10-Q 1 arc-20170402x10q.htm 10-Q arcw_Current_Folio_10Q

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10 - Q

 

QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 2, 2017

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

Picture 1

 

ARC Group Worldwide, Inc.

(Exact name of registrant as specified in its charter)

 

Utah

(State or other jurisdiction of incorporation or organization)

 

 

 

 

001-33400

    

87-0454148

(Commission File Number)

 

(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)

 

Indicate by check mark whether the registrant (1) has 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 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 Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 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 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 “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☒

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

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 May 4, 2017, the Registrant had 18,171,626 shares outstanding of its $.0005 par value common stock.

 

 

 

 


 

ARC Group Worldwide, Inc.

 

Table of Contents

 

 

 

 

 

PART I. FINANCIAL INFORMATION 

 

 

 

 

    

 

Item 1. 

Financial Statements

 

3

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended April 2, 2017 and March 27, 2016

 

3

 

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of April 2, 2017 and June 30, 2016

 

4

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended April 2, 2017 and March 27, 2016

 

5

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

6

 

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

30

 

 

 

 

Item 4. 

Controls and Procedures

 

30

 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

 

 

Item 1A. 

Risk Factors

 

31

 

 

 

 

Item 6. 

Exhibits

 

31

 

 

 

 

SIGNATURES 

 

32

 

 


 

PART I — FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

ARC Group Worldwide, Inc.

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except for share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

    

April 2, 2017

    

March 27, 2016

    

April 2, 2017

    

March 27, 2016

 

Sales

 

$

25,472

 

$

24,885

 

$

80,498

 

$

72,353

 

Cost of sales

 

 

22,370

 

 

19,851

 

 

67,604

 

 

59,097

 

Gross profit

 

 

3,102

 

 

5,034

 

 

12,894

 

 

13,256

 

Selling, general and administrative

 

 

4,986

 

 

4,707

 

 

14,824

 

 

12,827

 

(Loss) income from operations

 

 

(1,884)

 

 

327

 

 

(1,930)

 

 

429

 

Other income (expense), net

 

 

88

 

 

(23)

 

 

893

 

 

71

 

Interest expense, net

 

 

(865)

 

 

(1,106)

 

 

(3,002)

 

 

(3,372)

 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

(723)

 

 

 —

 

Loss before income taxes

 

 

(2,661)

 

 

(802)

 

 

(4,762)

 

 

(2,872)

 

Income tax (expense) benefit

 

 

(120)

 

 

 8

 

 

1,181

 

 

566

 

Net loss from continuing operations

 

 

(2,781)

 

 

(794)

 

 

(3,581)

 

 

(2,306)

 

Gain on sale of subsidiary and income from discontinued operations, net of tax

 

 

 7

 

 

457

 

 

3,704

 

 

934

 

Net (loss) income

 

 

(2,774)

 

 

(337)

 

 

123

 

 

(1,372)

 

Net income attributable to non-controlling interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

 

 —

 

 

(4)

 

 

(22)

 

 

(48)

 

Discontinued operations

 

 

 —

 

 

(20)

 

 

(4)

 

 

(40)

 

Net income attributable to non-controlling interests

 

 

 —

 

 

(24)

 

 

(26)

 

 

(88)

 

Net (loss) income attributable to ARC Group Worldwide, Inc.

 

$

(2,774)

 

$

(361)

 

$

97

 

$

(1,460)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per common share, basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.15)

 

$

(0.04)

 

$

(0.19)

 

$

(0.13)

 

Discontinued operations

 

$

 —

 

$

0.02

 

$

0.20

 

$

0.05

 

Attributable to ARC Group Worldwide, Inc.

 

$

(0.15)

 

$

(0.02)

 

$

0.01

 

$

(0.08)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

18,152,739

 

 

18,123,883

 

 

18,133,397

 

 

18,123,883

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

3


 

ARC Group Worldwide, Inc.

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

April 2, 2017

    

June 30, 2016

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash

 

$

723

 

$

3,620

 

Accounts receivable, net

 

 

13,996

 

 

14,186

 

Inventories, net

 

 

19,712

 

 

16,585

 

Deferred income tax assets

 

 

 —

 

 

478

 

Prepaid expenses and other current assets

 

 

3,326

 

 

3,886

 

Current assets of discontinued operations

 

 

 —

 

 

1,818

 

Total current assets

 

 

37,757

 

 

40,573

 

Property and equipment, net

 

 

42,182

 

 

41,828

 

Goodwill

 

 

11,427

 

 

11,427

 

Intangible assets, net

 

 

20,465

 

 

23,066

 

Other

 

 

11

 

