Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 December 31, 2020 (the “2020 Form 10-K”).
This discussion contains forward-looking statements that involve risks and uncertainties. You should specifically consider the various
risk factors identified in this report that could cause actual results to differ materially from those anticipated in these forward-looking
statements.
Business Overview
The financial statements contained
in this report as well as the discussion below principally reflect the status of our business and the results of our operations as of
June 30, 2021.
AIM became a public company
in 2005 and we are an aerospace company operating primarily in the defense industry. Our Complex Machining segment manufactures structural
parts and assemblies that focus on flight safety, including landing gear, arresting gear, engine mounts, flight controls, throttle quadrants,
and other components. Our Turbine Engine Components segment makes components and provides services for jet engines and ground-power turbines.
Our products 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, Northrop Grumman E2D Hawkeye, the US Navy F-18 and USAF F-16 fighter aircraft, Boeing 777 commercial
airliners. Our Turbine Engine segment makes components for jet engines that are used on the USAF F-15 and F-16, the Airbus A-330 and the
Boeing 777, in addition to a number of ground-power turbine applications.
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
service but also by increasing our ability to produce more complex and complete assemblies for our customers.
We are currently focused on
positioning our business to obtain profitability, achieve positive cash flow and we remain resolute on meeting customers’ needs.
We believe that an unyielding focus on our customers will allow us to execute on our existing backlog in a timely fashion. In 2018 and
2019, we consolidated the operations of our Complex Machining segment in our main campus located in Bay Shore, New York. In 2020, in order
to take advantage of the long-term growth opportunities we see in our markets, we made significant capital investments in new equipment.
Additionally, we expanded our operations and manufacturing cells located in our Connecticut facility where our Turbine Engine segment
is located. We believe these investments will increase the volume and efficiency of production, increase the size of product we can make
and allow us to offer additional services to our customers. We are pleased with the positive responses received from our customers to
date.
Our ability to operate profitably
is determined by our ability to win new contracts and renewals of existing contracts, and then fulfill these contracts on a timely basis
at costs that enable us to generate a profit based upon the agreed upon contract price. Winning a contract generally requires that we
submit a bid containing a fixed price for the product or products covered by the contract for an agreed upon period of time. 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.
19
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. In addition,
the market for the skilled labor we require to operate our plants is highly competitive. 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.
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. Recent increases in Defense Department spending have increased
orders for our products. Reductions to the Defense Department budget or decreased usage of aircraft reduces the demand for both new production
and replacement spares and could adversely impact our business and our revenues. We are focusing greater efforts on the civilian aircraft
market though we still remain dependent upon the military for an overwhelming portion of our revenues.
Segment Data
We follow Financial Accounting
Standards Board (“FASB”) ASC 280, “Segment Reporting” (“ASC 280”), which establishes standards for
reporting information about operating segments in annual and interim financial statements, ASC 280 requires that companies report financial
and descriptive information about their reportable segments based on a management approach. ASC 280 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
We currently divide our operations
into two operating segments: Complex Machining and Turbine Engine Components. Along with our operating subsidiaries, we report the results
of our corporate office as an independent segment.
The accounting policies of
our segments are the same as those described in the Summary of Significant Accounting Policies. We evaluate performance based on revenue,
gross profit contribution and assets employed.
RESULTS OF OPERATIONS
Selected Financial Information:
For the Three Months Ended
For the Six Months Ended
June 30,
June 30,
June 30,
June 30,
2021
2020
2021
2020
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Net sales
$ 15,453,000
$ 8,494,000
$ 29,165,000
$ 21,941,000
Cost of sales
12,850,000
7,880,000
24,765,000
19,146,000
Gross profit
2,603,000
614,000
4,400,000
2,795,000
Operating expenses and interest and financing costs
