Q2 2023 Astronics Corporation Earnings Call
Good afternoon, and welcome to the <unk> Corporation second quarter fiscal year 2023 financial results Conference call.
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I would now like to turn the pump Deborah Pawlowski Investor Relations for Stratus. Please go ahead.
Thank you Anthony and good afternoon, everyone. We certainly appreciate your time today and your interest in <unk>.
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. When you just crossed the wires after the market closed today.
If you do not have never leaves you can find it on our website at <unk> dot.
If you are aware, we may make some forward looking statements during the formal discussion and 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.
Those documents on our website or at SEC Gov.
During today's call. We will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance you should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP.
We have provided reconciliations of non-GAAP measures with comparable GAAP measures in the table the tables that accompany today's release.
So with that let me turn it over to Pete to begin here. Thank you Debbie and good afternoon, everybody and thank you for tuning in.
We're here to talk about our second quarter and our prospects for the rest of the year and then some.
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.
Youll 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 of our supply chain, while certainly not perfect is getting quite a bit better as time goes on and that's pretty evident.
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.
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 pretty strong pattern of recoveries that out over the last 456 quarters.
Last for.
Assertion.
Revenues of 131 million and $158 million 157 million and now have 170.
475.
Our aerospace segment was the key driver.
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.
With 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 earn outs and J P grants or et cetera.
Our pet line that jumps out was the strangest venturing in the numbers and that was that one of the last quarter two and it will be for the near future again, Dave will explain that briefly in a minute.
All in all we think an adjusted a bit.
Themed point 8 million.
Nice improvement from a year ago, when we had an adjusted EBITDA of 129000 or just one 6% of sales.
On the demand side.
At Kings 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 will come back and discuss the second half in a minute, but that's a number worth hanging onto.
Aerospace orders in our second quarter were particularly strong again at 189 million a book to Bill of 1.19 <unk>.
<unk> 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.
So talk a little bit about where our business is coming from.
And to give a little bit of the breath of our activities. These days.
Just had a big order from something called HHR Tee US we've talked about this before it's the handheld radio test sets.
Program with the U S Marine Corps.
Radio Test program, an idea Q program that we won earlier in the year.
So we think is going to be about a 40 million dollar program over a three or four years.
The big.
Delivery order that we received in the second quarter was for $10 million and there were some other smaller things that happened on HHR T O.
Earlier on.
But the $10 million is the first significant delivery order, which we are working on right now.
Another radio test program, but we.
We have talked about in the past 45 49 T 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 <unk>.
Contract negotiations on a direct procurement.
To our company.
Long story short, we're still waiting for that direct procurement, but it is moving forward.
And the reason I'm, bringing it up here is that the architecture and the.
Theory of operations between HHR T. S and 45 40 90 are complementary and the armed forces are recognizing that so.
The Army program is moving forward, we are of the opinion or the understanding but that contract should be awarded by year end at the latest in 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 was had to do with electric aircraft, commonly called EV tolls.
We have one of our specialty uses basically electrical power distribution and generation for.
For small aircraft and as most of you presumably know there is a wide range of you'd be tall aircrafts 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 lowering them a German company that is one of the leaders in the EV tall 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 putting getting our foot in the doors so to speak.
And.
Now people can disagree or defer over the prospects for the electric aircraft market, we think it's interesting.
And our approach is to develop a commercially available <unk>.
Merely off the shelf kinds of products that they can employ in that they need.
For the safe and certifiable operation of the aircrafts.
So where 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 of press releases out in early June one was on the Airbus <unk> hundred 20 passenger.
Passenger service units or Psus, that's one of our product specialties.
If you sit in a commercial airplane, but unit above your head, but contains a bunch of different things a couple of probably reading lights. Some air handling systems. Some oxygen assist emergency oxygen system, hopefully, we've not tried that one before.
And some communication usually a call button.
Oh, that's a pretty major product for us and this a 220.
Award.
From Airbus is the first time, we've done this kind of work.
On an Airbus airplanes, so we're pretty excited about it.
We think it's going to be a pretty significant program. If you've flown on an H two 'twenty, you've probably noticed that it's it's a different kind of airplane has a different kind of fuel and it seems to be gathering pretty good success in the market.
It is in production now our products are scheduled to be.
So ramp into production late in 2020 for about a year from now or early 2020 five.
Finally, we put a press release out about.
And our next generation NC 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, the wind 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.
Press release talked about.
12.
Or more airlines committing to about 1100 narrow body airplanes with options for a couple of hundred more.
Well, 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.
And transferred it over to the a major.
You know competitive element into the narrow body world and there are a lot of narrow body airplanes out there that are candidates system candidate aircrafts for.
For this product and for these systems on all of these products that I'm talking about your HHR T. S E V Tau.
Systems, the <unk> hundred 20, Psus and the what's called the Ultra light G to 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.
