Greetings and welcome to the Astronics Corporation Fourth Quarter Fiscal Year 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the call over to Deborah Pawlowski, Investor Relations for Astronics Corporation. Thank you. You may begin.

Thanks, Darryl. And good morning, everyone. We appreciate your time today and your interest in Astronics. Joining me on the call are Peter Gundermann, Chairman, President, and CEO; and David Burney, our Chief Financial Officer. You should have a copy of our fourth quarter 2021 financial results, which we released earlier this morning. And if not, you can find it on our website at astronics.com. As you are likely aware, we may make some forward-looking statements during the formal discussion as well as during the Q&A session. 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 release as well as with other documents filed with the Securities and Exchange Commission. You can find the 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 that accompanies today's release. So with that, let me turn it over to Pete to begin.

Thank you, Debbie, and good morning, everybody, and thanks for tuning in for our year-end 2021 conference call. Our topic today includes a range of fourth-quarter headlines. Sales were in the expected range of $116 million, but the income statement was clouded by a pretty long list of unusual items. Dave will walk us through those in a few minutes. The highlight of the quarter, which I'll spend some time covering, was bookings. Way up, again, a book-to-bill of 1.53 for the quarter set us up with a record backlog at year-end. We also have reworked our financing arrangement with the banks, getting a small three-month extension. Dave will talk through that. And then we will spend some time looking at 2022, and to cut to the chase, we expect it to be a year of strong growth. A lot of caveats here, as you might expect, but we are establishing an initial range for revenue for 2022 of $550 million to $600 million. The midpoint of that would represent something like 30% growth over where we ended up for 2021. We ended up with questions and answers. So fourth-quarter summary sales, as I said, $116 million, last time we talked, we predicted a range of $115 million to $118 million, so we were safely in there. This was despite ongoing supply chain and labor challenges, which will be a theme throughout this conversation and is not inconsistent with what's going on out there in the world in general. We ended the year with what we feel was about $15 million to $17 million of scheduled product that could not ship for one reason or another, typically having to do with supply chain challenges. As for labor, we're operating at about 2,200 people right now. Before the pandemic, we were at about 3,400, and we would like to be right now about 2,400. So we're facing challenges on the labor side. Again, we will talk about that a little bit more later when we talk about our current environment going forward. We don't expect to be profitable with $116 million, and depending on the metric you look at, we weren't; GAAP net income was 1.4% or $1.6 million and adjusted EBITDA of a negative $800,000 or a negative 0.7%. Again, Dave will walk through the forces that were in play in our fourth-quarter results. The bright spot, as I said, was bookings of $177 million against shipments of $116 million for a book-to-bill of 1.53. Both of our segments had very strong booking performances in the fourth quarter, but consolidated over the last four quarters, the trend has been very encouraging. The last four quarters being all four quarters of 2021 in succession went from $120 million in the first quarter to $126 million to $154 million to $177 million in bookings for a total of $577 million for the year and a book-to-bill of 1.3. Let's remember that $577 million booking when we try to explain our anticipated growth in 2022. Looking at aero bookings, aerospace for the quarter it was $148 million, a book-to-bill of 1.49. That's two quarters in a row of 1.49. The total cumulative for the last four quarters was $509 million, again, for an impressive book-to-bill for the year of 1.39. Our Test segment had a rebound quarter with respect to bookings of $30 million. That's a book-to-bill of 1.72. The $30 million somewhat compensates for very weak bookings in the second quarter and third quarter. We said at the time that we weren't losing things; they were just delayed, and a lot of them changed through in the fourth quarter, helping to cover those weak spots from the second and third quarters. We are not out of the woods in the sense that we continue to see COVID-related delays in the order flow in our test business for the year. We had bookings of $68 million versus shipments of $80 million, a book-to-bill of 0.86. So we look to improve that booking performance over the course of 2022. We have a number of pursuits that we think could decisively change the equation of the game if we're successful. The bookings left us at year-end with a backlog of $416 million. As I said, that's a new record for the company. Up from $283 million as the year began. So we started at $283 million, we ended up for $416 million. A little lesson from history. The last time we were at that level with a backlog, we were doing annual sales of about $800 million, that was late in 2018. So that backlog is something we take quite a bit of comfort in as we enter 2022. I think I'll turn it over to Dave here at this point to talk through the details of the income statement and our financing situation.