2,496,000
2,334,000
4,563,000
4,976,000
Other income, net
132,000
136,000
250,000
241,000
Benefit from income taxes
-
-
-
(1,414,000 )
Net Income (loss)
$ 239,000
$ (1,584,000 )
$ 87,000
$ (526,000 )
20
Balance Sheet Data:
June 30,
December 31,
2021
2020
(unaudited)
Cash and cash equivalents
$ 515,000
$ 2,505,000
Working capital
$ 16,747,000
$ 16,284,000
Total assets
$ 56,250,000
$ 57,777,000
Total stockholders’ equity
$ 15,514,000
$ 15,109,000
The following sets forth the
results of operations for each of our segments individually and on a consolidated basis for the periods indicated:
For the Three Months
For the Six Months
Ended June 30,
Ended June 30,
2021
2020
2021
2020
(unaudited)
(unaudited)
(unaudited)
(unaudited)
COMPLEX MACHINING
Net Sales
$ 13,783,000
$ 7,308,000
$ 25,949,000
$ 19,372,000
Gross Profit
2,325,000
681,000
3,944,000
2,849,000
Income (loss) before benefit from income taxes
1,573,000
(10,000 )
2,553,000
1,160,000
Assets
51,956,000
48,490,000
51,956,000
48,490,000
TURBINE ENGINE COMPONENTS
Net Sales
1,670,000
1,186,000
3,216,000
2,569,000
Gross Profit (loss)
278,000
(67,000 )
456,000
(54,000 )
Income (loss) before benefit from income taxes
114,000
(217,000 )
99,000
(343,000 )
Assets
3,471,000
4,430,000
3,471,000
4,430,000
CORPORATE
Net Sales
-
-
-
-
Gross Profit
-
-
-
-
Loss before benefit from income taxes
(1,448,000 )
(1,357,000 )
(2,565,000 )
(2,757,000 )
Assets
823,000
1,808,000
823,000
1,808,000
CONSOLIDATED
Net Sales
15,453,000
8,494,000
29,165,000
21,941,000
Gross Profit
2,603,000
614,000
4,400,000
2,795,000
Income (loss) before benefit from income taxes
239,000
(1,584,000 )
87,000
(1,940,000 )
Benefit from Income Taxes
-
-
-
(1,414,000 )
Net Income (loss)
239,000
(1,584,000 )
87,000
(526,000 )
Assets
$ 56,250,000
$ 54,728,000
$ 56,250,000
$ 54,728,000
Results of Operations for the three months
ended June 30, 2021
Net Sales:
Consolidated net sales for
the three months ended June 30, 2021 were $15,453,000, an increase of $6,959,000, or 81.9%, compared with $8,494,000 for the three months
ended June 30, 2020. Net sales of our Complex Machining segment were $13,783,000 in the three months ended June 30, 2021, an increase
of $6,475,000, or 88.6%, from $7,308,000 in the three months ended June 30, 2020. Net sales in our Turbine Engine Components segment for
the three months ended June 30, 2021 were $1,670,000, an increase of $484,000, or 40.8%, compared with $1,186,000 for the three months
ended June 30, 2020.
21
As indicated in the table
below, three customers represented 76.2% and two customers represented 71.9% of total sales for the three months ended June 30, 2021 and
June 30, 2020, respectively.
Percentage of Sales
Customer
2021
2020
(unaudited)
(unaudited)
Goodrich Landing Gear Systems
41.3 %
33.30 %
Sikorsky Aircraft
20.8 %
38.60 %
United States Department of Defense
14.1 %
*
*
Customer was less than 10% of net sales for the three months ended June 30, 2020.
Gross Profit:
Consolidated gross profit from operations for the three months ended
June 30, 2021 was $2,603,000, an increase of $1,989,000, or 323.9%, as compared to gross profit of $614,000 for the three months ended
June 30, 2020. Consolidated gross profit as a percentage of sales was 16.8% and 7.2% for the three months ended June 30, 2021 and 2020,
respectively.
Operating Expenses:
Consolidated operating expenses
for the three months ended June 30, 2021 totaled $2,163,000 and increased by $257,000 or 13.5% compared to $1,906,000 for the three months
ended June 30, 2020.
Interest and Financing Costs:
Interest and financing costs
for the three months ended June 30, 2021 were $333,000 a decrease of $95,000 or 22.2% compared to $428,000 for the three months ended
June 30, 2020. This decrease is attributable to the conversion of our third party Convertible Debt during fiscal 2020.
Net Income (Loss):
Net income for the three months ended June 30,
2021 was $239,000, an increase of $1,823,000, compared to a net loss of $1,584,000 for the three months ended June 30, 2020, reflecting
our ability to generate revenues consistent with our revenues before the onset of Covid-19 while continuing to focus on limiting the increases
in operating expenses and reducing interest costs.
Results of Operations for the six months ended June 30, 2021
Net Sales:
Consolidated net sales for
the six months ended June 30, 2021 were $29,165,000, an increase of $7,224,000, or 32.9%, compared with $21,941,000 for the six months
ended June 30, 2020. Net sales of our Complex Machining segment were $25,949,000 in the six months ended June 30, 2021, an increase
of $6,577,000, or 34.0%, from $19,372,000 in the six months ended June 30, 2020. Net sales in our Turbine Engine Components segment were
$3,216,000 for the six months ended June 30, 2021, an increase of $647,000, or 25.2% compared with $2,569,000 for the six months ended
June 30, 2020.
22
As indicated in the table
below, three customers represented 77.0% and two customers represented 69.3% of total sales for the six months ended June 30, 2021 and
June 30, 2020, respectively.
