Air Industries Group — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited consolidated results. Air Industries manufactures aerospace and defense components and services across Complex Machining, Aerostructures and Electronics, and Turbine Engine Components. Results include acquisitions from their respective closing dates.
Financial performance
- Revenue: $16.811 million, up 8.8% from $15.453 million. Growth from acquired businesses offset lower Complex Machining sales.
- Profit and margins: Gross profit was $4.369 million versus $4.045 million; gross margin was 26.0% versus 26.2%. Operating income fell to $466,000 from $1.229 million. Net income was $104,000, or $0.01 per diluted share, versus $341,000, or $0.06 per diluted share.
- Cash flow: Operating activities provided $988,000, compared with $2.338 million used in Q1 2014. Investing activities used $5.117 million, principally for Sterling; financing activities provided $5.169 million. Cash increased $1.040 million to $2.458 million.
- Liquidity and working capital: Working capital was $14.264 million, down from $16.176 million at year-end. Current assets were $48.420 million and current liabilities $34.156 million. Inventory rose to $31.498 million from $28.391 million.
- Debt: Notes payable and capital lease obligations totaled $34.429 million, up from $27.721 million at December 31, 2014. This included $21.228 million on the PNC revolver and $11.523 million in term loans. The company reported compliance with facility covenants at quarter-end.
Material changes and segment results
- Complex Machining sales fell 25.3% to $9.064 million, and the segment recorded a pretax loss of $180,000 versus pretax income of $1.279 million. Management attributed the sales decline mainly to Defense Department budget constraints, contract cancellations, and delays.
- Aerostructures and Electronics sales rose 74.5% to $5.782 million, largely reflecting acquisitions; pretax income was $770,000 versus a loss of $354,000.
- Turbine Engine Components reported $1.965 million in sales and a pretax loss of $462,000. Q1 2015 includes AMK and Sterling from March 1; there was no comparable segment in Q1 2014.
- Operating expenses increased 38.6% to $3.903 million, including approximately $1.390 million attributable to acquisitions. Interest and financing costs rose to $346,000 from $303,000.
- On March 1, the company acquired Sterling for $5.4 million in cash and 425,005 shares, funded in part by a $3.5 million PNC term loan. The filing recorded $1.963 million of acquisition goodwill.
Outlook, risks, and other notable items
- No specific revenue, earnings, or cash-flow guidance is provided. Management says results depend on contract awards, delivery volumes, pricing, materials and labor costs, and production efficiency; interim results are not necessarily indicative of full-year performance.
- Management describes the company as highly leveraged and reliant on continued PNC lending. Substantially all assets secure the facility, and cash receipts are swept through a PNC-controlled lockbox. The revolver is classified as current because of a subjective acceleration clause.
- Risk factors include dependence on defense spending, competitive fixed-price bidding, volatile material costs, skilled-labor availability, customer concentration, and several sole-source suppliers. Two customers represented 41.3% of Q1 sales.
- The company paid a $0.15-per-share dividend in January and paid another $0.15-per-share dividend in April. Management says future dividends are subject to board discretion and loan covenants.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether PNC borrowing availability, borrowing-base limits, and covenant compliance remain adequate as debt and acquisition-related obligations rise.
- Whether Complex Machining demand stabilizes and whether acquired businesses improve operating profitability; Turbine Engine Components reported a pretax loss.
- Whether inventory growth, customer concentration, and sole-source supplier exposure create working-capital or delivery risks.
- Whether dividend payments can be sustained given operating cash flow, acquisition funding needs, and lender restrictions.