Q3 2024 Astronics Corp Earnings Call
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Speaker Change: Greetings and welcome to the Astronix Corporation 3rd Quarter Fiscal Year 2024 Financial Results.
Speaker Change: At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Craig Mychajluk, Investor Relations. Thank you, sir. You may begin.
Craig Mychajluk: Yes, thank you and good afternoon everyone. We certainly appreciate your time today and your interest in astronics. Joining me on the call are Pete Gundermann, our Chairman, President and CEO, Dave Burney, our Chief Financial Officer, and Nancy Hedges, our Corporate Controller.
Craig Mychajluk: You should have a copy of our third quarter 2024 financial results, which crossed the wires after the markets closed today. If you do not have the release, you can find it on our website at Astronix.com.
Craig Mychajluk: As you are aware, we may make forward-looking statements during the formal discussion in 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.
Craig Mychajluk: These risks, uncertainties, and other factors are provided in the earnings release as well as with other documents filed with the Securities and Exchange Commission.
Craig Mychajluk: You can find these documents at our website or at scc.gov.
Craig Mychajluk: During today's call, we'll also discuss some non-GAAP measures.
Craig Mychajluk: 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 GAP.
Craig Mychajluk: We have provided reconciliations of non-GAP measures with comparable GAP measures in the tables that accompany today's release. With that, let me turn the call over to Pete to begin.
Pete Gundermann: Thank you, Craig, and good afternoon, everybody. I would like to begin this call by saying a few words about a couple of people here in the room with me.
Pete Gundermann: Dave Burney will be retiring as our CFO early in 2025 after a tenure of 29 years with the company.
Craig Mychajluk: Twenty-two years ago, he and I took over the C-suite at about the same time, revenues for our company at that time.
Craig Mychajluk: were about $33 million, and this year we expect to, again, be in the $800 million range.
Speaker Change: It has been quite a ride over these 29 years with Dave. He's been a tireless leader within our company.
Craig Mychajluk: and a trusted friend and partner for me, and it will be missed.
Craig Mychajluk: Although, I do have his cell phone number and I know where he lives.
Craig Mychajluk: So, if needed, we'll pull them back in. Also with me is Nancy Hedges.
Craig Mychajluk: She is a new name probably for most of the people on this call, but she will be succeeding Dave as our CFO in January.
Craig Mychajluk: Nancy has been around for a while. She joined in 2014 as controller and principal accounting officer of our company and over the time since has established herself internally as a leader and top-tier performer on our team.
Craig Mychajluk: She's very familiar with our personnel, our operations, and the improvement initiatives we seek. And I am confident the investor community will get to know her and appreciate her talents as time goes on.
Craig Mychajluk: I'm very confident she will do a very good job as CFO going forward. We'll hear from both Dave and Nancy in just a few minutes.
Craig Mychajluk: I want to move to a couple of comments on the top, you know, line trends that are affecting our company. Nothing really new here, but we felt operationally that the third quarter was a very good quarter for our Astronix.
Craig Mychajluk: Sales were strong, up 25% year-over-year and in the high end of our forecasted range once again.
Craig Mychajluk: http://www.youtube.com.uk
Craig Mychajluk: Our trailing 12-month adjusted EBITDA is $91 million at this point.
Craig Mychajluk: Our aerospace segment gets a lot of the credit for the improvement. Sales for our aerospace segment, again, were up 25% for the quarter and 19% for the year and adjusted operating margin
Craig Mychajluk: was 14.2% in the quarter, up from 3.5% in the comparator period a year ago, so we continue to recover.
Craig Mychajluk: With our volume and our margin improvement initiatives, they're starting to show up strongly on the bottom line. We have a ways to go still, but we're making progress for sure.
Craig Mychajluk: There are some kind of macro tailwinds which have been helping us over recent quarters and continue to help us. I'm not going to go into any of these in too much detail.
Craig Mychajluk: But it's worth reminding ourselves kind of where we've been and where we're going. And the first and probably the most important thing is that our supply chain continues to improve and perform.
