Astronics Corporation (NASDAQ:ATRO) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Good afternoon, and welcome to the Astronics Corporation First Quarter Fiscal Year 2023 Conference 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. Please go ahead.

Debbie Pawlowski: Thank you, Priscilla, and good afternoon, everyone. We certainly appreciate your time today and your interest in Astronics. On the call here with me are Peter Gundermann, our Chairman, President and Chief Executive Officer; and Dave Burney, our Chief Financial Officer. You should have a copy of our first quarter 2023 financial results, which we just released 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 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 measures in the tables that accompany today’s release. With that, let me turn it over to Pete to begin. Peter?

Peter Gundermann: Thank you, Debbie, and good afternoon, everybody. Thank you for tuning in for our call. In general, we feel the first quarter was a reasonably good start to the year, and we’re making lots of good progress, though there are challenges. We’ll divide this conversation generally into a discussion of the positive points to begin with and then focus a little bit on the challenges towards the end. Sales were up 35% year-over-year to $156 million that exceeded the range that we predicted when we last talked. Aero was up 34% — that’s Aerospace to $135 million. Our Test business was up 42% to $20.9 million but that includes a $5.8 million nonoperating adder, which we will discuss in some detail a little bit later. Jumping to the bottom line, we had a net loss of $4.4 million and an adjusted EBITDA of $6.1 million, which was 3.9% of sales.

That’s a nice improvement from where we were 1 year ago when we had adjusted EBITDA of $1 million and even an improvement over the fourth quarter when adjusted EBITDA was $4 million on higher sales. Evaluating the quarter and comparing it to last year’s first quarter is somewhat complicated due to several factors including this nonoperating revenue of $5.8 million in our Test segment, an equity investment payable write-off of $1.8 million, earn-out income on our semiconductor test sale from a few years ago of $3.4 million in the current quarter versus $11.3 million in the comparative quarter a year ago, and AMJP, Aerospace — Aircraft Manufacturing jobs Protection Act grant receipts of $6 million in the comparative quarter a year ago. Dave will dive into some of those specific items when it gets — when he gets to turn at the mic in a few minutes.

Demand remains pretty strong with bookings at $158 million, once again setting a new record backlog at the end of the quarter. Aerospace orders, in particular, were strong at $150 million, which is a book-to-bill of 1.11. Test was late by comparison at $7.8 million in bookings for the quarter. Test orders tend to be lumpy and vary quite a bit from quarter-to-quarter so we don’t get too worked up about 1 quarter being light in that business. In terms of new business, 2 significant developments occurred shortly after quarter end that are worth mentioning. On April 6, the General Accounting Office, the GAO dismissed the lockheed protest on the Army’s FLRAA program, clearing the way for Textron’s Bell to proceed. There isn’t — we’re not allowed to say too much about that program at this point, but we expect to be turned on with development work in the coming few weeks.

And as we have discussed on these calls in the past, this program promises or has the potential to be one of the most significant programs in our company’s history before it’s done. Also, in April, we were awarded the handheld radio test sets program by the Marine Corps, otherwise known as HHRTS. This is an award that we expected to come out almost a year ago but we’re happy to get it late than never. It’s a radio test program for the Marines and IDIQ, which stands for indefinite delivery, indefinite quantity, which we expect will be worth approximately $40 million in revenues over a 5-year period, and we expect it to be front-loaded in the first 3 years, mostly. We expect a first major task order, potentially of about $10 million in shipments in the coming weeks.

This is a complement to the 4549/T program we talked about before. That’s a radio test program for the U.S. Army that we won last fall that is in contract negotiation. As an aside, HHRTS is the final major new program pursuit that we had in our sites when the pandemic began in early 2020. We made a conscious decision to maintain certain resources and pursuits even though we knew that our business was going to struggle as the pandemic took its hold on the aerospace industry. At this point, I can say we have been stunningly successful actually winning pretty much every item on the list, except for a couple that have — on indefinite hold which includes in addition to FLRAA and HHRTS, 4549/T that I just discussed, a new generation in-seat power architecture, which was instrumental in winning Southwest Airlines as a customer and has subsequently been successful with narrow-body operators all around the world and antenna hit program for Safran and Airbus, establishing ourselves in the emerging electric and eVTOL aircraft market and a few other programs that we are not yet allowed to discuss.

These programs, as a group are barely represented in our backlog and have not yet meaningfully affected our results, but they will begin to do so as 2023 rolls along. Looking forward, we are holding our 2023 revenue forecast at $640 million to $680 million and establishing second quarter guidance at $165 million to $175 million. At the midpoint, this implies second quarter growth of 32% year-over-year and 9% sequentially. For most of the pandemic, we have vacillated between $100 million and $125 million in quarterly revenue. The last 2 quarters have been in the $155 million to $160 million. And now we feel we are stepping up to $175 million — $170 million, $175 million or slightly more for the rest of 2023. At that level, we would expect for the rest of the year to be strongly cash positive and profitable.

Some discussion on margins. We are reasonably comfortable with how our Aerospace segment is progressing. As volume increases, the margin profile will continue to improve, especially since the growth is largely in commercial aerospace, a market that has traditionally been quite lucrative for us. We are making margin progress in our Test business also, but first quarter results make it less obvious. We restructured the business in mid-April and took out about $4 million to $5 million of annual costs with savings being evident in the third quarter this year after severance costs are finished. This action was necessary due to delays with some of the new programs we have won, particularly in the area of the radio test, HHRTS and 4549/T programs discussed recently but also with some transit test work that we are progressing on slowly due to customer delays.

