Air Industries Group — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; filed November 13, 2013. Air Industries manufactures aerospace and defense components through AIM, WMI and NTW. It reincorporated from Delaware to Nevada in August 2013.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $16.052m | $15.558m | $45.016m | $46.835m |
| Gross profit / margin | $3.743m / 23.3% | $3.834m / 24.6% | $11.020m / 24.5% | $10.540m / 22.5% |
| Operating income | $1.031m | $1.455m | $3.287m | $4.350m |
| Income before taxes | $0.739m | $1.001m | $2.163m | $2.791m |
| Net income | $2.534m | $0.614m | $3.039m | $1.755m |
| Basic EPS | $0.44 | $0.11 | $0.53 | $0.40 |
Q3 revenue rose 3.2%, but gross profit fell 2.4% and operating income declined. Nine-month revenue fell 3.9%, while gross profit increased 4.6% and gross margin improved. Net income growth in both periods was substantially affected by a tax benefit from reducing the valuation allowance on deferred tax assets: $1.795m in Q3 and $1.625m deferred tax benefit for the nine months. The filing says management judged realization of those assets more likely than not. Nine-month pretax income was lower year over year.
Operating expenses were $2.712m in Q3 and $7.733m for the nine months. Interest and financing costs were $0.281m and $1.027m, respectively, down 37.8% and 27.8% versus comparable periods, chiefly following the 2012 conversion of $5.2m of 12% junior subordinated notes into common stock.
Cash, debt and liquidity
- At September 30, cash was $0.771m; working capital was $10.772m, down from $11.680m at December 31, 2012. Total assets were $53.787m and stockholders’ equity was $20.609m.
- Nine-month operating cash flow was $3.556m, investing cash outflow $0.920m, and financing cash outflow $2.355m; cash increased $0.281m. Inventory absorbed $1.295m of cash. Cash paid for interest was $0.935m.
- Debt and capital lease obligations totaled $22.287m: PNC revolver $16.831m, PNC term loan $2.398m, seller notes $0.897m, junior subordinated notes $1.000m and capital leases $1.161m. Current portion was $19.626m.
- The PNC facility provides for an $18m revolver, subject to a borrowing base and a $12.5m inventory sub-limit, plus a term loan. The facility is secured by substantially all assets. Management reported compliance with covenants at September 30. The revolver and term loan rates were reduced under a June amendment; stated revolver rate was 4.0% at quarter-end.
- PNC sweeps customer receipts through a controlled lockbox and the company borrows against its borrowing base. Management says it is highly leveraged and would lack funds to continue operations if PNC ceased lending. The filing does not state unused revolver availability.
Material changes and business developments
- Q3 segment revenue: AIM $9.863m (+2.9%), WMI $3.800m (+31.4%, including $0.557m from Decimal), and NTW $2.389m (−22.5%). AIM benefited from a quarter-on-quarter improvement; NTW shipments were delayed and expected in Q4.
- For nine months, AIM revenue fell 23.4% to $25.528m, which management attributed mainly to reduced defense demand associated with sequestration and delayed supplier shipments for Navy E2-D landing-gear products. WMI revenue rose 3.2%; NTW’s 2013 period includes nine months versus only post-acquisition results in 2012.
- WMI reported a nine-month pretax loss of $0.131m, compared with $0.705m income in 2012. NTW reported nine-month pretax income of $0.746m. Segment comparisons are affected by acquisition timing and allocation of corporate costs.
- The company acquired selected Decimal Industries assets on July 1 for $0.975m; approximately $0.507m remained payable at September 30. On November 6, it acquired Miller Stuart, Inc. for $25,000 plus the net value of receivables over payables; purchase-price allocation was not complete.
- Dividends totaled $1.432m for the first nine months. The quarterly rate increased to $0.125 per share for the dividend paid October 15, subject to board discretion and lender covenants. On October 28, the company sold 133,000 shares at $7.50 for gross proceeds of approximately $0.998m.
Outlook, risks and unusual items
No quantified revenue or earnings guidance is provided. Management said it is pursuing commercial aerospace business to offset reduced military demand and cited a multi-year contract valued at $27m for nacelle thrust struts. The filing does not provide a delivery or revenue-recognition schedule for that contract.
- Customer concentration is significant: three customers generated 58.9% of Q3 sales and 58.7% of nine-month sales. Three customers represented 59.8% of gross receivables at quarter-end.
- Risks include defense-budget reductions, supplier-related production delays, intense competition, volatile material costs, skilled-labor availability and reliance on fixed-price bids and subcontractors. AIM also depends on sole-source suppliers for certain parts.
- PNC’s subjective acceleration provisions and collateral rights create financing risk; most debt is classified current, including the revolver. Term-loan repayments and the facility’s potential excess-cash-flow prepayment requirement constrain liquidity; PNC did not request an excess-cash-flow payment for Q3.
- A former Sigma Metals vendor may pursue approximately $71,000; discussions were ongoing without a definitive resolution. Management reported no off-balance-sheet arrangements and stated disclosure controls were effective.
Important facts for investors to verify
- How much of reported earnings reflects the deferred-tax valuation-allowance reversal, and what evidence supports future realization of deferred tax assets?
- Actual borrowing-base availability, covenant headroom, and the effect of PNC’s acceleration provisions on near-term liquidity.
- Whether delayed NTW shipments were delivered in Q4 and whether AIM’s E2-D supplier delays and defense-related demand weakness persisted.
- Margin and integration progress at Decimal and Miller Stuart, including Miller Stuart’s final purchase-price allocation and cash requirements.
- Customer concentration, receivable collectability and the adequacy of the doubtful-account allowance, which increased to $0.987m from $0.705m.
- Whether dividend payments remain compatible with operating cash needs, lender restrictions and planned debt repayments.