Air Industries Group (NYSE:AIRI) Q3 2022 Earnings Conference Call November 14, 2022 4:15 PM ET
Company Participants
Luciano Melluzzo – CEO
Michael Recca – CFO
Conference Call Participants
Howard Halpern – Taglich Brothers
Operator
Hello and welcome to the Air Industries Conference Call. My name is Josh, coordinator for today’s event. Please note today’s conference is being recorded and for the duration of the call, your lines will be on listen-only. However, you will have the opportunity to ask questions at the end of the call. [Operator Instructions]
Except for the historical information contained herein the matters discussed in this presentation contained 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 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.
I will now hand you over to your host, Lou Melluzzo, President and CEO to begin today’s conference. Thank you.
Luciano Melluzzo
Thank you, Josh. Good afternoon, everyone, and thank you for joining us today. We saw a significant increase in new business activity in the third quarter and we made further progress in our strategic initiatives. However, supply chain challenges persisted, delaying our receipt of both components and raw materials, which impeded our shipments and third quarter sales.
Fortunately, the supply chain issue seems to be improving and we hope that that trend continues, but still had an impact on the third quarter.
Net sales for the third quarter of 2022 were $13.3 million, or 5% lower than the second quarter of 2022 and 7.6% lower than the third quarter last year. Primarily as a result, the sales declined, the net loss for the quarter was $142,000 and adjusted EBITDA was $801,000. We expect our fourth quarter sales to be stronger than the third quarter with stronger sales growth as 2023 progresses.
We did see sequential growth across several platforms in the third quarter, reflecting the benefits of our diverse customer and platform base. Those included the US Navy’s E-2D advanced Hawkeye aircraft, and the F-35 Joint Strike Fighter aircraft. We are looking forward to the remainder of this year at the 2023 with a great deal of excitement.
That’s based on current level of coding activity that seemed to take off following the Farnborough Airshow. We also see evidence that the government entities responsible for procurement, such as the Defense Logistics agencies are increasing their level of activity. Our confidence is also based on our major new businesses wins this — thus far this year.
For example, in the past nine months those have included and most recently a five-year $2.2 million long-term agreement or LTA for the Blackhawk helicopter bringing to 12 the number of Blackhawk LTAs we have received this year with a combined estimated value of over $30 million.
The latest win was for the manufacture of a Quadrate which is a complex assembly that controls the gearbox for the tail rotor of the Blackhawk. The award for this LTA was accompanied by an immediate purchase order for $5,000. The other Blackhawk LTA is in 2022, included flight control assemblies and other critical products.
Separately, we received an order worth $2.8 million for engine components to be used on the F-404 jet engine, which powers frontline fighters and trainers around the world, including the new Boeing-Saab T-7A Red Hawk advanced jet training aircraft. In April, the first T-7A Red Hawk rolled off the production line at Boeing.
The first of 351 aircrafts to be delivered to the US Air Force on their terms of $9.2 billion contract awarded to Boeing in September of 2018. The production aircrafts sport the iconic Red Tail symbol of the fame Tuskegee Airmen of World War II.
Earlier this year, we were also awarded a $12.4 billion contract to produce complete main, nose, landing gear, and isolator components for the US Navy’s E-2D Advanced Hawkeye Early Warning Aircraft. Deliveries are scheduled to begin this coming year and be completed in 2024.
As a reminder, the E-2D and its earlier variants have been an important platform for our Long Island subsidiary for decades. And we manufactured a complete ready-to-install gear as a Tier 1 supplier to the original equipment manufacturer.
And in January, we announced the new $6 million life-of-program LTA specifically for a turbine engine exhaust case for the PW-4000 jet engine. The exhaust case are used mainly on the Boeing 767s, Airbus 300s, and the Airbus 310s commercial aircraft. These exhaust cases are roughly five feet in diameter and are highly engineered critical engine component.
We manufacture those exhaust cases components at our Sterling Engineering facility in Connecticut. So, this win was especially important as it met one of our key corporate objectives at Sterling Engineering, and that is to transition a larger percentage of the product mix into long-term agreements and the further tap the potential of this subsidiary.
Our capital investment program is aimed at further supporting this objective. I am pleased to report that the last couple of weeks a new $1.2 million high-tech machine tool was installed at Sterling. This machine will expand that capability and improve efficiencies on the PW-4000 case and several other parts are already under our roof.
In addition, our new in-house paid facility is fully operational and undergoing qualifications. We will continue to focus on bringing key processes in-house including grinding, night allege [ph] non-destructive testing.
While we see an abundant opportunity in the aerospace industry for our industries in the coming years, we believe an import potential new platform for our future growth includes nuclear submarine components and adjacent market that is a natural fit with our capabilities.
