AIR Industries Group — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019. The unaudited results cover continuing operations, principally complex machining and turbine engine components; EPC and ECC were closed in March 2019 and are reported as discontinued operations. WMI Group had been sold in December 2018.
Financial performance and position
- Revenue: Second-quarter sales were $13.37 million, up 21.8% from $10.97 million. First-half sales were $27.25 million, up 19.1% from $22.88 million.
- Profitability and margins: Q2 gross profit was $2.19 million, or 16.4% of sales, compared with $1.52 million, or 13.9%, a year earlier. First-half gross profit was $4.47 million, or 16.4%, versus $3.50 million, or 15.3%. Q2 continuing-operations loss was $735,000, improved from $1.44 million; first-half continuing-operations loss was $1.73 million, improved from $2.70 million. First-half results included a $275,000 lease-abandonment loss. Net loss was $735,000 for Q2 and $1.66 million for the first half; the comparable 2018 periods included discontinued-operations income, including a significant gain in Q2.
- Segments: Q2 Complex Machining sales rose 20.6% to $11.70 million; Turbine Engine Components sales rose 31.5% to $1.67 million. For the first half, the segments generated $24.12 million and $3.13 million in sales, respectively. Corporate-level losses remained substantial.
- Cash flow: First-half operating cash use was $1.49 million, improved from $3.07 million in 2018. Investing cash use was $79,000; financing provided $917,000. Cash fell by $655,000 to $1.36 million.
- Liquidity: Working capital was $4.71 million, down from $9.04 million at December 31, 2018. Current assets were $39.88 million and current liabilities $35.17 million. Receivables were $7.81 million and inventory $30.16 million.
- Debt and leases: Notes payable and finance-lease obligations totaled $26.36 million, including $15.99 million owed to PNC. The PNC revolver and term loan mature December 31, 2019; substantially all assets secure the facility. Total liabilities were $43.03 million. Operating-lease liabilities were $5.24 million, recognized following adoption of ASC 842.
- Equity: Stockholders’ equity was $10.29 million, down from $11.61 million at year-end. Shares outstanding were 28.89 million at June 30 and 28.95 million as of August 5, 2019.
Changes, outlook and material risks
- Management attributed higher sales and gross profit to growth in both operating segments and a more favorable Complex Machining product mix. It said cost reductions, including consolidating the corporate office in Bay Shore, lowered operating expenses. Management expects higher revenue to aid gross margins through better absorption of fixed factory overhead, but provided no quantified guidance.
- The company stated that its operating results, negative operating cash flow, and reliance on external funding raise substantial doubt about its ability to continue as a going concern. Continued operations depend on achieving profitability and positive cash flow or securing further financing.
- PNC’s facility includes EBITDA covenants, capital-expenditure and dividend restrictions, and scheduled extension fees. The company reported compliance with the applicable EBITDA covenant at June 30, 2019, but the facility’s December 2019 maturity creates a near-term refinancing or repayment risk.
- Related-party financing is material: directors Michael and Robert Taglich provided financing, and the company reported additional $250,000 advances from each in June whose terms had not been finalized as of the filing. The 2019 notes’ maturity was extended to June 2020 in exchange for issuing 180,000 shares.
- Three customers accounted for 75.6% of Q2 sales and 74.7% of first-half sales. Two customers represented 58.9% of receivables. The company also relies on certain sole-source suppliers and has significant exposure to defense demand, competitive fixed-price contracts, material costs, skilled labor availability, and production efficiency.
- The company sold future AMK-related payments for $800,000; purchasers may demand payment of unpaid amounts from the company if the full amount has not been received by March 31, 2023. The company also disputes CPI’s working-capital adjustment from the WMI sale, with resolution potentially through arbitration.
- Contingencies include a landlord matter in which the court found the company liable but had not determined damages, a disputed sublease claim seeking more than $1 million, and other employment and shareholder litigation. Management described certain expected outcomes as not material or believed insurance would apply.
- Management concluded disclosure controls and procedures were not effective, citing material weaknesses involving inventory controls, subsidiary close and consolidation processes, reporting and disclosures, stock compensation administration, staffing, and supervision. Remediation depends in part on adding experienced accounting personnel and strengthening controls.
Important facts for investors to verify
- Whether AIR Industries refinanced, repaid, or amended the PNC facility before its December 31, 2019 maturity, and whether subsequent covenant compliance was maintained.
- Whether operating cash flow, working capital, and cash balances improved without recurring related-party or other external funding.
- Whether sales growth translated into sustained gross-margin improvement and reduced corporate losses.
- The status and final economic impact of the WMI sale adjustment dispute, the AMK payment arrangement, and material litigation.
- Progress in remediating the disclosed control weaknesses and any resulting changes to inventory or financial reporting estimates.
- The impact of customer concentration, share issuance and convertible or related-party debt on future cash needs and potential dilution.