Astronics Corporation

Astronautics Corporation fourth quarter fiscal year 2020 financial results conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the phone presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Debbie Pawlowski, Investor Relations for Astronautics Corporation. You may begin.

Thanks, Jamali, and good morning, everyone. We certainly appreciate your time today and your interest in Astronics. Joining me on the call are Peter Gunderman, our Chairman, President, CEO, and David Burney, our Chief Financial Officer. You should have a copy of the fourth quarter and full year 2020 financial results that was released this morning. If not, you can find them on our website at Astronics.com. Let me mention 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 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 that 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 in accordance with GATT. We have provided reconciliations of non-GATT measures with comparable GATT measures in the tables that accompany today's release. With that, let me turn it over to Pete to begin. Peter?

Thanks, Debbie, and good morning, everybody. Thank you for tuning in. Our rough agenda today will be to summarize our fourth quarter of 2020 and 2020 in review. We'll talk about our financial status, including our bank arrangements. And we'll turn our attention to a brief review of our outlook as we are in the early days here of 2021. And of course, Q&A at the end. I want to start with a premise, though, and the premise is this. We are very well aware that we are still being heavily affected by the COVID pandemic, but we are increasingly of the opinion that solid progress is being made and line of sight is being established for recovery in our chosen markets and for our company. And we're going to spend quite a bit of time on this call talking about kind of the green shoots that we are seeing and why we're increasingly confident that the worst is behind us. But first, let me remind everybody what our major goals are as a company as we've worked our way through this pandemic for almost a year now. And they are, first and foremost, the protection of our employees and the safety of our workplace. A lot of credit goes to our employees who have done phenomenal things working through this period of time. And under very unexpected and difficult circumstances, they've done a really good job. Our second objective is to keep meeting the requirements that our customers have placed on us. They've trusted us with some pretty important programs. And even in the difficult circumstances, our objective is to stay up to speed with those expectations. because they are important for our future beyond this pandemic, which we hope at some point is a distant memory in the past. So as such, our third goal or requirement is to, as best we can, position the company for survival during the pandemic, and more importantly, success afterwards. And to this end, we definitely realize that having just reported a year of $500 million in revenue and looking at our income statement that we are not optimized for financial success at $500 million. We are surviving at $500 million, but we have the infrastructure of a larger company and our expectation is that our revenue base will grow as recovery comes to us. All that is to say that from our perspective, as we sit here today in February of 2021, it is all about demand. That's the important thing to monitor. That's the important thing to watch. And that's what we are looking at very closely. So for the first part of my discussion here, I want to talk about what's happening with demand. And again, our perspective is we see, for the first time in many, many months, quite a bit more good news on the horizon than bad. And though we're not out of the woods by any stretch, we're cautiously optimistic that the worst is behind us. So stepping through our core markets, here is what we see. And as a reminder, 70% of our volume before the COVID pandemic came from the commercial transport market. And that's primarily Boeing and Airbus and airlines that fly those airplanes. And for that market to be successful, we need people flying again. And it's somewhat obvious, I suppose, at this point. But since we last talked, there have been a number of high-efficacy, very safe vaccines introduced to the market. Again, an obvious observation. But, you know, really good news in terms of setting us up for the future. The expectation in our company and for the industry is that as vaccines take hold, especially in the rich world, the second half of 2021 should see an increase in traffic, which is good for everybody in the industry. The second piece of news since we last talked, and again, this is pretty obvious to anybody who follows the industry, is that the 737 MAX has been recertified. The 737 MAX is an important program to Astronix. Back in 2019, before the pandemic, it was our single largest aircraft production program across our entire company, for which we provide a minimum of $90,000 per aircraft built and depending on how it's configured, that total can increase up to $250,000 or so. We do not expect much impact from that recertification in the first half of the year as Boeing is building at a rather low rate and they're going to burn off inventory that