10-Q 1 arcw-20171231x10q.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 December 31, 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)

 

(I.R.S. 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 “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☐ (Do not check if a smaller reporting company)

 

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 February 5, 2018, the Registrant had 18,305,982 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 Six Months Ended December 31, 2017 and January 1, 2017

 

3

 

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of December 31, 2017 and June 30, 2017

 

4

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2017 and January 1, 2017

 

5

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

6

 

 

 

 

Item 2. 

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

 

18

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

27

 

 

 

 

Item 4. 

Controls and Procedures

 

27

 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

 

 

Item 1A. 

Risk Factors

 

29

 

 

 

 

Item 6. 

Exhibits

 

29

 

 

 

 

SIGNATURES 

 

29

 

 


 

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 six months ended

 

 

 

December 31,

 

January 1,

 

December 31,

 

January 1,

 

 

    

2017

    

2017

    

2017

    

2017

 

Sales

 

$

18,354

 

$

27,009

 

$

38,304

 

$

52,722

 

Cost of sales

 

 

18,724

 

 

22,505

 

 

37,251

 

 

43,539

 

Gross profit

 

 

(370)

 

 

4,504

 

 

1,053

 

 

9,183

 

Selling, general and administrative

 

 

3,552

 

 

4,660

 

 

7,038

 

 

9,517

 

Loss from operations

 

 

(3,922)

 

 

(156)

 

 

(5,985)

 

 

(334)

 

Other income, net

 

 

167

 

 

837

 

 

130

 

 

804

 

Interest expense, net

 

 

(927)

 

 

(1,030)

 

 

(1,939)

 

 

(2,137)

 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

(723)

 

Loss before income taxes

 

 

(4,682)

 

 

(349)

 

 

(7,794)

 

 

(2,390)

 

Income tax benefit (expense)

 

 

366

 

 

(30)

 

 

194

 

 

1,301

 

Net loss from continuing operations

 

 

(4,316)

 

 

(379)

 

 

(7,600)

 

 

(1,089)

 

(Loss) gain on sale of subsidiaries and income (loss) from discontinued operations, net of tax

 

 

(6)

 

 

(331)

 

 

(276)

 

 

3,986

 

Net (loss) income

 

 

(4,322)

 

 

(710)

 

 

(7,876)

 

 

2,897

 

Net income attributable to non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

 

 —

 

 

 —

 

 

 —

 

 

(22)

 

Discontinued operations

 

 

 —

 

 

 —

 

 

 —

 

 

(4)

 

Net income attributable to non-controlling interest

 

 

 —

 

 

 —

 

 

 —

 

 

(26)

 

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

 

$

(4,322)

 

$

(710)

 

$

(7,876)

 

$

2,871

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.24)

 

$

(0.02)

 

$

(0.42)

 

$

(0.06)

 

Discontinued operations

 

$

 —

 

$

(0.02)

 

$

(0.01)

 

$

0.22

 

Attributable to ARC Group Worldwide, Inc.

 

$

(0.24)

 

$

(0.04)

 

$

(0.43)

 

$

0.16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

18,265,323

 

 

18,123,883

 

 

18,229,320

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

December 31, 2017

    

June 30, 2017

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash

 

$

387

 

$

593

 

Accounts receivable, net

 

 

10,769

 

 

10,488

 

Inventories, net

 

 

14,342

 

 

14,369

 

Prepaid expenses and other current assets

 

 

2,382

 

 

3,152

 

Current assets of discontinued operations

 

 

 —

 

 

1,452

 

Total current assets

 

 

27,880

 

 

30,054

 

Property and equipment, net

 

 

39,417

 

 

41,349

 

Goodwill

 

 

6,412

 

 

6,412

 

Intangible assets, net

 

 

17,942

 

 

19,624

 

Other

 

 

356

 

 

291

 

Long-term assets of discontinued operations

 

 

 —

 

 

1,893

 

Total assets

 

$

92,007

 

$

99,623

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

10,160

 

$

8,681

 

Accrued expenses and other current liabilities

 

 

2,153

 

 

3,273

 

Deferred revenue

 

 

1,387

 

 

1,165

 

Bank borrowings, current portion of long-term debt

 

 

1,747

 

 

1,701

 

Capital lease obligations, current portion

 

 

