Astronics Corporation

Greetings. Welcome to the Astronics Corporation third quarter fiscal year 2022 financial results conference call. At this time, all participants are in the 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 and telephone keypad. Please note this conference is being recorded. I'll now turn the conference over to your host, Deborah Polowski. You may begin.

Thanks, Jamali, and good afternoon, everyone. We certainly appreciate your time today and your interest in ASTRONIX. On the call here with me are Pete Gunderman, our Chairman, President, and Chief Executive Officer, and Dave Bernie, our Chief Financial Officer. You should have a copy of our third quarter 2022 financial results, which we released just after the markets closed today. If you do not have the release, you can find it on our website at ASTRONIX.com. As you are aware, We may make some forward-looking statements during the formal discussion and the Q&A session of this conference call. 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 and with other documents filed with Securities and Exchange Commission. You can find those documents on our website or at sbc.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've provided reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release. So with that, let me turn it over to Pete to begin. Peter?

Thanks, Debbie, and good afternoon, everybody. Thank you for tuning in to our call. Our agenda, as usual, will be mostly focused on a discussion of the recent quarter, the third quarter of 2022, and we will close with some forward-looking predictions for both the fourth quarter and an initial look at 2023. I'll start, and then I'll pass it over to Dave, and then I will finish up again. So when I look at the third quarter, I mean, there's a, at its basic, at its most basic, there's a bad negative headline and there's a pretty good headline. The bad headline is that the revenue ramp that we expected to begin in the third quarter was delayed. We did not get the ramp that we anticipated. The good news is that demand during the quarter in terms of bookings continues to be really strong, which sets us up again for a step change that we think is underway in the fourth quarter here in terms of volume and will carry into 2023. So first let's talk about the delayed revenue ramp, the negative headline. In my view, the third quarter was essentially a misfire. It was like a false start and a race. we thought we would see revenue of about 150 million. Instead, we ended up at 131 million. That delay led to a reset of our second half expectations and was mostly driven by a combination of supply chain problems and program delays, about 50-50. It also had the effect of delaying the expected ramp from the third quarter into the current quarter the fourth quarter of 2022. so a little detail on supply chain problems and program delays the supply chain struggles are well documented everybody's experiencing them i don't plan to go into a whole lot of detail about them but from our perspective there are a couple of bright spots One is that when the supply chain problems became apparent in our economy, especially in our world of electronics, in the middle and late of second half of 2021, lead times stretched out dramatically. And we'll talk in a minute about how demand has fluctuated for us over the pandemic. But basically, when demand came back in the second half of 2021, we started ordering parts that typically would have lead times of 8 to 12, 14 weeks, and all of a sudden we're getting quotes back at 52 weeks, which served to retard our ability to handle the surge in demand. Well, 52 weeks has come and gone, and those parts are now starting to come in. If you look at our inventory levels, In the most recent quarter, you will see that we've had a little buildup of inventory. That obviously is bad news in terms of working capital, but it's good news in terms of getting the parts that we've been waiting for for about a year, and which will set us up for the increased level of shipments that we anticipate in the current quarter and next quarter and the quarter after that. The other thing is that we're maybe a little bit of a contrarian here, but our perspective is that while supply chain has been a major disruption to our business and to many other businesses over the last year and a half, we see signs of promise. We run a handful, 12 or 13 different operations, and we do pretty systematic reviews and follow-up with them. And one of my regular questions is, What's the supply chain look like? Is it getting better? Is it getting worse? And for the first time in many quarters here, the feedback, the sentiment is that it's not getting worse, maybe getting a little bit better. Not across the board. We're not out of the woods by any means, but it seems to have plateaued. And we are hopeful and optimistic that we're going to continue to see lead times come down. In some cases, pricing comes back to a more normal realm, and that's a fundamental kind of expectation, not that things are going to snap back to perfect in the coming quarters, but that they're not going to get any worse. We're optimistic about that. I also want to talk a little bit about program delays. We have experienced a number of award delays that we thought were going to drive our second half that now look like they're going to be delayed into 2023, maybe even in the late 2023. One example of that is the FLARA award, which I've talked about in previous calls, future long-range assault aircraft, the Army's planned replacement for the Black Hawk. We're teamed with bell on their uh version of that and bell is competing with a team led by sikorsky this is a program that most of the world expected to be awarded in kind of a may june