OTTAWA, Aug. 14 /CNW Telbec/ - Allen-Vanguard Corporation (TSX: VRS) ("Allen-Vanguard" or the "Company") of Ottawa, Canada today reported financial results for the third quarter ended June 30, 2008. The Company also announced that it has received and is considering unsolicited expressions of interest for significant strategic investment in the Company by outside investors. All figures are in Canadian dollars unless otherwise noted.
Third quarter (Q3) results
In summary, the third quarter continued to be impacted by delays in timing of major orders, particularly in Electronic Counter Measures ("ECM") equipment to strategic U.S. partners, General Dynamics and Lockheed Martin. This in turn led to a significant under-absorption of fixed overheads, resulting in negative operating margins.
At the same time, order intake in the quarter increased substantially to $84 million, resulting in backlog at June 30, 2008 of $93.4 million, more than double the level of $45 million recorded at the end of the previous quarter. This increase in backlog reflected a pronounced upturn in order intake of Electronic Systems ("ES") equipment of approximately $60 million vs. $12 million in the previous quarter.
The Company noted that the timing and receipt of final approvals on major defense orders for the U.S. will continue to have a significant impact on Electronic Systems revenue over the next several quarters. To mitigate that volatility the Company stated that it is taking steps to strengthen order visibility from its major customers. "Although we had a pronounced upturn in Chameleon order intake in the third quarter and recently announced a follow-on Symphony order, we recognize that this uneven order flow makes it difficult for investors to monitor and evaluate our business," said David E. Luxton, President and CEO. "We are exploring potential solutions to improve the predictability and recurring nature of order intake with our major customers and after those discussions we expect to be in a better position to update all our stakeholders on expected order flow for the balance of 2008 and into fiscal 2009."
The Company reported revenue of $31.2 million in the third quarter, an increase from $12.4 million reported in the third quarter a year ago but down significantly from $91.3 million in the second quarter ended March 31, 2008. EBITDA (1) was a loss of $9.6 million, compared to an EBITDA loss of $1.3 million a year ago, and EBITDA of $21.6 million last quarter. A net loss of $36.6 million, or $0.34 per share, was recorded in the quarter, which included non-cash charges such as amortization of intangibles and acquisition financing charges of $24.3 million. This compared to a net loss of $1.8 million, or $0.03 per share, a year ago and a net loss of $34.2 million, or $0.32 per share, last quarter. The Company used cash of $14.5 million in the quarter, reflecting mainly its cash operating loss and building inventory to support the anticipated demand for ES product, in particular Symphony equipment.
For the nine months ended June 30, 2008, revenue was $262.8 million, EBITDA was $56.4 million and the net loss was $64.0 million, or $0.60 per share. These compare to revenue of $46.1 million, EBITDA of $1.7 million and a net loss of $3.4 million, or $0.07 per share in the first nine months of fiscal 2007. Due to the acquisition of Med-Eng Systems Inc. ("Med-Eng") in September 2007 and Hazard Management Solutions Ltd. ("HMS") in June 2008 and the related financings, the year-over-year figures are not comparable. The Company remains in full compliance with covenants on its $250 million senior debt facility.
Unsolicited expressions of interest in strategic investment
Allen Vanguard announced that it has received several unsolicited expressions of interest in strategic investment by outside investors. "These investors understand our industry and have the potential to bring strategic weight to advance our growth plans, and they have expressed interest in significant participation," said Mr. Luxton. "Our advisors, RBC Capital Markets, are assisting with an evaluation of proposals and we expect to conclude on and announce a preferred strategy in the very near future."
Financial Highlights of Q3 2008
(all figures in thousands of Canadian dollars)
Revenue from ES products represented 27% and 72% of revenue in Q3 2008 and YTD 2008 respectively, compared to 45% in Q3 2007 and 47% in YTD 2007. Sales to General Dynamics Armament and Technical Products ("GDATP") comprised the majority of ES revenue in Q3 2008, while Q3 2007 ES revenue was derived primarily from Lockheed Martin Corporation ("LM"). The timing of receipt of final approvals on US Marine Corps and Symphony orders will have a significant impact on Allen-Vanguard's ES revenue in the final quarter of FY 2008.
Revenue from PPS products accounted for 45% of Q3 2008 revenue and 20% of YTD 2008 revenue, compared to 51% in Q3 2007 and 49% in YTD 2007. Sales of MES ballistic protection, demining and cooling systems were the largest contributor to sales, with the balance derived primarily from sales of EOD search and tactical equipment.
Revenue from Services accounted for 22% of Q3 2008 and 7% of YTD 2008 revenue and is almost entirely generated by the Company's HMS subsidiary. Allen-Vanguard anticipates service revenue growth from HMS into FY 2009 as it pursues several major training contracts.
