Astronics Corporation

Greetings and welcome to Astronics Corporation's second quarter 2020 financial results conference call. At this time, all participants are in a listen-only mode. A 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. I would now like to turn the conference over to your host, Ms. Deborah Kulowski, Investor Relations for Astronics Corporation. Thank you. You may begin.

Thanks, Laura, and good morning, everyone. We appreciate your time today and your interest in Astronix. Joining me on the call are Peter Gundermann, our Chairman, President, and CEO, and David Burney, our Chief Financial Officer. You should have a copy of the second quarter 2020 financial results that were released this morning, and if not, you can find them on our website at Astronix.com. Let me mention first that we may make some forward-looking statements during this 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 release as well as with other documents filed with the Securities and Exchange Commission. These documents can be found on our website or at sec.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 per accordance to GAAP. We have provided reconciliations of non-GAAP measures to comparable GAAP measures in the tables that accompany today's release. So with that, let me turn it over to Pete to begin. Pete?

Thank you, Debbie. Good morning, everybody. Thank you for being with us today. Our agenda, as usual, will be to discuss the second quarter in some level of detail, spend some time talking about our markets as we see them emerging, given the pandemic crisis that we're all working through, and then finally do some questions and answers. Before we get going, though, I wanted to revisit some of the three overlying goals that I talked about in our last call and give you a brief assessment as to how I think we're doing on those three goals. The first goal was protecting our employees and providing a safe workplace from which we can operate. And I feel today that we are doing a reasonably good job in this area. Most of our facilities have continued to work with only minor disruptions. And in general, we have been able to stick to our tasks and the expectations our customers place on us without too much disruption. I'm not going to say a whole lot more about this throughout this call because it's kind of a non-issue as of today. Our second objective is to keep serving our customers' needs as they direct us and expect of us. And that's been a little bit more of a fluid environment. Our customers over the course of the quarter have told us a lot of different things as late as this week. So it is a challenge for our entire organization to stay in front of what our customers think they're going to be expecting from us. in the short term and in the medium term going forward. I think we're doing a reasonably good job of it. We are being as flexible as possible and as proactive as possible in anticipating what they need and responding when they give us instruction. The third overlying goal is to position the company for Thank you very much. to come out of the chute as strong as possible when this pandemic passes. So I think those overlying goals are valid and I think we're doing a reasonably good job and we'll probably touch on them individually as we go through the rest of this presentation. But for now, I think we're doing all right. So the second quarter was obviously quite an experience. In assessing it, it's helpful to keep in mind that in normal times, say pre-pandemic, Astronics would generate a majority of its revenue, as much as about 70% from the commercial transport market, which during a pandemic turns out to be a pretty bad place to be. That 70% of our business is basically for the manufacture of commercial aircraft and to operators, airlines, people who operate those commercial aircraft. I don't feel a need today to describe for everybody what's been going on in that market. Suffice it to say that at the low point in April, worldwide commercial flights were down to 20% of what they were before the pandemic. They've since rebounded generally to about 50%. and at the peak, 60% of the world's commercial airplane fleet was parked. That percentage has dropped to about 40% so airlines have been pulling people or pulling airlines aircraft back into service as traffic has picked up. During the quarter, major manufacturers including primarily Boeing and Airbus started pulling back on production plans They have been pulling them back successively as the quarter went on, and even this week, a little bit more than we expected, but we'll talk about that a little bit more later in this discussion. So 70% of our traditional market has been involved in commercial transport, airplane, and it's been pretty badly affected by the pandemic. Another 10% traditionally comes from business jet manufacturing. rates are down there also, maybe not quite as much as commercial transports, but that part of our business is also under stress. The final 20% comes from government and defense revenue streams. Demand here has held up reasonably well. In fact, it was one of the highlights of our first quarter. I'll get to it a little bit more in a minute. So taking all this into account, revenue for the second quarter was $123.7 million. That's actually a little bit higher than we expected when the pandemic hit. But it's certainly a weak number for our company, down 35% year over year and down 22% sequentially from the first quarter. In fact, it was our lowest quarter since way back in 2013. Fortunately, as we discussed in our May 6th first quarter call, we implemented a number of cost-saving measures across our business pretty early on intended to preserve cash and right-size the business. Those include pretty substantial capacity reductions including headcount to the tune of about 25% of our workforce before the pandemic hit, We've frozen pay levels and eliminated cash incentives and reduced travel and cut capital spending by two-thirds and dropped acquisition initiatives and buyback initiatives and so on and so forth, such that at the end of the day, we were able to report an adjusted EBITDA of 7.4% even with that drastically reduced revenue level in the second quarter. Also positive, from our perspective, cash from operations was a positive $18.3 million. Dave will talk through some of the specifics here on our adjusted EBITDA calculations in just a minute to give color into our performance during the second quarter. Bookings for the quarter were very low, $61.5 million. That's about half of shipments. Aerospace in particular took most of the drop. On the one hand, that's a surprising number perhaps. On the other hand, we think it's kind of a logical destocking adjustment as our customers adjust to the new reality of their expected run rate going forward. We expect bookings to recover in the current quarter pretty strongly and will obviously be keeping our eye on that very closely as this current quarter progresses. A couple of other topics on the quarter before I turn it over to Dave. A couple of weeks ago we issued a press release that Bell, Textron's Bell, has selected us to provide the electrical power and distribution system for their entrance in the Army's FARA and FLARA competition. FARA stands for Future Attack and Reconnaissance Aircraft. FLARA stands for Future Long Range Assault Aircraft. FARA is the planned Army replacement for the OH-58D and FLARA is the planned Army replacement for the UH-60 Black Hawk. These programs are obviously have a while to run. They're not guaranteed, and Bell has not been selected, but is one of two parties competing in both of these programs. And they've selected us to provide an electrical power distribution system based on some core technology which we've been developing for a number of years and which is proving to be pretty well accepted in the light aircraft industry. It Our technology is somewhat unique in that it depends entirely on electronic circuit breakers and solid state starter generator technology, which is much higher reliability and better performance than traditional starter generators. This is not our first time around the ring with Bell. They've selected us also for their 505, 525, and V280 platforms, so we've developed a really good working relationship with them over time. We're also developing systems or have developed systems for the Textron Denali, the Pilatus PC-24, and some other aircraft that are emerging in the near future. So we feel like we're building a very strong market position here and something that will serve the company very well for a long time in the future. The other kind of highlight for the second quarter is our test business. which flies a little bit under the radar these days given all that's happening in aerospace, actually had a really good quarter. Sales up 43% and operating margin of 12.3%. It's still relatively small in terms of our overall business, but it has very solid prospects in the market and our expectation is that we're going to have quite a bit of good news about our test business for the rest of this year. We're happy to have that as part of our portfolio these days. That ends my comments on the second quarter. I think I'll turn it over to Dave to cover some specifics in our financials.