aeti-10k_20151231.htm

    

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

Commission File No. 000-24575

 

AMERICAN ELECTRIC TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

 

Florida

59-3410234

(State or other jurisdiction

of incorporation)

(I.R.S. Employer

Identification No.)

1250 Wood Branch Park Drive, Suite 600, Houston TX 77079

(Address of principal executive offices)

(713) 644-8182

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Name of each exchange on which registered

Common Stock, $.001 par value per share

The NASDAQ Stock Market

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  x

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 Regulation S-T (S. 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    Yes  x    No   ¨

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. Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

¨

Accelerated filer

¨

 

 

 

 

Non-accelerated filer

¨

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 common stock held by non-affiliates of the registrant was $24,502,930 based on the closing sale price on June 30, 2015 as reported by the NASDAQ Stock Market.

The number of shares of common stock outstanding on March 17, 2016 was 8,275,559.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Document

Parts Into Which Incorporated

 

Proxy Statement for the 2016 Annual Meeting of Stockholders to
be held May 11, 2016 (Proxy Statement)

 

Part III

 

 

 

 

 


FORWARD-LOOKING STATEMENTS

 

The Description of Business section and other parts of this Annual Report on Form 10-K (“Form 10-K”) contain forward-looking statements that involve risks and uncertainties. Many of the forward-looking statements are located in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any current or historical fact. Forward-looking statements can also be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled “Risk Factors” under Part I, Item 1A of this Form 10-K. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law. Examples of other forward-looking statements contained or incorporated by reference in this report include statements regarding:

 

future oil and gas commodity prices;

 

the effects of current and future worldwide economic conditions (particularly in developing countries) and demand for oil and natural gas and power system equipment and services;

 

future cash needs and future availability to fund our operations and pay our obligations;

 

the effects of current and future unrest in the Middle East, North Africa and other regions;

 

the effects of ongoing and future industry consolidation, including, in particular, the effects of consolidation and vertical integration in the power systems market;

 

future levels of our capital expenditures;

 

future government regulations, pertaining to the oil and gas industry;

 

expected net revenues, income from operations and net income;

 

expected gross margins for our services and products;

 

future energy industry fundamentals, including future demand for power system equipment and services;

 

future benefits to our customers to be derived from new services and products;

 

future benefits to be derived from our investments in technologies, joint ventures and acquired companies;

 

future growth rates for our services and products;

 

the degree and rate of future market acceptance of our new services and products;

 

expectations regarding end-users purchasing our more technologically-advanced services and products;

 

anticipated timing and success of commercialization and capabilities of services and products under development and related start-up costs associated with their development;

 

future opportunities for new products and projected research and development expenses;

 

expected continued compliance with our debt financial covenants;

 

expectations regarding realization of deferred tax assets; and

 

anticipated results with respect to certain estimates we make for financial accounting purposes.

 

 

 

 

2


PART I

ITEM 1.

DESCRIPTION OF BUSINESS

Company Background and Corporate Structure

American Electric Technologies, Inc. (the “Company”, “AETI”, “our”, “us” or “we”) was incorporated on October 21, 1996 as a Florida corporation. On May 15, 2007, we completed a business combination (the “M&I Merger”) with M&I Electric Industries, Inc. (“M&I”), a Texas corporation, and changed our name to American Electric Technologies, Inc. Our principal executive offices are located at 1250 Wood Branch Park Drive, Suite 600, Houston Texas 77079 and our telephone number is 713-644-8182.

Our corporate structure currently consists of American Electric Technologies, Inc., which owns 100% of M&I Electric Industries, Inc., including its wholly-owned subsidiary, South Coast Electric Systems, LLC, M&I Electric Brazil Sistemas e Servicios em Energia LTDA (“M&I Brazil”), and American Access Technologies, Inc. (“AAT”). The operations of the AAT segment were sold on August 15, 2014 except for its real estate which was subsequently sold on December 15, 2015. At December 31, 2014, the real estate is presented as long-term assets held-for-sale in the accompanying financial statements. Results of operations related to AAT are reported as discontinued operation in all periods presented.

The Company is a leading provider of power delivery solutions to the global energy industry.

The principal markets that we serve include:

 

·

Power generation and distribution– the Company provides “turn-key” power delivery solutions for the power generation and distribution market sectors.

 

·

The company works with turbine manufacturers, engine-generator manufacturers and dealers, Engineering, Procurement and Construction (“EPC”) firms, and high voltage service companies to provide electric power delivery products and solutions. Renewable power generation includes biomass power generation, geothermal power generation and other renewable energy related businesses.

 

·

The company designs, manufactures, commissions and maintains our equipment for implementation in base-load, peaking power, cogeneration, and substation transmission facilities worldwide. 

 

·

Oil & gas – the Company provides “turn-key” power delivery solutions for the upstream, midstream and downstream oil and natural gas sectors.

 

·

Upstream relates to the exploration and production of oil and natural gas. The Company serves customers in the land drilling, offshore drilling, land-based production, and offshore production segments of the market.

 

·

Midstream, which is primarily related to oil & gas transportation, including oil & gas pipelines and compression and pumping stations. The Company also has a strong customer base in natural gas fractionation (separation), cryo, natural gas to liquids, and other natural gas related-plants.

 

·

Downstream, which includes oil refining and petrochemical plants, as well as Liquefied Natural Gas (LNG) plants, export facilities, and storage facilities.

 

·

Marine and Industrial

 

·

Marine applications includes blue water vessels such as platform supply vessels (PSV), offshore supply vessels (OSV), tankers and other various work boats, typically up to 300 ft. in length. The Company also provides solutions to brown water vessels such as barges and other river and inland water vessels.

 

·

Industrial, including non-oil & gas industrial markets such as steel, paper, heavy commercial, and other non-oil & gas applications.

A key component of our Company’s strategy is our international focus. We have three primary models for conducting our international business. First, where local market conditions dictate, we have expanded internationally by forming joint venture operations with local partners in key markets such as China and Singapore, where we can partner with the primary end-customer in that market, or there are local content requirements or a competitive advantage to using local manufacturing.

Second, we sell through foreign sales agents that we have appointed in energy regions around the world. Many of these international partners also provide local service and support for our products in those overseas markets.

Finally, we have expanded our international footprint by forming our first wholly-owned foreign subsidiary to serve the Brazil electrical service market.

Our business strategy is to grow through organic growth in our current key energy markets, expand our solution set to our current markets, continue our international expansion, and accelerate those efforts with acquisitions, while at the same time increasing earnings and cash flow per share to enhance overall stockholder value.

3


The Company is uniquely positioned to be the “turn-key” supplier for power delivery projects for our customers, where we are able to offer custom-designed power distribution and power conversion systems, power services, and electrical and instrumentation construction, all from one company.

Products and Services

We have provided sophisticated custom-designed power distribution, power conversion, and automation and control systems for our customers since 1946. Our products are used to safely distribute and control the flow of electricity from the source of the power being generated (e.g. a diesel generator or the utility grid) to whatever mechanical device needs to use the power (drilling machinery, motors, other process equipment, etc.) at low and medium voltages.

Our power distribution products include low and medium voltage switchgear that provides power distribution and protection for electrical systems from electrical faults. Our products include traditional low voltage and medium voltage switchgear, as well as a variety of arc-managed and arc-resistant switchgear to increase end-user safety in case of an arc-flash explosion. Our products are suitable for both American National Standards Institute (“ANSI”) and International Electrotechnical Commission (“IEC”) markets. Other power distribution products in our solution set include low voltage and medium voltage motor control centers, bus ducts, fuse and switch products, and other related power distribution equipment. We also bundle third party products per our customer specifications including items such as battery backup power systems and transformers.

Our new IntelliSafe™ medium voltage Arc-resistant switchgear product line is designed for the downstream sector, process industries and the power generation market, IntelliSafe is built with the goal of being the safest arc-resistant product on the market, and meets key industry specifications and certifications.

Our power conversion solutions include analog, digital silicon controlled rectifier (“SCR”) and alternating current variable frequency drive (“AC VFD”) systems, that are used to adjust the speed and torque of an electric motor to match various user applications, primarily in the land and offshore drilling and marine vessel markets.

Our automation and control solutions are programmable logic controllers (“PLC”) based systems designed for the management and control of power in a user’s application. Our DrillAssist™ for land and offshore drilling are control systems that enable the management of an entire drilling rig’s operations. DrillAssist™ includes auto-drill capabilities and a driller’s chair and cabin where the drilling rig operator manages the rig.

Our Power Distribution Centers (“PDC”) are a critical element of our turnkey solution set and are used to house our power distribution and power conversion products. Our PDCs can be manufactured over 100 ft. long and 40 ft. wide. The Company also manufactures VFD and SCR houses for land drilling and driller’s cabins for land and offshore deployment.

