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ARCW > SEC Filings for ARCW > Form 10-Q on 14-May-2013All Recent SEC Filings

Show all filings for ARC GROUP WORLDWIDE, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ARC GROUP WORLDWIDE, INC.


14-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to assist you in understanding our business and the results of our operations. It should be read in conjunction with the Consolidated Condensed Financial Statements and the related notes that appear elsewhere in this report as well as our Annual Report on Form 10-K for the year ended December 31, 2011 as well as our report on Form 8-K/A filed on September 28, 2012. Certain statements made in our discussion may be forward looking. Forward-looking statements involve risks and uncertainties and a number of factors could cause actual results or outcomes to differ materially from our expectations. These risks, uncertainties, and other factors include, among others, the risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and Report on Form 8-K/A filed with the Securities and Exchange Commission, as well as other risks described in this Quarterly Report. Unless the context requires otherwise, when we refer to "we," "us" and "our," we are describing ARC Group Worldwide, Inc. and its consolidated subsidiaries on a consolidated basis.

ARC BUSINESS OVERVIEW

After completion of the mergers mentioned above, ARC's operations consist of three groups of companies: the Precision Components Group, consisting of FloMet, AFT-US, AFT-Hungary, and TeknaSeal; the Flanges and Fittings Group, consisting of GF&F and TubeFit and the Wireless Group, consisting of ARC Wireless LLC and ARC Wireless Ltd. During the quarter ended March 31, 2013 Tubefit's operations were reclassified as discontinued operations.

PRECISION COMPONENTS GROUP

The precision component industry is comprised of a number of significant industries commonly defined by the process and/or type of metal utilized to manufacture the component. Common processes include casting, forging, machining, stamping, powder metallurgy (conventional P/M metal injection molding ("MIM"), and powder forging) and extrusion. Materials range from basic iron and steel to aluminum, magnesium, zinc, precious metals, copper and brass, tin, tungsten, titanium and others. While there are no compiled figures for the total of these markets, it is believed to be in total of hundreds of billions of dollars annually.

The Precision Components Group companies participate in several significant metal component fabrication market segments providing high quality fabricated metal components and the hermetic sealing of those components to some of the fastest growing industries, among them medical devices, firearms and electronic devices.

FLANGE AND FITTINGS GROUP

GF&F is one of approximately 10 domestic flange manufacturers in the United States, and the only one on the East Coast. GF&F has been in business since 1972. The majority of flange manufacturers are in the South West. GF&F is a very customer-driven and service-oriented company. GF&F estimates that the domestic market, combining carbon, stainless and alloy flanges, is more than a billion dollars.

GF&F's business model is focused on converting foreign-purchased alloy steel and stainless steel forgings into domestic flanges via value-added processing to provide a finished component with sufficient domestic content to qualify as domestically produced. The company also sells foreign produced finished flanges for certain applications. Additionally, the company will purchase forgings produced in the US and Europe and machine them into finished flanges for high-integrity applications.

WIRELESS GROUP

The Wireless Group focuses on wireless broadband technology related to propagation and optimization. It designs and develops hardware, including antennas, radios, and related accessories, used in broadband and other wireless networks. Products are sold to public and private carriers, wireless infrastructure providers, wireless equipment distributors, value added resellers and other original equipment manufacturers.

Growth in product revenue is dependent on market acceptance of the new ARCFlexTM family of full solution radio products, on gaining further traction with current and new customers for the existing product portfolio, as well on developing new products to support our wireless initiatives. Revenue growth for the products is correlated to the overall global wireless market and to the ability to take market share from our competitors. The Group focuses on keeping our operational and general costs low in order to improve margins.

Specific growth areas are last mile wireless broadband Internet delivered over standards-based solutions such as Worldwide Interoperability for Microwave Access ("WiMAX"), WiFi or vendor specific proprietary solutions; GPS and Mobile SATCOM solutions for network timing, fleet and asset tracking and monitoring; Machine to machine ("M2M") communications for controlling or monitoring data from devices; and base stations to build out or optimize carrier networks.

DISCONTINUED OPERATIONS

TubeFit

TubeFit's operations consisted of the distribution of imported fittings and both imported and domestic flanges. TubeFit served a segment of the market called the General Commodity Welds Fitting and Flange market. Tubefit is no longer actively operating and the assets and liabilities of Tubefit are presented as discontinued operations in the Company's financial statements as of March 31, 2013 and June 30, 2012 and the results of operation are presented as discontinued operations for the nine and three months ending March 31, 2013 and April 1, 2012 at its net realizable value.

