ATRO - NASDAQ

Good day, and welcome to the Astronics Corporation First Quarter 2024 Financial Results Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Debbie Pawlowski, Investor Relations for Astronics Corporation. Please go ahead.

Thank you, Megan, and good afternoon, everyone. We certainly appreciate your time today and your interest in Astronics. Joining me on the call here today are Pete Gundermann, our Chairman, President and CEO; and Dave Burney, our Chief Financial Officer. You should have a copy of our first quarter 2024 financial results, which 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 the Securities and Exchange Commission. You can find these documents on our website or at sec.gov. During today's call, we will also discuss some non-GAAP 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. So with that, let me turn it over to Pete to begin. Peter?

Thanks, Debbie, and good afternoon, everybody. Thanks for tuning in to the call. We feel our first quarter was a reasonably solid start to 2024, and we think it sets us up pretty well for what's going to be positive and exciting year. Sales of $185 million exceeded both our guidance and our internal forecast, frankly, up 18% year-over-year, down slightly from the fourth quarter where we recorded sales of $195 million, but the 2 together represent a near return to pre-pandemic revenue levels, which we're pretty excited about. The sales level has been enabled by positive trends that continue to propel us forward. We've talked about these before, and their widespread throughout industry. So I'm not going to spend a whole lot of time on them, but supply chain for us continues to improve. That was a major handicap over really the last 1.5 years, 2 years, but it's coming into line nicely now. It continues to get better. Also, our workforce churn, which was a big deal in 2021 and 2022 has moderated and efficiency of our team of employees has improved and continues to improve. Inflation has moderated despite recent travails with the Fred and price increases are taking hold and becoming more of a positive influence on our results. None of these things are done yet. They're all in work, but they're all continuing to improve. And in that sense, create significant tailwinds whereas they were headwinds not that long ago. The sales level approaching prepandemic level certainly helps our bottom line. Dave will talk through the puts and takes in a little bit. But from my perspective, adjusted EBITDA has improved and is improving in the first quarter up to 10.3% compared to 3.9% 1 year ago. That is improvement, and we expect more of it as we go through the year as our sales continue to climb, and we continue to get the tailwind benefits that I just talked about with respect to supply chain, workforce efficiency and pricing in particular. Also, now that we're back at pre-pandemic levels or pretty close to it, we have had an opportunity to review and reassert our promise that our business generally works with a 40% marginal contribution model. So as we continue to ramp over the next few quarters, that will be a useful measure to try to anticipate our performance. The segment analysis in the press release shows that our Aerospace segment had a pretty nice quarter, but our Test segment was pretty weak. Aerospace had 21% growth over a year ago and reported $12 million of operating profit, whereas test was up 2% and had an operating loss of $3.1 million. The evidence of that Aerospace -- our Aerospace segment is on a very good track, and we think has a really bright path ahead of it, but our test business needs to improve. To help bring that about, we executed a restructuring just a couple of weeks ago in late April that we think is going to save in the order of $4 million annually beginning in the third quarter. We also announced the closure of one of the smaller facilities in our Test segment and the planned consolidation over the next couple of months into our Orlando headquarters for our test business. The other thing that we continue to do in our test business, which I know people are going to be curious about is working on our radio test contract that we are trying to get in place with the U.S. Army. We're not there yet, but we're making really good progress. For those who don't know, we expect this to be a $200 million to $300 million program over the next few years. It's an IDIQ program. So the absolute timing is unknown. But there is good momentum at the moment. Some of the pre-award things that need to happen are happening, facility audits, financial audits, fact finding regarding pricing, so on and so forth. And we are, at this point, expecting that to happen in the coming months, perhaps late in the second quarter or early in the third quarter. Finally, with respect to the quarter, demand continues to be