Air Industries Group Q2 FY2025 Earnings Call

Hello, and welcome to the Air Industries Group Second Quarter of 2025 Earnings Conference Call. As a reminder, this conference is being recorded. This call may contain forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended, including statements regarding, among other things, the company's business strategy and growth strategy. Expressions, which identify forward-looking statements speak only as of the date the statement is made. These forward-looking statements are based largely on our company's expectations and are subject to a number of risks and uncertainties, some of which are beyond our control and cannot be predicted or quantified. These future developments and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate. This call does not constitute an offer to purchase any securities nor a solicitation of a proxy, consent, authorization or agent designation with respect to a meeting of the company's shareholders. At this time, I would now like to turn the call over to Lou Melluzzo, President and CEO. Please go ahead, sir.

Thank you, Joe, and thank you all for joining us today. There is no avoiding the fact that our results for the second quarter and 6 months of 2025 were disappointing. In the second quarter, we faced some headwinds. Delays in customer approvals and extended lead times from subcontractors definitely impacted our results. Combined with a higher non-cash stock compensation, we had a net loss for the quarter. Despite this, adjusted EBITDA for the first half remained positive. This resulted from our ability to manage costs. To further increase profitability, we have implemented cost-cutting initiatives, including a workforce reduction that will reduce annual payroll by around $1 million, and the savings may be a little bit more. Looking to the second half, reflecting the impact of these issues, we have adjusted our outlook. We now expect overall second-half results in 2025 to be lower than the first half. We do believe that the fourth quarter will be the strongest quarter of the year. In spite of recent headwinds, I remain confident about our long-term business outlook. In early July of 2025, we successfully completed an at-the-market offering raising nearly $4 million in gross proceeds from the sale of 1,003,653 common shares, further strengthening our balance sheet. Our backlog, reflecting sustained demand for our products, grew to record levels in the first half of 2025. The long lead times for raw materials and the long time necessary to manufacture our highly complex and sophisticated products mean the sales from our expanded backlog will begin to be realized in fiscal 2026 and in future years. An example that highlights this: We recently announced a contract worth over $5 million for landing gear components for the B-52 aircraft. We have ordered the required raw material and expect it will arrive in mid-2026. We anticipate making the first deliveries late in the fourth quarter of 2026, but the overwhelming percentage of sales and deliveries will be in 2027. That means a July 2025 order will yield deliveries in 2027, which is 1.5 years or up to 2 years later. Since returning from the Paris Air Show in late June, our business development team has been extremely busy following up on new opportunities. We conducted several dozen meetings during the show encompassing both customers, prospects, and suppliers. The meetings were fruitful in terms of assessing the current business climate, future opportunities, and engaging with our supply chain. With that said, I'd like to turn the call over to Scott, who will discuss the financial results in more detail and then come back for some closing comments. Scott?

Thank you, Lou, and good afternoon, everyone. As Lou mentioned, our results for the second quarter and the first 6 months of 2025 fell short. Let me discuss the results in some more detail. Consolidated net sales for the second quarter ended June 30, 2025, were $12.7 million. This represents a decrease of about $800,000 or 6.7% compared to the same quarter in 2024. Gross profit was $2 million, which represents 16% of sales for Q2. Though inflation has moderated, prices are still increasing. We have been very successful in controlling our operating expenses. Adjusting for non-cash stock compensation expense, our consolidated operating costs were slightly lower this year compared to 2024. Operating income was $8,000 in the second quarter of 2025 compared to operating income of $752,000 in 2024. We had a net loss of $422,000 or $0.11 per share during Q2 of 2025 compared to net income of $298,000 or $0.09 per share in Q2 of 2024. For the 6 months ended June 30, 2025, our adjusted EBITDA was $1,469,000, a decrease of $306,000 or 17% from the prior year 6-month period. Let me quickly highlight some items on our balance sheet. Our total debt has declined by a little more than $1 million. Inventory has increased by about $1.3 million. Accounts receivable has decreased by close to $2 million and accounts payable and accrued expenses have increased by approximately $1.2 million. As Lou mentioned earlier, we completed our at-the-market offering in early July, raising nearly $4 million, selling over 1 million shares at an average price of about $3.95 per share. This enhances our balance sheet, increasing our liquidity and reducing our net debt as of July by nearly $4 million. And with that, I will return the call over to Lou.

