Astronics Corporation

Greetings. Welcome to the Astronics Corporation fourth quarter fiscal year 2022 financial results. 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. Please note this conference is being recorded. I will now turn the conference over to your host, Greg Mahalik, and Festive Relations, you may begin.

Yeah, thank you, and good afternoon, everyone. We certainly appreciate your time today and your interest in Astronics. On the call here with me are Pete Gunderman, our Chairman, President, and Chief Executive Officer, and Dave Burney, our Chief Financial Officer. Today, we have a copy of our fourth quarter and full year 2022 financial results, which we released just after the market closed today. If you do not have the release, you can find it at our website, Astronics.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 can cause actual results that differ materially from what is stated here today. These risks, uncertainties, and other factors are provided in the earnings release and with other documents filed with the Securities and Exchange Commission. You can find those documents 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 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 again. Pete?

Thanks, Craig, and good afternoon, everybody. Thanks for tuning in for our fourth quarter conference call. As usual, or as is often the case, I've tried to simplify the headlines for the quarter and the things that I would broadly categorize as good news, things that I think will be well received by our investor base and some other things that are less good, maybe bad challenges. that we want to also give equal time to. And we will kind of close with turning our attention away from 2022 and turning towards 2023 and talking about what we expect to happen in the current year and how we think it's going to play out, recognizing that it's pretty early and a lot can happen. So the good news headlines, strong demand continues as evidenced by our bookings, 182 million And bookings is a very solid performance, our second highest since COVID came in, and a very good close for the year. We'll talk in detail about bookings and how that's translated into a record backlog and how that sets us up for a solid opening frame for 2023. We'll also talk about some reasons why we think that strong bookings level is very likely to continue based on how our market is evolving and how some of our programs are playing out. Second positive good news headline is that the revenue ramp that we've been looking for, we believe has begun. We have since COVID struck, been stuck in a quarterly revenue band of about 105 to 130 million and just seem to have a really hard time getting beyond that level until the fourth quarter. 159 million, frankly, was higher than we thought we would be as we started the quarter. We think it's a positive indicator. Again, as we head into 2023 and it gives us more confidence that our supply chain is pulling out of the real funk that it was in for most of the second half of 2021 and the first half or two-thirds of 2022. Not to say it's perfect, but we think it's getting better, not getting worse. Third good news headline is that we got our refinance completed. That was technically a January event, not a fourth quarter event, but there was a lot happening behind the scenes in the fourth quarter to bring that about, and we want to talk that over in adequate detail when we get to it. If I flip over to the other side of the coin, kind of the bad news things that you might pick up on or might be concerned about. Margins were under pressure, primarily due to inflation that we've incurred and some special charges that we have paid to compensate for supply chain snafus. That was apparent if you look at our cost structure or margins for the quarter, Dave will talk through that in some detail. And also during the quarter, it became apparent that a couple of programs that we think overall long-term are gonna be very positive contributors to our success are gonna be delayed over what we thought they would be. I'm talking specifically about a major test program that we've talked about before for the Army of 4549 to get called. It's a radio test program. And Flora, good news, bad news. Good news is that we're on the Bell team and Bell was selected by Army for the US Army for that program. Bad news is, as everybody probably knows, it's under protest. And that means that we're kind of at a standing stop, whereas we were hoping by now to be underway. We'll turn our attention at the end of 2023 preview. We are maintaining earlier guidance of 640 to 680 million. That's a big step up from 2022, we realize, but we believe we have some pretty solid reasons to think that that's achievable. Supply chain, of course, will be critical. And we'll tell you what we know about our supply chain, but it's early. We think that $640 to $680 million range has upside potential and downside risk, depending on how the supply chain performs as we get into the first half of 2023. So taking those topics in the range I just discussed, demand continues to be very strong. Fourth quarter bookings of $182 million, as I mentioned, second highest booking result since COVID only behind the previous quarter, the third quarter of 2022. Bookings for all of 2022 were 690 million. That's a book to bill of 1.29 for the year and sets us up with a record backlog of 571 million as we began 2023. You might be interested to know that our previous record backlog pre-COVID was $416 million in late 2018. That was a year when we did about $800 million in revenue. So $416 million was our previous high. Today we're at $571 million, or as we entered the first quarter, we were at $571 million. It's a big step up. Of that $571 million, $451 million is scheduled for delivery in 2023. Given the range we talked about for 2023, that leaves a couple hundred million of what we might call book and ship over the course of the year. In the normal course, that's a pretty achievable number. That's pretty low. Our supply chain gives us reason to be a little bit cautious about it's one thing to get the order, it's another thing to turn around and ship it. But 200 million over the course of 12 months, book and ship is pretty modest compared to what we've been used to. We expect to see a strong demand continue for a couple of reasons. Our recovery so far has largely been based on the narrow body regional market for the commercial transport industry. But now it appears wide body long haul is coming back pretty strongly. Pre-COVID, we were approximately 50-50 narrow body, wide body. Wide bodies have spent most of COVID parked in the desert. Narrow bodies are where the action has been as regional travel barriers have come down. But now with wide body coming back, we have reason to believe that we're going to see another kind of source of strength from demand in the market. and we're looking forward to that you probably read the headlines they're all over the place airlines are pulling wide-body airplanes out of storage and pressing them back in the service that uh not too long ago most experts in the industry were predicting would never fly again a380s a340s even some 747s but Demand has come back strong enough that airlines are taking the expense of resurrecting these airplanes, and that's good for us. Airplanes flying is good for us. Also along the way, production rates