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| LB > SEC Filings for LB > Form 10-K on 28-Aug-2009 | All Recent SEC Filings |
28-Aug-2009
Annual Report
Forward-looking Statements
Certain sections of this report contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that relate to future events or the Company's future financial performance. The Company has attempted to identify these statements by terminology including "believe," "anticipate," "plan," "expect," "estimate," "intend," "seek," "goal," "may," "will," "should," "can," "continue," or the negative of these terms or other comparable terminology. These statements include statements about the Company's market opportunity, its growth strategy, competition, expected activities, and the adequacy of its available cash resources. These statements may be found in the sections of this report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business," "Risk Factors" and "Legal Proceedings." Although the Company believes that, in making any such statement, its expectations are based on reasonable assumptions, readers are cautioned that matters subject to forward-looking statements involve known and unknown risks and uncertainties, including economic, regulatory, competitive and other factors that may cause the Company or its industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions as described in Item 1A, "Risk Factors" of this Annual Report on Form 10-K.
Given these uncertainties, undue reliance should not be placed on such forward-looking statements. Unless otherwise required by law, the Company disclaims an obligation to update any such factors or to publicly announce the results of any revisions to any forward-looking statements contained herein to reflect future events or developments.
Overview
The Company designs, engineers and produces sophisticated electronic and electromechanical systems and devices, and complex interconnect systems on a contract basis for its customers. Engineering and manufacturing facilities are located in Arkansas, Missouri, Oklahoma, Pennsylvania, Texas and Wisconsin.
The Company's customers conduct business in a variety of markets with significant revenues from customers in the defense, government systems, medical, aerospace, natural resources, industrial and other commercial markets. As a contract manufacturer, revenues are impacted primarily by the volume of shipments in the particular period.
The Company provides information about its end markets to demonstrate the diversity of its customer base, which the Company believes helps to reduce potential volatility in its revenue stream. However, the Company does not target customers in individual markets, but rather targets companies whose manufacturing requirements matched the services and capabilities the Company provides. Within all end markets, gross profit margins vary widely by customer and by contract.
The most significant factors influencing profitability in a particular period are: the mix of contracts with deliveries in that period and the volume of sales in relation to the Company's fixed costs during that period. Delivery schedules are generally determined by the Company's customers. The significant factors that influence the profitability of the individual contracts include: (i) the competitive environment in which the contract was bid; (ii) the experience level of the Company in manufacturing these particular product(s); (iii) the stability of the design of the product(s); and (iv) the accuracy of the Company's original cost estimates as reflected in the sale price for the product(s).
The Company has a centralized sales organization. Though the selling and marketing personnel have a customer and prospective customer focus, they are not limited to exclusively developing a specific end market.
On November 25, 2008, Eclipse Aviation Corporation ("Eclipse"), a customer of the Company, announced that it filed a petition for relief under Chapter 11 of the United States Bankruptcy Code. On March 5, 2009, the Eclipse bankruptcy was converted to Chapter 7 liquidation.
The Eclipse bankruptcy negatively impacted the Company's financial results for the fiscal year ended June 28, 2009, as described in more detail throughout the Management's Discussion and Analysis of Financial Condition and Results of Operations, and in Notes 4 and 5 to the Consolidated Financial Statements filed with this report. The end market for sales to Eclipse was commercial aerospace.
Results of Operations - Fiscal 2009 - 2008 - 2007
Backlog
(in thousands)
Fiscal Year Ended
Change Fiscal June 28, June 29, July 1,
2009 vs. 2008 2009 2008 2007
Defense $(10,010 ) $ 108,400 $ 118,410 $ 78,108
Natural resources (3,589 ) 14,469 18,058 28,167
Industrial (9,929 ) 10,844 20,773 17,438
Medical 9,057 20,552 11,495 10,713
Government systems (1,944 ) 1,799 3,743 14,266
Commercial aerospace (40,665 ) 6,562 47,227 56,126
Other 3,795 5,382 1,587 1,391
Total backlog $(53,285 ) $ 168,008 $ 221,293 $ 206,209
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The backlog at June 28, 2009 included $20.4 million from the newly acquired Pensar operation. Absent the Pensar acquisition, the backlog from June 29, 2008 to June 28, 2009 decreased by $73.7 million. The $40.7 million reduction in commercial aerospace is primarily related to the Eclipse bankruptcy discussed in more detail in Notes 4 and 5 to the Consolidated Financial Statements. The remaining decline in backlog results from reduced orders in several market sectors due to the economic downturn. The increase in medical backlog resulted from the addition of $10.7 million of backlog from the Pensar acquisition.