 

28

 

Long-term assets of discontinued operations

 

 

 —

 

 

3,527

 

Total assets

 

$

111,842

 

$

120,449

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

10,404

 

$

8,602

 

Accrued expenses and other current liabilities

 

 

2,926

 

 

2,591

 

Deferred revenue

 

 

1,152

 

 

1,457

 

Bank borrowings, current portion of long-term debt, net of unamortized deferred financing costs

 

 

1,644

 

 

15,648

 

Capital lease obligations, current portion

 

 

1,389

 

 

837

 

Accrued escrow obligations, current portion

 

 

1,211

 

 

2,842

 

Current liabilities of discontinued operations

 

 

 —

 

 

723

 

Total current liabilities

 

 

18,726

 

 

32,700

 

Long-term debt, net of current portion and unamortized deferred financing costs

 

 

42,891

 

 

36,769

 

Deferred income tax liabilities

 

 

1,312

 

 

1,407

 

Capital lease obligations, net of current portion

 

 

2,175

 

 

1,930

 

Accrued escrow obligations, net of current portion

 

 

1,184

 

 

966

 

Other long-term liabilities

 

 

1,061

 

 

2,115

 

Long-term liabilities of discontinued operations

 

 

 —

 

 

19

 

Total liabilities

 

 

67,349

 

 

75,906

 

 

 

 

 

 

 

 

 

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; 18,180,027 and 18,803,910 shares issued and 18,171,626 and 18,795,509 shares issued and outstanding at April 2, 2017 and June 30, 2016, respectively

 

 

10

 

 

10

 

Treasury stock, at cost; 8,401 shares at April 2, 2017 and June 30, 2016

 

 

(94)

 

 

(94)

 

Additional paid-in capital

 

 

30,784

 

 

29,702

 

Retained earnings

 

 

13,868

 

 

13,771

 

Accumulated other comprehensive loss

 

 

(75)

 

 

(6)

 

Total ARC Group Worldwide, Inc. stockholders' equity

 

 

44,493

 

 

43,383

 

Non-controlling interests

 

 

 —

 

 

1,160

 

Total equity

 

 

44,493

 

 

44,543

 

Total liabilities and equity

 

$

111,842

 

$

120,449

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

4


 

ARC Group Worldwide, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended

 

 

    

April 2, 2017

    

March 27, 2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

123

 

$

(1,372)

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

7,413

 

 

7,165

 

Share-based compensation expense

 

 

616

 

 

138

 

Gain on sale of subsidiaries

 

 

(5,456)

 

 

 —

 

Bad debt expense and other

 

 

120

 

 

92

 

Deferred income taxes

 

 

194

 

 

362

 

Changes in working capital:

 

 

 

 

 

 

 

Accounts receivable

 

 

(184)

 

 

18

 

Inventory

 

 

(3,506)

 

 

557

 

Prepaid expenses and other assets

 

 

815

 

 

(2,428)

 

Accounts payable

 

 

2,324

 

 

834

 

Accrued expenses

 

 

(640)

 

 

(1,259)

 

Deferred revenue

 

 

(305)

 

 

(274)

 

Net cash provided by operating activities

 

 

1,514

 

 

3,833

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(5,324)

 

 

(1,918)

 

Proceeds from sale of subsidiary

 

 

10,538

 

 

 —

 

Net cash provided by (used in) investing activities

 

 

5,214

 

 

(1,918)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from debt issuance

 

 

91,264

 

 

1,000

 

Repayments of long-term debt and capital lease obligations

 

 

(100,084)

 

 

(4,882)

 

Payment of distributions to non-controlling membership interests from the sale of subsidiary

 

 

(453)

 

 

 —

 

Purchase of non-controlling membership interests

 

 

(235)

 

 

 —

 

Issuance of common stock under employee stock purchase plan

 

 

98

 

 

 —

 

Net cash used in financing activities

 

 

(9,410)

 

 

(3,882)

 

Effect of exchange rates on cash

 

 

(215)

 

 

63

 

Net decrease in cash

 

 

(2,897)

 

 

(1,904)

 

Cash, beginning of period

 

 

3,620

 

 

4,821

 

Cash, end of period

 

$

723

 

$

2,917

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,917

 

$

2,550

 

Cash paid for income taxes, net of refunds

 

$

(858)

 

$

597

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

5


 

ARC Group Worldwide, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

NOTE 1 – Nature of Operations and Basis of Presentation

 

Nature of Operations

 

ARC Group Worldwide, Inc. (the “Company” or “ARC”) is a leading, global advanced manufacturer offering a full suite of products and services to its customers, including: (i) metal injection molding (“MIM”); (ii) metal 3D 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 the Company’s diverse product offering, ARC provides its customers with a holistic prototyping and full-run production solution for both precision metal and plastic fabrication.  The Company further differentiates itself from its competitors by providing innovative, custom capabilities, which improve high-precision manufacturing efficiency and speed-to-market for its customers.