We expect these new programs eventually to contribute $20 million to $40 million of annual revenue, which will be a significant adder to the current business level of about $80 million per year, but they’ve been slow to take off and they are not here yet. And to bridge the gap, we felt it necessary to cut some costs. This action will allow the business to establish profitability at current revenue levels of $80 million, $85 million per year while waiting for the new programs to launch. So the Test business has been a challenge. Another of our challenges is working capital. The sales ramp we are experiencing is a good thing, but it has led to higher receivable balances and ongoing supply chain snags have resulted in increased levels of stranded inventory.

This was especially apparent in the first quarter. Receivables remain — will remain high in the near term as revenue continues to ramp but we believe we are at the high point on inventory and expect to see a gradual decline from here. At this point, I’ll turn it over to Dave to go into some details of some of the topics I brought up, Dave?

David Burney: Thanks, Pete. As Pete mentioned, there are several unusual income and expense items to point out in the quarter and one in the comparable 2022 1st quarter. For reference, you can see these items called out, I think it’s Page 8 of the release in the table that reconciles adjusted EBITDA to GAAP net loss. First and most significant of which was a $5.8 million increase to sales, that is a result of reversing and opening balance sheet contract liability that was created in one of our acquisitions a few years back. The short explanation is that we bought a test company and assumed a $5.8 million deferred revenue liability related to a customer contract, which is no longer expected to occur. Second item I’d like to point out is the reversal of another liability of $1.8 million that was recorded in other income this quarter.

It was related to an equity investment in another company that we no longer are required to make. It was a startup company that failed to meet certain milestones. Third item, we recorded a final earn-out payment of $3.4 million from the sale of our semiconductor test product line a few years ago. In last year’s first quarter, we recognized $11.3 million for the earn-out and as compared to $3.4 million this year. And it was the final earn-out for that sale of that business from several years ago. Fourth item is our legal cost defending our positions in the IP-related suits was high in the quarter of $4.4 million. It’s about $3.2 million higher than last year’s first quarter. And last, I’d like to point out that in last year’s first quarter, we recognized $6 million from the AMJP grant program that Pete mentioned.

It’s a reduction in cost of sales for that period and there have been no comparable grants available since then. So considering all these puts and takes, our adjusted EBITDA improved from $949,000 in 2022 first quarter to $6.1 million this quarter and a $34 million increase of sales, excluding the adjustments for the $5.8 million of nonoperating sales that I previously referred to. I’d like to add that adjusted EBITDA also improved when compared to the preceding fourth quarter of 2022. Looking at segments. Our Aerospace business continues to see a strong recovery and is ramping to satisfy customer demand. Aerospace sales were $135.6 million, up $34.2 million or 33.7% from last year, and bookings were strong at $150 million. We expect Aerospace sales to ramp to $150 million to $160 million in each of the final 3 quarters of the year, which will see segment — the segment return to solid profitability.

So we’re still expecting to incur some spot buy expense in the second quarter, which will impact margins in that period. Aerospace operating margin was $4.1 million or 3%, and an improvement of $7 million compared to the 2022 1st quarter when you exclude the impact of the $6 million AMJP grant from last year. Our Test business, on the other hand, had a mixed quarter. The top line of $20.9 million looks all right, but it includes $5.8 million of nonoperating adjustment discussed above and mentioned by Pete. If one backs out the adjustment, the Test results were not so good. We expected sales to pick back up to $20 million in the second quarter and stay there for the rest of the year. Certainly, after the quarter closed, we had a restructuring.

Pete went through that a little bit, where we’re expected to benefit $4 million to $5 million annually from that restructuring. They’ll start to show up in the third quarter. And the restructuring, again, was necessary due to the slow takeoff of some of the higher dollar programs for the Test segment. Turning to debt and the balance sheet. Cash flow continues to be a challenge due to inventory growth. Cash flow from operations was negative $19 million due primarily to inventory growth which increased by $13.9 million and receivable growth, which increased by $4.2 million during the quarter. While the supply chain is improving, part shortages and last-minute reschedules from suppliers are hampering our efforts to reduce inventory levels and improve inventory turnover.

Receivable growth was mostly due to the timing of shipments weighted toward the last month of the quarter, where roughly 50% of our shipments occurred in the month of March. We’re compliant with our debt covenants and are forecasting continued compliance and positive cash flow for the balance of the year. And Pete mentioned maintaining revenue guidance of $640 million to $680 million for the year. And that’s all. Pete?

Peter Gundermann: Okay. I think that almost concludes our prepared remarks. With everything being said, we feel that the first quarter was a reasonable start to the year. There are challenges. There always are. But we think the rest of 2023 is setting up to be a pretty exciting time for our company. And we will open it up at this point for questions, Priscilla.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Jon Tanwanteng with CJS Securities.

Operator: Our next question comes from Pete Oberland with Truist Securities.

Operator: Our next question comes from Tony Bancroft with [Kibali] Fund.

Operator: Our next question comes from Scott Lewis with Lewis Capital Management.

Operator: Our next question comes from Jon Tanwanteng with CJS Securities.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.