our facilities. Liquid hydrogen, if stored carefully, is generally safe, but any
escape of liquid hydrogen can create significant hazards. Specifically, in the presence of oxygen, hydrogen can catch
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fire, sometimes explosively. Our processes are designed to prevent exposure to oxygen in the sintering furnaces by
first eliminating any remaining ambient atmosphere by flooding the furnace with inert argon gas prior to introduction
of hydrogen. As a result, no oxygen should be present in our hydrogen atmospheres or our hydrogen storage tank, but
trace amounts of air may contaminate any hydrogen supply. Our equipment has redundant control and alarm systems
to detect hydrogen leaks and shut down all gas flows should a leak or equipment malfunction be detected. However,
if the hydrogen should escape, it could come into contact with oxygen in the air and explode or catch fire. When
hydrogen catches fire, the hydrogen flames are nearly invisible and are thus both difficult to avoid and to put
out. Any fire or explosion originating from a hydrogen leak could seriously injure or cause death of employees and
other persons in the vicinity, as well as damage our equipment and our facilities. Further, even if any leaking
hydrogen does not explode or cause fire, because it is invisible, odorless, and flavorless, if one of our employees or
other persons in the vicinity should be exposed to and breathe pure hydrogen they could die of asphyxiation. Any
injuries or death arising from our use of hydrogen and any consequent lawsuits and resulting economic damages
could be materially adverse to our business. In addition any damage to our facilities or equipment resulting from any
explosion or fire could cause an interruption on our production capability and/or cause us to make substantial capital
expenditures, either of which could have a material adverse impact on our business, financial condition, and results of
operations.
As an owner or operator of real property, or generator of waste, we could become subject to liability for
environmental contamination, regardless of whether we caused such contamination.
Under various U.S. federal, state and local laws, regulations and ordinances, and, in some instances, international
laws, relating to the protection of the environment, a current or former owner or operator of real property may be
liable for the cost to remove or remediate contamination on, under, or released from such property and for any
damage to natural resources resulting from such contamination. Similarly, a generator of waste can be held
responsible for contamination resulting from the treatment or disposal of such waste at any off-site location (such as a
landfill), regardless of whether the generator arranged for the treatment or disposal of the waste in compliance with
applicable laws. Costs associated with liability for removal or remediation of contamination or damage to natural
resources could be substantial and liability under these laws may attach without regard to whether the responsible
party knew of, or was responsible for, the presence of the contaminants. In addition, the liability may be joint and
several. The presence of contamination or the failure to remediate contamination at our properties, or properties for
which we are deemed responsible, may expose us to liability for property damage or personal injury, or materially
adversely affect our ability to sell our real property interests or to borrow using the real property as collateral. We
cannot be sure that we will not be subject to environmental liabilities in the future as a result of historic or current
operations that have resulted or will result in contamination. The occurrence of any of the foregoing could have a
material and adverse effect on our business, financial condition, and results of operations.
Any failure to maintain and protect our trademarks, trade names, and technology may affect our operations and
financial performance.
The market for many of our products is, in part, dependent upon the goodwill engendered by trademarks and trade
names. The failure to protect our trademarks and trade names may have a material adverse effect on our business,
financial condition, and results of operations. Litigation may be required to enforce our intellectual property rights,
protect our trade secrets, or determine the validity and scope of proprietary rights of others. Any action we take to
protect our intellectual property rights could be costly and could absorb significant management time and
attention. As a result of any such litigation, we could lose any proprietary rights we have. In addition, it is possible
that others will independently develop technology that will compete with our technology. The development of new
technologies by competitors that may compete with our technologies could reduce demand for our products and affect
our financial performance. The occurrence of any of the foregoing could have a material and adverse effect on our
business, financial condition, and results of operations.
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If suppliers that we rely on encounter production, quality, financial or other difficulties, we may experience
difficulty in meeting customer demands.
We rely on unaffiliated contract manufacturers, both domestically and internationally, to produce certain of our
products or key components of our products. If we are unable to arrange for sufficient production capacity among
our contract manufacturers or if our contract manufacturers encounter production, quality, financial, or other
difficulties, including labor disturbances or geopolitical risks, or if alternative suppliers cannot be identified, we may
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If suppliers that we rely on encounter production, quality, financial or other difficulties, we may experience
difficulty in meeting customer demands.
We rely on unaffiliated contract manufacturers, both domestically and internationally, to produce certain of our
products or key components of our products. If we are unable to arrange for sufficient production capacity among
our contract manufacturers or if our contract manufacturers encounter production, quality, financial, or other
difficulties, including labor disturbances or geopolitical risks, or if alternative suppliers cannot be identified, we may
encounter difficulty in meeting customer demands. We have historically not had any material deficiencies arising
from suppliers, however, any such difficulties or deficiencies arising in the future could have an adverse effect on our
business, financial results, and results of operations, which could be material. If we do not have sufficient production
capacity, either through our internal facilities and/or through suppliers, to meet customer demand for our products, we
may experience lost sales opportunities and customer relations problems, which could have a material adverse effect
on our business, financial condition, and results of operations.
Our business depends on effective information management systems.
We rely on our enterprise resource planning systems to support such critical business operations as processing sales
orders and invoicing, inventory control, purchasing and supply chain management, human resources, and financial
reporting. If we are unable to successfully implement major systems initiatives and maintain critical information
systems with adequate redundancy and backup resources as well as sufficient levels of security to protect against
unauthorized access or damage to our information systems, we could encounter difficulties that could have a material
adverse impact on our business, internal controls over financial reporting, or our ability to timely and accurately
report our financial results.
Cyber-security incidents, including data security breaches or computer viruses, could harm our business by
disrupting our delivery of services, damaging our reputation or exposing us to liability.
We receive, process, store, and transmit, often electronically, the confidential data of our customers and
others. Unauthorized access to our computer systems or stored data could result in the theft or improper disclosure of
confidential information, the deletion or modification of records, or could cause interruptions in our
operations. These cyber-security risks increase when we transmit information from one location to another, including
transmissions over the Internet or other electronic networks. Despite implemented security measures, our facilities,
systems, and procedures, and those of our third-party service providers, may be vulnerable to security breaches, acts
of vandalism, software viruses, misplaced or lost data, programming and/or human errors, or other similar events
which may disrupt our delivery of services or expose the confidential information of our customers and others. Any
security breach involving the misappropriation, loss or other unauthorized disclosure or use of confidential
information of our customers or others, whether by us or a third party, could: (i) subject us to civil and criminal
penalties; (ii) have a negative impact on our reputation; or (iii) expose us to liability to our customers, third parties or
government authorities. Any of these developments could have a material adverse effect on our business, financial
condition, and results of operations.
We have in the past discovered, and may in the future discover, material weaknesses in our internal controls. If
we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial
results or prevent fraud. As a result, current and potential stockholders could lose confidence in our financial
reporting, which could harm our business and the trading price of our stock.
During our fiscal year 2016, our external auditors noted that we need to improve our information technology and
accounting infrastructure. The auditors identified these material weaknesses as ‘‘reportable conditions,’’ which
means that these were matters that, in the auditors’ judgment, could adversely affect our ability to record, process,
summarize, and report financial data consistent with the assertions of management in the financial statements. In
fiscal 2017, we will need to devote significant resources to remediate and improve our internal controls. We cannot
be certain that these measures will ensure that we maintain adequate controls over our financial processes and
reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in
their implementation, could harm our brand and operating results or cause us to fail to meet our reporting
obligations. Effective internal controls are necessary for us to provide reliable financial reports and effectively
prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our brand and operating results could
be harmed. Inferior internal controls could also cause investors to lose confidence in our reported financial
information, which could have a negative effect on the trading price of our stock.
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If our products, including material purchased from our suppliers, experience quality or performance issues, our
business may suffer.
Our business depends on consistently delivering high-quality products. To this end, we and our customers
periodically test our products for quality. Nevertheless, many of our products are highly complex and our testing
procedures are limited to evaluating likely and foreseeable failure scenarios. Our tests may fail to detect possible
failures and our products may fail to perform as expected. Performance issues could result from faulty design or
problems in manufacturing. We have experienced such performance failures in the past and remain exposed to
performance failures in the future. In some cases, recall of some or all affected products, product redesigns, or
additional capital expenditures may be required to correct a defect. In some cases, we indemnify our customers
against damages or losses that might arise from certain claims relating to our products. Future claims may have a
material adverse effect on our business, financial condition, and results of operations. Any significant or systemic
product failure could also result in lost future sales of the affected product and other products, as well as reputational
damage.
We are subject to governmental export and import controls that could subject us to liability or impair our ability to
compete in international markets.
Certain of our products are subject to export controls and may be exported only with the required export license or
through an export license exception. If we were to fail to comply with export licensing, customs regulations,
economic sanctions, and other laws, we could be subject to substantial civil and criminal penalties, including fines for
us and incarceration for responsible employees and managers, and the possible loss of export or import privileges. In
addition, if our distributors fail to obtain appropriate import, export or re-export licenses or permits, we may also be
adversely affected through reputational harm and penalties. Obtaining the necessary export license for a particular
sale may be time-consuming and may result in the delay or loss of sales opportunities. Furthermore, export control
laws and economic sanctions prohibit the shipment of certain products to embargoed or sanctioned countries,
governments, and persons. While we train our employees to comply with these regulations, a violation may
nonetheless occur, whether knowingly or inadvertently. Any such shipment could have negative consequences
including government investigations, penalties, fines, civil and criminal sanctions, and reputational harm. Any
change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of
existing regulations, or change in the countries, governments, persons, or technologies targeted by such regulations,
could result in our decreased ability to export or sell our products to existing or potential customers with international
operations. Any decreased use of our products or limitation on our ability to export or sell our products could
materially adversely affect our business, financial condition, and results of operations.
Difficulties may be encountered in the realignment of manufacturing capacity and capabilities among our global
manufacturing facilities that could adversely affect our ability to meet customer demands for our products.
We may realign manufacturing capacity among our global facilities in order to reduce costs by improving
manufacturing efficiency and to strengthen our long-term competitive position. The implementation of these
initiatives may include significant shifts of production capacity among facilities. There are significant risks inherent
in the implementation of these initiatives, including, but not limited to, failing to ensure that: there is adequate
inventory on hand or production capacity to meet customer demand while capacity is being shifted among facilities;
there is no decrease in product quality as a result of shifting capacity; adequate raw material and other service
providers are available to meet the needs at the new production locations; equipment can be successfully removed,
transported and re-installed; and adequate supervisory, production and support personnel are available to
accommodate the shifted production. In the event that manufacturing realignment initiatives are not successfully
implemented, we could experience lost future sales and increased operating costs as well as customer relations
problems, which could have a material adverse effect on our business, financial condition, and results of operations.
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We may experience significant variability in our quarterly or annual effective income tax rate.
We have a large and complex tax profile in various jurisdictions. Variability in the mix and profitability of domestic
and international activities, repatriation of earnings from our foreign subsidiary in Hungary, changes in tax laws,
identification and resolution of various tax uncertainties, and the inability to use net operating losses and other carry
forwards included in deferred tax assets, among other matters, may significantly impact our effective income tax rate
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We may experience significant variability in our quarterly or annual effective income tax rate.
We have a large and complex tax profile in various jurisdictions. Variability in the mix and profitability of domestic
and international activities, repatriation of earnings from our foreign subsidiary in Hungary, changes in tax laws,
identification and resolution of various tax uncertainties, and the inability to use net operating losses and other carry
forwards included in deferred tax assets, among other matters, may significantly impact our effective income tax rate
in the future. A significant increase in our quarterly or annual effective income tax rate could have a material adverse
impact on our results of operations.
There may be certain environmental and geological liabilities associated with our real estate, including our MIM
manufacturing facility in Colorado.
Certain of our subsidiaries own real property at our Colorado facilities. However, our Colorado subsidiaries do not
own the mineral rights related to this property as these rights were sold prior to our ownership. In the past, the
property has been used for coal, oil, and natural gas extraction. Oil and natural gas extraction is ongoing. As the
owner of the real estate, our Colorado subsidiaries and our Company could be strictly liable, jointly and severally,
under CERCLA with the mineral rights owner and production well operators for any government mandated
remediation of pollution related to the oil and gas production that could have a material adverse effect on our
business, notwithstanding that our Colorado subsidiaries did not cause or contribute to the contamination. Coal
extraction ceased on the property in 1947, and the mining entities are no longer in business. Consequently, our
Colorado subsidiaries and our Company could be strictly liable for government mandated remediation of acid mine
seeps or other pollution related to coal mining. As such liabilities are not insured, the payment of such remediation
costs could result in an adverse effect on our business or reduced asset value and a reduction in available funds for
other corporate purposes.
The Colorado Geological Survey has concluded that there may be a risk of ground subsidence due to the former
mining operations on a small portion of our Colorado property where our principal facilities are located. In the event
of a subsidence event, certain of our buildings, equipment and inventory which are material to our business could be
damaged or rendered unusable. A subsidence event could also result in death, serious bodily harm or injury to our
employees and other persons in the vicinity, as well as materially harm our facilities. In addition, our Colorado
subsidiaries and our Company could be liable for possible collateral damage or harm, such as possible release of any
hazardous waste into the environment. As such, liabilities are not insured, the payment of any personal injury
damages and facility remediation and equipment replacement costs, as well as lost revenues attributable to
interruption of our ability to conduct business, could result in a material adverse effect on our business or reduced
asset value and reduction in funds available for other corporate purposes.
Semi-volatile organic compounds and chlorinated solvents are present in the soil and groundwater at the facility of
GF&F (although such contamination was caused off-site, and not by GF&F). GF&F has an indemnity from its
landlord covering environmental liabilities pre-dating GF&F’s use of the facility. GF&F does not believe that it has
any liability related to the facility, however, in the event of a government-mandated remediation, GF&F and our
Company could become jointly and severally strictly liable as an operator of the facility under CERCLA for the
costs. As such liabilities are not insured, if for any reason the indemnity covering GF&F by its landlord is not
enforceable, the non-indemnified and/or unreimbursed costs of remediation could result in an adverse effect on our
business or reduced asset value and reduction in funds available for other corporate purposes.
Political instability in international markets and interruptions in timely and cost-efficient delivery of raw materials
from our overseas suppliers could have a negative effect on our Company.
Significant amounts of raw material purchases by the Company are made from overseas suppliers located in
Germany, South Korea, United Kingdom, and Japan. Consequently, we may encounter risks associated with these
countries and regions. Such risks include political instability, changes in legal regulations relating to trade, export
and employment, as well as deterioration in underlying economic conditions.
In particular, domestic policy changes in our overseas suppliers’ countries could negatively impact pricing of
components purchased from manufacturers in those countries, and any increase in the prices we pay for raw materials
could have a negative impact on our margins. Products purchased from our overseas suppliers may also be dependent
upon vessel shipping schedules and port availability. In addition, certain of our overseas suppliers may currently
operate near capacity, resulting in some of the raw materials we source from them being subject to limitations and
there could be
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restrictions placed on the amount of our orders or timing of deliveries of such materials to us. An inability to secure
the raw materials used in the manufacturing of our products or to transport such raw materials in both a cost-effective
and timely manner could have a material adverse effect on our operations.
Risks associated with overseas suppliers will also apply to our subsidiary AFT-Hungary, which conducts its
manufacturing in Hungary. The AFT-Hungary business is susceptible to the political and legal climate in Hungary
and Europe in general. Any instability in those areas could directly and adversely impact the business prospects of
the AFT-Hungary business.
Labor unrest could have a material adverse effect on our business, results of operations and financial condition.
While none of our U.S. employees are represented by unions, substantially all of our international employees are
members of unions or subject to workers’ councils or similar statutory arrangements. In addition, many of our direct
and indirect customers and vendors have unionized work forces. Strikes, work stoppages, or slowdowns experienced
by these customers or vendors, contract manufacturers or their other suppliers could result in
slowdowns. Organizations responsible for shipping our products may also be impacted by strikes. Any interruption
in the delivery of our products could reduce demand for our products and could have a material adverse effect on us.
In general, we consider our labor relations with our employees to be in good standing. However, in the future, we
may be subject to labor unrest. The inability to reach a new agreement could delay or disrupt our operations in the
affected regions, including the acquisition of raw materials and components, the manufacture, sales, and distribution
of products and the provision of services. Occurrences of strikes, work stoppages, or lock-outs at our facilities or at
the facilities of our vendors or customers could have a material adverse effect on our business, financial condition,
and results of operations.
Our future research and development projects may not be successful.
The successful development of our future products can be affected by many factors. Products that appear to be
promising at their early phases of research and development may fail to be commercialized for various reasons,
including possible failure to obtain any required regulatory approvals. There is no assurance that any of our future
research and development projects will be successful or completed within the anticipated time frame or budget or that
we will receive the necessary approvals from relevant authorities for the production of these newly developed
products, or that these newly developed products will achieve commercial success. Even if such products can be
successfully commercialized, they may not achieve the level of market acceptance that we expect.
We have incurred, and will continue to incur, increased costs as a result of operating as a publicly traded
company, and our management devotes substantial time to compliance initiatives.
As a publicly traded company, we have incurred, and will continue to incur, additional legal, accounting and other
expenses that we did not previously incur prior to becoming a publicly traded company. In addition, the Sarbanes-
Oxley Act of 2002 (“Sarbanes-Oxley Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act, and
the rules of the SEC and The NASDAQ Capital Market, impose various requirements on public companies. Our
management and other personnel devote a substantial amount of time to these compliance initiatives as well as
investor relations. Moreover, these rules and regulations increase our legal and financial compliance costs and make
some activities more time-consuming and costly. For example, these rules and regulations make it more difficult and
more expensive for us to obtain director and officer liability insurance, and we have incurred additional costs to
maintain such coverage. Furthermore, if we are not able to comply with certain requirements of the Sarbanes-Oxley
Act in a timely manner, the market price of our common stock could decline and we could be subject to potential
delisting by NASDAQ and review by such exchange, the SEC, or other regulatory authorities, which would require
the expenditure by us of additional financial and management resources. As a result, our stockholders could lose
confidence in our financial reporting, which would harm our business and the market price of our common stock. If
we fail to maintain adequate internal controls or fail to implement required new or improved controls, as such control
standards are modified, supplemented, or amended from time to time, we may not be able to assert that we can
conclude on an ongoing basis that we have effective internal controls over financial reporting. Effective internal
controls are necessary for us to produce reliable financial reports. If we cannot produce reliable financial reports, our
business and operating results could be harmed, investors could lose confidence in our reported financial information,
and there could be a material adverse effect on our stock price.
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Increases in the prices of raw materials would have an adverse effect on our profitability.