1,455

 

 

1,470

 

Accrued escrow obligations, current portion

 

 

1,212

 

 

1,212

 

Current liabilities of discontinued operations

 

 

 —

 

 

283

 

Total current liabilities

 

 

18,114

 

 

17,785

 

Long-term debt, net of current portion

 

 

43,358

 

 

42,822

 

Capital lease obligations, net of current portion

 

 

1,196

 

 

1,888

 

Accrued escrow obligations, net of current portion

 

 

942

 

 

1,184

 

Other long-term liabilities

 

 

927

 

 

1,017

 

Long-term liabilities of discontinued operations

 

 

 —

 

 

260

 

Total liabilities

 

 

64,537

 

 

64,956

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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; 18,282,681 shares issued and 18,274,280 shares issued and outstanding at December 31, 2017, and 18,180,027 shares issued and 18,171,626 shares issued and outstanding at June 30, 2017

 

 

10

 

 

10

 

Treasury stock, at cost; 8,401 shares at December 31, 2017 and June 30, 2017

 

 

(94)

 

 

(94)

 

Additional paid-in capital

 

 

31,675

 

 

31,109

 

Retained earnings (accumulated deficit)

 

 

(4,321)

 

 

3,569

 

Accumulated other comprehensive income

 

 

200

 

 

73

 

Total equity

 

 

27,470

 

 

34,667

 

Total liabilities and equity

 

$

92,007

 

$

99,623

 

 

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 six months ended

 

 

    

December 31, 2017

    

January 1, 2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net (loss) income

 

$

(7,876)

 

$

2,897

 

Adjustments to reconcile net (loss) income to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,051

 

 

4,889

 

Share-based compensation expense

 

 

397

 

 

375

 

Loss (gain) on sale of subsidiaries

 

 

109

 

 

(5,418)

 

Bad debt expense and other

 

 

84

 

 

49

 

Deferred income taxes

 

 

 —

 

 

(286)

 

Changes in working capital:

 

 

 

 

 

 

 

Accounts receivable

 

 

(137)

 

 

(621)

 

Inventory

 

 

(138)

 

 

(2,374)

 

Prepaid expenses and other assets

 

 

609

 

 

(306)

 

Accounts payable

 

 

1,486

 

 

1,628

 

Accrued expenses and other current liabilities

 

 

(1,472)

 

 

(700)

 

Deferred revenue

 

 

222

 

 

(629)

 

Net cash used in operating activities

 

 

(1,665)

 

 

(496)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,500)

 

 

(2,901)

 

Proceeds from sale of subsidiary

 

 

3,000

 

 

10,538

 

Net cash provided by investing activities

 

 

1,500

 

 

7,637

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from debt issuance

 

 

49,533

 

 

48,773

 

Repayments of long-term debt and capital lease obligations

 

 

(50,040)

 

 

(57,397)

 

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

 

 

 —

 

 

(438)

 

Purchase of non-controlling membership interests

 

 

 —

 

 

(200)

 

Issuance of common stock under employee stock purchase plan and exercise of stock options

 

 

155

 

 

 —

 

Net cash used in financing activities

 

 

(352)

 

 

(9,262)

 

Effect of exchange rates on cash

 

 

311

 

 

(284)

 

Net decrease in cash

 

 

(206)

 

 

(2,405)

 

Cash, beginning of period

 

 

593

 

 

3,620

 

Cash, end of period

 

$

387

 

$

1,215

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,244

 

$

1,913

 

Cash paid for income taxes, net of refunds

 

$

48

 

$

(877)

 

 

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 global advanced manufacturer offering a full suite of products and services to our customers, with specific expertise in metal injection molding (“MIM”) and metal 3D printing (also referred to herein as additive manufacturing).  To further advance and support these core capabilities, the Company also offers complementary services including: (i) precision metal stamping; (ii) traditional and clean room plastic injection molding; and (iii) advanced rapid and conformal tooling.  Through its diverse product offering, the Company 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.

 

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, 2017, 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, 2017.  The Company follows the same accounting policies for preparing quarterly and annual reports.  

 

Principles of Consolidation

 

The unaudited condensed consolidated financial statements include the accounts 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.

 

Comprehensive Income (Loss)

 

For each of the quarters and six months ended December 31, 2017 and January 1, 2017, there were no material differences between net income (loss) and comprehensive income (loss).

