Air Industries Group — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. The company manufactures aerospace and defense components and assemblies, with growing commercial aerospace activity. Results include acquisitions from their respective closing dates, including Sterling (March 2015) and Compac (September 2015).
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $21.076m | $15.154m | $56.944m | $43.967m |
| Gross profit | $4.178m | $3.557m | $12.444m | $10.955m |
| Gross margin | 19.8% | 23.5% | 21.9% | 24.9% |
| Operating income | $0.026m | $0.560m | $0.564m | $2.046m |
| Pre-tax income (loss) | $(0.389)m | $0.299m | $(0.679)m | $1.115m |
| Net income (loss) | $0.337m | $0.380m | $(0.160)m | $1.337m |
| Basic EPS | $0.04 | $0.05 | $(0.02) | $0.21 |
- Q3 revenue increased 39.1%; nine-month revenue increased 29.5%. Acquisitions contributed materially to growth.
- Margins contracted in both periods. Management attributed the decline primarily to materials billed to customers at cost in Aerostructures and Electronics.
- Q3 net income included a $0.726m tax benefit despite a pre-tax loss. The nine-month $0.519m tax benefit did not prevent a net loss.
- Interest and financing costs were $0.451m in Q3 and $1.341m for nine months, up 73.5% and 54.7%, respectively, year over year.
Cash flow, balance sheet and liquidity
- At September 30, cash was $0.791m, versus $1.418m at December 31, 2014. Working capital was $1.252m, down from $16.176m; total assets were $89.168m and stockholders’ equity was $28.991m.
- Nine-month operating cash use was $1.449m, investing cash use was $7.772m, and financing provided $8.594m. Cash declined by $0.627m. Inventory increased $10.291m during the period.
- Borrowings and capital lease obligations totaled $43.186m: $28.000m revolving credit, $10.396m term loans and $4.790m capital leases. Debt increased $15.465m from year-end 2014, principally to fund acquisitions and inventory.
- Substantially all assets secure the PNC facility. The company relies on PNC borrowing and a controlled cash lockbox to fund operations; management stated that cessation of PNC lending would leave the company without funds to continue operations.
- The company breached the PNC fixed charge coverage covenant at September 30. PNC had not accelerated the facility as of issuance; the company had received a draft waiver and was negotiating its finalization. The breach allowed PNC, at its option, to demand repayment, and PNC term loans were classified as current. Revolver capacity was up to $28m, subject to the borrowing base.
- The company paid $3.334m in dividends during the nine months and recorded a further $1.134m payable for a declared $0.15-per-share dividend due December 1, 2015. Future dividends are subject to board discretion and loan covenant compliance.
Segments, changes and management commentary
- Complex Machining: Nine-month sales were $29.281m versus $31.870m; pre-tax income fell to $0.733m from $1.473m. Management cited DoD budget constraints, including sequestration, as contributing to lower sales.
- Aerostructures and Electronics: Nine-month sales rose to $19.468m from $12.097m and pre-tax income improved to $0.598m from a $0.358m loss. Q3 segment pre-tax result was a $0.126m loss.
- Turbine Engine Components: AMK and Sterling generated $8.195m in nine-month sales but a $2.010m pre-tax loss; the Q3 pre-tax loss was $0.812m. Management said the businesses had yet to reach their anticipated potential.
- Acquisition-related operating expenses and higher borrowing costs weighed on results. The Sterling purchase was still within its measurement period, and its provisional purchase-price allocation had been revised.
- Four customers represented 55.3% of nine-month sales; four represented 62.1% of Q3 sales. The business also depends on certain sole-source suppliers. The company identifies competitive fixed-price bidding, volatile materials costs, skilled-labor availability and defense demand as operating risks.
- No quantified earnings or revenue guidance was provided. Management stated that operating results for the first nine months are not necessarily indicative of full-year results. It intends to continue quarterly dividends only subject to board discretion and lender covenant compliance.
- Disclosure controls were assessed as effective; no material quarterly change in internal control over financial reporting was reported. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether PNC finalized and maintains the covenant waiver, and whether the company remains in compliance with facility terms and borrowing-base limits.
- Available revolver capacity, near-term cash requirements and the effect of current classification of debt on liquidity.
- Whether AMK and Sterling improve operating performance, and whether Turbine Engine Components losses narrow.
- Inventory growth, cash conversion and the ability to fund operations without increasing reliance on PNC.
- Customer and sole-source supplier concentration, defense-budget exposure, and the sustainability of dividends under the credit agreement.
- Final purchase accounting for Sterling and Compac, including goodwill and acquired-asset valuations.