Air Industries Group — Form 10-Q Summary
Business context and reporting period
For the quarter ended September 30, 2014, Air Industries Group reported as an aerospace and defense manufacturer and supplier of aircraft components, assemblies, specialty welding, and military kits. Its four reporting segments were AIM, WMI, NTW, and Eur-Pac (EPC). Acquisitions during 2014 included Woodbine, Eur-Pac, and Electronic Connection Corporation (ECC); AMK Technical Services was acquired on October 1, after quarter-end.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $15.154m | $16.052m | $43.967m | $45.016m |
| Gross profit | $3.557m | $3.743m | $10.955m | $11.020m |
| Gross margin | 23.5% | 23.3% | 24.9% | 24.5% |
| Operating income | $0.560m | $1.031m | $2.046m | $3.287m |
| Net income | $0.380m | $2.534m | $1.337m | $3.039m |
| Diluted EPS | $0.05 | $0.43 | $0.20 | $0.52 |
Operating cash flow for the first nine months was negative $2.700m, versus positive $3.556m in 2013. Inventory growth used $4.401m of cash; investing activities used $5.102m, including acquisitions and capital spending. Financing activities provided $8.809m, including net offering proceeds of about $8.562m. Cash increased to $1.568m from $0.561m at year-end 2013.
At September 30, 2014, total assets were $59.116m, working capital was $19.330m, and stockholders’ equity was $31.057m. Total notes payable and capital lease obligations were $19.506m, of which $16.315m was classified as current. The PNC revolving balance was $15.232m; substantially all assets secured the facility. The company reported compliance with loan covenants at quarter-end.
Material changes versus prior period
- Q3 sales declined 5.6% year over year and nine-month sales declined 2.3%, despite revenue contributed by acquired businesses.
- Q3 net income fell 85%; nine-month net income fell 56%. Higher SG&A and lower sales contributed, while the Q3 2013 comparison included a substantial tax benefit related to a deferred-tax valuation allowance release.
- Q3 SG&A rose 10.5% to $2.997m; nine-month SG&A rose 15.2% to $8.909m, largely reflecting acquired operations and integration costs. Management said it expected WMI costs to decline after integration.
- Debt increased by $2.010m from December 31, 2013. The company raised equity, converted $1.000m of subordinated notes into common shares, and issued 1.170m shares in its registered offering; outstanding shares rose to 7.100m from 5.862m.
- Dividends paid during the nine months totaled $2.683m. A $0.15-per-share dividend was also paid in November 2014.
Outlook, commentary, and risks
- Management anticipated stronger Q4 sales at AIM and NTW. NTW’s weakness was attributed to delayed expected U.S. Navy F-18 landing-gear orders; the company said orders had begun to arrive and expected higher sales in Q4 2014 and through 2015.
- AIM cited continued low defense spending and E2-D landing-gear production delays caused by late supplier shipments and defective raw materials. Management also highlighted a $39m multi-year nacelle thrust-strut contract, with most expected revenue in 2016 and later.
- The company described itself as highly leveraged and dependent on continued PNC lending; cash receipts flow through a PNC-controlled lockbox, and the facility contains a subjective acceleration provision. The October 1 amendment expanded facility capacity and added a $3.5m term loan for AMK; AMK was acquired for $6.953m, partly financed by a $2.5m seller note and mortgage due by December 31, 2014.
- Key operating risks include defense-budget reductions, fixed-price contract execution, volatile material costs, skilled-labor availability, sole-source suppliers, and customer concentration. Three customers generated 68.3% of Q3 sales; four customers represented 73.3% of gross receivables at quarter-end.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether delayed Navy orders and supplier issues resolved, and whether management’s Q4 2014 and 2015 sales expectations were achieved.
- Whether acquired businesses, particularly WMI and Eur-Pac/ECC, can be integrated and contribute durable earnings and cash flow.
- How inventory growth, receivable concentration, and operating cash outflows affect liquidity and borrowing-base availability.
- Current borrowing capacity, covenant headroom, debt terms, and repayment of the AMK seller note due December 31, 2014.
- The sustainability of dividends given leverage, negative operating cash flow, and loan-facility restrictions.