UCT Coatings, Inc. UCT Employees IKS Sales Team Fiscal Year 2014 Annual Financial Report And Shareholder Letter
Shareholder Report - 2014 2014 FINANACIAL RESULTS Fiscal 2014 was a difficult year for UCT Coatings (uctcoatings.com) and its subsidiary International Knife & Saw (iksinc.com). The year was marked by significant operations issues and declining markets. Consolidated net sales for the year ended December 31, 2014 were $28.4 million and net income was $682 thousand. We achieved this performance despite the challenges we faced related to the significant breakdowns at the new UCT plant in February and March 2014 and ongoing plant capacity issues at the IKS plant. Our strong financial performance in prior years allowed us to make significant investments in 2014 in plant and equipment at both UCT and IKS, which has improved efficiency and increased capacity. We have also hired several key management team members, including Charbel Karam, President of UCT, George Revollo, Director of Operations at IKS and Lou D Ambrosio, Vice-President of Product Development as UCT. SUMMARY FINANCIAL INFORMATION 2014 2013 2012 Net revenue $ 28,429,492 $ 26,180,424 $ 23,271,030 Cost of goods sold 21,136,919 18,263,876 16,293,306 Gross Profit 7,292,573 7,916,548 6,977,724 Selling, general and administrative expenses 6,479,196 5,492,537 4,923,843 Income from operations 813,377 2,424,011 2,053,881 Other income (expense), net 26,617 (234,790) (217,093) Interest expense / income tax (158,167) (333,685) (281,373) Net Income (loss) $ 681,827 $ 1,855,536 $ 1,555,415 Adjusted EBITDA $ 1,980,825 $ 3,036,986 $ 2,378,296 Note: Adjusted EBITDA includes adjustments for one-time extraordinary expenses and legal fees. Page 1
UCT COATINGS UCT continued to grow its oil and gas and industrial knife plating businesses in 2014. Net plating revenues were $5 million in 2014. Oil and gas plating revenue increased $517,000 from the prior year due to coating services provided to Baker Hughes-Centrilift customers and GE Oil and Gas. However, due to the industry slowdown in firearms armaments, plating revenue in this industry decreased 58% in 2014. In addition, FailZero (failzero.com) distributor and internet kits sales also decreased 9% in 2014. UCT NEW HIRE CHARBEL KARAM - President Charbel Louis Karam joined UCT as President on January 12, 2015. Charbel has extensive experience in aerospace, oil and gas, and general coatings industries and the application of coatings within these industries. Most recently, he was Vice President at Chromalloy-Sequa Corporation in West Palm Beach, Florida. Charbel also held executive-level positions at Pratt & Whitney Canada, Hydroxyl Systems and Airbus. Charbel s role will be to drive execution of UCT s corporate strategy and develop executive level relationships with its customers. We are excited about Charbel joining our team because his vast experience in the coatings industry will be invaluable to UCT, as well as to our customers. Charbel will be the leader of our strategic initiatives and we are very pleased to have him leading the company. UCT NEW HIRE LOU D AMBROSIO VP Product Development Lou D Ambrosio joined UCT Coatings as Vice-President of Product Development in July, 2014. Louis has a degree in Mechanical Engineering and has spent his career in the coating business. Most recently, he was the Sales Engineering Manager at Ducon Technologies, a manufacturer of air pollution control equipment for many industries. Lou will be focus his efforts on developing and expanding in our existing markets and identify new EXO coating applications. Lou's wealth of experience in executive-level sales, product development and manufacturing engineering has already made him a key addition to UCT Coatings. He brings a proven track record of success, which will be invaluable to providing technical and high quality solutions for our customers. UCT NEW HIRE GEORGE REVOLLO VP Operations George Revollo joined IKS as Vice-President of Operations in Janauary, 2014. George has a degree in Mechanical Engineering and has built his working career in the world of manufacturing. Most recently he was the Plant Manager for a large manufacturing firm in Monroe, NC. George will be responsible for operations, customer service and purchasing. He brings experience and a proven track record of success in production, tooling, maintenance and quality, which will be invaluable to IKS as we continue to grow our business. Page 2
UCT NEW PLANT In October 2013, UCT moved into its new 45,000 square foot production facility. The new plant is a worldclass facility that represents our commitment to providing leading edge Nickel Boron technologies with EXO and FailZero. This new facility utilizes state of the art computer automated manufacturing techniques and controls to meet the challenging needs of our customers. UCT NAMED 2014 FLORIDA COMPANIES TO WATCH WINNER UCT is proud to have been selected as one of fifty leading companies selected from more than 500 nominations, as 2014 Florida Companies to Watch winners. Florida Companies to Watch is an award given to second stage companies headquartered in Florida. Awardees were selected for demonstrating the intent and capacity to grow based on employee or sales growth, exceptional entrepreneurial leadership, sustainable competitive advantage, outstanding corporate culture, inspired community giving and other notable strengths. It is an honor to be selected for this award and it is a testament to UCT s commitment achieving the highest possible levels of performance through our patented EXO technology and quality processes. INTERNATIONAL KNIFE & SAW International Knife & Saw (IKS) is a leading manufacturer and supplier of high-quality industrial machine knives and blades that has built outstanding brand recognition in the industry because of its unwavering commitment to quality and outstanding customer support and service. IKS continued its strong performance in 2014. Revenue increased $2.5 million over the prior year. However, due to unexpected plant maintenance and legal costs net income was down $800,000. In 2014, the IKS sales group re-organized into three distinct business units, each led by an industry veteran who reports directly to Terry Isaacs, Executive VP of Sales. These business units are Tissue, Metal and Industrial. The Tissue Division customers consist of Bath and Commercial Toilet Tissue Producers, Paper Towel Producers, Napkin and Wet Wipe producers. The Steel Division customers consist of Steel Manufacturers, Steel Service Centers and Metal Products Fabricators. The Industrial Division customers are Paper and Printing Converters and Recyclers of plastic and rubber products. In addition to these core markets, IKS also supplies cutting tools and accessories into other industrial markets such as packaging, textile and food processing. The Tissue Division s sales increased 5.7% in 2014. Sales of UCT s coated log saw blades in 2014 continued to grow and now account for 25% of all log saw blades IKS sold and 34% of the tissue products revenue stream. North American market share of log saw blades is now over 60%. The Tissue Division increased business with the three largest converting customers: Proctor and Gamble, Kimberly- Clark and Georgia Pacific. Page 3
As the industrial sectors of the economy continue to rebound from the recent economic downturn, producers and fabricators of metal products have ramped up their production and have increased their purchases of cutting tools from industrial knife companies such as IKS. This allowed the metals division to exceed its 2014 budgeted sales by $836,661 or 13%. The IKS Industrial Division continued their sales growth of recycling blades in 2014 with sales revenues of $790,476, an increase of $200,000 over 2013 sales. The Printing and Paper category had sales of $1,318,458 in 2014 and increase of $139,559 over 2013. IKS LAWSUIT In 2012, a lawsuit was filed against IKS alleging breach of contract, trade secret and copyright claims. The claims concerned the use and possession of drawings for industrial knives and blades used in pulp and paper converting equipment. The case proceeded through the pretrial discovery and the filing of dispositive motions, including expert witness discovery. In November 2014, the case was settled for a nominal amount. However, IKS incurred legal costs in 2014 of $203,000. 2015 OUTLOOK Over the last few years, UCT has achieved many milestones, including sustaining profitable operations, completing construction of its new world-class plant, reducing its outstanding debt, and improving its image and brand name in the market. IKS has been able to significantly increase sales (from $13.6 million in 2009 to 23.8 million in 2014), substantially improve and increase its production capacity and considerable increase sales of its new, patent pending Grinding System. Looking toward to 2015, we see many challenges ahead. UCT s oil and gas business is expected to be depressed by reduced drilling and production. The armaments business continues to be depressed and sales expect to be flat in 2015. IKS s sales are expected to continue to be strong as we continue to increase market share. However, IKS s metal sales is expected be negatively impacted by decreased demand for pipe cutting blades used in the oil and gas industry. Although the investments we made in plant and equipment at IKS have certainly helped, the increased growth will continue to make it difficult to meet the increased demand and required delivery schedules in a cost effective manner. We expect 2015 to be a critical year for both UCT and IKS. Some of the potential of changes we have planned in 2015 are: We expect to make additional investments in plant and equipment at IKS to increase capacity (to meet demand), reduce lead times, improve quality and increase efficiency. UCT is contemplating building an aluminum plating line in 2015. Adding this capability to our current nickel boron process will give us access to many new markets such as aerospace, defense and automotive. Several strategic options are being considered, including acquiring strategic coatings and industrial knife businesses. We are considering building another UCT plating facility in Houston or partnering with a Houston company that would install an UCT plating line to increase our presence and sales in the oil and gas industry. Page 4
SUMMARY In 2014, UCT and IKS invested over $1 million in additional plant and equipment. In addition, we hired several experienced management personnel. UCT hired Charbel Karam, President of UCT, Lou D Ambrosio, VP of Product Development of UCT and George Revollo, VP of Operations of IKS. Although the future looks challenging to both UCT and IKS, we believe we are making needed investment in plant and equipment and people to continue to grow and sustain profitable operations in 2015. We are optimistic about the future of UCT and IKS and expect to continue to make significant progress in 2015. We are also looking at some strategic options for the company. We will keep you informed as these options develop. On behalf of all of us at UCT and IKS, we want to thank the shareholders for their continued support. We are committed to achieving our strategic goals and delivering shareholder value. Donald L. Weeks, CEO Page 5