Air Industries Group — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. AIRI manufactures aerospace and defense components through its Complex Machining and Turbine Engine Components segments. Results are unaudited.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $14.354 million | $13.662 million | $43.519 million | $35.603 million |
| Gross profit / margin | $2.014 million / 14.0% | $1.656 million / 12.1% | $6.414 million / 14.7% | $4.451 million / 12.5% |
| Operating income (loss) | $177,000 | $(240,000) | $644,000 | $(1.613) million |
| Net income (loss) | $(66,000) | $(477,000) | $21,000 | $(1.003) million |
| Cash from (used in) operations | Not separately stated for the quarter | $2.514 million | $(3.184) million |
- Nine-month sales rose 22.2%; management attributed the recovery to increased production and a return toward pre-COVID operating conditions. Q3 sales increased 5.1% year over year.
- Complex Machining generated $38.992 million of nine-month sales and $5.966 million gross profit. Turbine Engine Components generated $4.527 million of sales and $448,000 gross profit, recovering from a gross loss in the prior-year period.
- Q3 net loss persisted despite positive operating income, reflecting interest and financing costs and other items. Nine-month net income was only $21,000; the prior-year comparison included a $1.414 million income tax benefit.
Financial position and liquidity
- At September 30, cash was $692,000, down from $2.505 million at year-end 2020. Working capital was $17.002 million; total assets were $53.521 million and stockholders’ equity was $15.647 million.
- Notes payable, related-party notes and finance-lease obligations totaled $24.329 million, including $14.285 million current. This included $17.874 million owed to Sterling National Bank (a $13.463 million revolver and $4.411 million term loan) and $6.412 million of related-party notes. Substantially all assets secure the bank facility.
- Nine-month investing cash use was $983,000, primarily capital expenditures. Financing cash use was $3.344 million, including net repayments of $2.187 million on the revolver and $1.147 million on the term loan; cash declined by $1.813 million overall.
- Management said operations had substantially returned to normal and, based on expected sales, orders, backlog, demand, cash receipts and expenditures, and possible access to additional liquidity, it expected adequate cash to support operations through at least November 30, 2022. This is management’s estimate, not a guarantee; no formal revenue or earnings guidance was provided.
Changes, commentary and risks
- Management linked improved gross margins to higher sales and better manufacturing-overhead absorption. Interim inventory values use estimated gross-profit percentages; the estimate was increased in 2021, with reconciliation to the physical inventory expected in Q4. Actual results may differ.
- Customer concentration is significant: three customers represented 75.5% of nine-month sales; Goodrich Landing Gear Systems alone represented 36.8%. Two customers represented 68.9% of gross receivables at quarter-end.
- The company reported compliance with bank covenants at September 30, 2021. The facility requires a 1.25:1 fixed-charge coverage ratio, limits capital expenditures and dividends, and matures December 30, 2022. The company paid the $558,750 required excess-cash-flow payment in three installments during 2021.
- Related-party notes are subordinated, mature July 1, 2023, and include convertible balances held by directors and an affiliated placement agent. The filing reports related-party interest expense of $376,000 for the first nine months.
- A landlord/sublease dispute seeks $700,000 in damages after the court permitted the claim to be reduced from more than $1 million. AIRI disputes the claim; management said the loss could not be estimated and recorded no accrual. Other vendor, landlord and injury-related claims are also disclosed.
- Management said supply-chain constraints had not materially affected sourcing or operations to date, but identified sole-source suppliers and warned that COVID-19 or other disruptions could materially affect results. The company remains heavily dependent on military-related demand, faces competitive bidding, volatile material costs and skilled-labor competition.
Important facts for investors to verify
- Whether operating cash generation and the projected liquidity runway are sustained, given only $692,000 of quarter-end cash and the bank facility’s 2022 maturity.
- Actual inventory margins after the year-end physical count and any Q4 adjustment to the interim gross-profit estimate.
- Customer demand, backlog conversion and concentration, particularly exposure to Goodrich and Sikorsky.
- Compliance with bank covenants and access to borrowing capacity under the receivables-and-inventory borrowing formula.
- Developments in the $700,000 sublease litigation and other contingencies, as well as repayment or conversion terms for related-party notes.