Thanks, Scott. 2025 has been an interesting year for Aerospace. The administration has unveiled plans to fund the F-47, which is a sixth-generation fighter awarded to Boeing. There's talk of the E-2D crossing lines and being adopted by the Air Force. There's a proposal on the table for a new F/A-XX, which is a sixth-generation fighter for the Navy, which would replace the F-18 and would be in support of the F-35C. As a support provider to these big OEMs and government directly, we are in exciting times in this business. I would like to highlight some of the recent accomplishments that Air Industries has had. We've been on a mission to recover from a decreased revenue stream with certain legacy customers by reinforcing relationships with our other existing customers, we have made a big push to add new clients, new aircraft platforms and expand into new markets. There is strong and tangible evidence that we've succeeded at doing some of that. We received the largest long-term agreement in our history from an established customer. Northrop Grumman, a longtime client, honored us with their prestigious Supplier Excellence Award. We have greatly increased our content on the CH-53K helicopter, which is a new and fast-growing and important platform. We have received more than $10 million in new orders from new and existing clients for aftermarket products. This is a strong validation of our success in further penetrating into the aftermarket. Despite the challenges of the past several quarters, I remain fully convinced that we will continuously improve and will monetize our large backlog. Joe, with that, I'd like to open up the call for the Q&A portion. See if we have any questions.

Our first question comes from Igor Novogratziv with Alaris Capital. I'm a new investor in your company. Forgive me if I'm asking questions that may be a little basic, but I have quite a few. So maybe I'll ask a couple, and if nobody else does, I'll ask a few more. My first one is about your credit facility. Your credit facility is maturing in December, and I think you've violated some of the covenants, which don't seem too critical since your EBITDA is still possible. Could you explain how your conversations with the current lender are going? Do you think the facility will be extended, or are you speaking with other lenders? Could you discuss that a bit?

So thank you for your question, Igor. We are in conversations with our current lender as we speak. They have been very supportive of us over the past several years. And I am confident that we will come to some sort of extension with them. I couldn't possibly say on what terms that would be, but I do not believe we will have an issue. Further, as I indicated before, we did recently successfully raise about $4 million. So that only enhances and adds to our liquidity for the remainder of the year.

Okay. Once you touched upon the raise, was it an opportunistic raise because, if my math serves me correctly, in July, it was on a day when your stock jumped for a short period of time above $4 and then just because of, I guess, a new order? Or was this something you were planning to do? Or was that just a good opportunity to raise knowing that your quarter is not going to be particularly strong?

Back in December 2024, we began the process of raising funds by filing an S-3, which became effective that month. We secured some funding towards the end of the year and continued to raise additional funds through March. We then resumed this process in late June, just before the market movement in early July. The stock's surge was already anticipated, and it worked out positively for us.

I know it's a little bit early to talk about this, but assuming everything is going to be okay past December this year with the lender, do you think, as things look out through the end of the year, you would need another capital raise? Or do you think you're okay for now?

I would say that we are probably okay for now. I don't have anything currently in the works for that. But we'll see what time brings.

European sales. You don't really have any significant European customers. But now the situation has changed, especially with the new tariff yield between where Europe is almost obligated to buy more from the U.S. and also very increased European defense spending. I think this is where the biggest increase is happening. Do you anticipate getting some of the European sales? Or is this not something you're actively working on?

Well, Igor, we don't sell directly in many cases, although it's a small part of our business. A lot of the spare parts and similar items we provide are sold directly through OEMs and distributed globally, not just in the U.S. If our OEMs have more spare parts available, it could be beneficial, but currently, our main sales are to the U.S. government. It might have an impact, but it's too soon to determine. Regarding tariffs, while they don't directly affect us, we only have one product that is at risk due to tariffs, and those costs are passed on to our clients as outlined in our contract. Other than that, larger OEMs like Pratt and Sikorsky may be affected by tariffs, but we have some safeguards in place. We are hopeful our sales will rise due to these circumstances, but it's still too early to assess.

Okay. So you anticipated my last question; I was specifically about the input of materials, especially now with steel tariffs and other raw material tariffs and things like that. Do you have a lot of contract protection? In other words, is there price margin already built into the cost of the components available?

As Lou was saying, there is only one product that we manufacture that has material that comes from a foreign source, and that contract specifically has a price protection clause in it that if the cost of the material increases by more than 5%, contractually they are bound to pay the difference. So we have complete price protection basically built into that contract. That is the only contract that has foreign material in it.

I understand that. But if I may clarify, you purchase the remainder from U.S. manufacturers, but eventually they will have to raise the price of that component. I'm asking if they raise the price of their components, would you be forced to absorb the extra cost? Or are you protected against that?

