Air Industries Group — Q1 2021 Form 10-Q
Business context and reporting period: Aerospace and defense manufacturer with Complex Machining and Turbine Engine Components segments. This unaudited report covers the three months ended March 31, 2021, compared with the same period in 2020. The company says operations had substantially returned to normal after COVID-19 disruptions.
Financial results and position
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Net sales | $13.712 million | $13.447 million |
| Gross profit / margin | $1.797 million / 13.1% | $2.181 million / 16.2% |
| Operating income (loss) | $27,000 | $(81,000) |
| Net income (loss) | $(152,000) | $1.058 million |
| Cash from operations | $567,000 | $(314,000) |
| Cash and cash equivalents | $1.731 million | $2.505 million at Dec. 31, 2020 |
| Working capital | $16.984 million | $16.284 million at Dec. 31, 2020 |
| Total assets / equity | $57.360 million / $15.166 million | $57.777 million / $15.109 million at Dec. 31, 2020 |
Basic and diluted loss per share were each reported as $(0.00). Q1 2021 investing activities used $273,000, and financing activities used $1.068 million; cash fell by $774,000 during the quarter.
At March 31, total notes payable and finance lease obligations were $26.605 million, including $6.412 million owed to related parties; $15.606 million was classified as current. SNB debt totaled $20.143 million, comprising a $14.781 million revolving balance and a $5.362 million term loan. Operating lease liabilities totaled $4.456 million. The company reported compliance with SNB covenants.
Material changes versus Q1 2020
- Sales rose 2.0%, while gross profit fell 17.6% and gross margin declined 3.1 percentage points.
- Management attributed lower gross profit mainly to approximately $518,000 of higher manufacturing overhead, particularly employee benefit costs and depreciation on new equipment, and an approximately $91,000 loss from a customer contract termination.
- Operating expenses fell 21.8% to $1.770 million. Interest and financing costs fell to $297,000 from $380,000, primarily following conversion of third-party convertible debt in 2020.
- The company reported a net loss in 2021 versus net income in 2020. The prior-year result included a $1.414 million income-tax benefit related to a CARES Act net operating loss carryback; the refund was received in April 2020.
- Complex Machining sales increased 0.8%, but gross profit declined to $1.619 million from $2.168 million. Turbine Engine Components sales rose 11.8%, and gross profit increased to $178,000 from $13,000.
- Operating cash flow improved to positive $567,000, but cash decreased because of debt repayments and capital spending. Deferred revenue increased $885,000 during the quarter and supported operating cash flow.
Outlook, risks and unusual items
- Management expects fiscal 2021 sales to exceed fiscal 2020 and believes liquidity will improve. Based on its estimates, backlog, orders, market demand, cash timing and access to additional liquidity if needed, management believes cash will support operations through May 31, 2022. No specific sales or earnings guidance was provided.
- The SNB facility expires December 30, 2022 and is secured by substantially all company assets. It includes a 1.25:1.00 fixed-charge coverage requirement, capital expenditure limits and dividend restrictions. Borrowing availability under the revolving line depends on eligible receivables and inventory.
- Three customers accounted for 77.9% of Q1 sales; three customers represented 77.8% of gross receivables at March 31. The company also depends on certain sole-source suppliers and remains heavily exposed to military demand, competition, skilled-labor availability, material costs and fixed-cost absorption.
- COVID-19 effects remain uncertain despite the reported return toward normal operations. A vendor/sublease dispute seeks damages exceeding $1 million; the company disputes the claim, says it cannot estimate a potential loss, and recorded no accrual.
- After quarter-end, the company agreed to surrender its former corporate office premises, with an approximately $37,000 one-time payment. Related-party notes totaling $6.412 million are due July 1, 2023, with no principal payments due before maturity; $400,000 of accrued interest was capitalized on January 1, 2021.
- Interim inventory values are estimated using gross-profit percentages rather than a physical count; the company adjusted Complex Machining margins below 2020 levels. Management said no goodwill impairment was identified.
Investor verification points
- Track whether sales growth converts into improved gross margin and sustainable operating cash flow, given the overhead increase and contract-termination loss.
- Verify cash needs, borrowing availability under the receivables-and-inventory-based revolver, and continued compliance with SNB covenants and debt maturities.
- Monitor customer and supplier concentration, backlog conversion, and the effect of defense and commercial aerospace demand.
- Assess the unresolved sublease litigation and other vendor or landlord claims; the filing provides no clear estimate of potential exposure.
- Compare management’s liquidity outlook through May 31, 2022 with subsequent results and cash-flow performance.