Air Industries Group — 2014 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014; it does not provide a separate fourth-quarter income statement or cash-flow summary. Air Industries Group manufactures flight-critical aerospace and defense components and assemblies. Approximately 90% of revenue came from products for U.S. military aviation. The 2014 results include acquisitions from their respective closing dates; Sterling was acquired on March 1, 2015 and is not included in 2014 results.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $64.331 million | $62.833 million |
| Gross profit / margin | $14.098 million / 21.9% | $15.235 million / 24.2% |
| Operating income | $1.735 million | $4.613 million |
| Income before taxes | $0.299 million | $3.569 million |
| Income-tax benefit | $0.368 million | $0.170 million |
| Net income / diluted EPS | $0.667 million / $0.10 | $3.739 million / $0.63 |
| Cash from operations | $(2.799) million | $8.889 million |
| Cash and cash equivalents at year-end | $1.418 million | $0.561 million |
| Working capital at year-end | $16.176 million | $12.531 million |
| Borrowings and capital-lease obligations at year-end | $27.721 million | $17.496 million |
| Total assets / stockholders’ equity at year-end | $65.920 million / $28.272 million | $50.172 million / $21.613 million |
Operating cash outflow reflected, among other factors, cash used by changes in operating assets and liabilities. Investing activities used $9.663 million, principally for acquisitions; financing activities provided $13.319 million. The company paid $3.748 million in dividends during 2014. Its PNC facility included a $23 million revolving line, subject to a borrowing base, and term loans. Substantially all assets secured the facility; the company reported compliance with its covenants at year-end.
Material changes versus 2013
- Sales increased 2.4%, but net income declined 82.2%. Gross profit fell 7.5%, and gross margin declined 2.3 percentage points.
- Complex Machining sales fell 10.1% to $44.220 million; segment pretax income declined to $1.074 million from $4.273 million. Management attributed the sales decline mainly to delays and reductions in government procurement orders related to sequestration, and cited a less favorable sales mix, including reduced higher-margin aftermarket sales.
- Aerostructures and Electronics sales rose 34.1% to $18.273 million, entirely from acquisitions, while the segment reported a $0.554 million pretax loss. Turbine Engine Components contributed $1.838 million in sales and $0.142 million pretax income from AMK’s fourth-quarter operations.
- Acquisitions expanded the business and increased assets and debt. 2014 acquisitions included Woodbine, Eur-Pac, ECC and AMK. The company raised approximately $8.562 million net cash through a registered offering and issued 1.17 million shares.
Outlook, risks and unusual items
- Management reported an approximately $95 million firm backlog for delivery within the forward 18 months as of February 28, 2015. Backlog is not equivalent to recognized revenue, and some long-term purchase agreements do not authorize production or shipment.
- Management intended to pursue internal growth and acquisitions and to continue quarterly dividends, subject to board discretion, financial condition and PNC covenant requirements. The filing provides no quantified revenue, earnings or margin guidance.
- In March 2015, the company acquired Sterling for approximately $2.9 million in cash and 425,000 common shares, subject to stated working-capital and share-price adjustments. A $3.5 million PNC term loan financed the acquisition.
- Financial risks include high leverage and reliance on PNC lending, a lockbox arrangement that sweeps cash receipts, and the lender’s rights under the facility. The company said it would lack funds to continue operations if PNC ceased lending. Debt and capital-lease obligations totaled $27.721 million at year-end; contractual obligations also included $18.930 million of operating-lease payments.
- Customer and platform concentration is material: two customers represented 47.3% of 2014 sales; Sikorsky and Goodrich accounted for 26.8% and 20.5%, respectively. Defense-budget reductions, contract delays, fixed-price cost overruns, volatile material costs, supplier availability, competition and aircraft-program changes could affect results.
- The 2014 tax benefit included reversals of prior-period deferred tax liabilities and over-accrued 2013 taxes. Management reported no goodwill impairment. The company recognized $772,000 of bill-and-hold revenue at year-end, 1.2% of annual sales. No off-balance-sheet arrangements or material legal proceedings were reported.
- Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2014. The independent auditor issued an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
Important facts for investors to verify
- Review the audited statements and notes, especially the drivers of the sharp earnings decline and negative operating cash flow.
- Assess borrowing-base availability, debt maturities, covenant headroom and PNC’s acceleration rights, including the effect of the Sterling acquisition and Term Loan D.
- Verify backlog conversion, customer order timing and exposure to defense spending, concentrated customers and aircraft platforms.
- Evaluate acquisition integration, acquired-business profitability, purchase-price assumptions and dilution from shares and outstanding options or warrants.
- Confirm that dividends remain supportable given cash generation, capital needs and lender restrictions; the filing provides no quantified forward earnings guidance.