Grosses Up, Profits Down

Ballistic Recovery Systems has announced its earnings results for Fiscal Year 2007 which ended September 30th, 2007. On March 7, BRS filed its Form 10-KSB for FY07 and its restated Form 10-QSBs for the quarters ended March 30, 2007 and June 30, 2007.

BRS announced a total of $9,402,351 in sales for the fiscal year ended September 30, 2007. This total represents an increase of 2.3% over the $9,191,729 in sales reported for the fiscal year ended September 30, 2006. The Company reported net loss of ($1,681,177) for the year ended September 30, 2007 compared to a net income of $27,377 for the year ended September 30, 2006.

BRS also restated its previously filed 10-QSB for the 2nd and 3rd quarters of FY2007. As a result of errors in financial statements relating to the valuation of inventories and accounting methods utilized for its Mexican subsidiary, the Company restated the financial statements to correct accounting methods and related issues. The Company historically fully absorbed the operational costs for its Mexico manufacturing facility into inventory as cost of goods sold. Upon review, and in connection with the Company’s Form 10-KSB for the fiscal year ended September 30, 2007, it was determined that these costs were not directly accounted to the production and processing of goods sold, and therefore were not included as cost of goods sold.

Commenting on the results, Larry E. Williams, Chief Executive Officer said, "While we are disappointed with the overall loss for FY 2007, we clearly understand the need for BRS to invest now for future years. The vast majority of the loss is directly attributable to our increased investment in product diversification and expanding operations to address current and potential business gains.”

Gross margin as a percentage of revenues was 16.0% for FY2007 compared to 36.2% for FY2006. The largest factors contributing to the reduction in gross margin were: (1) a product price reduction to Cirrus associated with increased purchase quantities; (2) investment in new product lines such as Head Lites to meet our diversification strategy; and (3) delays and limitations of the accounting system associated with the internal accounting of the Mexico operations and related allocation of production overhead. Mr. Williams further commented, “Diversification is a key part of our out-year growth strategy which means we must invest today in new products and processes. To achieve this goal, we hired production staff which ultimately had an impact to the cost of goods sold due to production facility inefficiencies, particularly the down time associated with training and prototyping which created excess non-productive labor. We also saw a sharp rise in production overhead due to the delays in the closing of the ATF acquisition.”

A number of factors contributed to BRS’s late filing of its Form 10-KSB and restatement of its two previous Form 10-QSBs with the primary factors being related to the costing of inventory and the associated monitoring of inventory controls connected with operations in Mexico. As a result, the Company performed additional analyses and other procedures with both internal and external resources

During the year, BRS expanded parachute production in Mexico to include manufacturing for CIMSA, a Barcelona-based parachute manufacturer which has also invested in BRS. BRS General Manager David Blanchard commented, “We now have three primary production lines in Mexico: BRS parachutes and components, CIMSA parachutes, and our newly acquired Advanced Tactical Fabrication line. We have expensed all costs in our Mexican production facility that would include inefficiencies and additional costs inherent in changing a production site.”

Blanchard continued, “We have reduced our personnel in Mexico since we are continually evaluating the required workforce levels as they relate to revenue generation. We specifically eliminated a higher portion of non-production employees in order to reduce overhead. We are closely monitoring all costs to operate the Mexico facility using timely and accurate variance analysis. We are also reviewing all product offerings with the goal of standardizing our products as much as possible. This will allow us to re-examine our pricing and margins for all BRS, ATF and Mexico products. We will continue our strong focus on identifying cost savings and reductions on an ongoing basis.”

Chief Financial Officer Carl Langr said, “We believe this investment enhances our ability to achieve consistent growth in revenue and a return to profitability. We are building on the market acceptance of whole airplane emergency recovery parachutes as we grow. With the addition of ATF, we expect to see significant growth in sales as we build market demand. Labor and operating expenses are the focus moving forward to assure profitability."

Highlighted Results of Operations for the Fiscal Year 2007:

• G&A expenses remained stable at 27.9% of sales in FY07
• R&D investment increased to 5.9% of sales in FY07

Williams added, “The Company has realized for some time that growing the basic infrastructure in Mexico would take significant capital investment at the outset with little payback in the short term. In fact, Fiscal Year 2007 saw what we believe are unprecedented opportunities for the Mexico operation which had only minimal impact to fiscal 2007 revenues. In order to take advantage of new customers and processes, BRS invested heavily in both capital equipment and personnel to meet these opportunities. The payback for these investments is only now becoming apparent through increased orders and improving efficiencies.”

In particular, the Company has set its goals going forward on several new programs which were only just beginning to form as FY08 began. VP of Sales & Marketing, Gary Moore, commented, “These programs, over the next few months to a year and a half, will continue to grow and develop into substantial new product lines. In addition, the recent establishment of our newest facility in Pinebluff, North Carolina will provide a great opportunity for BRS Fabrication to gain Department of Defense-related market share.”

FMI: www.brsparachutes.com