Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).
| Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the issuer as of the close of business on December 31, 2007 was approximately $15,886,000(1).
The number of shares of Common Stock outstanding as of September 26, 2008, the most recent practicable date prior to the filing of this Annual Report on Form 10-K, was 1,867,948 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s Proxy Statement to be filed in connection with its 2008 Annual Meeting of Shareholders are incorporated by reference in Part III of this Report.
| (1) |
The aggregate market value of the voting and non-voting common equity stock set forth herein equals the number of shares of Common Stock outstanding, reduced by the number of shares of Common Stock held by executive officers, directors and stockholders owning in excess of 10% of the registrant’s Common Stock, multiplied by the last closing price for the Common Stock as quoted on the Nasdaq Capital Market on December 31, 2007. The information provided shall in no way be construed as an admission that any person whose holdings are excluded from this figure is an affiliate of the registrant or that any person whose holdings are included in this figure is not an affiliate of the registrant and any such admission is hereby disclaimed. The information provided herein is included solely for record keeping purposes of the Securities and Exchange Commission. |
Table of Contents
FORM 10-K ANNUAL REPORT
KREISLER MANUFACTURING CORPORATION
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Forward-Looking Statements
Certain oral statements made by management of Kreisler Manufacturing Corporation (the “Company”) from time-to-time and certain statements contained herein or in other periodic reports filed by the Company with the Securities and Exchange Commission are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with respect to results of operations and the business of the Company. All such statements, other than statements of historical facts, including those regarding market trends, the Company’s financial position and results of operations, business strategy, projected costs, and plans and objectives of management for future operations, are forward-looking statements. In general, such statements are identified by the use of forward-looking words or phrases including, but not limited to, “estimates,” “intends,” “will,” “should,” “may,” “believes,” “expects” and “anticipates, or the negative thereof or variations thereon or similar terminology. These forward-looking statements are based on the Company’s current expectations. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. These forward-looking statements represent the Company’s current judgment. The Company disclaims any intent or obligation to update its forward-looking statements. Because forward-looking statements involve risks and uncertainties, the Company’s actual results could differ materially from those set forth in or underlying the forward-looking statements.
Examples of such risks and uncertainties are described under “Risk Factors” and elsewhere in this report, as well as in our other filings with the Securities and Exchange Commission or in materials incorporated by reference therein. You should be aware that the occurrence of any of these risks and uncertainties may cause our actual results to differ materially from those anticipated in our forward-looking statements and have a material adverse effect on our business, results of operations and financial condition. New factors may emerge from time to time, and it may not be possible for us to predict new factors, nor can we assess the potential effect of any new factors on us. These forward-looking statements are found at various places throughout this Form 10-K, including the financial statement footnotes.
We file reports with the Securities and Exchange Commission (“SEC”). You can obtain any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.
| ITEM 1. | BUSINESS |
Kreisler Manufacturing Corporation (the “Company”) is a Delaware corporation which was incorporated on December 13, 1968. The Company succeeded a New Jersey corporation, which was incorporated in New Jersey in 1940, and which succeeded a New York corporation which was incorporated in 1930. The Company and its wholly-owned subsidiaries, Kreisler Industrial Corporation (“Kreisler Industrial”), which was incorporated in New Jersey on July 3, 1956, and Kreisler Polska Sp. z o.o (“Kreisler Polska”), which was registered in the National Judicial Register in Krakow, Poland on March 17, 2005, manufacture precision metal components and assemblies for use in military and commercial aircraft engines and industrial gas turbines. Kreisler Industrial’s products primarily include tube and manifold assemblies of multiple sizes and configurations and are typically manufactured in accordance with customer designs and specifications. Kreisler Polska primarily provides machined components to Kreisler Industrial. The use of “we,” “us” or “our” in this Form 10-K refers to the Company and its wholly-owned subsidiaries unless specifically identified.
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Products
Kreisler Industrial’s products primarily include tube and manifold assemblies of multiple sizes and configurations and are typically manufactured in accordance with the designs and specifications of the particular customer. Kreisler Polska primarily provides machined components to Kreisler Industrial. We manufacture precision metal components and assemblies primarily for use in military and commercial aircraft engines and in industrial gas turbines. Our products include tube assemblies of multiple sizes and configurations as well as machined components. These high quality engineered tube assemblies transfer fuel, oil, water, air and hydraulic fluids. Assemblies may be made of various materials, including titanium, nickel and stainless steel.
Marketing and Sales
Sales of products are made either through an in-house sales staff or, within specific European countries, commissioned sales representatives. We also market our products through our participation at the Farnborough and Paris Air Shows. Orders are received through competitive proposals, which are made in response to requests for bids from contractors who either supply engines or engine components to various branches of the United States Department of Defense or to commercial businesses.
