Air Industries Group - Q4 2022

Transcript

Operator (participant)

Hello, welcome to the Air Industries Group preliminary fourth quarter and full year 2022 results call. At this time, all parties are in a listen-only mode. Question and answer session will follow the formal presentation. Anyone requiring At the reference call, all webcast forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended, including statements regarding, among other things, the company's business strategy and growth strategy. Expressions which identify forward-looking statements speak only as of the date the statement is made. These forward-looking statements are based largely on our company's expectations are subject to a number of risks and uncertainties, some of which are beyond our control and cannot be predicted or quantified. Future developments and actual results could differ materially from those set forth and contemplated by or underlying the forward-looking statement.

In light of these risks and uncertainties, there can be no sure that forward information will prove to be accurate. This call does not constitute an offer to purchase any securities nor solicit designation with respects to a meeting of the company's shareholders. At this time, I would now like to turn the call to Lou Melluzzo, President and CEO. Please go ahead, sir.

Lou Melluzzo (President and CEO)

Thank you, Daryl. Good morning, and thank you for joining us today. I'll discuss the in filing our 10-K. Last year, our independent audit firm for many years, actually over a decade, merged with a much larger firm. While the same individual partners are still involved with our annual audits, they and Air Industries are still adjusting to the new review procedures of the new firm. Michael Recca, our CFO, will provide more specific information later in the call. While I'm unable to provide specifics, I would like to provide some general comments about our top-line performance for the quarter and the year. Consolidated net sales were $13.9 million for the fourth quarter and $53.2 million for the full year 2022. Sales for both periods decreased approximately 9.7% from the prospective periods of 2021.

Our fourth quarter and full year 2022 shipments were impacted by significant supply chain disruptions, in particular, delayed arrival of raw materials. This has been a challenge for our industry ever since the beginning of the pandemic. While conditions have improved, problems still remain. At the same time, we enjoyed some important business wins in 2022. During the year, we made deeper inroads into the nuclear submarine component markets. This is a substantial and exciting opportunity for Air Industries. As I mentioned before, one of the key factors impacting our results for both the fourth quarter and the full year of 2022 was the disruption in supplies of raw materials. During 2022, delayed arrival of raw material delayed the delivery of more than $8 million worth of product.

In fact, product that should have delivered to customers in 2022 was now delayed to the second and third quarter of 2023. Our results were also impacted by losses incurred on a specific product. Between underestimating costs and the inflation processing costs, this contract has become unprofitable. These losses will continue as we finish the contract deliveries in 2023, accounting rules require that we estimate our future losses and accrue for these losses in 2022. The total recognized and anticipated losses total about $850,000. The good news is our 2023 results will not be materially reduced as losses are already accounted for in 2022. Let me emphasize that we are not satisfied with our 2022 results, and we are fully focused on improving profitability in 2023.

We do not believe that our 2022 performance is indicative of the opportunities we see going forward. We are seeing a significant increase in sales activity resulting from our business development efforts. The positive impact can be seen in the pickup in new business bookings at both our Long Island and Connecticut subsidiaries in recent months. Our bookings in the last three months have substantially improved over the previous nine. Let me highlight a few of the accomplishments in winning increased business during 2022. One of our key corporate objectives has been to transition a larger percentage of the product mix at our Sterling Engineering unit into Long-Term Agreements, LTAs, to further tap the potential of the subsidiary.

In that regard, contract wins for Sterling in 2022 included a $6 million life of program extension, LTA for a turbine case component for the PW4000 jet engine used on many Airbus and Boeing commercial aircraft. A new $2.8 million order for an engine components for the popular F404 jet engine, and a new contract for a long-established customer for a turbine nozzle using high-pressure turbine engines that generate onboard electric power on large ships. Our Long Island subsidiary, Air Industries Machining Corp., also had important wins in 2022, notably a $12.4 million contract award to produce complete main and nose landing gear and ancillary components for the US Navy E-2D Advanced Hawkeye airborne early warning aircraft. The contract is expected to be completed in 2024.

We have been making landing gear for E-2D for many years. Additionally, during the course of the year, we won a total of 12 LTAs for the Black Hawk helicopter with a combined estimated value of over $30 million. The Black Hawk has been a mainstay of our business for many years. There has been some concern expressed about the effect of the US Army's selection of the Bell, the Valor, as a future replacement for the Black Hawk. Based on the current timeline, the replacement helicopter is not projected to begin initial low rate production until 2030, seven years from now. Over the next five years, the Black Hawk production is forecasted to total over 500 new aircraft. Beyond producing product for new production, there will be continuing opportunity in the aftermarket sales.

The fleet of Black Hawks operating both in the US and in foreign countries is estimated at 4,000 aircraft. Because they have more moving parts than any fixed-wing aircraft, helicopters require more maintenance and replacement of parts. We estimate that 50% of our business is aftermarket. With 4,000 aircraft in operation, there is a considerable long-term opportunity. We have also previously announced a $5.2 million long-term agreement for Chaff Pods for CH-53K heavy lift helicopter, a program that is just now entering full rate production, now ramping up. Each CH-53K is four or five times the cost of a Black Hawk. Deliveries of nearly 100 aircraft over the next five years are expected in our, in the armed service, or simply the Marine Corps, is pressuring to increase this rate.

