General
The accompanying consolidated financial statements include EDAC Technologies Corporation (“
We”, “Us”, “
EDAC” or the “Company”) and its wholly-owned subsidiaries, Gros-Ite Industries, Apex Machine Tool Company, Inc., and EBTEC Corporation.
EDAC was incorporated in Wisconsin in 1985.
We provide
complete design, manufacture and service meeting the precision requirements of some of the most exacting customers in the world for tooling, fixtures, molds, jet engine components and machine spindles. The Company and its subsidiaries operate as two business segments.
On May 27, 2009, the Company acquired substantially all of the assets and certain liabilities of MTU Aero Engines North America, Inc.’s Manufacturing Business Unit (“AENA”), which manufactures rotating components such as disks, rings and shafts for the aerospace industry. This business is hereinafter referred to as “AERO”.
On June 1, 2012, the Company acquired all of the outstanding stock of EBTEC Corporation which manufactures jet engine parts and provides services to the aerospace and industrial markets including electron beam
laser welding, laser cutting and laser drilling, EDM, vacuum heat treating and abrasive waterjet cutting as well as expanding the Company’s markets to include semiconductors and medical devices.
This business is hereinafter referred to as “EBTEC”.
On October 5, 2012, the Company acquired certain assets and liabilities of Smith-Renaud, Inc. which manufactures
centerless grinding systems and custom precision spindles
.
This business is hereinafter referred to as “Smith-Renaud”.
Products
EDAC AERO
produces low pressure turbine cases, hubs, rings, disks and other complex, close tolerance components for all major aircraft engine and ground turbine manufacturers. This product line specializes in turnings and 4 and 5 axis milling of difficult-to-machine alloys such as waspalloy, hastalloy, inconnel, titanium, high nickel alloys, aluminum and stainless steels. Its products also include rotating components, such as disks, rings and shafts. Precision assembly services include assembly of jet engine sync rings, aircraft welding and riveting, post-assembly machining and sutton barrel finishing. EDAC AERO also includes the businesses of EBTEC and Aero Engine Component Repair. EBTEC manufactures jet engine parts and provides services to the aerospace and industrial markets including electron beam
laser welding, laser cutting and laser drilling, EDM, vacuum heat treating and abrasive waterjet cutting as well as expanding the Company’s markets to include semiconductors and medical devices.
Aero Engine Component Repair is engaged in precision machining for the maintenance and repair of selected components in the aircraft engine industry. Geographic markets include the U.S., Canada, Mexico, Europe and Asia, although most of this product line’s sales come from the United States.
The Company serves industrial customers through its Apex Machine Tool and Machinery product lines.
Apex Machine Tool
designs and manufactures highly sophisticated fixtures, precision gauges, close tolerance plastic injection molds and precision component molds for composite parts and specialized machinery. A unique combination of highly skilled toolmakers and machinists and leading edge
technology has enabled Apex to provide exacting quality to customers who require tolerances to +/- .0001 inches. Geographic markets include the U.S., Canada and Europe, although almost all sales come from the United States.
EDAC Machinery
(“Machinery”) designs, manufactures and repairs all types of precision rolling element bearing spindles including hydrostatic and other precision rotary devices. Custom spindles are completely assembled in a Class 10,000 Clean Room and are built to suit any manufacturing application up to 100 horsepower and speeds in excess of 100,000 revolutions per minute. Machinery’s repair service can recondition all brands of precision rolling element spindles, domestic or foreign. The Company also manufactures and services precision grinders as a part of its Machinery product line. The Machinery product line serves a variety of customers: machine tool manufacturers, special machine tool builders and integrators, industrial end-users, and powertrain machinery manufacturers and end-users. Geographic markets include the U.S., Canada, Mexico, Europe and Asia, although sales come primarily from the United States.
EBTEC.
EDAC acquired EBTEC on June 1, 2012. EBTEC is now a wholly-owned subsidiary of EDAC, and will be operated by EDAC as its EBTEC Division of its AERO segment. EBTEC is engaged in the business of providing precision fabricating services, including electron beam welding, laser welding, cutting and drilling, abrasive waterjet cutting and conventional machining, fabrication and welding services, and surface texturing.
EDAC is AS9100:2004 and ISO 14001:2004 Certified. EDAC Machinery is AS9100:2008 Certified.
We
currently
offer
design and manufacturing services for a wide range of industries in areas such as special tooling, equipment and gauges, and components used in the manufacture, assembly and
inspection of jet engines.
We
also specialize in the design and repair of precision spindles. Spindles are an integral part of numerous machine tools which are found in virtually any type of manufacturing environment. We have introduced new spindle proprietary products for the woodworking and automotive markets, and in July 2003, we entered into an exclusive worldwide licensing agreement to develop, design, manufacture and market a patented hydrostatic spindle product line.
We maintain
manufacturing facilities with computerized, numerically controlled machining centers,
and
grinding, welding, painting and assembly capabilities.
Products
manufactured by
us
include precision rings, and other components for jet engines, industrial spindles and specialized machinery designed by
us
or others and other assemblies requiring close tolerances.