Customers
Three commercial customers and the United States Government combined accounted for approximately 79% of our consolidated net sales for the fiscal year ended June 30, 2008 as compared to 77% of our consolidated net sales for the fiscal year ended June 30, 2007. Approximately 86% of our sales are for commercial and military aircraft engine customers with the balance of sales to industrial gas turbine customers. Some of these customers manufacture commercial and military aircraft engines as well as industrial gas turbines. The concentration of sales with a small group of customers places us in an adverse position should any of these customers reduce their volume of sales orders.
In fiscal 2008, 6% of our revenues were derived from direct U.S. Government contracts. Including these direct sales, our total sales of components used in military-related applications represented 50% of our fiscal 2008 sales. In addition to normal business risks, our sales of military-related components are subject to unique risks some of which are beyond our control. The funding of U.S. Government-related programs is subject to congressional appropriations. Many of these military programs may extend for several years; however, these programs are normally funded annually. Long-term government contracts and related orders are subject to cancellation if appropriations for subsequent performance periods are not made. The termination of funding for a U.S. Government-related program would result in a loss of anticipated future revenues attributable to that program, which could have a materially adverse impact on our operations. The U.S. Government may modify, curtail or terminate its contracts and subcontracts without prior notice at its convenience upon payment for work done and commitments made at the time of termination. Modification, curtailment or termination of our major programs or contracts could have a material adverse effect on our results of operations and financial condition. Our U.S. Government business, from both direct and indirect sales, is also subject to specific procurement regulations and other requirements. These requirements, although customary in U.S. Government contracts, can increase our performance and compliance costs. These costs might increase in the future, reducing our margins, which could have a materially adverse effect on our financial condition. Failure to comply with these regulations and requirements could lead to suspension or debarment, for cause, from U.S. Government contracting or subcontracting for a period of time and could have a materially adverse effect on the our reputation and ability to secure future direct or indirect U.S. Government contracts.
Please refer to Note G in the Notes to the Consolidated Financial Statements for additional information.
Competition
The markets in which we operate are highly competitive. Our competitors include several enterprises which are substantially larger than us and possess greater financial, production and marketing resources. However, the majority of our competitors are smaller privately-held companies. In addition, some of our
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customers and potential customers are vertically integrated and maintain manufacturing capabilities comparable to our own. For example, both Pratt & Whitney and GE Aircraft Engines rely on their related/affiliated companies or business units to supply a significant portion of their tubular requirements but also outsource to companies such as Kreisler Industrial a significant portion of their requirements. This dual use of internal and external suppliers has existed for many years and is expected to continue. Our competitors’ sales tend to be dominated by a single customer such as Pratt & Whitney, Honeywell Aerospace or GE Aircraft Engines. As we seek to expand globally, we have also encountered new competitors with operations in Europe, China and Mexico.
The principal bases of competition are price, quality, delivery and service. While some of our customers have additional needs (such as proximity to a particular location), flexibility, quality, pricing and speed of delivery are required elements of all of our customers. We believe that we are competitive with respect to all of the above elements. Our implementation of lean manufacturing techniques has enabled us to reduce manufacturing cycle time and improve our processes. We have also differentiated ourselves from much of our competition through the establishment of Kreisler Polska. Our presence in Poland also improves our proximity and access to potential non-U.S. aerospace and industrial manufacturers. In addition, we believe that our proprietary supply chain management software provides us with a competitive advantage.
Suppliers and Materials
We do not have any long-term or fixed quantity purchase agreements with our suppliers. Materials used in our products are purchased from various suppliers. While two suppliers provided approximately 13% and 12%, respectively, of our purchased materials during fiscal 2008, we believe that alternative suppliers of these components are available such that the loss of either of these suppliers would not have a long-term material impact on us. At times, our customers require us to purchase raw materials or components from designated suppliers. We procure approximately 12% of our purchased material components from a third supplier, a designated supplier of such proprietary components. Should this supplier no longer be able to provide proprietary components, an alternative supplier of these proprietary components is available to us, which may have longer delivery lead-times and higher prices. We also use a variety of raw materials in the manufacture of our products. During fiscal 2008, increased delivery lead-times for some raw materials, particularly titanium and nickel-based alloys, were experienced, along with significant price increases in the cost of these alloys. Smaller cost increases were also experienced in stainless steel alloys. We were able to mitigate some of the adverse effects of longer lead-times and rising raw material costs through an increase in quoted lead-times, forward planning and a partial pass through of cost increases to customers. Future shortages or price fluctuations in raw materials could have a material adverse effect on our operations and profitability.