Our profitability may be materially affected by changes in the market price and availability of certain raw materials,
most of which are linked to the commodity markets. The principal raw materials we purchase may become very
expensive. Prices for copper, steel, aluminum, and certain polymers, derived from oil and natural gas, have
experienced significant volatility as a result of changes in the levels of global demand, supply disruptions, and other
factors. As a result, we have adjusted our prices for certain products and may have to adjust prices again in the
future. Delays in implementing price increases or a failure to achieve market acceptance of price increases has in the
past and could in the future have a material adverse impact on our results of operations. Any significant increase in
raw material prices could have a significant adverse effect on our businesses. In particular, metal powders, especially
nickel and chrome, are subject to volatile pricing on world commodity markets. Significant increases in prices of
metal powders may negatively impact our MIM companies’ profitability if those increases cannot be passed along to
customers. Decisions made by major mining companies as to increasing or reducing capacities for mining and
refinement of these metals could also significantly affect supplies. In addition, pricing and availability of steel and
steel scrap in the world market has a large impact on pricing of these products and, thus, impacts both our metal
stamping and flange and fittings businesses. Our margins may be adversely subject to price increases by our
suppliers that we may not be able to pass along to customers because of competitive decisions by our larger
competitors. There is no assurance that we will be able to obtain reasonably priced supply sources in the future.
We are dependent on a limited number of key suppliers for certain raw materials and components.
For certain of our raw material and component purchases, including certain polymers, copper rod, copper and
aluminum tapes, fine aluminum wire, steel wire, optical fiber, circuit boards, and other components, we are dependent
on a limited number of key suppliers. We have not to date experienced any serious disruptions in deliveries of raw
materials from our key suppliers or been unable to obtain materials from alternate suppliers at comparable prices;
however, there is a risk that such disruptions could occur in the future at any time and have a material adverse effect
on our business. While we rely upon long-term relationships, we generally do not enter into long-term contracts with
our key suppliers. The timely procurement of necessary raw materials is critical to each of our operations. In
addition, some raw materials are available only from certain suppliers. Consequently, poor supply capacity amid
tight demand for these materials, as well as natural disasters or accidents, or other events that negatively impact our
suppliers, could adversely affect their timely procurement. Our key suppliers have in the past and could in the future
experience production, operational or financial difficulties, or there may be global shortages of the raw materials or
components we use, and our inability to find sources of supply on reasonable terms could have a material adverse
effect on our ability to manufacture products in a cost-effective way.
A significant uninsured loss or a loss in excess of our insurance coverage could have a material adverse effect on
our results of operations and financial condition.
We maintain insurance covering our normal business operations, including property and casualty protection that we
believe is adequate. We do not generally carry insurance covering wars, acts of terrorism, earthquakes, or other
similar catastrophic events. We may not be able to obtain adequate insurance coverage on financially reasonable
terms in the future. A significant uninsured loss or a loss in excess of our insurance coverage could have a material
adverse effect on our results of operations and financial condition. In addition, the financial health of our insurers
may deteriorate which could result in non-payment of our claims.
The overall global manufacturing industry, and certain of its sectors in particular, tend to be cyclical and/or
seasonal. A downturn or weakness in any particular sector, or in overall economic activity, could have a material
adverse effect on our financial condition, and operating results.
Historically, the global manufacturing industry has been subject to cyclical fluctuations. These fluctuations, which
have affected different sectors of the market at different times and to different degrees, can result from sector-specific
dynamics, such as changes in technology, government regulation, and end-consumer preference, as well as from
changes in general economic conditions. The Company derives a significant portion of its revenues from the
automotive and firearm sectors of the manufacturing industry. Both sectors have experienced significant volatility in
recent years. For example, the U.S. firearm sector saw substantial growth after the financial crisis and the election of
President Obama. Expectations of stricter gun-control legislation also fueled growth. During the first half of our
2015 fiscal year, however,
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consumer demand decreased significantly, resulting in reduced production levels by our firearm customers and a
material decrease in orders by these customers for our products. Cyclical fluctuations in other business sectors in
which we operate, such as the automotive sector, which has also seen significant volatility, could also materially
adversely affect our financial condition, and results of operations. In addition, seasonality, including the variability of
shipments under large contracts, customers’ seasonal orders and variations in product mix and in profitability of
individual orders, affects many aspects of our business and negative seasonal factors could have a material adverse
effect on our financial condition, and results of operations for the entire year. Our quarterly results of operations also
may fluctuate based upon other factors, including production life cycles and product maturity.
Significant movements in foreign currency exchange rates may adversely affect our financial results.
Our operating results and financial position could be affected by fluctuations in foreign currency exchange
markets. Significant fluctuations in the exchange rate may adversely impact the values of foreign currency-
denominated product sales, materials costs, and production costs in factories overseas. In addition, conversion of
foreign currency-denominated assets and liabilities, and the foreign currency-denominated financial statements of
overseas subsidiaries into U.S. dollar for disclosure may also affect our companies’ assets and liabilities, as well as
earnings and expenses. In particular, our AFT operations in Hungary could be subject to liabilities and obligations
that must be paid in the Hungarian currency of Forints. The value of the forint has been subject to substantial
volatility against the U.S. dollar over the past several years. If the forint increases in value against the dollar, the
costs of our prospective Hungarian operations may increase and adversely affect the anticipated results expected to be
derived from the Hungarian business. In addition, increases and/or decreases in value of other currencies on which
we have predicated our business model may also adversely affect our results of operations.
We may experience problems moving funds out of the countries in which the funds were earned and difficulties in
collecting accounts receivable in foreign countries where the usual accounts receivable payment cycle is longer. We
may hedge certain currency transactions which might protect us against certain fluctuations in currency value, but
such actions might also correspondingly increase our costs of doing business which could adversely affect our
competiveness. There can be no assurance that our risk management strategies will be effective.
We are dependent on the retention of key executives and certain senior operating personnel.
Our success is dependent upon the retention of our current experienced executives and certain senior operating
personnel. We currently have a small team of senior executives and the loss of our key executives or certain senior
operating personnel could have a material adverse effect on our business.
Any impairment in the value of our intangible assets, including goodwill, could negatively affect our operating
results and total capitalization.
Our total assets as of June 30, 2016 reflect net intangible assets of $23.1 million and goodwill of $14.8 million. The
goodwill results from our acquisitions, representing the excess of cost over the fair value of the net assets we have
acquired. If future operating performance at one or more of our business units were to fall significantly below current
levels, if competing or alternative technologies emerge, or if market conditions for businesses acquired declines, we
could incur, under current applicable accounting rules, a non-cash charge to operating earnings for impairment of our
goodwill or intangible assets. Goodwill and indefinite-lived intangible assets are reviewed for impairment at least
annually in June of each fiscal year, or more frequently if a triggering event occurs between impairment testing
dates. Any determination requiring the write-off of a significant portion of goodwill or unamortized intangible assets
could adversely affect our business, financial condition, results of operations and total capitalization, the effect of
which could be material.
We are subject to the laws and regulations of the United States and many foreign countries.
We are subject to a variety of laws regarding our international operations, including the U.S. Foreign Corrupt
Practices Act and regulations issued by U.S. Customs and Border Protection, the U.S. Bureau of Industry and
Security, and the regulations of various foreign governmental agencies. We cannot predict the nature, scope or effect
of future regulatory requirements to which our international sales and manufacturing operations might be subject or
the manner in which existing laws might be administered or interpreted. Future regulations could limit the countries
in which we manufacture or sell some of our products, and increase the cost of obtaining products from foreign
sources. In addition,
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actual or alleged violations of these laws could result in enforcement actions and financial penalties that could result
in substantial costs. The occurrence of any of the foregoing could have a material and adverse effect on our business,
financial condition, and results of operations.
Risks Related to Our Indebtedness
Leverage and debt service obligations may adversely affect us.
As of June 30, 2016, we had approximately $53.8 million of indebtedness on a consolidated basis. This level of
indebtedness increases the possibility that we may be unable to generate cash sufficient to pay the principal of,
interest on, or other amounts due with respect to our indebtedness. Our senior credit facility bears interest at floating
rates related to LIBOR, Eurodollar Rates, Eurocurrency Rates, Federal Funds Rate, and Prime Rates. As a result, our
interest payment obligations on such indebtedness will increase if such interest rates increase. Our leverage could
have negative consequences on our financial condition, and results of operations, including:
·
·
·
·
·
·
·
impairing our ability to meet one or more of the financial ratios contained in our senior and subordinated
credit facilities or to generate cash sufficient to pay interest or principal, including periodic principal
payments;
increasing our vulnerability to general adverse economic and industry conditions;
limiting our ability to obtain additional debt or equity financing;
requiring the dedication of a portion of our cash flow from operations to service our debt, thereby reducing
the amount of our cash flow available for other purposes, including capital expenditures;
requiring us to sell debt or equity securities or to sell some of our core assets, possibly on unfavorable terms,
to meet payment obligations;
limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we
compete; and
placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may
have better access to capital resources.
The credit agreements governing our senior and subordinated credit facilities require us to comply with a number of
customary financial and other covenants, such as maintaining debt service coverage and leverage ratios in certain
situations and maintaining insurance coverage. These covenants may limit our flexibility in our operations, and
breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness even
if we had satisfied our payment obligations. If we were to default on the credit agreements or other debt instruments,
our financial condition would be adversely affected.
If we default on any of the Financial Ratio Covenants required by our Credit Facilities, all of our outstanding
loans would become due and payable, which would be materially adverse to our Company.
The terms and conditions of the respective agreements governing the Amended & Restated Credit Agreement and the
Subordinated Loan Agreement (together, our “Credit Facilities”) each contain covenants requiring the Company to
maintain certain financial ratios. Non-compliance by the Company with any of the financial ratio covenants would
constitute events of default under both of the Credit Facilities pursuant to cross-default provisions and result in
acceleration of payment obligations for all outstanding principal and interest for loans made under both of the Credit
Facilities, unless such defaults were waived or subject to forbearance by the respective creditors.
Despite current indebtedness levels and restrictive covenants, we and our subsidiaries may incur additional
indebtedness or we may pay dividends in the future. This could further exacerbate the risks associated with our
substantial financial leverage.
We and our subsidiaries may incur significant additional indebtedness in the future under the agreements governing
our indebtedness. Although the credit agreements governing our credit facilities contain restrictions on the incurrence
of
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additional indebtedness, these restrictions are subject to a number of thresholds, qualifications and exceptions, and the
additional indebtedness incurred in compliance with these restrictions could be material. Additionally, these
restrictions also will not prevent us from incurring obligations that, although preferential to our common stock in
terms of payment, may not constitute indebtedness.
In addition, if new debt is added to our Company’s and/or our subsidiaries’ debt levels, the related risks that we now
face as a result of our leverage would intensify.
To service our indebtedness, we will require significant amounts of cash, and our ability to generate cash depends
on many factors beyond our control.
Our operations are conducted through our subsidiaries. Our ability to make cash payments on and to refinance our
indebtedness, to fund planned capital expenditures and to meet other cash requirements will depend on our financial
condition and operating performance of our subsidiaries, which are subject to prevailing economic and competitive
conditions and to financial, business, legislative, regulatory, and other factors beyond our control. We might not be
able to maintain a level of cash flow from operating activities sufficient to permit us to pay the principal, premium, if
any, and interest on our indebtedness.
Our business may not generate sufficient cash flow from operations and future borrowings may not be available under
our credit facilities in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity
needs. In such circumstances, we may need to refinance all or a portion of our indebtedness on or before
maturity. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all. If we
cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity or
reducing or delaying capital expenditures, strategic acquisitions, investments, and alliances. Such actions, if
necessary, may not be effected on commercially reasonable terms or at all. Our indebtedness will restrict our ability
to sell assets and use the proceeds from such sales.
If we are unable to generate sufficient cash flow or are otherwise unable to obtain funds necessary to meet required
payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the
various covenants in the instruments governing our indebtedness, we could be in default under the terms of the
agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to
declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, cease
making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy
or liquidation. If our operating performance declines, we may in the future need to obtain waivers from the required
lenders under our credit facilities to avoid being in default. If we breach our covenants under our credit facilities and
seek waivers, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default
under our credit facilities, and the lenders could exercise their rights, as described above, and we could be forced into
bankruptcy or liquidation.
We are dependent upon our lenders for financing to execute our business strategy and meet our liquidity needs. If
our lenders are unable to fund borrowings under their credit commitments or we are unable to borrow, it could
negatively impact our business.
During periods of volatile credit markets, there is a risk that any lenders, even those with strong balance sheets and
sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit
commitments, including, but not limited to, extending credit up to the maximum permitted by our credit
agreement. If our lenders are unable to fund borrowings or we are unable to borrow (such as having insufficient
capacity under our borrowing base), it could be difficult in such environments to obtain sufficient liquidity to meet
our operational needs.
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Our ability to obtain additional capital on commercially reasonable terms may be limited.
Although we believe our cash and cash equivalents as well as cash we expect to generate from operations and
availability under our credit facilities provide adequate resources to fund ongoing operating requirements, we may
need to seek additional financing to compete effectively. If we are unable to obtain capital on commercially
reasonable terms, it could:
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Our ability to obtain additional capital on commercially reasonable terms may be limited.
Although we believe our cash and cash equivalents as well as cash we expect to generate from operations and
availability under our credit facilities provide adequate resources to fund ongoing operating requirements, we may
need to seek additional financing to compete effectively. If we are unable to obtain capital on commercially
reasonable terms, it could:
·
·
·
·
reduce funds available to us for purposes such as working capital, capital expenditures, research and
development, strategic acquisitions, and other general corporate purposes;
restrict our ability to introduce new products or exploit business opportunities;
increase our vulnerability to economic downturns and competitive pressures in the markets in which we
operate; and
place us at a competitive disadvantage.
Difficult and volatile conditions in the capital, credit, and commodities markets, and in the overall economy, could
have a material adverse effect on our financial position, results of operations, and cash flows.
A worsening of global economic conditions, including concerns about sovereign debt and significant volatility in the
capital, credit, and commodities markets could have a material adverse effect on our financial position, results of
operations, and cash flows. Difficult conditions in these markets and the overall economy affect our business in a
number of ways. For example:
·
·
·
in the event of volatility in commodity prices, we may encounter difficulty in achieving sustained market
acceptance of past or future price increases, which could have a material adverse effect on our financial
position, results of operations and cash flows;
under difficult market conditions there can be no assurance that borrowings under our credit facilities would
be available or sufficient, and in such a case, we may not be able to successfully obtain additional financing
on reasonable terms, or at all;
in order to respond to market conditions, we may need to seek waivers from various provisions in our credit
facilities. There can be no assurance that we can obtain such waivers at a reasonable cost, if at all;
· market conditions could cause the counterparties to the derivative financial instruments we may use to hedge
our exposure to interest rate, commodity, or currency fluctuations to experience financial difficulties and, as
a result, our efforts to hedge these exposures could prove unsuccessful and, furthermore, our ability to
engage in additional hedging activities may decrease or become more costly; and
· market conditions could result in our key customers experiencing financial difficulties and/or electing to
limit spending, which in turn could result in decreased sales and earnings for us.
Risks Related to Ownership of our Common Stock
One holder of our common stock exerts significant influence over our Company and may make decisions with
which other stockholders may disagree that could reduce the value of our stock.
Everest Hill Group owns 9,068,122 shares, or 48.2%, of our total 18,795,509 outstanding shares as of June 30,
2016. As a result, Everest Hill Group has the ability to exert significant influence over our business and may make
decisions with which other stockholders may disagree, including, among other things, the appointment of officers and
directors, changes in our business plan, delaying, discouraging or preventing a change of control of our Company or a
potential merger, consolidation, tender offer, takeover or other business combination.
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The price of our Common Stock may fluctuate significantly, and investors could lose all or part of their
investment.
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The price of our Common Stock may fluctuate significantly, and investors could lose all or part of their
investment.
The market price of our Common Stock has been highly volatile. During the twelve months ended June 30, 2016, the
closing price of our common stock fluctuated significantly from a high of $5.41 to a low of $1.05 per share. The
market price of our common stock may continue to be volatile in the future. Volatility in the market price of our
common stock may prevent investors from being able to sell their common stock at or above the price investors paid
for such common stock. The market price of our common stock could fluctuate significantly for various reasons,
including:
·
·
·
·
·
·
·
·
·
our operating and financial performance and prospects;
our quarterly or annual earnings or those of other companies in our industry;
the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
changes in, or failure to meet, earnings estimates or recommendations by research analysts who track our
common stock or the stock of other companies in our industry;
the failure of research analysts to cover our common stock;
strategic actions by us, our customers or our competitors, such as acquisitions or restructurings;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
changes in accounting standards, policies, guidance, interpretations, or principles;
the impact on our profitability temporarily caused by the time lag between when we experience cost
increases until these increases flow through cost of sales because of our method of accounting for inventory,
or the impact from our inability to pass on such price increases to our customers;
· material litigations or government investigations;
·
·
·
·
·
·
changes in general conditions in the U.S. and global economies or financial markets, including those
resulting from war, incidents of terrorism, or responses to such events;
changes in key personnel;
sales of common stock by us, Everest Hill Group, or members of our management team;
the implementation of our employee stock purchase plan or the granting or exercise of employee stock
options;
volume of trading in our common stock; and
the realization of any risks described under this “Risk Factors” section.
These and other factors may cause the market price and demand for our common stock to fluctuate substantially,
which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively
affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile,
holders of that stock have sometimes instituted securities class action litigation against the company that issued the
stock. If any of our stockholders were to bring a class action lawsuit against us, we could incur substantial costs
defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business.
In addition, volatility or lack of performance in the trading price of our common stock may also affect our ability to
attract and retain qualified personnel. If we are unable to retain our employees, our business, financial condition, and
results of operations would be harmed.
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We do not currently intend to pay dividends on our common stock and, consequently, the ability to achieve a
return on your investment in our common stock will depend on appreciation in the price of our common stock. If
our common stock does not appreciate in value, investors could suffer losses in their investment in our common
stock.
We do not currently expect to pay cash dividends on our common stock. Any future dividend payments are within
the absolute discretion of our Board of Directors and will depend on, among other things, our results of operations,
working capital requirements, capital expenditure requirements, financial condition, contractual restrictions, business
opportunities, potential acquisition opportunities, anticipated cash needs, provisions of applicable law, and other
factors that our Board of Directors may deem relevant. We may not generate sufficient cash from operations in the
future to pay dividends on our common stock. As a result, the success of any investment in our common stock will
depend on future appreciation in its value. The price of our common stock may not appreciate in value or even
maintain the price at which the shares were purchased. If our common stock does not appreciate in value, investors
could suffer losses in their investment in our common stock.
Investors may experience dilution of their ownership interests due to the future issuance of additional shares of
our common stock which could be materially adverse to the value of our common stock.
