Air Industries Group — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. AIR Industries manufactures aerospace components, primarily for defense, through its subsidiaries. Beginning in Q1 2022, it reports as one integrated operating segment. Financial statements are unaudited and prepared under U.S. GAAP.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $13.278 million | $14.354 million | $39.348 million | $43.519 million |
| Gross profit | $2.242 million | $2.014 million | $6.742 million | $6.414 million |
| Gross margin | 16.9% | 14.0% | 17.1% | 14.7% |
| Operating income | $169,000 | $177,000 | $626,000 | $644,000 |
| Net income (loss) | ($142,000) | ($66,000) | ($177,000) | $21,000 |
Q3 sales declined 7.5%, which management attributed principally to sales of products at lower prices. Nine-month sales declined 9.6%, reflecting lower selling prices and contracts that expired in 2021 and were not renewed. Gross profit and reported margins increased despite lower sales. The company cautions that interim inventory and gross profit amounts are estimated using a prior-year gross-profit percentage; annual physical inventory adjustments are recorded in Q4.
Operating expenses rose 13.0% in Q3 and 6.0% for the nine-month period, mainly from employment and benefit costs, investor relations, and travel, partly offset by lower IT and bad-debt costs. Nine-month interest and financing costs were $935,000, versus $961,000; the average Webster Facility rate rose to 3.94% from 3.50%.
Cash, liquidity and debt
- At September 30, 2022, cash was $192,000, working capital was $18.337 million, total assets were $54.778 million, and stockholders’ equity was $17.636 million. Cash was $627,000 at December 31, 2021.
- Nine-month operating cash flow was negative $73,000, compared with positive $2.514 million in 2021. Inventory increased $3.876 million; lower receivables provided $1.917 million. Investing cash outflow was $1.980 million, principally capital expenditures. Financing provided $1.618 million. Cash declined $435,000 to $192,000.
- Debt and related-party notes totaled $24.984 million, including $14.097 million on the Webster revolver, $4.691 million on its term loan, and $6.162 million of related-party subordinated notes. Total liabilities were $37.142 million. The Webster Facility matures December 30, 2025; related-party notes are due July 1, 2026. Substantially all assets secure the Webster Facility.
- The Webster Facility requires a 1.25-to-1.00 fixed-charge coverage ratio and restricts capital expenditures and dividends. The company reported compliance with all financial covenants at September 30, 2022. Management said it believed current revenue visibility and backlog supported short-term liquidity, while noting that rising rates would increase borrowing costs.
Outlook, risks and notable items
- Backlog was approximately $65 million at September 30, 2022. Management expected to recognize $13–$15 million in the remainder of 2022, $25–$30 million in the first half of 2023, and $11–$15 million in the second half of 2023. These estimates depend on timely supplier and outsourced-processing deliveries and customer acceptance; additional sales may come from orders not then in backlog.
- Management expected Q4 2022 sales to be in line with Q4 2021 and anticipated liquidity would continue to improve. This is forward-looking, not a guarantee; the filing provides no formal earnings guidance.
- Customer concentration is significant: two customers accounted for 63.9% of Q3 sales; three accounted for 68.9% of nine-month sales. Two customers represented 70.2% of gross receivables at quarter-end. Sole-source suppliers, skilled-labor availability, inflation, fixed-price contracts, factory utilization, and defense-budget or aircraft-demand changes also pose risks.
- Management cited potential disruption to metal supplies, including titanium, related to Russia’s invasion of Ukraine and resulting measures. COVID-19, labor-market conditions, and higher interest rates were also identified as risks.
- A Contract Pharmacal lawsuit seeks $700,000 in damages after the court reduced its claim from more than $1 million; the company disputes the claim and said it would oppose the appeal. The filing also notes other vendor, landlord, and injury-related claims.
- A 1-for-10 reverse stock split became effective October 18, 2022; all share and per-share figures were retrospectively adjusted. The company reported no off-balance-sheet arrangements. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether backlog converts to sales on schedule, given supplier, processing, and customer-acceptance dependencies.
- Cash generation and working-capital trends, particularly inventory growth and the low cash balance.
- Customer and supplier concentration, contract renewals, pricing, and the effect of material and labor costs on margins.
- Webster Facility covenant compliance, borrowing availability, debt-service needs, and sensitivity to further rate increases.
- Developments in the Contract Pharmacal appeal and other disclosed claims.