Air Industries Group (AIRI) on Q4 2021 Results - Earnings Call Transcript
Operator: Good day, ladies and gentlemen and welcome to the Air Industries Fourth Quarter and Full Year 2021 Conference Call. Today's conference is being recorded. For Air Industries' Safe Harbor statement except for the historical information contained herein, and the matters discussed in this presentation contain forward-looking statements. The accuracy of these statements is subject to significant risks and uncertainties. Actual results could differ materially from those contained in the forward-looking statements. See the Company's SEC filings on Forms 10-K and 10-Q for important information about the company and related risks. EBITDA is used as a supplemental liquidity measure because management finds it useful to understand and evaluate results, excluding the impact of non-cash depreciation and amortization charges, stock-based compensation expenses and non-recurring expenses and outlays, prior to consideration of the impact of other potential sources of uses of cash, such as working capital items. This calculation may differ in method of calculation from similarly titled measures used by other companies. At this time, I'd turn the conference over to Mr. Lou Melluzzo. Please go ahead.
Luciano Melluzzo: Thank you, Keith. Good afternoon, everyone, and thank you for joining us today. Our strong fourth quarter caps the year of profitable growth for Air Industries Group as we accomplished our goal of delivering continued improvement in operating results. Consolidated net sales for the fourth quarter increased 6.2% from the same period a year ago, bringing full year sales to nearly $59 million, an increase of 17.7% from 2020. Further to underscore our operating leverage, while full year sales increased 17.7% gross profit increased 57.4%, three times faster. Gross profit for 2021 was $10.3 million for a gross margin of 17.4% of sales. This is an increase of 4.4 percentage points, or 440 basis points from 2020. We expect to maintain or even improve gross margin percentages in 2022. The profitability improvements flow to the rest of our income statement, which Mike Recca, our CFO will discuss in his report. 2021 was a year of important business wins. They included $6 plus million in purchase orders to manufacture major landing gear components for Navy F-18 fighter aircraft. We had held our license, we have held our license to manufacture complete landing gear and related components for the F-18 for many years. A $7.4 million order for thrust struts, a critical component of the geared turbofan, the GTF jet engine our largest commercial aviation product. This release was part of an existing long-term LTA Long Term Agreement. A follow-on LTA to produce landing gear components for the F-35 joint strike fighter aircraft, with estimated sales of between $12 million and $18 million over a three-year period beginning in 2022. The F-35 is used by the U.S. Air Force, the Navy and the Marines. We produce landing gear components used on all three variants of the aircraft. The F-35 is the military's program of record and best in world's fifth generation fighter aircraft. In an especially important win from a strategic perspective, our Sterling Engineering subsidiary was awarded a new LTA to deliver chatbots for the new CH-53K heavy-lift helicopter with a minimum value in excess of $5.2 million. This was our first award for the latest version of the aircraft. This award furthers our goal of transitioning Sterling's business from predominantly shoppes to make complete product produce on the long-term agreements. I'm also pleased to report that we began 2022 on a strong footing with a number of exciting new awards. We took another step forward in our strategy for Sterling Engineering with its award of life of the program extension LTA for a turbine exhaust case component for the PW-4000 jet engine, which is used on many Airbus and Boeing commercial aircraft including A330 and the Boeing 777. The contract extension is expected to generate revenue in excess of $6 million over its remaining term and it adds to our backlog in commercial aircraft. We also were awarded a total of three new LTAs for critical components for the Blackhawk Helicopter with an estimated combined value of more than $20 million. We are proud to have manufactured critical components for the Blackhawk for more than 20 years. One of our goals in 2022 is to expand our product line. Towards that end, we were awarded a contract to produce components for the landing gear of the U.S. Air Force's B1-B with a value of approximately $1.9 million with deliveries in 2023. While the order is from a long established customer, it is for an aircraft platform that's not been in Air Industries' portfolio for some time. Finally, we were awarded a $12.4 million contract to produce complete main and those landing gear and ancillary components for the U.S. E-2D Advanced Hawkeye, Airborne Early Warning aircraft. We manufacture complete, ready to install landing gear as a Tier 1 supplier to the OEMs. Deliveries will begin in 2023 and are expected to be completed in 2024. In total, we received in an announced new orders or long-term agreements totaling more than $38 million in the first two months of this year. And we would expect to see the revenue benefits starting in 2023. At December 31, 2021, our backlog totaled $75 million, a slight decrease from a year end 2020. Mainly due to timing between exploration of existing LTAs to the major customer and its recent restart. As I record on our last earnings call, we have continually to improve the composition of our 18-month backlog since 2020, which is comprised only affirm fully funded orders from our customers. To support our on-time delivery efforts, enhance our self-sufficiency and efficiencies and improve our profitability. We began deploying a robust capital investment program starting in May 2021. Our capital investment in 2021 totaled $1 million so far this year, we have written purchase orders for $1.2 million. We - currently have two large new machines costing about $435,000 each on order and has placed the order a third machine costing between $801 million in the next few days. We have previously discussed our initiative to bring processing of product in-house. Our first process to bring in-houses painting, we expect to complete the paint booths in the next few weeks and begin painting products shortly after. As I said in today's release, we intend to continually invest and modernize our equipment, enabling Air Industries to manufacture world-class product more efficiently and more profitably. Before I turn the call over to Mike Recca, I want to emphasize another point in today's release. Air Industries' business is overwhelmingly military aircraft, to check the tragic events in Ukraine that reinforce the necessity and value of a strong ready-to-fight military. Air Industries' manufacturers, critical components that are used on many, if not most of the U.S. frontline fighter aircraft. In fact, the state-of-the-art F-35 aircraft has recently been deployed from U.S. bases to the Baltic States and the Black Sea to bolster Air Defenses of our NATO Allies. Let me further emphasize the pride of all of our Air Industries Group that our products are supporting our warfighters in your crucial mission. Thank you for your attention. With that, I would like to turn this call over to Michael Recca, our CFO, and then we will follow-up with questions-and-answers. Mike?
