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spk06: Good afternoon and welcome to the Astronics Corporation second quarter fiscal year 2023 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Deborah Palowski, Investor Relations for Astronics. Please go ahead.
spk01: Thank you, Anthony, and good afternoon, everyone. We certainly appreciate your time today and your interest in astronomy. On the call here with me are Peter Gunderman, our Chairman, President, and CEO, and Dave Burney, our Chief Financial Officer. You should have a copy of our second quarter 2023 financial results, which just crossed the wires after the market closed today. If you do not have the release, you can find it on our website at 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 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. 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. We should not consider the presentation of this additional information in isolation or in the 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. So with that, let me turn it over to Pete to begin. Peter?
spk02: Thank you, Debbie, and good afternoon, everybody. Thank you for tuning in. We are here to talk about our second quarter and our prospects for the rest of the year, and in sum, We think our second quarter was a pretty strong step forward for our company, easily the best quarter we've had since COVID took over in early 2020. There are three prominent themes that are going to come up over and over again as we talk through our results. And you'll catch them, no doubt. I mean, one is that volume continues to ramp. We're recovering our production rates, and that has a lot to do with our supply chain, which is the second theme, our supply chain, while certainly not perfect, is getting quite a bit better as time goes on. And that's pretty evident in the volume that we've been able to produce. The third prominent theme is that demand for our products remains very strong. This gives us confidence of continued recovery as we move through the quarters, the near-term quarters in the future. Digging into the specifics, sales of 175 million were up 35% year-over-year and 11% sequentially. It continues a pretty strong pattern of recovery set out over the last four, five, six quarters. The last four in succession, saw revenues of $131 million, then $158 million, then $157 million, and now $174 million, $175. Our aerospace segment was the key driver of our results, with sales up 45% year over year to $158 million. Our test segment, by comparison, had a pretty difficult quarter. Sales were down 19%. year-over-year to $16.1 million. Jumping to the bottom line, we had a net loss of $12 million, but an adjusted EBITDA of $15.8 million, which was 9.1% of sales. Dave will talk through the major EBITDA adjustments in a moment, but it was a pretty clean quarter compared to many we have had recently, without any earnouts, AMJP grants, or et cetera. A tax line that jumps out was the strangest entry in the numbers and was that way the last quarter too, and it will be for the near future. Again, Dave will explain that briefly in a minute. All in all, we think an adjusted EBITDA of $15.8 million Nice improvement from a year ago when we had an adjusted EBITDA of 129,000 or just 1.6% of sales. On the demand side, bookings of 207 million is basically pre-pandemic level. I mean, that's where we were back in 2018, 2019. A book-to-bill of 1.19, even with relatively strong shipments. Once again, setting a new record backlog, this time of 611 million. Of the 611 million, 330 million is scheduled for second half shipments. We'll come back and discuss the second half in a minute, but that's a number worth hanging on to. Aerospace orders in our second quarter were particularly strong, again, at 189 million, a book to bill of 1.19. TEST also had decent bookings of $18.3 million with a book to bill of $1.14. There were four press releases of note that went out over the last quarter, and I wanted to hit each one kind of briefly to talk a little bit about where our business is coming from and to give a little bit of the breadth of our activities these days. Test had a big order from something called HHRTS. We've talked about this before. It's the Handheld Radio Test Sets program with the U.S. Marine Corps. It's a radio test program, an IDIQ program that we won earlier in the year that we think is going to be about a $40 million program over three or four years. The big... Delivery order that we received in the second quarter was for $10 million. There were some other smaller things that happened on HHRTS earlier on, but the $10 million is the first significant delivery order, which we are working on now. Another radio test program that we have talked about in the past, 4549T is for the U.S. Army. Those who have been following our company for a while may remember about a year ago, actually, we were named the winner of a technical competition for the U.S. Army for their next radio test platform. And we anticipated at that time a pretty prompt march into contract negotiations on a directed procurement to our company. Long story short, we're still waiting for that directed procurement But it is moving forward. And the reason I'm bringing it up here is that the architecture and the theory of operation between HHRTS and 4549T are complementary and the armed forces are recognizing that. The Army program is moving forward. We are of the opinion or the understanding that that contract should be awarded by year end at the latest. And that will be, if it happens that way, a very positive boost to our fourth quarter results. Second press release I'd like to briefly mention is something we came out with very recently. It had to do with electric aircraft, commonly called EVTOLs. We have one of our specialties is basically electrical power distribution and generation for small aircraft. And as most of you presumably know, there's a wide range of eVTOL aircraft under development right now. And we have developed a family of products or capabilities that can be employed by these OEMs developing these airplanes in