Production
Fabricated precision metal components and assemblies are manufactured and assembled by us to customer drawings and specifications. To meet the exacting requirements of our customers, we exercise strict quality and process controls and maintain third-party quality system accreditations including ISO 9001 and AS9100 as well as NADCAP (National Aerospace Defense Contractors Accreditation Program) special process accreditations. Our manufacturing processes include tube bending, sheet-metal fabrication, machining, welding, brazing and heat treatment as well as non-destructive testing processes such as radiographic inspection and fluorescent penetrant inspection.
Intellectual Property
Other than the “Kreisler” trademark and derivative forms thereof, we do not have any patents, trademarks, or other registered intellectual property that are considered to be of material importance to the conduct of our business.
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Employees
At June 30, 2008, we employed approximately 247 persons, of whom 13 are part-time employees, at Kreisler Industrial and at Kreisler Polska. Approximately 98 Kreisler Industrial employees are subject to a collective bargaining agreement with Local 377, RWSDU affiliated with AFL-CIO (“Local 377”). We consider our relations with our employees to be satisfactory.
On March 29, 2007, Kreisler Industrial entered into a Collective Bargaining Union Agreement Extension (the “Agreement”) with Local 377. The Agreement term is from December 5, 2006 through December 4, 2009. In addition to certain work rule changes, the Agreement increased wages $0.55 per hour effective December 5, 2006 and $0.50 per hour effective December 5, 2007 and increases wages $0.50 per hour effective December 5, 2008. The $0.55 per hour wage increase was retroactive to December 5, 2006. The effective annual increase was approximately 3.4%. We have not experienced any work stoppages and Management believes that labor relations are generally satisfactory. Contract renewal negotiations are expected to begin in the fall of 2009.
Government Regulations
We are subject to various Federal and State regulations concerning the conduct of our business including regulations under the Occupational Health and Safety Act, various acts dealing with the environment, as well as export licenses for the manufacture of military-related or commercial components in Poland.
The Federal Acquisition Regulation, or FAR, which mandates uniform policies and procedures for U.S. government procurement, governs our contracts with the U.S. Government. Individual agencies can have acquisition regulations that provide implementing language for the FAR or that supplement the FAR. These requirements, although customary in U.S. Government contracts, can increase performance and compliance costs. These costs might increase in the future, reducing our margins, which could have a negative effect on our financial condition. Failure to comply with these regulations and requirements could lead to suspension or debarment, for cause, from U.S. Government contracting or subcontracting for a period of time and could have a negative effect on the our reputation and ability to secure future U.S. Government contracts. Other federal regulations require certification and disclosure of cost or pricing data in connection with contract negotiations, define allowable and unallowable costs, govern reimbursement rights under cost-based contracts, and restrict the use, dissemination and exportation of products and information classified for national security purposes.
A material portion of our business is subject to contract provisions which permit the termination of contracts at the election of the U.S Government or its prime contractors. Contracts with the U.S. Government and with suppliers to the U.S. Government generally provide for termination at any time for the convenience of the U.S. Government and its prime contractors as well as for default based on our failure to meet specified performance measurements, and upon such termination a contractor is entitled to receive payment for the work performed plus a pro rata portion of the profit it would have earned before the termination and any allowable termination or cancellation costs. If any of our government contracts were to be terminated for default, generally the U.S. Government would pay only for the work that has been accepted and can require us to pay the difference between the original contract price and the cost to re-procure the contract items, net of the work accepted from the original contract. The U.S. Government can also hold us liable for damages resulting from the default.
Our international contracts are subject to the applicable foreign government regulations and procurement policies and practices, many of which differ substantially from those applicable in the U.S., as well as U.S. policies and regulations, including the Foreign Corrupt Practices Act, or FCPA. Our international operations are also subject to regulations governing investments, exchange controls, repatriation of earnings, brokering of defense articles and services, and import-export control, including the International Traffic in Arms Regulations, or ITAR, which our foreign competitors may not be subject to. Other factors that can affect our international business include currency exchange fluctuations, political and economic risks, and legal and business risks associated with using foreign representatives and consultants and relying upon international suppliers and subcontractors.
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Compliance with Environmental Laws
In July 1999, we became aware of historical releases of certain hazardous substances at our Kreisler Industrial manufacturing facility located at 180 Van Riper Avenue, Elmwood Park, New Jersey. We promptly notified the New Jersey Department of Environmental Protection (“NJDEP”) as required by the New Jersey Spill Compensation and Control Act (“Spill Act”) and retained the services of environmental remediation consultants to perform a full site characterization in accordance with the NJDEP’s Technical Requirement for Site Remediation. In June 2001, we entered into a Fixed Price Remediation Agreement (“FPRA”) with Resource Control Corporation (“RCC”). At June 30, 2008, the remaining cost estimated for remediation of the site under the FPRA with RCC was approximately $445,000 (the present value discounted at an interest rate of 6.16%, per annum), virtually all of which is expected to be paid by us in fiscal 2010, provided that RCC achieves specific milestones contained in the FPRA.
