Air Industries Group — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 15, 2020. Air Industries Group manufactures aerospace and defense components through its Complex Machining and Turbine Engine Components segments. The 2019 comparison excludes EPC and ECC, which were closed in March 2019 and reported as discontinued operations.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $13.447 million | $13.878 million |
| Gross profit / margin | $2.181 million / 16.2% | $2.274 million / 16.4% |
| Operating loss | $81,000 | $63,000 |
| Net income (loss) | $1.058 million | $(923,000) |
| Basic / diluted EPS | $0.04 / $0.03 | $(0.03) / $(0.03) |
| Cash from operating activities | $(314,000) | $(1.728) million |
| Cash from investing activities | $(78,000) | $54,000 |
| Cash from financing activities | $592,000 | $104,000 |
Revenue declined 3.1% year over year. Cost of sales fell 2.9%, but gross profit declined 4.1%; gross margin narrowed 0.2 percentage points. Operating expenses increased 9.7% to $2.262 million. Interest and financing costs fell 60.5% to $380,000, primarily following the replacement of the PNC facility with the Sterling National Bank (SNB) facility. The quarter’s $1.058 million net income included a $1.414 million income-tax benefit associated with a CARES Act net operating loss carryback claim; pretax continuing-operations loss was $356,000. The filing’s tax disclosures are not fully consistent: the statements show the benefit, while the tax note says no income-tax expense was recorded and describes the $1.416 million carryback claim.
Liquidity, debt and capital
At March 31, cash was $1.494 million, up from $1.294 million at year-end. Working capital was $22.248 million, compared with $18.166 million at December 31, 2019; current assets were $41.794 million and current liabilities $19.546 million. Operating cash use reflected cash tied up in receivables, inventory and the tax receivable, partly offset by higher accounts payable and accrued expenses.
Total notes payable, related-party notes and finance lease obligations were $24.910 million, including $17.222 million owed to SNB, $5.923 million of related-party notes and $1.437 million of third-party convertible notes. The SNB facility includes a $16 million revolving line and a term loan; substantially all assets are collateral, and the company reported compliance with its covenants at quarter-end. Related-party and third-party convertible notes were due December 31, 2020. The company raised $984,000 gross through a January common-stock sale and converted $885,000 of notes and accrued interest into shares, contributing to dilution. Weighted-average diluted shares were 36.5 million versus 30.4 million basic shares.
Segments and material changes
- Complex Machining: Sales were $12.064 million, down 2.9%; gross profit was $2.168 million versus $2.213 million.
- Turbine Engine Components: Sales were $1.383 million, down 5.3%; gross profit was $13,000 versus $61,000.
- Corporate pretax loss improved to $1.400 million from $2.268 million.
- Three customers accounted for 79.9% of sales, led by Sikorsky (36.2%), Goodrich Landing Gear Systems (31.5%) and the U.S. Department of Defense (12.2%).
Outlook, risks and unusual items
Management said COVID-19 had not materially affected Q1 results and the company continued operating as an essential defense supplier. However, facilities were below full staffing and productivity because of safety measures and absenteeism, with supplier shortages and customer and supplier disruptions. Management expects COVID-19 to reduce 2020 revenue and operating margins in parts of the business through supply interruptions, lower employee productivity and program delays; the duration and extent remain uncertain.
After quarter-end, in May 2020, subsidiaries entered into aggregate $2.4 million SBA loans at 1% interest, with initial two-year terms and potential forgiveness subject to program conditions. Management expected the $1.416 million tax carryback refund in Q3 2020 and stated it believed available cash, operations, credit availability and government assistance would support activities through at least June 1, 2021; this is not assured. SNB covenant requirements, debt maturities and limited access to financing remain relevant liquidity risks.
Contingencies include a disputed CPI Aerostructures working-capital claim of approximately $4.2 million, for which counsel could not assess the likely outcome, and a Contract Pharmacal claim seeking more than $1 million, for which no loss was accrued because it could not be estimated. The company also disclosed vendor, landlord and other claims. COVID-19 triggered a goodwill impairment assessment; management concluded no impairment was indicated at March 31, 2020, but said future deterioration could result in a charge.
Key facts for investors to verify
- Whether the $1.416 million tax carryback refund was received as expected and how the tax benefit is reconciled with the tax-note disclosure.
- Use, eligibility and eventual forgiveness of the $2.4 million post-quarter SBA loans.
- COVID-19 effects on production capacity, supplier availability, revenue, margins and cash conversion.
- Refinancing or repayment plans for notes due December 31, 2020, and ongoing compliance with SNB covenants and borrowing-base limits.
- Developments in the CPI and Contract Pharmacal disputes and any resulting loss or cash exposure.
- Customer concentration, share issuance and potential dilution, including the difference between basic and diluted weighted-average shares.