 

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

6


 

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; however, the Company’s operating lease commitments are disclosed in Note 13, Commitments and Contingencies, of the Company’s Form 10-K for the fiscal year ended June 30, 2017.

 

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 has completed its initial assessment of the effect of adoption.  Based on this initial assessment, the majority of the Company’s revenues will not be affected upon adoption.  The Company is still analyzing the disclosure requirements of this new standard.

 

NOTE 3 – Divestitures

 

General Flange & Forge LLC (“GF&F”)

 

On September 15, 2017, the Company sold substantially all of the assets of GF&F to GFFC Holdings, LLC (“GFFC”) for $3.0 million in cash.  GFFC is owned, in part, by Quadrant Management Inc., which is an affiliate of the Company.  The sale of GF&F is therefore a related party transaction.  The GF&F sale was made pursuant to an industry-wide auction undertaken on behalf of the Company by a registered investment banking organization that managed the sale process with prospective bidders.  GFFC entered into the bidding for the GF&F assets only after the first rounds of the auction indicated uncertainty both in respect to the timing for closing any prospective sale and achieving the Company’s valuation objectives.  Mr. Alan Quasha, CEO of Quadrant Management Inc. and Chairman of the Company’s Board of Directors, recused himself from any deliberations or voting by the Board of Directors in respect of the sale of the GF&F assets to GFFC.  The Board of Directors appointed a special committee consisting solely of independent directors to oversee and negotiate the sale process.  The special committee engaged its own independent legal counsel to advise the special committee in respect of the drafting of the asset sale agreement and ancillary transaction documents in accordance with customary terms and conditions for transactions of this type.  In this manner, the special committee was able to conclude that the sale price and the terms and conditions for the transaction were superior to any other offers, as well as fair and reasonable to the Company and its shareholders.

 

7


 

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

 

 

 

 

 

Gross proceeds

 

$

3,000

 

 

 

 

Less:

 

 

 

Property and equipment, net

 

 

181

Accounts receivable

 

 

561

Inventory

 

 

882

Other current assets

 

 

42

Accounts payable and accrued expenses

 

 

(269)

Total net assets disposed

 

 

1,397

 

 

 

 

Goodwill

 

 

1,712

Transaction costs

 

 

394

Loss on sale of discontinued operations, before income taxes

 

$

(503)

 

The condensed consolidated statement of operations for the six months ended December 31, 2017, includes the results of operations of GF&F through the sale date of September 15, 2017 and the loss on the sale of GF&F.  Financial information for discontinued operations for the three and six months ended December 31, 2017 and January 1, 2017 is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

 

December 31, 2017

 

January 1, 2017

 

December 31, 2017

 

January 1, 2017

Sales

 

$

 —

 

$

1,191

 

$

726

 

$

2,304

Cost of sales

 

 

 —

 

 

(903)

 

 

(615)

 

 

(1,695)

Gross profit

 

 

 —

 

 

288

 

 

111

 

 

609

Selling, general and administrative

 

 

 —

 

 

(128)

 

 

(108)

 

 

(320)

Income from discontinued operations, before income taxes

 

 

 —

 

 

160

 

 

 3

 

 

289

Loss on sale of discontinued operations

 

 

(21)

 

 

 —

 

 

(503)

 

 

 —

Total income (loss) from discontinued operations, before income taxes

 

 

(21)

 

 

160

 

 

(500)

 

 

289

Income tax benefit on discontinued operations

 

 

15

 

 

 —

 

 

224

 

 

 —

Income (loss) from discontinued operations, net of tax

 

$

(6)

 

$

160

 

$

(276)

 

$

289

 

The following table presents the carrying amount as of June 30, 2017, of the major classes of assets and liabilities held for sale in the condensed consolidated balance sheet (in thousands):

 

 

 

 

 

 

 

June 30, 2017

Current assets:

 

 

 

Accounts receivable, net

 

$

687

Inventories, net

 

 

717

Prepaid expenses and other current assets

 

 

48

Total current assets

 

 

1,452

Property and equipment, net

 

 

181

Goodwill

 

 

1,712

Total assets of discontinued operations

 

$

3,345

 

 

 

 

Current liabilities:

 

 

 

Accounts payable and accrued expenses

 