On August 28, 2008, we received an updated remediation status report from RCC indicating that the original remediation cost of $2,115,122, as specified in the FPRA, will be exceeded by approximately $402,000. Subject to the terms of the FPRA, RCC, not us, is responsible for any unexpected or unanticipated remediation cost increases. We monitor the project status and believe that RCC is capable of meeting RCC’s contractual obligations under the FPRA.
Tax Contingency
In a letter dated February 23, 2006, we received a Notice of Assessment Related to Final Audit Determination from the New Jersey Division of Taxation that Kreisler Industrial’s Business Tax Returns for the fiscal years ended June 30, 2002 and June 30, 2001 are subject to additional income tax. In accordance with the appropriate New Jersey statutes, we protested the final audit determination and requested an informal administrative conference with the Conference and Appeals Branch. On April 29, 2008, we participated in an informal administrative hearing with the Conference and Appeals Branch. In a letter dated June 13, 2008, we were notified by the New Jersey Division of Tax that our appeal was denied. We elected not to pursue further appeals of this audit determination. The amount due under the final audit determination totaled $104,561 of which $59,493 was additional income tax, $2,974 was for penalties and $42,094 was for interest through July 15, 2008. Approximately $90,000 of this expense was recognized during the three months ended December 31, 2005. Approximately $14,000 in additional interest expense was recognized during the three months ended March 31, 2008. The total amount owed was paid during July 2008.
Available Information
Copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed in accordance with Section 13(a) or 15(d) of the Exchange Act are available to the public over the internet at the SEC’s website at http://www.sec.gov. In addition, we provide paper copies of our SEC filings free of charge upon request. Please contact the Corporate Secretary of the Company at 201-791-0700, by mail at our corporate address Kreisler Manufacturing Corporation, 180 Van Riper Avenue, Elmwood Park, New Jersey 07407 or e-mail InvestorRelations@kreislermfg.com.
| ITEM 1A. | RISK FACTORS |
We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially adversely affect our operations. The following highlights some of the factors that have affected, and in the future could affect, our operations:
| • | Our inability to identify new sales opportunities or convert sales opportunities into contracts could adversely affect our sales and financial results. |
| • | We may not be able to compete successfully against current and potential competitors. |
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| • | We are dependent upon three commercial customers and the United States Government for approximately 79% of the consolidated net sales of the Company. |
| • | We are dependent upon three suppliers, each, for more than 10% of the components used in the products manufactured by the Company; and we don’t have any long-term or fixed quantity purchase agreements with suppliers. |
| • | We have continued to experience longer lead times and higher costs for nickel and titanium based raw materials which could negatively affect our ability to ship product to our customers. |
| • | We may be subject to supply chain disruptions which could negatively affect our ability to ship product to our customers. |
| • | While in the past we have been able to pass through to our customers most cost increases attributable to specific raw materials and proprietary components, we may not be able to continue to do so. |
| • | Approximately 65% of our sales of military aircraft engine components were attributable to the sale of components used on the F119 and F135. Should the requirements for these products decline significantly, it could negatively affect our sales and financial results. |
| • | We are dependent on military programs for a substantial percentage of our revenues and such programs are subject to Congressional funding authorizations which may alter the amount or timing of available funding. |
| • | Our growth opportunities are potentially limited by our historical reliance on a few significant customers. |
| • | Our largest customer is vertically integrated and has established manufacturing operations outside the United States that provides similar and, in some cases, greater capabilities than we offer. We expect this customer to consider transferring components manufactured by us to these operations. |
| • | Because competition for qualified technical and management personnel is intense, we may not be able to recruit or retain qualified personnel, which could harm our business. |
| • | The complexity of accounting regulations and related interpretations and policies, particularly those related to revenue recognition, could materially affect our financial results for a given period. |
| • | Failure to successfully manage our international operations could harm our financial results. |
| • | Provisions of our certificate of incorporation and bylaws might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock. Such provisions include that (i) stockholders cannot call a special meeting of stockholders; (ii) stockholders must give advance notice to nominate directors or submit proposals for consideration at stockholder meetings; (iii) the Board of Directors has the sole and exclusive authority to fill vacancies on the Board of Directors that occur between meetings of stockholders called for the election of directors; and (iv) a supermajority vote is required for stockholders to amend the Company’s Amended and Restated Bylaws. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for our common stock. These provisions may also prevent changes in our management. |
| • | Failure to maintain and adequately monitor internal controls could have a materially adverse effect on our financial results. |