any of a number of ways. And we had previously announced an arrangement with Lilium, a German company that is one of the leaders in the eVTOL movement. But we've also attracted attention from a number of other companies. We, in that press release, talked about 10 of them. And we put a contract or order value of approximately $20 million to these 10 customers. These are obviously not big orders today, but they are development orders, and they are getting our foot in the door, so to speak. And people can disagree or differ over the prospects for the electric aircraft market. We think it's interesting, and our approach is to develop commercially available, nearly off-the-shelf kinds of products that they can employ and that they need for the safe and certifiable operation of the aircraft. So we're pleased with that development. We think it's going to be an interesting market to watch, and we're excited to be a part of it. We also put a couple press releases out in early June. One was on the Airbus A220 passenger service units, or PSUs. That's one of our product specialties. If you sit in a commercial airplane, that unit above your head that contains a bunch of different things, a couple of probably reading lights, some air handling systems, some oxygen system, emergency oxygen system, hopefully you've not tried that one before, and some communication, usually a call button. That's a pretty major product for us, and this A220 award from Airbus is the first time we have done this kind of work on an Airbus airplane. So we're pretty excited about it. We think it's going to be a pretty significant program. If you've flown on an A220, you've probably noticed it. It's a different kind of airplane, has a different kind of feel, and it seems to be gathering pretty good success in the market. It is in production now. Our products are scheduled to be delivered to ramp into production late in 2024, about a year from now, or early 2025. Finally, we put a press release out about an in-seat power, next generation in-seat power system. This was a while ago. Specifically designed to deliver USB type A and type C 60 watt power for narrow body airplanes. This is a system that we developed primarily for our friends Southwest during the pandemic. And we were very tickled to win Southwest about a year ago. And since then, we have been marketing it to the world. We own the technology and we own the IP. And it's been very successful. The press release talked about 12 or more airlines committing to about 1,100 narrow-body airplanes with options for a couple hundred more. What we're really happy about is that we've taken a franchise that we kind of developed and grew up with in the wide-body world and transferred it over to a major, you know, competitive element into the narrow-body world. And there are a lot of narrow-body airplanes out there that are candidate systems, candidate aircraft for this product and for these systems. And all these products that I'm talking about here, HHRTS, the eVTOL systems, the A220 PSUs, and what's called the Ultralight G2 ISP in-seat power system, for narrow body airplanes, all of these were pretty much developed over the course of the pandemic. So I'm happy with how this worked out. You know, a lot of companies who got caught up in the pandemic, like us, had to make some decisions about where do you cut costs? Where do you keep investing? And we, in many cases, decided to keep investing in programs that we thought had exciting futures. all of these are examples of those decisions that have worked out well. So they're not really helping our income statement yet, but they are starting to show up prominently in our backlog, and I expect over the next months and years that these things will become major elements of our business base going forward. So enough from me for the moment. I'll turn it over to Dave to talk through some of the specifics of our income statement and balance sheet.
spk04: Okay. Thanks, Pete. Sales came in at the top end of our range, as we had some good supply chain cooperation in June that allowed for a really strong finish to the quarter. Our operating income for the quarter was $2.4 million, which was our first positive operating income since 2019, and a $4.8 million improvement compared with our first quarter of this year. $10.8 million improvement compared with last year's second quarter. The improvement was somewhat muted by high legal costs for the quarter, which were about $4.9 million, not including an adjustment that we had because of a lower interest rate that will be applied to the penalties that we've accrued for the German lawsuit. Driving the margin improvement was a 47 percent contribution margin on the incremental aerospace sales as compared with the sequential first quarter. It's highlighting that the top line growth is a key piece of our recovery. And we're seeing that the strong order levels over the past three quarters and the record backlog are translating into increased sales and improving margins. Test margins remain depressed as the segment continues to struggle with high costs relative to its revenue levels. To address this in the short term, on the first quarter earnings call, we announced a restructuring and headcount reduction that will begin to result in cost savings of about $1 million per quarter starting in Q3. Still, the cost structure is staffed in anticipation of a revenue growth that we expect will begin once the 4549T Army radio test program contract is awarded. And the Marine Corps HHRTS radio test program, which we recently received the first task order for that Pete mentioned, begins. SG&A continues to be high due to legal costs for the lawsuits we're involved with. Legal costs were $4.9 million in the quarter relating to those. And they were partially offset by a reduction in our legal reserve that I mentioned of 1.3 million relating to a slightly lower interest rate. Tax expense was 8.1 million for the quarter. As I've said for several quarters, this is not really representative of a normal tax rate or a cash tax rate. Because of our three-year cumulative pre-tax