Astronics Corporation

Greetings and welcome to Astronics' second quarter 2022 financial results call. At this time, all participants are on 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, Craig Mahalik with Investor Relations. Thank you. You may begin. Excuse me.

Yeah, thank you. Good morning, everyone. We appreciate you joining us here today. On the call with me are Pete Gunderman, our Chairman, President, and CEO, and Dave Burney, our Chief Financial Officer. I'm sure they have a copy of our second quarter 2022 financial results, which we released earlier this morning. If not, you can find the release on our website at Astronix.com. As you are likely aware, 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 release, as well as with other documents filed with the Securities and Exchange Commission. You can find the documents on our website or at sec.gov. During today's call, we'll also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance, 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-GAAP measures with comparable GAAP measures in the tables that accompany today's release. With that, let me turn it over to Pete to begin. Pete?

Thanks, Craig, and good morning, everybody. As in most quarters, there are some good things to think about or good things that happened in the second quarter, and there are some things that are a little bit more concerning or maybe watch items going forward. I've organized my comments today to talk about the good things first and the watch items or bad things second. And then we'll go to Dave for some specifics. on a few topics and then we'll do questions and answers afterwards. So the positive things, when I look at the second quarter there are a couple things that really stand out to me. One is that demand continues to be pretty strong for our business and for our products. Second quarter bookings were 148 million. That's slightly off the pace of recent quarters but was still a book to bill of 1.15. leaving us with another record backlog of $494 million in all time high. This continues the trend over the last year. Over the last four quarters, we had bookings of 655 million against sales of 473. That's a book to bill of 1.38, very strong in our experience. The important thing to recognize about the bookings that we've experienced to date is that for the most part, it's really a groundswell of business kind of across the business as the aviation industry, particularly the commercial transport industry, comes back to life. There are no big blockbuster bookings that inflated those numbers. It's really much more of a groundswell of business across the company. Again, a book-to-bill of 1.38 over the last year. That being the case, in the second quarter, we did announce some major program wins, which we think are going to be real important for driving our volume in the near future, but again, did not contribute meaningfully to our bookings in the second quarter. turn into bookings in the current quarter or the fourth quarter or the beginning of next year. And those three awards in particular that we released news about involve In-Seat Power for Southwest Airlines, one of the world's most prominent airlines, obviously, and one that has never used our In-Seat Power product before. That's specifically for their 737 MAX aircraft, which they run a bunch of MAXs now, and they're going to take deliveries of quite a few more over the next year or two. We also announced a SATCOM hardware award with Safran, which is going to be primarily originally for Airbus aircraft, but will be extended around the world. We think this is going to be a meaningful contributor to our progress also, but again, did not meaningfully contribute to second quarter bookings. And finally, we were awarded the electrical distribution system for the Lilium aircraft, which is our first major eVTOL announcement. eVTOL is electric vertical takeoff and landing. There are a bunch of other acronyms that describe that kind of aircraft, but most of you are aware that there's a bit of a rush going on around the world with a number of companies developing electric aircraft. And it happens, as we've discussed before, that our electrical system design expertise is very applicable to this class of aircraft. And we expect to play a prominent role in it, recognizing that reasonable people can differ over the timing and magnitude of how that industry is going to take off. We're pleased to be on the Lilium team and we're running hot and heavy on that one and will continue to do so for the next year and a half, two years as they work towards certification. So demand is strong, has been strong, continues to be strong and it's starting to drive a ramp in sales volume and that ramp was beginning to show signs in the second quarter. We expect it to step forward and become more of a driving force in our results in the third quarter and fourth quarter as we close out 2022. Second quarter revenue of 129 million is really a step up from where we were for the previous four quarters when we averaged 114 million. So 114 million stepping up to 129 we think is an important indicator of where we're going and The second quarter was actually our highest volume since the pandemic took hold in the first quarter of 2020. And as I said, we expect the revenue ramp to accelerate in the second half of the year, the current quarter and the fourth quarter. We revised our full year guidance to be 550 to 580 million, the midpoint there, implies average quarterly volume in the second half of $160 million. It's going to wait a little bit towards the fourth quarter, third quarter being a little lighter, fourth quarter being a little heavier, but that's what we are thinking our average will be in the second half of the year. So when you look at it sequentially, we averaged $114 for the previous four quarters, $129 in the second quarter, And we're thinking we're going to average about 160 million in the second half here. So it's quite a ramp. It gets us also, if we're successful, within spitting distance of where we were before the pandemic