Market Overview

ARC Group Worldwide Announces Initial Results from Strategic Operating Review and Reports Fiscal Year Fourth Quarter 2017 Financial Results


DELAND, Fla., Sept. 26, 2017 (GLOBE NEWSWIRE) -- ARC Group Worldwide, Inc. ("ARC" and the "Company") (NASDAQ:ARCW), a leading global provider of advanced manufacturing and metal 3D printing solutions, today announced the initial results of its recently implemented strategic operational review and reported its fourth quarter and fiscal year 2017 (June 30, 2017) results.

Operational, Financial, and Strategic Improvement Plan

Following the Company's recent announcement detailing leadership and operational changes, and an initiative to refocus its efforts to build upon its core capabilities of metal injection molding ("MIM") and metal 3D printing, ARC today provided initial results of its operational, financial, and strategic improvement review, notably:

  • Companywide Cost Reduction and Profitability Improvement Initiatives:  A multifaceted operational review was conducted at all ARC business units.  As a result, headcount reductions and other cost-reducing measures were implemented to materially reduce the Company's fixed cost structure.  These anticipated cost savings, both one time and recurring, are estimated to have eliminated or otherwise prohibited going forward approximately $6.0 million in annualized costs.  Separately, the Company also elected to exit products and projects that were deemed either low margin or currently unprofitable.  Finally, ARC also revised, and placed greater executive oversight over, the Company's tooling pricing strategy.  While the vast majority of these cost reduction and operational improvement initiatives have been implemented, the Company continues to evaluate further measures on an ongoing basis.
  • Strategic Review of Operations:  The Company initiated a strategic review of all operating and other assets in connection with a refocus towards ARC's core capabilities.  In response to this review, operations at the Company's unprofitable Mexico operation were ceased during July.  Separately, the Company determined its flange division to be non-strategic to core operations.  Subsequently, the Company divested the assets of its flange subsidiary for $3.0 million on September 15, 2017.  The Company continues to evaluate additional non-strategic divestitures.
  • Liquidity Improvement & Debt Reduction Programs:  A multi-pronged effort to improve cash flow generation and reduce the Company's capital intensivity through specific, addressable actions was implemented.  As a result, the Company revised its accounts payable and receivable policies, as well as other guidelines designed to ensure greater efficiency in inventory at all facilities.  Overall, these policy changes, along with the impact of improved operations and strategic initiatives, are designed to assist in the material deleveraging of the Company towards its normalized targeted rate of 2x debt to trailing annual EBITDA.

Intangible Asset Impairment and Other Non-cash Charges

In connection with the aforementioned strategic and operational review, the Company determined certain write-offs and impairment charges were warranted.  These charges were the primary drivers of decreases in gross profit and Facility EBITDA during the Company's fiscal fourth quarter. 

First, in connection with the decision to exit products and projects that were deemed low margin or currently unprofitable, the Company incurred non-cash charges of $3.1 million related to higher inventory reserves for excess, obsolete, or scrap inventory.  Similarly, the Company wrote off tools, inventory, and associated parts totaling $1.9 million.  The increase in reserves and write-offs was primarily due to a strategic decision related to tooling pricing, returned parts that could not be profitably re-worked and sold, and increased reserves for slow moving inventory.  Finally, the Company also concluded that goodwill was impaired at its ATC and Kecy subsidiaries, recording a non-cash impairment charge of $3.3 million to eliminate the carrying value of goodwill for these entities.

Quarterly Financial Summary

Fiscal fourth quarter 2017 revenue from continuing operations was $22.1 million, compared to $25.3 for the fiscal fourth quarter of 2016.  The decrease in sales was primarily driven by lower MIM and plastics sales, most notably in the firearm and defense sectors.

Gross profit (loss) from continuing operations for the fiscal fourth quarter of 2017, including approximately $5.0 million in non-cash inventory and fixed asset charges, was $(2.2) million, compared to $4.6 million for the prior year period. 

Facility EBITDA from continuing operations for the fiscal fourth quarter was $(5.9) million, compared to the prior year period of $3.6 million.  Net loss from continuing operations for the fiscal fourth quarter of 2017 was $(10.2) million, compared to $(1.1) million for the prior year period.  Both facility EBITDA and net loss from continuing operations in the recently completed quarter include approximately $5.0 million in non-cash inventory and fixed asset charges and $3.3 million in goodwill impairment charges. 