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 theyre 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 a major elements of our business space going forward.
So enough for me for the moment I will turn it over to Dave to talk through some of the specifics of our income statement and balance sheet.
Okay. Thanks.
Thanks Pete.
Sales came in at the top end of our range as we had some good supply chain cooperation in June .
It 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 dollar 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 higher legal costs for the quarter, which.
We're about $4 $9 million, not including an adjustment there.
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% contribution margin on the incremental aerospace sales as compared with the sequential first quarter.
Just highlighting that the top line growth is a key piece of our recovery.
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 cost relative to its revenue levels too.
To address this in the short term.
On the first quarter earnings call, we announced a restructuring and head count reduction.
It will begin to resolving 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 45 40 90 Army Radio test program contract is awarded.
And the Marine Corps H H R. T S 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 were 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 Ive said for several quarters. This is not really representative of a normal tax rate or cash tax rate.
Because of our three year cumulative pretax 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 rate this year to be.
Sure.
Cash tax this year to be in the range of $6 million to $8 million, that's six to <unk> 68.
All of it as a result of new rules, requiring R&D costs to.
To be amortized over five years, rather than deducted as incurred.
This would normally create a deferred tax asset reducing the effective tax rate.
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 in 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 needed to be or expected to be <unk>.
Cash used by operations during the second quarter was $2 million, which was a significant improvement from the first quarter were 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 that remains some inefficiency.
And long lead items long lead times, resulting in higher inventory levels.
And stranded inventory.
It's waiting for the final pieces to complete.
In order to ship the product.
This combined with 35% year over your 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.
We 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 where the high legal expenses.
$4 $9 million were offset partially by the adjustment to the ER.
So the legal reserve relating to a lower 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 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.
That's all I had.
Okay looking forward, we are holding our 2023 revenue forecast.
We're now at $640 million to $680 million.
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 in 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 $3 31 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.
Surely in the fourth quarter.
As time goes on the some of these changes the pull ins of the pop ups.
Can be difficult to predict but a $20 million 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 could be a little higher it could be a little bit lower.
But it's going to be in that neighborhood, we think in 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.
In the final days of our final week of any particular quarter in this last quarter. It was.
Somewhere in the neighborhood of 20 million.
Some of them 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.
Mr up right at the end can really change what are.
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.
Of.
Spot buys and special purchases because of the supply chain is getting a little better that's helping out.
And also some of the price increases that you've been able to implement across the business and contracts that permitted.
There is also starting to have a benefit so some of the margin.
<unk> talked about we think has room to run and it'll be a long term project.
We get it implemented across the business, but we are pretty pleased with how that's.
Shaping up across our operations.
So with all that 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 open up to those.
We will now begin the question and answer session.
Ask a question you May press Star then one your telephone keypad.
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To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question will come from John <unk> with C. C. J S. Securities you May now go ahead.
Hi, Good afternoon, guys. Thanks for taking my questions.
Peter or Dave.
At the high end of the range that 175 million in revenue, which is similar to what you did in Q2.
That doesn't give you the benefit of volume leverage.
Five margin so I'm wondering what kind of improvements are available just in the in the in the less spot buys.
Price increases that you're talking about and as volume actually going down as prices are increasing.
Yes, there is a couple of things that will start rolling in the spot buys are expected to come down.
They were somewhere between one and $2 million for the quarter.
Historically, they've been running about $3 million.
Ultimately sell they'll.
Turning to fade away there'll be new new contracts, new purchase orders that we will have higher margins on them as we priced in the <unk>.
The inflation over the last year as we.
Entered into new agreements.
On that.
And so there's so there is some leverage.
That the.
We'll see some continued improvement the legal the legal costs will come and go depending on what's going on in the various ports.
Port situations.
So I think that's likely to drop a little bit over the next couple of quarters.
Depending on what's going on.
Yeah.
Yeah.
Thank you.
At the top end I think I think we're being conservative here.
We have some programs that they.
And they are in the pipeline.
Uh huh.
We're hoping will increase.
Get us.
Up to that top end and I think we're just we're hesitant with the supply chain the way it is right now too.
To extend out over our skis on that.
So that's that's my.
That's my take on it.
Fair enough 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.
Is that does that kind of 200 plus million order run rate sustainable.
As you look at the ongoing recovery are there going to be fits and starts and a little bit of Lumpiness as you go forward.
So it's a very good question and it's something that we all need to keep our eye on.
If 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.
A cold 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 it's you can't Miss the general direction of it and.
We have won a number of pretty significant programs.
Just talk through a handful of them and none of those are really seriously reflected.
And our backlog at this point so.
And there are others like that out there.
So.
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 bookings standpoint felt really good because.
You know, we did $773 million in 2019, and obviously 200, if we can annualize that puts us.
Above that rate and if we do that then shipments will follow so are we.
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 market.
Got it and then last one from me just where do you think cash flow can be in 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.
