Air Industries Group — Q1 2016 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2016, Air Industries Group reported results from its aerospace and defense manufacturing businesses. Operations are organized into Complex Machining, Aerostructures & Electronics, and Turbine Engine Components. The filing is unaudited; results for the quarter are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Net sales | $15.184 million | $16.811 million; down 9.6% |
| Gross profit / margin | $2.821 million / 18.6% | $4.369 million / 26.0% |
| Operating income (loss) | $(1.591) million | $0.466 million |
| Interest and financing costs | $0.505 million | $0.346 million |
| Net income (loss) | $(1.430) million; $(0.19) per share | $0.104 million; $0.01 per share |
| Operating cash flow | $0.900 million | $0.988 million |
| Cash at quarter-end | $0.369 million | $0.529 million at Dec. 31, 2015 |
| Total debt, including capital leases | $44.782 million | $44.805 million at Dec. 31, 2015 |
| Working capital | $1.081 million | $2.166 million at Dec. 31, 2015 |
Operating cash flow remained positive despite the net loss, helped by a $3.850 million reduction in receivables and increases in accounts payable and deferred revenue; inventory increased $3.826 million. Investing activities used $0.567 million, financing activities used $0.493 million, and cash declined $0.160 million. Current assets were $56.312 million versus current liabilities of $55.231 million. Total assets were $88.120 million and stockholders’ equity was $27.402 million at March 31.
Material changes versus the prior period
- Sales declined mainly in Complex Machining (down $1.597 million) and Aerostructures & Electronics (down $0.622 million), partly offset by a $0.592 million increase in Turbine Engine Components. The latter included a full quarter of Sterling sales versus one month in Q1 2015.
- Gross profit fell $1.548 million. Aerostructures & Electronics accounted for most of the decline, with gross profit down $1.214 million.
- Operating expenses increased $0.509 million, including costs associated with Sterling and Compac. Management attributed higher financing costs principally to acquisition-related debt and increased inventory.
- All three segments recorded losses before tax: Complex Machining $0.400 million, Aerostructures & Electronics $0.772 million, and Turbine Engine Components $0.914 million.
Outlook, risks, contingencies, and unusual items
- Debt and covenant risk: The company was not in compliance with PNC’s Fixed Charge Coverage Ratio covenant at March 31, 2016. PNC had not accelerated the debt as of the filing, but could require immediate repayment. The company classified its revolving facility and term loans as current. It reported an agreement in principle for a further facility amendment, including a covenant waiver and extension of the revolver to April 30, 2018; the amendment was not described as completed. The agreement contemplated repayment of approximately $6.5 million of excess advances, including $1.5 million at closing and $100,000 weekly thereafter.
- Funding dependence: Substantially all assets secure the PNC facility, operating receipts flow through PNC’s lockbox, and management said the company would lack funds to continue operations if PNC stopped lending.
- Subsequent financing and property transaction: After quarter-end, the company issued $1.4 million in subordinated related-party notes in April and May, bearing 7% interest and generally due June 30, 2016, subject to earlier repayment upon specified equity proceeds. On April 11, it completed a $1.7 million sale-leaseback of its South Windsor property; net proceeds were to repay PNC. The company entered a 15-year lease with initial annual rent of about $155,000, increasing about 3% annually, and bears operating costs.
- Operating and concentration risks: Four customers represented 58.4% of sales; three customers represented 40.1% of gross receivables. The company also depends on several sole-source suppliers. Management cited lower military demand, competitive bidding, volatile material costs, and competition for skilled labor.
- Controls and accounting: Management concluded disclosure controls were not effective at quarter-end, citing material weaknesses involving complex accounting matters and inventory aging, reserves, and valuation. The company used the gross-profit method to compute interim inventory. Staffing and external advisory support had been added, but had not yet significantly improved control effectiveness.
- Outlook: The filing provides no quantified revenue or earnings guidance. Management’s forward-looking statements are subject to risks and actual results may differ materially.
Important facts for investors to verify
- Whether the PNC amendment and covenant waiver were executed, and whether the excess-advance repayment schedule was met.
- Availability under the borrowing base, subsequent cash balances, and the company’s ability to meet near-term debt and lease payments.
- Whether the Q1 margin decline, especially in Aerostructures & Electronics, persists and how each segment performs.
- Inventory valuation, aging and reserves, given the control weakness and interim gross-profit method.
- Repayment or refinancing of the related-party notes and application of sale-leaseback proceeds to PNC debt.
- Progress in remediating disclosure controls and the implications of customer and sole-source supplier concentration.