Craig Mychajluk: We do regular reviews of our business units, and not too long ago, every problem was attributed one way or another to the supply chain.
Craig Mychajluk: Today, those comments are fewer and farther between. There are still issues, there always will be, but in general, the supply chain continues to improve and enables our improved performance.
Craig Mychajluk: Similarly, input cost pressures continue to subside. The inflation that we experienced over the last year and a half has gotten much quieter.
Craig Mychajluk: Our workforce continues to improve and get more efficient.
Craig Mychajluk: Some of you might remember on the last call, I mentioned that we had something like 45% of our 3,000 employees have been with us for three years or less. That kind of turnover, which again was attributable to the pandemic,
Craig Mychajluk: is really hard to operate in. But as time goes on and people get more and more familiar with what they're doing and how to work with each other, our efficiency improves.
Craig Mychajluk: Similarly, pricing adjustments, which we negotiated through that period of inflation,
Craig Mychajluk: are now coming more and more into effect. Some of our major programs are beginning to take on new pricing structures, which will be a contributor as we move forward through 2025.
Craig Mychajluk: And finally, demand continues to be pretty strong. We are entering the fourth quarter with a backlog of $612 million.
Craig Mychajluk: If you look back to like 2018, 2019 when we were last at an $800 million run rate, our backlog was much lower, like in the $400, $420 million range. So we're entering the fourth quarter at $612 million. That sets us up, we think, for continued results.
Craig Mychajluk: and continued improvement top line as we move forward.
Craig Mychajluk: [inaudible]
Speaker Change: The press release talks a lot about adjusted measures. I thought it would be worth spending just a minute talking about some of the major adjustments in our third quarter. There were a few of them.
Speaker Change: We did a refinance in July and as part of that refinance we had to expense
Speaker Change: It's about $7 million of assets related to the old credit facility that are no longer applicable on our financial statements.
Craig Mychajluk: We also had legal expenses during the quarter of $5.6 million. That was ramping up to a hearing that happened in the U.K. that I will talk about again later in the call.
Craig Mychajluk: And finally, one of our eVTOL customers, Lilliam, filed for bankruptcy just a couple weeks ago.
Craig Mychajluk: And we took a total of about $2.2 million in charges related to that.
Craig Mychajluk: I wanted to comment that we are involved with a number of eVTOL customers, but we were more heavily involved with Lillium than we are with the others. So, for people who are concerned about...
Craig Mychajluk: Whether this is the first shoe of many shoes to drop in this segment, I would tell you I don't think that's the case.
Craig Mychajluk: What we have done with most customers is developed a kind of a standard architecture
Craig Mychajluk: off-the-shelf products that can be relatively easily
Craig Mychajluk: integrated into their into their aircraft without a high degree of customization. So I don't feel we have the same level of exposure, though we are working with a pretty wide range of eVTOL aircraft that are being developed currently.
Craig Mychajluk: Finally, we had a rare warranty reserve of $3.5 million. This is related to an electrical power system for a business jet aircraft that was experiencing less than desirable
Craig Mychajluk: reliability over time. It's something that we introduced a few years ago, and it's supposed to perform better and longer than it has been, so we need to take some actions to fix that.
Craig Mychajluk: a supplier with integrity and living up to our promises to our customers.
Craig Mychajluk: With that all said, I'm going to turn it over to Dave who's going to talk about our consolidated results and then we'll go to Nancy to talk more, a little bit about segment results.
Dave Burney: All right. Thanks, Pete. As Pete mentioned, there's quite a bit of noise in the quarter. So we presented some tables to help show where on the income statement the impacts of these items are reflected and to highlight the performance of the underlying business.
Craig Mychajluk: So I'll review the operational results on a consolidated basis and I'll pass it over to Nancy to review the segment results.
Craig Mychajluk: With higher sales volume, our operating leverage was demonstrated with stronger gross profit and margins.
Craig Mychajluk: The GAAP gross margins improved to 21%, up 8.3 points over the prior year. On an adjusted basis, gross margin improved to 23%.
Craig Mychajluk: Impacting reported results.
