Air Industries Group — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are with FY2021. This is an annual filing, not a standalone fourth-quarter report. The company manufactures complex aerospace and defense components and assemblies, predominantly for military aviation. Effective Q1 2022, it began reporting as one integrated operating segment.
Financial performance and position
- Revenue: $53.238 million, down 9.7% from $58.939 million. Management attributed the decline mainly to lower-priced products and contracts that expired in 2021 and were not renewed. Military sales were $43.993 million (82.6% of revenue); commercial sales were $9.245 million.
- Profitability: Gross profit was $7.452 million, down 27.3%; gross margin fell to 14.0% from 17.4%. The company reported an operating loss of $194,000 versus operating income of $2.487 million, and a net loss of $1.076 million versus net income of $1.627 million. Basic and diluted loss per share was $0.33.
- Drivers and unusual items: Lower sales and product mix reduced gross profit; an increased slow-moving and excess inventory reserve also weighed on results. Operating expenses declined 1.5% to $7.646 million. Interest and financing costs increased to $1.338 million, with the average Webster borrowing rate rising to 4.50% from 3.50%. A $317,000 gain from writing off old accounts payable partly offset losses; goodwill was fully impaired, resulting in a $163,000 charge.
- Cash flow and investment: Operating cash flow was $448,000, down from $4.064 million. Capital expenditures were $2.361 million, versus $1.364 million; investing cash outflow was $2.361 million. Financing activities provided $1.567 million. Cash declined by $346,000 to $281,000.
- Liquidity and assets: Working capital was $18.6 million, compared with $17.478 million. Total assets were $53.814 million and stockholders’ equity was $16.839 million. Inventory was $31.821 million, including a $3.973 million reserve, and represented about 60% of assets.
- Debt: Webster borrowings totaled $18.748 million ($13.352 million revolving loan and $5.396 million term loan); related-party subordinated notes totaled $6.162 million. Total debt shown in the debt note, including leases and financed assets, was $25.268 million. Webster debt is secured by substantially all company assets. The facility matures December 30, 2025; related-party notes are due July 1, 2026.
Changes, outlook and risks
- Firm 18-month backlog was approximately $60.1 million at year-end, down from $75.0 million. The company reported a 2022 book-to-bill ratio of 0.75. Backlog revenue expectations were approximately $22.5–$26.5 million for January–June 2023 and $15–$18 million for July–December 2023, subject to timely supplier deliveries, processing and customer acceptance.
- Management expected 2023 sales to be comparable to 2022 and said it believed liquidity would cover short-term cash needs for at least 12 months. It expected higher prevailing interest rates to increase Webster borrowing costs. Planned 2023 capital spending was $1.75–$2.5 million.
- Key risks include dependence on a small customer base (four customers represented 76.5% of 2022 sales) and a few aircraft platforms; defense-budget and program changes; fixed-price contract cost overruns; raw-material availability and price volatility; skilled-labor shortages; high inventory and working-capital demands; and substantial leverage. Three customers accounted for 70.3% of year-end gross receivables.
- The company was in compliance with Webster financial covenants at December 31, 2022, but had missed the deadline to deliver audited financial statements to the lender and obtained a waiver. A required $208,000 excess-cash-flow payment was authorized for funding from the revolver but had not been processed as of the filing.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end due to material weaknesses involving IT access/change controls and vendor controls, inventory reserve review, and income-tax provision review. Management was assessing remediation; the filing does not establish that the weaknesses had been remediated.
- The 2021 tax disclosures were revised after errors involving tax attributes and related calculations were identified. The company said there was no impact on the 2021 balance sheet or financial statements, and stated it would amend its 2020 and 2021 tax returns. The auditor gave an unqualified opinion on the 2022 financial statements; the filing does not include an auditor attestation on internal controls.
- A Contract Pharmacal lawsuit remained in appeal; the company disputes the claim, which had been reduced to $700,000. The filing does not provide a clear estimate of the ultimate loss or any related accrual.
- The 10-K was filed May 16, 2023. The company disclosed an NYSE American notice concerning late filing; it stated that filing the report would cure the delinquency.
Important facts for investors to verify
- Whether sales, order bookings and backlog stabilized or improved after year-end, and how much backlog converted to revenue on schedule.
- Inventory reserve assumptions, inventory turnover and any subsequent write-downs, given the inventory balance and disclosed control weakness.
- Cash generation, borrowing availability, interest-rate exposure, covenant compliance and repayment capacity, including the status of the $208,000 payment.
- Progress on remediating material weaknesses and the status and outcome of the amended tax returns.
- Customer and platform concentration, supplier delivery performance, and the outcome or financial effect of the Contract Pharmacal appeal.