 

ARC’s mission is to accelerate the adoption of key technologies, such as automation, robotics, production software, and metal 3D printing, in traditional manufacturing, thereby benefiting from the elimination of inefficiencies currently present in the global supply chain.  Further, ARC seeks 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.

 

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.

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).  In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of its financial position and results of operations.  Interim results of operations are not necessarily indicative of the results that may be achieved for the full year.  The consolidated balance sheet as of June 30, 2016, was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP.  As such, this quarterly report should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016.  The Company follows the same accounting policies for preparing quarterly and annual reports.  

 

Principles of Consolidation

 

The unaudited condensed 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 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.

 

6


 

Non-Controlling Interests

 

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 September 30, 2016, the Company sold Tekna Seal LLC, which included 95.7% owned by the Company and 4.3% held by minority stakeholders (see Note 3, Discontinued Operations, for more information).  Effective October 3, 2016, the Company purchased 3.8% of the outstanding non-controlling membership interests of FloMet LLC, increasing the Company’s ownership to 100%.  As a result of these transactions, there is no non-controlling interest on the consolidated balance sheet as of April 2, 2017.  The Company has recognized the carrying value of the non-controlling interests as a component of stockholders’ equity for the applicable periods presented. 

 

In connection with the purchase of the outstanding non-controlling membership interests of FloMet LLC, we entered into a Consent and Agreement with the seller that provides that if there is any sale of FloMet LLC within three years from October 3, 2016, and if such sale price is higher than the sale of the interests by the Seller, the Seller shall receive a proportionate gross-up payment reflecting such higher price.

 

Comprehensive Income (Loss)

 

For each of the quarters ended April 2, 2017 and March 27, 2016, there were no material differences between net income (loss) and comprehensive income (loss).

 

Accounting Pronouncements Adopted in the Current Period

 

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2015-17, Balance Sheet Classification of Deferred Taxes.  This update requires an entity to classify deferred tax assets and liabilities as non-current within a classified statement of financial position.  ASU 2015-17 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016, but early adoption is permitted.  This update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented.  The Company adopted the provisions of ASU 2015-17 on a prospective basis as of July 1, 2016; therefore, the prior period was not retrospectively adjusted.  The adoption of ASU 2015-17 did not have an impact on our consolidated results of operations or cash flows.

 

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs to ASC Topic 835, Interest - Imputation of Interest (“ASU 2015-03”).  ASU 2015-03 requires an entity to present debt issuance costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset.  Amortization of debt issuance costs will continue to be reported as interest expense.  ASU 2015-03 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015.

 

The Company adopted the provisions of ASU 2015-03 on July 1, 2016, which required retroactive application and represented a change in accounting principle.  The deferred financing costs of approximately $1.3 million associated with a portion of our outstanding debt, which were previously included in prepaid expenses and other current assets and other assets on the consolidated balance sheet as of June 30, 2016, are reflected as a reduction to the carrying liability of the Company’s outstanding debt.  As a result of this change in accounting principle, the consolidated balance sheet as of June 30, 2016 was adjusted as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

Previously

 

Effect of Adoption of

 

 

 

    

Reported

    

Accounting Principle

    

As Adjusted

Assets:

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

$

4,378

 

$

(429)

 

$

3,949

Other assets

 

$

948

 

$

(920)

 

$

28

Total assets

 

$

121,798

 

$

(1,349)

 

$

120,449

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Bank borrowings, current portion of long-term debt

 

$

15,909

 

$

(261)

 

$

15,648

Long-term debt, net of current portion

 

$

37,857

 

$

(1,088)

 

$

36,769

Total liabilities

 

$

77,255

 

$

(1,349)

 

$

75,906

 

7


 

Recent Accounting Pronouncements

 

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.

 

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 2019 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 of its pending adoption of ASU 2014-09 on its consolidated financial statements.

 

NOTE 3 – Divestitures

 

Tekna Seal LLC

 

On September 30, 2016, the Company sold its non-core subsidiary, Tekna Seal LLC (“Tekna Seal”), to Winchester Electronics Corporation (“Winchester”) pursuant to a Membership Interests Purchase Agreement for $10.5 million in cash.  The sale to Winchester covered all of the membership interests of Tekna Seal, including 95.7% owned by the Company and 4.3% held by the Tekna Seal minority stakeholders.  The proceeds of the sale, after giving effect to any working capital adjustments, were allocated among the Company and the minority sellers proportionate to their respective ownership of pre-closing membership interests.  The Company used the net cash proceeds of the sale to repay principal outstanding under the Company’s revolving loan.  During the second quarter of 2017, the Company finalized the working capital adjustments with Winchester and paid the former minority stakeholders.   