$

283

Total current liabilities

 

 

283

Other long-term liabilities

 

 

260

Total liabilities of discontinued operations

 

$

543

 

8


 

The following table presents depreciation and purchases of property and equipment of the discontinued operations related to GF&F (in thousands):

 

 

 

 

 

 

 

For the six months ended

 

December 31, 2017

 

January 1, 2017

Depreciation of property and equipment

$

 —

 

$

34

Purchases of property and equipment

 

 —

 

 

(47)

 

 

 

NOTE 4– Inventory

 

Inventories consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

December 31, 2017

    

June 30, 2017

 

Raw materials and supplies

 

$

5,331

 

$

5,357

 

Work-in-process

 

 

7,325

 

 

7,767

 

Finished goods

 

 

3,534

 

 

4,113

 

 

 

 

16,190

 

 

17,237

 

Reserve for obsolescence

 

 

(1,848)

 

 

(2,151)

 

Inventory of discontinued operations

 

 

 —

 

 

(717)

 

 

 

$

14,342

 

$

14,369

 

 

 

As part of the Company’s plan to reduce selected inventory to match current market conditions, the Company decreased inventory within certain business units comprising the Precision Components Group segment by $1.3 million during the six months ended December 31, 2017.  See Note 12, Segment Information, for a discussion about the Company’s segments.

 

 

 S

 

 

NOTE 5 – Property and Equipment

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciable Life

 

December 31,

 

June 30,

 

 

    

(in years)

    

2017

    

2017

 

Land

 

 

 

 

$

1,264

 

$

1,264

 

Building and improvements

 

7

-

40

 

 

18,210

 

 

18,125

 

Machinery and equipment

 

3

-

12

 

 

41,871

 

 

40,715

 

Office furniture and equipment

 

3

-

10

 

 

1,249

 

 

1,280

 

Construction-in-process

 

 

 

 

 

2,016

 

 

2,462

 

Assets acquired under capital lease

 

 

 

 

 

 

7,274

 

 

7,235

 

 

 

 

 

 

 

 

71,884

 

 

71,081

 

Accumulated depreciation

 

 

 

 

 

 

(29,678)

 

 

(27,201)

 

Accumulated amortization on capital leases

 

 

 

 

 

 

(2,789)

 

 

(2,350)

 

Property and equipment of discontinued operations

 

 

 

 

 

 

 —

 

 

(181)

 

 

 

 

 

 

 

$

39,417

 

$

41,349

 

 

Depreciation expense totaled $1.7 million for the three months ended December 31, 2017 and January 1, 2017, respectively, and $3.4 million and $3.2 million for the six months ended December 31, 2017 and January 1, 2017, respectively.

 

 

 

 

 

 

9


 

NOTE 6 – Goodwill and Intangible Assets

 

Goodwill

 

Total goodwill of $6.4 million is assigned to the Company’s Precision Components Group.  The Company performs a goodwill impairment assessment on at least an annual basis.  The Company conducts its annual goodwill impairment assessment during the fourth quarter, or more frequently, if indicators of impairment exist.  During the fiscal quarter ended December 31, 2017, the Company assessed whether any such indicators of impairment existed and concluded there were none.

 

Intangible Assets

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

As of June 30, 2017

 

 

 

Gross

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

Carrying

 

Accumulated

 

Net Carrying

 

Carrying

 

Accumulated

 

Net Carrying

 

Intangible assets:

    

Amount

    

Amortization

    

Amount

     

Amount

    

Amortization

    

Amount

 

Patents and tradenames

 

$

3,418

 

 

(832)

 

$

2,586

 

$

3,418

 

$

(717)

 

$

2,701

 

Customer relationships

 

 

24,077

 

 

(9,632)

 

 

14,445

 

 

24,077

 

 

(8,429)

 

 

15,648

 

Non-compete agreements

 

 

3,642

 

 

(2,731)

 

 

911

 

 

3,642

 

 

(2,367)

 

 

1,275

 

Total

 

$

31,137

 

$

(13,195)

 

$

17,942

 

$

31,137

 

$

(11,513)

 

$

19,624

 

 