Adjusted earnings (loss) per share for the fiscal fourth quarter was $(0.02), compared to a loss of $(0.05) in the prior year period.

ARC's interim CEO and CFO, Drew M. Kelley, commented, "While we are obviously disappointed by recent results, we believe ARC has recently taken corrective action and made great strides toward moving the Company forward to a more profitable and exciting future.  Overall, our primary objectives are clear: improve operational efficiency, drive cash flow and increased profitability at all business units, and deleverage the Company through specific, well-defined operational, financial, and strategic measures.  We have commenced, and largely completed, an intensive, all-encompassing business review.  Our implemented changes were material and widespread in scope and scale, but necessary to ensure the Company's continued success."

Mr. Kelley continued, "At the same time, these initiatives do not jeopardize the Company's ability to grow in its core MIM and 3D markets.  Rather, we are better positioned, both internally and externally, to drive customer satisfaction, bottom-line results, and shareholder value.  In particular, the ARC new product development team has completely restructured and we re-vamped our development process.  Both are now better positioned to effectively launch a multitude of new products.  In fact, in connection with these changes, ARC recently received customer approvals on 166 new customer products, with many parts already shipping.  Included in these launches are several holistic solutions for our customers in the medical and defense sectors.  These complete solutions use a multitude of our complementary technologies, including metal 3D printing, MIM, and plastic injection molding to garner a larger share of the previously untapped business opportunities."

"Finally, our metal 3D printing business continues to grow rapidly.  With the addition of four new machines, ARC now operates 15 metal printers.  Further, we recently opened our new 30,000 sq. ft. dedicated 3D facility, which provides us with the ability to add up to 40 machines, including designated areas for defense, controlled environments for medical implants, and in-house heat treatment and machining.  As a result, we expect fiscal year 2018 3D revenues to continue to grow at our recent pace, implying a doubling of 3D revenue in fiscal year 2018."

GAAP to Non-GAAP Reconciliation

The Company has provided non-GAAP financial information to provide additional, meaningful comparisons of current results to prior periods' results by excluding items that the Company does not believe are representative or indicative of its results of operations.  Non-GAAP financial measures are not in accordance with, or an alternative for, generally accepted accounting principles in the United States.  The Company's non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP financial measures, and should be read only in conjunction with the Company's consolidated financial statements prepared in accordance with GAAP.  Specifically, EBITDA from Continuing Operations, EBITDA Margin from Continuing Operations, Facility EBITDA from Continuing Operations, Facility EBITDA Margin from Continuing Operations, Adjusted Earnings, and Adjusted Earnings Per Share are non-GAAP financial measures.  EBITDA Margin from Continuing Operations and Facility EBITDA Margin from Continuing Operations are calculated by dividing EBITDA from Continuing Operations and Facility EBITDA from Continuing Operations, respectively, by sales.

The reconciliation to GAAP is as follows (dollars in thousands):

      June 30,   June 30,  
For the three months ended:     2017
Net Loss   $  (10,296 )   $  (834 )  
Interest Expense, Net     1,006       1,076    
Income Taxes     (1,450 )     519    
Depreciation and Amortization     2,498       2,341    
Adjustment to Exclude Loss (Income) from Discontinued Operations     121       (251 )  
EBITDA from Continuing Operations   $  (8,121 )   $  2,851    
EBITDA Margin from Continuing Operations      (36.7 ) %    11.3   %
Corporate Expenses     2,215       743    
Facility EBITDA from Continuing Operations   $  (5,906 )   $  3,594    
Facility EBITDA Margin from Continuing Operations      (26.7 ) %    14.2   %
Net Loss   $ (10,296 )   $ (834 )  
Adjustment to Exclude Loss (Income) from Discontinued Operations, Net of Tax       121       (251 )  
Inventory Write-Offs     4,982          
Goodwill Impairments     3,303          
Non-Recurring Losses     435          
Reorganization/Transaction Expenses     1,003       134    
Adjusted Earnings   $  (452 )   $  (951 )  
Adjusted Earnings Per Share   $  (0.02 )   $  (0.05 )  
Weighted Average Common Shares Outstanding        18,171,626          18,123,883    

EBITDA from Continuing Operations excludes interest expense, net and income taxes as these items are associated with our capitalization and tax structures.  EBITDA from Continuing Operations also excludes depreciation and amortization expense as these non-cash expenses reflect the impact of prior capital expenditure decisions, which may not be indicative of future capital expenditure requirements.  EBITDA from Continuing Operations excludes the (income) or loss associated with discontinued operations. 