 

Below is a summary of the gain on sale of discontinued operations (in thousands):

 

 

 

 

 

Gross proceeds

 

$

10,538

 

 

 

 

Less:

 

 

 

Property and equipment, net

 

 

218

Accounts receivable

 

 

918

Inventory

 

 

1,268

Other current assets

 

 

54

Accounts payable and accrued expenses

 

 

(936)

Working capital adjustment

 

 

(184)

Total net assets disposed

 

 

1,338

 

 

 

 

Goodwill

 

 

3,374

Transaction costs

 

 

393

Minority interests

 

 

(393)

Payments to minority stakeholders

 

 

452

Gain on sale of discontinued operations, before income taxes

 

$

5,374

 

8


 

In connection with the sale, the Company recorded a pre-tax gain of approximately $5.4 million, which includes a non-cash charge of $3.4 million related to goodwill associated with Tekna Seal, and transaction costs of approximately $0.4 million.  The income from operations of Tekna Seal attributable to the Company was approximately $0.4 for the three months ended March 27, 2016 and approximately $0.1 million and $0.9 million for the nine months ended April 2, 2017 and March 27, 2016, respectively. 

 

The condensed consolidated statements of operations for the nine months ended April 2, 2017, include the results of operations of Tekna Seal through the sale date of September 30, 2016 and the gain on the sale of Tekna Seal.  Financial information for discontinued operations for the three and nine months ended April 2, 2017 and March 27, 2016 is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

April 2, 2017

 

March 27, 2016

 

April 2, 2017

 

March 27, 2016

Sales

 

$

 —

 

$

1,615

 

$

1,277

 

$

3,665

Cost of sales

 

 

 —

 

 

(938)

 

 

(943)

 

 

(2,104)

Gross profit

 

 

 —

 

 

677

 

 

334

 

 

1,561

Selling, general and administrative

 

 

 —

 

 

(220)

 

 

(242)

 

 

(627)

Income from discontinued operations, before income taxes

 

 

 —

 

 

457

 

 

92

 

 

934

Gain on sale of discontinued operations

 

 

(14)

 

 

 —

 

 

5,374

 

 

 —

Total income from discontinued operations, before income taxes

 

 

(14)

 

 

457

 

 

5,466

 

 

934

Income tax benefit (expense) on discontinued operations

 

 

21

 

 

 —

 

 

(1,762)

 

 

 —

Income from discontinued operations, net of tax

 

$

 7

 

$

457

 

$

3,704

 

$

934

 

The following table presents the carrying amount as of June 30, 2016, of the major classes of assets and liabilities held for sale in the condensed consolidated balance sheet (in thousands):

 

 

 

 

 

 

 

June 30, 2016

Current assets:

 

 

 

Accounts receivable

 

$

727

Inventory

 

 

1,028

Other assets

 

 

63

Total current assets

 

 

1,818

Property and equipment, net

 

 

153

Goodwill

 

 

3,374

Total assets of discontinued operations

 

$

5,345

 

 

 

 

Current liabilities:

 

 

 

Accounts payable and accrued expenses

 

$

714

Capital lease obligations

 

 

 9

Total current liabilities

 

 

723

Capital lease obligations

 

 

19

Total liabilities of discontinued operations

 

$

742

 

Cash flows from Tekna Seal for the nine months ended April 2, 2017 and March 27, 2016 are combined with the cash flows from operations within each of the categories presented on the condensed consolidated statements of cash flows.  There were no significant operating or investing activities from discontinued operations during the nine months ended April 2, 2017 and March 27, 2016. 

 

ARC Wireless, LLC

 

On March 31, 2017, the Company exited its wireless business and sold the majority of its assets.  The proceeds and related gain were immaterial. 

