Air Industries Group — Q1 2022 Form 10-Q
Business context and reporting period. The aerospace-components manufacturer reported for the three months ended March 31, 2022, compared with Q1 2021. It supplies components primarily to the defense and aerospace markets. Beginning in Q1 2022, management combined its previously reported businesses into one operating segment, reflecting integrated operations and resource-allocation decisions.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Net sales | $12.062 million | $13.712 million; down 12.0% |
| Gross profit / gross margin | $2.078 million / 17.2% | $1.797 million / 13.1% |
| Operating income | $207,000 | $27,000 |
| Net loss | $28,000 | $152,000 net loss |
| Operating cash flow | $1.285 million | $567,000 |
| Capital expenditures | $430,000 | $273,000 |
| Cash at quarter end | $364,000 | $627,000 at Dec. 31, 2021 |
| Working capital | $17.401 million | $17.478 million at Dec. 31, 2021 |
| Total assets / stockholders’ equity | $52.446 million / $17.481 million | $53.425 million / $17.389 million at Dec. 31, 2021 |
Operating expenses were $1.871 million, up 5.7% year over year. Interest and financing costs were $323,000, versus $297,000; related-party interest expense was $125,000 in both periods. No income tax expense was recorded. Basic and diluted loss per share were each reported as $0.00.
At March 31, total notes payable, related-party notes and finance-lease obligations were $22.255 million, including $15.554 million owed under the Webster facility and $6.412 million of related-party notes. The Webster facility included an $11.555 million revolver and a $3.999 million term loan. Total liabilities were $34.965 million. Operating lease liabilities were an additional $3.763 million, including current and long-term portions.
Cash declined by $263,000 during the quarter: operating and investing activities provided $1.285 million and used $430,000, respectively, while financing activities used $1.118 million, principally for debt repayments. Operating cash generation included a $3.033 million decrease in receivables, partly offset by a $2.467 million inventory increase.
Material changes and management commentary
- Revenue declined $1.650 million, principally because two products whose contracts expired or were cancelled in 2021 contributed approximately $1.460 million less sales. Management said those products had margins below the company’s other products; their lower sales helped raise gross margin.
- Operating expenses increased due to employment and health-benefit costs, investor-relations expense and resumed customer travel, partly offset by lower stock compensation, IT and bad-debt expense.
- Three customers represented 70.8% of sales, compared with 77.9% a year earlier. Goodrich Landing Gear Systems, Sikorsky Aircraft and the U.S. Department of Defense accounted for 27.1%, 25.2% and 18.5% of Q1 2022 sales, respectively. Three customers also represented 75.9% of gross receivables at quarter end.
- The company reported compliance with Webster loan covenants at March 31. Its facility matures December 30, 2025; the company paid an $854,000 excess-cash-flow amount in April 2022 for fiscal 2021.
Outlook, risks and contingencies
Management said it expected fiscal 2022 sales to be in line with fiscal 2021 and believed liquidity would continue to improve, citing revenue visibility and backlog. It stated that short-term cash requirements could be met. The company was discussing an amendment to permit up to an additional $2.5 million of equipment spending; this was not described as finalized. Management expected higher borrowing rates to increase Webster interest expense, but did not expect a material liquidity impact.
Risks highlighted include inflation and volatile material costs, disruption to titanium availability associated with the war in Ukraine, skilled-labor availability and cost, customer and contract concentration, competition, and variable margins from product mix and fixed factory overhead. Management said COVID-related labor-pool changes had not materially impaired production schedules, while cautioning that future impacts remained uncertain. The company also depends on sole-source suppliers for certain parts.
Contract Pharmacal appealed a court decision in March 2022 in a dispute concerning a former subleased property. Its amended damages claim is $700,000; the company disputes the claim and intends to oppose the appeal. The filing also notes other actions involving vendors, landlords and former landlords, without providing a clear aggregate exposure. Management reported no off-balance-sheet arrangements. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Most important facts to verify
- Whether the expected fiscal 2022 sales level and improving-liquidity outlook are supported by subsequent results, backlog conversion and cash flows.
- Cash availability and working-capital needs, particularly the low $364,000 quarter-end cash balance and inventory build.
- Debt-service requirements, revolving-credit availability, covenant compliance and the effects of higher interest rates.
- Progress and final terms, if any, of the proposed equipment-spending amendment and the planned capital expenditures.
- Developments in the Contract Pharmacal appeal and any other litigation or claims that could affect the company.
- Customer concentration and exposure to material, sole-source supplier, labor and fixed-price contract risks.