Air Industries Group — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are with fiscal 2020. The company manufactures complex aerospace and defense components and assemblies, principally for military aviation. Defense products represented 87.7% of 2021 business.
Financial performance and liquidity
| Metric | 2021 | 2020 |
|---|---|---|
| Net sales | $58.939 million | $50.097 million |
| Gross profit | $10.253 million (17.4% margin) | $6.512 million (13.0% margin) |
| Operating income (loss) | $2.487 million | $(1.439) million |
| Net income | $1.627 million | $1.096 million |
| Cash from (used in) operating activities | $4.064 million | $(1.525) million |
| Cash and cash equivalents at year-end | $0.627 million | $2.505 million |
| Working capital | $17.478 million | $16.284 million |
| Total assets / stockholders’ equity | $53.425 million / $17.389 million | $57.777 million / $15.109 million |
Capital expenditures were $1.364 million in 2021, compared with $3.797 million in 2020. Financing activities used $4.578 million in 2021, primarily from repayments on Webster Bank borrowings. Inventory was $29.532 million—about 55% of assets—and net accounts receivable was $10.473 million.
At December 31, 2021, Webster debt was $16.648 million and related-party subordinated notes were $6.412 million. Total debt and finance lease obligations reported on the balance sheet were $23.362 million. The Webster facility is secured by substantially all assets; the company reported compliance with its covenants at year-end. Stockholders’ equity improved to $17.389 million.
Changes versus 2020
- Sales rose 17.6%; management attributed the increase to higher production and shipments, including delivery of work-in-process delayed by COVID-related subcontractor disruptions.
- Gross margin improved to 17.4% from 13.0%, reflecting a more favorable product mix and the end of a long-term agreement on which costs had equaled selling prices.
- Operating expenses declined 2.3% to $7.766 million, partly because a 2020 bad-debt expense was partly recovered in 2021. Interest and financing costs were $1.265 million in the MD&A comparison, down 15.2%; the financial statements separately present $805,000 of interest and financing costs plus $460,000 of related-party interest expense.
- Operating cash flow improved by $5.589 million, while cash fell by $1.878 million, largely reflecting debt repayments and capital spending.
- 2020 results included $2.414 million of forgiven SBA/PPP loans and a $1.412 million income-tax benefit; neither item recurred in 2021. The 2020 net income also included a $230,000 discontinued-operations loss.
Outlook, risks, and unusual items
- Management expects 2022 sales to be in line with 2021 and believes available liquidity will support operations through at least March 31, 2023. It cites 2021 operating cash generation, expected orders and backlog in that assessment.
- Firm 18-month backlog was $75.0 million at year-end 2021, down from $81.1 million a year earlier. Book-to-bill was 0.9 in 2021 versus 1.07 in 2020.
- Management anticipated $1.75 million to $2.5 million of 2022 equipment spending and was in early discussions with Webster about additional term financing. The December 2021 amendment extended the revolving line and term-loan maturity to December 30, 2025, increased the revolving commitment to $20 million from $16 million, and increased the inventory sublimit to $14 million from $11 million.
- A $787,000 excess-cash-flow payment to Webster was scheduled for about April 15, 2022. A further $314,000 of deferred payroll taxes remained payable in December 2022.
- Key risks include dependence on a few customers and aircraft platforms (three customers accounted for 75.4% of sales), defense-budget exposure, supply-chain and skilled-labor constraints, volatile material costs against fixed-price contracts, inventory valuation and working-capital demands, substantial leverage, and potential dilution from convertible related-party notes. COVID-19 and the war in Ukraine were cited as sources of economic, supply-chain, commodity-price and cyber risk.
- Contract Pharmacal’s claim against the company was reduced to $700,000; the court denied the plaintiff’s summary-judgment motion, and the plaintiff appealed in March 2022. The company disputes the claim and intends to oppose the appeal.
- The audited financial statements received an unqualified opinion. The auditor identified revenue recognition and inventory valuation as critical audit matters. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation.
- Beginning with Q1 2022, management planned to report the previously separate machining and turbine/engine operations as one operating segment.
Investor verification checklist
- Confirm 2022 sales, shipment recovery, new orders and backlog conversion against management’s expectations; backlog declined year over year and book-to-bill was below 1.0.
- Track operating cash flow, low year-end cash, working-capital needs, inventory reserves and customer collections, particularly given the inventory concentration and customer receivable concentration.
- Review debt service, the scheduled $787,000 excess-cash-flow payment, covenant compliance, and the availability and terms of any proposed equipment financing.
- Assess customer and platform concentration, fixed-price contract margins, supplier availability, labor costs and the impact of inflation or renewed supply disruptions.
- Monitor the Contract Pharmacal appeal and the potential dilution and governance implications of convertible related-party notes and concentrated ownership.