| • | A reduction in the U.S. defense budget could result in a substantial decrease in our revenue. A decline in overall U.S. military expenditures could cause a decrease in our revenue and profitability. Defense spending levels may not continue at present levels, and future levels of expenditures and authorizations for existing programs may decline, remain constant, or shift to agencies or programs in areas where we do not currently have contracts. Such changes in spending authorizations and budgeting priorities could occur due to changes in the number and intensity of political conflicts, including the current conflicts in Iraq and Afghanistan, the significant relief and recovery costs associated with natural disasters, the rapid growth of the federal budget deficit, increasing political pressure to reduce overall levels of government spending, or other factors. In addition, the U.S. Government conducts periodic reviews of U.S. defense strategies and priorities, the results of which may shift Department of Defense budgetary priorities or reduce overall U.S. Government spending |
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| for defense-related programs. A significant decline in defense expenditures, or a shift in expenditures away from agencies or programs that we support, could cause a material decline in our revenue. |
| • | The failure by Congress to approve budgets on a timely basis for the U.S. Department of Defense and the other agencies and instrumentalities of the U.S. Government that purchase from us could delay or reduce spending and cause us to lose revenue. On an annual basis, Congress must approve budgets that govern spending by each of the federal agencies we support. When Congress is unable to agree on budget priorities and is unable to pass the annual budget on a timely basis, Congress typically enacts a continuing resolution. A continuing resolution allows government agencies to operate at spending levels approved in the previous budget cycle. When government agencies must operate under a continuing resolution, it may delay funding we expect to receive from customers on work we are already performing and will likely result in any new initiatives being delayed, and potentially cancelled. |
| • | Federal government contracts contain provisions and are subject to laws and regulations that provide government clients with rights and remedies not typically found in commercial contracts. These rights and remedies and related laws and regulations allow government clients, among other things, to: (i) terminate existing contracts, with short notice, for convenience, as well as for default; (ii) reduce or modify contracts or subcontracts; (iii) terminate our facility security clearances and thereby prevent us from receiving classified contracts; (iv) cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable; (v) decline to exercise an option to renew a multi-year contract; (vi) claim rights in products and technology produced by us; (vii) prohibit future procurement awards with a particular agency due to a finding of organizational conflict of interest based upon prior related work performed for the agency that would give a contractor an unfair advantage over competing contractors; (viii) subject the contract award to protest by competitors, which may require the contracting federal agency or department to suspend our performance pending the outcome of the protest and may also result in a requirement to resubmit bids for the contract or in the termination, reduction, or modification of the awarded contract; or (ix) suspend or debar us from doing business with the federal government or with a particular governmental agency. |
| • | Our failure to comply with complex laws and regulations could cause us to lose business and subject us to a variety of penalties. We must comply with laws and regulations relating to the formation, administration, and performance of government contracts, which affect how we do business with our government clients and may impose added costs on our business. Among the most significant laws and regulations are: (i) the Federal Acquisition Regulation, and agency regulations analogous or supplemental to the Federal Acquisition Regulation, which comprehensively regulate the formation, administration, and performance of government contracts, including provisions relating to the avoidance of conflicts of interest and intra-organizational conflicts of interest; (ii) the Truth in Negotiations Act, which requires certification and disclosure of all cost and pricing data in connection with some contract negotiations; (iii) the Procurement Integrity Act, which requires evaluation of ethical conflicts surrounding procurement activity and establishing certain employment restrictions for individuals who participate in the procurement process; (iv) the Cost Accounting Standards, which impose accounting requirements that govern our right to reimbursement under some cost-based government contracts; and (v) laws, regulations, and executive orders restricting the use and dissemination of information classified for national security purposes and the importation and exportation of specified products, technologies, and technical data. |
| • | We derive significant revenue from federal government contracts that are awarded through a competitive bidding process. We expect that most of the government business we seek in the foreseeable future will be awarded through competitive bidding. Competitive bidding imposes substantial costs and presents a number of risks, including: (i) the need to bid on engagements in advance of knowing the complete design or full requirements, which may result in unforeseen difficulties in executing the engagement and cost overruns; (ii) the substantial cost and managerial time and effort that we spend to prepare bids and proposals for contracts that may not be awarded to us; (iii) the need to accurately estimate the resources and costs that will be required to service any |