Percentage of Sales
Customer
2021
2020
(unaudited)
(unaudited)
Goodrich Landing Gear Systems
34.4 %
32.2 %
Sikorsky Aircraft
26.9 %
37.1 %
United States Department of Defense
15.7 %
*
*
Customer was less than 10% of net sales for the six months June 30, 2020.
Gross Profit:
Consolidated gross profit
from operations for the six months ended June 30, 2021 was $4,400,000, an increase of $1,605,000, or 57.4%, as compared to gross profit
of $2,795,000 for the six months ended June 30, 2020. Consolidated gross profit as a percentage of sales was 15.1% and 12.7% for the six
months ended June 30, 2021 and 2020, respectively.
Operating Expenses:
Consolidated operating expenses
for the six months ended June 30, 2021 totaled $3,933,000 and decreased by $235,000 or 5.6% compared to $4,168,000 for the six months
ended June 30, 2020.
Interest and Financing Costs:
Interest and financing costs
for the six months ended June 30, 2021 were $630,000 a decrease of $178,000 or 22.0% compared to $808,000 for the six months ended June
30, 2020. This decrease is attributable to the conversion of our third party Convertible Debt during fiscal 2020.
Net Income (Loss):
Net income for the six months
ended June 30, 2021 was $87,000, an increase of $613,000 compared to a net loss of $526,000 for the six months ended June 30, 2020, due
to the reasons discussed above. In addition, the Company recorded a benefit from income taxes of $1,414,000 for the six months ended June
30, 2020 pursuant to the filing of a net operating loss claim (see below).
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2020, we took
advantage of a number of U.S. government programs to improve our liquidity to offset the negative impact to our business from COVID-19.
These steps included:
1)
Received Low Interest Loans from the SBA – In May 2020, our three operating subsidiaries entered into government subsidized loans with Sterling National Bank (“SNB”) in an aggregate principal amount of $2.4 million (“SBA Loans”).
2)
Applied for and Received Forgiveness of the SBA Loans – In accordance with U.S. government regulations we applied to SNB for forgiveness of each Loan in full and in December 2020 we received final approval from the SBA that the entire principal amount of our SBA Loans plus accrued interest had been forgiven.
3)
Deferred Certain Tax Payments – In accordance with Section 2302 of the CARES Act, we elected to defer the deposit and payment of the employer’s portion of Social Security taxes. These deferred amounts must be repaid 50% on December 31, 2021 with the remaining 50% on December 31, 2022. As of December 31, 2020, we deferred $627,000, which is included in Deferred payroll tax liability – CARES Act on the accompanying Condensed Consolidated Balance Sheet.
23
4)
Received a Net Operating Loss Refund – Pursuant to the CARES Act, we filed a net operating loss carryback claim for $1,416,000, which was received during the second quarter 2020.
Also, the U.S. Department
of Defense has, to date, taken steps to increase the rate for certain progress payments from 80 percent to 90 percent for costs incurred
and work performed on certain contracts.
In addition to taking advantage
of U.S. government programs, during fiscal 2020 we took additional significant steps to improve our liquidity and operating performance,
including:
1)
Entered into a Lower Cost Financing Facility – On December 31, 2019, we entered into a new loan facility (“SNB Facility”) with Sterling National Bank, (“SNB”) which expires on December 30, 2022. The SNB Facility provides for a $16,000,000 revolving loan (“SNB revolving line of credit”) and a term loan (“SNB term loan”). The interest on the SNB Facility is more advantageous than that of our previous lending facility which we paid off with the proceeds from the SNB Facility.
2)
Increased Term Loan to Modernize Equipment – On November 6, 2020, we amended the SNB Facility, increasing the Term Loan to $5,685,000. This allowed us to finance the acquisition of the new equipment at what we believe to be a reasonable interest rate.
The repayment terms of the term loan
were amended to provide monthly principal installments in the amount of $67,679 beginning on December 1, 2020, with a final payment of
any unpaid balance of principal and interest payable on December 30, 2022. We paid an amendment fee of $20,000. Additionally, the date
by which certain subordinated third-party notes were to be extended by was changed from September 30, 2020 to November 30, 2020. We caused
all of these notes to be converted into common stock prior to December 31, 2020.
The formula to determine the amounts
of revolving advances permitted to be borrowed under the SNB revolving line of credit is based on a percentage of eligible receivables
and inventory (as defined in the SNB Facility).
For so long as the SNB term loan remains
outstanding, if Excess Cash Flow (as defined) is a positive number for any fiscal year, beginning with the year ending December 31, 2020,
we shall pay to SNB an amount equal to the lesser of (i) twenty-five percent (25%) of the Excess Cash Flow for such Fiscal Year and (ii)
the outstanding principal balance of the term loan. Such payment shall be made to SNB and applied to the outstanding principal balance
of the term loan, on or prior to the April 15 immediately following such Fiscal Year.
