Executive Summary / Key Takeaways

• Air Industries Group, a long-standing precision component manufacturer for aerospace and defense, is executing a turnaround strategy focused on operational efficiency and business development, evidenced by improved gross margins and record backlog.
• The company's differentiated precision machining capabilities and status as a sole/single source supplier for critical parts on key military platforms like the E-2D and CH-53K provide a competitive moat, supporting its defense-heavy business model.
• Strong business development has resulted in a robust book-to-bill ratio (1.34:1 TTM Q1 2025) and a record funded backlog of $120.6 million as of March 31, 2025, providing significant revenue visibility for 2025 and beyond.
• Despite a dip in Q1 2025 revenue, operational efficiencies led to a notable increase in gross margin percentage (16.8% vs 13.6% in Q1 2024), signaling progress in profitability efforts, although increased operating expenses (driven by non-cash items) impacted the bottom line.
• A critical near-term challenge is the expiration of the Current Credit Facility in December 2025, which, along with related party debt maturities, raises substantial doubt about the company's ability to continue as a going concern, necessitating successful refinancing efforts currently underway.

A Legacy Forged in Steel and Sky: Air Industries' Pursuit of Precision

Air Industries Group traces its roots back to 1941, a legacy forged in the crucible of World War II, producing parts for fighter aircraft. This deep history has instilled a culture of precision and reliability, fundamental to its position today as a manufacturer of mission-critical components and assemblies for the aerospace and defense sectors. Operating primarily through its subsidiaries like Air Industries Machining Corp., Nassau Tool Works, and Sterling Engineering, the company specializes in complex parts such as landing gear, flight controls, engine mounts, and turbine components. These products serve a demanding clientele, predominantly the U.S. government, international governments, and major commercial airlines, often on high-profile platforms including the F-18 Hornet, E-2D Advanced Hawkeye, UH-60 Black Hawk, GTF engines, CH-53 Helicopter, F-35 Lightning II, and F-15 Eagle.

At the heart of Air Industries' value proposition lies its differentiated precision manufacturing technology and operational expertise. The company operates two state-of-the-art manufacturing centers in the U.S., equipped with machinery capable of holding extremely tight tolerances. Recent strategic investments, such as the $1.22 million spent on property and equipment in Q1 2025 and approximately $750 thousand planned for the remainder of 2025, are aimed at enhancing this capability. These investments include upgrading existing "old iron" machines with new controls and acquiring new equipment like a coordinate measuring machine. The stated goals are clear: improve productive capacity, increase efficiency and speed, expand the size of manufacturable products, and maintain closer tolerances. This focus on operational excellence is supported by continuous improvement programs utilizing internal and external resources, striving to reduce cycle times and eliminate bottlenecks.

This technological and operational focus provides Air Industries with a crucial competitive moat, particularly within the defense sector. The ability to consistently produce high-quality, reliable components for mission-critical applications has allowed the company to cultivate long-standing relationships with major prime contractors like Lockheed Martin (LMT) and RTX (RTX) (including Collins Aerospace), who represented 39.6% and 28.9% of Q1 2025 net sales, respectively. This often leads to Air Industries being designated as a sole or single source supplier for specific parts, securing Long-Term Agreements (LTAs) that demonstrate customer commitment and provide a degree of pricing power, with contracts often including provisions for passing through material cost increases above a certain threshold (e.g., 5%).

Navigating a Competitive Arena

The aerospace and defense components market is highly competitive, demanding not only technical prowess but also efficiency and cost-effectiveness. Air Industries competes with a range of players, from large diversified corporations to smaller specialized firms. Key publicly traded competitors operating in overlapping segments include Triumph Group (TGI), HEICO Corporation (HEI), and Ducommun Incorporated (DCO).

