Air Industries Group — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; filed November 7, 2019. Air Industries manufactures aerospace components, primarily for defense contractors. Results reflect continuing operations after the 2018 sale of WMI Group and the March 2019 closure of EPC and ECC; discontinued operations are shown separately.
Financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $14.0 million | $10.7 million | $41.2 million | $33.6 million |
| Gross profit | $3.0 million | $1.4 million | $7.4 million | $4.9 million |
| Gross margin | 21.2% | 12.7% | 18.0% | 14.5% |
| Operating income (loss) | $1.2 million | $(0.8) million | $1.3 million | $(2.0) million |
| Net income (loss) | $187,000 | $(3.1) million | $(1.5) million | $(4.4) million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $270,000 | $(2.9) million |
Q3 continuing-operations income was $398,000, versus a $1.6 million loss in Q3 2018. Nine-month continuing-operations loss was $1.3 million, compared with $4.3 million. Q3 and nine-month sales rose 30.4% and 22.7%, respectively. Management attributed improved gross margins mainly to product mix and higher sales in Complex Machining; operating expenses fell 17.2% in Q3 and 14.5% year to date, primarily from cost reductions and consolidation.
Cash, liquidity and debt
- At September 30, cash was $333,000, down from $2.0 million at year-end 2018. Nine-month cash decreased $1.7 million despite positive operating cash flow; investing activities used $397,000 and financing activities used $1.6 million.
- Working capital was $4.7 million, versus $9.0 million at December 31, 2018. Current assets were $37.7 million and current liabilities $33.0 million.
- Reported notes payable and finance lease obligations totaled $24.0 million, including $21.9 million classified as current. PNC debt was $13.9 million; substantially all assets secure the facility. The $15 million revolving facility and term loan were due December 31, 2019 under the disclosed amendments.
- Related-party notes payable, net of discounts, were $5.8 million. The company also reported $5.1 million of operating lease liabilities, recognized following ASC 842 adoption.
Material changes, outlook and risks
- Both operating segments grew: Complex Machining sales increased 26.8% in Q3 and 21.3% year to date; Turbine Engine Components sales increased 64.3% and 34.7%, respectively. Complex Machining generated most sales and gross profit. Three customers accounted for 73.4% of nine-month sales.
- Management stated it expects higher revenue to support further margin improvement through better absorption of fixed factory overhead. The filing provides no quantified revenue, earnings or cash-flow guidance.
- Going concern: Management reported substantial doubt about the company’s ability to continue as a going concern, citing ongoing financing needs, prior operating losses and cash-flow deficits, and debt service and capital spending. Continued operations depend on profitability, positive cash flow, or further financing.
- Debt maturity and financing dependence: PNC debt was scheduled to mature December 31, 2019, and the company relied on PNC borrowing and related-party or third-party financing. An additional $1 million related-party advance was received October 21, 2019; its terms were not finalized as of the filing.
- Legal contingency: CPI disputed the working-capital adjustment from the WMI sale and sought approximately $4.2 million. Air Industries contested the determination, had reserved substantially all of the escrow amount, and said it could not estimate the loss. On October 7, 2019, it agreed to release $619,316 from escrow for certain claims.
- Controls: Management concluded disclosure controls were ineffective due to material weaknesses involving inventory and work-in-process costing, subsidiary close and consolidation processes, stock compensation, accounting staffing, and supervision. Remediation was planned but not yet complete.
- Other operating risks include reliance on a small number of customers and sole-source suppliers, competitive fixed-price contracts, volatile material and skilled-labor costs, and inventory values that are largely estimated at interim periods. The company also recorded a $275,000 lease-abandonment loss year to date after moving its corporate offices while remaining liable on the vacant Hauppauge lease.
Key facts investors should verify
- Whether the PNC facility was refinanced, amended or repaid at its December 31, 2019 maturity, and the resulting liquidity and covenant position.
- Cash availability, working-capital needs, and the company’s ability to fund operations without additional financing.
- Developments and potential financial impact of the CPI working-capital dispute and escrow release.
- Progress in correcting the disclosed material weaknesses and reliability of interim inventory estimates.
- Customer concentration, order levels, and whether improved margins and operating cash flow can be sustained.