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| contract we are awarded; (iv) the possibility that difficult market conditions will cause our competitors to strive for growth by reducing their bid pricing and compel us to choose between bidding at unprofitable levels or losing contracts and foregoing revenue; (v) the expense and delay that may arise if our competitors protest or challenge contract awards made to us pursuant to competitive bidding, and the risk that any such protest or challenge could result in the resubmission of bids on modified specifications, or in termination, reduction, or modification of the awarded contract; and (vi) the opportunity cost of not bidding on and winning other contracts we might otherwise pursue. |
| • | Our U.S. Government business is subject to specific procurement regulations and other requirements. These requirements, although customary in U.S. Government contracts, increase our performance and compliance costs. These costs might increase in the future, reducing our margins, which could have a negative effect on our financial condition. Failure to comply with these regulations and requirements could lead to suspension or debarment, for cause, from U.S. Government contracting or subcontracting for a period of time and could have a negative effect on our reputation and ability to secure future U.S. Government contracts. |
| • | Our contract costs are subject to audits by U.S. Government agencies. U.S. Government representatives may audit the costs we incur on our U.S. Government contracts, including allocated indirect costs. Such audits could result in adjustments to our contract costs. Any costs found to be improperly allocated to a specific contract will not be reimbursed, and such costs already reimbursed must be refunded. We have recorded contract revenues based upon costs we expect to realize upon final audit. However, we do not know the outcome of any future audits and adjustments and we may be required to reduce our revenues or profits upon completion and final negotiation of audits. If any audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. Government. |
| • | Kreisler Polska exposes us to gains and losses due to foreign currency fluctuations which may have a materially adverse effect on our financial results. |
| • | Kreisler Polska and our investment in Poland may be adversely affected by geopolitical events. |
| • | We may not be successful with respect to future acquisitions, growth initiatives or other expansion efforts. |
| • | New material technologies may permit our customers to use materials that are incompatible with our current production capabilities which may have a negative effect on our financial results. |
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
We have not received written comments from the commission staff regarding our periodic or current reports under the Exchange Act that remain unresolved.
| ITEM 2. | PROPERTIES |
Our principal executive office is located at Kreisler Industrial’s manufacturing facility in Elmwood Park, New Jersey. Our New Jersey location consists of a 52,000 square foot leased facility of which over 95% of the square footage is committed to the operational requirements of Kreisler Industrial. The facility is approximately 60 years old and the current term under the existing lease agreement will expire on September 30, 2012. At June 30, 2008, the remaining minimum lease amount due in accordance with the facility lease agreement is $1,371,500.
Our Kreisler Polska subsidiary operates from an approximately 23,000 square foot leased facility (with approximately 4,200 additional square feet of leased land) in Krakow, Poland. Kreisler Polska’s lease agreement has no lease end date but does require six months notice of cancellation by either party. The current net monthly lease rate (excluding VAT) for the Kreisler Polska facility is approximately $12,100 (based on the Polish zloty exchange rate as of June 30, 2008).
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Our current facilities are sufficient for our current production requirements. Should Kreisler Industrial and/or Kreisler Polska continue to experience sales growth comparable to that of the past three years, we may need to increase the size of our facilities.
Capital expenditures during fiscal 2008 totaled $550,000 which were financed using our cash resources. Approximately 60% of these expenditures were for leasehold improvements for the expansion of our facility at Kreisler Polska. The average ages of equipment located at Kreisler Industrial and Kreisler Polska facilities are approximately eight years and two years, respectively. Management believes that the Company’s present industrial plant facilities are suitable for the Company’s current and near term operations and are adequately insured.
| ITEM 3. | LEGAL PROCEEDINGS |
From time to time, we are a party to litigation arising in the ordinary course of our business. We are not currently a party to any litigation that we believe could reasonably be expected to have a material adverse effect on our results of operations, financial condition or cash flows.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
During the fourth quarter of fiscal year 2008, there were no matters submitted to a vote of security holders through the solicitation of proxies or otherwise.
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| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Company’s Common Stock is traded on the Nasdaq Capital Market under the symbol “KRSL.” The following table sets forth the high and low per sales (quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions) for shares of the Common Stock on the Nasdaq Capital Market for each quarter in the two-year period ended June 30, 2008.
| Quarter |
Fiscal Year 2008 | Fiscal Year 2007 | ||||||||||
| High | Low | High | Low | |||||||||
| First Quarter - September 30 |
$ | 15.37 | $ | 14.84 | $ | 14.20 | $ | 9.51 | ||||
| Second Quarter - December 31 |
11.94 | 10.69 | 11.25 | 9.02 | ||||||||
| Third Quarter - March 31 |
12.00 | 11.03 | 23.50 | 9.40 | ||||||||
| Fourth Quarter - June 30 |
12.00 | 11.55 | 27.85 | 15.15 | ||||||||
On September 23, 2008, the most recent practicable date prior to the filing of this Annual Report on Form 10-K, the last reported sale price of our common stock on the Nasdaq Capital Market was $10.23 per share.
