Air Industries Group — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 27, 2020. This is an annual report, not a standalone fourth-quarter results report. Unless noted, comparisons are with FY2018 and sales figures refer to continuing operations.
Business context
Air Industries Group manufactures aerospace and defense components and assemblies through its Complex Machining segment (AIM and NTW) and Turbine Engine Components segment (Sterling). Its products serve military and commercial aircraft programs, with defense representing the predominant share of sales. In response to losses and working-capital pressure, the company sold WMI in 2018, closed EPC and ECC in March 2019, and consolidated operations.
Firm funded backlog was approximately $114.5 million as of February 29, 2020. The filing reports three customers accounted for 76.0% of 2019 sales; Goodrich Landing Gear Systems and Sikorsky Aircraft represented 34.2% and 30.4%, respectively.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales, continuing operations | $54.573 million | $44.530 million |
| Gross profit | $9.142 million | $5.445 million |
| Gross margin | 16.8% | 12.2% |
| Operating income (loss) | $0.328 million | $(4.913) million |
| Net loss | $(2.732) million | $(10.992) million |
| Net loss per share | $(0.09) | $(0.41), including discontinued operations |
| Cash used in operating activities | $(0.888) million | $(2.336) million |
Sales rose 22.6%; gross profit increased 67.9%. Management attributed improved gross profit to cost reductions, consolidation, and better absorption of fixed overhead on higher sales. Operating expenses were $8.539 million, up 2.7%. Interest and financing costs declined to $3.561 million from $3.916 million. FY2019 included a $275,000 lease-asset impairment; FY2018 included a $2.043 million write-off of capitalized engineering costs. Discontinued operations generated a $134,000 loss in 2019 versus $2.441 million in 2018.
At December 31, 2019, cash was $1.294 million, working capital was $5.623 million, total assets were $51.090 million, and stockholders’ equity was $10.206 million. Inventory was $28.646 million, approximately 56% of assets. Cash declined by $718,000 during the year; investing activities used $764,000 and financing activities provided $934,000.
Total notes payable and finance lease obligations were $25.950 million, including $16.343 million owed to Sterling National Bank (SNB) and $6.862 million of related-party notes. The contractual-obligations table shows $22.544 million of debt and finance lease payments due within one year. The company refinanced PNC debt with SNB on December 31, 2019. SNB’s facility includes a $16 million revolver and a $3.8 million term loan, is secured by substantially all assets, and carries a stated rate of 30-day LIBOR plus 2.5%, subject to a 3.5% floor. It also imposes a 1.25:1 fixed-charge coverage covenant beginning with the quarter ending March 31, 2020.
Changes, outlook, risks and contingencies
- Segment trends: Complex Machining sales increased 21.3% to $48.226 million; Turbine Engine Components sales increased 32.6% to $6.347 million. Both segments improved gross profit, though Sterling remained loss-making before tax.
- Management outlook: Management projected positive operating cash flow in 2020 and stated that cash, operating cash flows, and SNB availability were expected to fund operations for at least 12 months from filing. The filing says substantial doubt about going concern was alleviated by the refinancing and expected improvement, but provides no quantified 2020 earnings or cash-flow guidance.
- COVID-19: The company was deemed an essential business and had not curtailed operations by the filing date. Management warned that employee health, supply-chain disruption, or broader economic effects could force reduced or suspended operations; the financial impact was not then estimable.
- Customer and operating concentration: Heavy reliance on a few customers and aircraft platforms, fixed-price contracts, volatile material costs, limited suppliers, and skilled-labor availability expose results and margins to disruption. The company also disclosed prior difficulty obtaining timely raw-material shipments amid liquidity constraints.
- Financing and dilution: The company remains highly leveraged, depends on continued revolving-credit availability and possible external financing, and has related-party and third-party convertible debt. Related-party notes were due December 31, 2020; the $2 million 7% notes bear 7% interest and are convertible at $0.93 per share. Refinancing or new capital could carry unfavorable terms or dilute shareholders.
- CPI dispute: CPI sought approximately $4.2 million over the WMI sale working-capital adjustment. Air Industries disputes the determination; $619,316 of escrow was released to CPI, and the company said it reserved substantially all of the remaining escrow but could not estimate the loss. Counsel could not opine on the probable outcome. An adverse judgment could affect liquidity and potentially trigger a loan default.
- Other litigation: Contract Pharmacal seeks damages exceeding $1 million over a sublease dispute; the company disputes the claim and had not accrued a loss because it could not estimate the outcome. Other vendor, landlord, and employee matters are also disclosed.
- Reporting and governance: Management concluded disclosure controls and internal control over financial reporting were effective at year-end; the auditor did not provide an internal-control attestation. Related-party financing and placement-agent relationships involving directors’ affiliates merit attention.
Important facts for investors to verify
- Whether 2020 operating cash flow turned positive and whether the company met SNB’s quarterly fixed-charge coverage covenant.
- Available revolver capacity, borrowing-base availability, and cash needs relative to the substantial debt maturities due within one year.
- The resolution and cash impact of the CPI working-capital dispute and the Contract Pharmacal claim.
- Backlog conversion, customer concentration, and whether sales growth and gross-margin gains continued after FY2019.
- The effects of COVID-19 on operations, customers, suppliers, and working capital, as well as any share issuance or convertible-debt dilution.