july time frame then it flipped to october and here we are in november and maybe now it might happen by year end we If Bell wins this program, we expect to play a major role on their team, and it will be probably one of the, if not the largest, one of the largest programs that's ever come to our company. And it will require a significant amount of engineering and development work. And we originally, when this thing was supposed to be awarded in May, June, had a risk-reduced amount included in our program. kind of budget and forecast for the second half of 2022. Obviously that now at this point has slid out into 2023. Similarly, we made kind of a strange announcement on August 24th about a program called 4549T, which is a radio test down select that we won. from the US Army. The US Army operates like 20 different radio types in their arsenal, a total of over 600,000 radios, and they ran a technical performance-based competition between a number of suppliers, including us, to pick a platform to go forward with as their standard tester. We were selected as we hoped we would be, but we originally thought that this down select would happen early in the year, like in March or April, and then June, July, and then finally we were selected in August. But even after being selected, now we have the opportunity to negotiate basically a directed procurement contract with the Army, which will take some time and means that what we had expected would be a solid contributor for the second half of 2022 will slide into 2023 and beyond. It's a significant program and it's all preliminary. We don't know exactly how many and how many years this thing will go, but indications are that it'll be a significant test contract for us to the tune we think of somewhere between $150 and $200 million. So between supply chain and program delays that in some cases were material, we had to reset our second half expectations. The third quarter also included some atypical costs, $4.6 million. Dave will talk about these in some more detail, but we exited or are exiting a long-term lease to building, which required some departure costs, a customer accommodation, and a legal settlement, some of which we expect will be reimbursed in the fourth quarter. The accounting rules say we take the cost in the third quarter, and if we get reimbursed, that will happen in the fourth quarter. And finally, of course, in the third quarter, like many companies or all companies, we're dealing with the effects of inflation on our production inputs. We are heartened by the recent news that maybe the inflation expectations are softening a little bit going forward. We think over time we'll be able to work this out like everybody else. Spot buys will come down. Pricing opportunities will go up. to match the increase in cost, but it definitely had a negative impact on pricing or on margins in the third quarter. So all this results in margin pressure. The lower volume, the elevated input cost, the atypical expenses, we ended up at the end of the day with an adjusted EBITDA of a negative 0.6%. The positive headline, and it's a significant headline, was continued strong demand in the market for our products. We had third quarter bookings of 184 million. Again, against shipments of 131. That's a book to bill of 1.4. And almost back to pre-pandemic levels. Pre-pandemic, the way the company is structured and was structured then, we would expect to book in most quarters somewhere between 190 and 200 million. That was the trajectory we were on. To come into 184, and if you look at the chart on the last page of our press release, you'll see three out of the last four quarters were right around 180 million. In fact, for the last four quarters, we had bookings of 685 million. against shipments of 493. So that's a book to build of 1.39. Leads us with another record backlog of 547 million, our highest ever. Before I turn it over to Dave, I wanted to define or we get these questions every once in a while about how we count bookings. How do we define a booking? And it's a pretty conservative measure that we use. Basically, we need a delivery order with a firm price and a firm delivery date before we call it a booking. So we exclude blanket orders or long-term agreements that don't have specific pricing negotiations, pricing determinations or delivery deadlines. So I use the 737 Max, as an example, it's one of our historically largest production programs coming back, thankfully. We put a certain amount of product on every airplane, and we have long-term agreements with Boeing for that book of business that stretches out for years. One way to count bookings would be to look at the term of the agreement, say the 2027 or 2025 or whatever the case may be, and look at their skyline production chart and multiply the two together and call that backlog. That's not how we do it. In that case, with 737 and Boeing, for example, they give us delivery orders on a regular basis, say each quarter for delivery for the next quarter. And that amount is which is, you know, defines exactly what the product is and what the pricing is and what the delivery deadlines are. That's what we include as a booking, nothing more. So we're pretty consistent with that and I think helps people understand what true demand is for our business without getting messed up with long-term agreements and long-term assumptions that might go along with it in some cases. So again, Great bookings for the third quarter, a continuation of great bookings for the last, really the last five quarters. And we think that sets us up for a good short-term future here going into wrapping up 2022 and going into 2023. At this point, I'll turn it over to Dave to go over some of the specifics of the third quarter. Thanks, Pete.