We have the technical expertise to provide these solutions in compliance with a number of applicable industry standards such as National Electrical Manufacturers Association (“NEMA”) and ANSI or IEC equipment to meet American Bureau of Shipping (“ABS”), United States Coast Guard (“USCG”), Lloyd’s Register, a provider of marine certification services, and Det Norske Veritas (a leading certification body/registrar for management systems certification services) standards.

Our power distribution and control products are generally custom-designed to our customers’ specific requirements, and we do not maintain an inventory of such products.

We provide services to commission and maintain our customers’ electrical power conversion and controls systems. We also provide low and medium voltage start-up/commissioning, preventative maintenance, emergency call out services, and breaker and switchgear refurbishment services.

We offer a full range of electrical and instrumentation construction and installation services to our markets. These services include new construction as well as electrical and instrumentation turnarounds, maintenance and renovation projects. Applications include installation of switchgear, AC and DC motors, drives, motor controls, lighting systems and high voltage cable. Much of this work is generated from the installation (“rig-up”) of our power delivery solutions into our packaged power control systems.

Foreign Joint Ventures

We use foreign joint ventures to accommodate business in China and South East Asia. We believe our foreign joint ventures provide a prudent way to diversify and reduce the risk of international expansion, capitalize on the strengths and the relationships of our foreign joint venture partners with potential customers, and achieve competitive advantages. Our interests in foreign joint ventures are accounted for under the equity method of accounting. Sales made to the foreign joint ventures are made with terms and conditions similar to those of our other customers.

China. In March 2006, M&I Electric entered into a joint venture agreement with Baoji Oilfield Machinery Co., Ltd., (“BOMCO”), a wholly-owned subsidiary of the China National Petroleum Corporation, and AA Energies, Inc. of Houston, Texas, which markets oilfield equipment, to form BOMAY Electric Industries Co., Ltd. (“BOMAY”), as an equity joint venture limited liability company organized in China. M&I is a 40% interest owner in BOMAY with 51% being owned by BOMCO and the remaining 9% owned by AA Energies, Inc. BOMAY manufactures power and control systems for land drilling rigs. M&I has invested 16 million Yuan (approximately $2 million) in this joint venture in which M&I provides technology and services to BOMAY. Each of

4


the BOMAY investors may be required to guarantee the bank loans of BOMAY in proportion to their investment. No guarantees have been provided by AETI at this time.

Singapore. In 1994, the Company formed a joint venture in Singapore to provide sales, engineering, manufacturing and technical support for our products in Southeast Asia called M & I Electric Far East PTE Ltd. (“MIEFE”). The Company currently owns 41% of the joint venture with our joint venture partner, Sonepar, owning 51% and MIEFE’s general manager owning the remaining 8%.  

Brazil. During 2010, the Company entered into a joint venture agreement with Five Star Services, a Brazilian corporation, and formed AETI Alliance Group do Brazil Sistemas E Servicos Em Energia LTDA (“AAG”), a Brazilian Limited Liability Company, in which the Company held a 49% interest. AAG began operations mid-year 2010, and provided electrical products and services to the Brazilian energy industries. Effective April 30, 2014, the Company withdrew from this joint venture and formed M&I Brazil, a wholly-owned subsidiary.

The following is selected financial information of the Company’s investment in foreign joint ventures as of and for the years ended December 31, 2015 and 2014:

 

Year Ended December 31, 2015

 

Year Ended December 31, 2014

 

 

BOMAY

 

MIEFE

 

AAG

 

BOMAY

 

MIEFE

 

AAG

 

Investment as of end of year

$

10,896

 

$

208

 

$

-

 

$

11,548

 

$

505

 

$

-

 

Equity income (loss)*

 

973

 

 

(232

)

 

-

 

 

2,054

 

138

 

2

 

Distributions received from joint ventures*

 

1,032

 

 

137

 

 

-

 

 

1,042

 

650

 

830

 

Foreign currency translation*

 

(593

)

 

71

 

 

-

 

 

(73

)

 

(120

)

178

 

AETI sales to joint ventures

186

 

52

 

 

-

 

130

 

14

 

4

 

Accounts receivable due from joint ventures

 

-

 

52

 

 

-

 

32

 

2

 

1

 

 

*

Numbers are reflected in the investment balance as of end of year.

During 2015 and 2014, the Company recognized approximately $0.39 million and $0.52 million respectively, for employee joint venture related expenses which are included in Foreign Joint Ventures Operation’s Related Expenses in the accompanying consolidated statements of operations.

International Sales

During 2015, approximately 15% of the Company’s consolidated revenue was systems sold or shipped into international markets. Sales from the U.S are generally made in U.S. dollars and settled prior to shipment or are collateralized by irrevocable letters of credit. M&I Brazil’s sales are generally made in Brazilian Reals.

Marketing  

We market our products and services in the United States through direct contact with potential customers by our internal sales organization consisting of 17 full-time sales and sales support employees. We also exhibit at a variety of industry trade shows each year. We have several sales agreements with agents and distributors in the United States and several foreign countries. M&I Brazil markets in Brazil and other South American countries.

Our business is generally obtained through a competitive bid process where the lowest bid from pre-qualified suppliers is awarded the project. Depending on the market segment, we either sell directly to the end user or owner, a shipyard or rig builder, or, sell to an Engineering, Procurement and Construction (“EPC”) firm representing the end project owner.

Manufacturing

Manufacturing processes at our various facilities include machining, fabrication, wiring, subassembly, system assembly and final testing. We have invested in various automated and semi-automated equipment for the fabrication and machining of various parts and assemblies that we incorporate into our products. Our quality assurance program includes various quality control measures from inspection of raw material, purchased parts and assemblies through on-line inspection. We perform system design, assembly and testing in-house. The company significantly expanded our main manufacturing operation in Beaumont, Texas in 2014. The manufacturing operation in Beaumont, Texas is ISO 9001:2008 certified.

Raw Materials and Suppliers

The principal raw materials for our products are copper, steel, aluminum and various manufactured electrical components. We obtain these products from a number of domestic and foreign suppliers. The market for most of the raw materials and parts we use is comprised of numerous participants and we believe that we can obtain each of the raw materials we require from more than one supplier. We do not have any long-term contractual arrangements with the suppliers of our raw materials.

Competition

Our products and services are sold in highly competitive markets. We compete in all of our markets and regions with a number of companies, some of which have financial and other resources comparable to or greater than us. Due to the demanding

5


operating conditions in the energy sector and the high costs associated with project delays and equipment failure, we believe customers in this industry prefer suppliers with a track record of proven, reliable performance in their specific energy related project type. We seek to build strong long-term relationships with our customers by providing high-quality, efficient and reliable products and services, developing new products and services and responding promptly to our customers’ needs.

The principal competitive factors in our markets are product and service quality and reliability, lead time, price, technical expertise and reputation.

We believe our principal competitive strengths include the following:

Our power delivery, control and drive systems are custom-designed and are built to meet our customers’ specific requirements. We specialize in projects that are complex, require industry certification, have short lead times or other non-standard elements, such as systems that must be deployed in harsh environments or need to meet tight space or weight requirements. Our ability to provide custom-designed technical products, electrical and instrumentation construction services, and electrical startup and preventative maintenance services is unique, enabling us to provide customers total system responsibility for their electrical power control and distribution needs.

Our commitment to providing quality products and services, fair pricing, innovation and customer service is the foundation to the long-standing customer relationships that we enjoy with an attractive customer base. Since 1946, we have provided over 10,000 power delivery systems to many of the leading companies involved in oil and gas exploration, drilling, production, pipelines, shipbuilding, oil refineries, petrochemicals, power generation, and steel industries in the United States.

We are led by an experienced management team with a proven track record. We believe the experience of our management team provides us with an in-depth understanding of our customers’ needs and enhances our ability to deliver customer-driven solutions. We believe our management has fostered a culture of loyalty, resulting in high employee retention rates for our professional and technical employees.

The Company has multiple competitive advantages for our products:

 

-

Custom design

 

-

Turn-key solutions including in-house manufacturing of Power Distribution Centers (“PDC’s”).

 

-

Quick delivery time

 

-

Able to use best of breed components and mix and match subsystems from a variety of vendors versus an all one supplier solution

 

-

Ability to provide integrated solution by self-performing our Technical Products and Electrical &Instrumentation construction work.

We have identified our largest competitors, by product line as follows:

 

-

Power Distribution/Switchgear Systems—Powell Industries, Siemens, Eaton, GE, ABB and Volta.

 

-

Power Conversion/Drive Systems—Omron, National Oilwell Varco (NOV), ABB, and Siemens.