The $15.1 million increase in backlog from July 1, 2007 to June 29, 2008 primarily resulted from the $40.3 million increase in backlog for the defense market, offset by a $10.1 million decrease in backlog in the natural resources market and an $8.9 million decrease in backlog in the commercial aerospace market. The increase in defense was driven by several large contracts related to producing cable and electronic assemblies for a variety of defense applications, including military aircraft, missile systems, radar systems and shipboard programs. Natural resources backlog declined as a large contract that was booked in fiscal year 2007 shipped in fiscal year 2008. The decrease in commercial aerospace related to a long-term contract that was booked prior to 2007, which shipped $8.0 million in fiscal year 2008.
Approximately $22.9 million of the backlog at fiscal 2009 year-end is scheduled to ship beyond the next 12 months, pursuant to the shipment schedules of the contracts that comprise backlog. This compares with $48.4 million at fiscal year-end 2008. The decrease is due to the removal of Eclipse orders from the fiscal 2009 backlog.
Net Sales
(in thousands)
Fiscal Year Ended
Change Fiscal June 28, June 29, July 1,
2009 vs. 2008 2009 2008 2007
Defense $ 19,055 $ 126,294 $ 107,239 $ 87,313
Natural resources (15,125 ) 50,250 65,375 57,314
Industrial (1,280 ) 49,574 50,854 36,805
Medical 4,783 24,762 19,979 7,613
Government systems (6,462 ) 4,103 10,565 21,629
Commercial aerospace (11,627 ) 9,402 21,029 18,237
Other 4,539 8,983 4,444 6,292
Total net sales $ (6,117 ) $ 273,368 $ 279,485 $ 235,203
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The Pensar acquisition, described in Note 2 to the Consolidated Financial Statements, contributed $25.9 million of net sales to the 2009 fiscal year.
The overall decrease in net sales between fiscal years 2009 and 2008 was primarily due to the economic downturn. The $19.1 million increase in defense sales in fiscal year 2009 related to several contracts to produce cable and electronic assemblies for a variety of defense applications, including military aircraft, missile systems, radar systems and shipboard programs. Sales to customers in the natural resources market were negatively impacted by the overall economic downturn and lower commodity prices in the mining and oil and gas industries. This downturn was partially offset by $9.7 million of natural resources sales from the Pensar acquisition, in the wind-power generation sector. The increase in medical sales was driven by $8.7 million of sales from the Pensar acquisition. Government systems sales were down as the Company completed a large multi-year contract for baggage scanning equipment in December 2008. Commercial aerospace sales decreased due to the bankruptcy of Eclipse described in Notes 4 and 5 to the Consolidated Financial Statements. The increase in other markets was primarily due to $5.0 million of sales from the Pensar acquisition.
The increase in sales between fiscal years 2008 and 2007 was the result of strength in several markets. The increase in defense sales in fiscal year 2008 relates to several multi-year contracts to produce cable and electronic assemblies for a variety of defense applications including military aircraft, missile systems, radar systems and shipboard programs. The increase in natural resources reflected the strong demand for products in the mining industry. The increase in the industrial markets was a result of strong demand and expanded capabilities for the production of heavy mechanical assemblies.
Sales to the Company's 10 largest customers represented 64.4% of total revenue in fiscal 2009, versus 69.6% in fiscal 2008 and 69.9% in fiscal 2007. The Company's top three customers and their relative contribution to fiscal year 2009 sales were Owens-Illinois Group Inc., 14.2%; Raytheon Company, 8.8%; and Schlumberger Ltd., 8.5%. The Company's top three customers for fiscal year 2008 were Owens-Illinois Group, Inc., 14.2%; Schlumberger Ltd., 11.2%; and Modular Mining Systems, Inc., 9.4%. The Company's top three customers for fiscal year 2007 were Schlumberger Ltd., 12.9%; Northrop Grumman Systems Corp., 9.7%; and Modular Mining Systems, Inc., 9.6%.
