UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended Mar 31, 2013

 

or

 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ______________

 

Commission File No. 000-30185

 

PRECISION AEROSPACE COMPONENTS, INC.

(Exact Name of Small Business Issuer as Specified in Its Charter)

Delaware		20-4763096
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

 

351 Camer Dr.

Bensalem, PA 22109

(Address of Principal Executive Offices)

 

(718)-356-1500

(Issuer’s Telephone Number, including Area Code)

 

(Former Name or Former Address, if Changed Since Last Report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

	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]

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   NA

 

Number of shares outstanding of the registrant’s common stock, as of April 25, 2013: 4,009,349

 

 

 

TABLE OF CONTENTS

 

 

				Page
PART I FINANCIAL INFORMATION
Item  1.	Financial Statements – (Unaudited)			3
	Condensed Consolidated Balance Sheets			3
	Condensed Consolidated Statements of Operations			4
	Condensed Consolidated Statements of Cash Flows			5
	Notes to Condensed Consolidated Financial Statements			6
Item  2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
Item  3.	Quantitative and Qualitative Disclosures about Market Risk			16
Item 4	Controls and Procedures			16
PART II OTHER INFORMATION
Item  6.	Exhibits			17
Signatures				17

 

 

 

Item 1. Financial Statements   PRECISION AEROSPACE COMPONENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
			March 31,				December 31,
			2013				2012
CURRENT ASSETS
Cash and cash equivalents		$	88,684			$	460,522
Accounts receivable			3,424,584				2,914,859
Inventory, net			12,959,999				12,910,757
Restricted cash - escrow			500,085				500,085
Prepaid expenses			256,704				361,814
Prepaid income taxes and income taxes receivable			113,197				113,197
			17,343,253				17,261,234
PROPERTY AND EQUIPMENT - Net			63,291				49,343
OTHER ASSETS
Deposits			24,700				24,700
Intangible assets, net			286,450				294,633
Deferred taxes			569,099				606,200
Other assets			171,599				147,377
			1,051,848				1,072,910
TOTAL ASSETS		$	18,458,392			$	18,383,487
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses		$	3,285,260			$	3,586,179
Accrued restructuring expenses			106,365				229,441
Escrow payable			500,085				500,085
Current portion of long term debt			1,042,000				729,400
Line of credit			7,550,314				7,102,787
			12,484,024				12,147,892
LONG -TERM LIABILITIES
Term Loan			1,458,000				1,770,600
TOTAL LIABILITIES			13,942,024				13,918,492
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock A $.001 par value; 1,400,000 shares authorized
at March 31, 2013 and December 31, 2012; 1,336,703  shares			1,337				1,337
issued and outstanding, respectively.  Liquidation preference of $0.735 per share (total of $982,477)
Preferred Stock C $.001 par value; 4,825,000  shares authorized
at March 31, 2013 and December 31, 2012; 4,608,675 shares			4,608				4,608
issued and outstanding, respectively.  Liquidation preference of $0.735 per share (total of $3,387,376)
Common stock, $.001 par value; 100,000,000 shares authorized
at March 31, 2013 and December 31, 2012;			4,009				4,009
4,009,349 shares issued and outstanding, respectively
Additional paid-in capital			11,450,862				11,450,862
Accumulated deficit			(6,944,448	)			(6,995,821	)
TOTAL STOCKHOLDERS' EQUITY			4,516,368				4,464,995
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	18,458,392			$	18,383,487
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

  

  

PRECISION AEROSPACE COMPONENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
		FOR THE THREE MONTHS ENDED MARCH 31,
		2013				2012
NET REVENUE		$	7,204,759			$	2,106,021
COST OF GOODS SOLD			5,347,870				1,508,076
GROSS PROFIT			1,856,889				597,945
OPERATING EXPENSES
General and administrative expenses			1,498,043				466,558
Professional and consulting fees			73,704				85,498
Depreciation and amortization			23,448				5,585
Total Operating Expenses			1,595,195				557,641
INCOME  BEFORE OTHER INCOME (EXPENSE)			261,694				40,304
OTHER INCOME (EXPENSE)
Interest expense			(173,221	)			(15,873	)
			(173,221	)			(15,873	)
INCOME BEFORE PROVISION (BENEFIT) FOR INCOME TAXES			88,473				24,431
Provision (benefit) for income taxes			37,100				(42,714	)
NET INCOME APPLICABLE TO COMMON SHARES		$	51,373			$	67,145
NET INCOME PER SHARE APPLICABLE TO COMMON SHARES
Basic		$	0.01			$	0.02
Diluted		$	0.00			$	0.01
Weighted average shares outstanding - basic			4,009,349				3,688,497
Weighted average shares outstanding - diluted			13,248,466				12,927,617
The accompanying notes are an integral part of these condensed consolidated financial statements.

