Air Industries Group — FY 2020 Form 10-K
Reporting period: Year ended December 31, 2020; comparison is with FY 2019. Air Industries Group (NYSE American: AIRI) manufactures aerospace and defense components through Complex Machining and Turbine Engine Components. Defense-related sales predominate. The filing was signed March 29, 2021.
Financial performance
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Net sales | $50.097 million | $54.573 million |
| Gross profit / margin | $6.512 million / 13.0% | $9.142 million / 16.8% |
| Operating income (loss) | ($1.439 million) | $0.328 million |
| Income (loss) from continuing operations, net of tax | $1.326 million | ($2.598 million) |
| Net income (loss), including discontinued operations | $1.096 million | ($2.732 million) |
| Cash from operating activities | ($1.525 million) | ($0.888 million) |
| Cash from investing activities | ($3.797 million) | ($0.764 million) |
| Cash from financing activities | $6.533 million | $0.934 million |
FY 2020 net income included $2.414 million of forgiven SBA loans and a $1.416 million CARES Act tax refund; the filing attributes the improvement over 2019 largely to these items. Sales fell 8.2%, while gross profit fell 28.8%. Lower volume reduced manufacturing-overhead absorption, and COVID-related safety measures added costs. Operating expenses decreased 6.9% to $7.951 million. Interest and financing costs declined substantially following the late-2019 refinancing; the statements report $1.491 million in total interest and financing costs, compared with $3.561 million in 2019.
Balance sheet, liquidity and debt
- At December 31, 2020, cash was $2.505 million, working capital was $16.284 million, total assets were $57.777 million and stockholders’ equity was $15.109 million.
- Inventory was $32.120 million, approximately 56% of assets, up from $28.646 million. Accounts receivable, net, was $8.798 million.
- Notes payable and finance lease obligations totaled $27.273 million, including $21.207 million owed to Sterling National Bank (SNB) and $6.012 million of related-party notes. The SNB facility is secured by substantially all assets, matures December 30, 2022, and includes a 1.25:1.00 fixed-charge coverage covenant. The company reported covenant compliance at year-end.
- Related-party notes were extended to July 1, 2023. Approximately $4.412 million of principal was convertible into about 3.791 million shares at a weighted-average conversion price of $1.16, creating potential dilution. The filing reports 31.907 million shares outstanding at year-end.
- Operating lease liabilities were $4.628 million on a discounted basis; undiscounted future operating lease payments were $5.917 million. Total contractual obligations, including debt, finance leases and operating leases, were $33.190 million.
Operating cash use increased as receivables and inventory absorbed cash, including a $3.474 million increase in inventory. Capital expenditures were $3.797 million, principally for new machinery. Financing inflows included SNB borrowings, $2.414 million of SBA loans later forgiven, and $0.984 million from a stock issuance.
Material changes and business developments
- COVID-19 disrupted suppliers, subcontract processing and shipping, and reduced capacity and productivity during portions of 2020. The company remained open as an essential business; operating conditions had substantially returned toward normal as it entered 2021, but further disruption remained possible.
- Complex Machining sales declined 7.4% to $44.659 million. Turbine Engine Components sales declined 14.3% to $5.438 million; that segment’s gross profit was $19,000, versus $473,000 in 2019.
- The company invested in equipment and expanded manufacturing cells, including a $3.797 million capital-spending program. Management expects these investments to improve capacity, efficiency and product capability.
- Firm backlog for deliveries within the forward 18 months was approximately $81.1 million at December 31, 2020. Three customers accounted for 73.9% of sales, versus 76.0% in 2019; three customers represented 80.3% of gross receivables at year-end.
- Common shares outstanding rose to 31.907 million from 29.478 million, reflecting stock sales, note conversions and stock issued for director fees.
Outlook, risks and unusual items
Management expected FY 2021 sales to exceed FY 2020 and was optimistic that operating expenses would decline as a percentage of sales. It believed available cash, expected operating funds, confirmed orders and credit availability would support operations through April 1, 2022, and concluded substantial doubt about going concern did not exist. This expectation depends on forecasts and financing availability; the filing gives no quantified sales or earnings guidance.
- Key risks include COVID-19 and commercial aerospace recovery, reliance on a few customers and aircraft platforms, defense budget changes, supplier and raw-material availability and pricing, fixed-price contract cost overruns, and high inventory and working-capital needs.
- Debt, near-term facility maturity, covenant requirements, refinancing needs and potential dilution from convertible notes are important financing and shareholder risks. Management said additional financing might be needed.
- A customer, Contract Pharmacal Corp., seeks damages exceeding $1 million in a disputed sublease matter; discovery was ongoing. The company reported that it believed it had meritorious defenses. A separate CPI working-capital dispute was settled in December 2020, with $1.381 million released from escrow to CPI and mutual releases exchanged.
- The auditor issued an unqualified opinion on the financial statements and 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.
Important facts for investors to verify
- Whether 2021 sales growth materialized and whether backlog converted to shipments, revenue and cash collection.
- Inventory quality, work-in-process completion, reserve adequacy and cash tied up in inventory and receivables.
- Availability and terms of SNB financing through its December 2022 maturity, covenant compliance, and the company’s ability to manage related-party debt due in 2023.
- Extent of potential dilution from convertible notes, options, warrants and future financing needs.
- Resolution and financial exposure of the Contract Pharmacal litigation, and any renewed COVID-19 or supplier disruption.