ARC's Financial Condition

As of March 31, 2013 the Company had total assets of $69.3 million, consisting of total current assets of $26.1 million, plant and equipment, net of accumulated depreciation, of $24.6 million, and total long term assets of $18.6 million. In comparison, as of June 30, 2012 the Company had total assets of $21.3 million, consisting of total current assets of $9.7 million, plant and equipment, net of accumulated depreciation of $4.5 million, and total long-term assets of $7.2 million. The significant increase of $48.0 million in total assets is mainly attributed to the fair value of assets acquired in the business combination transaction discussed in Note A to the financial statements which amounted to $52.9 million. This amount is offset by $2.4 million in depreciation and amortization and reductions of accounts receivable and inventory in both General Flange and ARC Wireless amounting to approximately $1.0 million.

At March 31, 2013 and at June 30, 2012 the Company had working capital of $8.7 million and $6.0 million, respectively. The increase in working capital was driven by the increase in accounts receivable and inventory largely due to the acquisition of AFT and AFT-Hungary.

At March 31, 2013, the Company's total current assets of $26.1 million consisted of cash and cash equivalents of $2.6 million, accounts receivable, net of allowance for doubtful accounts, of $11.1 million, inventory of $11.2 million, prepaid expenses and other assets of $0.7 million and current assets of discontinued operations of $0.5 million. Total current liabilities of 17.4 million consisted of current portion of long-term debt in the amount of $4.5 million, line of credit of $4.2 million, accounts payable and accrued liabilities $7.6 million, deferred revenue of $1.0 million, and current liabilities of discontinued operations of $82 thousand.

ARC's Financial Condition

The Company's total current assets of $9.7 million as of June 30, 2012, consisted of cash and cash equivalents of $1.5 million, accounts receivable, net of allowance for doubtful accounts of $3.6 million, inventory of $3.6 million, a related party receivable of $0.2 million, prepaid expenses and other assets of $0.4 million, and current assets of discontinued operations of $0.4 million. Total current liabilities of $3.7 million consisted of current portion of long-term debt in the amount of $1.5 million, accounts payable and accrued expenses of $1.7 million, deferred revenue of $0.1 million and a related party payable of $0.4 million.

As of March 31, 2013, long term assets consisted of goodwill and other identifiable intangibles in the amount of $18.4 million, and $0.2 million in other assets. As of June 30, 2012 long term assets consisted of goodwill and other identifiable intangibles in the amount of $6.8 million, $0.2 million in other assets and $0.2 million in assets of discontinued operations. The increase in goodwill and other intangibles is attributed to $11.7 million in intangibles related to the acquisition of AFT and $0.1 million of intangibles related to the reverse acquisition of ARC. The discontinued operations are attributed to Tubefit's non-current assets at net realizable value.

The Company's total liabilities and stockholders' equity were $45.2 million and $24.1 million, respectively, as of March 31, 2013. In comparison, as of June 30, 2012 the Company's total liabilities and members' equity were $9.0 million and $12.3 million, respectively. The increase in total liabilities was primarily attributed to the increase in total debt as the result of the acquisition. The change in stockholders' equity was driven by the increase in additional paid in capital, due to reverse acquisition accounting for the Predecessor's investment in ARC.

Results of Continuing Operations for the Nine Months Ended March 31, 2013 and April 1, 2012

For the nine months ended March 31, 2013, the Company's total sales were $49.0 million, and other income including the gain on bargain purchase of $0.4 million. In comparison, total sales were $22.7 million for the nine months ended April 1, 2012 and $.1 million of other income.

The increase in sales of approximately $26.3 million for the nine months ended March 31, 2013 compared to the nine months ended April 1, 2012 is primarily attributed to incremental sales volume as a result of the acquisition of ARC and AFT, on August 8, 2012. Increased demand in the firearms market has also positively impacted the Company's sales revenue.

For the nine months ended March 31, 2013, the Company's total cost of sales and operating expenses were $46.3 million, including cost of sales of $36.2 million, selling, general and administrative expenses of $8.5 million, and nonrecurring merger expenses of $1.6 million. For the nine months ended April 1, 2012, QMTs total cost of sales and operating expenses were $18.5 million, including cost of sales of $13.3 million and selling, general and administrative expenses of $5.2 million. For the nine months ended March 31, 2013, the Company's other income included $0.4 million in gains on the bargain purchase of ARC offset by interest and miscellaneous expense of $0.6 million; for the nine months ended April 1, 2012 the Company had other expense of $0.3 million attributable to interest expense, offset with other income of $.1 million.

The cost of sales and operating expense increase over prior year is attributed to the acquisition of AFT and ARC on August 8, 2012 resulting in $27.1 million of additional cost of sales and operating expenses for acquired manufacturing volume and $1.6 million of merger expenses.