struck, when we were routinely in the $175 to $200 million range. So if we can close the year being at or near 160 million on average, will be within line of sight of where we were pre-pandemic. There were some negative items, of course, and they are significant also. Nothing unique to our business, but more a sign of the macroeconomic situation that's playing out in many companies in our industry and around the world. Supply chain, in particular, continues to be a struggle, especially with electronics. but with other items also. We described it, I think, in past calls as a bit of a whack-a-mole kind of game where you think you have things under control and things pop up last minute that causes delays or missed shipments. We continue to see those kinds of pressures in the second quarter. We expect it's going to continue in the third quarter and fourth quarter. In the second quarter, compared to where we started out, we ended up deferring shipments or delaying shipments to the tune of about 5 or 6 million over the course of the quarter. We thought we might end up, or we were shooting for about 135 as the quarter began. We ended up at about 129. There is some reason for optimism. Most of our operations report that at least things are not getting worse. They've stabilized. and in some cases seem to be getting a little bit better. And that lines up with what a lot of people are reading in the press, particularly dropping demand from other sectors for things like electronic components might give reason for hope for our business where we're a little bit more of a niche player and we use some high reliability electronics, which are a little harder to get. But if the world in general relaxes a little bit in terms of demand, we expect that will trickle down to our type of business also. The supply chain struggles are also the major reason for our revised revenue guidance. We, up till now, have been talking about $550 to $600 million revenue range, top line range, we're taking 20 million off the high end of that range. We're keeping the low end, so our revised range is 550 to 580. That midpoint, if we're successful, will be 565, and if we were to hit that, that would represent about 27% growth over 2021. So again, we think that would be a strong step in the right direction going forward. Second item that's kind of on the negative side is that labor shortages still exist. The great resignation is how people refer to it typically. And we are not immune from these pressures. We're experiencing turnover, have experienced turnover like a lot of other companies and have had troubles attracting people more so than before the pandemic. The good news here is that we think pressure does seem to be lessening a little bit, that we're finding an easier time bringing people on board. People today are not our limiting factor in terms of deliveries. We do not expect them to be going forward. Supply chain will be a bigger struggle, we think, at least through the rest of this year. Finally, again, a major macroeconomic issue shouldn't be news to anybody in the call, but we do face some inflationary pressure on the inputs to our business, both material and labor. Some of these we expect to decline or reverse over time. We do experience some spot buys for special material where you have to go to secondary sources and pay some premiums to get parts in to make deliveries. That hurts margins, of course, but we think it's important to keep up with our customers when we can with their expectations. There also is a general sense of inflation, both with material and labor. We think some of the commodity prices will decline as shipping expenses, for example, straighten out and revert back to something a little bit more Normal around the world which we expect will happen over the next six months or next year. So six months to a year But regardless we are working to pass higher costs on as best we can a lot of our business is Tied up by long-term contracts. We're more limited there. It's going to be a slower recovery, but as Other parts of our business are more higher velocity orders and typically in lower volumes, but incrementally we have flexibility to increase pricing in those areas and we're doing so as aggressively as we can. All this results in a lot of margin pressure. from my perspective, the biggest issue that we think we can correct in the near term is getting our volume up, as I've already discussed. We have been intentionally maintaining a lot of capability across the business to execute on programs that our customers have entrusted to us. We don't want to change that, but we recognize that that puts pressure on our income statement. We need volume to increase to justify that organizational structure and cost that we carry across our business going forward. We think we're in good shape in this area, but we also need to deal with the elevated input cost, and we recognize that, and that's going to be a major focus of ours as we work through the rest of the year here. Sequentially, of course, if you look back to the first quarter or to the fourth quarter last year, You'll recognize we had AMJP proceeds then. We don't have them now. We also had earn-out income in both those quarters from a company or a product line sale that we did a couple years ago. We don't have that right now. So the second quarter results kind of stand on their own and compared to the fourth quarter and the first quarter look a little thin accordingly. A watch item, Dave will talk about this in more detail momentarily, but we did extend our bank facility for another three months. We announced that today. That's to allow us to work a new deal with our banks, which is something we've been working on for the last couple months. Like everything these days, it seems to take a little longer than you'd think, and we While we think we're pretty close, coming weeks we should be able to close up this new deal, we needed to do an extension to allow the time to get that to happen. So I think that closes my prepared remarks. Dave, why don't you add in what you'd like?