Earnings Call Transcript - AIRI Q1 2020

Operator, Operator

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, amortization changes, stock-based compensation expenses and nonrecurring expenses and outlays prior to consideration of the impact of other potential sources and 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 would like to turn the conference over to CEO, Lou Melluzzo. Please go ahead, sir.

Luciano Melluzzo, CEO

Thank you, Connor. Good afternoon, everyone. Thank you for joining us as we summarize Air Industries' results for the first quarter of 2020. Our results for the quarter are in line or generally equal to the first quarter of 2019, despite disruptions that began in early to mid-March due to the pandemic. The results for the quarter were achieved against increasingly challenging conditions such as the shutting down of process shops for an extended period of time, all nonessential personnel working remotely and increased absenteeism at our shops. Air Industries, along with the entire aerospace industry, relies heavily on its processing shops to produce finished goods. Our location in the New York Metro area did not play in our favor. With that said, some particulars for 2020 compared to 2019. Sales were $13.4 million, a 3% decline from 2019. Gross profit declined by $100,000 or 4%. The adjusted EBITDA was $894,000. Notably, our net loss before taxes was reduced by $639,000, or 65%. As we now embrace a new way of conducting business, our primary responsibilities are centered on following certain protocols from the CDC, the state and the federal government. Social distancing, Zoom meetings, working remotely where applicable, and the general well-being of our workforce are at the forefront. I would like to turn the call over to our CFO, Mike Recca, for the financial recap, then I'll return to close the call. Mike?

Michael Recca, CFO

Thank you, Lou. Now if we look at the results for the first quarter, they are unremarkable, but frankly, in my opinion, they're quite an achievement in light of the production problems we experienced in March. In particular for 2020, the first quarter of 2020 compared to 2019, as Lou mentioned, sales declined by 3% to $13.4 million. Gross profit declined by 4%. This decline is in line with the decline in sales. Our operating costs increased by $200,000, or 10%. This is troubling. All of these increases related to additions to the reserve for doubtful accounts receivable, and nearly all of that increase related to a single invoice of a customer for a special project, which had to be rebuilt several times delaying payment. We're in touch with the customer, we seem to be on track now, and I expect this receivable will be collected soon. Interest expense, a bright spot, declined dramatically by $560,000 or nearly 65%, and this is due to the greatly reduced interest rates of our new credit facility. We've gone from a 9.5% rate for much of 2019 to just 3.5% today. Notably, our lower interest cost reduced our net loss before taxes by $639,000, or 65%. As Lou said, our adjusted EBITDA was $894,000, and we were in compliance with all the covenants of our new loan agreement. Also late in the quarter, we filed for an income tax refund of $1.4 million. This filing resulted from changes in the loss carryback law that was enacted in recent legislation. The addition of the $1.4 million is the reason we have a positive net after-tax income for the quarter. Lou, I'll pass it back to you for closing comments.

Luciano Melluzzo, CEO

Thank you, Mike. Now let me close the call with a few thoughts on the remainder of the year. It is pretty obvious that the commercial aerospace industry is in trouble. This pandemic is affecting all the airlines, the engine builders, Boeing, Airbus, and their suppliers. Air Industries is primarily a defense supplier and thus, is in a much better position to weather the storm. Defense procurement has not been affected. We have seen no reduction in orders for defense-related products. Our customers have been very supportive and have been creatively providing assistance to help us maintain production and shipments to them. Gaps created by cancellations and pushouts of certain commercial products have been filled by accelerating the production of defense articles. The combination of employees not being at work and supply chain issues seriously reduced April shipments. Sales improved in May, but remain lower than the prior year. We are hopeful that the worst of the disruption is over and that the conditions will improve for the balance of the year. This concludes our formal remarks this afternoon, and I would like to open the call to questions from participants. Connor, please open the lines to questions.

Operator, Operator

And we will take our first question.

John Nobile, Analyst

This is John Nobile with Taglich Brothers. I understand that Air is regarded as an essential business and that you have a considerable backlog. Could you update us on the backlog? I believe you mentioned in the last call that it was over $100 million.

Luciano Melluzzo, CEO

Yes. It still is. It still is, yes.

John Nobile, Analyst

Okay. I was hoping you could talk a little bit about how things currently look in regard to how COVID-19 is impacting the bottleneck with your external suppliers. I'm just wondering if there was any indication yet as to when some of the ones that are closed might open. I don't know if you have any news to share on that.