Craig Mychajluk: with a $3.5 million for warranty reserve for a product that's been in the field for several years that requires modification. We also recorded an inventory reserve of $900,000 in the quarter related to the Lilium bankruptcy filing.
Craig Mychajluk: I should point out that last year's third quarter also had an inventory reserve of $3.6 million, also relating to the bankruptcy of a contract manufacturing customer. We adjusted both periods accordingly in the non-GAAP comparison.
Craig Mychajluk: SG&A expense was also impacted by the bankruptcy in the amount of $1.3 million, with $800,000 in outstanding receivables being reserved for and $500,000 in fixed asset impairment for equipment relating specifically to lilium.
Craig Mychajluk: Adjusting for the impacts of the warranty reserve, the bankruptcy, and the other unusual items that are highlighted in the tables provided in the release, adjusted operating margin for the 2024 third quarter was about 9.6%.
Craig Mychajluk: compared with an adjusted operating margin in the prior year third quarter of zero.
Craig Mychajluk: Below the operating line was the seven million dollars in costs relating to the extinguishment of our previous term loan that we had discussed last quarter.
Craig Mychajluk: Our gap loss per share for the quarter was $0.34. Adjusted earnings per share was $0.35.
Craig Mychajluk: for the third quarter this year in comparison with
Craig Mychajluk: These compare with a gap loss per share in last year's third quarter of 51 cents and an adjusted loss per share last year in last year's quarter of seven cents.
Craig Mychajluk: In the third quarter, we generated $8 million in cash from operations.
Craig Mychajluk: We expected better, but between the Boeing strike and two IFE-related programs that were moved to the right by a few quarters, our inventory remains above where we would like it to be.
Craig Mychajluk: The improved cash flow is driven primarily by improvement of our net loss.
Craig Mychajluk: which was $11.7 million adjusted for $23.8 million of non-cash expenses.
Craig Mychajluk: and lower increase in our net operating assets. And you can see this on the cash flow statement.
Craig Mychajluk: Our net debt at the end of the quarter was about $174 million.
Craig Mychajluk: about even with our second quarter. Thus far in the fourth quarter we've had strong cash flow with our net debt today down to about 168 million dollars and roughly 60 million dollars available to draw on our revolver.
Speaker Change: For that, I'll turn it to Nancy to review the segments.
Nancy Hedges: Thanks Dave. As you have the results available in the press release, I'll just help pull out the major drivers of profitability for each of the segments.
Craig Mychajluk: starting with aerospace which represented about 88% of the business
Craig Mychajluk: The nearly $22 million improvement in operating income was driven primarily by higher sales volume and improved productivity. The comparator period was more heavily impacted by a customer bankruptcy, making the year-over-year comparisons challenging on a gap basis.
Craig Mychajluk: That's why we decided to include adjusted operating profit by segment to clearly delineate the noise of the two quarters.
Craig Mychajluk: Adjusted operating profit was $25.3 million in the quarter, compared with $5 million in the prior year period.
Craig Mychajluk: Litigation expenses were more elevated in both the quarter and year-to-day periods as we've been in court more this year, especially as it relates to the UK, which Pete will discuss in more detail.
Craig Mychajluk: Thank you.
Craig Mychajluk: Turning to the test segment, the test business was near break-even in the quarter, primarily the result of lower legal fees compared with the prior period.
Craig Mychajluk: We're seeing positive results from our right-sizing efforts, but we were affected by less favorable sales bids in the quarter, as well as under-absorption of fixed costs at our current volumes.
Craig Mychajluk: We also presented non-GAAP adjustments for the segment that show the significant decline in litigation related expenses that were associated with the Teradyne lawsuit, as there were no major developments in the quarter associated with that matter. With that, let me turn it back to Pete.
Pete Gundermann: Thank you, Nancy. So, moving to this legal situation that we have in the UK.
Pete Gundermann: By way of background, we have been in a lengthy patent infringement suit brought by a European plaintiff relative to our NC Power product line.
Pete Gundermann: Thank you for watching!