 

9


 

NOTE 4– Inventory

 

Inventories consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

April 2,

 

June 30,

 

 

    

2017

    

2016

 

Raw materials and supplies

 

$

6,065

 

$

6,299

 

Work-in-process

 

 

9,036

 

 

7,505

 

Finished goods

 

 

5,139

 

 

4,664

 

 

 

 

20,240

 

 

18,468

 

Reserve for obsolescence

 

 

(528)

 

 

(855)

 

Inventory of discontinued operations

 

 

 —

 

 

(1,028)

 

 

 

$

19,712

 

$

16,585

 

 

 

 

 

 

NOTE 5 – Property and Equipment

 

Property and equipment consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciable Life

 

April 2,

 

June 30,

 

 

    

(in years)

    

2017

    

2016

 

Land

 

 

 

 

$

1,264

 

$

1,264

 

Building and improvements

 

7

-

40

 

 

17,612

 

 

17,460

 

Machinery and equipment

 

3

-

12

 

 

39,984

 

 

39,350

 

Office furniture and equipment

 

3

-

10

 

 

1,272

 

 

1,050

 

Construction-in-process

 

 

 

 

 

2,851

 

 

1,838

 

Assets acquired under capital lease

 

 

 

 

 

 

7,104

 

 

5,482

 

 

 

 

 

 

 

 

70,087

 

 

66,444

 

Accumulated depreciation

 

 

 

 

 

 

(25,791)

 

 

(23,018)

 

Accumulated amortization on capital leases

 

 

 

 

 

 

(2,114)

 

 

(1,445)

 

Property and equipment of discontinued operations

 

 

 

 

 

 

 —

 

 

(153)

 

 

 

 

 

 

 

$

42,182

 

$

41,828

 

 

Depreciation expense totaled $1.7 million and $1.6 million for the three months ended April 2, 2017 and March 27, 2016, respectively, and $4.9 million and $4.6 million for the nine months ended April 2, 2017 and March 27, 2016, respectively.

 

 

 

 

 

 

NOTE 6 – Goodwill and Intangible Assets

 

Goodwill

 

The following table summarizes the activity in the Company's goodwill account by segment during the nine months ended April 2, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Precision Components Group

 

3DMT Group

 

Flanges and Fittings Group

 

Consolidated

 

Balance, June 30, 2016 (1)

 

$

10,285

 

$

2,804

 

$

1,712

 

$

14,801

 

Sale of subsidiary (1)

 

 

(3,374)

 

 

 —

 

 

 —

 

 

(3,374)

 

Balance, April 2, 2017

 

$

6,911

 

$

2,804

 

$

1,712

 

$

11,427

 


(1)

During the three months ended October 2, 2016, the Company sold its majority interest in Tekna Seal and recorded a reduction of goodwill of $3.4 million, which is included in income from discontinued operations, net of tax on the condensed consolidated statement of operations (see Note 3, Discontinued Operations, for more information).

 

10


 

Intangible Assets

 

The following table summarizes the Company's intangible assets (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 2, 2017

 

June 30, 2016

 

 

 

Gross

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

Carrying

 

Accumulated

 

Net Carrying

 

Carrying

 

Accumulated

 

Net Carrying

 

Intangible assets:

    

Amount

    

Amortization

    

Amount

     

Amount

    

Amortization

    

Amount

 

Patents and tradenames

 

$

3,418

 

$

(660)

 

$

2,758

 

$

3,773

 

$

(766)

 

$

3,007

 

Customer relationships

 

 

24,077

 

 

(7,827)

 

 

16,250

 

 

24,077

 

 

(6,021)

 

 

18,056

 

Non-compete agreements

 

 

3,642

 

 

(2,185)

 

 

1,457

 

 

3,642

 

 

(1,639)

 

 

2,003

 

Total

 

$

31,137

 

$

(10,672)

 

$

20,465

 

$

31,492

 

$

(8,426)

 

$

23,066

 

 

Intangible assets are being amortized using the straight-line method over estimated useful lives ranging from five to fifteen years.  Amortization expense totaled $0.8 million for identifiable intangible assets for the three months ended April 2, 2017 and March 27, 2016, and $2.5 million for the nine months ended April 2, 2017 and March 27, 2016.  Estimated future amortization expense for the next five years as of April 2, 2017, is as follows (in thousands):

 

 

 

 

 

 

Fiscal Years

    

Amount

 

Remainder of 2017

 

$

841

 

2018

 

 

3,364

 

2019

 

 

3,182

 

2020

 

 

2,636

 

2021

 

 

2,636

 

Thereafter

 

 

7,806

 

Total

 

$

20,465

 

 

The sale of ARC Wireless, LLC included certain patents.  The remaining intangible assets were immaterial and written off during the three months ended April 2, 2017.  There were no impairments of long-lived assets during the three and nine months ended March 27, 2016.

 

NOTE 7 – 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 (“Kecy”) 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.  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.  In December 2016, the Company entered into an agreement to settle and terminate the Kecy Escrow for $2.2 million.  The cash settlement has been accrued in current and long-term liabilities.  The Kecy Escrow shares were returned to the Company and retired in February 2017.