  

 

PRECISION AEROSPACE COMPONENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012
(UNAUDITED)
		2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	51,373			$	67,145
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization			23,448				5,585
Amortization of deferred financing costs			9,364				—
Deferred income taxes			37,101				—
Inventory write-down			200,000				59,340
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable			(509,725	)			(99,995	)
(Increase) Decrease in inventory			(249,242	)			(289,793	)
(Increase) Decrease in prepaid expenses			105,112				(29,810	)
(Increase) Decrease in prepaid income taxes and income taxes receivable			—				(43,217	)
(Increase) Decrease in other assets			(33,585	)			503
(Decrease) Increase in accounts payable and accrued expenses			(300,919	)			326,810
(Decrease) Increase in accrued restructing expenses			(123,076	)			—
Net cash used in operating activities			(790,149	)			(4,805	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment			(29,216	)			—
Net cash used in investing activities			(29,216	)			—
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from line of credit - Newstar			447,527
Net payments of line of credit - IDB							(45,000	)
Net cash provided by/(used in) financing activities			447,527				(45,000	)
DECREASE IN CASH AND CASH EQUIVALENTS		$	(371,838	)		$	(49,805	)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		$	460,522			$	269,956
CASH AND CASH EQUIVALENTS - END OF PERIOD		$	88,684			$	220,151
Cash paid during the period for:
Interest paid		$	164,864			$	15,873
Income taxes paid		$				$
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

    

PRECISION AEROSPACE COMPONENTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

(UNAUDITED)

 

 

1. SUMMARY OF BUSINESS

 

Precision Aerospace Components, Inc. and Subsidiaries (the “Company”) distributes high-quality, predominantly domestically-manufactured, technically complex, nut and bolt products and a proprietary locking washer product that are used primarily for aerospace and military applications and for industrial/commercial applications that require a high level of certified and assured quality.

 

The Company's operations are carried out through its wholly-owned distribution subsidiaries Aero-Missile Components, Inc. (“Aero-Missile”) and Freundlich Supply Company, Inc. (“Freundlich”), both of whom have Stocking Distributor relationships with a number of United States fastener manufacturers and who sell high technology, specially engineered fasteners - nuts and bolts - predominantly to all levels of the aviation industries (original equipment manufacturers, maintenance and repair organizations, and other distributors as well as to the United States Department of Defense (“Department of Defense”). Creative Assembly Systems, Inc. (“Creative Assembly”) is a value added distributor of proprietary and specialty fasteners, primarily serving the heavy truck, automotive, appliance, and material handling industries and Tiger-Tight Corp. (“Tiger-Tight”) the exclusive North American master distributor of the Tiger-Tight locking washer. Tiger-Tight washers are used in demanding vibration applications and the Company believes they have significant advantages in comparison to competitive products. Tiger-Tight products are now available and under evaluation by several major US corporations, is being used aboard the SpaceX Dragon – the first civilian space craft to dock and return from the International Space Station.

 

The Company’s products are manufactured, by others, to exacting specifications and are made from materials that provide the strength and reliability required for their aerospace and industrial applications.

 

On May 25, 2012, the Company acquired the assets of Fastener Distribution and Marketing Company, Inc., which included Aero-Missile and Creative Assembly. The Company paid for the acquisition with a new credit facility consisting of a $2.5 million term loan and a $10 million revolving loan with Newstar Business Credit, LLC. The operating results of the Aero-Missile and Creative Assembly businesses are included in the financial results from the date of acquisition.

