AIR Industries Group — Q2 2021 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2021, compared with the same periods in 2020. AIR Industries manufactures aerospace and defense components through its Complex Machining and Turbine Engine Components segments; it says military programs account for an overwhelming portion of revenue.
Financial performance and position
- Q2 revenue and earnings: Net sales were $15.453 million, up 81.9%; gross profit was $2.603 million, with a 16.8% gross margin versus 7.2%. Operating income was $440,000 and net income was $239,000 ($0.01 diluted per share), compared with a $1.584 million net loss in Q2 2020.
- First-half performance: Net sales were $29.165 million, up 32.9%; gross profit was $4.400 million, and gross margin was 15.1% versus 12.7%. Operating income was $467,000 and net income was $87,000, compared with a $526,000 net loss in the first half of 2020. The prior-year period included a $1.414 million income-tax benefit.
- Segments: Q2 Complex Machining sales grew 88.6% to $13.783 million; Turbine Engine Components sales grew 40.8% to $1.670 million. First-half sales rose 34.0% and 25.2%, respectively.
- Cash flow: First-half operating cash use was $181,000, improved from $1.043 million used in 2020. Investing used $631,000 and financing used $1.178 million; cash declined $1.990 million to $515,000.
- Liquidity and debt: Working capital was $16.747 million, versus $16.284 million at year-end 2020. Current assets were $43.171 million and current liabilities $26.424 million. Notes payable and finance lease obligations totaled $26.508 million, including $20.049 million owed to Sterling National Bank and $6.412 million of related-party notes; $16.266 million was classified current. Separately, operating lease liabilities totaled $4.238 million.
- Balance sheet: Total assets were $56.250 million and stockholders’ equity was $15.514 million at June 30, 2021. Cash was down from $2.505 million at December 31, 2020.
Material changes and management commentary
- Management attributed the rebound in sales and profitability to operations substantially returning to normal after COVID-19 disruption, higher production, and focus on controlling expenses and interest costs. The company also said it was beginning to see benefits from investments in machinery and equipment.
- Interest and financing costs declined 22.2% in Q2 and 22.0% in the first half, which management attributed to the 2020 conversion of third-party convertible debt.
- Management increased its interim gross-profit estimate for Complex Machining based on stronger sales and improved manufacturing-overhead absorption. Interim inventory values rely substantially on estimated gross-profit percentages; a fourth-quarter adjustment follows the annual physical inventory.
- Under a June 2021 amendment to its bank facility, the company paid $372,500 of a $558,750 excess-cash-flow payment in two installments by June 30; the final $186,250 installment was due September 15, 2021. It reported compliance with all bank covenants at June 30. Substantially all assets secure the facility.
Outlook, risks, and contingencies
- No specific sales or earnings guidance is provided. Management expects fiscal 2021 sales to exceed 2020 and believes liquidity will improve. Based on sales estimates, orders, backlog, market demand, projected receipts and expenditures, and potential access to additional liquidity, management believes cash will be adequate to support operations through at least August 31, 2022.
- The filing warns that future COVID-19 or other macroeconomic disruptions and supply-chain interruptions could materially affect results. The company also cites competition, volatile material costs, skilled-labor availability, fixed-overhead absorption, and dependence on military demand.
- Customer concentration is significant: three customers represented 76.2% of Q2 sales and 77.0% of first-half sales. Three customers represented 85.0% of gross receivables at June 30.
- The company identified key sole-source suppliers; disruption at any of them could harm operations. The filing does not clearly state the amount of unused revolving-credit availability.
- Contract Pharmacal’s amended claim seeks $700,000. The court denied its summary-judgment motion in July 2021; AIR disputes the claim, says it has meritorious defenses, and recorded no accrual because a loss could not be estimated.
- The company had no off-balance-sheet arrangements and reported effective disclosure controls. Management cautions that forward-looking statements are uncertain and undertakes no general obligation to update them.
Important facts for investors to verify
- Whether revenue growth, backlog conversion, and improved gross margins continue—and how much margin improvement reflects the interim inventory estimate.
- Cash generation and available borrowing capacity, given $515,000 of cash, working-capital demands, and scheduled debt payments.
- Compliance with bank covenants and payment of the remaining $186,250 excess-cash-flow installment.
- Exposure to concentrated customers, sole-source suppliers, and changes in defense and commercial aerospace demand.
- Developments in the Contract Pharmacal litigation and any resulting financial exposure.