Air Industries Group, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; filed May 10, 2013. The company manufactures aerospace and defense components and assemblies through AIM, Welding Metallurgy (WMI), and NTW. NTW was acquired in June 2012, so its Q1 2013 results are included but it had no comparable Q1 2012 contribution.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 or comparison |
|---|---|---|
| Net sales | $14.325 million | $16.038 million; down 10.7% |
| Gross profit / margin | $3.647 million / 25.5% | $3.271 million / 20.4% |
| Operating income / margin | $1.178 million / 8.2% | $1.597 million / 10.0% |
| Income before taxes | $768,000 | $1.106 million |
| Net income / diluted EPS | $279,000 / $0.05 | $820,000 / $0.23 |
| Cash from operations | $3.357 million | $726,000 |
| Cash from investing / financing | $(152,000) / $(2.729) million | $(232,000) / $(160,000) |
Cash increased by $476,000 to $966,000 from year-end. Working capital was $11.332 million, down from $11.680 million; current assets were $38.362 million and current liabilities $27.385 million. Total assets were $51.422 million and stockholders’ equity $18.909 million.
Notes payable and capital lease obligations totaled $21.144 million, including $13.752 million drawn on the PNC revolver, a $3.298 million term loan, $1.875 million of leases, $1.219 million owed to former WMI sellers, and $1.000 million of junior subordinated notes. The company used $1.914 million of cash to repay revolver borrowings during the quarter. A further $698,000 excess-cash-flow payment to PNC was calculated as due.
Material changes versus the prior comparable period
- Sales fell 10.7%; AIM sales declined 38.4% and WMI sales declined 19.4%. Management attributed AIM’s decrease mainly to lower Sikorsky and Goodrich Landing Gear Systems sales, defense budget sequestration, and manufacturing delays on Navy E2-D aircraft.
- Gross profit rose 11.5%, and gross margin improved to 25.5% from 20.4%, with NTW’s contribution included in 2013. AIM’s gross margin improved modestly to 19.5% from approximately 18.5% despite lower sales.
- Operating expenses increased 47.5% to $2.469 million, including NTW expenses and changes in corporate cost allocations. Operating income declined 26.2%.
- Net income fell 66.0%. Management cited reduced pretax income at AIM and WMI and higher taxes after the company had used nearly all available net operating losses during Q1 2012.
- Interest and financing costs declined 22.3% to $385,000, mainly because junior subordinated notes had been converted to equity in 2012, partly offset by increased PNC borrowings.
Outlook, risks, contingencies, and notable items
- The filing provides no quantitative revenue or earnings guidance. Management’s forward-looking statements are subject to risks and are not guarantees of future performance.
- Management described the company as highly leveraged and dependent on continued borrowing from its senior lender. Substantially all assets secure the PNC facility, cash receipts flow through a lender-controlled lockbox, and the facility includes a subjective acceleration clause. The company reported compliance with facility terms at March 31, 2013.
- Customer concentration remains significant: three customers accounted for 59.3% of Q1 sales; three customers represented 51% of gross receivables. The company also relies on certain sole-source suppliers.
- The company declared a $0.0625-per-share dividend, approximately $358,000, payable April 1, 2013; the amount was recorded as a liability at March 31. Management said future quarterly dividends were subject to board and lender discretion.
- A former Sigma Metals vendor was considering a claim of approximately $71,000; settlement discussions had begun, with no definitive resolution disclosed. The filing also reports approximately $518,000 due to NTW Dissolution for a working-capital adjustment, partly offset by $107,000 due to the company.
- Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting. No off-balance-sheet arrangements were reported.
Investor verification priorities
- Assess whether AIM’s sales weakness, including the cited defense-budget and E2-D production effects, continued beyond Q1.
- Verify operating cash flow quality: the quarter’s $3.357 million was supported substantially by working-capital changes, including lower receivables and higher payables and taxes payable.
- Review PNC borrowing availability, covenant compliance, the $698,000 excess-cash-flow payment, and refinancing or acceleration exposure.
- Track NTW’s contribution and integration costs, and whether WMI’s profitability recovers.
- Monitor customer and supplier concentration, the unresolved vendor matter, and the company’s ability to sustain dividends alongside debt service and investment needs.