accumulated when the production shut down almost a year ago. But we expect in the second half that that will start to have a meaningful impact on our financials. And if Boeing hits their anticipated production rates going into 2022, it should again be one of our larger programs across our company. Switching to the general aviation business jet market, that was before the pandemic, about 10% of our volume. The good news here is that most OEMs are planning to, major OEMs are planning to increase production rates from 2020 substantially in 2021. So most cut production rates on the heels of the pandemic in 2020. Most are publicly saying they're going to increase rates again in 2021. And most of our business in the GA market is a mindset. So production rates are really important to us. The third and final part of our core market is the government and defense area, which for us includes military aircraft and almost all of our test business. That was about 20% of our volume pre-pandemic. We expect that spending in this area will continue to be strong going through 2021. There's obviously been a lot of changes in Washington, DC. We do not expect those changes to affect our prospects in the government and defense realm in the short term. So how is all this playing out for us in current bookings? Our Q4 bookings were 116 million, that's up 42% over Q3 and Q3 was up 33% over Q2. So again, not out of the woods, 116 million in bookings is a far cry from where we were pre-pandemic at 170 or 180 million average through 2019. But again, when you look at the patterns, Q2 of $62 million, Q3 of $82 million, Q4 of $116 million, the trend is certainly going in the right direction. Aerospace bookings in the fourth quarter were up 14%. TEST had a great quarter, up 150% over a year ago. That was on the heels of a previously announced transit test program for the Atlanta Rapid Transit authority through our customer, Stadler Rail. That's about a $30 million program which we'll be executing over the next couple of years. So the real focus that we're watching these days is for the airline aftermarket. I talked earlier about 70% of our volume in being commercial transports, and of that 70%, about two-thirds are line fit. One-third is aftermarket. Line fit is relatively easy to keep a tab on because of the well-publicized and published production rates, primarily, again, at Boeing and Airbus. The aftermarket is a little bit harder to get a handle on in terms of what plans are. But qualitatively, what I can tell you today is that we have noticed a significant increase in general activity over the last three or four months. So airlines went into a shell from our perspective, basically, as the pandemic took hold and travel collapsed. In recent months, activity has picked up in terms of quoting activity and program activity, not necessarily translating into orders yet. There's a lot more potential there, but we're encouraged by pickup from the airline aftermarket. We can concur with most observers in the industry that that activity is more closely associated with narrow-body aircraft rather than wide-body aircraft and more closely correlated with domestic travel rather than international travel. We can also agree with the industry that the US and China seem to be exhibiting more activity and more health while Europe lags significantly. And that's simply because of the quarantine requirements and travel restrictions that exist throughout Europe today. So switching over to our Q4 financials. Very briefly, revenue of $115 million, again, we know is very depressed, down 42% year over year, but up 8% sequentially. I talked just moments ago about booking trends from Q2 to Q3 to Q4. Shipments, at least for now, have bottomed out in Q3 and rebounded a little bit, 8% in Q4. We took significant cost reductions early on in the pandemic. I'm not going to go through them again, but those pandemics have allowed us to have reasonable results given the situation we feel on our income statement. Gap net income in the fourth quarter was a negative 20 million or down 17% due significantly to a large income tax expense, which I will let my friend Dave explain in just a minute. Adjusted EBITDA of $2.9 million or 2.5%. Cash from operations in the fourth quarter of $5.8 million. For the year, sales of $500 million, again, down significantly from $773 million and down even more significantly from the $800 plus that we thought we would do in 2020. The entire drop was in our aerospace segment, which was down 40% 2020 over 2019. Test, excluding our semiconductor business, which we sold two years ago, was up 15% for the year, again, benefiting from a couple of small acquisitions we did in 2019, some strength in the transit test market, and continued government spending kind of across the board. On sales of $503 million, our gap net loss of $116 million was down from income in 2019 of $52 million. Adjusted EBITDA in 2020 was a negative $29 million, excuse me, positive $29 million, down from $88 million. And cash from operations was $37.3 million, down from $42.7 million in 2019. The best thing I can say about 2020 with that brief summary is good riddance. We're happy to be moving on. I'll turn it over to Dave now to talk about the status with our balance sheet and our banking arrangements. Dave?