Q3 2022 Air Industries Group Earnings Call
Yeah.
Hello, and welcome to the Air Industries Group earnings call.
My name is Josh.
Port later for today's event.
Please note that this conference is being recorded.
And of course your lines will be on listen only however, you will have the opportunity to ask questions at the end of the cold. This can be done by pressing star one at any time.
One key paths to buttress state your question.
If you require assistance at any point, please breast I'll say about it and she will be connected to an operator.
Except for the historical information contained herein the matters discussed in this presentation.
Yeah Christy of these statements is subject to significant risks.
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 us.
Yeah.
Excluding the impact of noncash depreciation and amortization charges stock based comp expense.
Expenses, and nonrecurring expenses and outlays approach consideration of the impact of other potential sources and uses of cash such as working capital items.
This calculation may differ.
The method of calculation from similarly, titled measures used by other companies.
I will now hand, you over to your host Ms. Sue like President and CEO to begin today's conference. Thank Kate.
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 on our strategic initiatives, however, supply chain challenges persisted delaying our receipt of both components and raw materials, which impeded our shipments in third quarter sales.
Fortunately the supply chain issues seem 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, or one or $13 3 million or 5% lower than the second quarter of 2022 and.
At seven 6% lower than the third quarter last year.
Primarily as a result of the sales decline the net loss for the quarter was 142000.
And adjusted EBITDA was 801000.
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 end platform base.
Those included the U S. Navy's E <unk> 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 quoting activity.
Take off following the Farnborough Air show.
We also see evidence that the government entities responsible for procurement such as the defense logistics agency's are increasing their level of activity.
Our confidence is also based on our major new business wins.
Thus far this year 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 Lta's. We've received this year with a combined estimated value of over $30 million.
The latest split was for the manufacturer of a quadrant, which is a complex assembly that controls the gearbox for the tail rotor of the Blackhawk.
The award for to sell T was accompanied by an immediate purchase orders for $5000.
The other Blackhawk L T. As in 2022 included flight control assemblies and other critical products.
Separately, we received an order were $2 8 million for engine components to be used on the F. Four O four jet engine.
Which powers frontline fighters and trainers around the world.
Quoting the new Boeing Sob T Dash seven eight Red Hawk advanced jet training aircraft.
In April the first T <unk> Red Hawk rolled off the production line at Boeing.
The first of 351 aircraft to be delivered to the U S. Air Force on the terms of a $9 2 billion contract awarded to Boeing in September of 2018.
The production aircrafts sport the iconic red tail.
Simple up the fame to ski Air Man of World War two.
Earlier this year we were.
We're also awarded a $12 4 million solid contract to produce complete made knows Madni Garrett oscillator components for the U S. Navy's <unk> advanced Hawkeye early warning aircraft.
Deliveries are scheduled to begin this coming year and be completed in 2024.
As a reminder, the EQT and its earlier variance has been an important platform for our long island subsidiary for decades.
We manufactured a complete ready to install gear as a tier one supplier to the original equipment manufacturer.
And in January we announced a new 6 million life of program LTA specifically.
For a turbine engine.
Ross case for the PW 4000 jet engine.
The exhaust case I used mainly on the Boeing 760 Sevens Airbus 300, and the Airbus three tenths of commercial aircraft.
He is exhaust cases or roughly five feet in diameter and a highly engineered critical engine component.
We manufacture those exhaust cases components that are generic 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 makes it to long term agreements and to further tap the.
All 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.
One 2 million Hy Tech machine tool.
It was installed at Sterling.
This machine will expand that capability and improve efficiencies and the PW 4000 case and several other parts 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 idle edge non destructive testing.
While we see it upon the opportunity in the aerospace industry for air industries in the coming years.
We believe an important 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 have won several quarters for summary components for both our complex machining and Sterling engineering business.
Let me reiterate what I said and 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 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 <unk>, our CFO for a financial recap, which we will follow with a question and answer and some concluding remarks, so with that Mike. Thank you Lou.
Some additional detail on our results for the third quarter and nine months.
As Lou said sales for third quarter were $13 3 million, bringing year to date sales to $39 3 million.
$4 2 million lower than the $43 5 million for the nine months of 2020 one.
The primary cause sales decline was due to a delayed shipment that we've discussed and.
And decline in shipments for Blackhawk helicopter product.
We are we have announced that we have finishing an old and beginning new LTA with Sikorsky in these last for approximately five years.
All these are all for Blackhawk product and the transition from an old LTA to a new one it's normal for orders and for product shipments of product to be a little choppy. One reason for this can be the older LTA may have lower prices in the new and.
And customers therefore have an incentive to buy ahead at the lower prices and delay ordering at the new higher prices ship.
Shipments to Sikorsky in Q3 were significantly lower than the quarterly for the first half and this has caused by fewer orders received earlier in the year.
The fourth quarter, we are projecting and are very confident that Sikorsky shipments 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 2.1 million or 14% of sales in the prior year.
For the nine months gross profit was $6 7 million again, 17, 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 thus gross profit or interim periods of the year.
It is estimated gross profit than refined following our year end inventory count and evaluation 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.
Not possible to determine whether the gross profit percentage for this year and will be increased decreased or remain the same as had been estimated for the first three quarters of the year.
Third quarter operating expenses.
Creased by nearly 100000 from the second.
Quarter of the year, but increased 236000 from the third quarter of last year and were up 346000 or 6% for the nine months.
These increases reflect very obvious inflationary pressures.
Present throughout the economy.
Also included in operating expense in Q3 of this year and that's in the nine months was about $130000 and employee severance costs.
And from some management employment changes that we made in September .
Operating income remained positive for all periods third quarter operating income declined by $81000 versus the second quarter of this year and was lower by $8000 in the third quarter of 2021.
For the nine months operating income declined by 18000.
Interest rates.
<unk> recent rate increases our interest expense remained essentially flat for all periods.
<unk>.
Over the past several years, our interest rate has been at 65 percentage point 65 percentage points or 650 basis points below the client prime rate with a floor of three 5% per year.
First federal reserve actions raising interest rates did not affect us.
What effect the floor, but they do now.
With the primary to 7% today, our rate as revenue has risen 263, 5% for the year.
So that will be what we pay going forward hopefully not too long.
The net loss for 2022 third quarter was 142000.
This compares with a loss of <unk> 7000 in the second quarter of 2022.
And a net loss of 66000 in the third quarter of 2021.
For the nine months of trying trying to our net losses of 177000 versus net income of 21000 in the prior year.
The balance sheet, our balance sheet remains.
Strong there were no major changes during the year, our accounts payable accounts receivable remained very well controlled.
And as I discussed last time.
May we renegotiated our term loan with Webster Bank to finance further investments in machinery.
We increased the amount of the term loan from $5 5 million and added an equipment line of credit for an additional $2.1 million.
This 2.1 billion can be used to finance, 85% of the cost of new equipment.
And all advances on the term loan, including a new line of credit <unk>.
<unk> over seven years.
84 months.
As I mentioned, we are making investments we've addressed aggressively invested in new machinery, this year and will spend in excess of $2 million.
The line of credit that we negotiated.
Militates this investment.
Now before I turn the call back to Lou Let me comment on the initiative, we announced after the end of the third quarter.
Well before.
We announced a one for 10 reverse stock split which became effective on October 18th.
This action was proactive.
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 stock.
With that I'll turn the call back to Lou and look forward to any questions you might have.
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 in our strategic initiatives, However supply chain challenges impeded our third quarter of 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.
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 air 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 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.
Thank you very much if you would like to ask a question or make a contribution on the call. Today. Please press star one on your telephone keypad now place.
Your line is Unmated locally I will then speak to you individually take your full name and then introduce you into the call.
One for any questions. Thank you very much.
Our first question comes from the line of Howard Halpern. Please go ahead.
Hi, I'm with tablets brothers and I'm pinch hitting for John today. He is he's out.
Oh, congratulations hi, 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 jobs.
Materials and components has that begun to ease and if so should we begin to see you increased shipments throughout the fourth quarter.
Well.
We are seeing we are seeing some improvements in our supplement.
Apply chain.
<unk> earlier this year actually started.
Starting about third quarter of last year were very difficult to get and we started some product late because of it we had a.
A pretty good size order that we expected material.
Before the end of <unk>.
Basically in December of last year that we didn't we didn't get until June of this year. So we lost six months on that order.
Yes.
See some better fall materials into our shop, they're still standing purchased hardware.
Springs, and particularly engineered springs and other items sensors.
No that are a little bit 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.
Material Youll see more just in time now we're starting to see.
Collins and your borrowings and perhaps.
<unk> order from material a year, sometimes two years in advance to try to to try to ease some of this so where we're seeing some improvements hopefully like I said that that trend continues.
Okay.
Why don't I add one thing to that.
Sure.
Our products take a long time to make.
Six months nine months.
Times longer than a year.
I have a product.
Do you have a shortage of material in the middle of that.
So if I ever would have.
We've worked on about three months six months cycle.
Product shortage or a material shortage for another three months when thats shortage is lifted I still have three months ago. So if all the supply chain issues evaporated tomorrow. It doesn't mean that all the problems are solved for the fourth quarter.
But we do expect third quarter fourth quarter, rather to be much stronger than the third.
Okay, and all things being equal as we go into 2023.
Machinery, either testing and once everything is full.
Fully up and running.
You would expect that you know you'll be able to.
You know really increased productivity increased gross and operating margin for all the different programs and even though the new nuclear.
Product shipments.
You really encouraged that that is going to kick in next.
Next fiscal year.
Well you know what.
What drives some of that is the type of orders that you get in obviously on the <unk>.
Platforms that we are ready.
Deliver on we know the quantities we know what next year will bring if you follow the forecast at the OEM puts out.
Some of these new opportunities that we're seeing we're not well birth, so far with the submarine business its lower quantities higher value type products a lot of valve work.
We know that we know that electric boat is looking to hire 571 employees as of two.
Two weeks ago with the last report we got so there are opportunities.
To be able to position ourselves in those type of industries.
It's a little early to tell.
A piece of the 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 stop.
Call. It 18 months to 12 years, we put them, we put them in place to fill that capacity and they're starting to recognize that.
We could be a place a place to go to.
Okay.
We'll see we will see a gradual increase as time progresses.
Okay.
Okay, well guys keep up keep up the good work.
And would you do us a favor and.
No John we settle out.
Well I love all our best Thank you Okay alright.
Yeah.
Thanks very much.
No further questions in the case just as a reminder, if you would like to ask a question on the core side. Please press star one on your telephone keypad now place.
Okay.
Further questions coming through so I'll hand back over to Loomis exact.
Thank you Josh.
So with that once again, thank you all for talk.
Taking the time to be on the call today and for your interest in the Air Industries Group.
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.
Thank you very much for joining the call today you may now disconnect your handsets.
Okay.