In Q3 2008 and YTD 2008, customers based in the United States, led by ES shipments to GDATP and LM, generated a majority of revenue. In total, North America revenue was $17,262 in Q3 2008 and $234,447 in YTD 2008, compared to $7,883 in Q3 2007 and $24,725 in YTD 2007.
ES margin was 16% in Q3 2008 and 42% in YTD 2008, compared to 56% in Q3 2007 and 54% in YTD 2007. The lower ES margin reflected the delays in timing of orders while retaining fixed costs within the product line.
PPS margin was 44% in Q3 2008 and 42% in YTD 2008, compared to 45% in Q3 2007 and 39% in YTD 2007. The YTD margin improvement over that of the prior year was primarily due to a sales mix shift in favour of higher margin products.
Services margin was 1% in Q3 2008 and 16% in YTD 2008, compared to 52% in Q3 2007 and 43% YTD 2007. The low Q3 2008 services margin was primarily due to order delays on several training contracts, with a resulting under-absorption of training salaries included in cost of sales and the recognition of an annual bonus in the amount of $637 related directly to the training personnel.
Selling and administration expenses were $13,800 in Q3 2008 and $36,600 in YTD 2008, compared to $6,209 in Q3 2007 and $15,370 in YTD 2007. Med-Eng and HMS overheads represented the majority of the year-over-year increases, with the balance attributable to higher audit, accounting and legal costs, capital taxes, and headcount additions to the corporate financial and administrative support staff, associated with the Med-Eng and HMS acquisitions. Q3 expenses increased over Q2 primarily due to $2.7 million of non-recurring items including insurance, accounting, professional fees and corporate incentive adjustments.
Research and development expenses, net of grants received and investment tax credits, were $4,023 in Q3 2008 and $12,668 in YTD 2008, compared to $1,432 in Q3 2007 and $3,966 in YTD 2007. Development of ES upgrades modifications and next-generation technology represented the majority of the YTD 2008 R&D expenditures, with the balance split between ballistic and robotic product development.
Acquisition and financing related charges and amortization
Allen-Vanguard incurred charges of $22,160 in Q3 2008 and $114,443 in YTD 2008 pertaining to the MES and HMS acquisitions and attendant financings. Such expenses compared to nil last year. Non-cash charges, consisting of amortization of financing fees and acquired intangible assets, included in these amounts were $12,069 in Q3 2008 and $88,767 in YTD 2008.
Net interest expense was $14,072 in Q3 2008 and $27,553 in YTD 2008, compared to net interest income of $432 in Q3 2007 and net interest income of $307 in YTD 2007. Interest on the Med-End Senior Debt and RBC Term Loan represented approximately one-third all of the interest expense in Q3 2008 with the majority of the remaining balance relating to the extinguishment costs of the Med-Eng Senior Debt.
EBITDA was $(9,600) in Q3 2008 and $56,371 in YTD 2008, representing (30%) and 21% of revenue respectively. This compares to EBITDA of $(1,342) in Q3 2007 and $1,670 in YTD 2007, representing (11%) and 4% of revenue respectively.
The net provision for income tax recovery was $13,228 in Q3 2008 and $34,029 in YTD 2008, compared to a net income tax recovery provision of $906 in Q3 2007 and $571 in YTD 2007. The Company's basic income tax rate was approximately 36% in Q3 2008, from which there are a number of adjustments for provincial and foreign tax rate differentials and permanent and temporary differences in the deductibility of certain expenses and inclusion or exclusion of income. The Company had approximately $30,361 of non-capital losses carried forward for income taxes at the end of FY 2007, the majority of which expire by FY 2027.
Net loss was $34,512 or $0.32 per share in Q3 2008, and $61,870 or $0.58 per share in YTD 2008. This compared to a net loss of $1,764 or $0.03 per share in Q3 2007, $3,387 or $0.07 per share in YTD 2007
Liquidity and cash flow
Allen-Vanguard's cash and cash equivalents totalled $8,536 at the end of Q3 2008, a decrease of $14,463 from the beginning of the quarter.
Operating cash flow, defined as net earnings adjusted for non-cash items, was $(4,232) in Q3 2008 and $22,248 in YTD 2008, compared to operating cash flow deficits of $(831) in Q3 2007 and $(1,375) in YTD 2007
Changes in non-cash working capital used cash of $17,070 in the third quarter. ES shipment volume was very high in Q1 2008 with trailing orders in Q2, resulting in substantial receivable balances which were collected in Q3 2008. Shipment volume was relatively low in Q3 2008 which also resulted in a reduction in receivable balances. Approximately 29% of Allen-Vanguard's outstanding receivables at the end of Q3 2008 were due from GDATP and LM, with government departments and agencies representing the majority of the balance. The inventory increase was primarily to support the upcoming demand for ES product. The reduction in accounts payable and accrued charges in Q3 2008 resulted from payments made to ES component suppliers following the substantial ES shipment volume in Q1 2008.