The Company's net income before non-controlling interest for the nine months ended March 31, 2013 was $1.7 million compared to earnings before non-controlling interest for the nine months ended April 1, 2012 of $3.8 million. The earnings before non-controlling interest decreased significantly over the prior year due to decreased net income attributed to initial merger and acquisitions costs. The net income as of March 31, 2013 excluding merger expenses and the gain on bargain purchase is $2.9 million.

Results of Continuing Operations for the Nine Months Ended March 31, 2013 and April 1, 2012

Income allocated to the Company's non-controlling interest was $0.2 million for the nine months ended March 31, 2013 compared to $0.2 million for the nine months ended April 1, 2012.

For the nine months ended March 31, 2013, the Company's net income attributable to ARC was $1.5 million compared to $3.6 million in net income for the nine months ended April 1, 2012. As noted above, the significant reductions in net earnings for the nine months ended March 31, 2013 over the nine months ended April 1, 2012 were primarily due to nonrecurring merger expenses of $1.6 million.

Results of Continuing Operations for the Three Months Ended March 31, 2013 and April 1, 2012

For the three months ended March 31, 2013, the Company's total sales were $18.2 million. In comparison, total sales were $7.6 million for the three months ended April 1, 2012.

The increase in sales of approximately $10.6 million for the three months ended March 31, 2013 compared to the three months ended April 1, 2012 resulted from the acquisition of ARC and AFT on August 8, 2012 and recent increased demand from our firearms market segment customers.

For the three months ended March 31, 2013, the Company's total cost of sales and operating expenses were $16.7 million, including cost of sales of $13.5 million and selling, general and administrative expenses of $3.2 million. For the three months ended April 1, 2012, total cost of sales and operating expenses were $6.3 million, including cost of sales of $4.4 million and selling, general and administrative expenses of $1.9 million. For the three months ended March 31, 2013, the Company had other expense of $0.2 million primarily attributable to interest expense; for the three months ended April 1, 2012 the Company had net other expense of $0.1 million primarily attributable to interest expense.

The cost of sales and operating expense increase over prior year is attributed to the acquisition of AFT and ARC on August 8, 2012 resulting in $10.8 million of additional cost of sales and operating expenses for acquired manufacturing volume.

The Company's net income before non-controlling interest for the three months ended March 31, 2013 was $0.8 million compared to earnings before non-controlling interest for the three months ended April 1, 2012 of $1.2 million. The earnings before non-controlling interest decreased over the prior year due to increased interest expense associated with long-term debt and higher operating costs as a percentage of sales associated with the lower historical margin levels at the acquired entities AFT and ARC Wireless.

Income allocated to the Company's non-controlling interest was $80 thousand for the three months ended March 31, 2013 compared to ($0.1) million loss for the three months ended April 1, 2012.

For the three months ended March 31, 2013, the Company's net income attributable to ARC was $0.8 million compared to $1.3 million in net income for the three months ended April 1, 2012. The difference is driven by $.3 million in other intangible asset amortization expense for the period ending March 31, 2013 and discontinued operations loss of $.25 million which includes the goodwill impairment for TubeFit for the period ending March 31, 2013.

Results of Continuing Operations by Segment: Comparison between Nine Months and Three Months Ended March 31, 2013 and April 1, 2012

Prior to the date of the acquisitions noted above, the Predecessor operated in two business segments, identified as the Precision Components Group, consisting of FloMet and TeknaSeal, and the Flanges and Fittings Group, consisting of GF&F and TubeFit. After completion of the acquisitions mentioned above, ARC operates three business segments: the Precision Components Group, consisting of FloMet, AFT-US, AFT-Hungary, and TeknaSeal; the Flanges and Fittings Group, consisting of GF&F; and the Wireless Group, consisting of ARC Wireless LLC and ARC Wireless Ltd. As noted previously, TubeFit, which was previously reported under the Flanges and Fittings segment has been classified as discontinued operations and therefore is excluded from the segment information below.

The following tables provide the dollar amount and percentage of net sales and operating profit for each reportable segment for the nine months and three months ended March 31, 2013 and April 1, 2012. It is noted that there is no data reflected for the Wireless segment for the nine months or three months ended April 1, 2012 as this date is prior to the reverse acquisition transaction.