Intangible assets are amortized using the straight-line method over estimated useful lives ranging from five to fifteen years.  Amortization expense for identifiable intangible assets totaled $0.8 million for the three months ended December 31, 2017 and January 1, 2017, and $1.7 million for the six months ended December 31, 2017 and January 1, 2017.  Estimated future amortization expense for the next five years as of December 31, 2017, is as follows (in thousands):

 

 

 

 

 

 

Fiscal Years

    

Amount

 

2018

 

$

1,682

 

2019

 

 

3,182

 

2020

 

 

2,636

 

2021

 

 

2,636

 

2022

 

 

2,636

 

Thereafter

 

 

5,170

 

Total

 

$

17,942

 

 

There were no impairments of long-lived assets during the three and six months ended December 31, 2017 and January 1, 2017.

 

NOTE 7 – Debt

 

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

 

 

 

 

 

 

 

 

 

 

Balance as of

 

 

    

December 31, 2017

    

June 30, 2017

 

Senior secured revolving loan

 

$

11,226

 

$

10,071

 

Senior secured mortgage-based term loans

 

 

19,761

 

 

20,493

 

Subordinated term loan

 

 

15,000

 

 

15,000

 

Total debt

 

 

45,987

 

 

45,564

 

Unamortized deferred financing costs

 

 

(882)

 

 

(1,041)

 

Total debt, net

 

 

45,105

 

 

44,523

 

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

 

 

(1,747)

 

 

(1,701)

 

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

 

$

43,358

 

$

42,822

 

 

10


 

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”); subsequently the Company entered into amendments one through four.

 

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.

 

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 September 21, 2017, the Company entered into a third amendment to the Senior ABL Credit Facility to amend the definition of Consolidated EBITDA.

 

11


 

On November 12, 2017, the Company entered into the Fourth Amendment to the Senior ABL Credit Facility (the “Fourth Amendment”).  The Fourth Amendment suspends the Company’s fixed charge coverage ratio covenant through December 31, 2018.  The suspension of the fixed charge coverage ratio covenant was effective as of October 1, 2017.  The Fourth Amendment also adds a minimum revolving credit availability financial covenant.  The Fourth Amendment also permits the Company to make infusions of junior capital, which may consist of subordinated debt and/or equity issuances.  The junior capital infusions made under the Fourth Amendment will not be subject to mandatory prepayment of the Senior ABL Credit Facility, but subject to certain limitations in respect of outstanding subordinated indebtedness.  Under the terms of the Fourth Amendment, the initial infusion of junior capital in amount of not less than $5.0 million must be completed by the Company no later than January 31, 2018.  The minimum revolving credit availability covenant requires the Company to maintain the following availability:  (a) at least $1,250,000 in revolving credit availability until the earlier of (i) the initial closing of the infusion of $5.0 million in junior capital and (ii) January 31, 2018; and (b) thereafter, at least $3,500,000 in such revolving credit availability.  The Fourth Amendment also reduces the Line Cap (consisting of the lesser of the aggregate revolving credit commitment and the borrowing base) in respect of certain prepayment obligations and conditions precedent to borrowing, by reducing the borrowing base by $1,250,000.  The Fourth Amendment contains customary representations and warranties regarding the status of the Company and compliance with all terms and conditions of the Senior ABL Credit Facility.

 

On February 9, 2018, the Company received a waiver from Citizens Bank, N.A. for any noncompliance with the minimum revolving credit availability covenant during the second fiscal quarter of 2018 and for not closing on the junior capital infusion prior to January 31, 2018.  The waiver is effective through February 28, 2018.

 

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; subsequently the Company entered into amendments one through five.  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 is 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. 

 

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.   

 

On September 22, 2017, the Company entered into a fourth amendment to the Subordinated Loan Agreement to amend the definition of Consolidated EBITDA and the Maximum Total Leverage Ratio.

 

On February 9, 2018, the Company entered into a fifth amendment to the Subordinated Loan Agreement to authorize discretionary omission by the administrative agent of certain non-cash items from the definition of Consolidated EBITDA and to include cash proceeds from the rights offering as excluded contributions of capital that will not be subject to mandatory prepayment under the terms of the Subordinated Loan Agreement. 

 

As of December 31, 2017, the Company was in compliance with its debt covenants under the Subordinated Credit Facility, after giving effect to the fifth amendment discussed above.