Backlog

Backlog represents the dollar amount of net sales that we expect to realize in the future as a result of performing work under multi-month contracts. Backlog is not a measure defined by generally accepted accounting principles, and our methodology for determining backlog may not be comparable to the methodology used by other companies in determining their backlog. Backlog may not be indicative of future operating results. Not all of our potential net sales are recorded in backlog for a variety of reasons, including the fact that some contracts begin and end within a short-term period. Many contracts are subject to modification or termination by the customer. The termination or modification of any one or more sizeable contracts or the addition of other contracts may have a substantial and immediate effect on backlog. Our backlog does not include any backlog in place at our foreign joint ventures’ operations.

We generally include total expected net sales in backlog when a contract for a definitive amount of work is entered into. We generally expect our backlog to become net sales within a year from the signing of a contract. Backlog as of December 31, 2015 and 2014 totaled $19.0 million and $26.5 million, respectively.

Intellectual Property

We have a number of trademarks and trade names utilized with our products and services. While proprietary intellectual property is important to the Company, management believes the loss or expiration of any intellectual property right would not materially impact the Company. The company has recently filed for several patents relating to its new IntelliSafe™ medium voltage arc-resistant switchgear product line.

Environmental Laws

6


We are subject to various federal, state, and local laws enacted for the protection of the environment. We believe we are in compliance with such laws. Our compliance has, to date, had no material effect on our capital expenditures, earnings, or competitive position.

Research and Development Costs

Total expenditures for research and development were $0.77 million and $0.81 million for the fiscal years ended December 31, 2015 and 2014. We incurred research costs to develop new products for our energy-related markets including new power distribution, power conversion and automation and control products.

Employees

As of December 31, 2015, we had 235 employees. No employees are covered by a collective bargaining agreement, and we consider our relations with our employees to be satisfactory.


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ITEM 1A.

RISK FACTORS

You should carefully consider each of the following risks associated with an investment in our common stock and all of the other information in this 2015 Annual Report on Form 10-K. Our business may also be adversely affected by risks and uncertainties not presently known to us or that we currently believe to be immaterial. If any of the events contemplated by the following discussion of risks should occur, our business, prospects, financial condition and results of operations may suffer.

Customers in the oil and gas industry account for a significant portion of our sales. Reduced expenditures by customers in this industry are likely to reduce demand for our products and services.

Customers related to the upstream, midstream and downstream oil and gas industry accounted for approximately 81% and 72% of our net sales in 2015 and 2014, respectively. The oil and gas industry is a cyclical commodity business, with product demand and prices based on numerous factors such as general economic conditions and local, regional and global events and conditions that affect supply, demand and profits. Demand for our products and services benefits from strong oil and gas markets. The recent decline in the price for oil has caused a decrease in demand for our products and services resulting in a decline in our net sales, profit margins and cash flows.

Our products include complex systems for energy and industrial markets which are subject to operational and liability risks.

We are engaged in the manufacture and installation of complex power distribution and control systems for the energy and industrial markets. These systems are frequently complex and susceptible to unique engineering elements that are not tested in the actual operating environment until commissioned. As a result, we may incur unanticipated additional operating and warranty expenses that were not anticipated when the fixed-price contracts were estimated and executed resulting in reduced profit margins on such projects.

The industries in which we operate are highly competitive, which may result in a loss of market share or decrease in net sales or profit margin.

Our products and services are provided in a highly competitive environment and we are subject to competition from a number of similarly sized or larger businesses which may have greater financial and other resources than are available to us. Factors that affect competition include timely delivery of products and services, reputation, manufacturing capabilities, price, performance and dependability. Any failure to adapt to a changing competitive environment may result in a loss of market share and a decrease in net sales and profit margins.

We often utilize fixed-price contracts which could adversely affect our financial results.

We currently generate, and expect to continue to generate, a significant portion of our net sales under fixed-price contracts. We must estimate the costs of completing a particular project to bid for such fixed-price contracts. The cost of labor and materials, however, may vary from the costs we originally estimated. These variations, along with other risks inherent in performing fixed price contracts, may result in actual costs and gross profits for a project differing from those we originally estimated and could result in reduced profitability and losses on projects. Depending upon the size of fixed-price contracts, variations from estimated contract costs can have a significant impact on our operating results for any fiscal quarter or year.

Our use of percentage-of-completion accounting could result in a reduction or elimination of previously reported profit.

A portion of our net sales is recognized on the percentage-of-completion method of accounting. The percentage-of-completion method of accounting practice we use results in recognizing contract net sales and earnings ratably over the contract term in proportion to our incurrence of contract costs. The earnings or losses recognized on individual contracts are based on estimates of contract net sales, costs and profitability. Contract losses are recognized in full when determined, and contract profit estimates are adjusted based on ongoing reviews of contract profitability. Actual collection of contract amounts or change orders could differ from estimated amounts and could result in a reduction or elimination of previously recognized earnings in future periods. In certain circumstances, it is possible that such adjustments could be significant.

We may not be able to fully realize the net sales value reported in our backlog.

Orders included in our backlog are represented by customer purchase orders and contracts. Backlog develops as a result of new business which represents the net sales value of new project commitments received by us during a given period. Backlog consists of projects which have either (1) not yet been started or (2) are in progress and are not yet complete. In the latter case, the net sales value reported in backlog is the remaining value associated with work that has not yet been completed. From time to time, projects that were recorded as new business are cancelled. In the event of a project cancellation, we may be reimbursed for certain costs but typically have no contractual right to the total net sales included in our backlog. In addition to being unable to recover certain direct costs, we may also incur additional costs resulting from underutilized assets if projects are cancelled.

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We rely on a few key employees whose absence or loss could disrupt our operations or be adverse to our business.

Our continued success is dependent on the continuity of several key management, operating and technical personnel. The loss of these key employees would have a negative impact on our future growth and profitability. We have entered into written employment agreements with our Chief Executive Officer; Chief Financial Officer; Chief Operating Officer; Senior Vice President of Sales and Marketing; and International Director, who is responsible for managing our BOMAY joint venture operations relationships and Brazil subsidiary.

Our results of operations and financial condition may be adversely impacted by economic uncertainty and global recession.

The consequences of a prolonged recession could include a lower level of economic activity and uncertainty regarding commodity and capital markets. The lack of a sustained economic recovery could have an adverse effect on our results of operations, cash flows or financial position.

Our indebtedness could adversely affect our liquidity, financial condition and our ability to fulfill our obligations and operate our business.

As of December 31, 2015, we had approximately $5.54 million of total outstanding indebtedness. Under our Loan Agreement, the lender has committed $4.00 million of revolving credit, subject to a borrowing base. As of December 31, 2015, we have $2.54 million of availability under the Loan Agreement based on our borrowing base of $3.58 million. The amount available will increase or decrease quarterly as our borrowing base changes. We may also incur additional indebtedness in the future. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing below in this Form 10-K.

Higher levels of indebtedness could have negative consequences to us, including:

 

we may have difficulty satisfying our obligations with respect to our outstanding debt;

 

we may have difficulty obtaining financing in the future for working capital, capital expenditures, acquisitions or other purposes;

 

we may need to use all, or a substantial portion, of our available cash flow to pay interest and principal on our debt, which will reduce the amount of money available to finance our operations and other business activities;

 

our vulnerability to general economic downturns and adverse industry conditions could increase;

 

our flexibility in planning for, or reacting to, changes in our business and in our industry in general could be limited;

 

our amount of debt and the amount we must pay to service our debt obligations could place us at a competitive disadvantage compared to our competitors that have less debt;

 

our customers may react adversely to our significant debt level and seek or develop alternative licensors or suppliers;

 

our failure to comply with the restrictive covenants in our debt instruments which, among other things, may limit our ability to incur debt and sell assets, could result in an event of default that, if not cured or waived, could have a material adverse effect on our business or prospects.

Our failure to attract and retain qualified personnel could lead to a loss of net sales or profitability.

Our ability to provide high-quality products and services on a timely basis requires that we employ an adequate number of skilled personnel. Accordingly, our ability to increase our productivity and profitability will be limited by our ability to employ, train and retain skilled personnel necessary to meet our requirements. We cannot be certain that we will be able to maintain an adequate skilled labor force necessary to operate efficiently and to support our growth strategy or that our labor expenses will not increase as a result of a shortage in the supply of skilled personnel.

Natural disasters, terrorism, acts of war, international conflicts or other disruptions could harm our business and operations.

Natural disasters, acts or threats of war or terrorism, international conflicts, and the actions taken by the United States and other governments in response to such events could cause damage to or disrupt our business operations or those of our customers, any of which could have an adverse effect on our business.

We manufacture products and operate plants in Mississippi, Texas and Brazil. Operations in the U.S. have been disrupted in the past due to hurricanes. Although we have not suffered any material losses as a result of these disruptions due to our insurance coverage and advance preparations, it is not possible to predict future similar events or their consequences, any of which could decrease demand for our products, make it difficult or impossible for us to deliver products, or disrupt our supply chain.

We generate a significant portion of our net sales from international operations and are subject to the risks of doing business outside of the United States.