 

2. Summary of Significant Accounting Policies

 

Interim Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conformity with the instructions to Form 10-Q and Article 8 of Regulation S-X and the related rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures included in these financial statements are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements included in this document have been prepared on the same basis as the annual consolidated financial statements, and in the Company’s opinion reflect all adjustments, which include normal recurring adjustments necessary for a fair presentation in accordance with GAAP and SEC regulations for interim financial statements. The results for the three months ended March 31, 2013 are not necessarily indicative of the results that the Company will have for any subsequent period.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K.

 

PRECISION AEROSPACE COMPONENTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

(UNAUDITED)

 

 

3. RESTRUCTURING

 

The Company committed to certain cost reduction initiatives during the third quarter of 2012, which included planned workforce reductions and restructuring of certain functions. The Company has taken these specific actions in order to more strategically align the Company’s operating costs and selling, general and administrative expenses relative to revenues.

2012 Cost Reduction Initiative

On September 25 of 2012, the Company announced its plans to relocate and consolidate the activities of its headquarters operations, as well as the operations of its Freundlich Supply Company Inc. and Tiger-Tight Corp. subsidiaries (the “2012 Cost Reduction Initiative”) from Staten Island New York to Bensalem, Pennsylvania, at the present location of its Aero-Missile Components Inc. subsidiary, prior to the end of the calendar year 2012. This relocation allows the Company to better serve its customers through the co-location of its broadened inventory and will enable the Company to realize additional efficiencies from its recent acquisition. The operations and service provided by the Company continue unabated. As a result of this relocation, the Company realized significant and continuing savings from the elimination of the facilities costs associated with its Staten Island location. Additionally, the lower overall tax environment outside of New York City and State will be beneficial to the Company. The Company has included its anticipated expenses associated with this announced relocation, as “Restructuring expenses” within its present consolidated statements of operations. The Company estimates the total costs to be incurred in connection with this initiative to be approximately $0.5 million, which primarily relate to one-time termination benefits, moving costs and other costs associated with closing the plant and all of which will result in future cash expenditures. As of March 31, 2013, the Company incurred approximately $400,000 of costs related to this initiative.

 

For the twelve months ended December 31, 2012, estimated restructuring costs of $0.50 million are included as other costs.

Estimated and actual expenses including severance, lease cancellations, and other restructuring costs, in connection with these initiatives, have been recognized in accordance with ASC 420-10, Exit or Disposal Cost Obligations, and ASC 712-10, Nonretirement Postemployment Benefits.

Estimated restructuring costs associated with the 2012 Cost Reduction Initiative consist of the following :

 

Severance and related benefits		$	233,300
Lease termination			146,000
Moving costs			55,000
Other restructuring costs			66,500
		$	500,800

 

  

PRECISION AEROSPACE COMPONENTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

(UNAUDITED)

 

4. ACQUISITION

 

On May 25, 2012, the Company acquired the assets of Fastener Distribution and Marketing Company, Inc., which included Aero-Missile and Creative Assembly (collectively the “FDMC Acquisition”) with a fair value of approximately $8.6 million which included a cash payment of approximately $7.1 million and bargain purchase gain of approximately $1.5 million (pretax or approximately $0.9 million after tax). The Company paid for the acquisition and repaid the existing outstanding credit facility of approximately $1.575 million with a new credit facility consisting of a $2.5 million term loan and a $10 million revolving loan with Newstar Business Credit, LLC (the “NewStar Loans”). The operating results of the FDMC Acquisition businesses are included in the financial results from the date of acquisition.

 

 

The following table provides the estimated fair value of assets acquired and liabilities assumed in the Acquisition.  The purchase price allocation is based on the estimated fair value of assets acquired and liabilities assumed:

 

Accounts receivable		$	2,298,400
Inventory			8,427,000
Property and equipment			44,200
Prepaid and other assets			222,800
Intangible assets — customer relationships			304,000
Intangible asset – website			7,000
Deferred tax liability			(611,000	)
Accounts payable and Accrued Expenses			(2,701,400	)
Fair value of net assets acquired		$	7,991,000
Cash paid for acquisition		$	7,117,700
Bargain purchase recorded			873,300
Total purchase price		$	7,991,000

 

 

  

Estimates of acquired intangible assets are as follows:

Acquired Intangible Assets		Estimated  Fair Value				Weighted Average Estimated  Useful Life (yrs)
Customer Relationships		$	304,000				10
Website			7,000				3

As part of the allocation of the purchase price, using an independent valuation expert’s results, the Company has recorded certain tangible assets, intangible assets, and deferred taxes.