 

12


 

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 December 31, 2017 (in thousands):

 

 

 

 

 

 

2018 (1)

    

$

990

 

2019

 

 

1,834

 

2020

 

 

42,205

 

2021

 

 

958

 

2022

 

 

 —

 

Total

 

$

45,987

 


(1)

Represents long-term debt principal payments for the six months ending June 30, 2018.

 

 

NOTE 8 – Income Taxes

 

The income tax receivable was $0.7 million and $0.5 million at December 31, 2017 and June 30, 2017, respectively, which are included in other current assets.  The long-term income tax receivable was $0.3 million at December 31, 2017, which is included in other non-current assets.  The Company had unrecognized tax benefits for uncertain tax positions of $0.9 million and $1.0 million on December 31, 2017 and June 30, 2017, respectively, which are included in other long-term liabilities. 

 

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law by the President of the United States.  The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018.  GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.  As a result of the Tax Reform Act, the Company recorded tax expense of $1.4 million due to a remeasurement of deferred tax assets and liabilities at a blended rate in the three months ended December 31, 2017, which is fully offset by a reduction in valuation allowance.  In addition, the Company recorded a tax benefit of $0.3 million due to reduction in the valuation allowance previously recognized on alternative minimum tax (“AMT”) credit carryforwards.  Under the Tax Reform Act, AMT credit carryforwards are refundable credits.  The tax expense and benefit are provisional amounts and the Company’s current best estimate.  Any adjustments recorded to the provisional amounts will be included in income from operations as an adjustment to tax expense, net of any related valuation allowance.  The provisional amount incorporates assumptions made based upon the Company’s current interpretation of the Tax Reform Act and may change as the Company receives additional clarification and implementation guidance.

 

NOTE 9 – Earnings Per Share

 

Net Income (Loss) Per Share – Basic and Diluted

 

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

13


 

during each period.  As a result of the Company’s net loss from continuing operations, for the three months ended December 31, 2017 and January 1, 2017, approximately 69,357 and 437,804 shares, respectively, and for the six months ended December 31, 2017 and January 1, 2017, approximately 105,857 and 275,779 shares, respectively, were considered anti-dilutive and were excluded from the computation of diluted earnings per share.  

 

Rights Offering

 

On December 8, 2017, the Company filed a registration statement on Form S-1 with the SEC for a proposed rights offering to its existing shareholders.  The proposed rights offering consists of a public offering of non-transferable subscription rights to purchase shares of ARC common stock.  The basic subscription right will grant to each shareholder a proportionate number of the rights offered allocated by reference to the shareholder’s percentage ownership of the Company on the record date.  The rights offering also contains an over-subscription right.  The over-subscription right will allow a shareholder to participate if they have exercised their basic subscription rights in full and other shareholders do not fully exercise their basic subscription rights.  If the number of remaining shares is not sufficient to satisfy all of the over‑subscriptions, the available remaining shares will be prorated among those subscribers who exercise over‑subscription rights in proportion to their respective basic subscription rights subject to certain limitations and subject to allotment.  The Company has entered into backstop agreements with certain existing shareholders, including its majority shareholder Everest Hill Group Inc., to purchase any and all shares not purchased in the rights offering by other shareholders. The gross proceeds from the Company’s rights offering is expected to reach $10.0 million.

 

The purpose of the rights offering is to raise equity capital for general corporate purposes. 

 

NOTE 10 – Share-Based Compensation

 

The Company’s share-based compensation arrangements include grants of stock options under the ARC Group Worldwide, Inc. 2015 Equity Incentive Plan and the 2016 ARC Group Worldwide, Inc. Equity Incentive Plan and the Employee Stock Purchase Plan.  The share-based compensation expense recognized during the three months ended December 31, 2017 and January 1, 2017 was $0.1 million and during the six months ended December 31, 2017 and January 1, 2017 was $0.4 million and is included in selling, general and administrative expense.  As of December 31, 2017, there was $0.5 million of total unrecognized compensation expense related to non-vested stock options, which is expected to be recognized over a weighted-average period of 1.4 years.

 

NOTE 11 – Commitments and Contingencies

 

During the third quarter of fiscal 2017, the Company’s stamping operations located in Michigan 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 ongoing loss of approximately $1.0 million is expected to be fully covered by insurance, and $0.9 million was collected through the second quarter of fiscal 2018.  The remaining $0.1 million is recorded as an insurance claim receivable at December 31, 2017. 

