Astronics Corporation

Greetings. Welcome to the Astronics Corporation Second Quarter 2021 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. Please note this conference is being recorded. I will now turn the conference over to your host, Deborah Pawlowski, Investor Relations for Astronics. Thank you. You may begin.

Thank you, Alex, and good morning, everyone. We certainly appreciate your time today and your interest in Astronics. I have here with me Peter Gunderman, our Chairman, President, and CEO, and Dave Burney, our Chief Financial Officer. You should have a copy of the second quarter financial results that were released this morning, and if not, you can find them on our website at Astronics.com. Let me mention 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 our 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 to substitute for results in accordance with GAAP. We have provided reconciliations of non-GAAP financial measures with comparable GAAP measures in the tables that accompany today's release. With that, I will turn it over to Pete to begin. Peter?

Thank you, Debbie, and good morning, everybody. Our agenda this morning is to talk through a summary of our second quarter. which frankly was a little bit of a mixed quarter. On the one hand, sales were a little bit lighter than we expected, as was the income statement. On the other hand, our core aerospace markets continue to recover nicely, and we believe we'll be setting up a better second half to 2021. I'll do that summary to begin with, then I'm going to turn it over to Dave for a more specific discussion on our income statement and balance sheet, some special items that are happening or are expected to happen in the near future. And we're also going to be reinstituting some revenue guidance more than we have been since the pandemic took hold. It's a little bit of a risky item, but we're here in August. We've well into the second half already. Much of the business that we plan to execute in the second half is in work, so it seems a reasonable time to do such a thing. And then, of course, we'll close with questions and answers. So the second quarter, revenue was, frankly, similar to previous quarters we've had recently at $111 million. We've been bouncing around a band from, say, $105 to $115 since the third quarter of last year. And as one might expect, we are not set up to be profitable at that revenue range. Our goal has been and continues to be since the pandemic took hold to execute on our responsibilities in terms of development programs that we think are important to our future and stay cash positive and financially healthy waiting for the markets to recover. Frankly, when the pandemic took hold in late first quarter, early second quarter of last year, few of us would have expected that we would be sitting here a year later waiting to see strong recovery. But that's how long it's taken. And even now, as all of you know, there are some clouds on the horizon for the aerospace industry, especially with the Delta variant that we're all dealing with. Our first quarter also was a little bit lighter than we expected, in part because of supply chain problems, which have become a familiar refrain not only in our industry but many industries these days. It's a little hard to estimate, and it's not really an auditable number, but we feel that our second quarter, absent any supply chain headaches, would have been 5 million to 10 million higher in terms of revenue, which would have made our income statement look quite a bit different than it does. Still, in many respects, we actually feel like we're making quite a bit of progress, and we think that things are coming around and starting to recover pretty strongly. Even with our second quarter results, when compared to the first quarter, we feel like we're on a pretty positive trend. And both Dave and I feel like the first quarter is a more relevant comparator actually than the year ago quarter because the year ago quarter when the pandemic was taking hold was full of chaos all around the world. Compared to the first quarter, revenue was up 5%. Our gap net income loss was reduced pretty substantially. Dave will talk through those numbers. Our adjusted EBITDA went from a slight loss to a slight profit and cash from operations improved from a negative 7 million to a positive 4.5 million. So we feel like we made progress even on a reduced revenue level. But the best news of the quarter is that our aerospace markets continue to show signs of recovery relative to where they were earlier in the pandemic. on a global basis or a macro basis, business jet and GA orders have been very strong for major OEMs. I won't repeat it, but you've probably seen book the bills in the industry for our OEM customers of, in some cases, 1.5 up to two or even higher. And narrow body transport activity has been very strong. with increasing utilization, especially in the U.S. and China, but also in other places around the world, and plans to increase production rates both in Seattle and in Toulouse. Military aircraft, a third part of our aerospace business, has been pretty consistent throughout the pandemic and remains so. The strength in the market has led to pretty solid improvement in our aerospace bookings. Our aerospace bookings in the second quarter were 118 million, which was a book to bill of 1.32. 1.32 is normally something we would be jumping for joy about. It continues a string of steady improvement in bookings on a quarterly basis since the pandemic took hold. Going back to the second quarter of last year, we hit a low point of 43 million. And since then, our quarterly totals have been, we went from 43 to 65 to 74 to 100 and now to 118. So we're pleased with that trajectory, keeping in mind, of course, that in 2019, before the pandemic took hold, we were running typically in the $175 million quarterly booking range. So even though $118 million is a solid book to build. It's still a ways away from where we were pre-pandemic. And given that historically a significant part of our business has been wide-body related and wide-body continues to be very weak in terms of utilization and flights and production rates, It's unclear at this point how long it's going to take to get back to that level. It's probably reasonable to assume that 175 million quarterly aerospace bookings is going to be a challenge until we see some wide body recovery. And again, the Delta variant has pushed back recovery that we thought was going to be taking place right about now, actually. Moving away from aerospace towards test, our test bookings performance hit a real soft spot in the second quarter. $8 million, which is a real drop off compared to the $24 million average that we've had for the previous four quarters. Our plan for the quarter wasn't $8 million, it was actually in excess of $20 million. We blame COVID, frankly, for a lot of the delay and not necessarily for competitive losses. There's a handful of programs that we are pursuing, we're still pursuing. They've been delayed. We feel because of COVID, we can't point to a competitive loss that brought us from our expectation of over $20 million down to $8 million for the quarter. So That being the case, we would hope for and expect a rebound in bookings for our test business in the current quarter and in the fourth quarter of this year. Taken together, aerospace and test consolidated bookings for the quarter were $126 million. That's a book to bill of $1.14, which we're still pretty pleased with, leaving us with a backlog at the end of the second quarter of I'll jump straight to our expectations before turning it over to Dave of what we expect to happen in the third quarter and the fourth quarter, and that is we're predicting revenues in the $115 to $120 million range for both of those quarters. We expect the fourth quarter to be slightly higher than the third quarter based on schedule. And we believe that that kind of revenue performance, given the way the company's set up right now, will get us in the range of break even on our income statement and solidly positive on an adjusted EBITDA basis. There are risks. The major one that I already referenced is there are supply chain challenges. These are things that everybody's wrestling with these days. It makes running a business a little bit unpredictable. Our sense is that things aren't getting much worse at the moment, but we don't see them getting a whole lot better either. So that's a complicating factor, and we'll have to see how things work out in the next, you know, not just two quarters, but frankly probably a little bit longer as the world kind of gets back to some level of normalcy. Also, our revenue projection for the third and fourth quarter is dependent on some level of book and ship business, quick orders that come in and go out that are somewhat unexpected, and there's usually a regular flow to them. Those orders had largely dried up when the pandemic took hold, which made earlier predictions much more difficult. They're starting to come back, and we're assuming continued progress in a book and ship business. So we have a healthy backlog. We're getting book and ship orders. Supply chain is a risk. But when you balance it all out, we think 115 to 120 is where we're going to be. Said another way, though, if we could wave a magic wand and solve supply chain, we would, we think, comfortably be above 120 on average. So we are building in some level of conservatism there in those numbers, hopefully enough. With that, I'll turn it over to Dave.