loss, the guidelines require us to record a valuation allowance for our deferred tax assets. creating a strange effective tax rate. We expect our full-year cash tax this year to be in the range of $68 million. That's 628, not 68. All of it is a result of new rules requiring R&D costs to be amortized over five years rather than deducted as incurred. This would normally create a deferred tax asset, reducing the effective tax rate, but because we take a valuation allowance against that asset, it creates this odd tax rate. There's been some discussion by Congress to defer or eliminate that particular part of the code, but so far, nothing has moved forward. Regarding debt and the balance sheet, as you can see from the balance sheet, liquidity remains tight as our investment in inventory continues to grow to support our growing backlog. Cash flow from the operation improved significantly from the first quarter, but still not where we need it to be or expect it to be. Cash used by operations during the second quarter was $2 million, which was a significant improvement from the first quarter. where cash used by operations was $19.2 million. Our income statement has improved significantly over the last few quarters driven by our sales growth. Unfortunately, despite seeing supply chain improvement, there remains some inefficiency and long lead items, long lead times resulting in higher inventory levels and stranded inventory that's waiting for the final pieces to complete. in order to ship the product. This, combined with 35% year-over-year growth, has increased our investment in inventory by $22.6 million this year, and about $9 million in the second quarter. The large sales increase in the second quarter, and specifically sales in the quarter being heavily weighted toward the last month of the quarter, caused an increase in receivables of $18 million. These inventory and receivable increases were partially offset by increases in payables and accrued expenses. We are forecasting that our inventory has peaked and expect our inventory levels to begin to drop as we move through the second half of the year. We continue to be compliant with our debt covenants and are forecasting continued compliance and positive cash flow for the remainder of the year. There weren't a whole lot turning to the reconciliation of net loss to adjusted EBITDA on page eight of the release. You can see it was a pretty clean quarter. Really the only two items I would say that were unusual were the high legal expenses of $4.9 million that were offset partially by the adjustment to the to the legal reserve relating to a lower interest rate based on a ruling in the German court, which lowered the legal costs by $1.3 million. So again, it was a solid adjusted EBITDA quarter for us at 15.8 million, which is a significant step up from where we were running last year at 2.1 million.
spk05: That's all I had, Pete.
spk02: okay looking forward uh we are holding our 2023 revenue forecast for now at 640 to 680 million dollars but we are very much focused on the high end of that range the 680 part we had first half sales of 331 million and we entered the second half with scheduled backlog of approximately 330 million, and these two together get us to 660, the midpoint of the range. Scheduled backlog for us means that we have a firm order, we have a firm delivery date, and we have high level of confidence in our supply chain in order to execute the program. If any of those things are untrue, we don't call it a scheduled backlog in the current period. It would go out into some future category. So 331 in the first half, 330 scheduled for the second half. And then on top of that, we expect in any period, but especially in any six-month period, a certain amount of pull-in or pop-up or book-and-ship, there are different names for it, orders that will add to the total, especially in the fourth quarter as time goes on. The sum of these changes the pull-ins or the pop-ups can be difficult to predict but a 20 million dollar net number over a six-month interval is pretty modest and we would consider it very achievable so we think that we are directionally going towards the high end of that range breaking the two quarters apart, we expect the third quarter to be relatively similar to the second quarter. It could be a little higher. It could be a little bit lower. But it's going to be in that neighborhood, we think. And the fourth quarter is the one that has the potential to be a step up or a step down. We don't have real foresight into what the net changes are going to be yet. And that's a large part of why we are leaving that range the way it is. Another reality is that because of supply chain inefficiencies that we've been talking about, it's getting better, but it's not perfect. We have developed a pattern where we ship a disproportionate amount of our product in the final days or final week of any particular quarter. And this last quarter, it was somewhere in the neighborhood of 20, somewhere in the neighborhood of like 20%. came in the last week. So that obviously puts it right down to the wire in terms of any kind of misstep right at the end can really change what our, you know, what our final number is relative to our forecast. We expect continued margin improvement going forward. Also, lower material input costs, primarily in a reduction of spot buys and special purchases. Because of the supply chains getting a little better, that's helping out. And also some of the price increases that we've been able to implement across the business in contracts that permit it is also starting to have a benefit. So some of the margin of they've talked about we think has room to run and it'll be a long-term project to get it implemented across the business but we are pretty pleased with how that's shaping up across our operations so with all this said we think the rest of 2023 will be an exciting time for the company with revenues approaching pre-pandemic levels finally and significant improvement on our income statements. So at this point, Anthony, if there are questions, we'd like to open up to those.