Facility EBITDA from Continuing Operations consists of EBITDA from our operating segments.  We believe this is a meaningful measurement of the operating performance of our manufacturing facilities.  Corporate expenses primarily consist of costs not allocated to our manufacturing facilities, such as compensation related costs for employees assigned to corporate, board of directors fees and expenses, professional fees, insurance costs, and marketing costs.

Adjusted Earnings removes the impact of reorganization/transaction related expenses, other gains/expenses including inventory adjustments and impairments as allowed by the Company's bank debt covenants, and the impact of discontinued operations.  Reorganization expenses are primarily labor and labor related costs associated with the termination of employees.  Transaction expenses are primarily professional fees related to the refinancing of debt and the sale of non-core assets.

About ARC Group Worldwide, Inc.

ARC Group Worldwide, Inc. is a global advanced manufacturing and metal 3D printing service provider focused on accelerating speed to market for its customers.  ARC provides a holistic set of precision manufacturing solutions, from design and prototyping through full run production.  These solutions include metal injection molding, metal 3D printing, metal stamping, plastic injection molding, clean room injection molding, thixomolding, and rapid and conformal tooling.  Further, ARC utilizes technology to improve automation in manufacturing through robotics, software and process automation, and lean manufacturing to improve efficiency.

Forward Looking Statements

This press release may contain "forward-looking" statements as defined in the Private Securities Litigation Reform Act of 1995, which are based on ARC's current expectations, estimates, and projections about future events.  These include, but are not limited to, statements, if any, regarding business plans, pro-forma statements and financial projections, ARC's ability to expand its services and realize growth.  These statements are not historical facts or guarantees of future performance, events, or results.  Such statements involve potential risks and uncertainties, and the general effects of financial, economic, and regulatory conditions affecting our industries.  Accordingly, actual results may differ materially.  ARC does not have any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.  For further information on risks and uncertainties that could affect ARC's business, financial condition, and results of operations, readers are encouraged to review Item 1A.  – Risk Factors and all other disclosures appearing in ARC's Form 10-K for the fiscal year ended June 30, 2017, as well as other documents ARC files from time to time with the Securities and Exchange Commission.

PHONE: (303) 467-5236

ARC Group Worldwide, Inc.
Consolidated Statements of Operations
(in thousands, except for share and per share amounts)
      For the three months ended June 30,      For the year ended June 30,    
Sales   $ 22,147     $ 25,336     $ 99,069     $ 94,124    
Cost of sales     24,298       20,754       89,247       77,261    
Gross profit     (2,151 )     4,582       9,822       16,863    
Selling, general and administrative     4,942       4,172       19,263       16,401    
Goodwill impairment charges     3,303             3,303          
(Loss) income from operations     (10,396 )     410       (12,744 )     462    
Other income (expense), net     (223 )     100       670       171    
Interest expense, net     (1,006 )     (1,076 )     (4,008 )     (4,449 )  
Loss on extinguishment of debt                 (723 )        
Loss before income taxes     (11,625 )     (566 )     (16,805 )     (3,816 )  
Income tax benefit (expense)     1,450       (519 )     2,631       491    
Net loss from continuing operations     (10,175 )     (1,085 )     (14,174 )     (3,325 )  
Gain on sale of subsidiary and income (loss) from discontinued operations, net of tax       (121 )     251       4,001       1,119    
Net loss     (10,296 )     (834 )     (10,173 )     (2,206 )  
Net income attributable to non-controlling interest                          
Continuing operations           (10 )     (22 )     (58 )  
Discontinued operations           (10 )     (4 )     (50 )  
Net income attributable to non-controlling interest           (20 )     (26 )     (108 )  
Net loss attributable to ARC Group Worldwide, Inc.   $ (10,296 )   $ (854 )   $ (10,199 )   $ (2,314 )  
Net loss per common share, basic and diluted:                          
Continuing operations   $ (0.56 )   $ (0.06 )   $ (0.78 )   $ (0.19 )  
Discontinued operations   $ (0.01 )   $ 0.01     $ 0.22     $ 0.06    
Attributable to ARC Group Worldwide, Inc.   $ (0.57 )   $ (0.05 )   $ (0.56 )   $ (0.13 )  
Weighted average common shares outstanding:                          
Basic and diluted        18,171,626          18,123,883          18,142,719          18,123,883    