As of the end of the period covered by this Report, we have 18,795,509 shares of our common stock outstanding. We
are authorized to issue up to 250,000,000 shares of Common Stock and 2,000,000 shares of preferred stock. We, or
our shareholders, including Everest Hill Group, may sell additional shares of common stock in subsequent offerings
or we may issue shares of our common stock as consideration in the future acquisitions. Our Board of Directors may
authorize the issuance of additional common or preferred shares under applicable state law without shareholder
approval. We may also issue additional shares of our common stock or other securities that are convertible into or
exercisable for common stock in connection with the hiring of personnel, future acquisitions, future private
placements of our securities for capital raising purposes or for other business purposes. If we need to raise additional
capital to expand or continue operations, it may be necessary for us to issue additional equity or convertible debt
securities. If we issue equity or convertible debt securities, the net tangible book value per share may decrease, the
percentage ownership of our current stockholders may be diluted and such equity securities may have rights,
preferences, or privileges senior or more advantageous than those of our common stockholders. We cannot predict
the size of future issuances of our common stock or the effect, if any, that future issuances and sales of our common
stock will have on the market price of our common stock. Sales of substantial amounts of our common stock, or the
perception that such sales could occur, may adversely affect prevailing market prices for our common stock.
We may issue additional common shares or other securities to finance our growth.
We may finance the development of our products and services or generate additional working capital through
additional equity financing. Therefore, subject to the rules of NASDAQ, we may issue additional shares of our
common stock and other equity securities of equal or senior rank, with or without stockholder approval, in a number
of circumstances from time to time. The issuance by us of shares of our common stock or other equity securities of
equal or senior rank will have the following effects:
·
·
·
the proportionate ownership interest in us held by our existing stockholders will decrease;
the relative voting strength of each previously outstanding share of common stock may be diminished; and
the market price of our common stock may decline.
If our shares become subject to the penny stock rules, it would become more difficult to trade our shares.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny
stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on
certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided
that current price and volume information with respect to transactions in such securities is provided by the exchange
or system. If we do not retain a listing on NASDAQ and if the price of our shares of common stock is less than
$5.00, our common stock will be deemed a penny stock. The penny stock rules require a broker-dealer, before a
transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure
document containing specified information. In addition, the penny stock rules require that before effecting any
transaction in a penny stock not otherwise exempt
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from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable
investment for the purchaser and receive: (i) the purchaser’s written acknowledgment of the receipt of a risk
disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy
of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity
in the secondary market for our common stock, and therefore stockholders may have difficulty selling their shares.
We will be required to meet NASDAQ’s continued listing requirements and other NASDAQ rules, or we may risk
delisting. Delisting could negatively affect the price of our common stock, which could make it more difficult for
us to sell securities in a future financing or for purchasers to sell their common stock.
We are required to meet the continued listing requirements of NASDAQ and other NASDAQ rules, including those
regarding minimum stockholders’ equity, minimum share price, and certain other corporate governance
requirements. In particular, we are required to maintain a minimum bid price for our listed common stock of $1.00
per share. If we do not meet these continued listing requirements, our common stock could be delisted. Delisting
from NASDAQ would cause us to pursue eligibility for trading of these securities on other markets, exchanges, or
over-the-counter quotation systems. In such case, our stockholders’ ability to trade, or obtain quotations of the
market value of, our common stock would be severely limited because of lower trading volumes and transaction
delays. These factors could contribute to lower prices and larger spreads in the bid and ask prices of these
securities. There can be no assurance that the offered securities, if delisted from NASDAQ in the future, would be
listed on a national securities exchange, a national quotation service, the over-the-counter markets or the pink
sheets. Delisting from NASDAQ, or even the issuance of a notice of potential delisting, would also result in negative
publicity, make it more difficult for us to raise additional capital, adversely affect the market liquidity of the offered
securities, decrease securities analysts’ coverage of us or diminish investor, supplier, and employee confidence.
There can be no assurance that we will ever provide liquidity to our investors through a sale of our Company.
While acquisitions of companies like ours are not uncommon, potential investors are cautioned that no assurances can
be given that any form of merger, combination, or sale of our Company will take place, or that any merger,
combination, or sale, even if consummated, would provide liquidity or a profit for our investors. Investors should not
purchase common stock in our Company with the expectation that we will be able to sell the business in order to
provide liquidity or a profit for our investors.
Reports published by analysts, including projections in those reports that exceed our actual results, could
adversely affect our common stock price and trading volume.
We currently expect that securities research analysts will publish their own periodic projections for our
business. These projections may vary widely and may not accurately predict the results we actually achieve. Our
stock price may decline if our actual results do not match the projections of these securities research analysts.
Similarly, if one or more of the analysts who write reports on us downgrades our stock or publishes inaccurate or
unfavorable research about our business, our stock price could decline. If one or more of these analysts ceases
coverage of us or fails to publish reports on us regularly, our stock price or trading volume could decline. While we
expect continued research analyst coverage, if no analysts continue coverage of us, the trading price for our stock and
the trading volume could be adversely affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
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ITEM 2. PROPERTIES
Our principal offices are located at the QMT and FloMet headquarters at 810 Flightline Blvd. in Deland, Florida
32724 where we lease land and own a 40,000 square foot facility that houses office space as well as engineering,
tooling, mixing, molding, debinding, sintering, secondary operations and quality assurance all under one roof,
offering a fully-integrated solution for complex small metal component needs.
AFT’s U.S. owned facility, located in Firestone, Colorado, consists of approximately 105,000 square feet under roof
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ITEM 2. PROPERTIES
Our principal offices are located at the QMT and FloMet headquarters at 810 Flightline Blvd. in Deland, Florida
32724 where we lease land and own a 40,000 square foot facility that houses office space as well as engineering,
tooling, mixing, molding, debinding, sintering, secondary operations and quality assurance all under one roof,
offering a fully-integrated solution for complex small metal component needs.
AFT’s U.S. owned facility, located in Firestone, Colorado, consists of approximately 105,000 square feet under roof
and is equipped with state of the art machinery for the manufacture of MIM components. Highly sophisticated
automation and controls are utilized, enabling high-volume product flow with minimal interruption. Office and
certain administrative functions are also located at this facility.
AFT-Hungary owned facility, located in Retsag, Hungary consists of a total of 70,000 square feet under roof and is
equipped similar to the AFT and FloMet facilities.
Tekna Seal leases approximately 12,000 square feet of space located in Minneapolis, Minnesota, where office space
and equipment used in the hermetic and other sealing production processes is located.
General Flange and Forge leases a 24,000 square feet of space in Huntington Valley, Pennsylvania, where office and
warehouse space is located.
ATC leases approximately 34,000 square feet of space located in Longmont, Colorado, where office space and
equipment principally used in plastic injection molding and specialized tool making is located.
Kecy owns approximately 84,000 square feet of space located in Hudson, Michigan, and leases approximately 94,000
square feet of space in Wauseon, Ohio. Office space and equipment principally used in metal stamping applications
are located at these locations.
Thixoforming owns approximately 23,000 square feet of space located in Longmont, Colorado, where office space
and equipment principally used in magnesium injection molding is located.
The leases expire at various times subject to certain renewal options. We believe that our facilities are well-
maintained and are sufficient to meet our current and projected needs.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are a party to various litigation matters incidental to the conduct of our business. We are not
presently a party to any legal proceedings the resolution of which, we believe, would have a material adverse effect
on our business, operating results, financial condition, or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
None
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PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERS
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
On April 10, 2007, our common stock began trading on the NASDAQ Capital Market Exchange under the symbol
ARCW. Because trading in our shares is limited, prices can be highly volatile.
The table below represents the high and low sales prices of our common stock on the NASDAQ during each of the
quarters in the past two fiscal years.
Common Stock
High
Low
Fiscal Year Ended June 30, 2016:
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PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERS
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
On April 10, 2007, our common stock began trading on the NASDAQ Capital Market Exchange under the symbol
ARCW. Because trading in our shares is limited, prices can be highly volatile.
The table below represents the high and low sales prices of our common stock on the NASDAQ during each of the
quarters in the past two fiscal years.
Common Stock
Fiscal Year Ended June 30, 2016:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended June 30, 2015:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders of Record
High
Low
$ 5.41 $ 1.65
1.51
1.05
1.95
2.35
3.50
2.86
$ 25.00 $ 12.50
7.91
5.15
5.00
18.22
10.40
8.44
On September 1, 2016, there were 147 stockholders of record of our common stock and the closing price of our
common stock was $2.40 per share as reported on the NASDAQ Capital Market Exchange. Many shares of our
common stock are held in street or nominee name by brokers and other institutions on behalf of stockholders;
therefore, we are unable to accurately estimate the total number of stockholders represented by these record holders.
Dividend Policy
We have not declared or paid any cash dividends on our common stock since our formation and do not presently
anticipate paying any cash dividends on our common stock in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
Securities authorized for issuance under our equity compensation plans as of June 30, 2016 are as follows:
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation plans
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
759,050
-
759,050
$1.51
-
$1.51
940,950
-
940,950 (1)
(1)
Includes 750,000 shares available for issuance under the 2015 Employee Stock Purchase Plan, adopted in
January 2015. The purchase period began on August 1, 2016; therefore, no shares have been purchased as
of June 30, 2016.
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Recent Sales of Unregistered Securities and Use of Proceeds
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The Company’s Board of Directors authorized the repurchase of up to 250,000 shares of the Company’s common
stock on October 9, 2013. The stock repurchase program does not obligate ARC to acquire any particular amount of
stock. This authorization has no expiration date and may be limited or terminated by the Board of Directors at any
time without notice. Any repurchased shares will be held as treasury stock and will be available for general corporate
purposes. There were no repurchases of the Company’s shares during the year ended June 30, 2016. As of June 30,
2016, the Company was authorized to repurchase approximately 241,599 shares.
The balance of the information required by Item 201 of Regulation S-K is omitted in accordance with the regulatory
relief available to smaller reporting companies.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company, the Company is not required to provide information for this item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding our business and the results of our operations. It
should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere
in this Report. Certain statements made in our discussion may be forward looking. Forward-looking statements
involve risks and uncertainties and a number of factors could cause actual results or outcomes to differ materially
from our expectations. See “Cautionary Statement Concerning Forward-Looking Statements” at the beginning of this
Report for additional discussion of some of these risks and uncertainties. Unless the context requires otherwise, when
we refer to “we,” “us” and “our,” we are describing ARC Group Worldwide, Inc. and its subsidiaries on a
consolidated basis.
Overview
We are a global advanced manufacturing and 3D printing service provider focused on accelerating speed to market
for our customers. We utilize technology to improve automation in manufacturing through robotics, software and
process automation, as well as lean manufacturing to improve efficiency. We provide a holistic set of precision
manufacturing solutions, from design and prototyping through full run production. These solutions include metal
injection molding, plastic and metal 3D printing, metal stamping, plastic injection molding, clean room injection
molding, rapid tooling, thixomolding, antennas, hermetic seals, and flanges and forges.
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Results of Operations for the Fiscal Year ended June 30, 2016 compared to the Fiscal Year Ended June 30,
2015
The following table sets forth, for the periods indicated, certain statements of operations data expressed as a
percentage of net sales. The financial information and discussion below should be read in conjunction with the
consolidated financial statements and notes thereto included in Item 8, “Financial Statements and Supplementary
Data.” The data below, and discussion that follows, represents our results from operations.
Sales:
Precision Components Group
3DMT Group
June 30, 2016
June 30, 2015
Year Ended
Amount
(in
thousands)
Amount
(in
Percent of total
thousands) Percent of total
76,023
$
21,551
73.2% $
20.7%
87,163
17,479
77.5%
15.5%
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Results of Operations for the Fiscal Year ended June 30, 2016 compared to the Fiscal Year Ended June 30,
2015
The following table sets forth, for the periods indicated, certain statements of operations data expressed as a
percentage of net sales. The financial information and discussion below should be read in conjunction with the
consolidated financial statements and notes thereto included in Item 8, “Financial Statements and Supplementary
Data.” The data below, and discussion that follows, represents our results from operations.
June 30, 2016
June 30, 2015
Year Ended
Sales:
Precision Components Group
3DMT Group
Flanges and Fittings Group
Wireless Group
Total
Gross profit:
Precision Components Group
3DMT Group
Flanges and Fittings Group
Wireless Group
Total
Sales
Amount
(in
Percent of total
thousands) Percent of total
Amount
(in
thousands)
76,023
$
21,551
4,757
1,509
$ 103,840
73.2% $
20.7%
4.6%
1.5%
87,163
17,479
5,872
1,991
100.0% $ 112,505
$
$
15,328
3,172
1,278
385
20,163
76.0% $
15.7%
6.4%
1.9%
100.0% $
19,891
3,605
1,476
476
25,448
77.5%
15.5%
5.2%
1.8%
100.0%
78.2%
14.2%
5.7%
1.9%
100.0%
Sales during fiscal year 2016 totaled $103.8 million, representing a decrease of approximately $8.7 million, or 7.7%,
from $112.5 million in the prior year period. The change in sales by reportable segment was as follows:
·
·
·
Precision Components Group sales during fiscal year 2016 totaled $76.0 million, representing a decrease of
approximately $11.2 million, or 12.8%, from $87.2 million in the prior year period. The decrease in sales
was primarily due to lower MIM sales of $8.6 million and lower metal stamping sales of $3.8 million. MIM
sales decreased as a result of lower sales to our European automotive customers, as well as lower sales in the
U.S. primarily related to our medical, aerospace, and consumer products customers. Metal stamping sales
decreased primarily due to lower prices for steel and scrap. The financial impact of the decline in the Euro
relative to the U.S. dollar on our Hungarian operations was approximately $0.5 million.
3DMT Group sales during fiscal year 2016 totaled $21.6 million, representing an increase of approximately
$4.1 million, or 23.4%, from $17.5 million in the prior year period. This increase was primarily due to
higher plastic injection molding sales of $4.7 million, and higher 3D printing sales of $1.1 million, partially
offset by lower tooling sales of $1.6 million.
Flanges and Fittings Group sales during fiscal year 2016 were $4.8 million, representing a decrease of
approximately $1.1 million, or 18.6%, from $5.9 million in the prior year period. The decrease was
primarily due to lower sales to customers in the oil and gas industry and the related competitive impact.
· Wireless Group sales during fiscal year 2016 were $1.5 million, representing a decrease of approximately
$0.5 million, or 25.0%, from $2.0 million in the prior year period. The decrease in sales was primarily due
to increased competition in the frequency space and applications in which are products are used.
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Gross Profit
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Gross Profit
Gross profit is affected by a number of factors including product mix, cost of labor and raw materials, unit volumes,
pricing, competition, new products and services as a result of acquisitions and new customer programs, and capacity
utilization. In the case of acquisitions and new customer programs, profitability normally lags revenue growth due to
product start-up costs, lower manufacturing volumes in the start-up phase, operational inefficiencies, and under-
absorbed overhead. Gross margin can improve over time if manufacturing volumes increase, as our utilization rates
and overhead absorption improves. As a result of these various factors, our gross margin varies from period to
period.
Gross profit during fiscal year 2016 was $20.2 million, representing a decrease of approximately $5.2 million, or
20.5%, from $25.4 million in the prior year period. Gross margin in fiscal year 2016 decreased to 19.4%, compared
with 22.6% in the prior year period. The change in gross profit by reportable segment was as follows:
·
·
·
Precision Components Group gross profit during fiscal year 2016 was $15.3 million, representing a decrease
of approximately $4.6 million, or 23.1%, from $19.9 million in the prior year period. Gross margin in fiscal
year 2016 decreased to 20.1%, compared with 22.8% in the prior year period. The primary reasons for the
decreases in gross profit and gross margin were lower production volume and decreased factory utilization at
certain of our MIM facilities resulting in a decrease in gross profit of $3.1 million, as well as lower prices for
scrap steel at our metal stamping facilities resulting in a decrease in gross profit of $1.5 million.
3DMT Group gross profit during fiscal year 2016 was $3.2 million, representing a decrease of
approximately $0.4 million, or 11.1%, from $3.6 million in the prior year period. Gross margin in fiscal
year 2016 was 14.8%, compared with 20.6% in the prior year period. The primary reasons for the decrease
in gross profit were lower tooling sales and higher labor, material, and third party service provider costs.
Flanges and Fittings Group gross profit during fiscal year 2016 was $1.3 million, representing a decrease of
approximately $0.2 million, or 13.3%, from $1.5 million in the prior year period. Gross margin in fiscal
year 2016 was 26.9% compared with 25.1% in the prior year period. GF&F reduced its employee headcount
and streamlined operations to offset its decrease in sales.
· Wireless Group gross profit during fiscal year 2016 was $0.4 million, representing a decrease of $0.1
million, or 20.0%, from $0.5 million in the prior year period. Gross margin in fiscal year 2016 increased to
25.5%, compared with 23.9% in the prior year period. The increase in gross margin was primarily due to a
charge in the prior year for obsolete inventory.
Selling, General and Administrative Expenses
Selling, general and administrative expense, or SG&A, during fiscal year 2016 totaled $18.0 million, or 17.3% of
sales, compared with $19.2 million, or 17.0% of sales during the prior year period. The decrease in SG&A expense
during fiscal year 2016 of $1.2 million was primarily due to lower labor and labor related costs of $0.9 million and
lower professional fees of $0.4 million.
Other Income, Net
Other income, net for the years ended June 30, 2016 and 2015, totaled $0.2 million and $0.3 million, respectively,
primarily due to foreign currency transactions.
Interest Expense, Net
Interest expense, net during fiscal year 2016 was $4.5 million, compared to $4.8 million in the prior year period. The
decrease in expense was primarily due to a reduction in the principal outstanding under our Senior Credit Facility.
Income Tax Expense
Income tax expense was $81 thousand for the fiscal year ended June 30, 2016 as compared with expense of $1.5
million in the prior year period. The primary reasons for the decrease in tax expense was our net operating loss
position in fiscal year 2016 and our net operating income in fiscal year 2015. Our tax provision for each period
varied from our pretax
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income (loss) due to the existence of a deferred tax asset valuation allowance. This circumstance generally results in
a zero net tax provision since the income tax expense or benefit that would otherwise be recognized is offset by the
change to the valuation allowance. Our tax expense is also highly dependent upon our ability to carry back net
operating losses to recover taxes paid in prior years. Our fiscal year 2016 tax expense included the accrual of non-
cash tax expense of approximately $0.4 million in connection with the tax amortization of our indefinite-lived
intangible assets that were not available to offset existing deferred tax assets (termed a “naked credit”). In addition to
the “naked credit” expense, we recognized approximately $0.1 million of foreign tax expense. The tax benefit of the
offsetting U.S. tax credit was not recognized due to the increase in our valuation allowance. These expenses were
partially offset by a $0.4 million tax benefit related to the refund we expect to receive when we carry back the current
year net operating loss.
Liquidity and Capital Resources
As of June 30, 2016, we had cash and cash equivalents of $3.6 million. We anticipate our cash on hand and cash
flows from operations will be sufficient to finance our operations for the next twelve months. In order to provide
additional liquidity in the future and to help support our strategic goals, we have a senior secured revolving loan, with
a total borrowing capacity of $20.0 million. After consideration of $7.6 million of borrowings outstanding, our
remaining borrowing capacity was $12.4 million at June 30, 2016. Any additional borrowings under the senior
secured revolving loan are subject to compliance with the terms of our Amended and Restated Credit Agreement.