Pete Gundermann: Hearings have been going on since 2010 and they have moved around in the USA, France, Germany, and the UK.
Pete Gundermann: In the USA and France, the subject patent was found to be invalid, though the French decision
Pete Gundermann: Germany dismissed some of the claims of the patent but upheld others and found that Astronix had been infringing.
Pete Gundermann: The company paid $3.5 million in penalties and interest in 2020 and has taken a reserve of $17.3 million to cover remaining estimated damages and associated interest.
Pete Gundermann: We expect proceedings may commence in the German matter in 2026.
Pete Gundermann: The UK court, however, maintained the entire patent and found Astronix to be infringing.
Pete Gundermann: A damages hearing was held last month in October and a ruling is expected in December or January.
Speaker Change: We have reserved $7.4 million to cover anticipated damages, but the plaintiff is seeking damages of up to approximately $105 million, excluding interest.
Pete Gundermann: Based on UK legal practices, the company expects that some amount of damages may be due in early 2025.
Pete Gundermann: The company is engaged with its lenders to arrange financing to cover the range of possible outcomes and satisfy any potential damages award as required.
Pete Gundermann: The company believes that an appeal to a higher court is likely in the matter brought by one or both of the parties.
Pete Gundermann: That appeal would start in late 2025 or 2026.
Pete Gundermann: and most importantly, perhaps,
Pete Gundermann: Rest assured that all of the subject patents expired years ago and do not restrict the business of astronics today in any way.
Pete Gundermann: Apart from that and looking ahead
Pete Gundermann: We are expecting our fourth quarter sales to be in the range of $190 million to $210 million. That's a little bit wider than usual, due in part to the Boeing strike situation.
Pete Gundermann: The Boeing strike hurt our third quarter revenues a little bit, but not badly.
Pete Gundermann: Our third quarter revenues, a little bit but not badly.
Pete Gundermann: by about $3 million as we got shut down in direct sales to Seattle in mid-September or late September.
Pete Gundermann: About $3 million.
Pete Gundermann: As we got shutdown direct sales to Seattle.
Pete Gundermann: In mid September late September.
Pete Gundermann: The fourth quarter, we'll get hurt more and the turn-on schedule is a little bit uncertain, so we have a wider range than we normally would at this point in a quarter.
Pete Gundermann: The fourth quarter will get hurt more.
Pete Gundermann: The turn on schedule is a little bit uncertain. So we have a wider range than we normally would at this point in a quarter.
Pete Gundermann: But assuming we hit the midpoint...
Pete Gundermann: But assuming we hit the midpoint.
Pete Gundermann: or actually that range of $190 to $210 million brings our 2024 year-end sales forecast to the range of $777 million to $797 million.
Pete Gundermann: We're actually that range of 190 to 210 million brings our 2020 for yearend sales forecast to the range of 777 million to $797 million.
Pete Gundermann: At the midpoint, that would show a 14.2% increase for the year, another year of strong growth.
Pete Gundermann: At the midpoint.
Pete Gundermann: That would show a 14.
Pete Gundermann: 2% increase for the year another year of strong growth.
Pete Gundermann: Looking a little further, we are working on our 2025 plan, which looks like another year of solid growth, though maybe not as high as what we're experiencing in 2024, and continued margin improvement.
Pete Gundermann: Looking a little further we are working on our 2025 plan, which looks like another year of solid growth, though maybe not as high as what we're experiencing in 2024 and continued margin improvement.
Pete Gundermann: We expect to release, our sales forecast to our shareholders in December or January.
Pete Gundermann: Yeah.
Pete Gundermann: I think that ends our prepared remarks latanya, maybe we can open it up for questions at this point.
Speaker Change: Sure. Thank you we will now conduct a question and answer session.
Speaker Change: I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, while we poll for our first question.
Pete Gundermann: Okay.
Pete Gundermann: Our first question comes from Jon <unk> with CJS Securities. Please proceed.
Jon: Alright, Thank you for taking my questions and nice quarter.
