Air Industries Group — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The unaudited consolidated statements compare continuing operations with the prior-year period, with WMI and related businesses presented as discontinued operations. Air Industries manufactures aerospace and defense components and was pursuing a sale of a major business unit.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Continuing-operations net sales | $12.242 million | $12.674 million |
| Gross profit / margin | $2.003 million / 16.4% | $2.712 million / 21.4% |
| Operating income (loss) | ($613,000) | $171,000 |
| Continuing-operations net loss | ($1.376 million) | ($454,000) |
| Discontinued-operations net loss | ($92,000) | ($700,000) |
| Total net loss | ($1.468 million) | ($1.154 million) |
| Cash from operating activities | ($1.782 million) | $900,000 |
- Revenue decreased 3.4%; gross profit fell 26.1%, with management attributing lower margins principally to product mix in Complex Machining.
- Operating expenses increased 3.0% to $2.616 million, mainly from professional and insurance costs. Interest and financing costs declined 13.0% to $777,000.
- Cash rose to $1.415 million from $630,000 at year-end, despite operating cash use. Financing provided $2.875 million, including $1.065 million from stock sales, $1.0 million in related-party advances, and $1.489 million of net revolver borrowings.
Balance sheet, debt and liquidity
- At March 31, total assets were $62.606 million, total liabilities $45.047 million, and stockholders’ equity $17.559 million. Working capital was $9.437 million.
- Total notes and capital lease obligations were $29.030 million, of which $25.881 million was classified as current. PNC debt was $21.046 million; related-party notes, net of discount, were $3.158 million. The company also reported $5.254 million principal outstanding on its 8% subordinated convertible notes.
- The company was not in compliance with its PNC fixed-charge coverage covenant at March 31. PNC could accelerate repayment following a default; the facility was secured by substantially all assets and classified as current. Its maturity had been extended from April 30 to May 31, 2018, and further extension discussions were ongoing.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing recurring losses, negative operating cash flow, covenant noncompliance, and reliance on future financing and improved performance.
Material changes, outlook and risks
- On March 21, 2018, the company agreed to sell WMI and related businesses to CPI Aerostructures for $9.0 million, subject to a working-capital adjustment, buyer financing and other conditions. Up to $1.0 million of contingent consideration may be payable if specified customer agreements are achieved. The agreement provides for a $2.0 million escrow. Closing was anticipated in May or June 2018; the sale was not completed as of the filing.
- Management said the company would focus more on complex machined products for aircraft landing gear and jet engines after the sale. It anticipated WMI-related losses through closing and believed gross margins could improve, but provided no quantified forecast.
- Management disclosed a Notice of Proposed Debarment affecting Eur-Pac. If imposed, Eur-Pac would be barred from bidding on federal contracts; the company said it would likely contest the proposal unless other business priorities warranted otherwise.
- Customer concentration increased: three customers accounted for 73.1% of Q1 sales, versus 60.3% a year earlier. Management also cited reliance on sole-source suppliers, competitive bidding, volatile material costs and skilled-labor availability.
- Disclosure controls and procedures were found ineffective. Reported weaknesses included inventory and labor-cost systems, subsidiary closing and consolidation processes, stock-compensation administration, insufficient accounting staff, and weak supervision and monitoring. Management planned remediation subject to available resources.
- The company had not completed its assessment of the new revenue-recognition standard’s financial-statement effects. It also recorded no federal income-tax benefit for the quarter because of a valuation allowance against deferred tax assets.
Important facts for investors to verify
- Whether the WMI sale closed, the final proceeds after adjustments and escrow, and whether contingent payments were earned.
- Whether PNC extended or amended the credit facility, waived or remedied the covenant default, and continued to provide borrowing capacity.
- Near-term cash needs, debt maturities and the company’s ability to fund operations without additional borrowing or equity issuance.
- The outcome of the proposed Eur-Pac debarment and any effect on federal-contract eligibility or revenue.
- Progress in remediating material weaknesses, including inventory valuation and reporting controls.
- The filing’s per-share loss presentation: the statements label continuing-operations per-share amounts as positive despite reporting losses; verify the intended sign and any related share-count effects.