 

Pro Forma Financial Information

 

The pro forma information below is for the combined entities and demonstrate the results of operations as if the acquisition of the FDMC had occurred beginning on January 1, 2012.

 

PRECISION AEROSPACE COMPONENTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

(UNAUDITED)

 

		March 31, 2012
Revenues		$	8,399,000
Gross profit			2,309,000
Net Income/(loss)			271,000
Earnings/(loss) per share – basic and diluted  (assuming 4,009,349 shares)			0.07

 

 

The pro forma adjustments used to prepare the information above include an increase for the amortization expense associated with the fair value adjustment at May 25, 2012 of definite lived intangible assets, for a net adjustment of $0.04 million in the three months ended March, 2012. In addition, interest expense has been adjusted to reflect the 2012 NewStar Loans (totaling approximately $9.6 million at December 31, 2012 and estimating an 8% interest rate) for a net increase of $0.2 million in the three months ended March, 2012; and a pro forma adjustment to tax expenses of an increase of approximately $0.06 million for the three months ending March 31, 2012.

 

5. LONG-TERM DEBT AND LINE OF CREDIT

 

Long-term debt

 

On May 25, 2012, in conjunction with the closing of the FDMC Acquisition, the Company entered into a three year $2.5 million term loan (the “Term Loan”), with payments of interest only during the first year. The principal amount of the Term Loan will be due and payable in 24 monthly installments of approximately $104,200, beginning on June 1, 2013. The Term Loan bears interest, at the Company’s election, at a rate tied to one of the following rates, in each case plus a specified margin: (i) the prime lending rate, but not less than 3.25%, plus a margin of 5.60% to 6.10% or (ii) adjusted one-month LIBOR, but not less than 1.5%, plus a margin of 7.10% to 7.60%. The interest margin for each such type of borrowing varies depending on the Company’s Fixed Charge Coverage Ratio.

 

As of March 31, 2013, $2,500,000 was outstanding at an interest rate of 9.10%.

 

Revolving funding facility

 

The Company has a revolving funding facility pursuant to which it can draw up to $10,000,000 against eligible assets. The facility allows for draws of up to eighty-five (85) percent of eligible accounts receivable or to eighty-five (85) percent of eligible inventory up to a maximum inventory advance amount of six million five hundred thousand dollars ($6,500,000); however the outstanding amount against eligible inventory is further limited to, an amount equal to 2.015 times the amount which can be drawn against the eligible accounts receivable. Eligible accounts receivable are, generally, those domestic accounts not outstanding for more than ninety (90) days or, for government accounts one hundred twenty (120) days and eligible inventory is inventory as determined by the bank, presently the net orderly liquidation value as determined by the bank. The loan balance is secured by a first lien position on all of the Company’s assets. The loan balance bears interest, at the Company’s election, at a rate tied to one of the following rates, in each case plus a specified margin: (i) the prime lending rate, but not less than 3.25%, plus a margin of 1.50% to 2.00%, or (ii) adjusted one-month LIBOR but not less than 1.5%, plus a margin of 3.00% to 3.50%. The interest margin for each such type of borrowing varies depending on the Company’s Fixed Charge Coverage Ratio. The facility expires on May 25, 2015.

 

During March 2013, the lender and the Company amended the debt agreements in order to change certain of the covenant ratios for 2013 and subsequent. In addition, the lender waived their covenants for December 2012 and January 2013. The waiver was required mainly as a result of the Company’s decision to write down its inventory in December 2012 which adversely impacted certain of the covenant ratios.

 

As of March 31, 2013, approximately $7.6 million was outstanding at an interest rate of 5.00%.

 

PRECISION AEROSPACE COMPONENTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

(UNAUDITED) 

 

 

6. COMMITMENTS AND CONTINGENCIES

 

The Company has operating leases for office and warehouse space with original terms ranging from three to five years. The Company currently has three locations with leases which are month to month and three locations with existing long term leases. The three leases have monthly payments of approximately $2,000, $2,100 and $2,100 and expire in November 2013, December 2015 and February 2016, respectively. Substantially all leases contain renewal provisions at the Company’s option.. The Company is responsible for real estate taxes, utilities, and repairs under the terms of certain of the operating leases.