Michael Recca: Thank you, Lou. Lou's already discussed sales and gross profit for the quarter in the year. So I'd like to focus on some additional operating results and on the balance sheet. First gross profit and I'll explain how we calculate gross profit. Historically, we have used what's called the gross profit method. And what that means is for interim periods, we estimate gross profit using historical gross profit from the prior year. Now, during the year, we may make some small adjustments to that resulting from sales volume, which affects the absorption of costs or a change in product mix or some other factors. But essentially, what was last year is versus this year. At the end of the year, typically in November, we have a complete inventory account and valuation. Following that, we then adjust or true-up the gross profit for the fourth quarter and full year. This year 2021, the adjustment from the inventory account was an increase in gross profit of $1.2 million. This increases the gross profit margin by 4.4 percentage points as Lou discussed a little a few minutes ago. The primary driver for the welcome increase in gross profit was a change in product mix. In 2021, we were in the last year of an LTA for product whose costs had significantly increased over time, essentially rendering that product breakeven at best. Sales of that product have decreased and we're able to replace those sales and use resources such as labor and like to replace those sales with product carrying a much higher profit margin. Now this zero profit product is back in the recently received LTA, but at a much higher price and will no longer be a zero or loser. Our operating costs in 2021 remained very well controlled - include modestly increasing by about 2% for the full year. This is achieved even in the face of 17% growth in sales. However, we alert to increasing inflationary pressure in 2022 and we are focused on minimizing any increase in operating costs. So gross profit was up, operating expenses are flat, slightly down. So operating income for the year 2021 was improved to $2.5 million. That's compared to a loss of $1.6 million in 2020. So we have a $4 million swing in operating income. Net income for the full year was $1.6 million and last year in 2020 net income from continuing operations was $1.3 million. But this $1.3 million included $2.4 million in income from forgiveness of the PPP loans, and an income tax benefit of $1.4 million due to a tax refund from COVID-related tax law changes. So including those two items, we had a net loss of $2.5 million in 2021, 2020 and net-in in 2021 we had net income improved by about $4 million similar to operating income. Our EBITDA adjusted only to include stock-based compensation totaled $6.2 million, and finally double-digits 10.6% of sales. We ended the year with a strengthened balance sheet also inventory which had increased significantly during the COVID disruption of 2020 was reduced by $2.6 million accounts payable and accrued expenses. Our well controlled there have been reduced by $2.4 million or nearly 25 26% and are now 36 days of sales outstanding compared to 56 back in 2020. Our revolving credit line and term along with Webster Bank, which was formerly called Sterling National Bank, were reduced by a combination of $4.4 million also 22%. Now since we got the Sterling Webster loan in 20th January of 2020. We've been in full compliance with these financial covenants since inception. I think this combined with our improving results, and our improved balance sheet, induce Webster to extend the maturity of our credit facility, both the revolving credit line and the term loan by three years to December 31, 2026 approximately, four years from today. So we have a long-term relationship with Webster Bank. However, accounting rules require us to consider the revolving credit line a current liability as opposed to a long-term liability. If we reclassify that - credit line to long-term our working capital was about $32 million at year-end certainly sufficient for us to execute the plan. That's all I have. I'll pass the call back to Lou look forward to your questions.