Holders
On September 22, 2008, the most recent practicable date prior to the filing of this Annual Report on Form 10-K, we had approximately 99 stockholders of record.
Dividend Policy
We have not paid any dividends during the last two fiscal years. The holders of our Common Stock are entitled to receive dividends when, and if, declared by the Board of Directors out of funds legally available for such dividends. It is our current policy not to pay dividends and to retain earnings for future growth. The payment and rate of future cash or stock dividends, if any, are subject to the discretion of our Board of Directors and will depend upon our earnings, financial condition, capital or contractual restrictions under our credit facilities and other factors.
Repurchase of Securities
We did not repurchase any of our Common Stock or other securities during our fiscal year ending June 30, 2008. Future repurchases, if any, of our Common Stock or other securities are subject to the discretion of our Board of Directors and will depend upon our earnings, financial condition, capital or contractual restrictions under our credit facilities and other factors.
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Equity Compensation Plan Information
The following table reflects information for our equity compensation plan as of June 30, 2008.
Equity Compensation Plan Information
| Plan Category |
(a) | (b) | (c) | ||||
| Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted-average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||
| Equity compensation plans approved by security holders |
94,000 | $ | 10.83 | 200,000 | |||
| Equity compensation plans not approved by security holders |
— | — | — | ||||
| Total |
94,000 | $ | 10.83 | 200,000 | |||
| ITEM 6. | SELECTED FINANCIAL DATA |
Not applicable.
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
You should read the following discussion and analysis in conjunction with our financial statements and the related notes included elsewhere in this Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under “Risk Factors” and elsewhere in this Form 10-K.
Overview
Kreisler Manufacturing Corporation and its wholly owned subsidiaries, Kreisler Industrial Corporation (“Kreisler Industrial”) and Kreisler Polska Sp. z o.o (“Kreisler Polska”), manufacture precision metal components and assemblies primarily for use in military and commercial aircraft engines and in industrial gas turbines. Unless the context indicates otherwise, the use of “we,” “us,” “our” or the “Company” refers to Kreisler Manufacturing Corporation and its subsidiaries. Our products include tube assemblies of multiple sizes and configurations as well as machined components and are typically manufactured to the designs and specifications of the particular customer. Our products may be made of various materials, including titanium, nickel and stainless steel. These high-quality engineered tube assemblies transfer fuel, oil, water, air and hydraulic fluids. Orders are received through competitive proposals, which are made in response to requests for bids from contractors who supply engines or engine components to various branches of the United States Department of Defense or to commercial businesses. This section should be read in conjunction with our audited consolidated financial statements and notes to such financial statements included in this Annual Report on Form 10-K.
| Summary Results |
Fiscal 2008 | Fiscal 2007 | $ Change | % Change | |||||||||
| Sales |
$ | 29,279,000 | $ | 23,852,000 | $ | 5,427,000 | 23 | % | |||||
| Operating Income |
3,213,000 | 3,140,000 | 73,000 | 2 | % | ||||||||
| Net Income |
1,866,000 | 1,960,000 | (94,000 | ) | (5 | )% | |||||||
Our fiscal 2008 sales grew 23% compared to fiscal 2007. While our overhead and selling, general and administrative expenses were equal to or lower as a percentage of sales compared to our fiscal 2007 financial results, year-over-year increases in our purchased material costs negatively impacted our growth in operating income. These items are further discussed in the “Results of Operations” sub-section.
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Despite current global economic uncertainties, we remain focused on our strategy of (i) expanding our global manufacturing capabilities, (ii) continuing to improve our product quality to increase customer satisfaction and lower costs, and (iii) enhancing the expertise of our employees. We believe these strategies best position us to capitalize on future strategic opportunities. We are also seeking to manage our costs effectively while making sure we attract new employees who can make a positive impact on our future.
We also continue to target organic sales opportunities while seeking to manage our costs growth at a rate below sales growth. As in the past, we are concerned about continuing customer pricing pressure and intend to continue our focus on controlling future costs through (i) the introduction of long-term agreements with our suppliers, (ii) increased use of economic order quantities with our suppliers and (iii) improved manufacturing productivity at both Kreisler Industrial and Kreisler Polska.
Our renovations of Kreisler Polska’s tube and pipe facility are nearing completion and we expect to start positioning equipment in the facility in the near term. We believe this will increase our capacity and attract new customers outside the United States. In addition, our sales and marketing presence at the bi-annual Farnborough Air Show during July 2008 generated additional U.S. and European interest in our product capabilities. We expect to again have a sales and marketing presence at the bi-annual Paris Air Show in June 2009.