 

Future minimum lease payments under these leases are as follows (approximately):

  

	2013			$	66,500
	2014				52,700
	2015				54,600
	2016				4,400
	Total			$	178,200

  

The United States Department of Defense (“DOD”) represented approximately 15% and 40% of the Company’s total sales for the three months ended March 31, 2013 and 2012. PACCAR Inc represented approximately 11% of the Company’s total sales for the three months ended March 31, 2013. The Company had no sales to this customer during the first three months of 2012. No other customer accounted for greater than 10% of the Company’s total sales and the Company has no substantial concentrations of credit risk in its trade receivables

 

The Company is subject to the possibility of claims and lawsuits arising in the normal course of business. In the opinion of management, the Company liability, if any, under existing claims, asserted or unasserted, would not have a material adverse effect on the Company’s consolidated financial position or results of operations.

  

During 2010, the Company entered into an employment agreement with its President and Chief Executive Officer. In the event of the termination of the agreement under certain circumstances the Company could be liable for up to twelve months’ salary (approximately $220,000 at March 31, 2013).

 

7. SUBSEQUENT EVENTS

 

During April 2013, our primary shareholder and CEO entered into a short term agreement to lend the Company up to approximately $0.9 million, as needed. The loans are to be collateralized by certain inventory purchases to be held by the shareholder. All amounts borrowed by the Company are repayable on demand from available operating funds. These loans are approved by the Company’s primary lender, Newstar.

 

 

 

 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS

 

This Form 10-Q contains "forward-looking statements" relating to Precision Aerospace Components, Inc. (the "Company") which represent the Company's current expectations or beliefs including, but not limited to, statements concerning the Company's operations, performance, financial condition and growth. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact are forward-looking statements. Without limiting the generality of the foregoing, words such as "may", "anticipate", "intend", "could", "estimate" or "continue" or the negative or other comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, such as credit losses, dependence on management and key personnel, variability of quarterly results, and the ability of the Company to continue its growth strategy and the Company’s competition, certain of which are beyond the Company's control. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, or any of the other risks set out under the caption “Risk Factors” in the Company’s 10-K report for the year ended 2012 occur, actual outcomes and results could differ materially from those indicated in the forward-looking statements.

  

Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

General

 

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements, and the notes thereto, included herein. The information contained below includes statements of the Company's or management's beliefs, expectations, hopes, goals and plans that, if not historical, are forward-looking statements subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. For a discussion of forward-looking statements, see the information set forth in the Introductory Note to this Quarterly Report under the caption "Forward Looking Statements" which information is incorporated herein by reference.

 

The condensed consolidated interim financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed consolidated financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Company’s annual consolidated statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The results for the three months ended March 31, 2013 may not be indicative of the results for the entire year.

 

These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management, are necessary for fair presentation of the information contained herein.

 

 

Plan of Operation and Discussion of Operations

 

The Company distributes high-quality, predominantly domestically-manufactured, technically complex, nut and bolt products and a proprietary locking washer product that are used primarily for aerospace and military applications and for industrial/commercial applications that require a high level of certified and assured quality.

 

The Company's operations are carried out through its wholly-owned distribution subsidiaries Aero-Missile Components, Inc. (“Aero-Missile”) and Freundlich Supply Company, Inc. (“Freundlich”), both of whom have Stocking Distributor relationships with a number of United States fastener manufacturers and who sell high technology, specially engineered fasteners - nuts and bolts - predominantly to all levels of the aviation industries (original equipment manufacturers, maintenance and repair organizations, and other distributors as well as to the United States Department of Defense (“Department of Defense”). Creative Assembly Systems, Inc. (“Creative Assembly”) is a value added distributor of proprietary and specialty fasteners for production, primarily serving the heavy truck, automotive, appliance, and material handling industries and Tiger-Tight Corp. (“Tiger-Tight”) the exclusive North American master distributor of the Tiger-Tight locking washer. Tiger-Tight washers are used in demanding vibration applications and the Company believes they have significant advantages in comparison to competitive products. Tiger-Tight products are now available and under evaluation by several major US corporations; they are being used aboard the SpaceX Dragon – the first civilian space craft to dock and return from the International Space Station.