for the prominent wide-body airplanes today, specifically 787 at Boeing and A350, they're talking about upward revisions to plans there. Now there are challenges, there are capacity issues to come across. But I guess my point is that as we look at what's been driving our demand, it's primarily been narrow body. Now we think wide bodies and we've seen this happening over the last few quarters. We think wide body is going to be more and more of a contributor as we go forward. And that's good for a company like us. Also, along these lines, the opening up of China from travel restrictions is a very positive sign. Geographically, the recovery in the commercial airline industry has been driven by the US and by Europe. Asia has lagged. China is obviously a very popular location in Asia. It's hard for the industry worldwide to recover without China recovering and China opening up to less strenuous travel restrictions as they did in early December, we think it's going to have a very positive impact on our industry overall. The second issue I wanted to call attention to, reason why we think demand is going to continue to be pretty strong, is that while we have talked about a number of pretty major program wins over the last year, those program wins are not really reflected in our booking level today. We think these programs collectively are going to be worth hundreds of millions of dollars. But today, if I were to add them up in backlog, they're probably less than 20 million cumulative. And I'm talking about programs that we've announced, Southwest Wind that we announced probably, boy, a year and a half ago now, an antenna program that we're doing with Safran, the 4549T program, some activity that we have going in the electric airplane market, and also FLARA. I guess we haven't talked as a conference call since the Bell decision came down. I think most people who follow our company know this, but we are on the Bell team. We're doing Most of the electrical system, right after generation to end-use system, and of course, assuming the protest doesn't disrupt things, we expect this program will be a real significant program, hard to overstate its significance for our company over the long haul. We're under a little bit of a gag order. I can't say much more than that. And we certainly don't know what the inner workings are of the protests that's going on currently. But that is one that we think is a major driver. And again, there are a couple other programs that we're not at liberty to talk about that are similarly significant. And all of these, we expect to start contributing to bookings and to demand in the coming quarters. But as of today, Whereas at the end of the fourth quarter, I think it was less than 20 million, all of these things cumulatively. So I want to switch from bookings and demand to the revenue ramp, as I mentioned. Since COVID hit, we've really been stuck in a band of 105 to 130 million in bookings or in, excuse me, in quarterly revenue, even though bookings have been much higher, our quarter four revenue of 159 million is a significant step up towards where we need to be in 2023 to meet our goals and to satisfy customer demand. The limiting factor through 2022 has been first supply chain and second people, much more of a supply chain issue than a people issue. And when all's said and done, we're going to look back on 2022 as a year of really strong demand and really disrupted supply chains where we had 20% growth. And usually, we would expect 20% growth to be a cause for celebration. But frankly, we were aiming a lot higher when the year started. We saw the demand coming back. Our original plans for 2022 anticipated growth well beyond 20%. We ended up at 20% because we were constrained by supply chains. And while our supply chain is not perfect, as I mentioned earlier, we do feel it is improving. A year ago, we saw regular negative surprise disruptions coming across the line. there are more and more positive surprises and fewer and fewer negative surprises. Hiccups still happen, but they're fewer, and we're better at responding to them, frankly. A year ago, we weren't used to dealing with the level of detail and climbing down our supply chain to our suppliers' suppliers as well as as effectively as we can and do today. So while the hiccups happen, There are fewer and fewer, and we're better and better at responding to them. Our refi, refinance, it was a complicated and drawn-out process. We finally completed it on January 19th, as most of you undoubtedly know. It's a deal that we feel is adequate to get us through the rest of the COVID recovery. And frankly, it reflects the reality of our macroeconomic environment and the position that the company is in at this point in the cycle. We need to perform, but if we can do what we think we can do, it should be an adequate facility for us for the time being. And Dave will cover some of those details in just a minute. The bad news headlines, two of them I talked about margins under pressure. We had elevated input costs and those costs are going to take some time to sort out. We have portions of our business where we can react pretty quickly. The order cycles are short. Frankly, a lot of the strong bookings that we've been taking are very helpful because we've been able to work in pricing that reflects the current cost structure. It's the longer term, older contracts that in many cases tend to cause us problems. We also tend to run into troubles when supply chain has a hiccup and we have to make what we call spot buys or pay expedite fees. Those activities are getting fewer and fewer. They're winding down and we expect them to continue to wind down, but they were a pretty major source of margin pressure or erosion in the fourth quarter. As we move through 2023, we expect that position to improve. A couple of program delays that I mentioned earlier, 45492, the Army Radio Test Program. As a reminder, we were identified or named back in August as the winner of a technical evaluation that the Army ran between a product we provided and those of a couple of competitors. The next step at that point was to negotiate and develop a sole source production contract or a directed procurement going forward, we expected that directed procurement would be in place probably by now, if not by the end of the year. It's become apparent now that it's going to be much later than that. We're now thinking, as we understand the Army's processes, that this could last until the middle of the year or even a little bit later. uh, before we get under contract and before that program starts seriously contributing. And, uh, depending on long lead funding and a couple of other things that are to be determined, uh, it's, uh, it's unclear at this point when that program is going to contribute. We believe that that order will be somewhere in the neighborhood of 150 to a couple hundred million in revenue. We expect it will run over, uh, two to three years. And, uh, We're eager to get at it, but we just can't get going until the Army wants us to. The other program that is stretching out because of the protest is the FLARA program that I talked about earlier. We thought that we would be underway by now, and now it appears that the protest period will last at least through April 6th or 7th, I believe it is. And so we will not be under contract. We're basically done in the water at this point.