Air Industries Group — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. Air Industries Group manufactures aerospace components, primarily for defense customers, through its subsidiaries. Comparisons below are against the corresponding 2022 periods unless noted.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $13.205 million | $14.008 million | $25.754 million | $26.070 million |
| Gross profit | $2.170 million | $2.422 million | $4.050 million | $4.500 million |
| Gross margin | 16.4% | 17.3% | 15.7% | 17.3% |
| Operating income (loss) | $72,000 | $250,000 | ($86,000) | $457,000 |
| Interest and financing costs | $480,000 | $289,000 | $956,000 | $612,000 |
| Net loss | ($395,000) | ($7,000) | ($1.013 million) | ($35,000) |
| Loss per share, basic and diluted | ($0.12) | ($0.00) | ($0.31) | ($0.01) |
Q2 sales declined 5.7%, primarily due to shipment timing for larger components. Six-month sales fell 1.2%. Gross profit declined 10.4% in Q2 and 10.0% year to date; management attributed margin pressure to lower sales and product mix in Q2, and to lower-margin products and elevated processing costs in Q1. Operating expenses decreased 2.3% in Q2 but increased 2.3% for the half year. Higher interest costs reflected increased equipment-related borrowing and higher rates: the average Webster Facility rate was 7.51% in Q2 2023 versus 3.60%, and 7.27% for the half year versus 3.55%.
Cash flow, liquidity and debt
- For the first half, operating activities provided $1.406 million, versus $315,000 in 2022. Investing activities used $1.383 million, principally for machinery and equipment; financing activities provided $533,000. Cash increased $556,000 to $837,000.
- At June 30, cash was $837,000, working capital was $17.740 million, and total assets were $54.384 million. Current assets were $42.293 million and current liabilities $24.553 million. Inventory was $32.767 million.
- Total debt and finance obligations, including $6.162 million of related-party notes, were $26.494 million. Webster Bank debt was approximately $19.343 million: $13.837 million revolving and $5.506 million term debt. The bank facility expires December 30, 2025; substantially all company assets secure it. Related-party notes are due July 1, 2026 and bear interest at rates of 6%, 7% or 12%, depending on the notes.
- Cash interest paid in the first half was $955,000, up from $572,000. The company also reported $382,000 remaining available under the equipment line of credit.
Material changes, outlook and risks
- On August 4, 2023, after quarter-end, the company amended its Webster Facility. The amendment waived the default arising from failure to meet the required fixed charge coverage ratio for Q1 2023 and lowered the required ratio to 0.95:1.00 for Q2 and Q3 2023. The filing says the company was in compliance for Q2 following the amendment. The amendment also raised the permitted purchase-money secured debt limit to $2 million and required a $10,000 fee.
- Management expects 2023 sales to be comparable to 2022 and believes operating cash flow and backlog will support short-term liquidity over the next 12 months. This is management’s expectation, not formal earnings guidance. Backlog was approximately $73 million at June 30, with expected recognition of $22.5–$25 million in the remainder of 2023, $25–$27 million in the first half of 2024, and $21–$25.5 million in the second half of 2024. These estimates depend on timely supplier deliveries and customer acceptance.
- Customer concentration is significant: three customers supplied 62.7% of Q2 sales; two customers represented 60.8% of gross receivables at June 30. The company also cites reliance on sole-source suppliers, volatile material costs (including titanium), skilled-labor availability, fixed-price contracts, production efficiency and defense demand as risks.
- Internal control over financial reporting was deemed ineffective as of June 30, 2023. Previously reported material weaknesses included inventory reserve judgments, income-tax review controls and IT access design. New written procedures were introduced for inventory and tax controls, but remediation depends on sustained operation and testing; IT remediation was still being assessed.
- An unresolved lawsuit by Contract Pharmacal seeks $700,000 in damages relating to a sublease; the company disputes the claim and is contesting an appeal. The filing does not provide a clear estimate of potential loss. The company recorded no income-tax expense and maintained a full valuation allowance against net deferred tax assets.
- Inventory accounting changed in 2023: inventory is valued using FIFO cost or estimated net realizable value, whereas prior interim periods substantially relied on an estimated gross-profit method. The filing notes this change in describing period comparisons.
Important facts for investors to verify
- Whether sales timing normalizes and backlog converts on schedule, particularly given customer acceptance and supplier-delivery assumptions.
- Progress in restoring and demonstrating effective internal controls, including the remaining IT access weakness.
- Compliance with Webster covenant requirements after the temporary ratio reduction, and the company’s ability to manage substantial debt service and rising interest expense.
- Whether gross margins recover from the first-half decline and whether production costs, inventory reserves and capital investment support improved cash generation.
- Developments in the Contract Pharmacal appeal and any resulting financial exposure.