                              Results of Continuing Operations by Segment - Comparison Between
                            The Nine Months Ended March 31, 2013 and April 1, 2012 (in thousands)
                                                                                                      Increase/(Decrease)
                                    03/31/2013       % of Sales       04/01/2012      % of Sales         $            %
Net sales:
Precision Components                     42,555             86.9 %         16,640            73.2 %     25,915        155.7 %
Flanges and Fittings                      4,925             10.1 %          6,079            26.8 %     (1,154 )      -19.0 %
Wireless                                  1,499              3.1 %              -             0.0 %      1,499          0.0 %
Consolidated net sales                   48,979                            22,719                       26,260        115.6 %
Operating Costs:
Precision Components                     37,356             87.8 %         12,941            77.8 %     24,415        188.7 %
Flanges and Fittings                      4,518             91.7 %          5,307            87.3 %       (789 )      -14.9 %
Wireless                                  1,779            118.6 %              -             0.0 %      1,779          0.0 %
Consolidated Operating Costs             43,653             89.1 %         18,248            80.3 %     25,405        139.2 %
Segment operating income (loss)
from continuing operations:
Precision Components                      5,199             12.2 %          3,699            22.2 %      1,500         40.6 %
Flanges and Fittings                        407              8.3 %            772            12.7 %       (365 )      -47.3 %
Wireless                                   (280 )          -18.6 %              -             0.0 %       (280 )        0.0 %
Corporate Expense                        (2,757 )           -5.6 %           (337 )          -1.5 %     (2,420 )      719.4 %
Total segment operating income
from continuing operations                2,569              5.2 %          4,134            18.2 %     (1,565 )      -37.9 %
Interest expense, net                      (538 )           -1.1 %           (349 )          -1.5 %       (189 )      -54.0 %
Gain on bargain purchase                    381              0.8 %              -             0.0 %        381          0.0 %
Other non-operating
income(expense)                             (41 )           -0.1 %            119             0.5 %       (160 )     -134.3 %
Non- Operating Income(Expenses)            (198 )           -0.4 %           (230 )          -1.0 %         32         14.4 %
Consolidated income from
continuing operations before
income tax expense and
non-controlling interest                  2,371              4.8 %          3,904            17.2 %     (1,533 )      -39.2 %

                               Results of Continuing Operations by Segment - Comparison Between
                            The Three Months Ended March 31, 2013 and April 1, 2012 (in thousands)
                                                                                                       Increase/(Decrease)
                                     03/31/2013       % of Sales       04/01/2012       % of Sales            $            %
Net sales:
Precision Components                     16,147             88.5 %          5,656             74.8 %     10,491        185.5 %
Flanges and Fittings                      1,560              8.5 %          1,910             25.2 %       (350 )      -18.3 %
Wireless                                    541              3.0 %              -              0.0 %        541          0.0 %
Consolidated net sales                   18,248                             7,566                        10,682        141.2 %
Operating Costs:
Precision Components                     14,505             89.8 %          4,348             76.9 %     10,157        233.6 %
Flanges and Fittings                      1,480             94.9 %          1,659             86.9 %       (179 )      -10.8 %
Wireless                                    559            103.2 %              -              0.0 %        559          0.0 %
Consolidated Operating Costs             16,544             90.7 %          6,007             79.4 %     10,537        175.4 %
Segment operating income (loss)
from continuing operations:
Precision Components                      1,642             10.2 %          1,308             23.1 %        334         25.5 %
Flanges and Fittings                         80              5.1 %            251             13.1 %       (171 )      -68.2 %
Wireless                                    (18 )           -3.2 %              -              0.0 %        (18 )        0.0 %
Corporate Expense                          (104 )           -0.6 %           (292 )           -3.9 %        188        -64.7 %
Total segment operating income
from continuing operations                1,600              8.8 %          1,267             16.8 %        333         26.3 %
Interest expense, net                      (146 )           -0.8 %            (99 )           -1.3 %        (47 )      -48.2 %
Gain on bargain purchase                      -              0.0 %              -              0.0 %          -          0.0 %
Other non-operating
income(expense)                             (65 )           -0.4 %             44              0.6 %       (109 )     -247.4 %
Non- Operating Income(Expenses)            (211 )           -1.2 %            (55 )           -0.7 %       (156 )     -286.8 %
Consolidated income from
continuing operations before
income tax expense and
non-controlling interest                  1,389              7.6 %          1,212             16.0 %        177         14.6 %

Precision Components

Precision Components' sales were $42.6 million for the nine months ended March 31, 2013, compared to sales of $16.6 million for the nine months ended April 1, 2012, an increase of $25.9 million. Operating income was $5.2 million for the nine months ended March 31, 2013 compared to $3.7 million for the nine months ended April 1, 2012, an increase of $1.5 million. Segment operating income as a percent of segment sales for the nine months ended March 31, 2013 decreased to 12.2percent from 22.2 percent of segment sales for the nine months ended April 1, 2012.