Compared to larger, more diversified players like Triumph Group, Air Industries operates at a smaller scale. While TGI's vertical integration and global footprint offer advantages in scaling for large contracts and supply chain resilience, Air Industries' strength lies in its focused expertise in precision machining and its direct relationships as a prime contractor to the U.S. Department of Defense for specific, critical components. Air Industries' gross margin of 16.8% in Q1 2025, while improved, still trails the higher margins often seen by TGI (e.g., 27% in FY24) and significantly lags HEICO (e.g., 39% in FY24), which benefits from a high-margin proprietary aftermarket parts business. This suggests that while Air Industries' operational improvements are yielding results, there is still ground to cover to reach peer profitability levels, potentially indicating areas for further cost structure optimization.

HEICO, with its focus on proprietary parts and aftermarket services, represents a different competitive dynamic. While Air Industries competes in OEM components, HEICO's strength is in FAA-certified replacements, offering high profitability and a defensive revenue stream. Air Industries' competitive edge against HEICO is its deep integration into defense OEM programs and its ability to meet stringent military specifications, areas where HEICO has less exposure.

Ducommun Incorporated, specializing in electronic systems and structural components, overlaps with Air Industries in structural parts. DCO's agility in prototyping and electronics integration are strengths. Air Industries competes by leveraging its precision machining capabilities, which may offer advantages in processing speed and part durability for complex mechanical structures, although DCO's electronics integration can lead to lower per-unit costs in certain applications.

Overall, Air Industries' competitive positioning is strongest in its defense niches where its precision manufacturing and sole-source status act as significant barriers to entry (high regulatory and capital costs). However, its smaller scale relative to TGI and lower margins compared to HEI and DCO highlight areas for continued operational and strategic focus. The company is strategically seeking to expand its footprint, pursuing opportunities in commercial aviation (where demand is increasing and OEMs are reshoring work), new vertical lift programs (like the V-280), eVTOL, drones, and missiles, leveraging its core capabilities to enter adjacent markets.

Building Momentum: Performance and Backlog

Fiscal year 2024 marked a pivotal period for Air Industries, characterized by management as a "successful rebuilding year." The company demonstrated significant financial improvement, with net sales increasing by 7% to $55.1 million compared to 2023. Crucially, operational enhancements led to a turnaround in profitability, converting an operating loss in 2023 to an operating profit of $459 thousand in 2024. The net loss was reduced by 36%, and Adjusted EBITDA saw a substantial 35% increase to $3.64 million. Gross margin also improved to 16.2% for the full year 2024, up 1.7 percentage points from 2023.

This positive momentum continued into the first quarter of 2025, albeit with some variability. Net sales for Q1 2025 were $12.13 million, a decrease of 13.7% compared to $14.06 million in Q1 2024. Management attributed this primarily to changes in the mix of products requested by customers. However, a key highlight was the continued improvement in gross profitability. Gross profit increased to $2.03 million in Q1 2025 from $1.91 million in Q1 2024, resulting in a significant jump in gross margin percentage to 16.8% from 13.6%. This improvement, even on lower sales, underscores the impact of ongoing operational efficiency efforts and favorable product mix shifts within the quarter. Operating expenses, however, increased significantly by 28.4% to $2.78 million, largely driven by non-cash stock-based compensation costs and investments in IT/cybersecurity, leading to an increased operating loss and net loss compared to the prior year quarter.

Underpinning the positive outlook is the company's robust business development activity. Air Industries has achieved a strong book-to-bill ratio, measuring 1.34 to 1 on a trailing 12-month basis as of the end of Q1 2025. This is well above the industry standard of 1.2 to 1 and represents a significant improvement over prior periods. This success in securing new orders has translated directly into a record funded backlog, which stood at $120.6 million as of March 31, 2025. The total backlog, including potential orders against LTAs, exceeds $0.25 billion. This substantial backlog provides significant revenue visibility and forms a solid foundation for anticipated sales growth in the coming periods.