 

The Company’s products are manufactured, by others, to exacting specifications and are made from materials that provide the strength and reliability required for their aerospace and industrial applications.

  

On May 25, 2012, the Company acquired the assets of Fastener Distribution and Marketing Company, Inc., which included Aero-Missile and Creative Assembly (collectively the “FDMC Acquisition”) with a fair value of $8.8 million (pre-tax) for approximately $7.1 million. The Company paid for the acquisition and repaid the existing outstanding credit facility of approximately $1.575 million with a new credit facility consisting of a $2.5 million term loan and a $10 million revolving loan with Newstar Business Credit, LLC (the “NewStar Loans”). The operating results of the FDMC Acquisition businesses are included in the financial results from the date of acquisition. The FDMC Acquisition Businesses are significantly increasing the Company’s revenue with related impacts on the cost of revenue and other items in the Company’s results of operations, compared to prior periods. The integration of the FDMC Acquisition businesses and the servicing of the acquisition debt will be important drivers of the Company’s financial results in future reporting periods.

 

The acquisition provides the Company numerous benefits, including expanded breadth of product offerings and markets served, coast to coast physical presence, substantially increased depth of management and sales capability and marks a significant event in the Company’s development.

 

The Company is a niche player in the North American fastener industry. The fastener distribution industry is highly fragmented with no single company holding a dominant position. The Company competes with numerous distributors who serve as authorized stocking distributors for the fastener manufacturers in the Company’s supplier base.

 

 

The Company’s Tiger-Tight product is a unique lock washer product that is seeking to gain market acceptance. It has extraordinary holding properties, is reusable and does not destroy the material which it is holding in place. In the coming year, the Company anticipates widespread distribution of Tiger-Tight lock washers under an exclusive distribution agreement providing the Company master distribution rights of the product in North America.  The washers, which the Company believes are superior to any competitive product, are now readily available and manufactured in the USA. While the Company carries a full line of washers, special orders can be accommodated.

 

The Company’s subsidiary, Aero-Missile Components, has been named the Master Distributor by SPS Technologies in Jenkintown, Pennsylvania for its FLEXLOC® Locknut product line toward the end of last year; the company’s initial sales of this mature product high market acceptance were slowed due to certain pricing changes which took place as the company started its distribution. The Company anticipates significant additional revenues from sales of the FLEXLOC® line as the year progresses..

 

The FLEXLOC® Locknut is a premium locknut line with Military, Aerospace and Industrial applications. FLEXLOC® locknuts have been designed into challenging joint applications by engineers for over 50 years. The FLEXLOC® line enjoys an unequalled history of success in applications where resistance to severe vibration is required. As a Master Distributor, Aero-Missile Components will service a network of SPS Authorized FLEXLOC® Distributors. The FLEXLOC® Locknut product line is manufactured by SPS Technologies domestically in the United States. FLEXLOC® is a registered trademark of SPS Technologies, a PCC Company.

 

During the quarter, the Company opened a warehouse facility in Denton Texas to serve one of its customers. This facility allows the customer to anticipate just in time delivery from the now closely located facility, rather than to be concerned about shipping delays, and will result in additional sales of additional products to the customer, the initial impact during this quarter was to reduce the Company’s sales to the customer as the customer absorbed its safety stock of materials in its inventory. The Company anticipates a restoration of normal shipping to the customer in the mid second quarter.

 

The Company has also experienced delay in shipment of orders to the Navy Department as a result of its consolidation, and anticipates restoration of these shipments when the facilities are inspected around the end of the second quarter.

 

During the third quarter 2013 the Company anticipates starting shipment of a unique sealing product that it has developed in conjunction with one of the major manufacturers and its customer to fulfill specific customer needs.The product should fulfill similar needs with other customers. The product addresses current product offering technical shortfalls by increasing resistance to torque out and providing an optional self-sealing feature.

 

The Company is a one-stop source for standard, self-locking, semi-special and special nuts, bolts and washers manufactured to several military, aerospace and industrial specifications. The Company maintains an inventory of approximately 44,000 SKUs comprised of approximately 65 million parts of premium quality, brand name fastener products.

