Air Industries Group — FY2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015; it does not provide standalone fourth-quarter results. Air Industries Group manufactures aerospace and defense components and assemblies, with three operating segments: Complex Machining, Aerostructures and Electronics, and Turbine Engine Components. The company remained heavily dependent on defense and a small number of aerospace customers. Sterling Engineering and Compac, acquired during 2015, contributed to reported growth.
Key financial results
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $80.442 million | $64.331 million |
| Gross profit / margin | $17.281 million / 21.5% | $14.098 million / 21.9% |
| Operating income | $626,000 | $1.735 million |
| Net income (loss) | $(832,000); $(0.11) per diluted share | $667,000; $0.10 per diluted share |
| Operating cash flow | $(894,000) | $(2.799 million) |
| Cash and equivalents at year-end | $529,000 | $1.418 million |
| Working capital | $2.166 million | $16.132 million |
| Total assets / stockholders’ equity | $88.250 million / $28.805 million | $66.180 million / $28.272 million |
Revenue increased 25.0%, while gross profit rose 22.6%; margin edged down 0.4 percentage point. Higher operating expenses and interest costs contributed to the swing from net income to a loss. Interest and financing costs were $1.858 million, up from $1.295 million. Cash used in investing was $8.560 million, principally acquisitions, capital expenditures, and capitalized engineering; financing provided $8.565 million.
Segments and material changes
- Complex Machining: Revenue fell 4.2% to $42.356 million, which management attributed to delayed and reduced government procurement associated with sequestration. Gross profit increased to $10.412 million, with cost reductions cited as a factor.
- Aerostructures and Electronics: Revenue rose 48.5% to $27.134 million, reflecting higher Miller Stuart volume and acquisition contributions. Segment pretax results improved to $386,000 from a $554,000 loss.
- Turbine Engine Components: Revenue rose to $10.952 million from $1.838 million, largely reflecting Sterling and a full year of AMK. The segment reported a $3.329 million pretax loss versus $142,000 pretax income; management said AMK and Sterling had not reached anticipated potential.
Acquisitions contributed to growth but also increased financing needs and operating costs. Sterling and Compac contributed $7.362 million of 2015 revenue, according to the company’s overview. Four customers represented 59.3% of 2015 sales; Sikorsky accounted for 20.5% and Goodrich Landing Gear Systems 15.4%. Two of the largest customers are units of United Technologies Corporation.
Debt, liquidity, and capital allocation
At December 31, 2015, notes payable and capital lease obligations totaled $44.805 million, including a $29.604 million PNC revolving balance, $9.833 million of PNC term loans, $5.018 million of capital leases, and a $350,000 related-party note. Substantially all assets secured the PNC facility, and operating receipts flowed through a PNC-controlled lockbox. The company reported only $529,000 of cash and $2.166 million of working capital.
The company was not in compliance with the PNC fixed-charge coverage covenant at year-end and had requested a waiver. PNC had not issued an acceleration notice as of the financial-statement issuance date; however, the default permitted PNC to demand repayment, and the revolving facility and term loans were classified as current. In February 2016, the revolver commitment was increased to $37.5 million, including a $4.5 million overdraft facility. The revolver’s stated maturity at year-end was November 30, 2016.
Operating cash use was driven in part by an $8.412 million increase in inventory. Inventory reached $36.923 million, with a $3.846 million reserve. The company paid $4.468 million in dividends during 2015, including a December payment, despite its leverage and negative operating cash flow. Dividend payments are subject to lender covenants and board discretion.
Outlook, risks, and unusual matters
- Management cited the December 2015 federal budget agreement ending sequestration and expected defense spending to increase under the 2016–2017 budgets, but gave no quantified revenue or earnings guidance and cautioned that higher spending might not translate into orders.
- As of February 29, 2016, firm backlog for delivery within the forward 18 months was approximately $81 million. Backlog includes authorized orders only and is not a guarantee of revenue.
- Major risks include defense-budget and aircraft-program exposure, customer concentration, fixed-price contract cost overruns, volatile raw-material prices, dependence on some sole-source suppliers, slow-moving inventory, acquisition integration, and substantial secured debt.
- Management concluded that disclosure controls and internal control over financial reporting were ineffective at December 31, 2015. It identified material weaknesses in accounting for complex, non-standard transactions and in inventory aging, obsolescence reserves, and valuation. Remediation plans included added experienced accounting personnel, upgraded systems and controls, and outside consultants; management said weaknesses would remain until remediation had operated and been tested.
- The company agreed to sell its South Windsor property for $1.7 million, with closing anticipated in April 2016, and lease it back for an initial 15-year term. Net proceeds were to be applied to PNC debt. The audited financial statements received an unqualified opinion; the auditor did not express an opinion on internal-control effectiveness.
- No legal proceeding was identified as likely to have a material adverse effect. The filing reported no off-balance-sheet arrangements as of year-end.
Important facts for investors to verify
- Whether PNC granted the requested covenant waiver, and the status, terms, and availability of the amended credit facility and any subsequent refinancing.
- Whether the South Windsor sale closed, how much net cash was applied to debt, and the resulting sale-leaseback costs.
- Whether inventory controls and transaction-accounting weaknesses were remediated and independently tested; assess inventory aging, reserve adequacy, and cash conversion.
- Whether Sterling and AMK improved profitability, given the Turbine Engine Components segment’s $3.329 million pretax loss.
- Whether the $81 million firm backlog converted to shipments and cash, and how customer concentration and defense procurement affected subsequent results.
- Dividend status and restrictions: the filing describes a history through the third quarter while also disclosing a December 2015 dividend payment; confirm any later policy or payments.