Earnings Call Transcript - AIRI Q4 2021

Operator, 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, CEO

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 over $6 million in purchase orders to manufacture major landing gear components for Navy F-18 fighter aircraft. 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 Agreement. A follow-on long-term agreement 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 the best in the world’s fifth generation fighter aircraft. In an especially important win from a strategic perspective, our Sterling Engineering subsidiary was awarded a new long-term agreement 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 shop-based work to complete product produced under 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 program extension long-term agreement 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 long-term agreements 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 has not been in Air Industries' portfolio for some time. Finally, we were awarded a $12.4 million contract to produce complete main and nose 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 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 year-end 2020, mainly due to timing between the expiration of existing long-term agreements to the major customer and its recent restart. As I mentioned on our last earnings call, we have continuously improved the composition of our 18-month backlog since 2020, which is comprised only of 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 have placed the order for a third machine costing between $800,000 and $1 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-house is 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 products 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 manufactures 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 the air defenses of our NATO Allies. Let me further emphasize the pride of all of us at Air Industries Group that our products are supporting our warfighters in their 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, CFO

Thank you, Lou. Lou's already discussed sales and gross profit for the quarter and 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 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 a long-term agreement for products 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 equipment to replace those sales with products carrying a much higher profit margin. Now this zero-profit product is back in the recently received long-term agreement, but at a much higher price and will no longer be a zero or loser. Our operating costs in 2021 remained very well controlled, including modestly increasing by about 2% for the full year. This was 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 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 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 2020 and net income in 2021 improved by about $4 million similar to operating income. Our EBITDA adjusted only to include stock-based compensation totaled $6.2 million, with a final EBITDA margin of 10.6% of sales. We ended the year with a strengthened balance sheet with inventory which had increased significantly during the COVID disruption of 2020 reduced by $2.6 million and accounts payable and accrued expenses. Our well-controlled costs 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 loans with Webster Bank, which was formerly called Sterling National Bank, were reduced by a combination of $4.4 million or 22%. Now since we got the Sterling Webster loan in 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 induced 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 and look forward to your questions.

Luciano Melluzzo, CEO

Thank you, Mike. Let me close this portion of the call with a few thoughts. The fourth quarter capped 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 long-term agreements and some 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 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 we 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, Operator

We'll take our first question. Please go ahead.

John Nobile, Analyst

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, CFO

As of December 31, our backlog was $75 million.

John Nobile, Analyst

75.

Michael Recca, CFO

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 working that out now, John.

Luciano Melluzzo, CEO

And John, remember on long-term agreements, we may get a five-year long-term agreement for, let's say, $5 million. But against that, we get $300,000 in orders immediately; that $300,000 goes into our backlog not the $5 million.

Michael Recca, CFO

And John when…

John Nobile, Analyst

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, CEO

Right. And what I'm saying, John, is we don't put our numbers in; our customers put it in for us, they put it into the portal as when they expect this product. So they're in the midst of doing that.

John Nobile, Analyst

Okay, and I understand. Thanks for the explanation. Mike on the gross profit you had a true-up by about $1.2 million in the fourth quarter to true 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, CFO

We are moving increasingly to a monthly real-time reconciliation of gross profit. We're not there yet. Historically, after the inventory and the 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 adjustment than we've had. So I don't expect that to be repeated next year. I think we've had order magnitude issues; a couple of hundred thousand dollars get 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, Analyst

Okay. And on the last call I had brought up and you said that 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, CFO

No, John, we've cleared the tax; you know, nobody likes push outs. So we were pretty diligent about declaring the tax starting a new year.

John Nobile, Analyst

Okay. And in Q3, I know the press release 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 zero. But in Q4, was there any further improvement in this overdue product?

Luciano Melluzzo, CEO

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, Analyst

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 quarter's number of 12.5%.

Luciano Melluzzo, CEO

That is correct.

John Nobile, Analyst

Well, that's a step in the right direction there.

Luciano Melluzzo, CEO

Customer - cause it customers can cause bad due you if a product…

John Nobile, Analyst

Okay. Well, single digits are better than double digits so?

Luciano Melluzzo, CEO

Single-digit is normal in Air Industries.

John Nobile, Analyst

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, CEO

Okay John, that's two different questions here. Last year, we processed zero amount of product in-house because we didn't have a processing plant. When we talk 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 just arrived.

John Nobile, Analyst

Really.

Luciano Melluzzo, CEO

So we're moving forward, we're moving forward with that. So once we get painting 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 be in-house grinding, and Nital etching. Eventually, over the next couple of years, we plan on getting as much as we can produced under one roof and accommodate that. 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 our 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, Analyst

Bottom line is it's only going to help reduce your bottleneck with the suppliers, the more you can bring in-house obviously?

Luciano Melluzzo, CEO

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, Analyst

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, CEO

Well, we've brought on two additional personnel in business development. So we brought on a 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 on a guy in for our Sterling facility about, I guess, in August or 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, Analyst

Okay. So your Turbine Engine segment when I think of that, I think predominantly a lot of commercial aircraft would be a good portion, excuse me?

Luciano Melluzzo, CEO

There's a lot of military jet engine products here also.

John Nobile, Analyst

Okay, but predominantly, your Commercial segment, your commercial sales are in that segment?

Luciano Melluzzo, CEO

The only commercial product that we have currently on Long Island is the thrust struts. And then the remaining commercial business is that turbine engine. But it's not, if it's 50% up in Connecticut, I'd be surprised. It's more skewed to military. But it's there; there is commercial up here, yes.

John Nobile, Analyst

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 an even 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, CFO

And that's a true statement John, we are seeing some activity for RS for proposals on commercial products, 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, Analyst

Okay. All right that's all I have. Thanks, Mike, Lou for taking my questions.

Michael Recca, CFO

Thanks John.

Luciano Melluzzo, CEO

Thanks John.

Operator, Operator

We'll take our next question from…

Unidentified Analyst, Analyst

Hello, gentlemen, my name is Paul, and I've got a question for you. What is your cash position right now?

Luciano Melluzzo, CEO

Hi, doing Paul.

Michael Recca, CFO

We have a zero cash balance. Basically, what happens is every collection that we get from our customers pays down our credit line. And then 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 is 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, Analyst

One more question. Is there any interest at all in buying back shares?

Michael Recca, CFO

Not at this point. But we have talked about that, but it's not something we're going to do right away.

Unidentified Analyst, Analyst

That's all I have. Thank you very much.

Michael Recca, CFO

Thank you.

Luciano Melluzzo, CEO

Thank you for the call.

Operator, Operator

It appears we have no further questions at this time.

Luciano Melluzzo, CEO

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, Operator

Thank you. Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.