Air Industries Group — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited consolidated results. The company manufactures aerospace and defense components and assemblies through AIM, WMI and NTW, with Miller Stuart included in WMI reporting.
Financial results and liquidity
- Revenue: $15.453 million, up 7.9% from $14.325 million.
- Profit: Gross profit was $4.045 million, up 10.9%; operating income was $1.229 million, up from $1.178 million. Net income was $341,000, up 22.2%; diluted EPS was $0.06 versus $0.05.
- Margins: Gross margin increased to 26.2% from 25.5%. Net margin was approximately 2.2%, compared with 1.9%.
- Cash flow: Operating activities used $2.338 million, versus $3.357 million provided a year earlier. The principal working-capital use was a $4.418 million increase in receivables. Investing used $241,000; financing provided $2.705 million, primarily from $4.183 million of additional revolver borrowings. Cash increased $126,000 to $687,000.
- Balance sheet: At March 31, cash was $687,000, working capital was $13.301 million, total assets were $54.554 million, and stockholders’ equity was $21.060 million. Net receivables rose to $12.909 million from $8.584 million at year-end.
- Debt and liquidity: Notes and capital lease obligations totaled $20.954 million, up from $17.496 million at December 31, 2013. The PNC revolver balance was $16.213 million. The company stated it was compliant with facility terms at quarter-end, but substantially all assets secure the facility and substantially all cash receipts flow through PNC’s lockbox. Management warned that loss of PNC lending could leave the company without funds to operate.
- Dividends: A $0.125-per-share dividend, totaling approximately $733,000, was paid in January. A $0.15-per-share dividend, approximately $880,000, was declared in March and paid April 22.
Changes versus Q1 2013
- NTW sales rose 35.0% to $5.009 million, and pretax income increased to $1.020 million from $493,000. Management attributed consolidated gross-profit improvement largely to NTW’s greater share of sales and stronger margins.
- AIM sales declined 4.6% to $7.131 million; gross margin fell to 18.0% from 19.5%. Management cited reduced defense spending and supplier-related delays on Navy E2-D landing-gear production.
- WMI sales increased 5.5% to $3.313 million, including $318,000 from Decimal and Miller Stuart, but pretax loss widened to $331,000 from $11,000. Management cited higher SG&A and lower-margin acquired operations.
- Consolidated SG&A increased 14.0% to $2.816 million, principally due to Decimal and Miller Stuart. Interest and financing costs fell 21.3% to $303,000, which management attributed to lower loan balances and rates.
Outlook, developments and risks
- Management is pursuing more commercial aerospace business in response to reduced military demand. A nacelle thrust-strut contract is valued at $27 million, but management expects most associated revenue in 2016 and beyond.
- On April 1, 2014, after quarter-end, the company acquired Woodbine Products for $2.4 million and 30,000 shares valued at $9.68 per share, subject to a working-capital adjustment. The purchase-price allocation was not complete. Woodbine was added to the PNC facility; the facility’s maximum borrowings increased to $22.676 million, subject to its terms.
- Management said it was in later-stage negotiations with two additional acquisition candidates, but neither had a binding agreement and completion was uncertain. It also intended to continue quarterly dividends, subject to board discretion and PNC covenants.
- Key risks include reliance on PNC and its borrowing base, high leverage, customer concentration (two customers represented 54.5% of Q1 sales), sole-source suppliers, competitive fixed-price bidding, volatile material costs, skilled-labor availability, and defense-spending reductions. Two customers represented 42.9% of gross receivables at quarter-end.
- The company reported no off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether receivables convert to cash and operating cash flow improves after the substantial Q1 working-capital outflow.
- PNC borrowing availability, covenant compliance, and the impact of the facility’s subjective acceleration provisions and collateral requirements.
- Woodbine’s final purchase-price allocation, working-capital adjustment, financing needs, and contribution to results.
- Whether AIM’s defense-related sales and E2-D production recover, and whether NTW’s stronger performance is sustainable.
- Whether customer concentration, supplier constraints, and dividend payments affect liquidity and the ability to fund operations or acquisitions.