However, the operational reality of the aerospace industry presents challenges, notably the long lead times for raw materials. Management highlighted that lead times for certain materials can range from 9 to 15 months, or even 40 to 80 weeks for some forgings, impacting the timing of production and deliveries. While materials are flowing more steadily, these extended lead times remain a factor influencing quarterly revenue variability.

Navigating Financial Headwinds and Future Outlook

Despite the operational and business development successes, Air Industries faces significant financial challenges, particularly concerning its debt structure and near-term liquidity. As of March 31, 2025, the company had total debt outstanding of $24.65 million.

A critical concern is the Current Credit Facility with Webster Bank, which includes a Revolving Loan ($11.20 million outstanding) and a Term Loan ($6.64 million outstanding), and is set to expire on December 30, 2025. Due to this near-term maturity, the entire Term Loan is classified as current debt. Additionally, the company has Related Party Notes totaling $4.87 million outstanding, maturing on July 1, 2026.

The looming expiration of the Current Credit Facility, coupled with the requirement to maintain a collection account where substantially all cash receipts are remitted (giving the lender significant control in a default scenario), raises substantial doubt about the company's ability to continue as a going concern for the one year commencing from the filing date of the 10-Q (May 15, 2025).

Management is actively addressing this by engaging in negotiations with both Webster Bank and the holders of the Related Party Notes to explore potential extensions or refinancing of these obligations. Refinancing could involve higher interest rates, more restrictive covenants, or the issuance of new securities. The Eighth Amendment to the Credit Facility in January 2025 provided some flexibility, permitting the use of funds from the company's At The Market offering to pay down up to $4.8 million of related party notes; $1.29 million was paid in Q1 2025 using these funds. As of March 31, 2025, the company had approximately $8.80 million in borrowing capacity under the Revolving Loan, subject to collateral and covenant compliance. Management believes that, based on current revenue visibility and backlog, they have sufficient liquidity for the next twelve months from the filing date, provided they do not default under the Credit Facility and the lender continues to provide revolving credit.

Looking ahead, management has provided a clear outlook for 2025. They reaffirm their belief that full-year 2025 net sales will exceed fiscal year 2024 results. This confidence is primarily driven by the record funded backlog of $120.6 million and the anticipation of increased funded orders from existing and new customers under LTAs. While acknowledging that quarterly results will vary, the overall trajectory is expected to be positive, with anticipated improvements in gross margins and operating income as operational efficiencies continue to take hold and program mix potentially shifts favorably. The planned capital expenditures of approximately $750 thousand for the remainder of 2025 are expected to further support operational capabilities and efficiency.

Key risks to this outlook include potential changes in the U.S. defense budget (though management feels their core programs are relatively insulated), sensitivity to commercial aviation demand, continued long material lead times and potential price increases (partially mitigated by contract terms), reliance on sole-source suppliers, the outcome of refinancing negotiations for the Credit Facility and Related Party Notes, the ongoing litigation, and the remediation of the material weakness in internal controls over IT systems.

Conclusion

Air Industries Group is a company with a deep history and specialized expertise in precision manufacturing for the critical aerospace and defense sectors. After a challenging period, 2024 marked a significant step forward in its turnaround efforts, driven by strategic investments in operations and accelerated business development. The company's core technological capabilities and sole-source status on key platforms provide a valuable competitive advantage, reflected in improving gross margins and a record backlog that offers substantial revenue visibility.

The central investment thesis hinges on Air Industries' ability to translate its robust backlog and operational efficiencies into sustainable top-line growth and improved profitability in 2025 and beyond. However, this potential is significantly overshadowed by the critical near-term liquidity risk associated with the expiring Current Credit Facility and maturing related party debt. While management is actively pursuing refinancing options and has demonstrated compliance with existing covenants, the successful resolution of these debt obligations is paramount and introduces considerable uncertainty. Investors should weigh the promising operational and backlog trends against the material financial risks and monitor the progress of refinancing negotiations closely as the December 2025 maturity date approaches. The company's ability to secure favorable refinancing terms will be a key determinant of its future trajectory.