IKONICS Corporation

2015 IKONICS Annual Report

Through processes based in photochemistry, abrasive etching, chemical etching and other technologies, IKONICS participates in a diverse spectrum of markets. From traditional and high-tech screen printing, to decorative and industrial etching.

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Page 17 of 47

16 The Company expects capital expenditures in 2016 of approximately $2.0 million. The total cost of the Company's building expansion to accommodate the growth of its AMS operations is estimated to be approximately $3.5 million including the $2.3 million already incurred, although the expansion cost could vary based on unexpected factors that arise during construction. The Company anticipates the remaining amounts for the building expansion will be spent over the first half of 2016. The Company will also incur additional costs related to the installation of its new ERP system, which will be completed in 2016, along with capital expenditures to improve AMS capacity and capabilities. Other expenditures will be incurred to enhance emulsion and film production along with research and development. Currently, the Company expects to fund its capital expenditures with existing cash, cash generated from operating activities and utilization of the Company's line of credit. The Company is also pursuing $3.5 million in permanent financing as a source of funds for the expansion. International Activity The Company markets its products in numerous countries in various regions of the world, including North America, Europe, Latin America, and Asia. The Company's 2015 foreign sales of $4.9 million were approximately 27.9% of total sales, compared to the 2014 foreign sales of $5.3 million, which were 28.4% of total sales. The Company experienced a decrease in foreign sales across all geographic regions in 2015 due to poor general economic conditions in Europe and a strong U.S. dollar. The Company's foreign transactions are primarily negotiated, invoiced and paid in U.S. dollars, though a portion is transacted in Euros. IKONICS has not implemented an economic hedging strategy to reduce the risk of foreign currency translation exposures, which management does not believe to be significant based on the scope and geographic diversity of the Company's foreign operations as of December 31, 2015. Furthermore, the impact of foreign exchange on the Company's balance sheet and operating results was not material in either 2015 or 2014. Future Outlook IKONICS has spent on average approximately 4% of annual sales in research and development and has made capital expenditures related to its DTX and AMS programs. The Company plans to maintain its efforts in this area to expedite internal product development as well as to form technological alliances with outside experts to commercialize new product opportunities. The Company continues to make progress on its AMS business initiative. The Company has entered into agreements with major aerospace companies along with working on smaller development programs to determine the feasibility of using its unique technologies in the production of military and commercial aircraft. Progress is being made on a number of these in-house feasibility projects, and the Company believes that several of these could lead to ongoing business. In anticipation of this business, the Company is expanding its AMS capacity and patent applications. The Company is also continuing to pursue DTX related business initiatives. In addition to making efforts towards growing the inkjet technology business, the Company offers a range of products for creating texture surfaces and has introduced a fluid for use in prototyping. The Company is currently working on production improvements to enhance its customer offerings. The Company has been awarded European, Japanese and United States patents on its DTX technologies. The Company has modified its DTX technology to enter the market for prototyping and 3D printing. Domestically, both the Domestic and IKONICS Imaging units remain profitable in mature markets and require aggressive strategies to grow market share. Although there will be challenges, the Company believes these businesses will continue to grow and prosper. In addition to its traditional emphasis on domestic markets, the Company will continue efforts to grow its business internationally by attempting to develop new markets and expanding market share where it has already established a presence. However, the strong U.S. dollar made this challenging during 2015, and the Company anticipates continued strength of the U.S. dollar in the near term. In addition to the $3.5 million building expansion to accommodate the AMS division and the implementation of a new ERP system, other future activities undertaken to expand the Company's business may include acquisitions, building improvements, equipment additions, new product development and marketing opportunities.

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