Pete Gundermann: Congrats also Dave on the retirement and Nancy on on the appointment and looking forward to working with you.
Pete Gundermann: Peter I was going to ask you if you could quantify the impact from Boeing on a monthly basis and kind of what run rate do you expect to see as we as we ramp through 'twenty five.
Pete Gundermann: As that program starts and kind of what kind of initial levels of start shipping and what you will be shipping to Boeing.
Speaker Change: Yeah, we really don't know the answer to that question at this point, John but let me, let me say a little bit about the situation.
Speaker Change: We.
Pete Gundermann: Because of the shut us down we accumulated some inventory during the quarter.
Pete Gundermann: No.
Pete Gundermann: That's going to be one factor in our rates going forward and they also accumulated some inventory.
Pete Gundermann: As part of the strike process, so theres, a little bit of an inventory burn down that's got to happen.
Pete Gundermann: We think they're going to we're guessing that theyre going to start slow and theyre going to accelerate as the year goes on I think.
Pete Gundermann: They have internal ambitions of catching up pretty quickly to the rate that they were at before the strike will have to see how realistic.
Pete Gundermann: Those plans are what we expect to happen is that they will hold us at some rate and that rate will be.
Pete Gundermann: Enough to keep us healthy and keep the supply chain going but not so great that we get way ahead of them and so.
Pete Gundermann: Right.
Pete Gundermann: We'll find out shortly here I think what that plan is we really don't know what it is at this point.
Pete Gundermann: But I would also further add that the main claim that they build up in Seattle for 737.
Pete Gundermann: And the situation that I just talked through really involve the product that Boeing buys from us directly that we shipped to Boeing for 737 installation line fit installation we call it.
Pete Gundermann: There is also a range of products that are primarily IFC in flight entertainment related.
Pete Gundermann: Get installed in 730 Sevens on the production line, but are not bought by Boeing and that shifted by us to Seattle, they're in rather ship two airlines or shipped to seed companies.
Pete Gundermann: And that content.
Pete Gundermann: As maybe averaging 60 $70000 an airplane.
Pete Gundermann: <unk> has been ongoing through the shutdown and through to today.
Pete Gundermann: Our assumption is that that's going to continue.
Pete Gundermann: Those shipments are going to continue.
Pete Gundermann: That Boeing will turn us back on for the direct shipments at some lower rate we were operating at about 32 to 33 ships a month.
Pete Gundermann: Maybe it's going to be somewhere in the 20 ship sets a month, but we don't know that for sure yes.
Pete Gundermann: Yes.
Pete Gundermann: It is an important part of our operating plan for 2025, so we need to get an answer to that.
Speaker Change: Got it in at the lower ship rate per month does that impact your margins or can you get that back in pricing somehow.
Speaker Change: I think it's still a very profitable work I mean, it's obviously higher volumes higher profits, but I.
Speaker Change: I don't think it's going to materially affect our our margins across the business.
Speaker Change: Okay, Great and then just with the inventory situation I guess do you see the cash flow.
Speaker Change: Net debt improving in Q4 does that.
Speaker Change: Do you guys extend that ANZ start shipping to billing again.
Speaker Change: Yes.
Speaker Change: I do see continued strong cash flow going going into the.
Speaker Change: Into the fourth quarter here.
Speaker Change: You said the month.
Speaker Change: A month into it cash flow has been been very positive and very good and.
Speaker Change: I think it will continue for the rest of the quarter.
Speaker Change: Okay, great. Thank you I'll jump back in queue.
Speaker Change: Okay.
Speaker Change: Thank you. The next question comes from Michael <unk> with <unk> Securities. Please proceed.
Michael: Hey, good evening guys. Thanks for taking my questions, Dave Congratulations Nancy as well look forward to working with you and Dave Best and best in retirement there.
Michael: Hi P J.
Michael: Maybe asking this another way.
Michael: Obviously impossible to predict how fast selling ramps up Airbus having their own challenges.
Michael: How much of your if you look at that revenue forecast.
Speaker Change: In the fourth quarter, how much is new production versus retrofit or aftermarket.
Speaker Change: We've been running around 50, 50 mindset and aftermarket.
Speaker Change: 103, seven coming down will probably hurt that to the tune of.
Speaker Change: So to do some thinking here.
Speaker Change: Probably to the tune of.
Speaker Change: $8 million to $10 million, if they don't turn us back on.
Speaker Change: So it will skew towards the aftermarket.
Speaker Change: But.
Speaker Change: Hmm.
Michael: The overall trends continue to be pretty positive and what's interesting to me.
Speaker Change: Is that our airline customers for the most part.
Speaker Change: We have been have been consistent with their demand schedules. They haven't been pushing a lot of stuff out. So you get a little bit of that every once in a while here and there but that hasnt been a major driver so boeing's.
Speaker Change: Strike it seems like a lot of our customers have been kind of looking through that.
Speaker Change: Not getting too worked up about it.
Speaker Change: Okay. Okay. That's helpful.
Speaker Change: And then could you maybe talk.
Speaker Change: I guess.
Speaker Change: Quickly if there is an opportunity.
Speaker Change: For IFC power all of your related products.
Speaker Change: Southwest given kind of the major changes that overhaul theyre going through it sounds like.
Speaker Change: The majority of their cabins are going to be retrofitted here I know they've got a pretty aggressive schedule is that is that on your radar and it's something you can maybe give us a little bit more detail on if it is.
Speaker Change: Sure absolutely that southwest is a pretty major customer of ours already and we're doing a lot of work in there Kevin refreshes.
Speaker Change: Going back actually.
Speaker Change: A little while now we developed a new architecture of in seat power.
Speaker Change: Specifically based on USB type C power.
Speaker Change: Not for southwest alone, but largely with and in partnership with southwest because we've been chasing them around for many many years and we finally kind of got through and it's pretty prominently featured in their new cabins. If you look at some of the pictures you can see it.
Speaker Change: And not only that but that new architecture again USB type C.
Speaker Change: Oriented.
Speaker Change: It is lighter weight and a little bit lighter cost and we've been very successful selling it around the world. It is becoming an increasing part of our.
Speaker Change: Of our in seat power franchise, our RSV franchise so no.
Speaker Change: We are we certainly are involved with southwest and.
Speaker Change: Maybe the current.
Speaker Change: Things that theyre going through in terms of further cabin modifications.
Speaker Change: Prove that opportunity and we might increase our content, but there's not much I can say about that at this point okay. Okay.
Speaker Change: Last one for me I mean, I know the legal battle has been going on for a long time here and I hate to get into the hypothetical but $105 million in damages.
Speaker Change: Given your balance sheet.
Speaker Change: <unk> <unk> percent of the market cap I mean.
Speaker Change: How are you guys kind of thinking about this and I mean is there.
Speaker Change: I typically think of you guys, having the dominant position in some of these product categories.
Speaker Change: I guess the damages one potential question, but then business also.
Speaker Change: Make your products a little bit more vulnerable.
Speaker Change: See more competition coming in and some of those in feed power and other related your offerings.
Speaker Change: Well the second part of your question is the easiest to answer no. Other patents in question are all expire to have them expired for years. So this is <unk>.
Speaker Change: <unk> fighting about.
Speaker Change: History.
Speaker Change: So.
Speaker Change: It doesn't restrict our business in any way today, and it's really not a material issue at all competitively as far as as far as I can see.
Speaker Change: So so that's really a non issue.
Speaker Change: And.
Speaker Change: I would get into the realm of speculation about damages, but I guess I would say that.
Speaker Change: We're coming out of the hole and we're financially gaining a lot of strength pretty quickly and in that sense.
Speaker Change: Financial options that we wouldn't have had maybe a year and a half two years ago. So.
Speaker Change: I don't view it as a as a major crisis.
Speaker Change: Also given the reality that it appears the court is going to.
Speaker Change: Allow.
Speaker Change: Appeals or even anticipates appeals.
Speaker Change: So.
Speaker Change: It's been going on for 14 years. This whole battle. It will go on at least for a couple more.