The following discussion of our financial condition and results of operations
should be read in conjunction with the unaudited condensed consolidated
financial statements and notes to those statements included elsewhere in this
Form 10-Q and with the audited consolidated financial statements and the notes
thereto included in our Annual Report on Form 10-K, for the year ended
Business Overview
We manufacture aerospace components primarily for the defense industry. Our
Complex Machining Segment ("CMS"), which consists of AIM and NTW, manufactures
structural parts and assemblies focusing on flight safety, including aircraft
landing gear, arresting gear, engine mounts, flight controls, throttle
quadrants, and other components. Our Turbine and Engine Component segment
("TEC") segment consists of
Products of CMS are currently deployed on a wide range of high-profile military
and commercial aircraft including the Sikorsky UH-60 Blackhawk, Lockheed Martin
F-35 Joint Strike Fighter,
The aerospace market is highly competitive in both the defense and commercial sectors and we face intense competition in all areas of our business. Nearly all of our revenues are derived by producing products to customer specifications after being awarded a contract through a competitive bidding process. As the commercial aerospace and defense industries continue to consolidate and major contractors seek to streamline supply chains by buying more complete sub-assemblies from fewer suppliers, we have sought to remain competitive not only by providing cost-effective world class products and service but also by increasing our ability to produce more complex and complete assemblies for our customers.
We are focused on maintaining profitability and positive cash flows from operating activities. We remain resolute on meeting customers' needs. To take advantage of the long-term growth opportunities we see in our markets, we have made significant capital investments in new equipment in recent years. We believe these investments will increase the velocity and efficiency of production, increase the size of product we can make and allow us to offer additional services to our customers. Some of our investments expand our capabilities allowing us to internally process product that was previously outsourced to third party processors. We are pleased with the positive responses from our customers about these initiatives.
Our ability to operate profitably and generate positive cash flows from operating activities is determined by our ability to win new or renewal contracts and fulfilling these contracts on a timely and cost effective basis. Winning a contract generally requires that we submit a bid containing fixed prices for the product or products covered by the contract for an agreed upon period of time, sometimes for five-years or longer, with negotiated increases to reflect a portion of the impact of inflation. Thus, when submitting bids, we are required to estimate our future costs of production and, since we often rely upon subcontractors, the prices we can obtain from our subcontractors.
While our revenues are largely determined by the number of contracts we are
awarded, the volume of product delivered and price of product under each
contract, our costs are determined by a number of factors. The principal factors
impacting our costs are the cost of materials and supplies, labor, financing and
the efficiency at which we can produce our products. The cost of materials used
in the aerospace industry is highly volatile. The invasion of
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In addition, the market for the skilled labor we require to operate our plants is highly competitive. Changes in the available pool of laborers caused by Covid-19 have not materially adversely impacted our ability to meet our production schedules. Nevertheless, as we seek to grow our business, there can be no assurance that the skilled laborers we need to operate our machinery will be available to us or that the costs incurred to maintain our current labor force and those we seek to bring on will not increase.
The profit margin of the various products we sell varies based upon a number of factors, including the complexity of the product, the intensity of the competition for such product and, in some cases, the ability to deliver replacement parts on short notice. Thus, in assessing our performance from one period to another, a reader must understand that changes in profit margin can be the result of shifts in the mix of products sold. Our operations have a large percentage of fixed factory overhead. As a result, our profit margins are also highly variable with sales volumes as under-absorption of factory overhead decreases profits.
Our revenues are principally determined by orders from our customers, generally orders - which we call releases - against LTA's with those customers. These long-term agreements generally have fixed prices for product with negotiated increases to reflect a portion of the impact of inflation, though over the term of a LTA prices often increase and not all of the increase is covered by agreed upon price protection clauses in our agreements. Our direct costs of production include costs for material, labor, and factory overhead; all of these costs may vary based on the efficiency of our factory operations. Our gross profit is highly variable due to the mix of products sold, and by sales volume, which can lead to the over absorption or under absorption of factory overhead costs.
Beyond these direct costs of production, we incur general and administrative costs termed Operating Expenses and financing costs for borrowed money, income taxes and miscellaneous income and expense.