Cash held in financial institutions outside the United States totaled $1.6 million and $1.5 million as of June 30, 2016
2015, respectively. Our Hungarian subsidiary, where these funds are held, is taxed in a similar manner to our
domestic subsidiaries. Thus, we would not incur a material tax obligation should we decide to repatriate these funds.
Operating Activities
Cash flows provided by operating activities increased $1.4 million to $6.5 million for fiscal 2016 as compared to $5.1
million in fiscal 2015, primarily due to the following:
·
Increase in cash provided from changes in working capital items of $4.8 million, the largest of which was an
increase in accounts payable of $3.8 million;
· Decline in earnings of $2.2 million; and
· Decrease in deferred income taxes of $1.6 million.
Investing Activities
Cash flows used in investing activities decreased $0.7 million to $2.6 million for fiscal 2016 as compared to $3.3
million in fiscal 2015, primarily due to the following:
· Decrease in cash used to purchase property and equipment of $2.2 million, primarily due to the completion
of the expansion of our MIM production facilities in Colorado and entering into operating leases for certain
equipment needs, allowing us to conserve cash; and
Partially offset by proceeds received from the sale of equipment of $1.5 million in fiscal year 2015.
·
Financing Activities
Cash flows used in financing activities decreased $1.3 million to $5.0 million for fiscal 2016 as compared to $6.3
million in fiscal 2015, primarily due to the following:
·
Lower net payments on our long-term debt of $15.1 million, due primarily to cash received of $15.5 million
from a public offering of our common stock in fiscal 2015, the net proceeds of which were used to prepay a
portion of our senior secured term loan; and
· Decrease in payments on capital lease obligations of $1.7 million.
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Debt and Credit Arrangements
For a discussion of our long-term debt, see Note 7, Debt, to our consolidated financial statements in Part I, Item 8 to
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Debt and Credit Arrangements
For a discussion of our long-term debt, see Note 7, Debt, to our consolidated financial statements in Part I, Item 8 to
this Report incorporated herein by reference thereto.
The descriptions of the Amended & Restated Credit Agreement and the Subordinated Loan Agreement (together, our
“Credit Facilities”) do not purport to be complete and are subject to, and are qualified in their entirety by, the full text
of the respective documents.
Financial Ratio Covenants
The terms and conditions of the Credit Facilities require us to comply with a number of financial and other covenants,
such as maintaining debt service coverage and leverage ratios in certain situations and maintaining insurance
coverage. These covenants may limit our flexibility in our operations, and breaches of these covenants could result in
defaults under the instruments governing the applicable indebtedness even if we had satisfied our payment
obligations. If we were to default on the credit agreements or other debt instruments, our financial condition would
be adversely affected.
Non-compliance by us with any of the covenants would constitute events of default under both of the Credit Facilities
pursuant to cross-default provisions and could result in acceleration of payment obligations for all outstanding
principal and interest for loans made under both of the Credit Facilities, unless such defaults were waived or subject
to forbearance by the respective creditors.
Senior Credit Facility Financial Ratios. Our Senior Credit Facility contains financial ratio covenants, summarized
as follows:
Minimum Fixed Charge Coverage Ratio. We may not permit the Minimum Fixed Charge Coverage Ratio,
as of the last day of any fiscal quarter ending during any period set forth in the table below, to be less than
the ratio set forth opposite such period in the table below. The Fixed Charge Coverage Ratio is defined as
the ratio of (a) Consolidated EBITDA minus the unfinanced portion of capital expenditures minus expense
for taxes paid in cash (other than certain federal and state taxes excluded under the Citizens Fourth
Amendment); to (b) fixed charges, all calculated on a consolidated basis in accordance with accounting
principles generally accepted in the United States (“GAAP”).
Period
March 27, 2016 through September 24, 2016
September 25, 2016 through March 25, 2017
March 26, 2017 through September 23, 2017
September 24, 2017 through March 24, 2018
March 25, 2018 through September 29, 2018
September 30, 2018 and thereafter
Total Leverage Ratio
1.00:1.00
1.05:1.00
1.10:1.00
1.15:1.00
1.20:1.00
1.25:1.00
The summary calculations of our Senior Credit Facility Fixed Charge Coverage Ratio as of June 30, 2016 is
as follows:
(in thousands, except ratio)
Consolidated EBITDA
Less unfinanced portion of capital expenditures
Less expense for taxes paid in cash
Coverage Amount (a)
Fixed Charges (b)
Fixed Charge Coverage Ratio (a:b)
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Amount
$
12,828
(2,633)
(275)
9,920
9,136
1.09:1.00
$
$
Maximum Total Leverage Ratio. We may not permit the Maximum Total Leverage Ratio, as of the last day
of any fiscal quarter ending during any period set forth in the table below, to exceed the ratio set forth
opposite such period in the table below. The Maximum Total Leverage Ratio is defined as the ratio of (a)
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Maximum Total Leverage Ratio. We may not permit the Maximum Total Leverage Ratio, as of the last day
of any fiscal quarter ending during any period set forth in the table below, to exceed the ratio set forth
opposite such period in the table below. The Maximum Total Leverage Ratio is defined as the ratio of (a)
our funded indebtedness, consisting of our Revolving Loan, Term Loan, Delayed Draw Term Loan, Senior
Subordinated Debt, and capital lease obligations, net of cash on hand, and its subsidiaries as of such date, to
(b) Consolidated EBITDA for the Test Period ended as of such date.
Period
March 27, 2016 through September 24, 2016
September 25, 2016 through December 24, 2016
December 25, 2016 through March 25, 2017
March 26, 2017 through June 29, 2017
June 30, 2017 through September 23, 2017
September 24, 2017 and thereafter
Total Leverage Ratio
5.25:1.00
4.75:1.00
4.25:1.00
4.00:1.00
3.75:1.00
3.50:1.00
The summary calculation of our Senior Credit Facility Maximum Total Leverage Ratio as of June 30, 2016,
is as follows:
(in thousands, except ratio)
Funded Indebtedness (a)
Consolidated EBITDA (b)
Maximum Total Leverage Ratio (a:b)
Amount
56,560
$
12,828
$
4.41:1.00
Maximum Senior Leverage Ratio. We may not permit the Maximum Senior Leverage Ratio, as of the last
day of any fiscal quarter ending during any period set forth in the table below, to exceed the ratio set forth
opposite such period in the table below. The Senior Leverage Ratio means the ratio of (a) our funded
indebtedness, less the aggregate amount of our junior financing included therein as of such date; to (b)
Consolidated EBITDA for the Test Period ended as of such date.
Period
March 27, 2016 through September 24, 2016
September 25, 2016 through December 24, 2016
December 25, 2016 through March 25, 2017
March 26, 2017 and thereafter
Senior Leverage Ratio
3.50:1.00
3.00:1.00
2.50:1.00
2.25:1.00
The summary calculation of our Senior Credit Facility Maximum Senior Leverage Ratio as of June 30,
2016, is as follows:
(in thousands, except ratio)
Funded Indebtedness
Less aggregate amount of junior financing
Senior Leverage Amount (a)
Consolidated EBITDA (b)
Senior Leverage Ratio (a:b)
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Amount
$
56,560
(20,000)
36,560
12,828
2.85:1.00
$
$
Subordinated Loan Agreement Financial Ratios. Our Subordinated Loan Agreement contains the
following financial ratio covenants, summarized as follows:
Minimum Fixed Charge Coverage Ratio. We may not permit the Minimum Fixed Charge Coverage Ratio,
as of the last day of any fiscal quarter ending during any period set forth in the table below, to be less than
the ratio set forth opposite such period in the table below. The Fixed Charge Coverage Ratio is defined as
the ratio of (a) Consolidated EBITDA minus the unfinanced portion of capital expenditures minus expense
for taxes paid in cash (other than certain federal and state taxes excluded under the McLarty Second
Amendment); to (b) fixed charges, all calculated on a consolidated basis in accordance with GAAP.
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Subordinated Loan Agreement Financial Ratios. Our Subordinated Loan Agreement contains the
following financial ratio covenants, summarized as follows:
Minimum Fixed Charge Coverage Ratio. We may not permit the Minimum Fixed Charge Coverage Ratio,
as of the last day of any fiscal quarter ending during any period set forth in the table below, to be less than
the ratio set forth opposite such period in the table below. The Fixed Charge Coverage Ratio is defined as
the ratio of (a) Consolidated EBITDA minus the unfinanced portion of capital expenditures minus expense
for taxes paid in cash (other than certain federal and state taxes excluded under the McLarty Second
Amendment); to (b) fixed charges, all calculated on a consolidated basis in accordance with GAAP.
Period
March 27, 2016 through September 24, 2016
September 25, 2016 through March 25, 2017
March 26, 2017 through September 23, 2017
September 24, 2017 through March 24, 2018
March 25, 2018 through September 29, 2018
September 30, 2018 and thereafter
Total Leverage Ratio
1.00:1.00
1.00:1.00
1.05:1.00
1.10:1.00
1.15:1.00
1.20:1.00
The summary calculation of our Subordinated Loan Agreement Fixed Charge Coverage Ratio as of June 30,
2016 is as follows:
(in thousands, except ratio)
Consolidated EBITDA
Less unfinanced portion of capital expenditures
Less expense for taxes paid in cash
Coverage Amount (a)
Fixed Charges (b)
Fixed Charge Coverage Ratio (a:b)
Amount
$
12,828
(2,633)
(275)
9,920
9,136
1.09:1.00
$
$
Maximum Total Leverage Ratio. We may not have a Total Leverage Ratio, as of the last day of any fiscal
quarter ending during any period set forth in the table below, to exceed the ratio set forth opposite such
period in the table below. The Total Leverage Ratio means the ratio of (a) our funded indebtedness as of
such date, to (b) Consolidated EBITDA for the Test Period ended as of such date.
Period
March 27, 2016 through September 24, 2016
September 25, 2016 through December 24, 2016
December 25, 2016 through March 25, 2017
March 26, 2017 through June 29, 2017
June 30, 2017 through September 23, 2017
September 24, 2017 and thereafter
Total Leverage Ratio
5.50:1.00
5.00:1.00
4.50:1.00
4.25:1.00
4.00:1.00
3.50:1.00
The summary calculations of our Subordinated Loan Agreement Total Leverage Ratio as of June 30, 2016 is
as follows:
(in thousands, except ratio)
Funded Indebtedness (a)
Consolidated EBITDA (b)
Maximum Total Leverage Ratio (a:b)
Amount
$
$
56,560
12,828
4.41:1.00
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Compliance with Financial Ratio Covenants
As of June 30, 2016, we were in compliance with our debt covenants under our Senior Credit Facility and
Subordinated Loan Agreement.
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Compliance with Financial Ratio Covenants
As of June 30, 2016, we were in compliance with our debt covenants under our Senior Credit Facility and
Subordinated Loan Agreement.
GAAP to Non-GAAP Reconciliation
Fixed Charges and Consolidated EBITDA used in our debt covenant calculations are non-GAAP financial
measures. We have provided this non-GAAP financial information to aid in better understanding of our financial
ratios as used in our debt covenant calculation. The methodology used is defined in our debt agreements. Non-
GAAP financial measures are not in accordance with, or an alternative for, GAAP. The non-GAAP financial
measures are not meant to be considered in isolation or as a substitute for comparable GAAP financial measures, and
should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
Fixed Charges consist of interest payments, principal payments on our debt, and capital lease payments for the prior
four quarters.
Consolidated EBITDA used in our debt covenant calculations is based on the sum of the prior four quarter actual
amounts. The reconciliation of GAAP net income to Consolidated EBITDA to is as follows (in thousands):
For the twelve months ended:
Net loss
Share-based compensation
Interest expense, net
Income taxes
Depreciation and amortization
Transaction related expenses (1)
Other non-recurring expenses (2)
Consolidated EBITDA (3)
June 30, 2016
(2,206)
$
177
4,451
81
9,529
224
572
12,828
$
(1) Transaction related expenses relate to legal fees incurred to amend certain debt agreements.
(2) Other non-recurring expenses primarily consist of professional fees related to acquisitions, severance payments
and allowable inventory adjustments.
(3) Consolidated EBITDA excludes interest expense, net and income taxes because these items are associated with
our capitalization and tax structures. Consolidated EBITDA also excludes depreciation and amortization
expense because these non-cash expenses reflect the impact of prior capital expenditure decisions which may not
be indicative of future capital expenditure requirements.
Off Balance Sheet Arrangements
We had no off-balance sheet arrangements that would have a material effect on our financial position, results of
operations, or cash flows as of June 30, 2016.
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Contractual Obligations and Commitments
We have various contractual obligations impacting our liquidity. The following table represents our contractual
payment obligations as of June 30, 2016 (in thousands):
Contractual Cash Obligations
Long-term debt (1)
Capital lease obligations
Purchase obligations (2)
Operating lease obligations
Total
$ 53,766 $ 15,909 $ 6,909 $ 9,225 $ 20,909 $ 814 $
2019
2017
2020
2018
2,994
626
4,308
3,808
920
626
1,419
2,842
919
—
1,250
966
914
—
1,094
2021 Thereafter
—
145
—
—
48
—
100
48
—
445
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Contractual Obligations and Commitments
We have various contractual obligations impacting our liquidity. The following table represents our contractual
payment obligations as of June 30, 2016 (in thousands):
Contractual Cash Obligations
Long-term debt (1)
Capital lease obligations
Purchase obligations (2)
Operating lease obligations
Escrow payment obligations (3)
Other long-term liabilities (4)
Total
Total
$ 53,766 $ 15,909 $ 6,909 $ 9,225 $ 20,909 $ 814 $
2019
2018
2017
2020
2,994
626
4,308
3,808
1,049
920
626
1,419
2,842
1,049
919
—
1,250
966
—
914
—
1,094
—
—
2021 Thereafter
—
145
—
—
—
—
145
48
—
100
—
—
48
—
445
—
—
$ 66,551 $ 22,765 $ 10,044 $ 11,233 $ 21,402 $ 962 $
(1) For further information, refer to Note 7, Debt, of the Notes to Consolidated Financial Statements included in
Part II of this Annual Report on Form 10-K.
(2) Purchase obligations represent material capital expenditure commitments.
(3) Escrow payment obligations consist of cash payments due to the sellers of ATC and Kecy, to the extent that
the escrow has not been drawn upon. For further information, refer to Note 6, Accrued Escrow Obligations,
of the Notes to Consolidated Financial Statements included in Part II of this Annual Report on Form 10-K.
(4) Other long-term liabilities primarily consists of $1.0 million for the purchase of two 3D printers. For further
information, refer to Note 4, Property and Equipment, of the Notes to Consolidated Financial Statements
included in Part II of this Annual Report on Form 10-K.
We have unrecognized tax benefits of $1.0 million at June 30, 2016, recorded as other long-term liabilities. At this
time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12
months due to uncertainties in the timing of tax audit outcomes. As a result, this amount is not included in the above
table.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated
financial statements requires us to make estimates and assumptions affecting the reported amounts of assets and
liabilities at the date of the consolidated financial statements, reported amounts of revenues and expenses during the
reporting period, and related disclosures. Our estimates are evaluated on an ongoing basis and are drawn from
historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results
could differ under other assumptions or conditions. We believe the following items in our consolidated financial
statements require more significant estimates and judgments:
Valuation of Inventories
Inventories are valued at the lower of average cost or market using the first-in, first-out (FIFO) method. It is our
practice to provide a valuation allowance for inventories to account for actual market pricing deflation and inventory
shrinkage. Management actively reviews this inventory to determine that all materials are for products still in
production to determine any potential obsolescence issues. While historical write-downs have not been material, if
actual market conditions are less favorable than those projected by management, additional inventory write-downs
may be required, which could have a significant impact on the value of our inventories and reported operating results.
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Business Combinations, Valuation of Goodwill and Other Acquired Intangibles Assets
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible
assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the
fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to
make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in
valuing certain intangible assets include, but are not limited to, future expected cash flows, useful lives, and discount
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Business Combinations, Valuation of Goodwill and Other Acquired Intangibles Assets
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible
assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the
fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to
make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in
valuing certain intangible assets include, but are not limited to, future expected cash flows, useful lives, and discount
rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are
inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the
measurement period, which is one year from the acquisition date, we may record adjustments to the assets acquired
and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period,
any subsequent adjustments are recorded to earnings.
We test goodwill for impairment at least annually or more frequently if events or changes in circumstances would
more likely than not reduce the fair value of our reporting units below their carrying values. We determined fair
values for each of the reporting units using the income approach. Under the income approach, fair value is
determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted
rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth
rates based on our most recent views of the long-term outlook for each business. Actual results may differ from those
assumed in our forecasts. We use discount rates that are commensurate with the risks and uncertainty inherent in the
respective businesses.
Acquired finite-lived intangible assets are amortized over their estimated useful lives. We evaluate the recoverability
of our intangible assets for possible impairment annually or whenever events or circumstances indicate that the
related carrying amounts may not be recoverable. Recoverability of these assets is measured by a comparison of the
carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates
that the carrying amount of property and equipment and intangible assets is not recoverable, the carrying amount of
such assets is reduced to fair value.
In addition to the recoverability assessment, we routinely review the remaining estimated useful lives of our finite-
lived intangible assets. If we reduce the estimated useful life assumption for any asset, the remaining unamortized
balance would be amortized over the revised estimated useful life.
Income Taxes
Significant judgment is required in determining our provision for income taxes and income tax assets and liabilities,
including evaluating uncertainties in the application of accounting principles and complex tax laws.
We record a provision for income taxes for the anticipated tax consequences of the reported results of operations
using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and
liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured
using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities
are expected to be realized or settled. We record a valuation allowance to reduce our deferred tax assets to the net
amount that we believe is more likely than not to be realized.
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We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax
position will be sustained on examination by the taxing authorities based on the technical merits of the position.
Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance
that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves
when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the
extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect
the provision for income taxes in the period in which such determination is made and could have a material impact on
our financial condition and operating results. The provision for income taxes includes the effects of any reserves that
we believe are appropriate, as well as the related net interest and penalties.
Share-based Compensation
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We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax
position will be sustained on examination by the taxing authorities based on the technical merits of the position.
Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance
that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves
when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the
extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect
the provision for income taxes in the period in which such determination is made and could have a material impact on
our financial condition and operating results. The provision for income taxes includes the effects of any reserves that
we believe are appropriate, as well as the related net interest and penalties.
Share-based Compensation
We account for share-based employee compensation under the fair value recognition and measurement provisions in
accordance with applicable accounting standards, which require all share-based payments to employees, including
grants of stock options, to be measured based on the grant date fair value of the awards, with the resulting expense
generally recognized on a straight-line basis over the period during which the employee is required to perform service
in exchange for the award.