Cost of Sales and Gross Profit
(dollars in thousands)
Fiscal Year Ended
Change Fiscal June 28, June 29, July 1,
2009 vs. 2008 2009 2008 2007
Cost of sales $(1,915 ) $ 222,583 $ 224,498 $ 189,408
Percent of net sales 110 basis pts. 81.4 % 80.3 % 80.5 %
Gross profit $(4,202 ) 50,785 54,987 45,795
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Gross profit margins vary significantly by contract. The most significant factors influencing profitability in a particular period are: the mix of contracts and orders with deliveries in that period; and, the volume of sales in relation to the Company's fixed costs during the period. Delivery schedules are generally determined by the Company's customers. The significant factors that influence the profitability of individual contracts include: (i) the competitive environment in which the contract was bid; (ii) the experience level of the Company in manufacturing the particular product(s); (iii) the stability of the design of the product(s); and (iv) the accuracy of the Company's original cost estimates.
Cost of sales for the fiscal year ended June 28, 2009 decreased $1.9 million, compared with the prior fiscal year, driven by the fiscal year 2009 sales decline of $6.1 million. Gross profit for fiscal year 2009 was down $4.2 million and gross profit margin was down 110 basis points versus the prior fiscal year. The decline in gross profit margin from 19.7% in fiscal year 2008 to 18.6% in fiscal year 2009 was primarily driven by the write-down of inventory related to the Eclipse program described in Note 5 to the Consolidated Financial Statements and the acquisition of Pensar. In addition, gross profit margin was negatively impacted by a percentage drop in sales that exceeded the percentage drop in indirect manufacturing expenses.
The write-down of the Eclipse related inventory increased cost of sales and reduced gross profit by $4.2 million. This write-down reduced the reported gross profit margin by 150 basis points.
The acquisition of Pensar added cost of sales of $23.6 million and gross profit of $2.3 million in the fiscal year ended June 28, 2009. The Pensar operation generated gross profit margin of 8.8% in the fiscal year ended June 28, 2009. The Pensar gross profit margin was negatively impacted by the step up of work in process and finished goods inventory as part of the allocation of the acquisition purchase price, which added $218,000 to cost of sales recorded by the Pensar operation. Excluding the Pensar operation, the gross profit margin would have been 19.6% for the twelve months ended June 28, 2009, a decrease of 10 basis points compared with the same period in fiscal 2008.
Absent the Eclipse write-off and the impact of the Pensar acquisition, the gross profit margin would have been 21.3% for the fiscal year ended June 28, 2009, which is 160 basis points higher than the fiscal year ended June 29, 2008.
During the fiscal years ended June 29, 2008 and July 1, 2007, the Company's gross margins were negatively impacted by higher than anticipated labor and material costs on certain early-stage long-term contracts that were not fully recoverable from the Company's customers, and start-up expenses on a significant new contract for the assembly of heavy mechanical products in the industrial market. In addition, in the fiscal years ended June 29, 2008 and July 1, 2007, the Company recorded costs of $248,000 and $738,000, respectively, to account for the actual and anticipated loss on current and future shipments on one particular defense program for which the Company experienced significant design changes.
Selling and Administrative Expense
(dollars in thousands)
Fiscal Year Ended
Change Fiscal June 28, June 29, July 1,
2009 vs. 2008 2009 2008 2007
Selling and administrative expense $3,253 $ 32,810 $ 29,557 $ 26,269
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In fiscal year 2009, the major factors increasing selling and administrative expense, as compared with fiscal 2008, were: the write off of the Eclipse accounts receivable ($3.7 million); the acquisition of Pensar ($2.1 million); and higher salaries and wages due to head count and wage inflation ($1.4 million). Partially offsetting these increases were: lower incentive compensation expense ($3.1 million); lower commissions ($575,000); and, reduced personnel recruiting and relocation expenses ($259,000).