We have determined that the need for proven, reliable suppliers to that industry is substantial. We have started to make small, but important inroads into this market and had won several orders for summary components for both our Complex Machining and our Sterling Engineering business.
Let me reiterate that I said in today’s news release we are excited about the many opportunities that are emerging in our marketplace, including in defense, commercial aerospace, and now nuclear submarines. And we remain committed to manufacturing products that can meet or exceed the exacting safety standards and performance demands of these industries we address, while continuing a capital investment program that makes us even more valuable partner to our customers.
Now, let me turn the call over to Mike Recca, our CFO for the financial recap, which we will follow with a question-and-answer and some concluding remarks. So, with that, Mike.
Michael Recca
Thank you, Lou. Let me provides an additional detail on results for the third quarter and nine months. As Lou said, sales for the third quarter with $13.3 million bringing year-to-date sales to $39.3 million, that’s $4.2 million lower than the $43.5 million for the nine months of 2021. The primary cause sales decline was due to delayed shipment that Lou discussed and declining shipments for Blackhawk helicopter product.
We are — we have announced that we have finishing all old and beginning new LTAs with Sikorsky and these last for approximately five years. All — these are all for Blackhawk products.
In the transition from an old LTA to a new one, it’s normal for orders and for products and their shipments of products to be a little choppy. One reason for this can be the older LTA may have lower prices than the new and customers therefore have an incentive to buy ahead at the lower prices and delay ordering at the new higher prices.
Shipments to Sikorsky in Q3 was significantly lower than the quarterly for the first half. And it’s caused by fewer orders received early in the year. For the fourth quarter, we are projecting and very confident that Sikorsky shipment will return to normal. For all our other aircraft platforms, there were no major variances in shipments.
Gross profit. Gross profit in the third quarter was $2.2 million, or 16.9% of sales versus $2.0 million, or 14% of sales in the prior year. For the nine months, gross profit was $6.7 million again, 17.1% of sales versus $6.4 million or 14.7% of sales for the nine months of 2021.
I need to remind you that for our largest subsidiary, we use the gross profit method of calculating inventory and those gross profit for interim periods of the year as estimated gross profits are refined following our year-end inventory count and valuation of that inventory.
Last year in the fourth quarter of 2021, the gross profit percentage was increased to update the estimate that had been used for the prior three quarters of 2021. At this time in 2022, it’s not possible to determine whether the gross profit percentage for this year end will be increased, decreased, or remained the same as had been estimated for the first three quarters of the year.
Third quarter operating expenses decreased by nearly $100,000 from the second quarter of the year, but increased $236,000 from the third quarter of last year and were up $346,000 or 6% for the nine months.
These increases reflect very obvious inflationary pressures that are present throughout the economy. But also included in operating expense in Q3 of this year and thus in the nine months was about $130,000 employee severance costs resulting from some management employment changes that we made in September,
Operating income remained positive for all periods. Third quarter operating income declined by $81,000 versus the second quarter of this year and was lower by $8,000 in the third quarter of 2021 and for the nine months, operating income declined by $18,000.
Interest rates. By recent rate increases, our interest expense remained essentially flat for all periods. For the past several years, our interest rate has been at 65 percentage points — 0.65 percentage points or 650 basis points below the primary with a floor of 3.5% per year.
First Federal Reserve actions raising interest rates did not affect us. It did not affect the floor. But they do now. With the primary is 7% today, our rate has risen to 6.35% for the year. And that will be what we pay going forward, hopefully for not too long.
The net loss for 2022 third quarter was $142,000 as compared to the loss of $7,000 in the second quarter of 2022 and a net loss of $66,000 in the third quarter of 2021. For the nine months of 2022, our net loss was $177,000 versus net income of $21,000 in the prior year.
Balance sheet. Our balance sheet remains strong. There were no major changes during the year. Our accounts payable, accounts receivable remind very well-controlled. And as I discussed last time, in May we renegotiated our term loan of Webster Bank to finance further investments in machinery. We increased the amount of the term loan to $5 million to $5 million and added an equipment line of credit for an additional $2.0 million. This $2.0 million can be used to finance 85% of the cost of new equipment. And all advances on the term loan, including the new line of credit, amortized over seven years that’s 84 months.
As Lou mentioned, we are making investments we have aggressively invested in new machinery this year, and we’ll spend in excess of $2 million. The line of credit that we negotiated facilitates this investment.
Now, before I turn the call back to Lou, let me comment on an initiative we announced after the end of the third quarter. On October 4, we announced a one for ten reverse stock split which became effective on October 18. This action was proactive. It was not done as a result of any threatened action by the stock exchange, but we also believe it broadens the base of potential investors in the staff.
And with that, I’ll turn the call back to Lou and look forward to any questions you might have.
