Air Industries Group — Q2 2015 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2015. The company manufactures aerospace and defense components and services, reporting three segments: Complex Machining, Aerostructures and Electronics, and Turbine Engine Components. Sterling, acquired March 1, 2015, contributed to 2015 results only from its acquisition date.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $19.057m | $13.360m | $35.868m | $28.813m |
| Gross profit | $3.897m | $3.353m | $8.266m | $7.398m |
| Gross margin | 20.5% | 25.1% | 23.0% | 25.7% |
| Operating income | $0.072m | $0.257m | $0.538m | $1.486m |
| Net income (loss) | $(0.601)m | $0.616m | $(0.497)m | $0.957m |
| Operating cash flow | — | $(0.224)m | $(0.384)m |
- Q2 revenue grew 42.6%; six-month revenue grew 24.5%. Growth primarily reflected acquired businesses, particularly AMK, Sterling, EPC and ECC.
- Profitability weakened despite higher sales: gross margin contracted, operating expenses and interest costs rose, and the company moved to a net loss. Q2 interest and financing costs were $544,000 versus $304,000; six-month costs were $890,000 versus $607,000.
- At June 30, cash was $1.214m, working capital was $3.907m (down from $16.176m at December 31, 2014), total assets were $78.579m and stockholders’ equity was $29.765m. Inventory rose to $33.283m from $28.391m.
- Debt for borrowed money and capital leases totaled $37.444m, up from $27.721m at year-end: $23.000m revolving credit, $10.960m term loans and $3.484m capital leases. All PNC debt was classified current because of the covenant-waiver terms described below.
- Investing cash use was $5.546m, including $4.825m net cash for Sterling, $350,000 of capitalized engineering and $371,000 of equipment purchases. Financing provided $5.566m; dividends paid were $2.2m.
Material changes and segment performance
- Complex Machining: Six-month sales fell to $18.595m from $21.460m and pretax income fell to $184,000 from $1.301m. Management attributed lower sales primarily to DoD budget constraints, contract reductions and delays.
- Aerostructures and Electronics: Six-month sales rose to $12.059m from $7.353m and pretax income improved to $724,000 from a $485,000 loss, reflecting acquisitions and higher activity.
- Turbine Engine Components: This segment contributed $5.214m in six-month sales but recorded a $1.198m pretax loss. Management said AMK had not yet reached its anticipated potential; Sterling also reported a segment-level operating loss in the quarter.
- Sterling was acquired for $5.4m cash and 425,005 shares. Its provisional purchase accounting was still being finalized; a Q2 revision increased goodwill by $1.3m with a corresponding increase in capital lease obligations. Goodwill totaled $8.719m, with no impairment recorded.
- Shares outstanding increased to 7,559,501 at June 30 from 7,108,677 at year-end, primarily reflecting 425,005 shares issued for Sterling.
Liquidity, outlook, risks and unusual items
- The company said it is highly leveraged and relies on PNC borrowing to support operations and acquisitions; substantially all assets secure the facility, and cash receipts flow through a PNC-controlled lockbox. Management stated that if PNC ceased lending, the company would lack funds to continue operations.
- At June 30, the company was not in compliance with the PNC fixed-charge coverage covenant. PNC granted a waiver on August 10, 2015 for the six months ended June 30. Because the waiver was for less than one year, PNC debt was classified as current. The company reported compliance with the facility’s other terms.
- Also on August 10, PNC amended the facility to provide maximum borrowings of approximately $38m, including a $28m revolving loan. This amendment followed the June 30 balance-sheet date and does not itself establish the amount available to borrow.
- On August 12, the company announced an agreement in principle to acquire Compac Development Corporation; the transaction was scheduled to close shortly. No purchase price or completed closing is provided in the filing text.
- The board approved a $0.15-per-share quarterly dividend payable August 12, subject to board discretion and PNC covenant compliance. The filing provides no quantified earnings or revenue guidance; management cautions that interim results are not necessarily indicative of full-year results.
- Risks include reliance on a major lender, customer concentration (three customers accounted for 45.3% of six-month sales), key sole-source suppliers, defense-budget exposure, competitive fixed-price contracts, volatile materials and skilled-labor costs, and AMK’s underperformance. Management reported no off-balance-sheet arrangements and no goodwill impairment. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the PNC covenant waiver and August amendment provide sufficient liquidity and borrowing-base availability, and whether the company meets future covenants.
- Whether operating cash generation improves, particularly given the inventory build, low cash balance and reduced working capital.
- Whether AMK improves performance and whether Sterling’s provisional purchase-price allocation or acquired obligations change materially.
- Whether Complex Machining demand recovers amid DoD budget constraints, and whether customer concentration or sole-source supply risks change.
- The terms, financing, closing status and expected contribution of the proposed Compac acquisition, as well as the sustainability of quarterly dividends.