Patents and Trademarks
We currently hold no patents or registered trademarks, tradenames or similar intellectual property. We believe that the nature of our business presently does not require the development of patentable products or registered tradenames or trademarks.
Marketing and Competition
The Company developed its high skill level by serving the aerospace industry for over 50 years. For the fiscal year ended December 29, 2012, sales to United Technologies Corporation and its affiliates amounted to approximately 35% of our sales. We provide a range of components, tooling, fixtures and design services for this aerospace company. Although we have expanded our commitment to serving the manufacturing needs of a broad base of industrial customers, the loss of this customer, or a significant
decrease in the amount of business we do with this customer, could have a material adverse effect on our business.
The competition for design, manufacturing and service in precision machining and machine tools consists of independent firms, many of which are smaller than we are. We believe that this allows us to bring a broader spectrum of support to our customers who are consistently looking for ways to consolidate their vendor base. We also compete against the in-house manufacturing and service capabilities of our larger customers. We believe that the trend by large manufacturers to outsource activities that are outside their core competency is an opportunity for us.
The market for our products and precision machining capabilities continues to change with the development of more sophisticated use of business-to-business tools on the internet. We are actively involved in securing new business leads on the internet and have participated in internet auctions and research for quoting opportunities.
We believe that we have a distinct competitive advantage through our ability to provide high quality, high precision, quick turnaround support to customers from design to delivery. Our experience and reputation in the demanding aerospace business provides an extra level of expertise in meeting our customers’ requirements. We believe our commitment to continuous improvement and the latest technology will generate the productivity improvements required to respond to the increasing price pressure of the competitive marketplace in which we operate.
Backlog
Our backlog as of December 29, 2012, was approximately $304,016,000 compared to approximately $252,100,000 as of December 31, 2011. The increase is primarily due to increased orders in all product lines. Backlog consists of accepted purchase orders that are cancelable or may be rescheduled by the customer without penalty, except for payment of costs incurred, and may involve delivery times that extend over periods as long as three years. We presently expect to complete approximately $76,000,000 of our December 29, 2012 backlog during the 2013 fiscal year.
We maintain a website with the address
www.edactechnologies.com
. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K.
Employees
As of March 11, 2013, we had approximately 480 employees.
Item 1A.
Risk factors.
Our business, operating results, financial condition and cash flows can be impacted by a number of factors, including but not limited to those set forth below, any one of which could cause our actual results to vary materially from recent results.
For a discussion of other matters which may affect our financial condition, results of operations or cash flows, see the further discussions in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2012 Annual Report.
We depend on revenues from a small number of significant customers. Any loss, cancellation, reduction or delay in purchases by these customers could harm our business.
Our largest customer accounted for 35% of our sales during fiscal 2012. Our success will depend on our continued ability to develop and manage relationships with this and other significant customers. Some of our customers could in the future shift some or all of their purchases from us to our competitors, or to other sources, or bring such business in-house. The loss of one or more of our largest customers, a significant reduction or delay in sales to one or more of these customers, an inability to successfully develop relationships with new customers, or future price concessions we could make to retain customers could significantly reduce our sales and profitability.
Our financial performance is dependent on the conditions of the aerospace industry.
Sales to our aerospace customers, which generated 75% of our total sales in 2012, are directly tied to the economic conditions in the commercial aviation and defense industries. The aviation industry is cyclical, and capital spending by airlines and aircraft manufacturers may be influenced by a wide variety of factors including current and predicted traffic levels, load factors, aircraft fuel pricing, labor issues, competition, the retirement of older aircraft, regulatory changes, terrorism and related safety concerns, general economic conditions, worldwide airline profits and backlog levels. Also, since a significant portion of the backlog for commercial customers is scheduled for delivery beyond 2013, changes in economic conditions may cause customers to request that firm orders be rescheduled or canceled. A reduction in capital spending in the aviation or defense industries could have a significant effect on the sales of our EDAC Aero and Apex Machine Tool product lines, which could have an adverse effect on our financial performance or results of operations.
Additionally, during a downturn in the cyclical aviation industry, there is substantial pressure on suppliers like us from original equipment manufacturers (“OEMs”) in the aerospace industry to reduce prices on new orders. We attempt to manage such downward pricing pressure, while trying to preserve our business relationships with our customers, by seeking to reduce our production costs through various measures, including purchasing raw materials and components at lower prices and implementing cost reduction strategies. If we were unable to offset OEM price reductions, our profitability and cash flows could be adversely affected.
Further, the consolidation and combination of defense or other manufacturers may eliminate customers from the industry and/or put downward pricing pressures on sales of component parts. For example, the consolidation that has occurred in the defense industry in recent years has significantly reduced the overall number of defense contractors in the industry. In addition, if one of our customers is acquired or merged with another entity, the new entity may discontinue using us as a supplier because of an existing business relationship of the acquiring company or because it may be more efficient to consolidate certain suppliers within the newly formed enterprise. The significance of the impact that such consolidation may have on our business is difficult to predict because we do not know when or if one or more of our customers will engage in merger or acquisition activity. However, if such activity involved our material customers it could materially impact our revenues and profitability.