very strong. We had Q1 bookings of $205 million. That's a book-to-bill of 1.11. It was pretty strong in aero and lighter in test. And it's really driven by what I would refer to as a ground swell of demand. There was no one big thing or even a few big things that really drove that booking performance. It's rather a rising tide lift all ships. We're getting good demand across the business, across our product lines, and it's encouraging and sets us up, I think, for a really good remainder of 2024. We ended the quarter with a record backlog again of $612 million. And interestingly, 12 months of bookings rolling 12 months ended with the first quarter was totaled $772 million, which is very supportive of our 2024 guide, which remains at $760 million to $795 million. Digging into the guide a little bit, it's early, just 1 quarter into the year, and there are many moving parts. I want to talk through some of the moving parts, which we are sensitive to and some of the watch items, which will help dictate how our year is going to play out. One of the trends is just the overall strength of the business. that groundswell of demand is encouraging, and the evidence is it's going to continue the record backlog and strong bookings suggest upward opportunity for the year, enabled by continuous improvements in the supply chain and workforce and pricing, as I mentioned earlier. A watch item is the radio test program with the Army, -- we have it slated for somewhere in the neighborhood of $8 million to $10 million of impact on our 2024 revenue at this point. That assumes a midyear award. That contract will obviously be much bigger in 2025 and 2026, but we need to get it going in the middle of 2024 in order for that to happen. And even just for 2024 in the $8 million to $10 million impact on our business plan is substantial. And then, of course, there's the elephant in the room, and that's production rates at Boeing, our biggest customer and specifically with the MAX. I'm going to be a little transparent here with some of our thinking and some of our numbers. The MAX production rate is down in the first quarter by pretty well documented by all accounts. And Boeing has expressed that they want to increase it as quickly as possible. They have not been clear with the world or certainly with us as to what that ramp is going to look like. So lacking any other information, we are currently planning on about 35 ships a month for the MAX. Will they slow down suppliers, they might. It's unclear. We have not heard anything at this point. But for information sake Windset, we put about $95,000 of product on each 737 that goes down the production line that gets delivered. That line fit content if they were to reschedule us could be affected what would they reschedule us to? I mean it's kind of a wild guess at this point, nobody really knows. And we certainly, again, have no indication of anything. But a conservative number that I've seen in a number of places is 20 ship sets a month, that would be a reduction of what we have loaded of about 15%. So if you take 15 ships times $95,000 a ship times 8 months for the rest of the year, you're talking about a potential downward reduction in our volume of about $11.5 million of revenue. We put another amount of content on each airplane, which is generally BFE buyer furnished equipment. At this point, our general feeling is that, that's unlikely to be adjusted in a substantial way. So it's really the linefit equipment that could come into play here. So how would this affect our range -- our internal forecast right now is really at the high end of our revenue guidance range, so right around that $795 million level. So from my perspective, we've got upward potential with the general ground swell of demand. If you take a pessimistic perspective on the Army radio contract, you'd be down $10 million. If you took Boeing, you'd be down if the rate went down 20 MAXs a month for the rest of the year, that would be another $10 million to $11 million. So that would take our internal forecast down right to the middle of our range. So we think our range is reasonable and adequate at this point. As we get through the next couple of months, we'll know what the radio test contract looks like and what the timing is. We'll know what the production rate for MAX is likely to be for the rest of the year. And we'll now with that groundswell of demand, the strong bookings and the record backlogs continue from my perspective, there's very little downside risk to our forecast beyond the published range and there is upside potential depending on how the MAX shapes up and how the Army contract goes. We will undoubtedly clarify this and update it next time we talk or maybe even before, depending on how things go. I'd like to turn it over to Dave now to talk about some of the fine points.