In some cases, probably half the time the product is supplied to us by the OEM. So if they raise the prices, it's on them. In other cases, our clients have been very willing to work with us if it's outside of the scope of the contract. And anything that we can put price protection on at the early stage, we do.

The next question comes from the line of Ethan Berenbaum, Private Investor. Just to clarify why sales are going down. I'm not clear. Can you clarify some more, and hopefully, sales will start increasing?

Thank you for the question. Sales going down right now is a timing issue. We've had some customer approvals that just did not materialize timely enough to make the quarter, and a few other issues of that nature. We have some first articles that have not come back on time. Our backlog is still very healthy. It's the largest backlog we've ever had. Materials that we thought would take 6 months or 9 months are taking a year or 1.5 years. So there's a lag in there regarding what's going on in the industry.

The next question comes from the line of Lawrence Case.

Yes. I just wondered, given that the sales have been essentially flat or even going down for years now, I wonder if you considered selling the company to maybe a larger firm and maybe they could make things move better?

That's a great question, Lawrence. In our Connecticut operations, we have seen growth for three consecutive years, with increases of about 60%, 50%, and 40% year-over-year. In New York, a few years ago, we lost a significant client who moved work offshore to Poland, but we have managed to recover that business. Although it may seem like sales have stagnated, we have made progress from our baseline and are experiencing some growth. It hasn't occurred at a rate that you're likely satisfied with, given your question, but there has been growth. As for the second part of your question regarding why we haven't sold, as a public company, we are always open to opportunities for buying or selling when it serves the best interests of our shareholders. I hope that answers your question, Lawrence.

Well, yes, I guess I've been a shareholder for a very long time. And it just seems to me like it's always a matter of the check is in the mail, but it never gets here. We're now at $12 million. And I don't think we've been lower than that I can remember in quarters for a very long time. We have always been told about the great backlog and all, but it never seems to result in better numbers for the quarter. So I just wondered if maybe somebody else could take the apparent, the ostensible expertise that's there and make things work better. So that was all I wondered.

I can't answer that question. But as I said before, if an opportunity arises, I'm sure that our shareholders and our Board would approve it.

And the next question comes again from the line of Igor Novogratziv with Alaris Capital.

Okay. So I'll ask more questions. So my next question is about your backlog. Obviously, you have a record backlog, and I think that's what a lot of investors are potentially excited about for the future of the company. Could you just tell me historically how much of the backlog is actually historically converted into actual orders? My understanding is orders are, in theory, at least, all cancelable, right? Because that's mostly like the government orders. But what is your historical sort of conversion percentage of backlog to the order?

The backlog we have consists of two components: our firm backlog and our full backlog. The firm backlog represents an amount that generally cannot be canceled, indicating we have a solid order for it. If it were to be canceled, there would be a termination liability. When an order is placed and enters the full backlog, it means it is simply an order. As time passes, we receive releases against it, which eventually convert into sales. These orders are typically long-term agreements, so releases occur over several years.

So our firm fully funded backlog right now, I think, Scott, correct me if I'm wrong, is at about $120-plus million. Those are orders that are fully funded and released on it over the next 18 months.

18 to 24, yes.

I'm sorry. That's the guidance we follow. However, order awards can extend 6 or 7 years into the future, and there is uncertainty regarding what will happen in that time frame. This is what we have quoted and what they have committed to, but it's not based on a fully funded backlog exceeding $270 million.

Okay. And my final question is about the overall defense spending on the U.S. side. Several months ago, there was a lot of concern, especially with Elon Musk and the government, who said that all the planes and helicopters are obsolete and everything is going to be drones. I guess now that he's no longer there, what's the overall mood regarding using aviation and traditional planes and helicopters? How does it look over the years from a philosophical point of view, or direction point of view of the defense department?

Although I'm not a mind leader, I can tell you that drones will only aid manned aircraft. I don't see manned aircraft going anywhere, at least in my lifetime. They are a great product, and they're inexpensive to build, they're expandable, and they have a lot of advantages, but they don't have a human brain, and that's not going to go away anytime soon. So they would not be spending the money on the F-47, the new aircraft that was just awarded to Boeing if they thought the drones were going to solve the problems in the next 3 years. So I remain confident that the manned aircraft will be around for a long time.

And there are no further questions at this time. So I'd like to turn the call back to Lou Melluzzo for closing remarks.

Thank you, Joe. Thank you all for taking the time to be on the call today and for your questions and your interest in the Air Industries Group, and we look forward to talking to you on the next call. Thanks, Joe. I think you can disconnect.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.