Okay. Thanks, Peter. I'll skip going through the sales, the top-line again. Pete covered that pretty thoroughly there and just jump right down to margins and some of the items that impacted the margins for the fourth quarter. It was a pretty noisy quarter. I think the easiest way to walk through it is to point into our adjusted EBITDA reconciliation. It's on Page 9 in the press release and talk about the items on there, as most of those items are going to be the noise that flowed through our income statement in the quarter. So we had GAAP net income of $1.6 million and adjusted EBITDA loss of $800,000 in the fourth quarter. There are a number of puts and takes, we had positive and negative items that had an impact. First, we received an unfavorable ruling from the Appeals Court in the United Kingdom regarding the ongoing patent infringement litigation. A lower court ruled that the patent was valid and that Astronics had been infringing and lifetimes of technique patent, and our appeal was dismissed. Based on the information available to us, we recorded an estimated damages loss, including interest, in the amount of $8.4 million. This is included in our SG&A cost in the fourth quarter. Next item, as we committed in the fourth quarter to reinstate a company contribution to our 401K plans and other retirement plans, the company contribution was suspended when we entered the pandemic in early 2020. A non-cash company contribution to our 401K plans for 2021 will be funded with the shares of Astronics common stock that we'll issue out of treasury to shares with a value of $4.2 million. At the current stock price, this equates to roughly 300,000 shares, which is less than 1% of the shares outstanding. Of note is that this is roughly a full year's worth of an annual expense recorded in the fourth quarter. So going forward, we expect a run rate for the 401K expense in 2022 to range about roughly $1 million to $1.2 million per quarter, which can be paid in either cash or stock. Next item is we recognized $7.6 million of the $14.7 million AMJP grant as a reduction of cost and sales in the fourth quarter. We expect to recognize an additional $6 million in the first quarter of 2022 and receive the second cash installment of about $5 million also in the first quarter. If you remember, we received the first installment back at the end of the third quarter. The next item is as part of a consolidation plan in October, we closed on the sale of our Fort Lauderdale building. This resulted in a gain of $5 million and net cash proceeds of about $8.8 million. That operation will be relocating to our e-store and New York operation. Lastly, in December, we came to terms with the buyer of our semiconductor test business regarding the calculation of earn-out payments. This resulted in a gain of $10.7 million that was recognized in the fourth quarter relating to the 2020 earn-out period. Proceeds were received in January. We expect the second earn-out for the 2021 earn-out period in the amount of approximately $11.2 million. We've received the earn-out calculation and are in the process of reviewing that calculation. Upon acceptance, we will receive the payment within 10 days. There are a few other items that are not in this that affected the quarter as well but had a large impact on the P&L. We had $2 million in sales of excess raw materials during the quarter for no margin. When you look at our sales, you have to consider that there were $2 million of sales at no margin in there that affected the margin percentage. We also had high customer accommodation cost related to supply chain delays and warranty costs, which combined totaled $2.2 million in the quarter. Additionally, we increased our estimated cost to complete several overtime programs that reduced margins by about $1 million in the fourth quarter. Jumping to cash flow, our cash flow from operations was good in the fourth quarter; it was $13 million in the quarter, driven by lower investment in networking capital and cash provided from operating income. Net debt at the end of the quarter was $133 million. That's down $20 million from the end of the third quarter. Our focus will continue to be deleveraging as we move through 2022. We mentioned that we amended and closed an amendment on our revolving credit facility. We extended the terms of the credit facility by three months to the end of May 2023. The purpose of this was to move the determination date, the revolver, out beyond the 12-month period where we're going to file our financial statements, as well as to give us time to consider an appropriate longer-term facility as we move into the summer and expect to increase our profitability in the second half of the year. Select key modifications to the amended agreement include a $225,000 amendment fee which was 10 basis points. The revolver was reduced in size from $375 million to $225 million. A revised definition of adjusted EBITDA excludes income from earn-out payments and asset sales. An increase in the maximum leverage ratio to 4.75 times adjusted EBITDA through the second quarter of 2022 and then reverting to 3.75 times adjusted EBITDA thereafter. The pricing grid was revised to be based on SOFR as LIBOR is going away, and the top drawn leverage, which is above four times adjusted EBITDA, is priced at SOFR with a floor of a 100 basis points plus 325 basis points. The top undrawn fee is also priced at SOFR with a floor of a 100 basis points plus 40 basis points, and there's a first lien on all of our real estate. Based on our financial projections, we're forecasting to remain compliant with our financial covenants for the duration of the agreement. Maximum permitted leverage at the end of the fourth quarter of 2021 was about 5.5 times, and our calculated leverage is about five times for the quarter. It's our intention to replace the amended agreement with a new long-term agreement in the near future. Here, we'll begin working on that as soon as possible.