Approximately 15% of our net sales in 2015 were generated from projects and business operations outside of the United States, primarily provided to the oil and gas drilling and marine industries in the following countries: Mexico, Canada, United Arab Emirates, Singapore, Indonesia and Brazil. This percentage was approximately 9% in 2014. The oil and gas industry operates in both

9


remote and potentially politically unstable locations, and numerous risks and uncertainties affect our non-United States operations. These risks and uncertainties include changes in political, economic and social environments, local labor conditions, changes in laws, regulations and policies of foreign governments, as well as United States laws affecting activities of United States companies abroad, including tax laws and enforcement of contract and intellectual property rights. In addition, the costs of providing our services can be adversely and/or unexpectedly impacted by the remoteness of the locations and other logistical factors.

The marketplace may not accept and utilize our newly developed products and services, the effect of which would prevent us from successfully commercializing our proposed products or services and may adversely affect our financial condition and results of operations.

Our ability to market and commercialize our new products and services depends on the acceptance of such products and services by the industry.

Joint Venture limited life risk

The joint venture, BOMAY was formed in 2006 in China. It was formed with a term of 12 years. The joint venture may be terminated earlier for valid business reasons including Force Majeure. In the event the joint venture is to be terminated either party may acquire the other parties’ interests and continue the operations of the joint venture. Additionally, the term of the joint venture may be extended upon agreement of all parties. In such case, the joint venture shall apply for the extension to the relevant Chinese authority six months before expiry of the venture. At this time, AETI has no indication that the joint venture will not be extended beyond 12 years.

Risk related to our Chinese Joint Venture

We maintain a significant investment in a joint venture with a Chinese energy company. We may encounter risks pertaining to a weakening Chinese economic environment. We may encounter unforeseen or unexpected operating, financial, political or cultural factors that could impact its business plans and the expected profitability from such investment. We will face risks if China loses normal trade relations with the United States and it may be adversely affected by the diplomatic and political relationships between the United States and China. As a result of the relatively weak Chinese legal system, in general, and the intellectual property regime, in particular, we may face additional risk with respect to the protection of our intellectual property in China. Changes in China’s political and economic policies could adversely affect our investment and business opportunities in China.

Risk from Restricted U.S. Government Access to Audit Documents in China

The audit of BOMAY for the fiscal years ended December 31, 2015 and 2014 was conducted in China by a Chinese audit firm not registered with the Public Company Accounting Oversight Board (“PCAOB”) under the direction of the Company’s independent auditor.  The Company’s independent auditor has directed additional procedures to comply with auditing standards prescribed by the PCAOB.  

Under the laws of the United States, auditors of public companies are to undergo regular inspections by the PCAOB and to make all requested work papers available for the SEC and the PCAOB inspection. However, due to laws of the People’s Republic of China applicable to auditors, the SEC and the PCAOB are currently unable to conduct such inspections on work papers prepared in China without the approval of the Chinese government authorities.

As a result, the SEC or PCAOB may be unable to conduct inspections of the BOMAY audit work papers.  The Company’s stockholders may be deprived of the benefits of PCAOB inspections, and may lose confidence in our reported financial information and procedures and the quality of portions of our financial statements.

Joint Venture Centralized Government Risks

Since the centralized government of China controls most of the petroleum industry and related manufacturing through annual planning and budgets, the financial results realized by the Company’s joint venture, BOMAY, will reflect the government’s decisions on production levels for oil and gas equipment. The Company further understands that the value of BOMAY’s assets including inventory may not be fully realized if demand for these products is reduced significantly because of economic policy decisions or other organizational changes in the Chinese petroleum industry.

Market Risk

The markets in which we participate are capital intensive and cyclical in nature. The volatility in customer demand is greatly driven by the change in the price of oil and gas. These factors influence the release of new capital projects by our customers, which are traditionally awarded in competitive bid situations. Coordination of project start dates is matched to the customer requirements and projects may take a number of months to complete; schedules also may change during the course of any particular project.

Foreign Currency Transaction Risk

The Company operates a subsidiary in Brazil and maintains equity method investments in its Singapore and Chinese joint ventures, MIEFE and BOMAY respectively. The functional currencies of the Brazilian subsidiary and the joint ventures are the Brazilian Real, Singapore Dollar and Chinese Yuan, respectively. Investments are translated into United States Dollars at the exchange rate in effect at the end of each quarterly reporting period. The resulting translation adjustment is recorded as accumulated

10


other comprehensive income in our consolidated balance sheets. This item decreased from $0.85 million at December 31, 2014 to $0.31 million at December 31, 2015 due principally to the strength of the United States Dollar against the Chinese Yuan and Brazilian Real.

Other than the aforementioned items, we do not believe we are exposed to significant foreign currency exchange risk because most of our net sales and purchases are denominated in United States Dollars.

Commodity Price Risk

We are subject to commodity price risk from fluctuating market prices of certain raw materials. While such materials are typically available from numerous suppliers, commodity raw materials are subject to price fluctuations. We endeavor to recoup these price increases from our customers on an individual contract basis to avoid operating margin erosion. Although historically we have not entered into any contracts to hedge commodity risk, we may do so in the future. Commodity price changes can have a material impact on our prospective earnings and cash flows. Copper, steel and aluminum represent a significant element of our material cost. Significant increases in the prices of these materials could reduce our estimated operating margins if we are unable to recover such increases from our customers.

Interest Rate Risk

Our interest rate sensitive items do not subject us to material risk exposures. Our revolving credit facility remains available through December 29, 2017. The revolving promissory note, effective in December 2015, has a similar interest rate exposure, with semi-annual payments of $0.15 million. The outstanding balance is due December 2020. At December 31, 2015, the Company had $5.54 million of variable-rate term debt outstanding. At this borrowing level, a hypothetical relative increase of 10% in interest rates would have an unfavorable but insignificant impact on the Company’s pre-tax earnings and cash flows. The primary interest rate exposure on variable-rate debt is based on the LIBOR rate (0.61% at December 31, 2015) plus 2.75% per year. The loan agreements are collateralized by real estate, trade accounts receivable, equipment, inventory and work-in-process, and guaranteed by our operating subsidiaries.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2.

PROPERTIES

The following table describes the material facilities of AETI and its subsidiaries, including foreign joint ventures, as of December 31, 2015:

 

Location

 

General Description

 

Approximate
Acres

 

Approximate Square
Feet of Building

 

Owned/Leased

 

Houston, Texas  

 

Company and M&I headquarters, engineering, administration, E&I services

 

0.1

 

13,000

 

Leased

 

Beaumont, Texas

 

Manufacturing, engineering, E&I services, administration and storage

 

9.0

 

118,000

 

Owned

 

Bay St. Louis, Mississippi

 

M&I manufacturing

 

3.0

 

11,700

 

Owned

 

Brazil - Macaé

 

M&I Brazil offices and shop services

 

1.0

 

10,764

 

Leased

 

Rio

 

M&I Brazil offices and shop services

 

0.1

 

6,458

 

Leased

 

Foreign joint ventures’ operations:

 

 

 

 

 

 

 

 

 

Xian, Shaanxi, China

 

BOMAY Electric Industries offices and manufacturing

 

4.1

 

 

100,000

80,000

 

Owned

Leased

 

Singapore

 

M&I Electric Far East offices and manufacturing

 

0.3

 

15,000

 

Leased

 

 

11


ITEM 3.

LEGAL PROCEEDINGS.

The Company becomes involved in various legal proceedings and claims in the normal course of business. In management’s opinion, the ultimate resolution of these matters is not expected to have a material effect on our consolidated financial position or results of operations.

 

ITEM 4.

MINE SAFETY DISCLOSURES.

Not applicable.

 

 

 

12


 

PART II

 

ITEM 5.

MARKET FOR THE REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s common stock trades on The NASDAQ Stock Market under the symbol “AETI”.

The following table sets forth quotations for the high and low sales prices for the Company’s common stock, as reported by NASDAQ, for the periods indicated below:

 

Year Ended December 31, 2015

 

 

Year Ended December 31, 2014

 

 

High

 

Low

 

 

High

 

Low

 

First Quarter

$

6.12

 

$

3.05

 

 

$

11.21

 

$

6.54

 

Second Quarter

6.24

 

3.97

 

 

 

7.15

 

 

5.67

 

Third Quarter

5.14

 

2.31

 

 

 

7.60

 

 

6.42

 

Fourth Quarter

3.51

 

1.85

 

 

 

7.60

 

 

5.00

 

 

As of March 17, 2016, there were 49 shareholders of record of our common stock.  

