Air Industries Group Q2 FY2021 Earnings Call

Good day, and welcome to the Air Industries conference call. Today's conference is being recorded. Air Industries Group safe harbor statement. Except for the historical information contained herein, 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 noncash depreciation and amortization charges, stock-based compensation expenses and nonrecurring expenses and outlays, prior to consideration of the impact of the potential sources and uses of cash, such as working capital items. This calculation may differ in methods of calculations from similar titled measures used by other companies. At this time, I would like to turn the call over to Lou Melluzzo. Please go ahead, sir.

Thank you, Travis. Good afternoon, and thank you for joining us as we summarize Air Industries' results for the second quarter and the first half of 2021. Air Industries had a profitable second quarter, and we are excited to discuss the results. The strong performance delivered by our team was led by significant improvement at our Sterling manufacturing facility and a more profitable product mix at our complex machining sector. Net sales in the second quarter were close to $15.5 million, an increase of more than 82% compared to 2020. Sales in Q2 of 2021 were the highest in recent memory, certainly the highest since I became CEO. Our gross profit increased by more than threefold, some 333%. This increase was significantly greater than the increase in sales which is to be expected. And our gross margins have returned to normal. But remember, the second quarter of last year was deeply impacted by COVID. For the 6 months, sales were up about 33%, and gross profit was up 57%, again, record-setting results. These strong results were helped by great improvements in our Connecticut operations at Sterling Engineering. Sterling sales increased 25% for 2021, yielding a positive operating income and EBITDA contribution. The turmoil in the aerospace industry caused by the pandemic seems to be dissipating and our backlog is growing. During the 6 months, we booked $40.9 million in new business, and our 18-month fully funded backlog increased by $3.1 million or 3.5% to more than $91 million at June 30. I would like to reiterate that our backlog represents firm orders from customers, not unfunded hopes for anticipated orders under long-term contracts. We are continuing a robust capital investment program. Last year, we invested over $4 million in new equipment, a total of 5 new major large machines. We are budgeting an investment of about $2 million to $2.5 million for 2021. I would like to turn the call over to our CFO, Mike Recca, for the financial recap. Then I'll return to open the call for questions.

Thank you, Lou. As Lou described, we had an excellent quarter and 6 months. I'd like to point out a couple of points that I consider important. First is gross profit. In absolute terms and as a percentage of sales, these increased significantly. The 3 and 6 months, there were 2 main reasons for this. First was higher sales. Higher sales absorb more of our manufacturing overhead. And in our Long Island operations, our Complex Machining segment, as Lou mentioned before, there was a change in product mix. We had more sales of a higher gross margin than we had in prior periods. Lou pointed out the good results of our Connecticut operation. Sterling in Connecticut added about $500,000 in gross profit to the increase in gross profit. For the quarter, sterling sales increased by $650,000 and gross profit increased by $500,000. This is really an example of moving work from Long Island to Sterling, where it absorbs some of their manufacturing overhead plus their internal growth, showing a dramatic increase in contribution to profit. Our operating costs remained well-controlled. For the 6 months, they are down 5.6% over the prior year. Operating income in the second quarter swung to a profit of about $440,000. This compares to a minor operating profit in Q1 and an operating loss in 2020. For the quarter, we also recorded a net profit; and for the 6 months, also a net profit. There are some balance sheet changes I would like to discuss. While there are no major changes in assets and liabilities, our accounts payable and accrued expenses declined by over $1 million. Our inventory, which began to grow last year due to COVID supply chain disruptions, declined by nearly $2 million. Our bank debt since year-end has also declined by $1 million. So in summary, sales are up, gross profits up, operating income is up, net income is up. Accounts payable declined, inventory declined, bank debt declined. All in all, a very good quarter in 6 months. I'll turn the call back to Lou and I look forward to your questions.

Thank you, Mike. Let me close the call with a few thoughts. We continue to add to our backlog and are optimistic that additional long-term contracts are coming due for renewal. Our shops are buzzing with activity. We are offering additional overtime to all our employees. We are actively looking to expand our workforce in both New York and Connecticut operations. We look forward to a strong second half of the year and anticipate that the improvements and enhancements we've initiated will continue to generate strong results. With that, Travis, I would like to open the call up for questions from participants.

We have a question from John Nobile.