spk06: Okay. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your hands up before pressing the keys. To withdraw your question, please press star then 2.
spk05: At this time, we will pause momentarily to assemble our roster.
spk06: Our first question will come from John Tan-Wan Tang with CJS Securities. You may now go ahead.
spk07: Hi, good afternoon, guys. Thanks for taking my questions. Peter or Dave, at the high end of the range, that's $175 million in revenue, which is similar to what you did in Q2. That doesn't give you the benefit of volume leverage to drive margins. So I'm wondering what kind of improvements are available just in the less spot buys, you know, the price increases that you're talking about. Is volume actually going down as prices are increasing?
spk04: Yeah, there's a couple things that will start rolling in. The spot buys are expected to come down. They were somewhere between $1 and $2 million for the quarter. Historically, they've been running about $3 million. Ultimately, they'll continue to fade away. There'll be new contracts, new purchase orders that will have higher margins on them as we've priced in the inflation over the last year as we've entered into new agreements on that. And so there is some leverage, and I think that the, we'll see some continued improvement. The legal costs will come and go depending on what's going on in the various court situations. So I think that's likely to drop a little bit over the next couple quarters, depending on what's going on there. And, you know, I think we're, you know, at the top end, I think we're being conservative here. We have some programs that are in the pipeline that we're hoping will increase, get us up to that top end. And I think we're hesitant with the supply chain the way it is right now to extend out over our skis on that.
spk05: So I think that's my take on it. Fair enough.
spk07: And then just on the bookings, how should we think of the pipeline of design activity and ongoing book and ship activity that you're seeing today? You know, is that kind of 200 plus million order runway sustainable as you look at the ongoing air recovery, or are there going to be fits and starts and a little bit of lumpiness as you go forward?
spk02: It's a very good question, and it's something that we all need to keep our eye on. If you're You look at that table on the last page of our press release, not only just the four quarters, but the trend that has existed really since the pandemic took hold as evident by the bar chart on the bottom of the page. I mean, it's been a pretty, I mean, it jumps around a little bit, but you can't miss the general direction of it. And, you know, we have won a number of pretty significant programs, And I just talked through a handful of them and none of those are really seriously reflected in our backlog at this point. So, and there are others, you know, like that out there. So, you know, our ambition is to exceed where we were pre-pandemic, but in order to get there, we have to get to the pre-pandemic level. And this quarter, I think from a booking standpoint felt really good because we We did $773 million in 2019, and obviously $200 million, if we could annualize that, puts us above that rate. And if we do that, then shipments will follow. So we talk about bookings, I think, more than most companies do. For us, we think bookings are a real good leading indicator for where the business is going, and that's why we draw so much attention to it, both internally and when we're talking to the markets.
spk07: Got it. And then last one for me, just where do you think cash flow can be in the coming quarters? It seems like it's been tighter than expected over the last two. I mean, is there any indication that it will get better than that, you know, from what you're seeing today?
spk05: Yeah, that's what the plan is.
spk04: It's been tight for the past two quarters. You know, we saw a pretty big buildup in our working capital in the second quarter between the inventory and receivables. So we'll, you know, those receivables will convert to cash pretty quick. The one that we're having the hardest time getting our hands around is the inventory at this point. But we are internally forecasting to be cash flow positive for the balance of the year.
spk05: Okay, great. I'll jump back in queue. Thank you. Our next question will come from Sam Strelseker with Cura Securities.
spk06: You may now go ahead.
spk03: Hey, good evening, guys. I'm on Vora. I'm Mike Trimoli tonight. Appreciate you taking the questions. To begin, I was curious, as you guys are kind of returning on the aerospace segment to pre-pandemic levels and prior peak, how should we think about margins going forward? Kind of the same as you were getting in the past at this level, stronger, weaker?
spk05: they're going to start out being probably, I mean, it depends what period you're looking at.
spk03: I'm thinking on like a go-forward basis, once you, you know, kind of, once you get back to those revenue levels, like what can we expect in terms of margins from pre-pandemic?
spk04: Yeah, I think, you know, we should be able to, I don't see any reason why we can't get back up to our pre-pandemic margins. You know, we need the new program, the new programs that we're winning to and pricing at higher margins to kick in here, which will happen as we move through next year and the second half of this year. But, yeah, the mix isn't a whole lot different. You know, and there's no significant fundamental change there. You know, we're lagging. in terms of getting our, flowing the increased costs from the past year on wages and materials through into our new contracts. But that's going to, that'll catch up as we move through next year.
spk05: Great.
