Air Industries Group — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The company manufactures aerospace and defense components, assemblies, landing gear, and specialty welded products through AIM, WMI, and NTW. NTW was acquired in June 2012; its inclusion for a full six months in 2013 affects year-over-year comparisons. Decimal was acquired July 1, 2013, after quarter-end.
Key financial results
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $14.639m | $15.240m | $28.965m | $31.278m |
| Gross profit | $3.630m | $3.436m | $7.278m | $6.708m |
| Gross margin | 24.8% | 22.6% | 25.1% | 21.4% |
| Operating income | $1.078m | $1.296m | $2.257m | $2.892m |
| Net income | $0.226m | $0.319m | $0.505m | $1.139m |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $4.861m | $0.082m |
Q2 diluted EPS was $0.04 versus $0.08; first-half diluted EPS was $0.09 versus $0.31. Q2 interest and financing costs were $393,000, and first-half costs were $775,000. Taxes were $430,000 and $919,000, respectively.
For the first half, investing cash outflow was $260,000 and financing cash outflow was $4.136m, producing a $465,000 increase in cash. Cash ended at $955,000. Operating cash generation benefited from a $2.530m reduction in receivables and a $952,000 increase in income taxes payable; inventory increased $1.508m.
Financial position and liquidity
At June 30, cash was $955,000, working capital was $11.552m, total assets were $50.847m, and stockholders’ equity was $18.784m. Notes payable and capital lease obligations totaled $20.128m, including a $13.535m PNC revolver and $2.848m PNC term loan. Total liabilities were $32.063m. The revolver is classified as current, in part because of a subjective acceleration clause.
A June 27 amendment to the PNC facility set maximum borrowings at approximately $20.848m, with an $18m revolving commitment subject to its borrowing base and a $2.848m term loan. The filing reports reduced interest rates: the revolver was at 4.0% and the term loan at approximately 5.0% at period-end. The company reported covenant compliance, but says it is highly leveraged, relies on PNC borrowing, and would lack funds to continue operations if PNC stopped lending. Cash receipts are swept through a PNC-controlled lockbox.
Changes, outlook, and risks
- First-half sales fell 7.4%; AIM sales declined 34.0%, which management attributed largely to defense budget sequestration and reduced sales to Sikorsky and Goodrich, as well as supplier-related delays on Navy E2-D landing gear. The company also cited competitive bidding, volatile materials costs, and competition for skilled labor.
- Higher NTW contribution lifted consolidated gross profit and margins, but operating expenses rose, and first-half net income fell 55.7%. WMI reported a $5,000 first-half pretax loss.
- The June PNC amendment reduced borrowing costs. The company repaid $2.132m on its revolver during the first half. The term loan requires monthly principal payments starting July 2013; PNC did not request an additional excess-cash-flow prepayment for Q2.
- On July 1, the company acquired Decimal assets for $975,000, partly in cash and partly in installments, and planned to combine its operations with WMI. It also retired approximately $454,000 of capital leases on that date. These are post-quarter events.
- The board declared a $0.0625-per-share dividend payable July 5, approximately $358,000, and management said it intended to continue quarterly dividends subject to board discretion and lender covenants. The company had $955,000 cash at quarter-end, of which approximately $358,000 was used for that payment.
- Three customers accounted for about 59% of first-half sales. The filing gives differing customer concentration percentages in its notes and MD&A; the figures should be reconciled. Sole-source suppliers, customer concentration, and dependence on PNC are material risks.
- A former Sigma vendor was considering litigation over approximately $71,000; settlement discussions had begun without a definitive resolution. Management reported no off-balance-sheet arrangements, effective disclosure controls, and no material quarterly changes to internal control over financial reporting.
The filing provides no quantified revenue or earnings guidance. Management’s forward-looking statements are subject to risks and are not guarantees of future results.
Important facts for investors to verify
- Reconcile the customer concentration disclosures and assess exposure to Sikorsky, Goodrich, and other major customers.
- Track AIM sales, defense-budget effects, E2-D production delays, and whether supplier constraints improve.
- Review PNC borrowing-base availability, covenant headroom, acceleration provisions, and the company’s ability to meet scheduled debt and lease payments.
- Assess the sustainability of operating cash flow, including the effects of receivables collection, rising inventory, and taxes payable.
- Confirm the integration costs and operating contribution of NTW and the post-quarter Decimal acquisition, as well as the affordability and covenant treatment of dividends.
- Monitor the unresolved vendor claim and the realizability of deferred tax assets; the filing reports a $2.770m valuation allowance and a capital-loss carryforward expiring in 2015.