Air Industries Group — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. Air Industries Group manufactures aerospace and defense components and assemblies, and also provides specialty welding, fabrication, and military supply-kitting services. The period includes Woodbine from April 1 and Eur-Pac from June 1, 2014.
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $13.360m | $14.639m | $28.813m | $28.965m |
| Gross profit | $3.353m | $3.630m | $7.398m | $7.278m |
| Gross margin | 25.1% | 24.8% | 25.7% | 25.1% |
| Operating income | $0.257m | $1.078m | $1.486m | $2.257m |
| Income (loss) before tax | $(0.109)m | $0.656m | $0.816m | $1.424m |
| Net income | $0.616m | $0.226m | $0.957m | $0.505m |
| Diluted EPS | $0.09 | $0.04 | $0.15 | $0.09 |
- Q2 sales fell 8.7%; six-month sales were down 0.5%. Operating expenses increased 21.3% in Q2 and 17.7% for the half, largely reflecting acquired businesses and integration costs.
- Net income rose despite lower pretax income, primarily because of income tax benefits: $725,000 in Q2 and $141,000 for the half. Management attributed these benefits to prior-year tax accrual reversals and reduced deferred tax liabilities.
- Six-month cash flow from operations was negative $384,000, versus positive $4.861m a year earlier. Inventory absorbed $2.920m and receivables absorbed $789,000. Investing used $4.620m, including $4.190m for acquisitions; financing provided $5.612m. Cash ended at $1.169m.
- At June 30, current assets were $41.596m, current liabilities $22.730m, and working capital $18.866m. Total assets were $58.407m; stockholders’ equity was $30.666m.
- Debt and capital lease obligations totaled $15.228m, down from $17.496m at year-end 2013. This included $10.608m on the PNC revolver, a $2.613m term loan, $1.615m in capital leases, and $392,000 owed to former WMI stockholders. The $23m revolver is subject to a borrowing base; substantially all assets secure the facility. Revolver and other current obligations are classified as current, in part because of a subjective acceleration clause.
Material changes and unusual items
- Woodbine was acquired for $2.4m plus 30,000 shares, with a $165,000 working-capital adjustment. Eur-Pac was acquired for $1.6m plus 20,000 shares; a $78,000 adjustment was payable in August. Acquisitions added $4.061m of goodwill; reported goodwill rose to $4.514m. No goodwill impairment was reported.
- A June registered direct offering issued 1.17m shares and generated $10.530m gross proceeds, comprising $9.530m cash and conversion of $1.000m in subordinated notes. Net cash proceeds were approximately $8.562m after fees and expenses. The remaining junior subordinated notes were converted to common stock.
- Quarterly dividends of $0.15 per share were declared; the June-quarter dividend of approximately $1.064m was payable in July. Management said it intended to continue quarterly dividends subject to board discretion and loan covenants.
Outlook, commentary, and risks
- Management said AIM’s backlog suggested stronger third- and fourth-quarter sales, while NTW expected a slower third quarter after delayed Navy contract awards, followed by higher sales in the fourth quarter and through 2015. EPC sales were expected to be approximately $2m in the second half of 2014; July sales were approximately $400,000.
- A multiyear nacelle thrust-strut contract is valued at $39m, with most revenue expected in calendar 2016 and beyond. No consolidated full-year earnings or revenue guidance was provided.
- Management expected WMI integration to reduce costs as acquired operations are combined. Q2 WMI sales included $598,000 from acquisitions, but SG&A at WMI rose 51% year over year.
- Risks include reduced defense spending, supplier delays and defective raw materials affecting production, volatile material costs, competition for skilled labor, and customer and supplier concentration. Three customers represented 58.3% of Q2 sales and 55.9% of six-month sales. The company stated it was highly leveraged and relied on continued PNC lending; it said it was in compliance with loan terms at June 30.
- Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting. The filing reports no off-balance-sheet arrangements.
Investor verification points
- Assess whether the expected Navy order recovery, AIM production improvements, and forecast EPC second-half sales materialized.
- Track operating cash flow and inventory/receivables growth, and verify borrowing-base availability and compliance with PNC covenants.
- Review acquired-company integration costs, segment profitability, purchase accounting, and the assumptions supporting goodwill and deferred tax assets.
- Separate recurring earnings from the quarter’s tax benefit; check the sustainability of earnings and dividends against cash generation and lending restrictions.
- Monitor customer concentration and the effects of defense-budget changes, supplier disruptions, and the timing of the $39m contract’s expected revenue.