Air Industries Group — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Air Industries Group manufactures aerospace components, primarily for defense customers, through its subsidiaries. The financial statements are unaudited.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $12.293 million | $13.278 million | $38.047 million | $39.348 million |
| Gross profit | $1.228 million | $2.242 million | $5.278 million | $6.742 million |
| Gross margin | 10.0% | 16.9% | 13.9% | 17.1% |
| Operating income (loss) | ($796,000) | $169,000 | ($882,000) | $626,000 |
| Net loss | ($1.299 million) | ($142,000) | ($2.312 million) | ($177,000) |
| Loss per share, basic and diluted | ($0.40) | ($0.04) | ($0.71) | ($0.05) |
| Operating cash flow | — | — | $7.093 million | ($73,000) |
Q3 sales declined 7.4% year over year; nine-month sales declined 3.3%. Management attributed lower sales to shipment timing and a supplier delay in obtaining raw material for a specific product. Gross profit and margins fell more sharply, reflecting lower volume and factory-overhead under-absorption, as well as a lower-margin product mix. Interest and financing costs rose 59.8% in Q3 and 57.4% for the nine-month period, reflecting higher rates and equipment-related debt.
Liquidity, debt and cash flow
- At September 30, cash was $740,000, working capital was $12.307 million, total assets were $49.719 million, and stockholders’ equity was $14.949 million. Cash increased from $281,000 at year-end 2022, while working capital declined from $18.600 million.
- Total debt listed in the debt note was $21.221 million, including $6.162 million of related-party notes. Webster Bank borrowings were approximately $13.7 million; substantially all company assets secure the Webster facility. Related-party notes are subordinated and due July 1, 2026.
- Operating cash flow of $7.093 million included a $4.224 million reduction in accounts receivable and a $2.695 million increase in customer deposits. Management said the deposits were an advance for long-lead-time materials expected to be disbursed in late 2023 and early 2024. Investing activities used $1.867 million, principally for equipment; financing activities used $4.767 million, primarily for net revolver repayments.
- The company had breached financial covenants, including the fixed-charge coverage ratio. A November 20, 2023 Webster amendment waived specified defaults and revised covenant tests and thresholds. Despite the waiver, management said future covenant compliance is uncertain and warned that failure to obtain future waivers could raise substantial doubt about the company’s ability to continue as a going concern within one year after report issuance. The term loan due in 2025 was classified as current.
Outlook, risks and other material matters
- Backlog was approximately $66.9 million at September 30, 2023. Management expected to recognize $11.9–$13.9 million in the remainder of 2023, approximately $48.5 million in 2024, and $3.0–$4.5 million through March 2025. These expectations depend on timely supplier deliveries and customer acceptance.
- Management cited supply-chain constraints, critical-inventory availability, skilled-labor costs, inflation, higher interest rates, geopolitical instability—including the wars in Ukraine and Israel—and possible defense-industry or financial-market deterioration as risks to results and liquidity. It stated that forecasting and covenant compliance had become particularly difficult.
- The company reported significant customer concentration: three customers accounted for 60.8% of Q3 sales; four accounted for 62.9% of nine-month sales. It also relies on sole-source suppliers for certain parts and services.
- A lawsuit by Contract Pharmacal seeks damages of $700,000. The company disputes the claim; an appeal was heard in November 2023, with no decision reported in the filing.
- Management concluded internal controls over financial reporting were not effective at September 30, 2023. Previously reported material weaknesses related to inventory reserves, income-tax review controls, and IT access remained under remediation.
- The company received an NYSE American notice for late filing of this 10-Q, with a stated cure period through May 20, 2024. The filing says the delinquency would be cured upon filing this report.
Important facts for investors to verify
- Whether the company meets revised Webster covenants and generates sufficient cash after the customer-deposit-funded material purchases.
- Whether backlog converts to revenue on schedule despite supplier and production constraints, and whether gross margins recover.
- Liquidity needs, debt service, borrowing availability, and the impact of interest rates; confirm the terms and ongoing compliance under the amended credit facility.
- Progress in remediating control weaknesses and the outcome of the Contract Pharmacal appeal.
- Customer and supplier concentration and the assumptions underlying management’s backlog conversion schedule and going-concern assessment.