Selling and administrative expense in fiscal 2008 increased from the prior year due to higher salaries and wages of $700,000 caused by increased head count and wage inflation; higher incentive compensation expense of $1.4 million; higher medical expenses of $240,000; and increased personnel recruiting and relocation expense of $266,000.
Interest Expense
(in thousands)
Fiscal Year Ended
Change Fiscal June 28, June 29, July 1,
2009 vs. 2008 2009 2008 2007
Interest expense $(165 ) $ 1,294 $ 1,459 $ 2,241
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Interest expense decreased in fiscal year 2009 from the prior year due to lower average interest rates. The debt level increased in the fiscal year period ended June 28, 2009 as a result of borrowings to finance the Pensar acquisition.
Interest expense decreased in fiscal year 2008 from the prior year due to lower average debt levels.
Income Tax Expense
(in thousands)
Fiscal Year Ended
Change Fiscal June 28, June 29, July 1,
2009 vs. 2008 2009 2008 2007
Income tax expense $(2,682 ) $ 6,329 $ 9,011 $ 6,656
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The effective income tax rate for fiscal 2009 was 40%, compared with 38% and 37% in fiscal years 2008 and 2007, respectively.
Net Earnings and Earnings Per Share
(amounts in thousands, except per-share data)
Fiscal Year Ended
June 28, June 29, July 1,
2009 2008 2007
Net earnings $ 10,338 $ 14,827 $ 11,343
Basic net earnings per share $ 0.67 $ 0.98 $ 0.75
Diluted net earnings per share $ 0.64 $ 0.92 $ 0.71
Fiscal Year Ended
June 28, June 29, July 1,
2009 2008 2007
Average common shares outstanding -- basic 15,498 15,198 15,143
Dilutive options and nonvested shares 546 940 904
Adjusted average common shares 16,044 16,138 16,047
outstanding -- diluted
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All outstanding stock options and nonvested shares at June 28, 2009, June 29, 2008 and July 1, 2007 were dilutive. The stock options expire in various periods through 2014. The Company had awarded certain key executives nonvested shares tied to the Company's fiscal year 2008 financial performance. The compensation expense related to these awards is recognized quarterly. The nonvested shares vest over the next fiscal year.
Liquidity and Capital Resources
Cash Flow
(in thousands)
Fiscal Year Ended
June 28, June 29, July 1,
2009 2008 2007
Net cash provided by operating activities $ 29,620 $ 18,047 $ 11,951
Net cash (used) provided by investing (56,500 ) (5,185 ) 3,592
activities
Net cash provided (used) by financing 29,531 (11,608 ) (16,098 )
activities
Net increase (decrease) in cash and 2,651 1,254 (555 )
cash equivalents
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The Company's operations generated $29.6 million of cash in fiscal 2009, compared with $18.0 million in fiscal 2008. The Pensar acquisition generated positive operating cash flow of $2.0 million for fiscal year 2009. The primary driver of the increased operating cash flow was a $42.5 million reduction in disbursements for inventory purchases and other costs of production. The lower inventory purchases and other production costs were primarily driven by the reduction of sales volume in fiscal year 2009, exclusive of the Pensar acquisition, and a reduction of purchases of long lead time materials. This increase in net cash provided by operations was partially offset by a reduction of cash receipts from trade receivables of $25.0 million and a reduction of cash received from cash advances from customers of $5.2 million in fiscal year 2009, compared with fiscal year 2008. In addition, the cash used for payroll-related expenditures increased by $5.6 million in fiscal year 2009, compared with fiscal year 2008. Income tax payments made during fiscal year 2009 were $4.6 million lower than in fiscal 2008.
The Company's investing activities used $56.5 million in fiscal year 2009, compared with $5.2 million used in fiscal year 2008. The primary driver was the $45.1 million used to acquire Pensar (see Note 1 to the Consolidated Financial Statements). In addition, capital expenditures used $10.8 million, including the Company's $2.5 million purchase of the Tulsa manufacturing facility, which had been leased in prior years. Also the Company purchased $4.2 million of surface mount technology equipment to expand its capabilities in Tulsa and Pittsburgh.
The $41.1 million increase in cash provided by financing activities is primarily due to the $35.0 million of senior term debt to finance the Pensar acquisition.