Luciano Melluzzo: Thank you, Mike. Let me close this portion of the call with a few thoughts. The fourth quarter cap the year of growth for Air Industries Group, as we executed on our growth strategy, and pursued our goal of continued improvement in operating results. We have started 2022 on a strong footing with important and strategic wins in the first two months of the year. As we look to 2022, first quarter revenues will be lower than that of a year ago, mostly due to timing differences in LTAs in some simmering, lingering supply chain issues. However, our profit margins should be significantly above Q1 of 2021. It should offset the first quarter revenue trend. We expect to deliver a full year revenues equal to or better than last year, accompanied by continued strong margins throughout 2022. Bottom line, Q1 profitability will be up on lower revenues, and will be a more profitable company in 2022 than we were in 2021. With that, I'd like to thank everybody for their attention. And at this point, I would like to open up the call to questions from participants. Keith, can you open up the call please?
Operator: We'll take our first question. Please go ahead.
John Nobile: Hi good afternoon, Lou and Mike. Thanks for the call. Thanks for taking my questions. First of all, congratulations on the recent orders announced over the last two months, it was pretty significant. I didn't catch what you said the backlog was at December 31. I would just like to get that number. And if you could even update as to what the current backlog is now being that you had these orders that came in was it $38 million over the last two months?
Michael Recca: As of December 31, our backlog was $75 million.
John Nobile: 75.
Michael Recca: The orders that came in now we're in the midst of putting them because we only - look at our backlog from an 18-month perspective. So some of this falls in, some of this falls out so we are we are working that out now John.
Luciano Melluzzo: And John, remember on LTAs, we may get a five-year LTA for making this up $5 million. But against that we get $300,000 in orders immediately $300,000 goes into our backlog not the $5 million.
Michael Recca: And John when…
John Nobile: You're looking at the 18-month number for that backlog even though it's going to be a good five-year number?
Luciano Melluzzo: Right and what I'm saying John is we don't put our numbers in our customers are do it for us, they put it in into the portal as when they expect this product. So they're in the midst of doing that.
John Nobile: Okay and I understand. Thanks for the explanation. Mike on the gross profit you had a trued up by about $1.2 million in the fourth quarter to trued up for the prior three quarters because you kind of guesstimate looking at the prior year what the gross profit would be. Now did you have this - and this situation is typical, like last year in the fourth quarter, you actually trued up or true down. And if I could say I don't know what it was at that time, this is going to be like an ongoing thing in the fourth quarter would you really just make sure that your gross profit is accurate?
Michael Recca: We are moving increasingly to a monthly real-time reconciliation of gross profit. We're not there yet. Historically, after the – gross after the inventory and the vat, the realist valuation, not the account of the inventory, the inventory accounts are always remarkably accurate 99.5%. It's just the lower across the market adjustments, which in recent years have gone against us because prices have been going down. They're no longer going against us. But - this was a larger adjustments' we've had. So I don't expect that to be repeated next year. I think we've had order magnitude issues a, couple $100,000 gets lost in the noise. But we had inklings that gross margin was better this year than it was last. But we wanted to wait to the inventory to be certain of it before releasing it.
John Nobile: Okay. And on the last call I had brought up and you said that there. There was a substantial amount of shipments that were anticipated for that third quarter that was going to be pushed into the fourth quarter, which you just reported. I was wondering if you could actually quantify that amount or roughly quantify what that amount was and if there was any substantial amount that was anticipated to be in that fourth quarter that might actually be pushed into the first quarter of 2022?
Michael Recca: No John, we've cleared the tax you know, nobody - likes push outs. So we were pretty diligent to declare the tax starting a new year.
John Nobile: Okay. And in Q3, I know the press release, it said that you had an improvement in your overdue product it was actually showing up to be less than 12.5% of your backlog, which was a nice improvement obviously, you want to have 0%. But in Q4, was there any further improvement in this overdue product?
Luciano Melluzzo: Yes, there was. I can't quantify for you exactly John now, but I'd be happy to get back to you on it. But you'd never get to zero in overdue, because….
John Nobile: Okay, but obviously, customers, you know, would be happy to see that go down. So it was an improvement over the last year not last year excuse me last quarters' number of 12.5%.
Luciano Melluzzo: That is correct.
John Nobile: Well, that's a step in the right direction there.
Luciano Melluzzo: Customer - cause it customers can cause bad due you if a product…
John Nobile: Okay. Well single-digits are better than double-digit so?
Luciano Melluzzo: Single-digit is normal in Air Industries.
John Nobile: Is that right? Okay. Over the past year, how much of your product processing was done in-house and how much more do you believe you could process in-house in the current year 2022 with the capital investments that you projected to be made this year?