spk03: And then kind of going along the line of, the inventory and supply chain. Where exactly are you guys seeing the bigger issues on the supply chain in terms of getting parts in? Is it extended lead times? And is there any particular area that's worse than others that might be impacting, you know, guidance for the year?
spk02: Well, a lot of what we do is electronics related. So I think, you know, our answer to that question would definitely include the general electronics you know, difficulties that the world's seen over the last couple of years. We have, in some cases, some extended supply chains that move into Asia and all parts of Asia. And so we've dealt with a little bit of that also. And, you know, it's not uncommon for some of our more complex products to have a couple hundred components in them. So all you need is one to be late and, you know, the other 199 sit there on the shelf until you have everything you need. So it's getting better in that the general level of responsiveness and lead time has come down. The surprises we see today are decidedly positive compared to where they were certainly, you know, a year ago or a year and a half, two years ago where they were decidedly negative. All surprises seem to be negative. So I think we're making progress on that, but it still is clumsy and it still is a situation where, you know, our customers want to be able to place orders and get parts in 20 weeks in many cases, but the components that go into those parts for us have 40 or 50 week lead times. So trying to balance the lead times that we face from our suppliers with the lead times that our customers are demanding, uh, put some risk in the system. And that's part of what we're dealing with also. Again, we think it's all getting better. And we think, I think, in terms of inventory management, most parts of our business are doing a better job, but we got to get more consistent across the entire company. So that is a major focus, all hands on deck. And we got to do a better job there.
spk03: Great. If I could just speak in one more. What's the update on the Laura program?
spk02: Anything there? There is activity. I'm not at liberty to discuss it in this context right now, but we are engaged, and I'm looking to make some public news about that shortly.
spk05: Understood entirely. All right. Thanks, guys. That's it for me. Again, if you have a question, please press star then one.
spk06: Our next question will be a follow-up from John Tan-Wan Tang with BJS Securities. You may now go ahead.
spk07: I was wondering if you could go into a little bit more detail on the legal expenses in the quarter. What were they for? Kind of what's the run rate they expect going forward and if there's going to be an end to them anytime soon?
spk05: Well, we have a couple of long-running issues
spk02: situations that we've been dealing with. The longest one has to do with our in-seat power product and electrical outlets, specifically against a German competitor, and that's been playing out in four countries over the last decade, really. I mean, the U.S., France, U.K., and Germany. The U.S. is done, and we won that case basically a long time ago. France, we think, is almost done. It could be done, depending on whether an appeals court wants to hear the other side's appeal. But either way, we think that one's pretty much done, and it's very much going in our direction. The UK and Germany are a little bit more complicated. The UK we lost, so there will be a penalty phase. We've accrued for what we think that's going to be. That's probably going to play out in 2024, 2025. And Germany has been going on forever. And that's also one that's probably going to play out in really late 2024 or 2025. So it has been active for the last few months. And that's why the bills are so high. We also have one going on in our test segment. That is basically... It started off as a patent dispute. We got the patent dismissed. It was brought against us. And then it's evolved into a copyright dispute. So from our way of thinking, the stakes are significantly reduced. But we had no choice but to pursue legal remedies to get there. And we're not done yet. That'll be something that Actually, it could shut down depending on court decisions by the end of this year. If not, it'll probably wrap up by the end of next year, I would say.
spk05: Got it. Thank you very much. Sure. Our next question will be a follow-up from Sam Strussaker with Trues Securities.
spk06: You may now go ahead.
spk03: Hey, guys. Thanks for taking the follow-up. Just I have two quick clarifying questions. In your prepared remarks, you mentioned the system for the EB tolls. Was that 10 million total or per potential customer?
spk02: Oh, no. It's 20 million total for the 10 customers. Got it. Okay. Okay.
spk03: And then within the, I think it was the USB-C product that you guys have across narrowbodies, do you have any rough dollar content per aircraft on that?
spk02: It's pretty highly variable, but I think the general rule of thumb that we have I mean, it depends on the configuration and some aircraft want to go, you know, just for certain classes of seats. But I would say it's pretty widely variable. A real inexpensive installation might be $70,000 a ship and expensive or a more normally priced one could be up around $130,000 or $140,000. Highly variable depending on how the airline wants to configure their cabins.
spk05: Okay, great. Got it. Thank you. This concludes our question and answer session.
spk06: I would like to turn the conference back over to Peter Gunderman for any closing remarks.
spk02: No closing remarks. Thank you for your attention. Again, we think the second quarter was a very significant step forward. We think we're set up for a good second half and close for the year, and we look forward to talking to you next time.
spk05: Have a good day. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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