The Company did not declare or pay cash dividends on common shares in either fiscal year 2015 or 2014. Dividends were paid on our Series A Convertible Preferred Stock. The Company anticipates that, for the foreseeable future, it will retain any earnings for use in the operations of its business. Our amended bank loan agreement prohibits the payment of cash dividends on our common stock.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

In conjunction with the issuance of common stock to employees upon conversion of vested restricted stock units under the 2007 Employee Stock Incentive Plan, between February 27, 2015 and March 13, 2015, the Company withheld 20,288 shares for employee withholding tax of $0.07 million in accordance with the provisions of the Plan. These shares are reflected as treasury stock at December 31, 2015.

EQUITY COMPENSATION PLAN INFORMATION

The following table summarizes information about outstanding equity plans as of December 31, 2015. The 2007 Employee Stock Incentive Plan, as amended, has been approved to issue up to 1,700,000 shares of the Company’s common stock.

Plan Category

 

Number of securities to
be issued upon exercise of
outstanding  
rights (1)

 

 

Weighted-average
exercise price of
outstanding
options (2)

 

 

Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (1))

(3) (a)

 

Equity compensation plans approved by security holders

 

 

315,847

 

 

$

 

 

 

531,212

 

Equity compensation plans not approved by security holders

 

 

 

 

 

 

 

 

 

Total (c)

 

 

315,847

 

 

$

 

 

 

531,212

 

 

(1) Includes shares of common stock issuable upon vesting of outstanding restricted stock units (RSUs).

(2)

The weighted average exercise price does not take into account the shares issuable upon vesting of outstanding RSUs, which convert to common stock on a one-to-one basis. No options were outstanding.  

(3)

Consists of the shares available for future issuance under 2007 Employee Stock Incentive Plan for services by eligible employees, board members, independent contractors and consultants.

(a)

See Note 10 to the consolidated financial statements included in this 10-K for the year ended December 31, 2015 for further information.

 

 

13


 

ITEM 6.

SELECTED FINANCIAL DATA  

The following table summarizes our consolidated financial data for continuing operations for the periods presented. This data excludes the results of AAT, a discontinued operation. You should read the following selected consolidated financial data in conjunction with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this annual report. The information set forth below is not necessarily indicative of results of future operations. Amounts are in thousands of dollars except share and per share data.

 

CONTINUING OPERATIONS

 

 

2015

 

2014

 

2013

 

2012

 

2011*

 

Net sales

$

49,083

 

$

57,254

 

$

59,239

 

$

48,169

 

$

44,407

 

Net income (loss) from continuing operations before dividends on redeemabe preferred stock

$

(2,593

)

$

(4,727

)

$

5,263

 

$

2,793

 

$

(5,643

)

Earnings (loss) from continuing operations per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.36

)

$

(0.29

)

$

0.62

 

$

0.33

 

$

(0.72

)

Diluted

$

(0.36

)

$

(0.29

)

$

0.56

 

$

0.31

 

$

(0.72

)

Cash dividends declared per common share

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

Shares used in computing earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

8,241,585

 

 

8,182,034

 

 

7,990,690

 

 

7,901,225

 

 

7,813,587

 

Diluted

 

8,241,585

 

 

8,182,034

 

 

9,472,506

 

 

8,258,742

 

 

7,813,587

 

Cash and cash equivalents

$

7,989

 

$

3,550

 

$

4,148

 

$

4,477

 

$

3,749

 

Total assets**

 

38,586

 

 

43,254

 

 

45,836

 

 

38,974

 

 

36,231

 

Long-term debt (including current maturities)

 

4,500

 

 

4,000

 

500

 

500

 

 

5,211

 

Total liabilities**

 

15,924

 

 

17,701

 

 

15,565

 

 

13,789

 

 

18,710

 

Redeemable preferred stock (net of discount)

 

4,329

 

 

4,281

 

 

4,236

 

 

4,194

 

 

0

 

Total stockholders’ equity

 

18,333

 

 

21,272

 

 

26,035

 

 

20,991

 

 

17,521

 

 

Note:

* In 2011 the Company recorded a net valuation reserve of $6.7 million related to its net operating loss carry forwards and other related deferred tax assets resulting in a $5.4 million non-cash tax expense.

**   Includes assets and liabilities held for sale.

 

14


 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  

The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this Form 10-K. This discussion contains forward-looking statements, based on current expectations related to future events and AETI’s future financial performance that involves risks and uncertainties. AETI’s actual results may differ materially from those anticipated in these forward-looking statements as a result of many important factors, including those set forth in the section entitled “Risk Factors” in this Form 10-K.

Overview  

Our corporate structure currently consists of American Electric Technologies, Inc., which owns 100% of  M&I Electric Industries, Inc., its wholly-owned subsidiary, South Coast Electric Systems, LLC, M&I Electric Brazil Sistemas e Servicios em Energia LTDA (“M&I Brazil”), and American Access Technologies, Inc. (“AAT”). The operations of the AAT segment were sold on August 15, 2014, except for its real estate, which was sold on December 15, 2015. As of December 31, 2014, the real estate was presented as long-term assets held for sale. The results of operations of AAT are reported as discontinued operations for all periods presented. In 2015, we reorganized the Company’s continuing operations under the Chief Operating Officer. As a result, the Company manages its continuing operations as a single segment and has removed the presentation of business segments. Our single segment reporting is equivalent to that presented on the condensed consolidated statements of operations.

The Company is a leading provider of power delivery solutions to the global energy industry.

The principal markets that we serve include:

 

·

Power generation and distribution– the Company provides “turn-key” power delivery solutions for the power generation and distribution market sectors.

 

·

The Company partners with turbine manufacturers, engine-generator manufacturers and dealers, EPC’s, and high voltage service companies to provide electric power delivery products and solutions. Renewable power generation includes biomass power generation, geothermal power generation and other renewable energy related businesses.

 

·

The Company designs, optimizes, manufactures, commissions, and maintains our equipment for implementation in base-load, peaking power, cogeneration, and substation transmission facilities worldwide. 

 

·

Oil & gas – the Company provides “turn-key” power delivery solutions for the upstream, midstream and downstream oil and natural gas sectors.

 

·

Upstream relates to the exploration and production of oil and natural gas. The Company serves customers in the land drilling, offshore drilling, land-based production, and offshore production segments of the market.

 

·

Midstream, which is primarily related to oil & gas transportation, including oil & gas pipelines and compression and pumping stations. The Company has a strong customer base in natural gas fractionation (separation), cryo, natural gas to liquids, and other natural gas related-plants.

 

·

Downstream, which includes oil refining and petrochemical plants, as well as Liquefied Natural Gas (LNG) plants, export facilities, and storage facilities.

 

·

Marine and Industrial

 

·

Marine applications includes blue water vessels such as platform supply vessels (PSV), offshore supply vessels (OSV), tankers and other various work boats, typically up to 300 ft. in length. The Company also provides solutions to brown water vessels such as barges and other river and inland water vessels.

 

·

Industrial, including non-oil & gas industrial markets such as steel, paper, heavy commercial, and other non-oil & gas applications.

15


 

Business Sectors Disclosures

Our financial results are captured in three major market sectors. These sectors are: Oil and Gas; Power Generation and Distribution; and Marine and Other Industrial. The products we manufacture are consistent in application within all the sectors. This information is supplemental and provided to allow investors to follow our future trends in marketing to various customer groups.

 

 

For the Twelve Months Ended December 31, 2015 and 2014

 

 

(in thousands)

 

 

 

 

 

 

Power Generation

 

 

Marine & Other

 

 

 

 

 

2015

Oil & Gas

 

 

& Distribution

 

 

Industrial

 

 

Total

 

Net Sales

$

39,876

 

 

$

3,704

 

 

$

5,503

 

 

$

49,083

 

Gross Profit

 

5,018

 

 

 

788

 

 

 

784

 

 

 

6,590

 

Gross Profit as % of Revenue

 

13

%

 

 

21

%

 

 

14

%

 

 

13

%

 

 

 

 

 

Power Generation

 

 

Marine & Other

 

 

 

 

 

2014

Oil & Gas

 

 

& Distribution

 

 

Industrial

 

 

Total

 

Net Sales

$

41,378

 

 

$

6,454

 

 

$

9,422

 

 

$

57,254

 

Gross Profit (Loss)

 

3,855

 

 

 

(89

)

 

 

1,229

 

 

$

4,995

 

Gross Profit as of % of Revenue

 

9

%

 

 

-1

%

 

 

13

%

 

 

9

%

 

Non-U.S. GAAP Financial Measures

A non-U.S. GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. In this report, we define and use the non-U.S. GAAP financial measure EBITDA as set forth below.

EBITDA

Definition of EBITDA

We define EBITDA as follows:

Net income (loss) before:

 

·

provision (benefit) for income taxes;

 

·

non-operating (income) expense items;

 

·

depreciation and amortization;

 

·

dividends on redeemable preferred stock; and

 

·

discontinued operations

Management’s Use of EBITDA

We use EBITDA to assess our overall financial and operating performance.  We believe this non-U.S. GAAP measure, as we have defined it, is helpful in identifying trends in our day-to-day performance because the items excluded have little or no significance on our day-to-day operations.  This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieving optimal financial performance.  It provides an indicator for management to determine if adjustments to current spending decisions are needed.