Michael Recca, CFO

I'm happy to provide an update on that. I'm glad to say that all of our suppliers are back up and running. We've had various suppliers in Long Island, Connecticut, and even overseas. The shutdown lasted about two weeks for most, while some faced a three-week closure, and a few had brief shutdowns of two to three days for cleaning. Although they are back online, they're not yet operating at full capacity. Currently, some locations are open three days a week, while others have resumed five-day operations but are no longer working Saturdays due to reduced business levels. This has led to a reduction in overtime. Suppliers are addressing the bottlenecks that emerged during their shutdowns, which affected us as well since we didn't halt operations but did face employee absenteeism of about 30% in late March and April. Fortunately, that number has significantly decreased. Everyone is operational again, but still not at full capacity. I anticipate that in the coming weeks or months, we should see a return to normalcy.

John Nobile, Analyst

I know that you're considered essential, but are they also considered essential being that they were supplying parts?

Michael Recca, CFO

They are. But when someone comes down with a virus and it impacts your workforce, whether essential or not...

John Nobile, Analyst

No, no, no, believe me, I understood…

Michael Recca, CFO

The owners and the managers imagine what they need to do in order to take – so if we had this problem, we would have made the same decisions.

Luciano Melluzzo, CEO

Yes. Being open is one thing, but it doesn't mean you can be open if 40% of the staff is sick.

John Nobile, Analyst

I understand. I have another question related to the bottleneck issue, and I want to move past the pandemic. Assuming that pandemic conditions improve in the next few quarters, perhaps by Q4, we can only guess. If some level of normalcy returns to the market by the end of the year, considering the capital expenditures you made over the past year to address the bottlenecks, could you provide your estimate of the quarterly revenue run rate if we return to normal by year-end? In the third quarter, you reported $14 million in revenue despite facing significant bottlenecks. Given the capital expenditures you have already made, what revenue do you anticipate? It's a big assumption to predict when the virus will be under control, but if it is by the end of the year, what is your outlook for revenue once the bottleneck situation is largely resolved?

Michael Recca, CFO

The whole dynamic of the business has changed. You're talking about us being a defense contractor, getting in line at the process shops to have our parts processed. Now you're talking about the commercial business being maybe 20% of what it was 2 months ago. So you got to believe that those opportunities, some opportunities have opened up. How much, I do not know.

Luciano Melluzzo, CEO

We don't know. We also don't know when, John. That's really the issue.

John Nobile, Analyst

I understand completely. I wanted to know when, if at all, we might return to normalcy, considering the capital equipment you’ve invested in to address the bottlenecks, and what the potential could be. Regarding the commercial side of the business, which is clearly under pressure, you received a $9.3 million flush truck order back in January. This was expected to be delivered in the second half of this year and the first quarter of 2021. Will it still be delivered on schedule, or is there a chance it might be delayed?

Luciano Melluzzo, CEO

It has been partially delayed. We removed $5 million from our backlog regarding that. We still expect to ship 4 out of the 9, and we are compensating for the $4 million in lost revenue by accelerating some military products to fill that gap. Regarding backlog, it remains mostly unchanged, reduced to $3 million, which is a 2% decrease. We still have a backlog of $100 million to $111 million for the next 18 months. If you evenly distribute that, it equates to about $40 million a year or possibly more, closer to $60 million a year. We are facing challenges in fulfilling our backlog because we have ample resources to address the delays or losses in commercial orders, keeping in mind that this is a long lead time product, typically taking 3 to 9 months from start to delivery, so immediate shifts are not feasible. However, in the long run, we have the orders and backlog, and we will fulfill them as we transition from one product to another, provided our processing houses can handle and return them to us in a timely manner.

Michael Recca, CFO

Materials are also a factor. Some of the materials that had been ordered are still not here and are expected to arrive later in the year. To answer your original question about what it does to our CapEx, that CapEx will be directed towards a different product.

John Nobile, Analyst

Okay. Okay. So it's obviously a different product, you're talking more defense-related product. But out of that $9.3 million, I just want to clarify, at least $4 million of this is going to ship at a time period that you expected to ship it?

Michael Recca, CFO

That is correct.

Luciano Melluzzo, CEO

That is correct. That is correct today.

John Nobile, Analyst

Right. Understood. Understood. Things changing on a daily basis. All right. Well, listen, that's all I want to get. So I appreciate your comments on that, and I wish you the best.

Luciano Melluzzo, CEO

Thanks, John.

Michael Recca, CFO

Thank you, John.

Operator, Operator

And speakers, at this time, there are no more questions in queue.

Luciano Melluzzo, CEO

Okay. Okay. Thank you, Connor. So with that, once again, thank you, everyone, for taking the time to be on this call today and for your attention and questions. This concludes our conference call for Q1 2020. And thank you, everybody, for attending and the questions for today. Connor, you may disconnect.

Operator, Operator

This concludes today's call. Thank you for your participation. You may now disconnect.