11


 

 

NOTE 8 – Debt

 

Long-term debt payable consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

Balance as of

 

 

    

April 2, 2017

    

June 30, 2016

 

Senior secured revolving loan

 

$

10,097

 

$

7,560

 

Senior secured mortgage-based term loans

 

 

20,558

 

 

4,449

 

Senior secured term loan

 

 

 —

 

 

16,248

 

Senior secured delayed draw term loan

 

 

 —

 

 

5,509

 

Subordinated term loan

 

 

15,000

 

 

20,000

 

Total debt

 

 

45,655

 

 

53,766

 

Unamortized deferred financing costs

 

 

(1,120)

 

 

(1,349)

 

Total debt, net

 

 

44,535

 

 

52,417

 

Current portion of long-term debt, net of unamortized deferred financing costs

 

 

(1,644)

 

 

(15,648)

 

Long-term debt, net of current portion and unamortized deferred financing costs

 

$

42,891

 

$

36,769

 

 

Senior Credit Agreement

 

On September 29, 2016, the Company and certain of its subsidiaries, entered into a new senior asset-based lending credit agreement with Citizens Bank, N.A. (the “Senior ABL Credit Facility”).

 

The Senior ABL Credit Facility provides the Company with the following extensions of credit and loans: (1) a Revolving Commitment in the principal amount of $25.0 million (the “Revolving Loan”) and (2) a mortgage-based Term Loan Commitment in the principal amount of $17.5 million (the “Term Loan”).  The loans under the Senior ABL Credit Facility are secured by liens on substantially all domestic assets of the Company and guaranteed by the Company’s domestic subsidiaries who are not borrowers under the Senior ABL Credit Facility.

 

The aggregate amount of revolving loans permitted under the Senior ABL Credit Facility may not exceed a borrowing base consisting of: (i) the sum of 85% of certain eligible accounts receivable, plus (ii) the lesser of 65% of the value of certain eligible inventory and 85% of the net orderly liquidation value of certain eligible inventory, plus (iii) an amount not to exceed $4.2 million, which amount will be adjusted based on the face amount of certain letters of credit issued to Citizens Bank, N.A. in connection with certain operating leases and capitalized leases, minus (iv) reserves for any amounts which the lender deems necessary or appropriate.

 

Borrowings under the Senior ABL Credit Facility may be made as Base Rate Loans or Eurodollar 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 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 (i) the ICE Benchmark Administration LIBOR Rate; plus (ii) the Applicable Rate.  The “Applicable Rate” will be (a) 2.50% with respect to Base Rate Loans that are Term Loans and 3.50% with respect to Eurodollar Rate Loans that are Term Loans, and (b) 2.50% with respect to Base Rate Loans that are Revolving Loans and 3.50% with respect to Eurodollar Rate Loans that are Revolving Loans, in each case until December 31, 2016, and thereafter the Applicable Rate will be adjusted quarterly, responsive to the Company’s Quarterly Average Availability Percentage, ranging from 1.25% to 1.75% with respect to Base Rate Loans that are Revolving Loans and from 2.25% to 2.75% with respect to Eurodollar Rate Loans that are Revolving Loans.  In addition to interest payments on the Senior ABL Credit Facility loans, the Company will pay commitment fees to the lender of 0.375% per quarter on undrawn Revolving Loans.  The Company will also pay other customary fees and reimbursements of costs and disbursements to the lender.

 

The Maturity Date with respect to the Revolving Loan and the Term Loan is August 11, 2019, provided, however, upon repayment of Company subordinated indebtedness the maturity date will automatically extend to five years after the Closing Date for Revolving Loans and Revolving Commitments, and with respect to the Term Loans, the earlier of the date that is (i) ten years after the Closing Date and (ii) the maturity date of the Revolving Loans.  The Senior ABL Credit Facility contains certain mandatory prepayment provisions, including mandatory prepayments due in respect of sales of assets, sales of equity securities, events of default and other customary events, with exceptions for non-core business dispositions.

12


 

 

The Senior ABL Credit Facility contains customary covenants and negative covenants regarding operation of the Company’s business, including maintenance of certain financial ratios, as well as restrictions on dispositions of Company assets.

 

In connection with the Senior ABL Credit Facility, the Company and the Borrowers together with certain subsidiaries (collectively, the “Guarantors”), have entered into an Amended and Restated Guarantee and Collateral Agreement with Citizens Bank, N.A. dated as of September 29, 2016, which secures all of the loans and credits drawn from the Senior ABL Credit Facility by the Borrowers.  The security interests established under the Amended and Restated Guarantee and Collateral Agreement include senior secured liens on substantially all of the assets of the Guarantors.  The Guarantors have agreed to guarantee the unconditional payment and performance to the lender of all obligations of the Borrowers under the Senior ABL Credit Facility.