We provide, under a Memorandum of Understanding (“MOU”) between Kreisler Industrial and United Technologies Corporation (“UTC”), the majority of tube and manifold components used on the F119 engine (2 engines per F-22 aircraft) which is the only engine currently certified for use on the F-22 Raptor. As a result, sales of F119 engine components are an important part of our military sales through fiscal 2010. Effective January 1, 2008, we began to recognize deferred revenue under the MOU. During fiscal 2008, we recognized $740,000 in deferred revenue and received $1,000,000 in advance payments out of the total amount of $2,000,000. We received $500,000 in advance payments under the MOU during fiscal 2007. We expect to receive an additional $500,000 in advance payments by December 31, 2008. See the sub-section “Liquidity and Capital Resources” below for a description of the MOU.
As of June 30, 2008, we held $700,000 of long-term investments. These long-term investments are AAA-rated auction rate securities and have been affected by the ability of the financial markets to trade such securities. On August 11, 2008, our securities broker for these auction rate securities publicly announced its intent to purchase, at par, auction rate securities sold by this broker. We expect to sell these auction rate securities in the financial markets or to our broker by December 31, 2008. See the sub-section “Liquidity and Capital Resources” below for a further description of these auction rate securities.
We monitor global economic conditions that could affect us, and we believe that we are prepared to respond accordingly if an economic slowdown should occur that would have the potential to affect us.
Though our current information systems have served us well, we recognized that our rapid sales growth and global presence with Kreisler Polska required new information systems to integrate and support our needs. After considering a number of alternatives, we selected Microsoft Dynamics AX enterprise resource system. We believe this ERP system will best meet our current and future operating and financial reporting requirements. Implementation commenced in July 2008 and we expect Kreisler Industrial to begin using this system by June 30, 2009 and Kreisler Polska shortly thereafter.
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Results of Operations
(All amounts rounded to the nearest thousand)
Fiscal 2008 Compared to Fiscal 2007
Sales
Sales increased $5,427,000, or 23%, to $29,279,000 for fiscal 2008 compared with sales of $23,852,000 for fiscal 2007. Our sales and sales changes by industry market area for fiscal years 2008 and 2007, respectively, were as follows:
| 12 Months Ended June 30, | ||||||||||||||||||
| Industry Market Area |
Sales | Percent of Sales | ||||||||||||||||
| Fiscal 2008 | Fiscal 2007 | $ Change | % Change | 2008 | 2007 | |||||||||||||
| Commercial |
$ | 10,674,000 | $ | 10,250,000 | $ | 424,000 | 4 | % | 36 | % | 43 | % | ||||||
| Military |
14,564,000 | 10,925,000 | 3,639,000 | 33 | % | 50 | % | 46 | % | |||||||||
| Industrial Gas Turbine |
4,041,000 | 2,677,000 | 1,364,000 | 51 | % | 14 | % | 11 | % | |||||||||
| Total |
$ | 29,279,000 | $ | 23,852,000 | $ | 5,427,000 | 23 | % | 100 | % | 100 | % | ||||||
Our sales of products for commercial aircraft engines of $10,674,000 for fiscal 2008 increased $424,000, or 4%, compared to sales for fiscal 2007 of $10,250,000. Our sales growth continues to be primarily attributable to an increased need for components used in the CF34 and V2500 aircraft engines as well as short-term increases in GP7000 components. These increases were partially offset by reduced requirements for various other commercial engine programs, including the PW4000, and the limited commercial aircraft programs currently in production by some of our customers.
Our sales of military aircraft engine products of $14,564,000 for fiscal 2008 increased $3,639,000, or 33%, compared to our sales of $10,925,000 for fiscal 2007. We experienced increased sales of components for the F119 and F100 aircraft engines as well as increased sales of spare parts to the U.S Government. These increases were partially offset by lower shipments of development and production components for the F135 aircraft engine.
For fiscal 2008, our sales of products to the industrial gas turbine industry increased to $4,041,000 compared to sales of $2,677,000 for fiscal 2007. This $1,364,000, or 51%, increase was primarily attributable to increased demand for components used in large industrial gas turbines such as the Siemens 501F.
Cost of Goods Sold and Gross Margin
Cost of goods sold for fiscal 2008 was 79.8% of sales, or $23,374,000, compared to 77.5% of sales, or $18,480,000, for fiscal 2007.
Our cost of goods sold and gross (“COGS”) margins for fiscal 2008 and 2007, respectively, were as follows:
| Fiscal 2008 | Fiscal 2007 | $ Change | % Change | |||||||||||
| Sales |
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