Good results, good top line numbers there to see $15.5 million. And not really comparable to last year's quarter, but it's almost $2 million or $1.8 million higher than the first quarter. So that was nice to see in that regard. But I know you said that you were profitable. Could you tell us what the actual net income or EPS was? Is it breakeven or $0.01 a share?

We're filing the Q tomorrow morning. I don't have that in front of me right now. But we had EPS for the year, about $90,000. And for the quarter, it was significantly higher. I think it was close to $225,000.

$225,000 net income. And EPS was filed tomorrow.

Yes. It'll be on EDGAR at 9:00.

All right. I'll be on the lookout. And over the past year, your results have been adversely affected by reduced commercial aircraft business, which had a significant impact on your gross margins. And with the pickup in commercial business, particularly in this quarter; and the recently announced there was a $7.4 million order you had for thrust trust. I'm curious, where do you see your gross margins for the second half of 2021 and beyond, if you can even talk about that? Because I know they picked up to, what, 16.8% in the quarter. Should we anticipate a higher number going forward at this point?

I'm not sure you get a higher number than that for the balance of the year, but if you look back, our gross margin in the way back by 2016, 2017, was 18% to 20%, and I could see us getting into that percentage very, very late this year or in 2022.

Okay. I know Sterling played a significant role in that because it was previously negative, but this quarter showed a positive gross margin. Regarding Sterling, what was the gross margin for the quarter?

The gross margin dollars were $456,000, about 15%. And that compares with a $54,000 gross margin loss on about $500,000 fewer sales in 2020. So the benefit there is twofold. Number one, we've moved manufacturing from Long Island to Connecticut, and that absorbs Connecticut's overhead. It doesn't generate any sales. We transfer those costs at cost from Connecticut to Long Island, and we recognize the sale of the profit there. In 2020, Sterling had about $400,000 in unabsorbed manufacturing overhead based on their sales. So by absorbing that, the benefit and then adding on the benefit of their increasing sales, we kind of get a double whammy. So if we could pick up $0.5 million in revenue, I'm sorry, $650,000 in revenue and a $500,000 increase in gross profit, that's pretty good.

And John, that was accomplished without really adding anything in capital expense here. So we moved several pieces of equipment that we updated in our New York operations here at Sterling at the end of last year and into the first quarter of this year. So that move took place then. And now all that equipment is coming, it's being used. So it's definitely generating hours that will eat into unabsorbed burden.

All right. Great. And last call, you mentioned that you were looking to hire more machinists. I forget if it was CNC, but just curious, how does it currently look as far as any hiring difficulties with the labor shortage the country is currently experiencing? And also, has this actually had an adverse impact on your Q2 results?

Well, overtime right now is almost unlimited at Air Industries. Our guys are not working 40 hours. A lot of them are working 55 hours and beyond. So we've been able to cover some of the shortcomings that way. We are still actively looking to hire. I mean, we've been successful in bringing in a couple of guys, but we can use more. I'm on the Board of Adapt in Long Island and all the manufacturers are seeing the same problems. We're reaching deep into the university, high schools, training programs, anything and everything that we could think of to try to bring more people in. So it's slowly but surely. We're going to probably see a little bump up in September when the government programs kind of start tapering off, and people are going to be looking for jobs. I think there'll probably be an uptick in activity. That's kind of what we are right now.

No, understood. I fully agree with that. I just have one final question. A while back, I learned that Sikorsky accounts for approximately one-third of your revenue in any given quarter or year. I wanted to ask about Sikorsky's recent $879 million Navy contract to build heavy-lift helicopters. Will this contract benefit you? Is it going to have a positive impact on Air or is it related to another area?

We have a close relationship with Sikorsky in terms of contracts, but just because they secured this contract does not mean we will see any benefits immediately. We are still discussing the potential for future opportunities, particularly related to heavy lift, although that program is not yet fully developed. Nonetheless, I am confident there will be chances for us ahead.

Okay. Well, that's great to hear. And when you say a little bit down the road, how long do you think, like, if they just received the contract, would it filter down to Air?

I haven't seen this particular contract, but it's not unusual for a defense contract to be awarded today with deliveries at '23, '24, '25.

We have no further questions in the queue at this time.

Thank you, Travis. So with that, once again, thank you all for taking the time to be on the call today and for your attention and questions. Travis, you may conclude the call.

Thank you, sir. Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.