The Company's operations generated $18.0 million of cash in fiscal year 2008, compared with $11.9 million in fiscal year 2007. The primary driver of the $6.1 million increase was the cash collected from customers, which was $46.8 million higher in fiscal year 2008, compared with fiscal year 2007. This was the result of increased sales levels, partially offset by a $37.9 million increase in cash disbursements primarily for purchase of raw materials and other production costs to support the higher sales levels. Cash paid for compensation costs was $4.1 million higher in fiscal year 2008 due to higher headcount. Cash used for incentive compensation payments was $2.2 million higher in fiscal year 2008. In addition, cash advances received from customers was $2.5 million higher in fiscal year 2008, compared with fiscal year 2007.
Net cash flows from investing activities was a use of cash of $5.2 million in fiscal year 2008, compared with a source of cash of $3.6 million in fiscal year 2007. The positive cash flow in fiscal year 2007 was driven by $9.6 million of cash received from the sale of a building. (See Note 10 to the Consolidated Financial Statements for a more detailed discussion.) This was offset by $6.2 million of purchases of capital equipment and software. The capital purchases in fiscal year 2008 were $5.3 million
Cash flow used in financing activities in fiscal year 2008 of $11.6 million and of $16.1 million in fiscal year 2007 reflects repayments of both short- and long-term debt.
Capital Structure
The Company entered into a senior secured loan agreement on December 22, 2008, amended on January 30, 2009. The following is a summary of certain provisions of the agreement:
• A revolving credit facility, up to $30.0 million, available for direct borrowings or letters of credit. The facility is based on a borrowing base formula equal to the sum of 85% of eligible receivables and 35% of eligible inventories. As of June 28, 2009, there were no outstanding loans under the revolving credit facility. As of June 28, 2009, letters of credit issued were $1.1 million, leaving an aggregate of $28.9 million available under the revolving credit facility. This credit facility matures on December 28, 2011.
• An aggregate $45.0 million term loan, with principal payments beginning in September 2009, at a quarterly rate of $2.0 million, increasing to $2.5 million in September 2010, and increasing to $2.7 million in September 2011. The balance is due on December 28, 2011.
• Interest on the revolving facility and the term loan is calculated at a base rate or LIBOR plus a stated spread based on certain ratios. For the fiscal year ended June 28, 2009, the average rate was approximately 3.9%.
• All loans are secured by substantially all the assets of the Company other than real estate.
• Covenants and certain financial performance criteria consisting of Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") in relation to debt, minimum net worth and operating cash flow in relation to fixed charges. The Company was in compliance with its borrowing agreement covenants as of and during the fiscal year ended June 28, 2009. The write-off of certain assets related to Eclipse during the fiscal year ended June 28, 2009 did not impact the Company's debt covenant compliance.
To mitigate the risk, associated with interest rate volatility, during the period ended June 28, 2009, the Company entered into an interest rate swap agreement with a bank. This pay-fixed, receive-floating rate swap limits the Company's exposure to interest rate variability and allows for better cash flow control. The swap is not used for speculating purposes.
Under the agreement, the Company fixed the interest payments to a base rate of 1.89% plus a stated spread based on certain ratios. The beginning notional amount is $35.0 million, which will amortize simultaneously with the term loan schedule in the associated loan agreement and will mature on December 28, 2011.
The interest rate swap agreement has been designated as a cash flow hedging instrument under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and the Company has formally documented, designated and assessed the effectiveness of the interest rate swap. The financial statement impact of ineffectiveness for the fiscal year ended June 28, 2009 was de-minimus.
Other Long-Term Debt: Other long-term debt includes capital lease agreements with outstanding balances totaling $238,000 at June 28, 2009 and $336,000 at June 29, 2008. The aggregate maturities of long-term obligations are as follows for the periods presented: (in thousands) Fiscal Year 2010 $ 6,162 2011 12,069 2012 27,257 2013 --- 2014 --- Total $ 45,488 |
The following table shows LaBarge's equity and total debt positions:
Stockholders'Equity and Debt
Fiscal Year Ended
June 28, June 29,
2009 2008
Stockholders' equity $ 103,151 $ 91,469
Total Debt 45,488 15,629
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Management believes the availability of funds going forward from cash generated . . .
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