 

The Company, during the first quarter of 2013, completed the last phase of its relocation and consolidation of the activities of its headquarters operations, as well as the operations of its Freundlich Supply Company Inc. and Tiger-Tight Inc. subsidiaries from Staten Island New York to Bensalem, Pennsylvania, at the present location of its Aero-Missile Components Inc. subsidiary. This relocation allows the Company to better serve its customers through the co-location of its broadened inventory and is enabling the Company to realize additional efficiencies from its recent acquisition. As a result of this relocation, the Company is achieving significant and continuing savings from the elimination of the facilities costs associated with its Staten Island location. Additionally, the lower overall tax environment outside of New York City and State is beneficial to the Company.

 

 

The Company sells its products pursuant to written purchase orders from its customers. All products are shipped from the Company’s warehouses via common carrier.

 

With the acquisition, the Company’s percentage of sales to the Department of Defense, one of two customers who accounted for more than 10 percent of the Company’s sales as a percentage of its total sales, was reduced. Sales to two customers totaled greater than 10% during 2013. The United States Department of Defense (“DOD”) represented approximately 15% and 40% of the Company’s total sales for the three months ended March 31, 2013 and 2012. PACCAR Inc represented approximately 11% of the Company’s total sales for the three months ended March 31, 2013. The Company had no sales to this customer during the first three months of 2012. No other customer accounted for greater than 10% of the Company’s total sales and the Company has no substantial concentrations of credit risk in its trade receivables.

 

The Company’s sales and gross profit this quarter were above the comparable period last year. This is largely a result of the acquisition which occurred on May 25, 2012, and is reflected in the results of operations from that date. The Company believes that its sales will be increasing in the upcoming months, as new business opportunities mature. The Company anticipates the economy will show increased growth in the middle part of 2013.

  

Results from Operations for the three months ending March 31, 2013

 

The Company’s revenues increased approximately 242% or $5.1 million for the quarter to $7.2 million from $2.1 million in the comparable period last year. This is largely a result of the acquisition. The Company believes that its sales will be increasing in the upcoming months, but not until the middle part of the second quarter of 2013, based on discussions which it has had with customers.

 

Direct Government demand for the products offered by the Company is expected to be reduced from the prior levels, since the products sold to the Government are consumables utilized for the maintenance and repair of military aircraft and ships. Government purchasing has declined during this quarter as the Defense Department has dealt with uncertainties regarding its funding and the Company had raised some of its offering prices to accommodate transient higher goods costs necessitated by required purchases of smaller lots. . Longer term, although a reduced Government purchasing schedule may impact sales to manufacturers, the pace of operations of the military and prescribed maintenance schedules are the driving forces behind the consumption of the parts supplied by the Company to the Government and reallocation of inventory investment will restore government sales levels. Repair and maintenance to equipment no longer immediately required for combat requirements will take an extended time. Additionally possible restrictions of new purchases will mitigate toward additional repair and refurbishment of existing equipment.

 

 

 

The Company’s gross profit increased approximately 211% or $1.3 million for the quarter to $1.9 million from $0.6 million in the comparable period last year. This is largely a result of the acquisition. The Company believes that its gross profit will remain at the current levels during 2013, based on discussions it has had with customers related to sales.

 

The Company’s total operating expenses increased 188% or $1.0 million for the quarter to $1.6 million from $0.6 million in the comparable period last year. This is largely a result of the acquisition and costs associated with the acquisition. 

 

The Company’s accounts receivable have increased by approximately $0.5 million to $3.4 million at March 31, 2013 from $3.0 million at December 31, 2012; this difference is due to mainly to sales and normal deviations in customer payments. The Company’s inventory has remained relatively consistent as of March 31, 2013 compared to December 31, 2012; The Company’s inventory does not have any life limitations and is all available for sale.

 

The Company has refinanced its operations in conjunction with its acquisition. The refinancing included entering into a new $2.5 million term loan, due in May 2015. The Company previously had no long term debt. The term loan, which has interest paid currently, will be amortized monthly starting in June 2013 over 24 monthly payments of $104,200. Additionally, the Company entered into a new line of credit and has drawn approximately $0.45 million from December 31, 2012 to March 31, 2013 to substantially provide financing for additional inventory acquisition and reduction in accounts payables. Accounts payable decreased by approximately $0.3 million to $3.3 million from $3.6 million at December 31, 2012 .

