Air Industries Group Q4 FY2022 Earnings Call

Hello and welcome to the Air Industries Group Preliminary Fourth Quarter and Full Year 2022 Results Call. As a reminder, this conference is being recorded. This call and the accompanying webcast may contain forward-looking statements as defined in Section 27A of the Securities Act of 1933, including statements regarding the company's business and growth strategies. These statements reflect our expectations and are subject to various risks and uncertainties, some beyond our control, which could lead to outcomes that differ significantly. Future results may not align with what is expressed in these forward-looking statements. In light of these factors, we cannot guarantee the accuracy of the forward-looking information. This call is not an offer to purchase any securities or a solicitation for a proxy, consent, authorization, or designation with respect to a shareholders' meeting. At this time, I’d like to turn the call over to Lou Melluzzo, President and CEO. Please go ahead, sir.

Thank you, Darrell. Good morning and thank you for joining us today. I would like to discuss the reasons for the delay in filing our 10-K. Last year, our independent audit firm, with whom we have worked for many years, merged with a much larger firm. Although the same individual partners remain involved with our annual audits, they and Air Industries are still adapting to the new review procedures of the larger firm. Mike Recca, our CFO, will provide more specific information later in the call. While I cannot offer specifics, I want to share some general comments about our top line performance for the quarter and the year. Consolidated net sales reached $13.9 million for the fourth quarter and $53.2 million for the full year 2022. Sales for both periods fell approximately 9.7% compared to the same periods in 2021. Our shipments in the fourth quarter and for the entire year were affected by significant supply chain disruptions, particularly delays in the arrival of raw materials. This has posed a challenge for our industry since the start of the pandemic. Although conditions have improved, issues still persist. At the same time, we achieved some important wins in our business during 2022. Throughout the year, we made significant progress in the nuclear submarine component markets, which represents a substantial and exciting opportunity for Air Industries. One of the key factors affecting our results for both the fourth quarter and the full year of 2022 was the disruption in the supply of raw materials. Delays in raw material deliveries affected more than $8 million worth of product that was supposed to reach customers in 2022 but is now delayed until the second and third quarter of 2023. Our results were also impacted by losses on a specific product. Due to underestimating costs and rising processing expenses, this contract has turned unprofitable. Given that these losses will continue as we finalize the contract deliveries in 2023, accounting rules necessitate that we estimate and accrue these future losses in 2022. The total recognized and anticipated losses amount to around $850,000. The positive aspect is that our results for 2023 will not face significant reductions since those losses were already accounted for in 2022. I want to stress that we are not pleased with our 2022 results, and we are fully committed to enhancing profitability in 2023. We do not consider our performance in 2022 to be reflective of the opportunities ahead. We are witnessing a notable uptick in sales activity due to our business development efforts. This positive trend is evident in the increase in new business bookings at both our Long Island and Connecticut subsidiaries in recent months. Our bookings in the last three months have significantly improved compared to previous months. I would like to highlight several accomplishments in securing new business during 2022. A key corporate objective has been to transition a larger percentage of the product mix at our Sterling Engineering Unit into long-term agreements. In regard to this objective, contract wins for Sterling in 2022 included: a $6 million extension of a LIFO program; a long-term agreement for a turbine case that contains components for the PW4000 jet engine used in many Airbus and Boeing commercial aircraft; a new $2.8 million order for components for the F404 jet engine; and a new contract for a Support Nozzle for a high-pressure turbine engine used to generate onboard electric power for large ships, coming from an established customer. Our Long Island subsidiary, Air Industries Machining Corp., also secured significant contracts in 2022. Notably, we received a $12.4 million contract to produce complete Main and Nose landing gear and associated components for the U.S. Navy E-2D Advanced Hawkeye Airborne Early Warning Aircraft, which is expected to be completed in 2024. We have manufactured landing gear for the E-2D for many years. Additionally, during the year, we secured a total of 12 long-term agreements for the Blackhawk helicopter, with a combined estimated value exceeding $30 million. The Blackhawk has been a staple of our business for many years. Some concerns have been raised about the impact of the U.S. Army's selection of the Bell Valor as the future replacement for the Blackhawk. According to the current timeline, production of the replacement helicopter is not expected to begin until 2030, which is seven years from now. Over the next five years, Blackhawk production is anticipated to total over 500 new aircraft. Besides producing new aircraft, there will also be ongoing opportunities in the aftermarket sales sector. The fleet backlog of operational Blackhawks, both in the U.S. and internationally, is estimated at around 4,000 aircraft. As helicopters require more maintenance and parts replacement than any fixed-wing aircraft, we estimate that approximately 50% of our business comes from the aftermarket. Given the 4,000 operational aircraft, there is significant long-term potential. We also announced a $5.2 million long-term agreement for Chaff Pods for the CH-53K heavy lift helicopter, a program that is now entering full-rate production and ramping up. Each CH-53K costs four to five times more than a Blackhawk. Deliveries of nearly 100 aircraft are expected over the next five years, and the Marine Corps is pressing to increase this rate. Beyond the agreement for the CH-53K, our Sterling subsidiary is currently producing two FIRST articles products on a single purchase order and is expecting an order for a third product. We are hopeful that these orders will lead to larger long-term agreements in the near future. We have been focusing on the nuclear submarine market, which presents exciting potential and has been part of our major growth strategy to expand our portfolio beyond existing aerospace platforms to include non-aerospace components. The nuclear submarine industry is rapidly growing to meet the Navy's projected 50% increase in demand. We see substantial opportunities for suppliers like Air Industries that can meet the ultra-high quality standards required. We have recently secured two contracts from suppliers to Electric Boat, one of the two U.S. submarine builders. We are optimistic that successfully executing these projects will lead to larger and more significant opportunities as the submarine industry seeks new suppliers to support the expected growth in the coming years. In summary, 2022 posed significant challenges but also provided substantial strategic business wins. Looking forward to 2023, while we anticipate that Air Industries and the aerospace sector will continue to face supply chain delays, we are also encouraged by our progress into several promising and expanding platforms. We look forward to providing our complete results for the fourth quarter and the year in due course. We are diligently executing our stated strategy and are excited about the opportunities we see for Air Industries Group.