The Company entered into a payout arrangement with the lender of its senior debt facility dated September 17, 2007, and on May 6, 2008, the Company made cash payments in the amount of $175,363 (US$174,109) to repay the principal amount outstanding, $3,960 (US$3,932) in respect of accrued interest and $8,768 (US$8,705) in respect of pre-payment fees. The prepayment fee was expensed in Q3 2008. The Company also expensed $1,005 of financing fees relating to the senior debt facility that had been deferred and was being amortized.
Effective May 6, 2008, the Company entered into new secured credit facilities, consisting of a three-year $188,703 (US$187,391) and a Canadian $6,796 term loan facility and revolving credit facility with availability up to $50,000. The interest rate on the US dollar term loan is based on the LIBOR rate plus 3.5%. The interest rate on the Canadian dollar term loan is based on the Prime rate plus 2.5%. The interest rate on the Revolving credit facility is based on the US base rate plus 2.0%. The Company is required to repay the term loan in quarterly principal payments of US$9,704, plus additional quarterly payments ranging from 50% to 75% of excess cash flow, with any remaining principal repayable upon the maturity date of the term loan.
Allen-Vanguard had common shares outstanding of approximately 109,050,000 and fully diluted common shares outstanding of approximately 121,772,000 at the end of Q3 2008.
Financial Statements and the Management Discussion and Analysis for the third quarter ended June 30, 2008 have been filed on www.sedar.com.
The Company will be hosting an investor and analyst conference call and webcast as follows:
Date: Thursday, August 14, 2008 Time: 9:00 a.m. ET Dial-in numbers: 1-800-591-7539 1-416 644 3427 Web access: http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID(equal sign)2243780 For those unable to listen to the call live, a replay will be available for a two week period beginning at 11:00 a.m. on August 14, 2008. The replay phone number is 877-289-8525 and the access code is 21280164 (pound key). (1) Earnings before interest, taxes, depreciation, amortization, foreign exchange and stock-based compensation
Forward looking statements
This press release may contain forward-looking statements, which reflect Allen-Vanguard's current expectations regarding future events, its strategy, expected performance and condition. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as "expects," "anticipates," "plans," "believes," "estimates" or negative versions thereof and similar expressions. In addition, any statement that may be made concerning future performance, strategies or prospects, and possible future acquisitions or dispositions, is also a forward-looking statement. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to, among other things, risks, uncertainties and assumptions about the Company and economic factors. Forward-looking statements are not promises or guarantees of future performance, and actual events and results could differ materially from those expressed or implied in any forward-looking statements made about the Company. Any number of important factors could contribute to these digressions, including, but not limited to, general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings, and catastrophic events. We stress that the above-mentioned list of important factors is not exhaustive. We encourage you to consider these and other factors carefully before making any investment decision and we urge you to avoid placing undue reliance on forward-looking statements. Further, you should be aware that the Company disclaims any obligation to publicly update or revise any such forward-looking statements whether as a result of new information, future events or otherwise, prior to the release of the next Management Discussion and Analysis to be released by the Company or except as required by law.
Allen-Vanguard Corporation supports the mission of military and homeland security forces around the world with leading proprietary solutions for protection and counter-measures against hazardous devices of all kinds, whether chemical, biological, radiological or explosive (CBRNE), including improvised explosive devices (IEDs) and remotely controlled IEDs (RCIEDs). Allen-Vanguard equipment is in service in more than 120 countries. Products include Electronic Counter-Measures ("ECM") equipment for jamming remote detonation of terrorist devices, specialty security equipment for Explosive Ordnance Disposal ("EOD"), remote intervention robots for hazardous applications, and personal protective wear for use in dealing with explosive and bio-chemical agents. Allen-Vanguard is the developer and/or sole, worldwide licensee of proprietary technologies such as the Med-Eng bomb suit, the Defender(TM) and Vanguard(TM) Mk2 bomb disposal robots, and the Universal Containment System and CASCAD Foam system for blast mitigation and decontamination of bio-chemical warfare agents. Professional services encompass counter-IED intelligence, training and advisory services, including the Triton(TM) Report on terrorist incidents around the world. The Company operates globally through its wholly-owned subsidiaries under the names "Allen-Vanguard", "Med-Eng" and "Hazard Management Solutions". Head office operations are located in Ottawa, Ontario, Canada, with manufacturing operations in Stoney Creek and Pembroke, Ontario; Ogdensburg, New York; Tewkesbury, U.K.; and Cork, Ireland; The Company has professional services operations in Shrivenham, UK, Canada and in the U.S. in Arlington, Virginia, plus sales offices in Canada, the U.S., the U.K. and Asia. Allen-Vanguard's shares are listed on The Toronto Stock Exchange (TSX) under the symbol "VRS".
To find out more about Allen-Vanguard Corporation (TSX: VRS), visit our website at www.allenvanguard.com.