 

On March 21, 2017, the Company entered into a first amendment to the Senior ABL Credit Facility to modify various definitions, including Consolidated EBITDA and the fixed charge coverage ratio, and amend prepayment provisions.

 

On May 12, 2017, the Company entered into a second amendment to the Senior ABL Credit Facility to amend the definition of capital expenditures and amend the fixed charge coverage ratio effective with the fiscal quarter ending April 2, 2017.

 

As of April 2, 2017, the Company was in compliance with its debt covenants under the Senior ABL Credit Facility.

 

Prior Amended & Restated Credit Agreement

 

On September 29, 2016, the Company refinanced all of the existing long-term debt obligations with Citizens Bank, N.A. into the Senior ABL Credit Facility described above.  The Company accounted for the refinancing as an extinguishment of debt and wrote off $0.7 million of previously deferred financing fees.

 

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.  Upon an event of default under the Subordinated Loan Agreement, the interest rate increases automatically by 2.00% annually.  The proceeds were used to repay certain outstanding loans under the Company’s previous credit facility. ARC’s Chairman and CEO are indirectly related to McLarty; 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 April 20, 2016, the Company entered into a second amendment to the Subordinated Loan Agreement (“McLarty Second Amendment”), as previously amended on December 29, 2014, 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.

 

On March 31, 2017, the Company entered into a third amendment to the Subordinated Loan Agreement to amend the Consolidated EBITDA definition to increase the amount of permitted add-backs related to a number of items such as tooling investments and certain non-recurring income and expenses and revise the fixed charge coverage ratio definition.

 

The Subordinated Loan Agreement has been subordinated to the Senior ABL Credit Facility 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 similar to those contained in the Senior ABL Credit Facility described above.   

 

As of April 2, 2017, the Company was in compliance with its debt covenants under the Subordinated Credit Facility.

13


 

 

Loan Contract

 

On March 23, 2016, AFT-Hungary Kft. (“AFT Hungary”), a wholly owned subsidiary of the Company, 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 April 2, 2017 (in thousands):

 

 

 

 

 

 

2017 (1)

    

$

292

 

2018

 

 

1,731

 

2019

 

 

1,731

 

2020

 

 

16,730

 

2021

 

 

25,171

 

Total

 

$

45,655

 


(1)

Represents long-term debt principal payments for the three month period ending June 30, 2017.

 

NOTE 9 – Income Taxes

 

The income tax receivable was $0.5 million and $1.6 million at April 2, 2017 and June 30, 2016, respectively.  The decrease in the income taxes receivable during the nine months ended April 2, 2017, was primarily associated with the receipt of a federal income tax refund of approximately $0.9 million related to the carryback of the Company’s 2015 net operating loss.  The Company had unrecognized tax benefits for uncertain tax positions of $1.1 million and $1.0 million on April 2, 2017 and June 30, 2016, respectively, which are included in other long-term liabilities. 

 

NOTE 10 – 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.  In February 2017, the remaining 671,626 shares of common stock previously issued for the Kecy acquisition were returned to the Company and retired. 

 

As a result of the Company’s net loss from continuing operations, for the three months ended April 2, 2017 and March 27, 2016, approximately 466,119 and 253,718 shares, respectively, and for the nine months ended April 2, 2017 and March 27, 2016, approximately 332,031 and 253,718 shares, respectively, were considered anti-dilutive and were excluded from the computation of diluted earnings per share.  

 

NOTE 11 – Share-Based Compensation

 

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

14


 

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 April 2, 2017, there were 7,125 shares of common stock available to be granted under the 2015 Plan.  In the case of stock options, the exercise price of the stock 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.

 

In November 2016, the Company’s stockholders approved the 2016 ARC Group Worldwide, Inc. Equity Incentive Plan (“2016 Plan”), which reserves for issuance a total of 950,000 shares of common stock.  The 2016 Plan contains terms and conditions substantially similar to the 2015 Plan.  As of April 2, 2017, there were 75,920 shares of common stock available to be granted under the 2016 Plan. 

