Air Industries Group (AIRI) 2021 Q4 法說會逐字稿

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 Group 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 the important information about the company and the 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 the 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 similarity and titled measures used by the other companies.

At this time, I'd like to turn the conference over to Lou Melluzzo. Please go ahead.

Thank you, Keith. Good afternoon, everyone, and thank you for joining us today. Our strong fourth quarter capped a 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%, 3x 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 improvement flow through 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 a license -- we have held a 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 Turbo-Fan, 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 3-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 3 variants of the aircraft. The F-35 is the military's program of record and best in world's fifth generation fighter aircraft.

And an especially important win from a strategic perspective, our Sterling Engineering subsidiary was awarded a new LTA to deliver [chat pods] 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 assist] to make complete product produced 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] (inaudible) 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 the 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 3 new LTAs for critical components for the Black Hawk helicopter, with a estimated combined value of more than $20 million. We are proud to have manufactured critical components for the Black Hawk 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 B-1B 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 industry's 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. [Navy'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 and announced new orders or long-term agreements, totaling more than $38 million in the first 2 months of this year, and we would expect to see the revenue benefit 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 expiration of existing LTAs with a major customer and its recent restart. As I reported on our last earnings call, we have continually improved the composition of our 18-month backlog since 2020, which is comprised only of firm 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 mid-2021. Our capital investment in 2021 totaled $1 million. So far this year, we have written purchase orders for $1.2 million.

We are -- we currently have 2 large new machines costing about $435,000 each on order, and [expect to place] to order 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 booth 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. The tragic events in Ukraine had reinforced 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 war fighters in their crucial missions. 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?

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 want to 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 what's used this year. At the end of the year, typically, in November, we have a complete inventory count and valuation. Following that, we then adjust or true up the gross profit for the fourth quarter and the full year.

This year, 2021, the adjustment from the inventory count was an increase in gross profit of $1.2 million. This increased 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 an LTA for a product whose cost has 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 the like to replace those sales with product having a much higher profit margin. Now this 0 profit product is back in the reason we received LTA, but at a much higher price and will no longer be a 0 or a loser.

Our operating costs in 2021 remained very well controlled, modestly increasing by about 2% for the full year. This was achieved even in the face of 17% growth in sales. However, we are 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 were flat slightly down, and 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. 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 exclude those 2 items, we had a net loss of $2.5 million in 2020. And net -- in 2021, we had net income improve 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 are well controlled. They 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 loan 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 January of 2020, we've been in full compliance with the 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 3 years to December 31, 2026, approximately 4 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 about all I have, so I'll pass the call back to Lou. I look forward to your questions.

Thank you, Mike. Let me close this portion of the call with a few thoughts. The fourth quarter capped a 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 2 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 and some lingering supply chain issues. However, our profit margin should be significantly above Q1 of 2021. And 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'll 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 Instructions) We'll take our first question.

First off, congratulations on the recent orders announced over the last 2 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 us as to what the current backlog is now being that you had these orders that came in, was it $38 million over the last 2 months?

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

$75 million.

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.

And John remember, on LTAs, we may get a 5-year LTA for, I'm 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.

And John, when we say...

You're looking at the 18-month number for that backlog, even though it's going to be a good 5-year number?

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

Okay. And I understand, and thanks for the explanation, Mike, on the gross profit. You had to true it up by about $1.2 million in the fourth quarter to true it up for the prior 3 quarters because you kind of guesstimate looking at the prior year what the gross profit would be. Now did you have this in -- this situation is typical like last year in the fourth quarter, you actually trued up or trued 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 where you really just make sure that your gross profit is accurate?

The -- 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 real issue is the valuation not the count of the inventory. The inventory counts are always remarkably accurate, 99.5%. It's just the lower cost to market adjustments, which in recent years have gone against us. Because prices have been going down, they're no longer going against us.

But the -- this is one of the larger adjustments we've had. So I don't expect that to be repeated next year. I think we've had an order of magnitude, it's usually a couple of hundred thousand that 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 till the inventory to be certain before [releasing] it.

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?

No, John, we've cleared the decks. We -- nobody likes pushouts. So we were pretty diligent to clear the decks starting a new year.

Okay. And in Q3, I know the press release had said that you had an improvement in your overdue product, it was (inaudible) 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?

Yes, there was. I can't quantify it for you exactly, John, now, but I'll be happy to get back to you on it. But you never get to 0 overdue. Because...

Okay. But obviously, customers would be happy to see that go down. So it was an improvement over the last year -- excuse me, last quarter's number of 12.5%.

That is correct.

That's a step in the right direction there. And...

(inaudible) customer deposit.

Okay. Well, single digits better than double digits. So...

[Double digits] is normal in the (inaudible).

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?

Okay, John, that's 2 different questions here. Last year, we processed 0 amount of product in-house because we don't have a processing plant. When we're saying about processing, we're talking about things like metal plating, shop [heating], painting. We didn't do any of that. So we set up our 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, literally. 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(inaudible) in April, we will take the next step, which will probably be in-house grinding, Nital Etch. Eventually, over next couple of years, we plan on getting as much as we can put under one roof and a accommodate done. So it's going to be an ongoing thing. We'll still be relying (inaudible) processing for some things that we will never put under our roof. But anything we can't keep control over and it's environmentally friendly with the state and the laws of the land, we will do.

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

It's more than -- yes, and scheduling. It's nice to know that if a product goes out to paint, you're going to get it back in 2 days or 2 hours instead of having to go out the paint and you get your queue in line and in a couple of weeks, they call you and say it will be delayed further. It's a scheduling problem.

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?

Well, we brought on 2 additional personnel in business development. So we brought a guy on the West Coast that actually works right on the outskirt 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 it 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 quoting activity, things are getting reviewed, and we made tremendous help.

We -- finally, we're doing a Farnborough Air Show this year in July, which any air show -- 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.

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?

No, not at all. There's a lot of military jet engine products here also.

Okay. But predominantly, your commercial segment -- your commercial sales are in that segment?

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

Okay. Really, what I'm looking at is, because obviously, commercial sales, well, when COVID hit back in 2020, it really impacted your sales to that market, but 2021 opened up. And it looks like 2022 should be even a further opening up of that. So I was just looking to see what your outlook is as far as the commercial end of your business in 2022?

And that's a true statement, John. We are seeing some activity for RF -- 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 before orders get placed.

(Operator Instructions) We'll take our next question from…

My name is [Paul], and I've got a question for you. What is your cash position right now?

We have -- we run a 0 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 the credit line to cover checks that we've written. So at any given point in time, our cash balance basically are 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.

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

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

(Operator Instructions) It appears we have no further questions at this time.

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.

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