Luciano Melluzzo: Okay John, that's two different - questions here. Last year, we processed zero amount of product in-house because we don't have a processing plant. When we saying about processing, we're talking about things like, you know, metal plating, shop painting, painting, we didn't do any of that. So we've set up a paint booth up at Sterling that we're in the tail end of getting this thing certified and in action. So obviously, with - supply chain disruption ovens that we ordered months ago that were supposed to be in late last year have still - have just arrived.
John Nobile: Really.
Luciano Melluzzo: So we're moving forward, we're moving forward with that. So once we get painting in done, which is going to be hopefully before the end of Q1, or very close or early in April. We'll - take the next step, which will probably in-house grinding, Nital etch. Eventually, over the next couple of years, we plan on getting as much as we can put under one roof and accommodate done. So it's going to be an ongoing thing, we'll still be relying on processing for some things that we will never put under a roof. But anything we can keep control over. And it's environmentally friendly with the - state and the laws of the land, we will do.
John Nobile: Bottom line is it's only going to help or reduce your bottleneck with the suppliers, the more you can bring in-house obviously?
Luciano Melluzzo: It's more than yes in scheduling. It's nice to know that if a product goes out to paint, you're going to get it back in two days or two hours instead of having to go out to paint and you get your cue in line and in a couple of weeks, they call you and say it will be delayed further. It's a scheduling problem.
John Nobile: Okay, I just have one further question here. I know that your gross margins are really sensitive to the revenue levels in the Turbine Engine segment, just curious to get your outlook or the prospects for this segment this year 2022 and beyond?
Luciano Melluzzo: Well, we've brought on two additional personnel in business development. So we brought up guy on the West Coast that actually works right on the outskirts of Hill Air Force Base. And he's handling all of South America, the West Coast and anything else that we can throw at him. And we brought a guy in for our Sterling facility about I guess, was August, September of last year, and it's really starting to gain traction with new opportunities and new prospects, that he's brought on board. And obviously, we've had some coding activity, things are getting reviewed, and we made tremendous out. We finally were doing a Farnborough Airshow this year in July, which any Airshow there hasn't been any activity out there. So we're really stepping up the business development side of things to be able to make up for COVID lost ground where people are just taking calls instead of seeing you. So we expect - that all these actions will have some results.
John Nobile: Okay. So your Turbine Engine segment when I think of that, I think predominantly a lot of commercial aircraft would be a good portion, of excuse me?
Luciano Melluzzo: There's a lot of military - jet engine products here also.
John Nobile: Okay, but predominantly, your Commercial segment, your commercial sales are in that segment?
Luciano Melluzzo: The only commercial product that we have currently on Long Island is the thrush struts. And then the remaining commercial business is of that turbine engine. But it's not if it's 50% 50-50, up in Connecticut, I'd be surprising. It's more skewed to military. But it's there is commercial up here, yes.
John Nobile: Okay. Really what I'm looking at is because obviously, commercial sales, when COVID hit back in 2020, you know, it really impacted your sales to that market. But 2021 opened up and it looks like 2022 should be even a further opening up on that. So I was just looking to see, what your outlook is as far as the commercial end of your business in 2022?
Michael Recca: And that's a true statement John, we are seeing some activity for RS for proposals on commercial product, things that we had not seen a year ago. So it's, I think it's a matter of time, you know, before our orders get placed.
John Nobile: Okay. All right that's all I have. Thanks, Mike, Lou for taking my questions.
Michael Recca: Thanks John.
Luciano Melluzzo: Thanks John.
Operator: We'll take our next question from…
Unidentified Analyst: Hello, gentlemen, my name is Paul, and I've got a question for you. What is your cash position right now?
Luciano Melluzzo: Hi doing Paul.
Michael Recca: We have we run a zero cash balance. Basically, what happens is every collection that we get from our customers pays down our credit line. And then we borrow - we daily borrow against a credit line to cover our checks that we've written. So at any given point in time, our cash balance basically, our advances we've taken from the credit line, but checks haven't been presented and cleared yet. So - I think the better measure is what is our availability under that credit line and today, at year end, it was about $3 million and - today is about the same.
Unidentified Analyst: One more question. Is there any interest at all in buying back shares?
Michael Recca: Not at this point. But we have talked about that, but it's not - something we're going to do right away.
Unidentified Analyst: That's all I have. Thank you very much.
Michael Recca: Thank you.
Luciano Melluzzo: Thank you for the call.
Operator: It appears we have no further questions at this time.
Luciano Melluzzo: Okay, thank you Keith. So with that, once again, thank you all for taking the time to be on the call today and for your attention and questions. We look forward to updating you on the progress of Air Industries Group on our next call. Operator, you may conclude the call at this time, thank you Keith for your time.
Operator: Thank you. Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.