Share-based compensation expense is recorded net of estimated forfeitures in our consolidated statements of
operations and as such is recorded for only those share-based awards that we expect to vest. We will revise our
estimated forfeiture rate if actual forfeitures differ from our initial estimates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, the Company is not required to provide information for this item.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firms
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Balance Sheets
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
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42
44
45
46
47
48
49
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
ARC Group Worldwide, Inc.
We have audited the accompanying consolidated balance sheet of ARC Group Worldwide, Inc. and subsidiaries as of
June 30, 2016, and the related statements of operations, comprehensive loss, stockholders’ equity and cash flows for
the year then ended. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2016 consolidated financial statements referred to above present fairly, in all material respects, the
financial position of ARC Group Worldwide, Inc. and subsidiaries as of June 30, 2016, and the results of their
operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting
principles.
/s/ Hein & Associates LLP
Denver, Colorado
September 9, 2016
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42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
ARC Group Worldwide, Inc.
We have audited the accompanying consolidated balance sheet of ARC Group Worldwide, Inc. (a Utah corporation)
and subsidiaries (the “Company”) as of June 30, 2015, and the related consolidated statements of operations,
comprehensive income, changes in stockholders’ equity, and cash flows for the year ended June 30, 2015. These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the
Company’s internal control over financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audit
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of ARC Group Worldwide, Inc. and subsidiaries as of June 30, 2015, and the results of their
operations and their cash flows for the year ended June 30, 2015 in conformity with accounting principles generally
accepted in the United States of America.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
ARC Group Worldwide, Inc.
We have audited the accompanying consolidated balance sheet of ARC Group Worldwide, Inc. (a Utah corporation)
and subsidiaries (the “Company”) as of June 30, 2015, and the related consolidated statements of operations,
comprehensive income, changes in stockholders’ equity, and cash flows for the year ended June 30, 2015. These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the
Company’s internal control over financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audit
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of ARC Group Worldwide, Inc. and subsidiaries as of June 30, 2015, and the results of their
operations and their cash flows for the year ended June 30, 2015 in conformity with accounting principles generally
accepted in the United States of America.
/s/ GRANT THORNTON LLP
Denver, Colorado
September 25, 2015
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43
ARC Group Worldwide, Inc.
Consolidated Statements of Operations
(in thousands, except for share and per share amounts)
Sales
Cost of sales
Gross profit
Selling, general and administrative
Merger expenses
Income from operations
Other income, net
Interest expense, net
(Loss) income before income taxes
Income tax expense
Net loss
Net income attributable to non-controlling interest
Net loss attributable to ARC Group Worldwide, Inc.
Net loss per common share:
Basic and diluted
For the year ended June 30,
2016
103,840 $
83,677
20,163
18,008
—
2,155
171
(4,451)
(2,125)
(81)
(2,206)
(108)
(2,314)
$
2015
112,505
87,057
25,448
19,172
187
6,089
266
(4,848)
1,507
(1,509)
(2)
(210)
(212)
(0.13)
$
(0.01)
$
$
$
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ARC Group Worldwide, Inc.
Consolidated Statements of Operations
(in thousands, except for share and per share amounts)
Sales
Cost of sales
Gross profit
Selling, general and administrative
Merger expenses
Income from operations
Other income, net
Interest expense, net
(Loss) income before income taxes
Income tax expense
Net loss
Net income attributable to non-controlling interest
Net loss attributable to ARC Group Worldwide, Inc.
Net loss per common share:
Basic and diluted
Weighted average common shares outstanding:
Basic and diluted
For the year ended June 30,
2016
103,840 $
83,677
20,163
18,008
—
2,155
171
(4,451)
(2,125)
(81)
(2,206)
(108)
(2,314)
$
2015
112,505
87,057
25,448
19,172
187
6,089
266
(4,848)
1,507
(1,509)
(2)
(210)
(212)
(0.13)
$
(0.01)
$
$
$
18,123,883
15,458,404
See accompanying notes to consolidated financial statements.
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ARC Group Worldwide, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
Net loss
Foreign currency translation adjustment, net
Comprehensive loss
Comprehensive income attributable to noncontrolling interests
Comprehensive loss attributable to ARC Group Worldwide, Inc.
For the year ended June 30,
2016
(2,206) $
52
(2,154)
(108)
(2,262)
$
2015
(2)
(58)
(60)
(210)
(270)
$
$
See accompanying notes to consolidated financial statements.
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ARC Group Worldwide, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
$
$
$
ASSETS
Current assets:
Cash
Accounts receivable, net
Inventories, net
Deferred income tax assets
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Goodwill
Intangible assets, net
Other
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Deferred revenue
Bank borrowings, current portion of long-term debt
Capital lease obligations, current portion
Accrued escrow obligations, current portion
Total current liabilities
Long-term debt, net of current portion
Deferred income tax liabilities
Capital lease obligations, net of current portion
Accrued escrow obligations, net of current portion
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 12)
Equity:
Preferred stock, $0.001 par value, 2,000,000 shares authorized, no shares issued and
outstanding
Common stock, $0.0005 par value, 250,000,000 shares authorized; 18,803,910 shares
issued and 18,795,509 shares issued and outstanding at June 30, 2016, and 18,538,522
shares issued and 18,530,121 shares issued and outstanding at June 30, 2015
Treasury stock, at cost; 8,401 shares at June 30, 2016 and June 30, 2015
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total ARC Group Worldwide, Inc. stockholders' equity
Non-controlling interests
Total equity
Total liabilities and equity
$
See accompanying notes to consolidated financial statements.
46
As of June 30,
2016
2015
3,620 $
14,913
17,613
478
4,378
41,002
41,981
14,801
23,066
948
121,798 $
9,286 $
2,621
1,457
15,909
846
2,842
32,961
37,857
1,407
1,949
966
2,115
77,255
4,821
15,385
16,386
672
2,330
39,594
43,813
14,801
26,441
1,374
126,023
7,338
3,026
991
5,995
857
4,291
22,498
51,971
1,126
2,784
—
903
79,282
—
—
10
(94)
29,702
13,771
(6)
43,383
1,160
44,543
121,798 $
5
(94)
29,751
15,931
(58)
45,535
1,206
46,741
126,023
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ARC Group Worldwide, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands)
For the Years Ended June 30, 2016 and 2015
Common Stock
Treasury Stock
Additional
paid-in
Shares $0.0005) Shares (at cost) capital
Amount
(Par value
Amount
Accumulated
other
Retained comprehensive controlling
earnings income (loss)
Non-
interests equity
Total
Balance, June 30,
2014
Net (loss) income
Issuance of shares, net
Currency translation
adjustment
Balance, June 30,
2015
Net (loss) income
Purchase of
membership interest
Cancellation of
escrow shares
Share-based
compensation expense
Shares issued to
escrow in connection
with previous
acquisition
Offering costs
Currency translation
adjustment
Other
Balance, June 30,
2016
15,089 $
—
3,450
3
—
2
(8) $ (94) $ 14,293 $ 16,143 $
(212)
—
—
—
—
15,458
—
—
—
—
—
—
—
—
18,539
—
5
—
(8)
—
(94)
—
29,751
—
15,931
(2,314)
—
(234)
—
—
—
—
—
—
—
499
—
—
—
—
—
—
—
—
—
—
5
10
—
—
—
—
—
—
—
(195)
154
—
177
—
(26)
—
(5)
—
—
—
—
—
—
— $
—
—
(58)
(58)
—
—
—
—
—
—
52
—
996 $ 31,341
(2)
210
15,460
—
—
(58)
1,206
108
46,741
(2,206)
(154)
(195)
—
—
—
—
—
—
—
177
—
(26)
52
—
18,804 $
(8) $ (94) $ 29,702 $ 13,771 $
(6) $ 1,160 $ 44,543
See accompanying notes to consolidated financial statements.
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ARC Group Worldwide, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
Share-based compensation expense
Bad debt expense and other
Deferred income taxes
Changes in working capital:
Accounts receivable
Inventory
Prepaid expenses and other assets
Accounts payable
For the Year Ended
June 30,
2016
2015
$
(2,206)
$
(2)
9,529
177
98
565
400
(1,227)
(1,621)
1,708
9,459
—
21
2,159
(8)
(230)
(1,194)
(2,092)
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ARC Group Worldwide, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
Share-based compensation expense
Bad debt expense and other
Deferred income taxes
Changes in working capital:
Accounts receivable
Inventory
Prepaid expenses and other assets
Accounts payable
Accrued expenses
Deferred revenue
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
Proceeds from the sale of assets
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from debt issuance
Repayments of long-term debt and capital lease obligations
Proceeds from the issuance of stock, net
Net cash used in financing activities
Effect of exchange rates on cash
Net decrease in cash
Cash, beginning of period
Cash, end of period
Supplemental disclosures of cash flow information:
Cash paid for interest
Cash paid for income taxes
For the Year Ended
June 30,
2016
2015
$
(2,206)
$
(2)
9,529
177
98
565
400
(1,227)
(1,621)
1,708
(1,423)
466
6,466
(2,633)
8
(2,625)
9,459
—
21
2,159
(8)
(230)
(1,194)
(2,092)
(2,953)
(25)
5,135
(4,810)
1,506
(3,304)
5,543
(10,542)
—
(4,999)
(43)
(1,201)
4,821
3,620
4,058
599
$
$
$
24,500
(46,296)
15,460
(6,336)
(58)
(4,563)
9,384
4,821
4,414
1,283
$
$
$
See accompanying notes to consolidated financial statements.
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ARC Group Worldwide, Inc.
Notes to Consolidated Financial Statements
NOTE 1 – Nature of Operations and Basis of Presentation
Nature of Operations
ARC Group Worldwide, Inc. (referred to herein as the “Company” or “ARC”) was incorporated in Utah on
September 30, 1987. ARC is a global advanced manufacturing and 3D printing service provider focused on
accelerating speed to market for its customers. ARC utilizes technology to improve automation in manufacturing
through robotics, software and process automation, as well as lean manufacturing to improve efficiency. ARC
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ARC Group Worldwide, Inc.
Notes to Consolidated Financial Statements
NOTE 1 – Nature of Operations and Basis of Presentation
Nature of Operations
ARC Group Worldwide, Inc. (referred to herein as the “Company” or “ARC”) was incorporated in Utah on
September 30, 1987. ARC is a global advanced manufacturing and 3D printing service provider focused on
accelerating speed to market for its customers. ARC utilizes technology to improve automation in manufacturing
through robotics, software and process automation, as well as lean manufacturing to improve efficiency. ARC
provides a holistic set of precision manufacturing solutions, from design and prototyping through full run
production. These solutions include metal injection molding, plastic and metal 3D printing, metal stamping, plastic
injection molding, clean room injection molding, rapid tooling, thixomolding, antennas, hermetic seals, and flanges
and forges.
Basis of Presentation
The Company’s fiscal year begins July 1 and ends June 30, and the quarters for interim reporting consist of thirteen
weeks; therefore, the quarter end will not always coincide with the date of the calendar month-end.
Principles of Consolidation
The Consolidated Financial Statements include the amounts of ARC and its controlled subsidiaries. All material
intercompany transactions have been eliminated in consolidation.
NOTE 2 – Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and reported
amounts of revenue and expenses during the reporting period. Due to the inherent uncertainties in making estimates,
actual results could differ from those estimates and such differences may be material to the consolidated financial
statements.
Reclassifications
Certain amounts have been reclassified in the prior year financial statements to conform to the current year
presentation.
Concentration of Credit Risk
The Company places its cash with high credit quality financial institutions and does not believe it is exposed to any
significant credit risk on cash. At times, such cash amounts may exceed FDIC limits.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the original invoiced amount due from the Company’s customers less an
allowance for any potential uncollectible amounts. ARC controls credit risk related to accounts receivable through
credit approvals, credit limits and monitoring processes. In making the determination of the appropriate allowance
for doubtful accounts, management considers prior experience with customers, analysis of accounts receivable aging
reports, changes in customer payment patterns, and historical write-offs. The allowance for doubtful accounts totaled
$0.2 million as of June 30, 2016 and 2015. The amounts charged to operations and write-offs were immaterial for the
periods presented.
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Inventories
Inventories are stated at the lower of average cost using the first-in, first-out (FIFO) method or market. It is the
Company’s practice to provide a valuation allowance for inventories to account for actual market pricing deflation
and inventory shrinkage. Management actively reviews this inventory to determine that all materials are for products
still in production to determine any potential obsolescence issues.
Property and Equipment
Property and equipment are stated at cost or acquisition date fair value less accumulated depreciation. Depreciation is
recognized on a straight-line basis over the estimated useful lives of the related assets and is allocated between cost of
sales and selling, general and administrative expenses. Major additions and improvements are capitalized, while
replacements, maintenance and repairs, which do not improve or extend the life of the respective assets, are expensed
as incurred.
Assets held under capital leases are included in property and equipment and are recorded at the lower of the net
present value of the minimum lease payments or the fair value of the leased asset at the inception of the
lease. Amortization expense is computed using the straight-line method over the shorter of the estimated useful lives
of the assets or the lease term and is recorded in depreciation and amortization expense.
Goodwill, Intangible Assets and Other Long-lived Assets
Goodwill is tested for impairment at least annually in June of each fiscal year, or more frequently if a triggering event
occurs between impairment testing dates, and the Company is required to record any necessary impairment
adjustments.
During the fourth quarter of 2016, we performed our annual impairment test of goodwill for all of our reporting
units. The Company determined fair values for each of the reporting units using a discounted cash flow
methodology. Based on the results of our testing, the fair values of each of the reporting units exceeded their carrying
values; therefore, no goodwill impairment was recognized.
Intangible assets (identified as patents, tradenames, customer relationships, and non-compete agreements) are
recorded at fair value at the time of acquisition. Finite-lived intangibles are stated at cost less accumulated
amortization. Amortization is recorded using the straight-line method, which approximates the expected pattern of
economic benefit, over the estimated lives of the assets.
The Company reviews the carrying value of its finite-lived intangible and long-lived tangible assets whenever events
or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. Factors that
would require an impairment assessment include, among other things, a significant change in the extent or manner in
which an asset is used, a continual decline in the Company's operating performance, or as a result of fundamental
changes in a subsidiary's business condition.
Recoverability of long-lived assets is measured by comparing their carrying amount to the projected cash flows the
assets are expected to generate. If such assets are considered to be impaired, the impairment loss recognized, if any,
is the amount by which the carrying amount of the finite-lived intangible assets exceeds fair value. There were no
impairments of finite-lived intangible or long-lived assets during the years ended June 30, 2016 or 2015.
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Non-Controlling Interest
In connection with the acquisitions of FloMet and TeknaSeal, the Company obtained a majority interest in the
subsidiaries and control of the subsidiaries' boards of directors. During the first quarter of fiscal 2016, the Company
purchased approximately 1.9% of the outstanding non-controlling membership interests of Tekna Seal LLC. On June
30, 2016, third party investors owned approximately 3.8% of the outstanding membership interests of FloMet LLC
and approximately 4.3% of the outstanding membership interests of TeknaSeal LLC. On June 30, 2015, third party
investors owned approximately 3.8% of the outstanding membership interests of FloMet LLC and approximately
6.2% of the outstanding membership interests of Tekna Seal LLC. Accordingly, the Consolidated Financial
Statements include the financial position of these subsidiaries as of June 30, 2016 and 2015 and the results of
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Non-Controlling Interest
In connection with the acquisitions of FloMet and TeknaSeal, the Company obtained a majority interest in the
subsidiaries and control of the subsidiaries' boards of directors. During the first quarter of fiscal 2016, the Company
purchased approximately 1.9% of the outstanding non-controlling membership interests of Tekna Seal LLC. On June
30, 2016, third party investors owned approximately 3.8% of the outstanding membership interests of FloMet LLC
and approximately 4.3% of the outstanding membership interests of TeknaSeal LLC. On June 30, 2015, third party
investors owned approximately 3.8% of the outstanding membership interests of FloMet LLC and approximately
6.2% of the outstanding membership interests of Tekna Seal LLC. Accordingly, the Consolidated Financial
Statements include the financial position of these subsidiaries as of June 30, 2016 and 2015 and the results of
operations of these subsidiaries since the dates of acquisitions. The Company has recognized the carrying value of
the non-controlling interests as a component of stockholders’ equity.
Accrued Expenses
As of June 30, 2016 and 2015, accrued expenses that exceeded 5% of current liabilities consisted of approximately
$1.4 million and $1.7 million, respectively, of payroll related costs.
Fair Value Measurements
The carrying value of the Company’s accounts receivable, accounts payable and accrued expenses approximate fair
value because of the short maturity of these items. The carrying value of the Company’s debt outstanding
approximates fair value as interest rates on these instruments approximate current market rates.
Deferred Revenue
Deferred revenue consists of customer deposits for the development of molds used in the manufacturing process. As
of June 30, 2016 and 2015, deferred revenue was $1.5 million and $1.0 million, respectively. The Company
recognizes revenue and the related expenses when the customer approves the mold for production. Accordingly, as of
June 30, 2016 and 2015, the Company has incurred costs of $1.0 million and $0.7 million, respectively, related to
molds in the process of being developed which have been deferred and are included as part of the total current assets
on the accompanying balance sheet.
Revenue Recognition
Revenue is measured at the fair value of the consideration received or receivable net of sales tax, trade discounts and
customer returns. The Company recognizes revenue when the earnings process is complete. This generally occurs
when products are shipped to the customer in accordance with the contract or purchase order, ownership and risk of
loss have passed to the customer, collectability is reasonably assured, and pricing is fixed and determinable. In
instances where title does not pass to the customer upon shipment, the Company recognizes revenue upon delivery or
customer acceptance, depending on terms of the sales agreement. Service sales, representing maintenance and
engineering activities, are recognized as services are performed. Products are generally shipped free-on-board from
our facilities, the customer pays freight costs and assumes all liability.
Research and Development Costs
Research and development costs are expensed as incurred. The majority of these expenditures consist of salaries for
engineering and manufacturing personnel and outside services. For the years ended June 30, 2016 and 2015, the
Company incurred $0.3 million and $1.2 million, respectively, for research and development, which is included in
selling, general and administrative expenses on the accompanying statements of operations.
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Income Taxes
The Company accounts for income taxes in accordance with the asset and liability method of computing income
taxes. The objective of this method is to establish deferred tax assets and liabilities for any temporary differences
between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates
expected to be in effect when such amounts are realized or settled.
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Income Taxes
The Company accounts for income taxes in accordance with the asset and liability method of computing income
taxes. The objective of this method is to establish deferred tax assets and liabilities for any temporary differences
between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates
expected to be in effect when such amounts are realized or settled.
The Company also provides for the accounting for uncertainty in income taxes recognized in financial statements and
the impact of a tax position in the financial statements if that position is more likely than not of being sustained by the
taxing authority.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. Interest and
penalties related to uncertain tax positions of $0.1 million and $0.2 million were recognized during the years ended
June 30, 2016 and 2015, respectively. As of June 30, 2016 and 2015, accrued interest and penalties were $0.3
million.