 

A summary of stock option activity under the 2015 Plan and 2016 Plan as of April 2, 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted

    

Weighted Average

 

 

 

 

 

Average Exercise

 

Remaining Contractual

 

 

 

Shares

 

Price

 

Term (in years)

 

Outstanding as of June 30, 2016

 

759,050

 

$

1.51

 

 

 

Granted

 

1,065,030

 

$

4.06

 

 

 

Forfeited

 

(7,125)

 

$

1.51

 

 

 

Outstanding as of April 2, 2017

 

1,816,955

 

$

3.00

 

7.81

 

Vested and exercisable as of April 2, 2017

 

451,754

 

$

1.90

 

6.03

 

Vested and expected to vest as of April 2, 2017

 

1,603,891

 

$

2.97

 

7.75

 

 

The vesting of 874,080 shares granted under the 2016 Plan during the third quarter of 2017 is contingent upon the achievement of a market condition.  If vesting occurs, the compensation expense related to the vested awards that has not been previously amortized will be recognized upon vesting.  As of April 2, 2017, the market-based condition has not been achieved.

 

Stock options granted during the nine month period ending April 2, 2017 have contractual lives of seven to ten years.  The weighted-average grant date fair value of stock options granted during the nine months ended April 2, 2017, was $2.17 per share.  The total fair value of shares vested during the nine months ended April 2, 2017 was $1.0 million.

 

Determining Fair Value

 

The Company estimated the fair value of stock options granted under the 2015 Plan using the Black-Scholes method.  The Company estimated the fair value and derived service period of stock options granted under the 2016 Plan with market-based vesting conditions on the date of grant using a Monte Carlo simulation, with assumptions comparable to those used under the Black-Scholes method.  The assumptions used to determine the value of the Company’s stock options granted to employees during the nine month period ended April 2, 2017 were as follows:

 

 

 

 

 

 

 

 

 

Expected term

    

3.50

 

-

4.75

years

 

Expected volatility

 

78.8

%

-

85.0

%

 

Expected dividend yield

 

-

%

 

 

 

 

Risk-free interest rate

 

1.02

%

-

2.41

%

 

 

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.

15


 

 

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 three months ended April 2, 2017 and March 27, 2016 was $0.2 million and $0.1 million, respectively, and during the nine months ended April 2, 2017 and March 27, 2016 was $0.6 million and $0.1 million, respectively, and is included in selling, general and administrative expense.  As of April 2, 2017, there was $1.9 million of total unrecognized compensation expense related to non-vested stock options, which is expected to be recognized over a weighted-average period of 1.8 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.

 

Employee Stock Purchase Plan

 

Under the terms of the Company’s employee stock purchase plan ("ESPP"), eligible employees may authorize payroll deductions up to 10% of their base pay to purchase shares of the Company’s common stock at a price equal to 85% of the lower of the closing price at the beginning or end of each six-month purchase period.  A total of 750,000 shares were authorized under the ESPP.  The purchase period began on August 1, 2016.  As of April 2, 2017, there were 702,266 shares available for issuance.

 

During the three months ended April 2, 2017, 47,734 shares were purchased under the ESPP at a price of $2.05 and a grant date fair value of $2.42. 

 

NOTE 12 – Commitments and Contingencies

 

During the third quarter of fiscal 2017, Kecy experienced a wind-generated power disruption that temporarily halted production for several days and severely damaged key equipment.  The Company is insured for these business interruption and equipment repair costs and filed an insurance claim with its insurance provider.  The estimated loss of $0.4 million is expected to be covered by insurance and is recorded as an insurance claim receivable at April 2, 2017. 

 

The Company leases land, facilities, and equipment under various non-cancellable operating lease agreements expiring through August 31, 2024, which contain various renewal options.  The Company also leases equipment under non-cancellable capital lease agreements expiring through June 30, 2024.  The capital leases have interest rates ranging from 3.0% to 4.6%.

 

From time to time, the Company is a party to various litigation matters incidental to the conduct of its business.  As of April 2, 2017, 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 were classified into four reportable business segments:  Precision Components Group, 3DMT Group, Flanges and Fittings Group, and Wireless Group.  On March 31, 2017, the Company ceased its wireless operations, which comprised the Wireless Group. 

 

·

The Precision Components Group companies provide highly engineered fabricated metal components using processes consisting of metal injection molding and precision metal stamping.  Industries served include aerospace, automotive, consumer durables, electronic devices, firearms and defense, and medical and dental devices.

 

·

The 3DMT Group consists of our tooling product line, 3D Material Technologies, LLC (“3DMT”, our metal 3D printing and additive manufacturing operations), and ATC.

 

16


 

·

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 focused on wireless broadband technology. 

 

The historical results of Tekna Seal, which were included in the Precision Components Group segment, have been reflected as discontinued operations; therefore, historical segment information has been restated.  Summarized segment information for the three and nine month periods ended April 2, 2017 and March 27, 2016 is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

    

April 2,

    

March 27,

    

April 2,

    

March 27,

 

 

 

2017

 

2016

 

2017

 

2016

 

Sales: