Astronics Corporation

Greetings and welcome to the Astronics Corporation First Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deb Pulaski, Investor Relations. Thank you. You may begin.

Thanks, Christine, and good morning, everyone. We certainly appreciate your time today and your interest in astronomy. Joining me on the call are Peter Gundermann, our President and CEO, and Dave Burney, our Chief Financial Officer. You should have a copy of the first quarter 2019 financial results, which were released earlier this morning. and if not you can find them on our website at www.astronix.com. Let me mention first and you're likely aware that we may make some forward-looking statements during the formal discussion as well as during the Q&A session. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings relief as well as with other documents filed with Securities and Exchange Commission. These documents can be found on our website, supportfbc.gov. During today's call, we will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAP measures to comparable GAP measures in the tables that accompany today's release. So with that, let me turn it over to Pete to begin.

Pierre? Thank you, Debbie, and good morning, everybody. Thanks for tuning in to our call. We're going to talk through the following agenda. First, we're going to go through, talk about our semiconductor test We're going to talk through some of the consequences of that. And then we're going to talk through first quarter results, both on a consolidated basis and then through our segments. And long story short, first quarter in most respects was a really strong quarter for the company. Demand was very strong. Margins with a couple of weak spots were generally strong and improved. We're happy with that as a first start to the year. Dave's going to talk through our balance sheet. on the heels of our semiconductor sale and some of our debt covenants and financial status in those areas. And then I'll take it back and we'll talk about the remainder of our 2019 expectations. So with respect to the semiconductor sale, as previously announced, It closed on February 13th. We sold that business to Advantest Corporation for $104 million cash at closing. There are some other earn out opportunities, but it's a little early to begin to value those things at this point. The $104 million turned into a pretty profitable gain on sale of about $80 million. I'm going to try to confuse people first here for a second, and then I'll let Dave unconfuse them in a minute. But that $80 million gain on sale, when all is said and done, we feel will be a net gain of about $58.8 million. But you'll notice if you look through our non-GAAP presentation, at the end of the first quarter, the net value of that transaction was closer to 62 million. And the reason for the disparity between the 58.8 that we will mention frequently and the 62 that is in that table is that the tax treatment here is a little bit progressive in nature over four quarters. So that 62 on the table on page eight of our press release will change in the second quarter release and again in the third quarter release until it kind of trues up at 58.8 million. Because of the nature of the sale and the importance of semiconductor test to our test business in particular last year, we are adopting this non-gap presentation where we're going to for the next three quarters expect back out the semiconductor test business both from the comparator period of a year ago and our current results obviously so that we feel given the circumstances that will present a much better understanding of what's going on in the business underneath. We don't expect to do non-GAAP presentations forever. I don't think we've ever done them before. But given the circumstance here with the sale of our semiconductor test business, we think that's an appropriate and helpful thing to do. So first quarter overview on a consolidated basis. Revenue was strong at $208 million. It's like our third highest quarter ever. $3.4 million came from our semiconductor test product line prior to the sale, so adjusted consolidated sales were $204.5 million. That's up around 19% over the comparator period and all organic, as we haven't done an acquisition in the last year. The results were strongly driven by our aerospace business, which is now 90% of our total or so. had a reasonable quarter. We'll talk about that in a minute. Net income gap was $78.1 million, including the net gain recognized on the semi-sale. Adjusted net income, backing out that gain, was still pretty strong at $16.1 million or 7.8% of sales. That's up dramatically from our comparator period a year ago when we had adjusted net income of 2.8 million or 1.6% of sales. The comparator period a year ago had a number of things going on in it. There were relatively high acquisition-related costs from our telephonics acquisition, which was in December of 2017. There was some legal expense in there, and there was pretty light volume, especially on the test side. First quarter of 2018 was not a solid quarter for the company. Our gap diluted earnings per share for the first quarter was $2.35. Adjusting out the effect of our semiconductor test sale, the adjusted diluted earnings per share was $0.47. Consolidated bookings were strong also at 205 million. That's about equal to adjusted shipments. Aerospace bookings were relatively strong. That drove the total at 192 million. Test bookings were a little bit lighter. Consolidated backlog at the end of the first quarter was $400 million. Going into the segments, we'll start with aerospace. As I said, aerospace, 90% of our total. Given the way the company's structured right now, our aerospace segment had a really good first quarter. Revenues of $188.5 million. That's are fifth in a row, up 14.5% over the comparator period of a year ago and up 7.6% sequentially over the fourth quarter of last year. Operating profit was strong on the volume, 25.8 million or 13.7%. That's our highest operating profit in a couple of years. And that's after operating losses from what we've been referring to over the last year or so, what we call our three stragglers, or our three troubled businesses. Actually, it's down to two now. And those two put in a combined operating loss of $10.7 million, which is a high number. We get the two down to break even just for comparison purposes, and they're not hurting us. Our operating margin for aerospace would have been in excess of 19%. Bookings for our aerospace business for the first quarter were $192 million, just shy of that. That's a positive book to bill, even on record numbers. and our ending backlog was 329 million for aerospace business, our highest ever. I want to talk a little bit about these three stragglers and help put the situation there in context and help you understand where we're going, we think. We think we have line of sight for pretty substantial improvement in the immediate quarters, including the current quarter. and the long and the short of it here is that while we had a $10.7 million operating loss in the first quarter, we are expecting the second quarter loss to be less than half of that, $5 million or a little bit less. And then we expect it to drop in half again in the third quarter down to $2.5 million or so. So the question is, how do we get from the operating loss that we observed in the first quarter of 10.7 to somewhere in the neighborhood of two and a half million in the third quarter. And to understand the situation in the first quarter in the press release, we detailed out that we had a material reserve or inventory reserve of a couple million dollars, which is not expected to repeat We had an estimate to complete of this development program that we've had going on for about a year now. An increase in cost estimate of $1.7 million. That was disappointing, but again, at this point, we don't expect that to repeat either. So between the material write-down and the estimate to complete, that's 3.7 on a total of 10.7. which gets us down to $7 million which is in the range of what we predicted the first quarter operating loss for these businesses would be. I think we said $6.4 million last time we talked. So it was a little bit higher than that net of this estimate to complete increase and the material write down. The estimate to complete, the program that's driving that is largely are going to be coming due in terms of delivery to the customer in various stages in July, August, and September. So we're at the trailing edge of that development program. Unless something goes substantially wrong as we get closer to the end, as you might expect, we feel like we have better visibility into where things are going to end up. And We're one month into the second quarter here, and the indications thus far are pretty positive. So we're reasonably confident that we're not going to have another estimate to complete. Things can happen, but at this point, we feel pretty good. We also, in one of those two businesses, had a pretty major restructuring, not in the first quarter, but in the opening days of the second quarter. That was at our Aerosat business, and it was a restructuring that we expect will save fixed costs in the neighborhood of $3.5 million on an annual basis. That will bring that business much more in line with the revenue expectations that we have for the remainder of the year. The final thing that's worth mentioning is that both of these two troubled businesses, Aerosat and CCC, are anticipating revenue increases specifically in the third quarter and fourth quarter. for that to happen at CCC, this development program that they've been working on needs to be wrapped up. But they pretty much have the business in backlog to drive those revenue increases. So the risk there is getting the program developed on time and within budget. At Arrowsat, we're also expecting revenue increases in the third and fourth quarter. Those orders are not yet in place, so we need to get those orders. And so that's where the risk is there. It's less a development risk, it's more an order risk and a timing risk. We're optimistic about our prospects. It's a question of whether they line up with our expectations for our 2019 year-end results. So that's the issue. we've put in a major restructuring in one of those two businesses and we've chipped away at the development expense we think we have the material reserve cleaned up and if the revenue picks up in both locations towards the end of the year then those predictions I made should be pretty solid which is having the operating loss from those two businesses drop to 5 million or a little bit less in the second quarter and 2.5 million or so in the third quarter on our way to break even. Switching over to our test segment, our test business is going through a pretty major adjustment as you might expect. The sale of the semi-business fundamentally reshapes the business. Last year we came in with test revenues of about $128 million. This year, our forecast, our revenue forecast is between $50 and $60 million. You can see that our Q first quarter adjusted segment sales were about 16.3, which is in line with that annual forecast. Our first quarter adjusted operating margin was 7.8% after backing out the semiconductor sale and semiconductor revenues. And that 7.8% on inline revenue confirms that our cost structure needed to be adjusted to the lower volume expectations. And we have similarly, as I was just describing in the aerospace side, we've also Thank you for joining us. in that business. A lot of moving parts in test. Our best advice for model makers at this point is to anticipate somewhere breakeven or a little bit north for the business and we're obviously keeping a really close eye on it and we'll report regularly as to how we see things shaping up. At this point I think I'll turn it over to Dave to talk through balance sheet related issues.