In general, the tax returns for the years ending June 30, 2013 through 2016 are open to examination by federal and
state authorities. Tax years 2003 and forward are open for certain of the Company's subsidiaries due to the
carryforward of unutilized net operating losses.
Foreign Currency
Effective July 1, 2015, the financial position and results of operations of AFT-Hungary Kft. (“AFT Hungary”), a
wholly owned subsidiary of the Company, are measured using the Euro. Accordingly, all assets and liabilities of
AFT Hungary are translated into U.S. dollars at the currency exchange rates as of the respective balance sheet
dates. Revenue and expense items are translated at the average exchange rates prevailing during the
period. Resulting translation adjustments, net of applicable deferred income taxes, are recorded in accumulated other
comprehensive income. Foreign currency transaction gains and losses are included in other income (expense), net in
our consolidated statements of operations. Such gains and losses were not material for any period presented.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”)
2016-13, Financial Instruments – Credit Losses Topic 326 (“ASU 2016-13”), which requires entities to use a new
forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for
losses. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods
within that year. Early adoption is permitted. The adoption of ASU 2016-03 is not expected to have a material effect
on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation Topic 718: Improvements to
Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for
share-based payment transactions, including the income tax consequences, classification of awards as either equity or
liabilities, and classification on the statement of cash flows. The guidance will be effective for fiscal years beginning
after December 15, 2016, including interim periods within that year. The Company is in the process of evaluating the
impact of adopting this guidance on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases: Topic 842 (“ASU 2016-02”), to supersede nearly all
existing lease guidance under GAAP. ASU 2016-02 requires the recognition of lease assets and lease liabilities on
the balance sheet by lessees for those leases currently classified as operating leases. ASU 2016-02 also requires
qualitative disclosures along with specific quantitative disclosures and is effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Entities are
required to apply the amendments at the beginning of the earliest period presented using a modified retrospective
approach. The Company is evaluating the requirements of this guidance and has not yet determined the impact of the
adoption on its consolidated financial position, results of operations and cash flows.
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In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740) - Balance Sheet Classification of
Deferred Taxes (“ASU No. 2017-17”). ASU No. 2015-17 will require that deferred tax assets and liabilities be
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In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740) - Balance Sheet Classification of
Deferred Taxes (“ASU No. 2017-17”). ASU No. 2015-17 will require that deferred tax assets and liabilities be
classified as non-current in a classified statement of financial position. ASU No. 2015-17 is effective for public
business entities for annual periods, including interim periods within those annual periods, beginning after December
15, 2016. The Company plans to adopt this guidance in the first quarter of fiscal year 2017 on a prospective basis and
does not expect the impact to be material on the Company's financial position.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (“ASU 2014-
09”), to supersede nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09
is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the
consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to
achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the
revenue recognition process than required under existing GAAP including identifying performance obligations in the
contract, estimating the amount of variable consideration to include in the transaction price and allocating the
transaction price to each separate performance obligation. In August 2015, the FASB issued ASU 2015-14 which
defers the effective date for one year beyond the originally specified effective date. ASU 2014-09 is effective in the
Company’s first quarter of fiscal 2018 and may transition to the standard using either the full retrospective approach
or retrospectively with a cumulative effect of initially applying the amendments recognized at the date of initial
application. The Company is currently evaluating the impact, if any, of its pending adoption of ASU 2014-09 on its
consolidated financial statements.
NOTE 3 – Inventory
Inventories consisted of the following (in thousands):
Raw materials and supplies
Work-in-process
Finished goods
Less: Reserve for obsolescence
NOTE 4 – Property and Equipment
Property and equipment consisted of the following (in thousands):
Land
Building and improvements
Machinery and equipment
Office furniture and equipment
Construction-in-process
Assets acquired under capital lease
Less: Accumulated depreciation
Less: Accumulated amortization on capital leases
June 30,
2016
June 30,
2015
$ 6,299 $ 5,723
7,335
4,224
17,282
(896)
$ 17,613 $ 16,386
7,505
4,664
18,468
(855)
Depreciable
Life
(in years)
—
7
3
3
-
40
-
12
-
10
—
June 30,
2016
June 30,
2015
1,264
17,460
39,350
1,050
1,838
5,482
66,444
(23,018)
(1,445)
41,981
$
$
1,264
17,422
35,238
931
1,934
5,573
62,362
(17,808)
(741)
43,813
$
$
Depreciation expense totaled $6.2 million and $6.1 million in the years ended June 30, 2016 and 2015, respectively.
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In June 2016, the Company entered into an agreement to purchase two 3D printers valued at $2.2 million. As of June
30, 2016, the Company received one 3D printer valued at $0.6 million, which is included in machinery and
equipment, and has made payments totaling $1.1 million on the second 3D printer, which is included in construction-
in-process. Also in June 2016, the Company entered into a Master Lease Agreement with Citizens Asset Finance,
Inc. for $1.7 million of secured financing related to these 3D printers. As of June 30 2016, the Company has received
approximately $1.5 million in cash advances under this financing agreement. The lease will commence upon receipt
of the second 3D printer, which the Company anticipates will be in the first quarter of fiscal year 2017. As of June
30, 2016, the Company has recorded accounts payable of $0.2 million due to the vendor, and other current accrued
liabilities of $0.5 million and other long term liabilities of $1.0 million both due to Citizens Asset Finance, Inc.
NOTE 5 – Goodwill and Intangible Assets
The following table summarizes the activity in the Company's goodwill account by segment during the years ended
2016 and 2015 (in thousands):
Balance, June 30, 2014
Purchase accounting adjustments
Balance, June 30, 2015
Adjustments
Balance, June 30, 2016
$
$
Precision
Components
Group
11,210
(925)
10,285
3DMT Group
$
3,435
(631)
2,804
—
$
10,285
—
$
2,804
Flanges and
Fittings Group
$
1,712
$
—
1,712
—
$
1,712
Consolidated
16,357
(1,556)
14,801
—
14,801
The following table summarizes the Company's intangible assets as follows (in thousands):
As of June 30, 2016
As of June 30, 2015
Intangible assets:
Patents and tradenames
Customer relationships
Non-compete agreements
Total
Gross
Gross
Carrying Accumulated Net Carrying Carrying Accumulated Net Carrying
Amount Amortization Amount
$ 3,773 $
24,077
3,642
$ 31,492 $
3,007 $ 3,773 $
18,056
2,003
23,066 $ 31,492 $
3,246
20,464
2,731
26,441
(6,021)
(1,639)
(8,426) $
(3,613)
(911)
(5,051) $
Amount Amortization Amount
24,077
3,642
(527) $
(766) $
Intangible assets are amortized over estimated useful lives ranging from five to fifteen years. Amortization expense
totaled $3.4 million for other identifiable intangible assets for the years ended June 30, 2016 and 2015,
respectively. Estimated future amortization expense for the next five years as of June 30, 2016, is as follows (in
thousands):
Amount
$
$
3,375
3,375
3,191
2,643
2,643
7,839
23,066
Fiscal Years
2017
2018
2019
2020
2021
Thereafter
Total
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NOTE 6 – Accrued Escrow Obligations
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NOTE 6 – Accrued Escrow Obligations
On April 7, 2014, the Company acquired the membership interests of Advance Tooling Concepts, LLC (“ATC”) for
approximately $24.3 million, of which: (i) $21.9 million was paid in cash and (ii) $2.4 million, consisting of 233,788
newly issued shares of common stock of the Company, was to be held in escrow for a period of 12 months (“ATC
Escrow”) to satisfy certain working capital adjustments and/or indemnification obligations. In July 2014, the ATC
Escrow was reduced by $0.7 million following the completion of a working capital adjustment. In October 2015, the
Company entered into an agreement to settle and terminate the ATC Escrow in cash. The cash settlement has been
accrued in current and long-term liabilities. The ATC Escrow shares were returned to the Company and retired in
February 2016.
On June 25, 2014, the Company acquired substantially all of the assets of Kecy Corporation and 411 Munson
Holding, LLC for approximately $26.8 million, of which: (i) $24.2 million was paid in cash; and (ii) $2.6 million,
consisting of 172,450 newly issued shares of common stock of the Company, was to be held in escrow for a period of
18 months (“Kecy Escrow”) to satisfy certain working capital adjustments and/or indemnification obligations. The
Company has determined the common stock issued is mandatorily redeemable and has therefore recorded $2.6
million as a current liability in the accompanying balance sheets. In August 2015, and in connection with the decline
in the Company’s stock price since the date of acquisition, the Company issued 499,176 additional shares for security
of the escrow. The Company is in the process of finalizing the settlement of the Kecy Escrow.
NOTE 7 – Debt
Long-term debt payable consists of the following (in thousands):
Balance as of
Senior secured revolving commitment
Senior secured term loan
Senior secured delayed draw term loan
Subordinated term loan
Other long term debt
Total debt
Less: Senior secured term loan, current portion
Less: Senior secured delayed draw term loan, current portion
Less: Other long term debt, current portion
Non-current portion
Amended & Restated Credit Agreement
$
June 30,
2016
7,560 $
16,248
5,509
20,000
4,449
53,766
(11,217)
(3,783)
(909)
June 30,
2015
7,560
22,924
7,482
20,000
—
57,966
(4,781)
(1,214)
—
$ 37,857 $ 51,971
On November 10, 2014, the Company and certain of its subsidiaries entered into a $90.0 million, five-year Amended
and Restated Credit Agreement with Citizens Bank, N.A. and Capital One, National Association (“Amended &
Restated Credit Agreement”), which amended and restated in its entirety the Company's prior credit facility entered
into April 7, 2014 and amended June 25, 2014. Borrowings under the credit facility are secured by liens on
substantially all assets of the Company and guaranteed by the Company’s subsidiaries who are not borrowers under
the credit facility.
Borrowings under the credit facility may be made as Base Rate Loans or Eurocurrency Rate Loans. The Base Rate
Loans will bear interest at the fluctuating rate per annum equal to: (i) the highest of (a) the Federal Funds Rate plus
1/2 of 1.00%, (b) Citizens Bank’s own prime rate; and (c) the adjusted Eurodollar rate on such day for an interest
period of one (1) month plus 1.00%; and (ii) plus the Applicable Rate, as described below. Eurodollar Rate Loans
will bear interest at the rate per annum equal to the ICE Benchmark Administration LIBOR Rate plus the Applicable
Rate. The Applicable Rate will be adjusted quarterly, based on the Company’s total leverage ratio, in a range of
1.50% to 3.00% for Base Rate Loans and 2.50% to 4.00% for Eurodollar Rate Loans. In addition to interest
payments on the credit facility loans, the Company will pay commitment fees to the lenders, ranging from 0.25% to
0.45% per quarter on
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undrawn revolving loans and 0.50% per annum on undrawn term loan amounts. On June 30, 2016, the interest rate
on borrowings under the Amended & Restated Credit Agreement was approximately 5.0%.
On December 23, 2014, the parties to the Amended & Restated Credit Agreement entered into a first amendment
(“Citizens First Amendment”) to make technical corrections and to clarify, among other matters, that mandatory
prepayments of the loans will not be required in connection with any issuance of equity interests of the Company,
depending on the Company’s senior leverage ratio, and the proceeds are used to finance a permitted acquisition or
other permitted investments or finance consolidated capital expenditures.
On April 8, 2015, the Company prepaid a portion of the principal outstanding under the Amended & Restated Credit
Agreement with net proceeds from a registered public offering of common stock. On May 11, 2015, as a result of the
prepayment, the Company entered into the Limited Waiver and Second Amendment to the Amended & Restated
Credit Agreement (“Citizens Second Amendment”). Under the terms of the Citizens Second Amendment, the lenders
agreed to waive the Company’s non-compliance with certain covenants and agreed to exclude from the fixed charge
coverage calculation scheduled principal payments on indebtedness for the fiscal quarters ended March 29, 2015 and
June 30, 2015.
On March 29, 2016, the Company entered into a third amendment to the Amended & Restated Credit Agreement,
which required the Company to prepay a portion of the principal outstanding under the Amended and Restated Credit
Agreement with the net proceeds received from a recent borrowing by the Company’s Hungarian subsidiary
(described below under “Loan Contract”).
On April 20, 2016, the Company entered into a fourth amendment to the Amended & Restated Credit Agreement
(“Citizens Fourth Amendment”) to modify certain terms including:
(1) Allows for the exclusion from the fixed charge coverage ratio $1.3 million of certain federal and state taxes
paid related to prior years, effective March 27, 2016;
(2) Modifies the minimum fixed charge coverage ratio, maximum total leverage ratio and maximum senior
leverage ratio in line with the Company’s current financial expectations, effective March 27, 2016;
(3) Reduces mandatory principal payments for the remainder of the Amended and Restated Credit Agreement
term;
(4) Adjusts mandatory prepayments that will be required upon the completion of asset sales or sale leaseback
transactions, with the amount of prepayments to be determined based upon achievement of certain leverage
ratios; and
(5) Establishes mandatory prepayments on December 15, 2016, to be calculated and based upon a percentage of
the principal outstanding as of such date.
The Amended & Restated Credit Agreement requires us to comply with a number of financial and other covenants,
such as maintaining debt service coverage and leverage ratios in certain situations and maintaining insurance
coverage. As of June 30, 2016, the Company was in compliance with its debt covenants under the Amended &
Restated Credit Agreement.
Subordinated Term Loan Credit Agreement
On November 10, 2014, the Company and certain of its subsidiaries entered into a $20.0 million, five-year
Subordinated Term Loan Credit Agreement (“Subordinated Loan Agreement”) with McLarty Capital Partners SBIC,
L.P. (“McLarty”), which bears interest at 11% annually. The proceeds were used to repay certain outstanding loans
under the Company’s previous credit facility. McLarty is indirectly a related party to one of the officers and directors
of the Company; therefore, the Board of Directors appointed a special committee consisting solely of independent
directors to assure that the Subordinated Loan Agreement is fair and reasonable to the Company and its shareholders.
On December 29, 2014, the Company entered into an amendment to the Subordinated Loan Agreement (“McLarty
First Amendment”) to clarify, among other matters, that mandatory prepayments of the subordinated loans will not be
required in connection with any issuance of equity interests of the Company, depending on the Company’s senior
leverage ratio, and the proceeds are used to finance a permitted acquisition or other permitted investments or finance
consolidated capital expenditures.
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On April 20, 2016, the Company entered into a second amendment to the Subordinated Loan Agreement (“McLarty
Second Amendment”) to modify certain terms including:
(1) Allows for the exclusion from the fixed charge coverage ratio $1.3 million of certain federal and state taxes
paid related to prior years, effective March 27, 2016;
(2) Modifies the minimum fixed charge coverage ratio and maximum total leverage ratio in line with the
Company’s current financial expectations, effective March 27, 2016; and
(3) Establishes mandatory prepayments that will be required upon the completion of asset sales or sale-
leaseback transactions, with the amount of the prepayments to be determined based upon achievement of
certain leverage ratios.
The Subordinated Loan Agreement has been subordinated to the Amended & Restated Credit Agreement pursuant to
a First Lien Subordination Agreement. The Subordinated Loan Agreement contains customary representations and
warranties, events of default, affirmative covenants, negative covenants, and prepayment terms that are substantially
similar to those contained in the Amended and Restated Credit Agreement described above.
As of June 30, 2016, the Company was in compliance with its debt covenants under the Subordinated Credit Facility.
Loan Contract
On March 23, 2016, AFT Hungary entered into a Loan Contract with Erste Bank Hungary Zrt. in an amount equal to
€4.0 million (“Loan Contract”). The initial funding of €4.0 million drawn on the Loan Contract occurred on March
31, 2016. Approximately $3.0 million of the net proceeds from the Loan Contract were used to partially repay
obligations outstanding under the Amended & Restated Credit Agreement, with the remaining net proceeds to be used
for capital expenditures and other investments to facilitate the export of goods and services provided by AFT
Hungary.
The loan matures on March 7, 2021, and bears interest at a fixed rate of 0.98% per annum. The Company is required
to make semi-annual principal payments in an amount equal to approximately €400,000 along with monthly interest
payments. The Loan Contract is secured by certain of AFT Hungary’s assets, including the real estate and selected
machinery and equipment located in Retsag, Hungary.
Future Debt Payments
The following schedule represents the Company's future debt payments as of June 30, 2016 (in thousands):
2017
2018
2019 (1)
2020
2021
Total
(1) Amount includes $7.6 million for the senior secured revolving commitment.
NOTE 8 - Income Taxes
The components of (loss) income before income taxes are as follows (in thousands):
United States
Foreign
Total
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$
$
15,909
6,909
9,225
20,909
814
53,766
June 30, 2016 June 30, 2015
(613)
$
2,120
1,507
(1,362) $
(763)
(2,125) $
$
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The provision for income taxes consisted of the following (in thousands):
June 30, 2016 June 30, 2015
Current:
Federal
State
Foreign
Total current benefit
Deferred:
Federal
Total deferred expense
Income tax expense
$
$
A reconciliation of the federal statutory rate to the effective income tax rate follows:
Federal income taxes
State income taxes
Foreign income inclusions
Share-based compensation
Permanent items
Research and development tax credits
Foreign taxes
Change in tax rates
Uncertain tax positions
Valuation allowance and other
Effective rate
526 $
(69)
(122)
335
(416)
(416)
(81) $
June 30,
2016
34.0 %
2.2 %
(2.4)%
(2.6)%
0.7 %
12.5 %
(5.7)%
— %
(2.4)%
(40.0)%
(3.7)%
915
(77)
(358)
480
(1,989)
(1,989)
(1,509)
June 30,
2015
34.0 %
3.4 %
— %
— %
0.8 %
— %
— %
1.1 %
38.0 %
22.7 %
100.0 %
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and
liabilities and their tax basis, as well as from net operating loss and tax credit carryforwards, and are stated at enacted
tax rates expected to be in effect when taxes are actually paid or recovered. Deferred income tax assets and liabilities
represent amounts available to reduce or increase taxes payable on taxable income in future years. Management
evaluates the recoverability of these future tax deductions and credits by assessing the adequacy of future expected
taxable income from all sources, including carrybacks (if applicable), reversal of taxable temporary differences,
forecasted operating earnings and available tax planning strategies. To the extent the Company does not consider it
more likely than not that a deferred tax asset will be recovered, a valuation allowance is established.
Goodwill recorded as part of an asset purchase agreement is deductible for tax purposes and only recorded as a book
charge if it is impaired. A deferred tax liability is recorded as the tax deduction is realized, which will not be reversed
unless and until the goodwill is disposed of or impaired. The Company will continue to record an income tax expense
related to the amortization of goodwill as a discrete item each quarter unless and until such impairment occurs.