 

Subsequent Events

 

During April 2013, our primary shareholder and CEO entered into a short term agreement to lend the Company up to approximately $0.9 million, as needed. The loans are to be collateralized by certain inventory. All amounts borrowed by the Company are repayable on demand from available operating funds. These loans are approved by the Company’s primary lender, Newstar.

 

Liquidity

 

The Company anticipates additional capital expenditures of approximately $0.25 million on plant and equipment as it brings all of its facilities on to the same enterprise software system.

 

The Company believes that it can meet its financial obligations at its presently contemplated operating levels, even as its growth is constrained by its present financing. However, if the anticipated sales levels are not attained, the Company’s availability to access its line of credit would be adversely affected. The Company believes that its present funding is insufficient to enable the Company to accomplish some of its desired sales growth plans. The Company is presently seeking to expand its capital availability which will enable the Company to fully take advantage of sales opportunities presented to it which require the Company to make additional investments in inventory.

 

The Company believes it can expand its business with its present staff numbers.

 

Critical Accounting Policies

 

Critical accounting policies and the significant estimates made in accordance with them are discussed under “Critical Accounting Policies” in the Company’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

  

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

This item is not required for smaller reporting companies, and, if it were required, is not applicable to the Company’s present operations.

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

(A) Disclosure Controls and Procedures

 

The Company carried out an evaluation, under the supervision and with the participation of the Company's Principal Executive Officer/Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of March 31, 2013.  The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended the ("Exchange Act").  This term refers to the controls and procedures of a company that are designed to ensure that the information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the required time periods.  The Company's disclosure controls and procedures are designed to provide a reasonable level of assurance of achieving the Company's disclosure control objectives.  The Company's Principal Executive Officer/Principal Financial Officer has concluded that the Company's disclosure controls and procedures are effective at this reasonable assurance level as of the period covered by this Form 10-Q.  Due to the size of the Company and as a result of the implementation of the Company’s integrated financial reporting system, items of note are appropriately brought to the attention of the Company’s CEO for appropriate disclosure.

 

No significant changes were made in our internal control over financial reporting during the Company’s first quarter of 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

 

 

 

PART II

OTHER INFORMATION

 

ITEM 6. EXHIBITS

 

The following exhibits are included herein:

Exhibit No.			Exhibit
3.1		Amended Bylaws of Precision Aerospace Components, Inc (a Delaware Corporation) adopted on April 10, 2013
10.1		Third Amendment to the Loan and Security Agreement, dated as of May 25, 2012, among Precision Aerospace Components, Inc., Freundlich Supply Company, Inc. (“Freundlich”), Tiger-Tight Corp., Aero-Missile Components, Inc., and Creative Assembly Systems, Inc., the lenders from time to time party to the Agreement, and Newstar Business Credit, LLC, as administrative agent.
31.1		Certification of Chief Executive Officer of the Company required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
31.2		Certification of Chief Financial Officer of the Company required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
32.1		Certification of Chief Executive Officer and Chief Financial Officer of the Company required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended

 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

	Dated: May 15, 2013		PRECISION AEROSPACE COMPONENTS, INC.
			/s/ Andrew S. Prince
			Andrew S. Prince
			President and Chief Executive Officer

 

 

 

 

 

 

EXHIBIT INDEX

Exhibit Number			Description
3.1		Amended Bylaws of Precision Aerospace Components, Inc (a Delaware Corporation) adopted on April 10, 2013
10.1		Third Amendment to the Loan and Security Agreement, dated as of May 25, 2012, among Precision Aerospace Components, Inc., Freundlich Supply Company, Inc. (“Freundlich”), Tiger-Tight Corp., Aero-Missile Components, Inc., and Creative Assembly Systems, Inc., the lenders from time to time party to the Agreement, and Newstar Business Credit, LLC, as administrative agent.
31.1		Certification of Chief Executive Officer of the Company required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
31.2		Certification of Chief Financial Officer of the Company required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
32.1		Certification of Chief Executive Officer and Chief Financial Officer of the Company required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended