Astronics Corporation

Greetings and welcome to the Astronics Corporation first quarter fiscal year 2025 financial results conference call. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Deborah Pulaski, Investor Relations for Astronics Corporation. Please go ahead, Deb.

Thanks, Kevin, and good afternoon, everyone. We certainly appreciate your time today and your interest in astronomy. On the call with me here, I have Pete Gunderman, our Chairman and President CEO, and Nancy Hedges, our Chief Financial Officer. You should have a copy of our first quarter results, which crossed the wires after the market closed today. And if you don't have that 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'll also discuss some non-GAAP measures, which we believe will be useful in evaluating our performance. We 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. With that, let me turn it over to Pete to begin. Peter?

Thank you, Debbie. Hello, everybody, and welcome to the call. I'm going to open the presentation with my comments on the first quarter, which we feel was a very strong start to the year. And Nancy will follow up with some specifics on our financials. Then we'll turn our attention to expectations going forward for the remainder of the year. As I said, the first quarter was a very strong start to 2025. Revenue of $206 million was at the high end of our range or just beyond and up 11% year over year. The revenue level drove solid improvement on margins with adjusted net income of $17 million up from $2 million last year. and adjusted EBITDA of $30.7 million up from $17.6 million last year. Adjusted EBITDA was about 15% of sales and similar to the fourth quarter from last year. On a rolling 12-month basis, adjusted EBITDA, as we calculate it, has been $110 million. This is up from $67 million for the previous 12-month period and $16 million for the 12-month period before that. So we've made some pretty solid progress. In addition, first quarter bookings were really strong at $280 million, which yields a book-to-bill of 1.36%. That bookings total was a new record for the company, which left us with a backlog at quarter end of 673 million, also a new all-time record. The bookings included a significant order of 57 million for the next phase of our FLARA development effort. We remain very engaged in that program and are doing whatever we can to help ensure its success. We expect total development Billings of approximately $90 million by the time it is all done, and we continue to believe that the program will be a significant driver for our company's long-term future. It's worth noting that even if one backs out the FLARA order from Q1 bookings, we still would have had a booked bill of $1.08, a strong result no matter how one looks at it. Apart from the FLERA order, our first quarter was fairly routine operationally, much like the fourth quarter of last year was. The improvement in our performance has not been driven by one-time events or significant adjustments, but rather the steady operational improvement across the business, including our supply chain primarily and also the increased efficiency of our workforce. together with certain operational improvements we have implemented in recent periods. The rather routine nature of this acceleration gives us confidence in the quality of our results and our expectations for the future. As for segments, our first quarter results were clearly driven by our aerospace segment, which is performing at a very high level. New records were set in the quarter for revenue, bookings, and backlog. Revenue of $191 million was up 17% year over year. Bookings of $268 million were the first time ever above $200 million. And backlog of $614 was up $66 million over our previous high. Margins are encouraging also with adjusted operating profit in the aerospace segment of 16.2%. Our test business, on the other hand, had a lackluster quarter and sales of only 14.6 million and an adjusted operating loss of 2.2 million. Results were hurt by an EAC adjustment on a long-term development contract of 1.9 million. Bookings were thin at 12 million, leaving backlog at 59 million. There is some good news in the test segment in that the cost changes we have recently implemented in business are showing results, even at the reduced volume. And our long-awaited radio test program for the U.S. Army remains on track for a volume start in the fourth quarter. But the goodness at test is undermined by the operational challenges we have seen and the result in the EAC growth. And we're doing a deep dive currently to understand the challenges. and strive for some improvements on a related note we have a few areas in our aero business that are also challenged and we are taking a close look at these situations also there are always weak spots that accompany our size And we are optimistic that the margin improvement we have seen overall has plenty more room to run if we can get some improvement out of the challenged parts of our business. We'll talk more on this topic generally in future calls. Now I'll turn it over to Nancy for some details on our financials in the first quarter.

Thanks, Pete. I'll now walk through the key drivers behind our consolidated Q1 performance and then touch on segment level results. As Pete noted, we had a strong start to fiscal 25 with continued momentum in our aerospace segment and solid execution across the organization. Gross margin expansion, improved EBITDA, and strong operating cash flow are clear signs that the operational and financial initiatives we implemented over the past year are delivering results. Beginning in Q1 of fiscal 25, we implemented a change in how research and development expenses are presented in our financial statements. R&D is now shown as a separate line item below gross profit on the income statement, whereas previously it was included within cost of goods sold. The prior period was recasted for comparability. This change enhances transparency and better aligns with common industry practices. That said, gross profit increased 28% year over year to $60.8 million, and gross margin expanded almost 390 basis points to 29.5%, up from 25.7% in the prior year quarter. This improvement reflects continued volume growth and favorable operating leverage in aerospace. The quarter also included a $1.9 million adjustment, as Pete mentioned, in our test segment related to the long-term contract. Operating income was $13.1 million for the quarter and includes a $6.2 million true-up to the reserve for the UK litigation matter, comprised of half a million in additional damages and $5.7 million in interest-related accruals. We also incurred $3 million in legal expenses tied to the ongoing litigation. Excluding these items, adjusted operating income was $22.6 million, or 11% of sales, compared with 5.5 million and 3% in the prior year. Adjusted EBITDA was $30.7 million, or 14.9% of sales, up from 9.5% last year, primarily reflecting improved profitability from the higher volume. Interest expense declined $2.6 million year over year due to our successful refinancing of the prior term loan and the ABL late last year. As we've discussed previously, the convertible bond financing was precautionary given the situation at the time with the potential outcome we could have realized with the UK damages award. Given the damages landing at just $12.5 million and interest expense of $5.7 million, we're comfortable with our available liquidity. There's still the issue of legal fee reimbursement that has not yet been settled on. The plaintiff is estimating $7.2 million, and given we believe we have valid grounds to dispute the position, we have not reserved for this amount. The lower interest rate on our convertible debt provides meaningful savings in addition to the liquidity cushion and will significantly reduce full-year interest expense. Gap earnings per share was 26 cents. Non-gap adjusted EPS for the quarter was $0.44, a substantial increase from $0.05 in the prior year period. Turning to our segment level results, our aerospace segment delivered record first quarter sales of $191.4 million, a 17% increase year over year. Commercial transport sales rose 13%, driven by continued strength in cabin power and in-flight entertainment and connectivity products. Military sales nearly doubled, up 95%. primarily due to our work on the FLARA program and increased demand for lighting and safety products. Operating profit in aerospace improved $10.2 million over the prior year. Adjusted segment operating profit was $31 million in the quarter, compared with $15.6 million a year ago. And on an adjusted basis, aerospace achieved 56% operating leverage on the higher volume. Adjusted operating margin improved by 660 basis points year-over-year to 16.2%. Turning to the test segment, sales were 14.6 million, down 6.9 million from Q1 of last year. We recorded an adjusted operating loss of $1.5 million, which reflects the $1.9 million adjustment stemming from those revised cost estimates to the long-term mass transit contract. The updated estimates lowered the percentage of work completed, which in turn reduced revenue recognized for the period. This project is now anticipated to be completed later in 2026. The test segment remains on track to achieve the $4 to $5 million in annual cost savings, with benefits expected to be more visible in the second half of the year. Bookings totaled $12 million in the quarter, driven by contributions across multiple product categories. While the second quarter will continue to be weak for this business, we continue to expect improvement in segment performance as the year progresses, underpinned by the next planned order under the radio test program for the Marines, as well as the start of production for the U.S. Army radio test program, which we still anticipate in Q4. Now turning to cash flow in the balance sheet, we generated $20.6 million in operating cash flow, up sharply from $2 million in Q1 of last year. This improvement was driven by stronger cash earnings and more efficient working capital management. This also marks our second consecutive quarter with operating cash flow in excess of $20 million. I should point out that we have a number of items that will impact cash from operations in the second quarter, including the damages award and the interest payment on the UK case. There's also the potential that the legal fee reimbursement issue associated with that case could get determined, and if not in our favor, paid in the second quarter. The second quarter cash from operations will also be impacted by significant income tax payments on the order of approximately $10 million, related to 24 and 25. As our liquidity has improved, we have returned to making quarterly estimated payments. Long-term debt net of cash at the quarter end was $134.2 million, a $16 million reduction from the prior quarter. We finished the quarter with $25.9 million in cash and approximately $168 million of availability under our ABL facility. The ABL availability was reduced by the reserve for the damages and interest amounts due under the UK litigation. All said, we ended the quarter with about $194 million in total liquidity. We're currently undrawn on our revolver and expect that cash from operations can fund the business in the near term. Our healthy balance sheet provides flexibility to consider value creating initiatives, including acquisitions and share repurchases. We can continue to advance on our financing structure as well. As profitability continues to improve, we will evaluate a transition to a cash flow based revolver, which is less restrictive and eliminates the liquidity block, all of which positions us well to settle the bonds in cash when the time comes. Capital expenditures in the quarter were $2.1 million. For the full year, we now expect CapEx to be in the range of $35 to $50 million. This elevated level reflects both a catch-up on previously deferred investments and new spending tied to facility consolidation, capacity expansion, and automation and efficiency efforts to support our long-term growth. The estimates on the facility build-out have come in higher than originally anticipated based on more detailed design specifications and current material costs. The team continues to get that amount down as much as possible. Overall, we're pleased with the strong start to the year and encouraged by the underlying performance trends in our core aerospace business. We remain focused on margin expansion, free cash flow generation, and consistently executing on continuous improvement. And with that, let me turn it back to Pete.

Now, for a look at the future, which is usually a straightforward discussion but not so much these days, Long story short, we are for now holding to our original top line forecast for 2025 of 820 to 860 million in revenue, representing a 6% increase on 2024 at the midpoint. However, at the same time, we feel there's both upside potential and downside risk to this forecast. On the positive side, Our strong first quarter results and recent booking success suggest there should be upside potential, and there very well may be. As we have discussed, there are many positive trends surrounding our industry and our business, and there are scenarios in which those positive trends could continue for the indefinite future. At the same time, there's reason to be cautious given the macroeconomic concerns that exist today due largely to the tariff regime that the administration in Washington is rolling out. The implications of the on-again, off-again nature of the rollout has caused major uncertainty, and many significant companies in a wide range of industries are pulling guidance altogether until the situation is clarified. As for us, we feel we are reasonably well positioned to deal with whatever tariffs become part of the final plan. We estimate our tariff obligation based on the structure currently in place and before mitigations is in the range of $10 to $20 million. This estimate could change obviously if when the tariff rates change and is also dependent on confirming indirect tariffs from our domestic suppliers who may import subcomponents on our behalf. In any event, we feel we have a full toolkit to deal with final tariffs, whatever they turn out to be. These include modifying our supply chain first and foremost to favor lower tariff countries, which we did plenty of the first time Trump was in office. Secondly, implementing pass-through pricing changes, which we expect will be very achievable in a number of our product lines. and the development of other tariff-reducing structures and practices, including duty drawback systems, free trade zones, and or local-for-local manufacturing arrangements in certain situations. We hope and expect the tariff situation will stabilize in the coming months, and as it does, we will implement a set of actions to minimize the effects for our company and for our customers, preserving value for them and margin for us. This will take some time, but we will maintain a disciplined and determined mindset to make sure we get the best answer. We'll certainly plan to be talking about this subject regularly on future calls with you all. And that concludes our prepared remarks, so I think we're ready for questions now.

Thank you. And I'll be conducting a question and answer session. If you'd like to be placed into question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to move your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. Once again, that's star 1 to be placed into question queue. One moment please while we poll for questions. Our first question today is coming from John Tanwantang from CJS Securities. Your line is now live.

Hi, this is Jeremy on for John. And I want to start by saying congrats on a strong start to the year. And thank you for taking the time. How much mitigation can you do this year to offset the $10 to $20 million tariff impact? And are you able to quantify what is direct and indirect tariff?

Sure. Well, first of all, it's really hard to quantify timing when we don't yet know exactly what the tariffs are going to be. It's a little frustrating. You want to have a plan to solve a situation, but we don't know what the situation is yet, so it's a little hard to act. Let me give you a little bit of a flavor. Last time Trump was in office, he implemented some tariffs that We were at that point very heavily involved with subcontract manufacturing in China in particular. And we moved a ton of that out, something like $40 million. We moved it to other countries, which at the time had lower tariff rates and tariffs. You know, before you can consider doing something similar now, you kind of have to take a guess as to what those tariffs are going to be in various countries around the world, or you have to kind of wait and see. So we don't have a timing plan at this point, and we need more surety as to what the tariff structure is going to be before we really pull the trigger on anything significant. But we're considering all kinds of alternatives. and playing scenarios back and forth to try to be up to speed and ready to go when the time comes. Your second part of your question about how much was direct and how much was indirect, it's roughly three quarters direct and one quarter indirect. I would also add though that we're relatively confident on what our direct tariff charges are given the current tariff rates. we're still doing quite a bit of digging to confirm what our indirect tariff obligations might be. Nancy, you want to add anything to that?

No, I think you summarized it well. I mean, our exposure to China is significantly less than it previously was, so I think there's still obviously a heavy tariff rate, so that will be impactful depending on where that lands. Yeah, I don't think I have anything else to add.

understood thank you for that and then you mentioned conducting reviews of each business so does that mean more restructuring or is it maybe a product and portfolio management type review or perhaps a prelude to something more strategic uh it could be any of those things we're not really limiting it and it's a little premature to talk about it until we get done with the reviews but

You know, one of the challenges in running a company like ours, from my perspective, you know, we take a number of initiatives to develop new products and develop new businesses. Sometimes those are quickly successful. Sometimes they're quickly not successful. And in those cases, you have to ask yourself, Is it worth investing in? Is it worth maintaining the effort? Or at some point, do you get impatient with it and try to change? And I've got examples in my head right now where we were probably more patient than we should have been, and other examples where our patience has paid off very handsomely. So it's not a science. It's a little bit of an art, and we're kind of going into these reviews in that direction. with that mindset. But these are not big chunks of our business. The test business is the biggest. The others are relatively small at this point in terms of product lines or initiatives. So, you know, should be less consequential. But the test business in particular, because it is its own segment, it kind of sticks out like a sore thumb.

So it gets a corresponding amount of attention.

Awesome. And if I could just squeak one more in here. Can you talk about your 737 expectations today versus last quarter, and if there's any change in how Boeing has communicated its production needs with you, especially given Spirit announcing furloughs and China refusing some deliveries?

Thank you. Sure. We have not heard of major changes from Boeing. I would remind listeners that We intend to build at a rate somewhat reduced from what they are building. We are, however, actually, if anything, pleased at the progress they seem to be making, which is perhaps a little bit more than what industry in general expected in terms of rate progression as we move through 2025. So we don't think that the wheels are coming off by any means. From what I understand, the China situation is is not consequential, at least for 2025. There are plenty of other people who will take their airplanes if they don't want them. So, you know, I think if anything, we're encouraged. I mean, the sooner they get up to 38 or, you know, anything similar to that, the sooner we will get an uptick also as they burn through our inventory.

Awesome.

Thank you, and congrats again on a great quarter.

Thank you.

Thank you. Next question is coming from Sam Strusaker from Truist Securities. Your line is now live.

Hi. Good evening, guys. I'm from Mike Tramoli. And, yeah, congrats on a nice quarter here. Thank you. Just to start off kind of building on the last question there, is there any way you guys could provide any more detail kind of on with the demand within the quarter, how much of that was an arrow you were sort of seeing from for the product that you sell to both, how much of the demand growth was kind of coming from airlines directly versus from the OEMs themselves? Any additional color there by chance?

Well, it's been pretty strong demand from both sides. We typically say that our commercial transport sales are roughly 50% line fit and 50% aftermarket with the caveat that There are some major customers of ours where it's kind of hard to know, actually, whether the product's ultimately going to end up line fit or end up aftermarket. But I guess I would tell you that we feel demand has been pretty consistently strong in both sides, and we're pretty comfortable with how it sits. tariff wars. You know, we think it's the table set for a pretty good trend here with Boeing ramping up production and Airbus also. And a reminder, though you didn't ask this specifically, Airbus is just as important to us in terms of line fit content as Boeing is. We don't put quite as much content on a typical Airbus airplane, but they build more of them at this point. So uh the two of them together are are very important and all the trends are going in the right direction both for narrow body and wide body and and generally up until you know the tariff war erupted demand from the uh from the airlines has remained strong also it hasn't uh cut off at this point our projects tend to be pretty long-term projects or at least longer term than one month so We haven't seen a significant change there, and I don't expect we will given, you know, all the wheels that are in motion for various modification programs. Obviously, you know, if macroeconomic issues result in, you know, a depressed economy, economy here in the North America or around the world that will change them sooner or later. But we're not seeing evidence of that at this point. We're certainly not modeling it in.

No, that makes great sense. I'm glad to hear as well. I guess kind of shifting here a little bit over to the test segment, that $1.9 million charge, do you guys feel like that's pretty contained at this point? Or I know you mentioned you're kind of still looking into that. I mean, what's Is there potential incremental risk there, or you feel pretty good about where that is after that?

We would have to say that there is potential risk there, and that's why we're doing this review. The programs in question have suffered from, you know, consistent misses, I would say, over the two years that we've been involved. Actually, it's longer than that, three or four years. So we have to kind of draw a conclusion to these things sooner than later for the company to get on its right foot. And one of the things we're going to look at is, you know, how comfortable are we with those estimates that have come out of that business on those programs?

Got it. Makes sense. And then just maybe one last one from me, if I could. It seems like the UK settlement is, for the most part, you know, kind of coming out as a relatively best case scenario for you guys. At this point, are you kind of thinking the worst case risk ceiling would be that $7.2 million? And, you know, that's worst case scenario, but that's probably the worst you could get. And after that, you know, whichever way that settlement goes, that would sort of be the conclusion to that part of the whole case in the UK? Okay.

Yes, yes and yes. The $7.2 million we think is worst case on legal fees. We think it will probably end up or could end up lighter than that. We're not going to know probably until we have another hearing, which is later in the second quarter here. And then that should be it for UK with the big, you know, asterisk that there's likely to be an appeal. We don't know that for sure. We expect that it will be an appeal. We're not really that nervous about an appeal at this point. Our lawyers seem to be pretty comfortable with the judgment that we received. So hopefully that's the end of it. But if there is an appeal, that will likely draw or stretch into the middle of 2026, I would guess, at this point. So it'll be a while before it gets resolved. But You know, to qualify the judgments in the UK to date, we're thrilled with the damages ruling. That could have been a whole lot worse based on what the plaintiffs were asking for. We're not so pleased with the interest charges, but given the damages ruling, we'll live with it. And the legal situation is a little bit frustrating, but that's how the rules work there. I mean, the legal expense situation, it's not something we're familiar with in the UK or in the US, but in the UK, you know, legal fees are debatable. So we'll see how that works out. But I think in a worst case, we're going to end up somewhere around that $20, $22, $23 million total.

Got it. Makes sense. Yeah. And As you said, I mean, even with those back then, it's still definitely better than what the worst case scenario could have been. And then the Germany side of that, I know, was like way far out. That's nothing on the horizon, right? Any potential reappeal over there? You mentioned that in the past.

Yeah, that's something that is pretty much on hold, waiting to see how the UK situation worked out, we suspect. And now that there's some clarity there, Germany may pick up. But again, we don't expect that to happen until 2026 either. So, you know, apart from this May hearing on legal fees, it should be a pretty quiet year for the rest of the year in 2025 on the legal front, we're hoping, until, you know, 2026 gets here, and then we'll start to fire it all up again.

Got it. Makes good sense. Thanks again for the time, and congrats again on the nice results. Thank you.

Thank you. We reach the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.

No real closing comments. Thank you for your time and attention, and keep your fingers crossed for successful tariff clarity for all of us sometime soon. Talk to you next quarter. Bye.

Thank you. That does conclude today's teleconference and webcast. We disconnect your line at this time, and have a wonderful day. We thank you for your participation today.