Thank you, Lou. I share your frustration that the 10-K has been delayed. And again, I reiterate that along with Lou that the delay is really caused by the shift from our smaller accounting firm combining with a larger one and everybody getting to know the new procedures that we have to go through. I would like to provide some specifics on the issue that’s caused the delay. In valuing our inventory, we have a policy of a reserve that is to write down the value of inventory that is aged. By aged, we mean inventory that has not moved either back into production or has been sold, and for which we do not have existing purchase orders. So several steps over time over a number of years, this write-down reduces the value of the inventory to zero. In reviewing this policy, our auditors are considering whether a more appropriate policy might be to write off the total value of this aged inventory after a period of non-movement. So if we conclude that additional write-down of our inventory is more appropriate, then we will incur a noncash charge and expense. We do not have an amount for that expense yet, but again I emphasize this is due to the noncash expense. I'd like to reiterate also that Lou discussed our full year revenues for 2022 were about $53.2 million. That's a reduction of, as Lou said, $6 million or close to 10% from 2021. The effect of the raw material that caused the delay that Lou discussed and shipping two orders worth $8 million clearly illustrates the impact of the limited material. While I wish I could share more detailed financial information, the resolution of the inventory issue will affect almost all of our income statement categories. So I really cannot and do not want to provide what might turn out to be inaccurate information now. But I will say that our liquidity remains strong. We have substantial availability on our primary credit line, and also, we are in compliance with our bank covenants. We have one single covenant, the most important called a fixed charge coverage ratio with our bank Webster Bank. For 2022, the ratio has declined, and that's due in part to poor financial results on our part and in part to higher interest rates induced by the Federal Reserve. That said, we remain comfortably above the minimum requirement. And so with that, I'll turn the call back to Lou for some closing remarks, and I look forward to your questions.

Thank you, Mike. Darrell, I would like to now open the lines for our shareholders' questions and answers. Can you do that, please?

Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of Howard Halpern with Taglich Brothers.

Based on your commentary, we're looking at, I guess, the second half of 2023 revenues should grow compared to the first half revenues. Is that a fair assumption?

Well, Howard, it depends on the incoming raw material. We have a product right now, which is one of our better running products in the shop that has a three-month lag in material receipt. So we're working not only with the distributor, but we're working with the mills directly to see how we can do this because the line will go dry in the next month or two, and then the next batch of material will not be scheduled to come in until sometime in September. Now keep in mind that these products have a 16-week window, or 16-week lead time. So we're doing whatever we can to pull that left. But that's what I can put out there for right now. So there is this material at all phases.

Okay. But as far as you're concerned, the customers are in place. The orders are in place. It's really just the raw materials and the timing of the shipments of those raw materials because the customers have nowhere else to go.

That is correct, Howard, 100%.

And the customers are working with us to try and solve the raw material issues.

Okay. And from previously, are all the machinery in place that when you start producing all the product, the run rate, the leverage you're going to see some of that in 2023 and beyond?

All the equipment we have purchased is in place except for one piece that is expected to arrive in late July or early August. This equipment is intended for our thrust strut line to effectively double our capacity and meet growing demand, with thrust struts projected to reach around 720 units per year as we start up. This year, we face a significant ramp-up in production, but currently, we are struggling to source material. We hope that when the machine arrives and is set up in our New York shop, the material challenges will resolve. The mills indicate this should improve, but we must also consider the 16-week lead time. It's crucial to maintain that line at all times since it's a vital product.

Okay. I don't know if you care to share what your current backlog is and/or what are you seeing in the pipeline in terms of the request for proposals and what kind of activity is going on for the future?

In the last three months, we've seen a significant increase in bookings and sales compared to the last nine months of the previous year. There is definitely more activity in both our rotorcraft and nuclear submarine sectors. We're being selective about our submarine work, focusing on orders for valves, which are top-tier products in that area. This has generated a notable increase in interest, which is encouraging for us. Regarding the CH-53K, we currently have two parts in-house that we plan to submit for FIRST Article. If these spot buys are successful, we hope they will lead to long-term agreements, and we are confident in our ability to deliver results to our client. Overall, there is a clear increase in market activity.

Okay. Okay. Thanks. And well, keep up the work in managing everything that's going on. There's a lot on your plate than peers.

Thank you, Howard. Thank you for the call.

I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Melluzzo for any closing remarks.

Thank you, Darrell. So with that, once again, thank you all for taking the time to be on the call today and for the interest in Air Industries Group. We look forward to updating you on our progress on our next call. Darrell, I'll turn it over back to you for the conclusion.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.