From what Youre seeing today.
Yeah, that's what that's what the plan is it's been tight for the past two quarters.
We saw a pretty big buildup in our working capital in the second quarter between that inventory.
Inventory and receivables so will those reserved receivables or convert the 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.
Okay, great I'll jump back in queue. Thank you.
Our next question will come from Sam <unk> with <unk> Securities.
You May now go ahead.
Hey, good evening guys I'm on for Mike smaller Tonight I appreciate you taking the questions.
To begin I was curious did you guys you guys are kind of returning on the aerospace.
Segment to pre pandemic levels in prior peak, how should we think about margins going forward. It kind of seems to be getting in the past at this level stronger weaker.
They're going to start out being probably I mean, it depends on what period Youre looking at.
And back it out.
I'm thinking on a go forward basis. Once you you know kind of when do you get back to those revenue levels like what can we expect in terms of margins from pre pandemic.
Yeah, I think you know.
We should be able to and I don't see any reason why we can't get back up to some of our pre pandemic margins.
We need the new program the new the new programs that we're winning two two and pricing at higher margins too.
To kick in here, which will happen as we move through.
Through next year in the second half of this year.
But yeah the mix the mix isn't a whole lot differ.
You know when there is no no significant fundamental change there.
We're lagging in terms of getting are flowing the increased costs from the past year.
And wages and materials through into our new contracts, but.
It's going to that will catch up as we move through.
Through next year.
Great and then kind of.
Going along the line of the inventory and supply chain, where we're in fact that you guys seen the bigger issues on the supply chain in terms of getting parts and extended lead times and is there any particular area, that's worse than others that might be impacting.
You know guidance for the year.
Well a lot of what we do is electronics related so I think.
Our answer to that question would definitely.
Include the general electronics.
No difficulties at the world 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 it's not uncommon for some of our more complex products to have couple of hundred components in them. So all you need is one to be late.
The other.
199 sit there on the shelf until you have everything you need so.
It's getting better and 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.
A year ago, or a year and a half two years ago, where they were decidedly negative all surprises seem to be negative.
So so I think we're making progress on that but its still is clumsy and it still is a situation where.
Our customers want to be able to place orders and get parts and 20 weeks.
Many cases.
But the components that go into those parts for us have 40 or 50 week lead time, so trying to balance the lead times that we face from our suppliers with the lead times that our customers are demanding.
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 we got to get more consistent across the.
Across the entire company so.
That is a major focus all hands on deck.
And we got to do a better job there.
Great and if I could just sneak in one more.
What's the update on the.
Laura program anything there.
There is activity I'm not at Liberty to discuss it in this in this context right now, but we we are.
<unk> and.
<unk>.
Make some public news about that shortly.
Understood Alright, thanks, guys. That's it for me.
Right.
Again, if you have a question. Please press Star then one.
Our next question will be a follow up from Jon <unk> with CJS Securities.
But.
Yeah.
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 whats the run rate to expect going forward is going to be an engineer anytime soon.
Yes.
Well, we have a couple of.
Long running situations that we've been dealing with the longest one is has to do with our in seat power product and electrical outlets specifically against the German competitor and that's been playing out.
In four countries over the last decade, really I mean U S. France.
In Germany.
The U S has 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 sides appeal.
But either way, we think that one is pretty much done and it's very much going in our direction. The UK and Germany are a little bit more complicated the U K, we lost so there'll be a penalty phase we've accrued for what we think that's going to be.
That's probably going to play out in 'twenty to 'twenty four 'twenty five in Germany.
Has been going on forever and that's also one that's probably going to play out and really late 2024 or 2025. So.
It has been active for the last few months and that's why the builds 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 that 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 so and we're not done yet that'll be something that.
Actually it could 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.
Got it thank you very much.
Sure.
Our next question will be a follow up from Sam stress Saker chooses true securities.
Go ahead.
Hey, guys. Thanks for taking the follow up.
Just I had two quick clarifying questions.
In your prepared remarks, you mentioned the systems or the EEP tolls was that $10 million.
Total ore per.
Potential customer.
Oh, no it's $20 million total.
For the for returning customers.
Got it Okay and then.
Within the <unk>.
It was the U S b.
Yes.
USB C product that you guys have across narrow bodies do you have any rough dollar content per.
Aircrafts on that.
It's pretty highly variable.
I think the general rule of thumb, but we might I mean, it depends on the configuration and some aircrafts long ago, just for certain classes of seats.
But I would say, it's pretty widely variable of real inexpensive installation might be $70000 a ship on expenses or in more normally priced one could be up around 130 or 140.
Highly variable depending on how the airline wants to configure their or their cabin.
Okay, Great got it thank you.
This concludes our question and answer session.
I'd like to turn the conference back over to Peter <unk> for any closing remarks.
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 from close to the year and look forward to talking to and that's fine.
Good day.
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