Precision Components' sales were $16.1 million for the three months ended March 31, 2013, compared to sales of $5.7 million for the three months ended April 1, 2012, an increase of $10.5 million. Operating income was $1.6 million for the three months ended March 31, 2013 compared to $1.3 million for the three months ended April 1, 2012, an increase of $0.3 million. Segment operating income as a percent of segment sales for the three months ended March 31, 2013 decreased to 10.2 percent from 23.1 percent of segment sales for the three months ended April 1, 2012.

Precision Components

Sales for the Precision Components segment increased, by $10.4 million or 185.5 percent, comparing the three months ended March 31, 2013 to the three months ended April 1, 2012 primarily due to the acquisitions of AFT and AFT-HU on August 8, 2012 and the inclusion of their operating results in this segment, which increased sales by $11.0 million and was slightly offset by $.6 million decrease in revenues for FloMet and TeknaSeal reflecting the general slowing economy.

The firearms market segment at AFT continued to grow strongly as the company was able to meet increased demand and secure several new programs from their customers in this growing market segment. Sales at AFT-HU to their automotive turbocharger customers reflected the increasing demand for turbochargers in cars as engine displacements continue to shrink to meet increasing fuel economy requirements. Turbochargers enable the automakers to downsize engines while improving performance thus providing customers with a relatively transparent solution to improved fuel efficiency without sacrificing power.

The operating costs for the segment increased on a percentage basis over prior year due to lower historical margin levels at AFT and AFT-HU due to higher material costs as a percentage of sales and certain manufacturing inefficiencies which are being addressed with a large number of continuous improvement programs and price increases to certain customers. We expect that the current slowing economy will continue to have a slightly negative impact on revenues for the balance of fiscal year 2013. The Precision Components segment is experiencing a slight slowdown in demand in several important market segments such as medical devices but we expect demand in the firearms and automotive segment to offset much of the negative impact on revenues. The operating companies have implemented additional cost reduction and continuous improvement activities to maintain and improve margins, and will also aggressively pursue price increase opportunities with certain customers to offset increases in raw materials and other operating costs. Additionally, we expect demand in Europe for automotive turbochargers to continue its strong growth patterns which should translate into increased revenues at AFT-HU.

Flanges & Fittings

Flanges and Fittings' sales were $4.9 million for the nine months ended March 31, 2013, compared to sales of $6.1 million for the nine months ended April 1, 2012. Segment operating income was $0.4 millionfor the nine months ended March 31, 2013, compared to segment operating income of $0.8 million for the nine months ended April 1, 2012. Segment operating income, as a percent of segment sales, for the nine months ended March 31, 2013decreased to 8.3 percent from 12.7 percent of segment sales for the nine months ended April 1, 2012.

Flanges and Fittings' sales were $1.6 million for the three months ended March 31, 2013, compared to sales of $1.9 million for the three months ended April 1, 2012. Segment operating income was $.1 million for the three months ended March 31, 2013, compared to segment operating income of $0.3 million for the three months ended April 1, 2012. Segment operating income, as a percent of segment sales, for the three months ended March 31, 2013 decreased to 5.1 percent from 13.1 percent of segment sales for the three months ended April 1, 2012.

The reduction in revenues and operating income reflects the impact of the slowing in the general economy in the quarter in addition to the significant impacts of Hurricane Sandy on our customer base in the Northeast US. Additionally, the decision was made in the quarter to discontinue operations of Tubefit due to the subsidiary's continuing inability to generate adequate sales volume and positive income as a result of significant price competition in the Southwest U.S. geographic market.

Flanges & Fittings

We have made certain cost reductions in our General Flange operation to reduce our operating costs as the Northeast recovers and demand in that geographic market improves as reconstruction projects get underway with the improved weather in the area.

As with our Precision Components segment, the Flanges & Fittings segment is witnessing a slight slowdown in overall demand from its customers due to the sluggish US economy. However, we remain optimistic about the overall prospects of the Flanges & Fittings industry. The increasing attention on energy, chemical manufacturing, food processing, and other industries requiring flow management all appear to position General Flange and Forge for future growth. GF&F is focused on continuing to expand its customer base in 2013, particularly with the instrumentation market segment and the energy segment by marketing flanges rated for higher pressure applications than current product lines.

Wireless

Wireless sales were $1.5 million for the nine months ended March 31, 2013. Segment operating loss was $.3 millionfor the nine months ended March 31, 2013. Segment operating loss, as a percent of segment sales, for the nine months ended March 31, 2013 was -18.6 percent.

. . .

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