Air Industries Group, Inc. - 10-Q Summary (Period Ended June 30, 2009)
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Air Industries Group, Inc. ("AIRI") for the period ended June 30, 2009. AIRI is a smaller reporting company engaged in manufacturing aircraft structural parts (Air Industries Machining Corp. or "AIM") and providing specialty welding services (Welding Metallurgy, Inc. or "Welding"). The Company discontinued its metal distribution business, Sigma Metals, Inc., in late 2008, with results reported as discontinued operations.
Key Financial Metrics
| Metric | 3 Months Ended June 30, 2009 | 6 Months Ended June 30, 2009 |
|---|---|---|
| Net Sales | $11,096,000 | $22,279,000 |
| Gross Profit | $2,059,000 (18.6% margin) | $4,559,000 (20.5% margin) |
| Income from Operations | $634,000 | $1,457,000 |
| Net Loss (Continuing Ops) | $(560,000) | $(1,019,000) |
| Net Loss (Total) | $(723,000) | $(1,145,000) |
| Net Loss Attributable to Common | $(1,039,000) | $(1,728,000) |
| Cash Flow from Operations | N/A | $1,096,000 |
| Total Debt (Approx.) | $32,000,000 | |
| Cash and Equivalents | $0 | |
| Working Capital | $(40,000) |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated net sales increased 20% ($1.87M) for the quarter and 22% ($3.8M) for the six months compared to 2008, driven primarily by a 25% increase in AIM sales.
- Margin Compression: Despite revenue growth, gross profit margins declined significantly from 32% to 19% (quarterly) and 30% to 20% (six-month) due to higher cost of sales relative to revenue.
- Operating Expenses: Total operating costs decreased 31% year-over-year for both periods, largely due to a 71% reduction in corporate (AIRI) costs related to legal and consulting fees.
- Interest Costs: Interest and financing costs surged 115% for the quarter and 193% for the six months, primarily due to the accretion of debt discounts on junior subordinated notes ($1.33M non-cash charge for the six months).
- Liquidity: Cash and cash equivalents dropped from $164,000 to $0. The Company has negative working capital of approximately $40,000.
Guidance, Outlook, Risks, and Unusual Items
Liquidity and Debt Covenants: The Company faces severe liquidity constraints. As of June 30, 2009, it was in default of covenants with its primary lenders (PNC Bank and Steel City Capital Funding). While amendments were negotiated in September 2009 to waive prior defaults, the loans remain subject to acceleration clauses. The Company utilizes a "lock box" arrangement where cash receipts are swept daily to reduce debt, leaving negligible cash on hand.
Discontinued Operations: The Sigma Metals business was discontinued. While the net loss from this segment decreased compared to the prior year, it continues to generate losses and requires asset liquidation.
Equity Dilution: To manage cash flow, the Company is issuing Series B Convertible Preferred Stock in lieu of cash dividends. This practice dilutes common stockholders. As of October 2009, outstanding Series B shares were convertible into over 76 million common shares.
Internal Controls: Management concluded that disclosure controls and procedures were not effective as of June 30, 2009, citing staffing weaknesses and deficiencies in allocating labor costs between inventory and cost of sales.
Legal Proceedings: The Company settled a $350,000 claim with Blair-HSM Companies (paid via cash and stock). It also faces litigation from Sigma vendors totaling approximately $400,000, with one judgment of $107,000 already awarded.
Investor Verification Checklist
- Debt Maturity: Verify the status of the $15.1M senior bank debt and $4.5M term loan maturing in April/August 2010 and the likelihood of refinancing.
- Covenant Compliance: Confirm the specific terms of the September 2009 loan amendments and whether the Company is currently in compliance with the new covenants.
- Backlog Quality: Assess the "firm backlog" of $49M versus "projected backlog" of $60M to determine revenue visibility given the margin compression.
- Customer Concentration: Review the risk associated with three customers accounting for 75-77% of net sales.
- Internal Control Remediation: Evaluate the plan to fix labor cost allocation deficiencies and the impact on future financial reporting accuracy.