EBITDA provides us with a measure of financial performance, independent of items that are beyond the control of management in the short-term, such as dividends required on preferred stock, depreciation and amortization, taxation and interest expense associated with our capital structure.  This metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization. EBITDA is one of the metrics used by senior management and the board of directors to review the financial performance of the business on a regular basis. EBITDA is also used by research analysts and investors to evaluate the performance and value of companies in our industry.

Limitations of EBITDA

EBITDA has limitations as an analytical tool.  It should not be viewed in isolation or as a substitute for U.S. GAAP measures of earnings.  Material limitations in making the adjustments to our earnings to calculate EBITDA, and using this non-U.S. GAAP financial measure as compared to U.S. GAAP net income (loss), include:

 

·

the cash portion of dividends, interest expense and income tax (benefit) provision generally represent charges (gains), which may significantly affect our financial results; and

16


 

 

·

depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our fixed assets and may be indicative of future needs for capital expenditures. 

An investor or potential investor may find this item important in evaluating our performance, results of operations and financial position.  We use non-U.S. GAAP financial measures to supplement our U.S. GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.

EBITDA is not an alternative to net income, income from operations or cash flows provided by or used in operations as calculated and presented in accordance with U.S. GAAP.  You should not rely on EBITDA as a substitute for any such U.S. GAAP financial measure.  We strongly urge you to review the reconciliation of EBITDA to U.S. GAAP net income (loss) attributable to common stockholders, along with our consolidated financial statements included herein.

We also strongly urge you to not rely on any single financial measure to evaluate our business.  In addition, because EBITDA is not a measure of financial performance under U.S. GAAP and is susceptible to varying calculations, the EBITDA measure, as presented in this report, may differ from and may not be comparable to similarly titled measures used by other companies.

The table below shows the reconciliation of net income (loss) attributable to common stockholders to “EBITDA” for the years ended December 31, 2015 and 2014 (dollars in thousands):

 

Years Ending December 31,

 

 

2015

 

 

2014

 

Net (loss) attributable to common stockholders

$

(2,942

)

 

$

(5,072

)

Add: Loss on discontinued operations

 

-

 

 

 

2,673

 

Depreciation and amortization

 

894

 

 

 

684

 

Interest expense and other, net

 

172

 

 

 

165

 

Provision (benefit) for income taxes

 

428

 

 

 

(334

)

Dividend on redeemable preferred stock

 

349

 

 

 

345

 

EBITDA

$

(1,099

)

 

$

(1,539

)

 

Backlog

Backlog is another non-U.S.GAAP indicator management uses to measure the level of outstanding orders.

The order backlog at December 31, 2015 and December 31, 2014 was $19.03 million and $26.50 million, respectively. The current period drop is primarily attributable to project cancellations and a delay in orders from the industries we serve.

Foreign Joint Ventures:

Summary financial information of BOMAY, MIEFE and AAG in U.S. dollars was as follows at December 31, 2015 and 2014 (in thousands):

 

BOMAY

 

 

MIEFE

 

 

AAG*

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

$

68,151

 

 

$

77,812

 

 

$

2,365

 

 

$

3,488

 

 

$

-

 

 

$

-

 

Total non-current assets

 

4,131

 

 

 

4,710

 

 

 

70

 

 

 

108

 

 

 

-

 

 

 

-

 

Total assets

$

72,282

 

 

$

82,522

 

 

$

2,435

 

 

$

3,596

 

 

$

-

 

 

$

-

 

Liabilities and equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

$

44,415

 

 

$

53,277

 

 

$

1,930

 

 

$

2,128

 

 

$

-

 

 

$

-

 

Total joint ventures’ equity

 

27,867

 

 

 

29,245

 

 

 

505

 

 

 

1,468

 

 

 

-

 

 

 

-

 

Total liabilities and equity

$

72,282

 

 

$

82,522

 

 

$

2,435

 

 

$

3,596

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Twelve Months Ended December 31,

 

 

BOMAY

 

 

MIEFE

 

 

AAG*

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

47,347

 

 

$

73,148

 

 

$

5,741

 

 

$

5,161

 

 

$

-

 

 

$

1,078

 

Gross Profit

$

8,353

 

 

$

12,469

 

 

$

1,112

 

 

$

2,091

 

 

$

-

 

 

$

154

 

Earnings

$

2,433

 

 

$

5,136

 

 

$

(567

)

 

$

336

 

 

$

-

 

 

$

4

 

17


 

The Company’s investments in and advances to its foreign joint ventures’ operations were as follows as of December 31, 2015 and 2014:

 

2015

 

 

2014

 

 

BOMAY*

 

 

MIEFE

 

 

AAG

 

 

TOTAL

 

 

BOMAY*

 

 

MIEFE

 

 

AAG

 

 

TOTAL

 

 

(in thousands)

 

 

(in thousands)

 

Investments in foreign joint ventures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

$

2,033

 

 

$

14

 

 

$

-

 

 

$

2,047

 

 

$

2,033

 

 

$

14

 

 

$

54

 

 

$

2,101

 

Additional amounts invested and advanced

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Withdrawal from joint venture

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(54

)

 

 

(54

)

Balance, end of year

 

2,033

 

 

 

14

 

 

 

-

 

 

 

2,047

 

 

 

2,033

 

 

 

14

 

 

 

-

 

 

 

2,047

 

Undistributed earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

 

8,157

 

 

 

358

 

 

 

-

 

 

 

8,515

 

 

 

7,145

 

 

 

870

 

 

 

1,481

 

 

 

9,496

 

Equity in earnings (loss)

 

973

 

 

 

(232

)

 

 

-

 

 

 

741

 

 

 

2,054

 

 

 

138

 

 

 

2

 

 

 

2,194

 

Dividend distributions

 

(1,032

)

 

 

(137

)

 

 

-

 

 

 

(1,169

)

 

 

(1,042

)

 

 

(650

)

 

 

(830

)

 

 

(2,522

)

Withdrawal from joint venture

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(653

)

 

 

(653

)

Balance, end of year

 

8,098

 

 

 

(11

)

 

 

-

 

 

 

8,087

 

 

 

8,157

 

 

 

358

 

 

 

-

 

 

 

8,515

 

Foreign currency translation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

 

1,358

 

 

 

134

 

 

 

-

 

 

 

1,492

 

 

 

1,431

 

 

 

254

 

 

 

(249

)

 

 

1,436

 

Change, during the year

 

(593

)

 

 

71

 

 

 

-

 

 

 

(522

)

 

 

(73

)

 

 

(120

)

 

 

178

 

 

 

(15

)

Withdrawal from joint venture

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

71

 

 

 

71

 

Balance, end of year

 

765

 

 

 

205

 

 

 

-

 

 

 

970

 

 

 

1,358

 

 

 

134

 

 

 

-

 

 

 

1,492

 

Investments, end of year

$

10,896

 

 

$

208

 

 

$

-

 

 

$

11,104

 

 

$

11,548

 

 

$

506

 

 

$

-

 

 

$

12,054

 

 

*

Accumulated statutory reserves in equity method investments of $2.72 million and $2.10 million at December 31, 2015 and 2014, respectively, are included in AETI’s consolidated retained earnings. In accordance with the People’s Republic of China, (“PRC”), regulations on enterprises with foreign ownership, an enterprise established in the PRC with foreign ownership is required to provide for certain statutory reserves, namely (i) General Reserve Fund, (ii) Enterprise Expansion Fund and (iii) Staff Welfare and Bonus Fund, which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A non-wholly-owned foreign invested enterprise is permitted to provide for the above allocation at the discretion of its board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends.

The Company accounts for its investments in foreign joint ventures’ operations using the equity method of accounting. Under the equity method, the Company’s share of the joint ventures’ operations’ earnings or loss is recognized in the consolidated statements of operations as equity income (loss) from foreign joint ventures’ operations. Joint venture income increases the carrying value of the joint ventures and joint venture losses reduce the carrying value. Dividends received from the joint ventures reduce the carrying value.

The equity income for the Company’s interest in the two joint ventures for 2015 and 2014 was: BOMAY $0.97 million vs. $2.07 million and MIEFE ($0.23) million vs. $0.14 million. These results reflect the lower market demand in China and in Southeast Asia attribute to global energy prices.

The 2014 AAG results reflect that the Company exited the AAG Joint Venture in April 2014.

Historically, the operating results of BOMAY have appeared almost seasonal as budgets were established for new years in March and the company worked to complete production to meet targets. Most of BOMAY’s production is for BOMCO for the Chinese National Petroleum Corporation, (“CNPC”), for land drilling in China and in other international markets where BOMCO or CNPC have relationships.