Beyond the LTA for the CH-53K, our Sterling subsidiary is currently producing under single purchase order, 2 first articles, products. This is expecting, excuse me, this is expecting a purchase order for a 3rd product. We are hopeful that these purchase orders will lead to larger LTAs in the near future. We have been targeting the nuclear submarine market, a new market for us with exciting potential for some years now. This initiative is reflective of one of our major growth strategies, to expand our portfolio beyond aerospace platforms we currently serve to include non-aerospace components. The nuclear submarine industry is rapidly expanding to meet what is projected to be a 50% increase in demand from the Navy. We see substantial opportunities for suppliers such as Air Industries that can deliver to the ultra-high quality standards required. We have recently won 2 contracts from 2 Electric Boat suppliers.

I'm sorry. We have recently won two contracts from two suppliers to Electric Boat, one of the two US Marine Corps builders. We are optimistic that our successful execution of this project will lead to larger and more significant opportunities as the submarine industries continue to seek new suppliers to support the forecasted ramp up in the years ahead. In summary, 2022 was a year of substantial challenges as well as significant strategic business wins. Looking ahead to 2023, while we expect Air Industries and the overall aerospace sector to continue to be experiencing supply chain delays, we are also encouraged by our inroads into several exciting and expanding platforms. We look forward to reporting our full results for the fourth quarter and the year in due course.

We are vigorously executing our strategy and excited about the opportunities we see for Air Industries Group. At this point, I'm gonna turn the call over to Mike Recca, our CFO, for his report, and then we'll follow up with, question and answers. Mike?

Michael Recca (CFO)

Thank you, Lou. I share your frustration that the 10-K has been delayed. Again, I reiterate that I agree with Lou that the delay is really caused by the shift from a smaller accounting firm to a much 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, we write down the value of inventory that is aged. By age, 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. In 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. If we conclude that additional write down of our inventory is more appropriate, then we will incur a non-cash charge and expense. We do not have an amount of that expense yet, again, I emphasize it is a non-cash 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 he said, $6 million or close to 10% from 2021. The effect of the raw material that caused delay that Lou discussed and shipping two orders worth $8 million clearly illustrates the impact of the late receipt of material.

While I wish I could share more detailed financial information, the resolution of the inventory issue will affect almost all income statement categories. I really cannot and do not want to provide what might turn out to be inaccurate information now. 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, 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.

With that, I'll turn the call back to Lou for closing remarks, and I look forward to your questions.

Lou Melluzzo (President and CEO)

Thank you, Mike. Thanks, Daryl. I would like to take, at this time, open up the line for our shareholders, questions and answers from the community members.

Operator (participant)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your question. Our first question comes from the line of Howard Halpern with Taglich Brothers. Please proceed with your questions.

Howard Halpern (VP)

Good morning. Good morning, guys.

Lou Melluzzo (President and CEO)

Good morning, Howard.

Michael Recca (CFO)

How are you doing?

Howard Halpern (VP)

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

Lou Melluzzo (President and CEO)

Well, you know, Howard, it depends on our raw materials incoming raw materials. We have a product right now, which is one of our better running products in the shop that we had a three month lag in material receipt. 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 a 16-week lead time. We're doing whatever we can to pull that lag, but that's what I can put out there for right now.

Howard Halpern (VP)

Okay.

Lou Melluzzo (President and CEO)

material at all, at all phases.

Howard Halpern (VP)

Okay. 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, but the customers have nowhere else to go.

Lou Melluzzo (President and CEO)

That is correct, Howard. 100%.

Michael Recca (CFO)

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

Howard Halpern (VP)

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

Lou Melluzzo (President and CEO)

All the equipment that we have purchased is in place with the exception of one piece of equipment that is due in later July, early part of August. That particular piece of equipment was purchased for our thrust strut line, so basically to double capacity and keep up with demand. Those the thrust struts are being forecasted to go to around 720 units per year. you know, it'll start up from that. It's a substantial ramp-up this year that unfortunately we can't get material for right now. Hopefully by the time that machine comes in and gets set up in our shop in New York, the materials issue with that will kind of alleviate itself.

That's what the kind of the mills are saying it, you also gotta look at the, you know, the 16-week lead time.

Howard Halpern (VP)

Okay.

Lou Melluzzo (President and CEO)

It's an important product. It's important to have that line set all the time.

Howard Halpern (VP)

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

Lou Melluzzo (President and CEO)

Our like I made a comment earlier in my presentation. The last three months, we've had substantial increase in bookings and, you know, in sales wins over than the last nine months of last year. There is definitely more activity out there, both in our rotorcraft and, you know, the nuclear submarines. I mean, we're being pretty choosy as what we do with the submarine work. You know, currently, our orders are for valves, which is kind of the cream of the crop in the sub.

Howard Halpern (VP)

Okay.

Lou Melluzzo (President and CEO)

We're seeing a significant, you know, uptick in interest in that, which is very positive for us. The CH-53K, as I alluded, we have two CH-53K parts in-house that are going through first article. You know, as a spot buy, those hopefully can materialize into LTAs, which we have a high degree of comfort once we show success to our client. There is definitely an uptick in activity in the market.

Howard Halpern (VP)

Okay. Okay, thanks. Well, you know, keep up the work in managing the everything that's going on. It's a lot on your plate, it appears.

Lou Melluzzo (President and CEO)

Thank you, Howard. Thank you for the call.

Howard Halpern (VP)

Yep.

Operator (participant)

Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. 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.

Lou Melluzzo (President and CEO)

Thank you, Daryl. 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. Daryl, I'll turn it over back to you for the conclusion.

Operator (participant)

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.