2008 Annual Report
Letter to Shareholders
The worldwide recession made 2008 a challenging year for IKONICS. In spite of contractions in our primary markets, we were able to hold sales equal to last year. Gross profit fell by only 4%, and we continued to generate a healthy cash flow. Earnings declined to $814,000 or $0.40 per share due primarily to non-cash charges: an increase in the LIFO inventory reserve and the write off of patent application expenses. Earnings in 2008 were also negatively impacted by a large severance payment. The only area of our business that did not grow was sales to the awards and recognition market, which is very vulnerable to recession.
The most promising development in 2008 was the commercial acceptance of four of our new business initiatives. I believe they will generate significant revenue and profits in 2009.
Photo Machining (the abrasive etching of electronic wafers and industrial ceramics) has gained acceptance by large customers; we anticipate ramped up production in 2009, primarily to the defense industry. We are now speced into one sophisticated weapons system, and sales to this customer are rapidly ramping up. We are currently being qualified for other defense and aerospace applications.
IKONICS Acoustics (the etching of sound-deadening patterns in advanced composite materials) has gained acceptance in the aerospace industry. In 2008 our technology was used for sound deadening on GE, Pratt & Whitney and Rolls Royce jet engines. Although temporarily impacted by the Boeing strike and the slow down in orders for some aircraft models, we anticipate good sales in the second half of 2009. The time-saving and quality improvements we bring to this market are compelling.
Digital Texturing (acid resist transfer films for mold texturing) has also gained customer acceptance as we have continually improved our equipment and print quality. We hope to start selling our next generation DTX™ fluid deposition equipment in the second quarter of 2009. Equipment sales bring significant ongoing sales of our patentapplied-for substrates and proprietary jettable fluids. Although the initial market is automotive, we believe that the revolutionary nature of our technology will bring us sales even in this depressed industry.
IKONICS Industrial Solutions is a new venture of creating custom products to meet the needs of specific users. We custom design and manufacture the product and retain the intellectual property outside the customer’s field of use. We currently have two such products in production and anticipate others in 2009.
All of our (non-defense) new businesses are subject to variations in the world economy. In 2009 our core businesses of photochemical stencils for screen printing and decorative abrasive etching will face challenges, particularly in the domestic market. However, we still see good opportunities for growth in export markets and have taken steps to increase our presence in India and Latin America.
Barring a further material worsening of the world economy, our new technologies are important enough that we will see them contributing 10-20% of our sales in the next 12 months, with growth accelerating in future years.
In December 2008, we completed construction on a new $4.4 million facility to house our new businesses. We financed the construction with cash, and remain free of long term debt.
During 2008 we repurchased 87,850 shares of stock and are continuing that activity.
For the Board of Directors, William C. Ulland
Chairman, President & CEO March 19, 2009
The preceding letter contains statements regarding future financial results, new products, the success of acquisitions and other matters that involve risks and uncertainties. The Company’s actual results could differ materially as a result of domestic and global economic conditions, competitive market conditions, acceptance of new products, the ability to identify, complete and successfully integrate suitable acquisitions, as well as the other factors described elsewhere in this Annual Report and in the Company’s most recent Form 10-K and most recent Form 10-Q on file with the SEC.