Air Industries Group — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. AIR Industries manufactures aerospace components and assemblies, principally for defense customers, through its Complex Machining and Turbine Engine Components segments. Results are unaudited.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $8.494 million | $13.368 million | $21.941 million | $27.246 million |
| Gross profit | $0.614 million | $2.191 million | $2.795 million | $4.465 million |
| Gross margin | 7.2% | 16.4% | 12.7% | 16.4% |
| Net loss | $1.584 million | $0.735 million | $0.526 million | $1.658 million |
| Operating cash flow | Not separately presented for the quarter | $(1.043) million | $(1.493) million |
- Q2 operating loss was $1.292 million, versus operating income of $0.219 million a year earlier. Six-month pretax loss was $1.940 million, compared with $1.730 million in 2019. The six-month 2020 net loss was lower primarily because the company recorded a $1.414 million income-tax benefit related to a CARES Act NOL carryback.
- At June 30, cash was $2.068 million; working capital was $8.838 million; total assets were $54.728 million; and stockholders’ equity was $11.719 million. Inventory was $33.859 million, up from $28.646 million at year-end 2019.
- Cash increased $0.774 million during the first half. Financing provided $2.126 million, including $2.414 million of SBA loans and $0.984 million from common-stock issuance; operating and investing activities used $1.043 million and $0.309 million, respectively.
- Notes payable and finance lease obligations totaled $26.589 million, including $16.488 million owed to Sterling National Bank (SNB) and $5.992 million of related-party notes. The SNB facility includes a $16 million revolving line and term loan, matures December 30, 2022, and is secured by substantially all company assets. The company reported covenant compliance at quarter-end.
Changes versus the prior comparable period
- Q2 sales fell 36.5% year over year and gross profit fell 72.0%; management attributed the declines to COVID-19 effects. Six-month sales declined 19.5% and gross profit declined 37.4%.
- Both segments had lower first-half sales: Complex Machining decreased 19.7% to $19.372 million; Turbine Engine Components decreased 17.8% to $2.569 million. Turbine Engine Components recorded a first-half gross loss of $0.054 million, versus gross profit of $0.157 million in 2019.
- Interest and financing costs fell to $0.428 million in Q2 from $0.992 million, and to $0.808 million for the first half from $1.955 million, reflecting lower rates and costs under the SNB facility, which replaced the PNC facility at year-end 2019.
- Two customers accounted for 71.9% of Q2 sales and 69.3% of first-half sales. One customer represented 49.7% of gross receivables at June 30.
Outlook, risks and unusual items
- The company remained open as an essential defense-industry business, but reported reduced productivity from absenteeism, enhanced safety procedures, supplier disruptions and program delays. COVID-19 reduced revenue and margins beginning in April; management said the effects continued into June and that the duration and future impact were uncertain.
- Management stated that confirmed orders, operating cash generation, government loan proceeds and credit-facility availability were expected to support operations through September 1, 2021. No numerical revenue or earnings guidance was provided.
- The company ordered $2.5 million of machinery expected to arrive in September and October 2020, and was seeking loans to fund the purchase. Financing was not assured.
- The company received $2.414 million in PPP/SBA loans at 1% interest and may apply for forgiveness; forgiveness is not assured. It disclosed that loans exceeding $2 million would be subject to audit. It also deferred $0.199 million of employer Social Security taxes, payable in 2021 and 2022.
- Related-party and third-party convertible notes were due December 31, 2020. Under SNB facility terms, they were to be extended to a date more than six months after December 30, 2022, or converted to common stock, before September 30, 2020.
- Legal contingencies include a CPI Aerostructures working-capital dispute with a demand of approximately $4.2 million; the company is contesting the claim and said counsel could not assess the outcome. A Contract Pharmacal claim seeks more than $1 million; the company disputes it and recorded no accrual because a loss could not be estimated.
- COVID-19 triggered a goodwill impairment assessment; management concluded no impairment was indicated at June 30, 2020, while noting future forecast or share-price declines could change that assessment.
Important facts for investors to verify
- Whether revenue, production capacity and gross margins recover as pandemic-related absenteeism and supply disruptions ease, particularly in the commercial aerospace market.
- Whether the company obtains financing for the $2.5 million equipment purchase and whether the expected production savings and new business materialize.
- Whether SBA loans qualify for forgiveness and the outcome of the required audit, and whether the company meets the September 30 deadline for extending or converting subordinated notes.
- Available borrowing capacity under the SNB borrowing base, covenant headroom, and the company’s ability to meet debt maturities and its stated liquidity outlook.
- Developments in the CPI and Contract Pharmacal disputes, and the potential effect of customer concentration and the large inventory balance on cash conversion.