A very large percentage of the products we produce are used on military as
opposed to civilian aircraft. These products can be replacements for aircraft
already in the fleet of the armed services or for the production of new
aircraft. Reductions to the
Segment Data
In this report, we follow
Historically we have operated our businesses and reported their results as two
separate segments with AIM and NTW comprising our CMS segment and
In recent years we integrated and consolidated the business of AIM and NTW into
one facility on
18 RESULTS OF OPERATIONS
Selected Financial Information:
Three Months Ended March 31, March,31 2022 2021 (unaudited) (unaudited) Net sales$ 12,062,000 $ 13,712,000 Cost of sales 9,984,000 11,915,000 Gross profit 2,078,000 1,797,000 Operating expenses and interest and financing costs 2,194,000 2,067,000 Other income, net 88,000 118,000 Net loss$ (28,000 ) $ (152,000 ) Balance Sheet Data: March 31, December 31, 2022 2021 (unaudited) Cash and cash equivalents$ 364,000 $ 627,000 Working capital$ 17,401,000 $ 17,478,000 Total assets$ 52,446,000 $ 53,425,000 Total stockholders' equity$ 17,481,000 $ 17,389,000 Net Sales:
Consolidated net sales for the three months ended
As indicated in the table below, three customers represented 70.8% and 77.9% of total net sales for the three months endedMarch 31, 2022 andMarch 31, 2021 , respectively. Percentage of Sales Customer 2022 2021 (unaudited) (unaudited) Goodrich Landing Gear Systems 27.1 % 26.6 % Sikorsky Aircraft 25.2 % 33.8 % United States Department of Defense 18.5 % 17.5 % 19 Gross Profit:
Consolidated gross profit for the three months ended
Operating Expense
Consolidated operating expenses for the three months ended
Interest and Financing Costs
Interest and financing costs for the three months ended
Net Loss
Net loss for the three months ended
LIQUIDITY AND CAPITAL RESOURCES
Our material cash requirements are for debt service, capital expenditures and funding working capital/operating costs.
As of
1) Our Webster Facility of$15,554,000 consisting of a Revolving Line of Credit of$11,555,000 and a term loan in the amount of$3,999,000 . During the remainder of our fiscal 2022, we are required to pay$1,463,000 of this amount plus an amount of Excess Cash Flow we generate.
2) Related party debt consisting of a convertible subordinated note payable of
$6,412,000 . This debt is not due untilJuly 1, 2026 .
3) Various equipment leases and contractual obligations related to our normal
business.
We have historically met our cash requirements with funds provided by a
combination of cash generated from operating activities and cash generated from
equity and debt financing transactions. Based on our current revenue visibility
and strength of our backlog, we believe that we have enough liquidity to meet
our short-term cash requirements. Although the Webster Facility does have
certain restrictions on our ability to fund capital expenditures, we are
currently in discussions to amend the facility to provide us with the capability
to spend up to an additional
Because we believe our fiscal 2022 sales will be in line with the amount achieved in fiscal 2021, we believe our liquidity in 2022 will continue to improve. As a result of recent increases in the federal funds borrowing rate, interest rates and related expense under our Webster Facility are expected to increase from current levels. Such increases are not expected to material impact our liquidity.
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Our future liquidity may be adversely impacted by various risks and
uncertainties, including, but not limited to future and current impacts of
global events such as COVID-19 and the war in the
Changes in our cash flow are discussed further below.
Cash Flow
The following table summarizes our net cash flow from operating, investing and financing activities for the periods indicated:
Three Months Ended March 31, 2022 2021 (unaudited) (unaudited) Cash provided by (used in) Operating activities$ 1,285,000 $ 567,000 Investing activities (430,000 ) (273,000 ) Financing activities (1,118,000 ) (1,068,000 )
Net decrease in cash and cash equivalents
Cash Provided by Operating Activities
Cash provided by operating activities primarily consists of our net loss adjusted for certain non-cash items and changes to operating assets and liabilities.
For the three months ended
Changes in operating assets and liabilities provided cash in the net amount of
Cash Used in Investing Activities
For the three months ended
Cash Used in Financing Activities
For the three months ended
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OFF-BALANCE SHEET ARRANGEMENTS
We did not have any off-balance sheet arrangements as of
Critical Accounting Policies and Estimates
A critical accounting policy is one that is both important to the portrayal of a company's financial condition and results of operations and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Our condensed consolidated financial statements are presented in accordance with
? Liquidity; ? Inventory valuation; ? Revenue recognition; ? Income taxes;
? Stock-based compensation; and
?Goodwill .
We base our estimates, to the extent possible, on historical experience. Historical information is modified as appropriate based on current business factors and various assumptions that we believe are necessary to form a basis for making judgments about the carrying value of assets and liabilities. We evaluate our estimates on an on-going basis and make changes when necessary. Actual results could differ from our estimates.
Recently Issued Accounting Pronouncements
See Note 2 of the Condensed Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.
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