At December 31, 2015 there were inventories and work in progress at BOMAY of approximately $29.66 million compared to approximately $37.15 million at December 31, 2014. We expect much of this will be invoiced in 2016 after new budgets are established and products accepted. Additionally, new international orders will be completed and recognized. BOMAY has addressed the recent downturn in the Chinese market, including the decrease in the oil price, with reduced staff and other cost cutting measures.

18


 

Results of Operations

The table below summarizes our consolidated net sales and profitability for the years ended December 31, 2015and 2014 (dollars in thousands):

CONTINUING OPERATIONS

 

 

2015

 

 

2014

 

Net sales

$

49,083

 

 

$

57,254

 

Gross profit

 

6,590

 

 

 

4,995

 

Gross profit %

 

13

%

 

 

9

%

Research and development expenses

 

(769

)

 

 

(807

)

Selling and marketing expenses

 

(2,380

)

 

 

(2,517

)

General and administrative expenses

 

(5,782

)

 

 

(5,566

)

Income (loss) from consolidated continuing operations

 

(2,341

)

 

 

(3,895

)

Equity income from foreign joint ventures’ operations

 

741

 

 

 

2,194

 

Foreign joint ventures’ operations related expenses

 

(393

)

 

 

(522

)

Net equity income from foreign joint ventures’ operations

 

348

 

 

 

1,672

 

Income (loss) from consolidated continuing operations and net equity income from foreign joint ventures’ operations

 

(1,993

)

 

 

(2,223

)

Other income (expense), net

 

(172

)

 

 

(165

)

Net income (loss) from continuing operations before income taxes

 

(2,165

)

 

 

(2,388

)

(Provision for) benefit from income taxes

 

(428

)

 

 

334

 

Net income (loss) before redeemable preferred dividends

 

(2,593

)

 

 

(2,054

)

Dividends on redeemable preferred stock

 

(349

)

 

 

(345

)

Net income from continuing operations attributable to common stockholders

$

(2,942

)

 

$

(2,399

)

 

Year ended December 31, 2015 compared to year ended December 31, 2014

Revenue and Gross Profit

Revenue decreased 14%, or $8.17 million to $49.08 million for the year ended December 31, 2015, compared to the year ended December 31, 2014, primarily due to the decline in oil prices, resulting in reduced demand for our products and services and several project cancellations and postponements in the U.S..

Gross profit increased 32%, or $1.60 million, to $6.59 million for the year ended December 31, 2015, compared to the year ended December 31, 2014. Gross profit as a percentage of revenues increased to 13% for the year ended December 31, 2015, compared to 9% for the year ended December 31, 2014. The increase in gross margin levels was primarily attributable to more effective project execution. During the second half of the year ended December 31, 2014, gross margins were adversely impacted by several project cost overruns and delays as the Company experienced capacity constraints for engineering and fabrication personnel as it introduced several new products and experienced a higher volume of large dollar power distribution center (“PDC”) projects.

Research and Development costs

Research and development costs decreased 5%, or $0.04 million to $0.77 million for the year ended December 31, 2015, compared to the year ended December 31, 2014 as the Company cost effectively focused our R&D efforts on the IntelliSafe medium voltage arc resistant switchgear program in 2015.

Selling and Marketing expenses

Selling and marketing expenses decreased 5%, or $0.14 million to $2.38 million for the year ended December 31, 2015, compared to the year ended December 31, 2014, due to expense management for advertising and marketing programs. Selling and marketing expenses, as a percentage of revenues, increased approximately 1% to 5% for the year ended December 31, 2015, compared to the year ended December 31, 2014.

General and Administrative Expenses

General and administrative expenses increased by 4%, or $0.22 million to $5.78 million for the year ended December 31, 2015, compared to the year ended December 31, 2014, due to an increase in costs related to the start-up of the Company’s wholly-owned subsidiary in Brazil totaling $0.3 million. General and administrative expenses, as a percentage of revenues, increased approximately 2% to 12% for the year ended December 31, 2015, compared to the year ended December 31, 2014.

Foreign Joint Venture Equity

19


 

Net equity income from foreign joint ventures decreased 79%, or $1.32 million to $0.35 million for the year ended December 31, 2015, compared to the year ended December 31, 2014, primarily due to lower market demand in China and in Southeast Asia attribute to global energy prices.

Other Income (Expense), Net

Interest expense and other expenses increased 4% or $0.01 million to $0.17 million for the  year ended December 31, 2015, compared to the year ended December 31, 2014, primarily due to the disposal of equipment. Interest expense and other expenses, as a percentage of revenues, increased to 0.35% for the year ended December 31, 2015, compared to 0.29% for the year ended December 31, 2014.

Income Tax Provisions

The provision for income taxes for 2015 was $0.43 million compared to a benefit of $0.33 million in 2014. These amounts reflect the valuation allowance related to the Company’s net deferred tax assets related to its U.S. operation.  See Note 7 Income Taxes to the Consolidated Financial Statements included in this report for further details.  The 2015 and 2014 tax accruals represent U.S. taxes on the foreign joint ventures equity income less dividends and proceeds received.

LIQUIDITY AND CAPITAL RESOURCES

 

December 31, 2015

 

 

December 31, 2014

 

 

(in thousands except percentages and ratios)

 

Working capital

$

10,945

 

 

$

11,348

 

Current ratio

2.3 to 1

 

 

2.1 to 1

 

Total Debt

$

5,543

 

 

$

4,000

 

Debt as a percent of total capitalization

 

19

%

 

 

16

%

Consolidated net worth

$

22,662

 

 

$

25,553

 

 

*

“Consolidated Net Worth” represents the Company’s consolidated total assets less consolidated total liabilities.

AETI’s long-term debt as of December 31, 2015 was $4.20 million on which payments were current.  

See Note 8 Notes Payable to the Consolidated Financial Statements included in this report for discussion of recent financial activity.

Notes Payable

On December 29, 2015, the Company entered into a Loan Agreement (the “Loan Agreement”) with Frost Bank (“Frost”). The Loan Agreement provides two separate revolving credit facilities to the Company. The first facility (“Facility A”) provides the Company with a $4.00 million revolving line of credit with a two-year term maturing December 29, 2017, subject to a maximum loan amount (the “Borrowing Base”) based on a formula related to the value of certain of the Company’s accounts, inventories and equipment totaling $3.58 million at December 31, 2015. Under Facility A, the Company may borrow, repay and reborrow, up to the Borrowing Base. Facility A requires a period of not less than 30 consecutive days during each calendar year that the entire outstanding principal amount of the revolving credit facility is paid. Upon Facility A’s maturity date, all outstanding principal and unpaid accrued interest is due and payable.  The Company borrowed $1.04 million under Facility A upon initiation of the Loan Agreement. As of December 31, 2015, we had $2.54 million of additional borrowing capacity.

The second facility (“Facility B”) provides the Company with a $4.50 million declining revolving line of credit. The Company may be borrow, repay and reborrow from the line. The amount available to borrow under Facility B declines from the initial $4.50 million by $0.15 million each six months. Facility B’s maturity date is December 29, 2020 when all outstanding principal and unpaid accrued interest is due and payable. The Company was advanced $4.50 million under Facility B upon the initiation of the Loan Agreement which was to pay off the remaining balance on the facility from JP Morgan Chase Bank N.A. (“Chase”) and as of December 31, 2015, the outstanding balance is $4.50 million.

Under the Loan Agreement, the interest rate on both facilities is LIBOR (0.61% at December 31, 2015) plus 2.75% per annum period. The Loan agreement also provides for usual and customary covenants and restrictions  including that the borrower must maintain a fixed charge coverage ratio of no less than 1.25 to 1.00, and will not permit the ratio of consolidated total liabilities to consolidated net worth to exceed 1.25.   Additionally, the Company’s obligations under Facility A are secured by:

1.     All our accounts receivable, whether now owned or hereafter acquired.

2.     All our inventory, whether now owned or hereafter acquired.

3.     All our machinery and equipment, whether now owned or hereafter acquired.

4.     A collateral assignment on all future distributions from joint ventures.

20


 

The Company’s obligations under Facility B are secured by:

1.     Our fee simple interest in certain real estate and improvements in Beaumont, Texas.

2.     Any parking, utility and ingress/egress easements on the foregoing property.

3.     A collateral assignment on all future distributions from joint ventures.

The Company’s subsidiaries, M&I Electric Industries, Inc. and South Coast Electric Systems, LLC are additional obligors on the Loan Agreement.      

           

Sources and Use of Cash

We derive the majority of our operating cash inflow from receipts from the sale of goods and services and cash outflow is used for the procurement of materials and labor. Accordingly, cash flow is subject to market fluctuations and conditions. A substantial portion of our business, primarily construction and products, is characterized by long-term contracts. Most of our long-term contracts allow for several progress billings that provide us with cash receipts as costs are incurred throughout the project, rather than upon contract completion, thereby reducing working capital requirements. We also utilize borrowings under our revolving credit agreement, discussed in the preceding section, for our cash needs.

