Air Industries Group — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed March 25, 2014. This is an annual report, not a standalone fourth-quarter results report. The company manufactures aerospace and defense components and assemblies. Approximately 90% of sales were defense-related. 2013 results include Decimal from July 1 and Miller Stuart (MSI) from November 6; NTW results were included for only part of 2012, limiting comparability.
Financial performance
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $62.833 million | $64.215 million | Down 2.2% |
| Gross profit / margin | $15.235 million / 24.2% | $14.858 million / 23.1% | Profit up 2.5% |
| Operating income / margin | $4.613 million / 7.3% | $5.984 million / 9.3% | Down 22.9% |
| Net income / margin | $3.739 million / 6.0% | $2.548 million / 4.0% | Up 46.7% |
| Diluted EPS | $0.63 | $0.54 | Up |
| Cash from operating activities | $8.889 million | $1.694 million | Up |
| Cash and cash equivalents | $0.561 million | $0.490 million | Up $0.071 million |
| Working capital | $12.531 million | $11.680 million | Up |
| Total debt and capital leases | $17.496 million | $23.851 million | Down $6.355 million |
Interest and financing costs were $1.340 million, down from $1.843 million. The company reported a $0.170 million income tax benefit versus $1.447 million of tax expense in 2012, primarily reflecting reversal of valuation allowances on deferred tax assets. Other income included a $0.361 million non-cash bargain-purchase gain on MSI. Operating cash flow benefited from working-capital movements, including lower receivables; the filing cites timing of a customer receipt.
Material changes and segment trends
- AIM sales fell 16.8% to $34.997 million, which management attributed mainly to lower Sikorsky sales and slower orders amid anticipated defense spending reductions. AIM’s gross profit fell 23.3% to $6.305 million.
- WMI sales declined 8.6% to $13.630 million; gross margin eased from 27.0% to 25.5%, and the segment reported a $0.203 million pretax loss versus $1.138 million pretax income in 2012.
- NTW sales were $14.206 million, compared with $7.233 million for the partial 2012 period after acquisition; its 2013 pretax income was $1.905 million.
- Consolidated SG&A increased 19.7% to $10.622 million. Management cited the inclusion of NTW costs for the first half of 2013 and added personnel related to Decimal.
- Three customers accounted for 56.0% of 2013 sales, down from 65.3% in 2012. Sikorsky alone represented 27.7%.
Liquidity, debt and capital allocation
PNC’s facility provides a revolving loan of up to $20 million, subject to the borrowing base, and a $1.948 million term loan. Year-end balances included $12.029 million on the revolver, $1.948 million on the term loan, $1.787 million in capital leases, $0.732 million owed to WMI sellers and $1.000 million in junior subordinated notes. The PNC facility is secured by substantially all company assets; cash receipts flow through a lender-controlled lockbox. The company said it was in compliance with loan covenants at year-end, but described itself as highly leveraged and reliant on continued PNC lending. The revolving balance was classified as current due to a subjective acceleration clause.
Financing cash outflow was $7.700 million, including $1.433 million in dividends and debt repayments; cash increased by only $0.071 million. The company paid quarterly dividends and said it intended to continue them in 2014, subject to board discretion and lender covenants. A $0.717 million dividend payable was recorded at year-end.
Outlook, risks and unusual items
- No quantified sales or earnings guidance was provided. Management described defense-budget uncertainty and continuing order slowdowns, particularly at AIM, as risks; the slowdown was also affecting WMI and NTW to a lesser extent.
- Management was negotiating three acquisitions, with no binding agreements. The targets reported combined 2013 revenue of about $13 million and adjusted EBITDA of about $2.5 million; proposed aggregate consideration was about $6.5 million, including $5 million cash and $1.5 million in stock. Completion depended on financing and lender consent and could dilute shareholders.
- Key risks include concentrated customers and aircraft platforms, defense spending changes, fixed-price contracts, volatile material costs, competition, sole-source suppliers, and dependence on PNC. Boeing planned to close the C-17 production line in 2015.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end. The auditor gave an unqualified opinion on the financial statements but did not attest to internal controls, consistent with the company’s emerging-growth-company exemption.
- The filing reported no known legal proceeding expected to have a material adverse effect and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether customer orders and sales at AIM stabilized after the reported slowdown, and how much Sikorsky demand drives subsequent results.
- Current borrowing-base availability, covenant headroom, repayment requirements and the lender’s position on dividends or acquisitions.
- Whether the three proposed acquisitions were completed, their actual financing and consideration, and integration results.
- Whether operating cash flow is repeatable: 2013 benefited from working-capital changes and a customer-receipt timing effect.
- The realizability of deferred tax assets supporting the 2013 tax benefit, and the treatment of the expiring capital-loss carryforward.
- Share dilution from equity financing, options and warrants; the filing also disclosed an unvalued down-round derivative feature in the 2013 stock purchase agreement.