Air Industries Group, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; this 10-K reports annual results, not standalone fourth-quarter results. The company manufactures aerospace and defense components and assemblies through AIM, Welding Metallurgy (WMI), and NTW. NTW was acquired on June 20, 2012, so its results are included only from that date.
Financial performance
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $64.215 million | $53.745 million |
| Gross profit / margin | $14.858 million / 23.1% | $10.928 million / 20.3% |
| Operating income | $5.984 million | $4.379 million |
| Interest and financing costs | $1.843 million | $2.102 million |
| Income before taxes | $3.995 million | $2.304 million |
| Income tax provision | $1.447 million | $57,000 |
| Net income / net margin | $2.548 million / 4.0% | $2.247 million / 4.2% |
| Diluted earnings per share | $0.54 | $0.63 |
| Cash from operations | $1.694 million | $3.633 million |
Sales increased 19.5%, while net income rose 13.4%; diluted EPS declined, reflecting the higher weighted-average share count following the 2012 equity issuance. The gross margin improved, but the tax provision increased substantially after the company used nearly all available net operating loss carryforwards.
By segment, AIM sales declined 1.4% to $42.075 million; WMI sales grew 34.6% to $14.907 million; and NTW contributed $7.233 million after acquisition. WMI’s reported margin also benefited from reclassifying some personnel costs from factory overhead to SG&A.
Liquidity, debt, and capital
- Year-end cash was $490,000, down from $577,000. Working capital was $11.680 million; current assets were $39.539 million and current liabilities were $27.859 million.
- Operating cash flow fell to $1.694 million, principally as receivables increased by $4.606 million and accounts payable and accrued expenses decreased by $1.534 million. Investing used $13.038 million, including $11.6 million for NTW. Financing provided $11.257 million, primarily from the stock placement and increased bank borrowing.
- Debt and capital lease obligations totaled $23.851 million at year-end: $15.667 million revolving credit, $3.748 million PNC term loan, $2.060 million capital leases, $1.376 million seller notes, and $1.000 million junior subordinated notes. The filing classifies the revolving loan as current because of a subjective acceleration provision.
- The PNC facility is secured by substantially all company assets; cash receipts flow through a lender-controlled lockbox. The company reported compliance with its credit-facility terms at December 31, 2012, but states it depends on continued bank lending and would lack operating funds if the lender stopped advancing funds.
- To fund the NTW acquisition, the company raised approximately $6.528 million net in a private placement and converted approximately $5.204 million of junior subordinated notes into common shares. It paid a $0.0625-per-share dividend in 2012 and declared another for April 2013; future dividends require board discretion and lender consent.
Material changes, outlook, and risks
- The NTW acquisition expanded landing-gear capabilities and customer/platform reach. Management stated that the combined company had approximately $71.1 million in pro forma 2012 sales; this is not the reported consolidated revenue, which includes NTW only from the acquisition date.
- Defense-related products account for approximately 90% of sales. The company reported slower AIM orders, including lower sales to Sikorsky in the second half of 2012, and said the decline continued into 2013. Management linked this to anticipated defense-budget reductions; sequestration took effect March 1, 2013.
- Customer concentration remains significant: three customers represented 65.3% of 2012 sales. Sikorsky and Goodrich Landing Gear represented 27.6% and 26.3%, respectively. The company also depends on a limited number of aircraft platforms and has certain sole-source suppliers.
- AIM’s 18-month firm backlog was approximately $49 million and projected backlog approximately $60 million; WMI and NTW firm backlogs were approximately $9.1 million and $17.8 million, respectively, all as of February 28, 2013. Projected backlog includes forecast releases against agreements that do not themselves authorize production, so it is not equivalent to firm orders.
- No quantified earnings or revenue guidance is provided. Management describes plans to pursue internal growth and potentially accretive acquisitions, while cautioning that performance depends on defense spending, customer orders, fixed-price contract costs, materials and labor, supplier performance, and successful integration of NTW.
- Other risks include substantial leverage, restrictive debt covenants, volatile raw-material prices, competitive bidding and cost-estimation risk, regulatory and government-contract compliance, and limited trading liquidity. An unresolved former Sigma Metals vendor matter involved approximately $71,000; management said other known proceedings were not expected to have a material adverse effect.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective at year-end; the auditor did not attest to internal controls, consistent with the company’s emerging-growth-company exemption.
Investor verification priorities
- Reconcile reported full-year growth with NTW’s partial-year contribution and review NTW’s post-acquisition performance and integration costs.
- Check the trend in AIM orders and Sikorsky sales, the effect of defense-budget reductions, and conversion of reported backlog—especially forecasted GPA releases—into authorized orders and revenue.
- Assess operating cash conversion, receivables and inventory quality, and the company’s ability to meet debt maturities, scheduled principal payments, and excess-cash-flow prepayments.
- Review PNC borrowing availability, covenant compliance, subjective acceleration provisions, collateral coverage, and the lender-consent requirement for dividends.
- Verify customer and platform concentration, sole-source supplier exposures, fixed-price contract margins, and the treatment of the approximately $71,000 Sigma vendor claim.
- Assess share dilution and potential selling pressure following the 2012 private placement, note conversion, and issuance of warrants; confirm the sustainability of dividends given liquidity and debt constraints.