ARC Group Worldwide, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
    As of June 30,  
Current assets:              
Cash   $ 593     $ 3,620    
Accounts receivable, net     10,488       13,677    
Inventories, net     14,369       15,500    
Deferred income tax assets           498    
Prepaid expenses and other current assets     3,152       3,836    
Current assets of discontinued operations     1,452       3,505    
Total current assets     30,054       40,636    
Property and equipment, net     41,349       41,644    
Goodwill     6,412       9,715    
Intangible assets, net     19,624       23,066    
Other     291       28    
Long-term assets of discontinued operations     1,893       5,423    
Total assets   $ 99,623     $ 120,512    
Current liabilities:              
Accounts payable   $ 8,681     $ 8,469    
Accrued expenses and other current liabilities     3,273       2,458    
Deferred revenue     1,165       1,457    
Bank borrowings, current portion of long-term debt     1,701       15,648    
Capital lease obligations, current portion     1,470       837    
Accrued escrow obligations, current portion     1,212       2,842    
Current liabilities of discontinued operations     283       989    
Total current liabilities     17,785       32,700    
Long-term debt, net of current portion     42,822       36,769    
Deferred income tax liabilities           803    
Capital lease obligations, net of current portion     1,888       1,930    
Accrued escrow obligations, net of current portion     1,184       966    
Other long-term liabilities     1,017       2,115    
Long-term liabilities of discontinued operations     260       686    
Total liabilities      64,956        75,969    
Commitments and contingencies              
Preferred stock, $0.001 par value, 2,000,000 shares authorized, no shares issued and outstanding              
Common stock, $0.0005 par value, 250,000,000 shares authorized; 18,180,027 shares issued and 18,171,626 shares issued and outstanding at June 30, 2017, and 18,803,910 shares issued and 18,795,509 shares issued and outstanding at June 30, 2016       10       10    
Treasury stock, at cost; 8,401 shares at June 30, 2017 and June 30, 2016     (94 )     (94 )  
Additional paid-in capital     31,109       29,702    
Retained earnings     3,569       13,771    
Accumulated other comprehensive income (loss)     73       (6 )  
Total ARC Group Worldwide, Inc. stockholders' equity     34,667       43,383    
Non-controlling interest           1,160    
Total equity     34,667       44,543    
Total liabilities and equity   $ 99,623     $ 120,512    

ARC Group Worldwide, Inc.
Consolidated Statements of Cash Flows
(in thousands)
      For the Year Ended June 30,    
Cash flows from operating activities:              
Net loss   $ (10,173 )   $ (2,206 )  
Adjustments to reconcile net loss to net cash provided by operating activities:              
Depreciation and amortization     9,930       9,529    
Share-based compensation expense     752       177    
Loss on disposal of assets     293          
Gain on sale of subsidiaries     (5,485 )        
Goodwill impairment charges     3,303          
Bad debt expense and other     173       98    
Deferred income taxes     (407 )     565    
Changes in working capital:              
Accounts receivable     2,597       400    
Inventory     1,120       (1,227 )  
Prepaid expenses and other assets     480       (1,621 )  
Accounts payable     1,068       1,708    
Accrued expenses and other current liabilities     (509 )     (1,423 )  
Deferred revenue     (292 )     466    
Net cash provided by operating activities     2,850       6,466    
Cash flows from investing activities:              
Purchases of property and equipment     (6,641 )     (2,633 )  
Proceeds from sale of subsidiary and other assets     10,538       8    
Net cash provided by (used in) investing activities     3,897       (2,625 )  
Cash flows from financing activities:              
Proceeds from debt issuance     118,124       5,543    
Repayments of long-term debt and capital lease obligations     (127,468 )     (10,542 )  
Payment of distributions to non-controlling membership interests from the sale of subsidiary       (453 )        
Purchase of  non-controlling membership interests     (235 )        
Issuance of common stock under employee stock purchase plan     98          
Net cash used in financing activities     (9,934 )     (4,999 )  
Effect of exchange rates on cash     160       (43 )  
Net decrease in cash     (3,027 )     (1,201 )  
Cash, beginning of year     3,620       4,821    
Cash, end of year   $ 593     $ 3,620    
Supplemental disclosures of cash flow information:              
Cash paid for interest   $ 3,303     $ 4,058    
Cash paid for income taxes, net of refunds   $ (849 )   $ 599    

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