Operating Activities

During the twelve months ended December 31, 2015, the Company’s operating activities provided cash of $2.37 million as compared to using $2.21 million for 2014. This was primarily due to a decrease in net working capital requirements, specifically receivables and inventories in the period ended December 31, 2015 compared to the same period in 2014.

Investing Activities

During the twelve months ended December 31, 2015, the Company’s investing activities provided $0.80 million in cash as compared to using $2.04 million for the comparable period in 2014. The increase in cash provided in 2015 is mainly attributable to the completion of the manufacturing facility expansion at Beaumont in 2014, partially offset by higher dividends received from our joint venture companies in the same period.

Financing Activities

During the twelve months ended December 31, 2015, the Company’s financing activities provided $1.43 million in cash as compared to providing $2.85 million in the comparable period in 2014. The increase in cash provided in 2015 was primarily due to a net increase in borrowings of $1.54 million.

Liquidity

We periodically evaluate our liquidity requirements, capital needs and availability of resources in view of debt requirements and operating cash needs. To meet our short and long-term liquidity requirements, we rely primarily on cash from operations. Beyond cash generated from operations, we have a credit facility with $2.54 million available to be borrowed at December 31, 2015 and $8.50 million of unrestricted cash at December 31, 2014. See Note 8 Notes Payable to the Consolidated Financial Statements included in this report for recent financing discussion.

Operating Lease Commitments

The following is a schedule of future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2015:

 

Year Ending December 31,

 

Amount

 

 

 

(In thousands)

 

2016

 

$

692

 

2017

 

 

634

 

2018

 

 

607

 

2019

 

 

430

 

2020

 

 

221

 

 

 

$

2,584

 

21


 

Contractual Obligations

Payments due under contractual obligations other than leases at December 31, 2015, are as follows:

 

 

Within 1 Year

 

 

2 - 3 years

 

 

4 - 5 years

 

 

More Than 5
Years

 

 

Total

 

 

(in thousands)

 

Long-term debt obligations

$

300

 

 

$

600

 

 

$

3,600

 

 

$

0

 

 

$

4,500

 

Interest on long-term debt

 

149

 

 

 

268

 

 

 

228

 

 

 

0

 

 

 

645

 

Total

$

449

 

 

$

868

 

 

$

3,828

 

 

$

0

 

 

$

5,145

 

 

Interest is estimated based on the current rate of approximately 3.4%

Other Commercial Commitments

We are contingently liable for secured letters of credit of $1.25 million as of December 31, 2015 in relation to performance guarantees on certain customer contracts. These guarantees assure that we will perform under the terms of our contract.

The following table reflects potential cash outflows that may result in the event that we are unable to perform under our contracts as of December 31, 2015:

 

For the Year Ending December 31,

 

Amount

 

 

 

(in thousands)

 

Payments Due by Period:

  

$

-

  

Less than 1 year

 

 

-

 

1 to 3 years

 

 

1,248

 

More than 3 years

 

 

-

 

 

 

$

1,248

 

 

Outlook for Fiscal 2016

Although the market outlook for much of the Company’s traditional upstream and midstream sectors remains down, the Company is strongly pursuing the opportunities it sees in the downstream niches in the oil & gas market including storage terminals, LNG projects, refineries and petrochemical facilities.  The Company also sees opportunities in the power generation and distribution sectors as the availability of low cost natural gas, coupled with political pressures on coal-fired power generation plants, drive an increased market opportunity for the Company.

The Company also sees growth opportunities for its recently announced IntelliSafe™ medium voltage arc-resistant switchgear primarily in the downstream and power generation and distribution sectors in 2016 and beyond.

The Company believes that the increased sales and marketing team that was built up in North America coupled with the new products and new manufacturing capacity introduced in 2014 and 2015, will enable the organization to meet those market growth opportunities in 2016.

Internationally, the Company believes that all of our global energy markets will remain flat at 2015 levels throughout 2016 as oil prices remain low and both China and Brazil deal with internal country political and economic challenges.

The Company enters the 2016 fiscal year with backlog of $19.03 million, which is up significantly from the end of Q3 based on orders received in Q4 for the Company’s products. We closely monitor our backlog and order activity and continue to adjust our cost structure and expenditures as conditions require.

The Company continues to review growth opportunities and depending on cash needs may raise cash in the form of debt, equity, or a combination of both.

Effects of Inflation

We experienced minimal increases in our material prices in 2015. The Company has been generally successful in recovering these increases from its customers in the form of increased prices. As a result, AETI has not experienced material margin erosion in 2015 due to inflationary pressures. Future inflationary pressures will likely be largely dependent on the worldwide demand for these basic materials which cannot be predicted at this time.

22


 

Commitments and Contingencies

The Company maintains a group medical and hospitalization minimum premium insurance program. For the policy year ended August 2015 and the subsequent policy, the Company is liable for all claims each year up to $70,000 per insured, or $1.7 million in the aggregate. An outside insurance company insures any claims in excess of these amounts. The Company’s annual expense for this minimum premium insurance program totaled $1.16 million and $1.17 million during the years ended December 31, 2015 and 2014, respectively. Insurance reserves included in accrued payroll and benefits in the accompanying consolidated balance sheets were approximately $0.00 million and $0.17 million at December 31, 2015 and 2014, respectively. The Company is a party to a number of legal proceedings in the normal course of business for which appropriate provisions have been made if it is believed an ultimate loss is probable.

Critical Accounting Policies and Estimates

We have adopted various critical accounting policies that govern the application of accounting principles generally accepted in the United States of America (“U.S. GAAP”) in the preparation of our consolidated financial statements. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.

Certain accounting policies involve significant estimates and assumptions by us that have a material impact on our consolidated financial condition or operating performance. Management believes the following critical accounting policies reflect its most significant estimates and assumptions used in the preparation of our consolidated financial statements. We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities”, nor do we have any “variable interest entities”.

Inventories – Inventories are stated at the lower of cost or market, with material value determined using an average cost method. Inventory costs for finished goods and work-in-process include direct material, direct labor, production overhead and outside services. TP&S and E&I indirect overhead is apportioned to work-in-process based on direct labor incurred.

Allowance for Obsolete and Slow-Moving Inventory – The Company regularly reviews the value of inventory on hand using specific aging categories, and records a provision for obsolete and slow-moving inventory based on historical usage and estimated future usage. As actual future demand or market conditions may vary from those projected, adjustments to our inventory reserve may be required. Based on this assessment, management believes the inventory reserve is adequate.

Allowance for Doubtful Accounts – The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. The estimate is based on management’s assessment of the collectability of specific customer accounts and includes consideration for credit worthiness and financial condition of those specific customers. The Company also reviews historical experience with the customer, the general economic environment and the aging of receivables. The Company records an allowance to reduce receivables to the amount that is reasonably believed to be collectible. Based on this assessment, management believes the allowance for doubtful accounts is adequate.

Revenue Recognition – The Company reports earnings from fixed-price and modified fixed-price long-term contracts on the percentage-of-completion method.  Earnings are accrued based on the ratio of costs incurred to total estimated costs. Costs include direct material, direct labor, and job related overhead.  However, for our manufacturing activities, we have determined that labor incurred, rather than total costs incurred, provides an improved measure of percentage-of-completion. For contracts with anticipated losses, estimated losses are charged to operations in the period such losses are determined. A contract is considered complete when all costs, except insignificant items, have been incurred and the project has been accepted by the customer. Revenue from non-time and material jobs of a short-term nature (typically less than one month) is recognized on the completed-contract method after considering the attributes of such contracts. This method is used because these contracts are typically completed in a short period of time and the financial position and results of operations do not vary materially from those which would result from use of the percentage-of-completion method. The asset, “Work-in-process,” which is included in inventories, represents the cost of labor, material, and overhead on jobs accounted for under the completed-contract method. For contracts accounted for under the percentage-of-completion method, the asset, “Costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenue recognized in excess of amounts billed and the liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” represents billings in excess of revenue recognized.

Foreign Currency Gains and Losses – Foreign currency translations are included as a separate component of comprehensive income. The Company has determined the local currency of foreign subsidiary and foreign joint ventures to be the functional currency. In accordance with ASC 830, the assets and liabilities of the foreign equity investees and M&I Brazil, denominated in foreign currency, are translated into United States dollars at exchange rates in effect at the consolidated balance sheet date and net sales and expenses are translated at the average exchange rate for the period. Related translation adjustments are reported as comprehensive income, net of deferred income taxes, which is a separate component of stockholders’ equity, whereas gains and losses resulting from foreign currency transactions are included in results of operations.

Federal Income Taxes –