Significant components of the Company's deferred tax assets at June 30, 2016 and 2015 are shown below. A
valuation allowance has been established as realization of such deferred tax assets has not met the more likely-than-
not threshold requirement. The Company has recognized a valuation allowance to an amount it expects to realize via
carry back based on fiscal year 2016 operations and the reversal of existing temporary differences. The increase in
the valuation allowance in fiscal year 2016 represents the increase in deferred tax assets that the Company has
determined is not more likely than not of being recovered. If the Company's judgment changes and it is determined
that the Company will be able to realize these deferred tax assets, the tax benefits relating to any reversal of the
valuation allowance on deferred tax assets will be accounted for as a reduction to income tax expense.
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Components of our deferred tax assets and liabilities were as follows (in thousands):
June 30, 2016
June 30, 2015
Deferred tax assets arising from:
Accrued liabilities and reserves
Deferred revenue
Bad debt reserves
Tangible property
Inventory reserve
Intangible assets
Other
Share-based compensation
Unrealized foreign currency gain
Foreign tax credit carryforward
Research and development tax credits
Alternative minimum tax credits
Tax effects of net operating loss carryforwards
Less valuation allowances
Deferred tax assets
Deferred tax liabilities arising from:
Property and equipment
Prepaid expenses
Deferred revenue
Deferred tax liabilities
Net deferred tax liability
$
237 $
9
95
150
365
718
49
4
2
122
201
319
2,117
(1,957)
2,431
(3,198)
(162)
—
(3,360)
$
(929) $
152
—
80
141
331
685
117
—
50
—
—
—
2,063
(1,062)
2,557
(2,985)
(14)
(12)
(3,011)
(454)
At June 30, 2016, the income tax receivable was $1.6 million and at June 30, 2105, the income tax receivable was
$0.6 million, which includes $0.3 million related to uncertain tax positions, and were recorded in other current assets.
At June 30, 2016, the Company had federal net operating loss carryforwards of approximately $5.5 million expiring
beginning in 2027 and state net operating loss carryforwards of approximately $7.3 million expiring beginning in
2023.
Pursuant to the Internal Revenue Code Sections 382 and 383, use of the Company's U.S. federal and state net
operating loss carryforwards may be limited in the event of a cumulative change in ownership of more than 50%
within a three-year period. The Company had an ownership change in 2012 and, as a result, certain of the Company's
net operating loss carryforwards are subject to an annual limitation, reducing the amount available to offset income
tax liabilities absent the limitation.
As of June 30, 2016, the Company had research and development tax credit carryforwards of approximately $0.2
million, foreign tax credit carryforwards of approximately $0.1 million, and alternative minimum tax credit
carryforwards of approximately $0.3 million. If unused, the research and development tax credit carryforwards will
begin to expire in 2035 and the foreign tax credit carryforwards will expire in 2026. The alternative minimum tax
credits can be carried forward indefinitely.
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The following table summarizes the changes in the Company's unrecognized tax benefits during the year ended June
30, 2016 and 2015 (in thousands). The Company expects no material changes to unrecognized tax positions within
the next twelve months. If recognized, all of these benefits would favorably impact the Company’s income tax
expense, before considerations of any related valuation allowance.
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The following table summarizes the changes in the Company's unrecognized tax benefits during the year ended June
30, 2016 and 2015 (in thousands). The Company expects no material changes to unrecognized tax positions within
the next twelve months. If recognized, all of these benefits would favorably impact the Company’s income tax
expense, before considerations of any related valuation allowance.
Balance, beginning of year
Increase in current year position
Increase in prior year position
Decrease in prior year position
Balance, end of year
NOTE 9 – Stockholders’ Equity and Earnings Per Share
Stockholders’ Equity
June 30,
2016
924
131
—
$
(272)
783
$
June 30,
2015
568
—
441
(85)
924
$
$
On April 8, 2015, the Company sold 3,450,000 shares of ARC common stock in a registered public offering at a price
to the public of $5.00 per share, including 450,000 shares sold pursuant to an option to purchase additional shares
granted to the underwriters by the Company, which was exercised in full. The Company received net proceeds from
the offering, after underwriting discounts, commissions, fees, and expenses, of approximately $15.5 million. The net
proceeds were used to prepay a portion of the principal outstanding on the Company’s Senior Secured Term Loan.
Earnings Per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-
average number of shares of common stock outstanding during each period. Diluted earnings per share is computed
by dividing net income available to common stockholders by the diluted weighted-average shares of common stock
outstanding during each period. In connection with the acquisitions of ATC and Kecy, the Company issued a total of
905,414 shares of common stock, which were placed in escrow to satisfy certain working capital adjustments and/or
indemnification obligations. As these escrow shares are expected to be returned to the Company, the escrow shares
have been excluded from the basic and diluted earnings per share computations. In February 2016, the 233,788
shares of common stock previously issued for the ATC acquisition were returned to the Company and retired.
As a result of the Company’s net loss for the fiscal year ended June 30, 2016, potentially dilutive stock options of
approximately 8,563 were considered anti-dilutive and were excluded from the computation of diluted earnings per
share. For the fiscal year ended June 30, 2015, the Company had no outstanding equity awards or other potentially
dilutive securities; therefore, there was no computation of dilutive securities.
NOTE 10 – Related Party Transactions
Everest Hill Group Inc.
Everest Hill Group Inc. (“Everest Hill Group”) is the controlling shareholder of ARC, owning approximately 48.2%
of its shares outstanding as of June 30, 2016. Everest Hill Group also owns 100% of Quadrant Management Inc.
(“QMI”), which indirectly owned 74% of the membership interests of Quadrant Metals Technologies LLC (“QMT”)
prior to ARC’s acquisition of QMT in August 2012. ARC and QMI are under common control of Everest Hill
Group.
In addition, the following officers and directors of ARC are also affiliated with QMI and Everest Hill Group:
· Mr. Jason Young, the Company's Chief Executive Officer, has been a Managing Director at QMI since
2005, where he is responsible for making investments in U.S. and emerging market companies, and where
he frequently serves in active management or director-level roles.
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· Mr. Jason Young and Mr. Alan Quasha, the Company’s Chairman and an officer of QMI, each served on the
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· Mr. Jason Young and Mr. Alan Quasha, the Company’s Chairman and an officer of QMI, each served on the
Board of Directors of QMT during fiscal 2016 and received fees for such services.
Brean Capital, LLC
Brean Capital, LLC (“Brean Capital”) acted as an underwriter for the registered public offering discussed above in
Note 9. Everest Hill Group owns a minority interest in Brean Capital. Brean Capital does not own any common
stock of the Company. The offering was be made in compliance with the applicable provisions of FINRA Rule 5121
whereby Imperial Capital, LLC (“Imperial Capital”) acted as the qualified independent underwriter for the
offering. In that role, Imperial Capital participated in the preparation of the prospectus and the registration statement
of which the prospectus formed a part and exercised its usual standards of due diligence with respect thereto.
NOTE 11 – Share-Based Compensation and Employee Benefit Plans
In November 2015, the Company’s stockholders approved the ARC Group Worldwide, Inc. 2015 Equity Incentive
Plan (“2015 Plan”), which is administered by the Compensation Committee (“Committee”) of the Board of
Directors. The 2015 Plan reserves for issuance a total of 950,000 shares of common stock, which may be in the form
of incentive stock options, non-qualified stock options, restricted stock, restricted stock units, or other types of awards
as authorized under the plan. As of June 30, 2016, there were approximately 190,950 shares of common stock
available to be granted under the 2015 Plan. In the case of stock options, the exercise price of the options granted
may not be less than the fair market value of a share of common stock at the date of grant. The Committee
determines the vesting conditions of awards; however, the performance period for an award subject to the satisfaction
of performance measures may not exceed five years. The 2015 Plan will terminate ten years after its adoption, unless
terminated earlier by the Company’s Board of Directors.
A summary of stock option activity under the 2015 Plan as of June 30, 2016 is as follows:
Weighted
Average Exercise Remaining Contractual
Weighted Average
Shares
Price
Term (in years)
Outstanding as of June 30, 2015
Granted
Forfeited
Outstanding as of June 30, 2016
Vested and exercisable as of June 30, 2016
Vested and expected to vest as of June 30,
2016
-
766,175 $
(7,125) $
759,050 $
114,950 $
638,023 $
-
1.51
1.51
1.51
1.51
1.51
-
6.54
6.54
6.54
Options granted during the year ended June 30, 2016 have contractual lives of seven years. The weighted-average
grant date fair value of options granted during the year ended June 30, 2016 was $0.98. The total fair value of shares
vested during the year ended June 30, 2016 was $0.1 million.
Determining Fair Value
The Company estimates the fair value of stock options granted using the Black-Scholes method. The assumptions
used to determine the value of the Company’s stock options granted to employees during the year ended June 30,
2016 were as follows:
Expected term
Expected volatility
Expected dividend yield
Risk-free interest rate
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- 4.75 years
4.50
84.0 % - 85.1 %
- %
1.37 % - 1.41 %
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Expected Term – The expected term represents the period of time the options are expected to be outstanding. The
Company uses the simplified method, as permitted by the SEC, to calculate the expected term, as the Company does
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Expected Term – The expected term represents the period of time the options are expected to be outstanding. The
Company uses the simplified method, as permitted by the SEC, to calculate the expected term, as the Company does
not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected life in
years. The simplified method is calculated as the average of the time-to-vesting and the contractual life of the options.
Expected Volatility – Expected volatility is based on the historical volatility of the Company’s common stock, which
we believe will be indicative of future experience.
Expected Dividends – The Company has never paid dividends on its common stock and currently does not intend to
do so in the near term, and accordingly, the dividend yield percentage is zero.
Risk-Free Interest Rate - The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant
with a term equal to the expected term of the stock option granted.
Share-Based Compensation Expense
Compensation expense recognized during the year ended June 30, 2016 was $0.2 million, and is included in selling,
general and administrative expense. As of June 30, 2016, there was $0.4 million of total unrecognized compensation
expense related to non-vested stock options, which is expected to be recognized over a weighted-average period of
3.5 years. The Company estimated expected forfeitures and is recognizing compensation expense only for those
option grants expected to vest. The Company’s estimate of forfeitures may be adjusted throughout the requisite
service period based on the extent to which actual forfeitures differ, or are likely to differ, from the Company’s
previous estimates. At the end of the service period compensation cost will have been recognized only for those
awards for which the employee has provided the requisite service.
401(k) Plan
The Company sponsors 401(k) plans and matches employee contributions as determined by resolution of the Board
on an annual basis. The employer contribution criterion currently varies by operating entity. Company matching
contributions to the 401(k) plan totaled $0.6 million and $0.4 million for years ended June 30, 2016 and 2015,
respectively.
Employee Stock Purchase Plan
The Company maintains an employee stock purchase plan (“ESPP”), which allows eligible employees to authorize
payroll deductions up to 5% of their base pay to purchase shares of the Company’s common stock, subject to an
annual maximum dollar amount. The purchase price is 85% of the fair market value of the stock on the last business
day of the six-month purchase period. A total of 750,000 shares were authorized under the ESPP. The purchase
period began on August 1, 2016; therefore, no shares have been purchased under the Company’s ESPP as of June 30,
2016.
NOTE 12 – Commitments and Contingencies
Leases
The Company leases land, facilities, and equipment under various non-cancellable operating lease agreements
expiring through August 31, 2024, and contain various renewal options. Rent expense was $0.9 million and $0.8
million for the years ended June 30, 2016 and 2015, respectively. The Company also leases equipment and a building
under non-cancellable capital lease agreements expiring through June 30, 2024. The capital leases have interest rates
ranging from 3.0% to 15.6%.
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At June 30, 2016, approximate future rental commitments were as follows (in thousands):
June 30,
2017
2018
Capital
Leases
Operating
Leases
$
920 $
919
1,419
1,250
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At June 30, 2016, approximate future rental commitments were as follows (in thousands):
June 30,
2017
2018
2019
2020
2021
Thereafter
Total minimum lease payments
Amount representing interest
Present value of total minimum lease payments
Current portion
Capital lease obligation, net of current portion
Capital
Leases
Operating
Leases
1,419
1,250
1,094
445
100
—
4,308
$
$
920 $
919
914
48
48
145
2,994 $
(199)
2,795
(846)
1,949
As of June 30, 2016, the Company had $0.6 million in capital expenditure commitments.
Legal Proceedings
From time to time, the Company is a party to various litigation matters incidental to the conduct of its business. The
Company is not presently a party to any legal proceedings, the resolution of which, management believes, would have
a material adverse effect on its business, operating results, financial condition or cash flows.
NOTE 13 – Segment Information
The Company’s operations are classified into four reportable business segments: Precision Components Group,
3DMT Group, Flanges and Fittings Group, and Wireless Group.
·
·
·
·
The Precision Components Group companies provide highly engineered fabricated metal components using
processes consisting of metal injection molding, precision metal stamping, and the hermetic sealing of
certain components. Industries served include medical and dental device, firearm and defense, automotive,
aerospace, consumer durable, and electronic device.
The 3DMT Group was established to meet customer needs of reducing costs and accelerating the “speed-to-
market” through rapid prototyping, short-run production, and rapid tooling. The segment consists of our
legacy tooling product line, 3DMT (our 3D printing and Additive Manufacturing operations), and ATC.
The Flanges and Fittings Group consists of General Flange & Forge LLC (“GF&F”). GF&F provides
custom machining solutions and special flange facings.
The Wireless Group focuses on wireless broadband technology related to propagation and optimization. It
designs and develops hardware, including antennas, radios, and related accessories, used in broadband,
industrial and other wireless networks. Products are sold to public and private carriers, wireless
infrastructure providers, wireless equipment distributors, value added resellers and other original equipment
manufacturers.
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Summarized segment information for the years ended June 30, 2016 and 2015 is as follows (in thousands):
Fiscal Year Ended June 30,
2016
2015
Sales:
Precision Components Group
$ 76,023 $ 87,163
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Summarized segment information for the years ended June 30, 2016 and 2015 is as follows (in thousands):
Fiscal Year Ended June 30,
2016
2015
Sales:
Precision Components Group
3DMT Group
Flanges and Fittings Group
Wireless Group
Consolidated sales
Operating costs:
Precision Components Group
3DMT Group
Flanges and Fittings Group
Wireless Group
Consolidated operating costs
Segment operating income (loss):
Precision Components Group
3DMT Group
Flanges and Fittings Group
Wireless Group
Corporate (1)
Total segment operating income
Interest expense, net
Other income, net
Non-operating expense
Consolidated (loss) income before income taxes and non-controlling interest
$ 76,023 $ 87,163
17,479
5,872
1,991
$ 103,840 $ 112,505
21,551
4,757
1,509
$ 69,551 $ 76,262
19,082
5,222
2,021
$ 98,069 $ 102,587
22,883
4,245
1,390
$
$
$
6,472 $ 10,901
(1,603)
(1,332)
650
512
(30)
119
(3,829)
(3,616)
6,089
2,155 $
(4,451)
171
(4,280)
(2,125) $
(4,848)
266
(4,582)
1,507
(1) Corporate expense includes compensation and benefits, insurance, legal, accounting, consulting, and board of
director’s fees.
Fiscal Year Ended June 30,
2016
2015
Capital expenditures:
Precision Components Group
3DMT Group
Flanges and Fittings Group
Wireless Group
Consolidated capital expenditures
Depreciation and amortization expense:
Precision Components Group
3DMT Group
Flanges and Fittings Group
Wireless Group
Consolidated depreciation and amortization expense
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$
$
$
$
1,956 $
656
21
—
2,633 $
6,268 $
3,169
71
21
9,529 $
4,459
327
24
—
4,810
6,038
3,260
87
74
9,459
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Total assets:
Precision Components Group
3DMT Group
Flanges and Fittings Group
Wireless Group
Corporate
Consolidated total assets
Geographic information for the Company is as follows (in thousands):
As of June 30,
2016
2015
$ 69,657 $ 78,675
21,567
21,055
1,528
1,257
963
1,006
28,823
23,290
$ 121,798 $ 126,023
Fiscal Year Ended June 30,
2016
2015
Sales:
U.S.
International
Property and equipment, net:
U.S.
International
NOTE 14 – Significant Customers
$ 96,492 $ 100,757
11,748
$ 103,840 $ 112,505
7,348
As of June 30,
2016
2015
$ 33,782 $ 35,555
8,258
8,199
$ 41,981 $ 43,813
The concentration of the Company’s business with a relatively small number of customers may expose it to a material
adverse effect if one or more of these large customers were to experience financial difficulty or were to cease being a
customer for non-financial related issues. The Company’s revenue concentrations of 5% or greater are as follows:
Customer
1 (a)
2 (b)
3 (a)
4 (a)
5 (a)
Total
Percentage of Sales
2015
2016
10.2 %
9.4 %
8.8 %
8.1 %
5.9 %
42.4 %
8.1 %
* %
9.5 %
7.7 %
5.2 %
30.5 %
*
(a)
(b)
Customer represented less than 5% of sales for the years presented.
Revenue from this customer is generated through our Precision Components Group segment.
Revenue from this customer is generated through our 3DMT Group segment.
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The Company’s accounts receivable concentrations of 5% or greater for the above-listed customers are as follows:
Customer
1
2
3
Percentage of Receivables
2015
2016
10.5 %
8.3 %
5.2 %
9.0 %
6.2 %
7.0 %
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The Company’s accounts receivable concentrations of 5% or greater for the above-listed customers are as follows:
Customer
1
2
3
4
5
Total
Percentage of Receivables
2015
2016
10.5 %
8.3 %
5.2 %
8.3 %
** %
32.3 %
9.0 %
6.2 %
7.0 %
** %
** %
22.2 %
**
Customer represented less than 5% of accounts receivable for the years presented.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
(a)
Disclosure Controls and Procedures
Under the supervision of and with the participation of management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as
amended (the “Exchange Act”), as of June 30, 2016. Based on this evaluation, and the identification of a material
weakness in our control over financial reporting described in “Management’s Report on Internal Control over
Financial Reporting” below, our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures were not effective as of June 30, 2016.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
defined in Exchange Act Rule 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process designed
under the supervision of our Chief Executive Officer and Chief Financial Officer, and effected by our Board of
Directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of ARC’s Consolidated Financial Statements for external purposes in accordance with
GAAP.
We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in “Internal Control - Integrated Framework” (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission as of June 30, 2016. Based upon that evaluation, management identified
the following material weaknesses as of June 30, 2016 in the Company’s internal control over financial reporting:
·
Insufficient Information Technology and Accounting Infrastructure. Management did not maintain a
sufficient complement of information technology personnel with appropriate systems knowledge,
experience, and training, which resulted in inadequate segregation of duties, access to computer systems,
documentation of policies and procedures, and system maintenance. Management noted that the Company’s
computer systems are often running on older versions of accounting software with limited functionality that
hindered our ability to automate controls. Additionally, at certain of our manufacturing facilities there are a
relatively small number of professionals employed by our Company in bookkeeping and accounting
functions, which has resulted in instances of inadequate segregation of duties within our internal control
systems. The insufficient information technology and accounting infrastructure resulted in deficiencies in
the design and operating effectiveness over financial reporting that are considered a material weakness
because they could lead to the untimely identification and resolution of accounting and disclosure matters or
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
(a)
Disclosure Controls and Procedures
Under the supervision of and with the participation of management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as
amended (the “Exchange Act”), as of June 30, 2016. Based on this evaluation, and the identification of a material
weakness in our control over financial reporting described in “Management’s Report on Internal Control over
Financial Reporting” below, our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures were not effective as of June 30, 2016.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
defined in Exchange Act Rule 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process designed
under the supervision of our Chief Executive Officer and Chief Financial Officer, and effected by our Board of
Directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of ARC’s Consolidated Financial Statements for external purposes in accordance with
GAAP.