Luciano Melluzzo
Thank you, Mike. Let me provide a brief summary of my comments today. We saw a significant increase in new business activity in the third quarter and made progress on our strategic initiatives. However, supply chain challenges impeded our third quarter shipment and sales. Even so, we are optimistic that we can deliver stronger sales for the 2022 fourth quarter and expect stronger growth as 2023 progresses.
Our product and platform diversity our new business wins in 2022 and the current high level of quoting activity combined are the basis for our confidence for the remainder of the year and for 2023.
To further support our opportunity and growth, we are continuing our strategic capital investment with a focus on expanding our capabilities, enhancing our efficiencies through vertical integration and further tapping the substantial opportunity of our Sterling engineering subsidiary.
Let me also emphasize that we remain highly optimistic about the long-term prospects of their industries. We continue to serve major defense and commercial aerospace programs where demand is growing. Additionally, we are highly encouraged by our initial success in the adjacent nuclear submarine market.
Air Industries Group remains committed to manufacturing products that meet or exceed the exacting safety and performance demands of the industries we address and to becoming an even more valuable partner to our customers.
That concludes our report. And I would like to open the call to questions from participants. Josh, can you open up the lines, please?
Question-and-Answer Session
Operator
Thank you very much. [Operator Instructions] Our first question comes from the line of Howard Halpern.
Howard Halpern
Hi. I’m with Taglich Brothers, and I’m pinch hitting for John today. He’s out. Congratulations on navigating a tough quarter and still producing operating profit. That was nice to see. But in terms of, you talked about some of the headwinds with supply chain and materials and components, has that begun to ease? And if so, should we begin to see you increase shipments throughout the fourth quarter?
Luciano Melluzzo
Well, we are seeing some improvements in the supply chain. Materials earlier this year actually started — it started about third quarter of last year were very difficult to get, and we started some product late because of it. We had a pretty good size order that we expected material before the end of — basically in December of last year that we didn’t get until June of this year.
So we lost six months on that order. We’re starting to see some better full materials into our shop. There’s still a purchased hardware springs and particularly engineered springs and other items, sensors that are a little bit more challenging to get. But we are starting to see some easement in that, largely because some of the OEMs are ordering a lot in advance, where material used to be more just in time. Now we’re starting to see Collins and your Boeings and your Pratts place order for material a year, sometimes two years in advance to try to ease some of this. So we’re seeing some improvements. Hopefully, like I said, that trend continues.
Michael Recca
Can I add one thing to that?
Howard Halpern
Sure.
Michael Recca
Our products take a long time to make six months, nine months, sometimes longer than a year. If you have a product — if you have a shortage of material in the middle of that, so if I have a done we’ve worked on for three months in a six-month cycle, and we have a product shortage or material shortage for another three months when that shortage is lifted, I saw a few months ago. So, if all the supply chain issues evaporated tomorrow, it does mean that all the problems are soft for the fourth quarter. But we do expect the third quarter — fourth quarter rather, to be much stronger than the third.
Howard Halpern
Okay. And all things being equal, as we go into 2023, the new machinery, the testing and once everything gets fully up and running, do you expect that you’ll be able to really increase productivity, increase gross and operating margin for all the different programs and even the nuclear product shipments. Are you really encouraged that, that is going to kick in next fiscal year?
Luciano Melluzzo
Well, what drives some of that is the type of orders that you get in, obviously, on the platforms that we already deliver on we know the quantities, we know what next year will bring. If you follow the forecast that the OEM puts out, some of these new opportunities that we’re seeing, we’re not well versed so far with the submarine business. Its lower quantities, higher value type products, a lot of Dalberg. So we know that electric boat is looking to hire 571 employees as of two weeks ago, the last report we got.
So there are opportunities to be able to position ourselves in those types of industries. It’s a little early to tell, what piece of a pie we can get, but they like some of the capacity that we’re offering, what the machine tools that we’ve added in the last call it 18 months to 12 years, we put them in place to fill that capacity. And they’re starting to recognize that we could be a place to go to. We will see — we will see a gradual increase as time progresses.
Howard Halpern
Okay. Okay. Well, guys, keep up the good work.
Michael Recca
And would you do it in favor, and tell John, we said a love. All our best.
Howard Halpern
I will. I will.
Michael Recca
Thank you.
Howard Halpern
Okay. Bye.
Operator
Thank you very much. There are no further questions in the queue. [Operator Instructions] Okay. It looks like there are no further questions coming through, so I’ll hand back over to Lou Melluzzo.
Luciano Melluzzo
Thank you, Josh. So with that, once again, thank you all for talk — for taking the time to be on the call today, and for your interest in Air Industries Group. We look forward to updating you on our progress on our next call. And in the meantime, we would like to extend our best wishes for the holiday season. With that, Josh, you may conclude the call.
Operator
Thank you very much for joining the call today. You may now disconnect your handsets.
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