Thanks, Pete. As Pete mentioned, we had a strong start to 2024 with 18% sales growth. This was driven by 21% growth in our Aerospace segment. Test Systems sales were up modestly, but up against the tough comp that I'll talk about in a second here. The growth in aerospace and the higher volume through our facilities translated into margin expansion year-over-year. However, this was muted by the results of our Test segment. Consolidated operating income increased $4 million to $1.7 million. I should point out that the 2023 first quarter benefited from a $5.8 million liability reversal of a deferred revenue liability that increased sales and margins in the Test segment and consolidation. Adjusting for this, the leverage achieved on the incremental sales was about 37% on a consolidated basis, a little lower than our expected 40% incremental margin, but this was due primarily to the resumption of bonus plans in 2024. The increase in SG&A year-over-year to $32.5 million is nonetheless at a rate similar to the fourth quarter of last year. There are not any unusual items in the mix, but a couple of things to point out. For year-over-year comparison, we've reinstated a couple of bonus programs, which have been suspended. For the first quarter of 2024, our bonus expense amounted to about $3.6 million, which is likely to continue versus no bonus expense in the first quarter of last year. For a sequential comparison, I should point out that the corporate expenses of $7.7 million includes roughly $1 million of annual equity compensation granted in the quarter primarily to directors, which won't repeat in the remaining quarters of this year as it vested in the first quarter. We incurred $3.7 million in litigation expenses in the quarter, which we expect are likely to continue through the year. And this was, for the most part, in the Aerospace segment this quarter. Aerospace sales were up 21% compared with the first quarter last year. This increase was primarily in the commercial transport market, which increased $27 million or about 29%, demonstrating the continued strong recovery in the market. Sales to the military aerospace market were up $3 million or 21% and sales to the general aviation market were relatively flat at about $20 million. I should point out that the decline in the other category in Aerospace was related to the efforts to walk away from noncore contract manufacturer. We're filling our facilities with more profitable aerospace business as that business and that facility rebounds. Aerospace operating margin improved to 7.4%, a 440 basis point expansion over last year that's driven by higher sales, some improved pricing and productivity gains. We expect our Aerospace segment operating income to improve as we move through the year. Higher volume will help as well continued improvements in productivity. Also, as new contracts roll on with improved pricing, we expect that to contribute to margin expansion as well. As I noted last quarter, the test segment continues to be challenged by underutilization and program mix. The Test business had prepared itself to meet the requirements of the very large U.S. Army radio test program that Pete mentioned. While it's progressing, the program has not yet started. In April, we restructured that business. Restructuring costs will be approximately $1 million, which is expected to translate into $4 million in annualized savings. Those savings will be split approximately 75% between cost of goods sold and 25% in SG&A. Total liquidity at the end of the quarter was $23 million. When we file our quarter-end paperwork next week with the lenders, we will free up another -- an additional $5 million in liquidity. Inventory turns are stepping up with the 2024 goal of getting our inventory turns up to the mid 3x per year and the 2025 goal of over 4x per year, which would get us back to where we were prior to the pandemic. The rate of growth of our inventory has slowed measurably even as we plan for increasing levels of shipments in the latter half of the year. Despite a slight increase to our inventory in Q1, that was primarily related to a specific new program, we are forecasting our inventory levels to drop over the course of the year. We generated $2 million in cash from operations and CapEx was just $1.6 million in the quarter. We are planning CapEx for the full year to be in the range of $17 million to $22 million, and we expect to pace that with improvements in cash generation. We paid down $5.9 million of debt during the quarter. We also executed a minor amendment to the credit agreement that established a $5 million accordion that we -- that had expired in January. Also, we updated covenants that had been established in January 2023 to reflect the actual results for the relevant trailing 12-month period as we move through the year. While we have approximately $8 million remaining at the ATM program, we do not plan on using it since our liquidity is improving as planned. As we're in a much better financial position now than in early 2023, -- we are reviewing our debt structure options with the objective to lower our interest rate and improve cash flow and reduce required debt amortisation payments. We expect to have this completed midyear. This concludes my remarks. And Pete, back to you.

Just want to talk a little bit about the second quarter, specifically the current quarter that we're in. We are issuing guidance for this quarter of $185 million to $195 million. That would be at the midpoint of marginal step-up from the first quarter. if you add the first quarter and the midpoint of the second quarter and subtracting the midpoint of the year range, you'd see that in the second half, we are planning for a step up of revenue to or above slightly $200 million a quarter. That would represent a complete return to pre-pandemic levels. We expect our income statement to strengthen considerably as we get into that neighborhood, and that is what we are very much looking forward to these days. So I think that ends our prepared remarks. Megan, maybe we open it up for questions at this point.

[Operator Instructions] The first question comes from Michael Ciarmoli with Truist.

Pete, just can you walk me through, I mean, obviously, the MAX is a total moving equation here. I don't expect anybody to understand what's really happening. But how is your BFE content not impacted there? I mean, I typically think of that as some of the airline customers outfitting the interiors and the finishing stalls, just maybe can you just give us give an assessment there? I mean, it sounds like it could be 120 planes or so coming out, but no BFE impact. How does that work?

Well, it's a good question. And if the rates stay lower for longer, then eventually BFE would be affected. But what we find with our BFE is that for narrow-body airplanes were basically primarily selling to the airlines, and the airlines often are going through retrofits, so they have the opportunity to reallocate from line fit to retrofit for a while. They also are pretty reluctant to jeopardise their BFE obligations. They want to be ready when the airplane is ready. So they are usually a little -- quite a bit more conservative, I should say, or slow to react when rates adjust. On the wide-body side, it's kind of the same story. We primarily sell to IFE integrators, in-flight entertainment integrators, and they service customers around the world, including the active retrofit efforts that are underway. So for some period of time, that hardware can be reallocated from line fit to retrofit. And that's why we don't think over the course of 2024 that we're likely to see too much rescheduling of BFE.

Okay. Got it. No, that makes sense. What about any shift or change that you're seeing on the 787. I mean, the wide-body seemingly still, I think, a good story, Airbus talking about raising rates. And it sounds like a couple of suppliers may be responsible for Boeing having slowed the 87 year. But any major swing to your P&L one way or the other for the year on that?

I don't think so. I mean they've been at a lower rate for quite a while, as you know, and we don't think that's a major driver. There is pretty substantial upside potential there for us if they ever get to where they want to go. We've got primarily BFE content to the tune of $250,000 of an airplane. So that's an important program for us. Similar with A350.

Yes. Got it. Got it. Last one on -- you kind of into that and alluded to back half of the year is going to be above $200 million. I mean, if we look kind of pre-COVID those levels, you guys were solidly in the double-digit op margin, you kind of talked about the contribution margin. Anything kind of preventing you from getting back there? I know it sounds like labor is getting a little bit more efficient pricing. I don't know, do you have to add any more employees to achieve those revenues? Or just how do we think about some of the moving parts in the margins?

Well, I think we're well positioned for it. There are no major changes to our cost structure. Obviously, direct labor would have to ramp up a little bit, and we're working on that every day. But one of the things that I think we have gone in our favor that we haven't really talked a whole lot about because we've been talking about more dire consequences or dire topics over the last few years. But we have done a number of things to make the business more efficient. And one of them I referred to when I was talking about the Test business, where we are not seeing a consolidation in the closing of the facility. And I may talk about this more in the future on other calls. But over the last few years, during the pandemic, we've done that like 5 or 6 times on a company our size. That's a significant simplification. So I think there's good potential for us to get -- not only get back to where we were, but to do better in terms of margins and efficiency with all the way everything is developing. I think we feel pretty good about it.

Okay. Okay. Good. Perfect. I'll jump back in the queue here.

Our next question comes from John Tanwanteng with CJS Securities.

Congrats on the strong quarter. I was wondering if you could talk about the opportunities for refinancing and how you're initially expecting that to shape up? What kind of recapitalisation are you thinking about? And just thinking about the last time around, there was a lot of delays related to the lenders. And I was wondering if that might be something you were trying to avoid at this time.

Well, Jon, it's a different day and it's a better day. How is that -- we have been playing a little bit of a game where the longer we wait, the better our financials and the better our results and the better our prospects -- and I think we're, at the same time, sensitive to execution risk as we get closer to an election and some of the things that are going to be happening at year-end. So I think we are pulling the market. We're getting pretty good interest and pretty good results. And we're kind of waiting to see what kind of final terms we can come up with. If we could act sooner, we could act later. But I think it's a 2024 event. Dave, I don't know if you want to expand on that at all?

No, that's exactly what I would have said.

Okay. Great. And then, Dave, just a quick clarification. Do you expect that run rate of stock comp and bonuses to continue through the rest of the year, the minus the Director bonus at roughly $6 million to $7 million.

Yes. The stock comp, if you back out $1 million from that, then the remainder should be the run rate roughly for the next 3 quarters.

Got it. And Pete, is there any update on the litigation? And what do you think the outcomes might be?

No. It's been pretty quiet, actually. I think we're still of the opinion that we're beginning to see the light at the end of the tunnel with respect to the LHT, to Lufthansa, Saga. We're thinking that, that could and should wrap up sometime next year 2025. Assuming that an appeal that's going on right now in France is not successful. We're doing well in France, and they are appealing it, and we're waiting for their equivalent of a high court to get involved with it. But we're reasonably confident there. So then it's just a matter of cleaning up issues in the U.K. and in Germany, and we're thinking that should be able to happen in 2025.

Okay. And then finally, just any update on the flare program? I know last quarter or maybe intra-quarter, the Army made a decision to cancel Farand maybe put more money into flare. I was just wondering if there's any change there.

Well, we're certainly working on Flora, hot and heavy. We're also still working to get kind of an official contract in place with Bell. We are working on what they would call kind of a temporary contract to get going. But we remain very excited about the program. I think -- for us, the Farand cancellation probably was a blessing in a way because we're busy enough with Florand EVTOL and some of the other things that we're doing for flight critical power, and we would have a team member -- we were a team member with Bell on that program also. So we would have had additional duties there. And given that we have our hands full with Flora, we're happy the way things are working out. We're okay with that.

[Operator Instructions] Our next question comes from Tony Bancroft with Gabelli Funds.

Great job managing through all the moving parts that have been going on in the last couple of years. Maybe could you just lay out for us and remind us again sort of the longer-term opportunities? I know you just talked about flare there. Maybe just on the IFE side power. I know that there's been discussions with the airline penalties for in-flight entertain, WiFi not working? Could that positively impact you in the longer run, having more sort of higher fidelity WiFi to customers?

Absolutely. I think it's an interesting observation, Tony. I've long been of the opinion that one of the unique things about our business is that is the reality that consumer electronic product and technology life cycles turn really quickly compared to aerospace life cycles. And we are one of these companies where we kind of live in that junction, that space between consumer electronics and aerospace. So on the one hand, we've got the real quick turning things with cell phones and tablets and computers and communication and satellite connectivity. And on the other hand, we live in this world where the aerospace industry likes to be pretty conservative sometimes. And what -- and the reality is that people want to be able to do in airplanes, the same kind of things they do in their living room. And it's hard to keep up for aerospace, which means that we always have an opportunity to kind of replace ourselves or upgrade ourselves, and that happens fairly regularly. I mean power, people think of power as being a commodity like technology, but it's one of those things that's not easy to do a really good job at and you think of how a 110-volt system is turned into USB Type A and now USB Type C, power is dynamic. It turns out in consumer electronics. Same thing with wireless access points, there are increasing requirements and upgrades for security and for performance. So many of the webs that are out there in service right now need to be replaced, and we're on the forefront of that also. They were fine. There's no problem with them, except they don't meet the current evolving requirements. So it's an interesting business as it grows. We've always looked at new markets, some new customers and new penetration, but it also is one of those where we're increasingly going to have the opportunity to replace ourselves or obsolete ourselves. And that's a good place to be.

Yes. Great answer. I think that's a pretty interesting place to be. Thanks so much, and have a great job.