The aerospace industry is highly competitive, and this competition could reduce our profitability or limit our ability to grow.
The aerospace industry is highly competitive. We compete with many U.S. and non-U.S. companies as well as the in-house manufacturing and service capabilities of large manufacturers, some of which may benefit from lower labor costs than ours. We compete primarily based on product qualifications, service and price. Certain competitors are larger than we are or are subsidiaries of larger entities and may be better able to manage costs than us or may have greater financial resources than we have. Due to the competitiveness in the aerospace industry, we may not be able to increase prices for our products to cover increases in our costs, or we may face pressure to reduce prices, which could materially reduce our revenues, gross margin and profitability. Competitive factors, including changes in market penetration, increased price competition and the introduction of new products and technology by existing and new competitors could result in a material reduction in our revenues and profitability.
We may not realize all of the sales expected from our existing Aerospace segment backlog.
There is an ongoing risk that aerospace orders may be cancelled or rescheduled due to fluctuations in our customers’ business needs and market conditions. We consider backlog to be firm customer orders for future delivery. Certain of our customers have the right to terminate, reduce or defer firm orders that we have in backlog. If a customer terminates or reduces firm orders, we are able to invoice for work performed, but our future sales would be adversely affected.
Also, the realization of sales from new and existing programs of all of our customers is inherently subject to a number of important risks and uncertainties, including whether our customers will execute the launch of product programs on time, or at all, and the number of units that our customers will actually produce.
We maintain a frozen defined benefit pension plan.
Declines in the stock market and prevailing interest rates could cause an increase in our pension benefit expenses in the future and result in reductions in our pension fund asset values and increases in our pension benefit obligations. These changes could cause a reduction in our net worth and may require us to make higher cash contributions to our pension plan in the future.
Any product liability claims in excess of insurance could adversely affect our financial condition.
There are potential product liability risks that are inherent in the design, manufacture and sale of certain of our products. While we believe that our liability insurance is adequate to protect us from these liabilities, our insurance may not cover all liabilities. Any material liability not covered by insurance could have a material adverse effect on our financial condition, results of operations and cash flows.
We engage in acquisitions and may encounter difficulties integrating acquired businesses with our current operations; therefore, we may not realize the anticipated benefits of these acquisitions.
We seek to grow through strategic acquisitions in addition to internal growth. In the past several years, we have made various acquisitions expected to complement and expand our businesses, and expect to do so in the future. On June 1, 2012, we acquired EBTEC Corporation and on October 5, 2012 we acquired the assets of Smith Renaud, Inc. Our due diligence reviews may not identify all of the material issues necessary to accurately estimate the cost and potential loss contingencies of a particular transaction, including potential exposure to regulatory sanctions resulting from an acquisition target’s previous activities. We may incur unanticipated costs or expenses, including post-closing asset impairment charges, expenses associated with eliminating duplicate facilities, litigation, and other liabilities. We also may
encounter difficulties in integrating acquisitions with our operations, applying our internal controls processes to these acquisitions, or in
managing strategic investments. Additionally, we may not realize the degree or timing of benefits we anticipate when we first enter into a transaction. Any of the foregoing could adversely affect our business and results of operations.
Our debt has increased as a result of the EBTEC acquisition and the acquisition of the Cheshire Facility.
We have outstanding debt and other financial obligations and significant unused borrowing capacity. We have incurred substantial additional debt as a result of the EBTEC acquisition and the acquisition of certain property located in Cheshire, Connecticut and Plainville, Connecticut. As of December 29, 2012, we had approximately $39.6 million of total debt. Our debt level and related debt service obligations could have negative consequences, including, among others:
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requiring us to dedicate significant cash flow from operations to the payment of principal and interest on our debt, which would reduce the funds we have available for other purposes, such as acquisitions;
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reducing our flexibility in planning for or reacting to changes in our business and market conditions; and
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exposing us to interest rate risk since a portion of our debt obligations are at variable rates.
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We may incur significantly more debt in the future. If we add new debt and do not retire existing debt, the risks described above could increase
.
We depend heavily on our senior management and other key personnel, the loss of whom could materially affect our financial performance and prospects.
Our business is managed by a small number of key executive officers, including Dominick A. Pagano and Glenn L. Purple. Our future success will depend on, among other things, our ability to keep the services of these executives and to hire other highly qualified employees at all levels. We compete with other potential employers for employees, and we may not be successful in hiring and retaining executives and other skilled employees that we need. Our ability to successfully execute our business strategy, market and develop our products and serve our customers could be adversely affected by a shortage of available skilled employees or executives.
We face costs and risks associated with maintaining effective internal control over financial reporting.
Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) requires our management to include in our annual reports on Form 10-K, their report on the operating effectiveness of the Company’s internal controls over financial reporting. The process of maintaining and evaluating the effectiveness of our internal control over financial reporting requires us to incur expense and to devote resources on an on-going basis.
In the event that our management determines that our internal control over financial reporting is not effective as defined under Section 404, we could be subject to regulatory scrutiny and a loss of confidence among our current and potential shareholders and customers in our financial reporting and disclosure, which could adversely affect our business.