Air Industries Group — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018; filed April 1, 2019. This is an annual report, not a standalone fourth-quarter report, and the filing does not provide clear standalone Q4 financial results.
Business context
Air Industries Group manufactures flight-critical aerospace and defense components and assemblies. At year-end, its continuing operations were focused on Complex Machining and Turbine Engine Components. The company sold its WMI businesses in December 2018 and was winding down Eur-Pac and Electronic Connections; Eur-Pac had been debarred from future U.S. government contracts through October 29, 2020.
Financial results and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Continuing-operations sales | $46.309 million | $49.869 million |
| Gross profit / margin | $5.414 million / 11.7% | $4.867 million / 9.8% |
| Operating loss | $5.963 million | $12.758 million |
| Loss from continuing operations | $9.609 million | $16.073 million |
| Net loss, including discontinued operations | $10.992 million | $22.551 million |
| Cash used in operating activities | $2.336 million | $3.986 million |
| Cash and cash equivalents at year-end | $2.012 million | $0.630 million |
| Working capital | $6.008 million | $9.531 million |
| Total assets | $47.756 million | $60.755 million |
| Stockholders’ equity | $11.606 million | $17.766 million |
Sales shown above exclude WMI, which was classified as discontinued operations; WMI generated $13.852 million of revenue and a $1.042 million operating loss in 2018 before its sale. The company reported $3.685 million of investing cash inflow, largely from the WMI sale, and $33,000 of net financing cash inflow. Operating cash flow remained negative.
At December 31, 2018, PNC debt was $15.615 million, capital lease obligations were approximately $1.786 million, related-party notes were $4.835 million, and other notes payable were $2.830 million. Interest and financing costs rose to $3.921 million from $3.378 million. Inventory was $29.051 million, approximately 61% of total assets.
Changes versus 2017
- Continuing-operations sales declined 7.1%. Complex Machining sales increased 3.3% to $39.745 million, while Turbine Engine Components sales fell 29.7% to $4.785 million and Aerostructures sales fell 61.1% to $1.779 million.
- Gross margin improved to 11.7% from 9.8%, which management attributed primarily to cost-reduction and productivity measures. Operating expenses decreased 22.7% to $8.839 million.
- Net loss narrowed by $11.559 million, but remained substantial. The comparison benefited from much lower impairment charges: 2018 included $109,000 of goodwill impairment, $386,000 of asset impairment, and a $2.043 million write-off of capitalized engineering costs; 2017 included $6.195 million of continuing-operations goodwill impairment.
- Cash from operations improved but remained negative. Cash at year-end increased, while working capital and equity declined.
Outlook, risks and unusual items
- Going concern: The auditor’s report and management disclosures state that recurring losses and dependence on additional financing raise substantial doubt about the company’s ability to continue as a going concern. The financial statements contain no adjustments for a possible failure to continue.
- Credit facility: PNC’s facility was extended to December 31, 2019, with interest at the Alternate Base Rate plus 4%, minimum EBITDA covenants, and staged extension fees that could total $1.0 million. Substantially all assets secure the facility. The company said it complied with the year-end 2018 EBITDA covenant; future refinancing was uncertain.
- Funding and dilution: The company relied on debt and equity financing, including funding from directors Michael and Robert Taglich and their affiliates. In January 2019, they purchased $2 million of 7% convertible notes due in 2020, convertible at $0.93 per share. Further financing may be unavailable or dilutive.
- WMI sale dispute: The $9 million sale price was reduced by a $1.093 million working-capital adjustment, with $2 million held in escrow. CPI later disputed the working-capital calculation; the company said it intended to contest the claim.
- Customer and supply concentration: Three customers accounted for 70% of 2018 sales. Management also reported supplier delays associated with liquidity constraints, posing a risk to production and deliveries. Firm funded backlog was approximately $92.4 million as of February 28, 2019.
- Controls: Management concluded disclosure controls and internal controls over financial reporting were ineffective at year-end. Identified weaknesses included inventory and labor-cost systems, quarter-end close and consolidation processes, and insufficient accounting staff. Remediation was ongoing and not yet established as effective.
- Legal and regulatory matters: Contract Pharmacal sought more than $1 million over a sublease dispute; the company disputed the claim. Other disclosed matters included vendor claims and a stockholder lawsuit concerning a prior share-authorization vote. The filing does not identify a currently known proceeding expected by management to have a material adverse effect.
- Other unusual items: The company changed its accounting policy for pre-production engineering costs and wrote off the $2.043 million capitalized balance. WMI’s 2018 discontinued-operations results and sale should be distinguished from continuing results.
- Management outlook: Management said it expected Turbine Engine Components sales to improve in 2019 and emphasized executing backlog, improving operations, and pursuing profitability and positive cash flow. These statements were not quantified guidance.
Key facts for investors to verify
- Whether the company achieved positive operating cash flow and met PNC’s 2019 EBITDA and repayment requirements, and whether the facility was refinanced or repaid by its December 31, 2019 maturity.
- How the CPI working-capital dispute and $2 million escrow were resolved, including any resulting cash impact.
- Whether the reported backlog converted into shipments and cash, given customer concentration and supplier delays.
- Whether internal-control material weaknesses were remediated and inventory valuation and cost accounting were strengthened.
- The effects of Eur-Pac’s debarment and closure, the WMI divestiture, and engineering-cost expensing on future revenue, margins, and liquidity.
- Potential dilution and related-party financing terms, including outstanding convertible notes, warrants, and any further capital raises.