On June 14, 2021, we entered into the
Second Amendment to the Loan and Security Agreement (“Second Amendment”). The purpose of the Second Amendment was to clarify
the definition and calculation of Excess Cash Flow, and to confirm the extension of the due date for the payment of the Excess Cash Flow.
The amount of the Excess Cash Flow payment for the year ended December 31, 2020 was calculated to be $558,750. Per the terms of the Second
Amendment, the Excess Cash Flow is payable in three installments of $186,250 on each of June 15, 2021, June 30, 2021, and September 15,
2021. As of June 30, 2021, we paid the first two installments totaling $372,500. Additionally, we paid an amendment fee of $10,000.
The terms of the SNB Facility require
that, among other things, we maintain a specified Fixed Charge Coverage Ratio of 1.25 to 1.00 at the end of each Fiscal Quarter beginning
with the Fiscal Quarter ending March 31, 2020. In addition, we are limited in the amount of Capital Expenditures we can make. As of June
30, 2021, we were in compliance with all loan covenants. The SNB Facility also restricts the amount of dividends we may pay to our stockholders.
Substantially all of our assets are pledged as collateral under the SNB Facility.
24
As of June 30, 2021, our debt to SNB
in the amount of $20,049,000 consisted of the SNB revolving line of credit note in the amount of $15,256,000 and the SNB term loan in
the amount of $4,793,000.
3)
Conversion and Extension of Subordinated Notes – During 2020, third party holders of convertible subordinated notes of the remaining principal balance plus accrued interest, converted these notes into common stock. In addition, the maturity date of related party convertible subordinated notes and subordinated notes payable in the aggregate amount of $6,012,000 plus $400,000 of accrued interest was extended until July 1, 2023, and we were relieved of the obligation to make any principal payments on these notes prior to maturity.
Because we continue to believe
our fiscal 2021 sales will be higher than the amount achieved in fiscal 2020, we believe our liquidity for the remainder of 2021 will
continue to improve.
Cash Flow
The following table summarizes
our net cash flow from operating, investing and financing activities for the periods indicated below:
Six Months Ended
June 30,
2021
2020
(unaudited)
(unaudited)
Cash (used in) provided by
Operating activities
$ (181,000 )
$ (1,043,000 )
Investing activities
(631,000 )
(309,000 )
Financing activities
(1,178,000 )
2,126,000
Net (decrease) increase in cash and cash equivalents
$ (1,990,000 )
$ 774,000
Cash Used in Operating Activities
Cash used in operating activities
primarily consists of our net income of $87,000 adjusted for certain non-cash items and changes to working capital items.
For the six months ended June
30, 2021 non-cash items of $1,920,000 consisted primarily of depreciation of property and equipment of $1,417,000, non-cash employee stock
compensation expense of $214,000, amortization of right-of-use assets of $240,000 and non-cash directors’ compensation expense of
$104,000 offset by $195,000 of non-cash income. The remaining non-cash items totaled $140,000.
Operating assets and liabilities
used cash in the net amount of $2,188,000 consisting primarily of the net increases in accounts receivable, prepaid expenses and other
current assets in the amounts of $3,435,000, $49,000 and $4,000, respectively and decreases in accounts payable and operating lease liabilities
of $894,000, and $390,000, respectively, partially offset by a decrease in inventory in the amount of $1,911,000 and an increase in deferred
revenue in the amount of $673,000.
Cash Used in Investing Activities
Cash used in investing activities
consists of capital expenditures for property and equipment.
For the six months ended June
30, 2021, cash used in investing activities was $631,000. This was for the purchase of property and equipment.
Cash Used In Financing Activities
For the six months ended June
30, 2021, cash used in financing activities consisted of net payments on our SNB revolving loan and term note in the amounts of $393,000
and $778,000, respectively and payments of $3,000 and $4,000 on our financing lease obligations and loan payable – financed asset.
25
OFF-BALANCE SHEET ARRANGEMENTS
We did not have any off-balance
sheet arrangements as of June 30, 2021.
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 U.S. GAAP, and all applicable U.S. GAAP accounting standards effective as of June
30, 2021 have been taken into consideration in preparing the condensed consolidated financial statements. The preparation of condensed
consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures. Some of those estimates are subjective and complex, and, consequently, actual results could differ from
those estimates. The following accounting policies and estimates have been highlighted as significant because changes to certain judgments
and assumptions inherent in these policies could affect our condensed consolidated financial statements:
●
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.
26
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.