We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in “Internal Control - Integrated Framework” (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission as of June 30, 2016. Based upon that evaluation, management identified
the following material weaknesses as of June 30, 2016 in the Company’s internal control over financial reporting:
·
Insufficient Information Technology and Accounting Infrastructure. Management did not maintain a
sufficient complement of information technology personnel with appropriate systems knowledge,
experience, and training, which resulted in inadequate segregation of duties, access to computer systems,
documentation of policies and procedures, and system maintenance. Management noted that the Company’s
computer systems are often running on older versions of accounting software with limited functionality that
hindered our ability to automate controls. Additionally, at certain of our manufacturing facilities there are a
relatively small number of professionals employed by our Company in bookkeeping and accounting
functions, which has resulted in instances of inadequate segregation of duties within our internal control
systems. The insufficient information technology and accounting infrastructure resulted in deficiencies in
the design and operating effectiveness over financial reporting that are considered a material weakness
because they could lead to the untimely identification and resolution of accounting and disclosure matters or
could lead to a failure to perform timely and effective reviews at a level of precision necessary to identify a
material error.
Plan for Remediation of the Material Weaknesses in Internal Control over Financial Reporting
As disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015, which was filed with the
Securities and Exchange Commission on September 25, 2015, we concluded that, as of June 30, 2015 two material
weaknesses in our internal control over financial reporting existed as we did not maintain effective controls over the
review and analysis of our tax structure and applicable tax compliance regulations, and we had an insufficient
information technology and accounting infrastructure that could lead to the untimely identification and resolution of
accounting and disclosure matters.
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During fiscal year 2016, we implemented the following changes in our internal control over financial reporting to
address the previously reported material weaknesses and to enhance our overall financial control environment:
· we liquidated our wireless subsidiary in the British Virgin Islands. As a result, all of the Company’s
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During fiscal year 2016, we implemented the following changes in our internal control over financial reporting to
address the previously reported material weaknesses and to enhance our overall financial control environment:
· we liquidated our wireless subsidiary in the British Virgin Islands. As a result, all of the Company’s
subsidiaries are included in its U.S. tax return. In addition, our tax preparer provided a questionnaire to help
identify potential foreign tax issues prior to the preparation of the tax provision;
· we implemented a new enterprise resource planning system at ATC, which went live on April 25, 2016, to
establish better access controls, segregation of duties, timely reporting and more efficient processes and
operations.
· we have reviewed weaknesses in internal controls with our plant general managers and controllers to
implement improved controls over information technology, segregation of duties, and policies and
procedures.
To address the material weaknesses associated with the Company’s information technology infrastructure, planned
actions in fiscal year 2017 include:
·
·
·
upgrade to the latest version of the enterprise resource planning system used at AFT;
initiate project to upgrade the enterprise resource planning system used at Kecy; and
strengthen the documentation of processes, procedures, and the review and approval of financial activities at
our smaller facilities;
The Audit Committee has directed management to develop a detailed plan and timetable for the implementation of
the foregoing remedial measures and will monitor their implementation. In addition, under the direction of the Audit
Committee, management will continue to review and make necessary changes to the overall design of our internal
control environment, as well as policies and procedures to improve the overall effectiveness of internal control over
financial reporting.
Management believes the measures described above and other procedures that will be implemented will largely
remediate the control deficiencies we have identified and strengthen our internal control over financial
reporting. However, the implementation of certain mitigating processes and procedures, particularly at the
Company’s smaller reporting entities, will be dependent on certain factors, including, but not limited to, financial
performance, and as such, the timing and effectiveness cannot be accurately forecasted at present time. Management
is committed to continuous improvement of our internal control processes and will continue to diligently review our
financial reporting controls and procedures. As management continues to evaluate and work to improve internal
control over financial reporting, we may determine to take additional measures to address control deficiencies or
determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described
above.
(b)
Changes in Internal Control over Financial Reporting
Except as described above, there have been no changes in our existing internal control structure over financial
reporting during the three months ended June 30, 2016 which have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
Internal control over financial reporting may not prevent or detect all errors and all fraud. Also, projection of any
evaluation of effectiveness of internal control to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may
deteriorate.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item will be included under the captions “Information Regarding the Board of
Directors and Executive Officers,” and “Corporate Governance” in our Proxy Statement for the 2016 Annual Meeting
of Stockholders to be filed with the SEC within 120 days of the fiscal year ended June 30, 2016 (2016 Proxy
Statement) and is incorporated herein by reference. The information required by this item regarding delinquent filers
pursuant to Item 405 of Regulation S-K will be included under the caption “Section 16(a) Beneficial Ownership
Reporting Compliance” in the 2016 Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included under the captions “Director Compensation,” “Executive
Compensation,” “Corporate Governance” and “Compensation Committee Interlocks and Insider Participation” in the
2016 Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item will be included under the captions “Security Ownership of Certain Beneficial
Owners and Management,” “Outstanding Equity Awards at Fiscal Year-End,” and “Grants of Plan-Based Awards” in
the 2016 Proxy Statement and is incorporated herein by reference. Additional information required by this Item is set
forth under the caption “Securities Authorized for Issuance under Equity Compensation Plans” in Item 5, above,
which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information required by this item will be included under the captions “Certain Transactions with Management
and Principal Shareholders” and “Corporate Governance” in the 2016 Proxy Statement and is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be included under the caption “Independent Registered Public Accounting
Firm” in the 2016 Proxy Statement and is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this annual report on Form 10-K:
(1) Consolidated Financial Statements. See the Index to Financial Statements in Part II, Item 8 of this report.
(2) Financial Statement Schedules
Schedules have been omitted since the required information is not significant or is included in the Notes to
Consolidated Financial Statements.
(b)
Exhibits
The exhibit list required by this Item is incorporated by reference to the Exhibit Index filed as part of this report.
Exhibit
Number
Description
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this annual report on Form 10-K:
PART IV
(1) Consolidated Financial Statements. See the Index to Financial Statements in Part II, Item 8 of this report.
(2) Financial Statement Schedules
Schedules have been omitted since the required information is not significant or is included in the Notes to
Consolidated Financial Statements.
(b)
Exhibits
The exhibit list required by this Item is incorporated by reference to the Exhibit Index filed as part of this report.
Exhibit
Number
1.1
3.1
3.2
3.3
10.21
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
Description
Underwriting Agreement, dated April 2, 2015, by and between the Company, Brean Capital, LLC and
Imperial Capital, LLC (incorporated by reference to Exhibit 1.1 to the Company’s Current Report on
Form 8-K, filed on April 2, 2015).
Amended and Restated Articles of Incorporation dated October 11, 2000. (1)
Bylaws of the Company as amended and restated on March 25, 1998. (2)
Amended and Restated Articles of Incorporation dated August 7, 2012. (3)
Lock Up Agreement, by and between the Company and Jason T. Young, dated as of September 3,
2013. (3)
Membership Interest Purchase Agreement, by and among Nigel Sutton, Gregory Curtis, Frank Ferree,
Dermot Rafferty and the Company, dated as of April 7, 2014. (4)
Escrow Agreement, by and among the Company, Nigel Sutton, Gregory Curtis, Frank Ferree and
Dermot Rafferty, dated as of April 7, 2014. (4)
Assignment Agreement, among the Company, 3D Material Technologies, LLC, Advance Tooling
Concepts, LLC and Advanced Forming Technology, Inc., dated as of April 7, 2014. (4)
Purchase Agreement among Precision Castparts Corp., Thixoforming LLC and Advanced Forming
Technology, Inc., dated April 7, 2014 (5)
Credit Agreement, among the Company, Advanced Forming Technology, Inc. ARC Wireless, Inc.,
Flomet LLC, General Flange & Forge LLC, Tekna Seal LLC, 3D Material Technologies, LLC,
Citizens Bank, N.A. (formerly known as RBS Citizens, N.A.) and Capital One National Association,
dated as of April 7, 2014. (4)
Guarantee and Collateral Agreement, among the Company, Advanced Forming Technology, Inc.
ARC Wireless, Inc., Flomet LLC, General Flange & Forge LLC, Tekna Seal LLC, 3D Material
Technologies, LLC and Citizens Bank, N.A. (formerly known as RBS Citizens, N.A.), dated as of
April 7, 2014. (4)
First Amendment to Credit Agreement, by and among ARC Group Worldwide, Inc., Citizens Bank,
N.A. (formerly known as RBS Citizens, N.A.), Capital One, National Association, TD Bank, N.A.,
Advanced Forming Technology, Inc., ARC Wireless, Inc., FloMet LLC, General Flange & Forge
LLC, Tekna Seal LLC, 3D Material Technologies, LLC, ARC Wireless, LLC, Thixoforming LLC,
ARC Metal Stamping, LLC, Advance Tooling Concepts, LLC, and Quadrant Metals Technologies
LLC, dated as of June 25, 2014. (6)
Guarantee and Collateral Agreement Supplement, made by ARC Metal Stamping, LLC in favor of
Citizens Bank, N.A. (formerly known as RBS Citizens, N.A.), dated as of June 25, 2014. (6)
Asset Purchase Agreement, by and among Kecy Corporation, 4111 Munson Holding, LLC, ARC
Metal Stamping, LLC and ARC Group Worldwide, Inc., dated as of June 25, 2014. (6)
Escrow Agreement, by and among ARC Metal Stamping, LLC, ARC Group Worldwide, Inc., Kecy
Corporation and Wuersch & Gering LLP, dated as of June 25, 2014. (6)
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Exhibit
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Exhibit
Number
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
Lease Agreement, between 447 Walnut, LLC and ARC Metal Stamping, LLC, dated as of June 25,
Description
2014. (6)
Transition Services Agreement, by and between Moore & Associates Sales Company and ARC Metal
Stamping, LLC, dated June 25, 2014. (6)
Amended and Restated Credit Agreement, among the Company, Advanced Forming Technology, Inc.
ARC Wireless, Inc., Flomet LLC, General Flange & Forge LLC, TeknaSeal LLC, 3D Material
Technologies, LLC, Quadrant Metals Technologies LLC, Citizens Bank, N.A. and Capital One
National Association, dated as of November 10, 2014 (incorporated by reference to Exhibit 10.38 to
the Company’s Current Report on Form 8-K, filed on November 12, 2014).
Credit Agreement, among the Company, Advanced Forming Technology, Inc. ARC Wireless, Inc.,
Flomet LLC, General Flange & Forge LLC, TeknaSeal LLC, 3D Material Technologies, LLC,
Quadrant Metals Technologies LLC, and McLarty Capital Partners SBIC, L.P., dated as of
November 10, 2014 (incorporated by reference to Exhibit 10.39 to the Company’s Current Report on
Form 8-K, filed on November 12, 2014).
First Amendment, dated December 23, 2014, to the Amended and Restated Credit Agreement, by and
among the Company, Advanced Forming Technology, Inc. ARC Wireless, Inc., Flomet LLC, General
Flange & Forge LLC, TeknaSeal LLC, 3D Material Technologies, LLC, Quadrant Metals
Technologies LLC, Citizens Bank, N.A. and Capital One National Association, dated as of
November 10, 2014 (incorporated by reference to Exhibit 10.40 to the Company’s Current Report on
Form 8-K, filed on December 30, 2014).
First Amendment to the Credit Agreement, dated December 29, 2014, by and among the Company,
Advanced Forming Technology, Inc. ARC Wireless, Inc., Flomet LLC, General Flange & Forge LLC,
TeknaSeal LLC, 3D Material Technologies, LLC, Quadrant Metals Technologies LLC, and McLarty
Capital Partners SBIC, L.P., dated as of November 10, 2014 (incorporated by reference to
Exhibit 10.41 to the Company’s Current Report on Form 8-K, filed on December 30, 2014).
Schedules and Exhibits to the Amended and Restated Credit Agreement, dated November 10, 2014,
by and among ARC Group Worldwide, Inc., Advanced Forming Technology, Inc., ARC
Wireless, Inc., Flomet LLC, General Flange & Forge LLC, Tekna Seal LLC, 3D Material
Technologies, LLC, and Quadrant Metals Technologies, LLC, Citizens Bank, N.A., as Administrative
Agent, issuing bank and swingline lender, and Capital One, N.A., as Syndication Agent, and other
lenders from time to time party thereto (incorporated by reference to Exhibit 10.42 to the Company’s
Current Report on Form 8-K, filed on January 14, 2015).
Schedules and Exhibits to the Credit Agreement, dated November 10, 2014, by and among ARC
Group Worldwide, Inc., Advanced Forming Technology, Inc., ARC Wireless, Inc., Flomet LLC,
General Flange & Forge LLC, Tekna Seal LLC, 3D Material Technologies, LLC, and Quadrant
Metals Technologies, LLC, McLarty Capital Partners SBIC, L.P., as administrative agent, and other
lenders from time to time party hereto (incorporated by reference to Exhibit 10.42 to the Company’s
Current Report on Form 8-K, filed on January 14, 2015).
Land Lease, dated August 7, 2014, by and between City of Deland, a Florida municipal corporation,
and Flomet LLC (incorporated by reference to Exhibit 10.44 to the Company’s Amendment 1 to
Registration Statement on Form S-1, filed on January 20, 2015).
Form of Lock-Up Agreement, dated April 8, 2015 by and among Brean Capital, LLC, Imperial
Capital, LLC and Jason T. Young, CEO and Chairman; Drew M. Kelley, CFO and Director, Gregory
D. Wallis, Director; Eddie W. Neely Director, Todd Grimm Director, Theodore Deinard and Everest
Hill Group Inc. (incorporated by reference to Exhibit D of Exhibit 1.1 to the Company’s
Amendment 4 to Registration Statement on Form S-1, filed on March 23, 2015).
Second Amendment, dated as of May 11, 2015, to the Amended & Restated Credit Agreement, by
and among the Company, Advanced Forming Technology, Inc. ARC Wireless, Inc., Flomet LLC,
General Flange & Forge LLC, TeknaSeal LLC, 3D Material Technologies, LLC, Quadrant Metals
Technologies LLC, Citizens Bank, N.A. and Capital One National Association, dated as of
November 10, 2014 (incorporated by reference to Exhibit 10.46 to the Company’s Annual Report on
Form 10-K, filed on September 25, 2015).
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Exhibit
Number
10.47
2015 ARC Group Worldwide, Inc. Equity Incentive Plan (incorporated by reference to Annex A to
Description
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Exhibit
Number
10.47
10.48
10.49
10.50
10.51
14.1
21.1*
23.1*
23.2*
31.1*
31.2*
32.1&
Description
2015 ARC Group Worldwide, Inc. Equity Incentive Plan (incorporated by reference to Annex A to
the Company’s definitive proxy statement, Form DEF 14A, filed on September 29, 2015).
Fourth Amendment to Amended and Restated Credit Agreement, dated April 20, 2016, by and among
ARC Group Worldwide, Inc. and certain of its subsidiaries as borrowers, and Citizens Bank, N.A and
Capital One, N.A. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K, filed on April 22, 2016).
Second Amendment to the Subordinated Loan Agreement, dated April 20, 2016, by and among ARC
Group Worldwide, Inc. and certain of its subsidiaries as borrowers, and McLarty Capital Partners
SBIC, L.P. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K,
filed on April 22, 2016).
Loan Contract between Erste Bank Hungary Zrt. and AFT-Hungary Kft. dated as of March 23, 2016
(incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q, filed on May 4, 2016).
Third Amendment, dated March 29, 2016, to the Amended and Restated Credit Agreement, by and
among the Company, Advanced Forming Technology, Inc. ARC Wireless, Inc., Flomet LLC, General
Flange & Forge LLC, TeknaSeal LLC, 3D Material Technologies, LLC, Quadrant Metals
Technologies LLC, Citizens Bank, N.A. and Capital One National Association, dated as of November
10, 2014 (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q, filed on May 4,
2016).
Amended and Restated Code of Ethics (incorporated by reference to the Company’s Current Report
on Form 8-K, filed on February 7, 2008).
Subsidiaries of the Registrant.
Consent of Hein & Associates LLP
Consent of Grant Thornton LLP
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Written Statement of the Chief Executive Officer and Chief Financial Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Schema
101.CAL* XBRL Taxonomy Calculation Linkbase
101.DEF* XBRL Taxonomy Definition Linkbase
101.LAB* XBRL Taxonomy Label Linkbase
101.PRE* XBRL Taxonomy Presentation Linkbase
Filed with this Form 10-K.
*
& This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall it be deemed
incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act.
Incorporated by reference from the Company’s Form 10-KSB for December 31, 2000 filed on April 2, 2001.
Incorporated by reference from the Company’s Form 10-KSB for December 31, 1997 filed on March 31, 1998.
Incorporated by reference from the Company’s Annual Report on Form 10-K filed on October 4, 2013.
Incorporated by reference from the Company’s Current Report on Form 8-K filed on April 11, 2014.
(1)
(2)
(3)
(4)
(5) Exhibit 10.29, the Purchase Agreement among Precision Castparts Corp., Thixoforming LLC and Advanced
Forming Technology, Inc., dated April 7, 2014 (originally filed with certain redactions as an exhibit to the
Company’s Current Report on Form 8-K on April 11, 2014).
Incorporated by reference from the Company’s Current Report on Form 8-K filed on June 27, 2014.
(6)
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72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ARC Group Worldwide, Inc.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: September 9, 2016
Date: September 9, 2016
ARC Group Worldwide, Inc.
/s/ Jason T. Young
By:
Jason T. Young, President, Chief Executive Officer,
Director
(Principal Executive Officer)
/s/ Drew M. Kelley
By:
Drew M. Kelley, Chief Financial Officer
(Principal Financial Officer and Principal Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following
persons on behalf of the registrant in the capacities and on the dates indicated.
Date
Signatures
September 9, 2016
September 9, 2016
September 9, 2016
September 9, 2016
September 9, 2016
/s/ Alan G. Quasha
Alan G. Quasha, Chairman of the Board
/s/ Jason T. Young
Jason T. Young, President, Chief Executive Officer,
Director
/s/ Todd A. Grimm
Todd A. Grimm, Director
/s/ Gregory D. Wallis
Gregory D. Wallis, Director
/s/ Eddie W. Neely
Eddie W. Neely, Director
73
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