 

The Company leases land, facilities, and equipment under various non-cancellable operating lease agreements expiring through 2022, which contain various renewal options.  The Company also leases equipment and a building under non-cancellable capital lease agreements expiring through 2024.  The capital leases have interest rates ranging from 3.0% to 6.3%.

 

From time to time, the Company is a party to various litigation matters incidental to the conduct of its business.  As of December 31, 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 12 – Segment Information

 

During fiscal 2017, the Company sold its non-core subsidiaries, Tekna Seal and ARC Wireless.  Subsequently, in September 2017, the Company sold its non-core subsidiary, GF&F, which comprised the Flanges and Fittings Group segment.  The completed divestiture of these non-core businesses, along with the growth in its 3D metal printing business, has changed the way in which management and its chief operating decision maker evaluate performance and allocate resources.  As a result, during the quarter ended June 30, 2017, the Company revised its business segments,

14


 

consistent with its management of the business and internal financial reporting structure.  Specifically, the Precision Components Group now includes the results of its plastic injection molding operations and its tooling product line, which were previously included within the 3DMT Group.  Results depicted in its 3DMT Group business unit now solely reflect those operations associated with metal 3D printing and associated services.  In addition, its precision metal stamping operations are now reported within the newly created Stamping Group, which were previously included in the Precision Components Group.

 

As a result of the above transactions, the Company will report three segments as part of continuing operations:  Precision Components Group, Stamping Group, and 3DMT Group.

 

·

The Precision Components Group companies provide highly engineered, precision metal components using processes consisting of metal injection molding. It also includes our tooling product line and plastic injection molding.  Industries served include aerospace, automotive, consumer durables, electronic devices, firearms and defense, and medical and dental devices.

 

·

The Stamping Group consists of our precision metal stamping operations, primarily servicing the automotive industry.

 

·

The 3DMT Group consists of 3D Material Technologies, LLC (“3DMT”), our metal 3D printing and additive manufacturing operations, primarily servicing the medical and dental, and firearms and defense industries.

 

15


 

The historical results of Tekna Seal, which were included in the Precision Components Group segment, and the historical results of the Flanges and Fittings Group segment have been reflected as discontinued operations.  Historical segment information has been restated.  Summarized segment information for the three and six months ended December 31, 2017 and January 1, 2017 is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

    

December 31,

    

January 1,

    

December 31,

    

January 1,

 

 

 

2017

 

2017

 

2017

 

2017

 

Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Precision Components Group

 

$

13,069

 

$

20,773

 

$

27,402

 

$

40,778

 

Stamping Group

 

 

4,359

 

 

5,511

 

 

9,112

 

 

10,690

 

3DMT Group

 

 

926

 

 

568

 

 

1,790

 

 

856

 

Wireless Group

 

 

 —

 

 

157

 

 

 —

 

 

398

 

Consolidated sales

 

$

18,354

 

$

27,009

 

$

38,304

 

$

52,722

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

Precision Components Group

 

$

15,353

 

$

19,531

 

$

30,622

 

$

38,134

 

Stamping Group

 

 

4,746

 

 

5,431

 

 

9,748

 

 

10,400

 

3DMT Group

 

 

1,193

 

 

1,027

 

 

1,999

 

 

1,713

 

Wireless Group

 

 

 —

 

 

180

 

 

 —

 

 

425

 

Consolidated operating costs

 

$

21,292

 

$

26,169

 

$

42,369

 

$

50,672

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Precision Components Group

 

$

(2,284)

 

$

1,242

 

$

(3,220)

 

$

2,644

 

Stamping Group

 

 

(387)

 

 

80

 

 

(636)

 

 

290

 

3DMT Group

 

 

(267)

 

 

(459)

 

 

(209)

 

 

(857)

 

Wireless Group

 

 

 —

 

 

(23)

 

 

 —

 

 

(27)

 

Corporate (1)

 

 

(984)

 

 

(996)

 

 

(1,920)

 

 

(2,384)

 

Total segment operating loss

 

$

(3,922)

 

$

(156)

 

$

(5,985)

 

$

(334)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(927)

 

 

(1,030)

 

 

(1,939)

 

 

(2,137)

 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

(723)