We'll switch topics now and look ahead to 2022. I mentioned earlier that we are establishing initial revenue guidance of $550 million to $600 million. The midpoint of that $575 million would represent 30% growth over our 2021 results, and the high end would indicate 35% growth, which are substantial figures. A reasonable question might be how we plan to achieve this, and part of the answer lies in our bookings and backlog. Our 2021 bookings were $577 million, which is right in the middle of our guidance. If we assume that orders booked in 2021 will need to be delivered in 2022, we have to increase our internal production capacity throughout the year to meet those demands. Our internal forecast actually exceeds the upper end of our guidance. To clarify, the orders we anticipate, combined with the scheduled backlog, suggest we could surpass $600 million, although we are being conservative due to the challenging operating environment. At the end of 2021, we had $15 million to $17 million of scheduled backlog that we couldn’t deliver because of supply chain issues. Our opening backlog for 2022 is $416 million, with $340 million scheduled for this year. The calculations indicate that we need to book and ship $235 million to reach the midpoint, which is a feasible target based on historical standards for our business. We anticipate that first-half sales will comprise about 40% of the total, with second-half sales making up approximately 60%. We expect to begin slowly and then ramp up as the year advances. Our first-quarter sales will slightly exceed our expectations from the fourth quarter. Regarding our business environment, we have noted a significant acceleration in demand, mainly driven by narrow-body aircraft in our aerospace segment, while wide-body demand has lagged. Most industry analysts anticipate a recovery in wide-body demand around 2023 or 2024, which aligns with our expectations as well. The current bookings reflect a broad recovery of business rather than substantial new contracts, mainly from longstanding programs and clients. Looking ahead, we see a remarkable array of new business opportunities that we are actively pursuing. In my long tenure with this company, I have rarely seen such a diverse range of prospects before us. While we’ve experienced a solid increase in bookings, we remain excited about the significant future opportunities and look forward to discussing these in detail throughout the year. On the other hand, the operating environment is extremely challenging. We are witnessing unprecedented conditions unlike anything I have experienced in over 30 years, with geopolitical tensions drawing significant focus. Notably, we have an engineering operation in Lviv, Ukraine, which is situated near the Polish border and is relatively safe, but we are deeply concerned about the situation in Ukraine and are taking measures to support our team there. Nearer to home, inflation is impacting our operations, and we are observing an average inflation pressure of 5% to 10%. Like many aerospace companies, we are tied into long-term contracts for major programs, limiting our pricing flexibility. However, we strive to adapt in other areas as we move through 2022. Supply chain issues are pervasive, affecting all businesses, including ours, and have undermined our ability to respond promptly to customer demands. The $15 million to $17 million of product that couldn’t ship due to supply chain challenges is just a portion of the overall problem, as there is significantly more that we could deliver if logistics weren't an issue. Experts anticipate that supply chain pressures could ease by mid-year, and we are hopeful, but currently, we do not see evidence of an improvement. We are constantly seeking workarounds and alternatives to maintain operations, so far successfully, but it remains a risk as we progress through 2022. Labor shortages continue to be a significant concern, with our current workforce at around 2,200 people while we need to scale up to meet business demands. This is a major focus for us, and like many others, we are grappling with these challenges. Despite these pressures, we believe 2022 will be a year of substantial recovery. It is uncommon to plan for a business strategy that targets 30% growth. By the end of the year, achieving those volumes should lead to consistent and positive profit performance, which we are eagerly anticipating. With that, our prepared remarks are concluded. Darryl, let’s open it up for questions.

Thank you. We will now be conducting a question-and-answer session. One moment, please, while we poll for your questions. Our first question comes from the line of Michael Ciarmoli with Truist. Please proceed with your question.

Hey, good morning, guys. Thanks for taking the questions. I guess, could you give me a little bit more detail on why you would be selling excess raw materials? Was that for out-of-production or it just seems like given the current environment, you'd want to have some buffer stock there. Was it Aerospace? Was it test or what was the rationale there?

It was related to aerospace and involved older generation raw materials intended for servicing older generation equipment. While we might have used it over time if requested, we didn't see it as necessary for the current products we are selling.

Got it. That makes sense. Are there any long-term implications related to the patent infringement and the ruling? Will that have an impact on future profitability or sales? Additionally, as part of the settlement, are there any extra payments or royalties that might be required? Could you provide more detail on that?

This has been ongoing for more than a decade, and while time is limited, it's another step in the process. I would characterize it as losing a battle, yet we are still winning the war in my view. To provide some context, the litigation has occurred in the U.S., France, the UK, and Germany. The critical countries are the U.S. and France, as they are where most wide-body airplanes have been manufactured over the past 20 years and where the majority of the involved products have been delivered. A few years ago, we successfully concluded the U.S. case, and the relevant patent was annulled. Currently, the patent in France is also being invalidated, but Lufthansa Technic has the option to appeal this decision, with the hearing expected in December this year. If that appeal fails, indications suggest we will also prevail in France, making these two countries very significant. The situations in Germany and the UK are less critical; the UK case is nearly finalized aside from a damages hearing we anticipate in 2023, for which we accrued $8.4 million in the fourth quarter as our best estimate. Although the opposing side has a different figure in mind, we will address that when necessary. In Germany, we recorded $17.3 million back in late 2020 for anticipated damages, but we are contesting that amount, with the appeal also set for 2023. Therefore, not much action is expected in 2022. We will have a hearing in December for the appeal in France and anticipate damages hearings in Germany and the UK in 2023, along with our appeal in Germany. This process will take time, but we believe the accruals we expect to be paid are already reflected in our records.

Okay.

You can expect that the opposite side will have a different number in mind, but we'll have to settle that when the time comes. And then in Germany, let me dig up a note here, we accrued, way back in late 2020, $17.3 million for what we believe damages will be in there, but we are appealing that number. So that appeal is also not going to happen until 2023. So basically, very little is going to happen in 2022. We will have a case right in December on the appeal in France. We expect damages hearings in Germany and the UK in 2023, and we're appealing Germany, and I think they are also appealing in Germany. This is going to go on for a while, but we think the accruals that were likely to be paid, that we know about, are in the books at this point.

Okay. And then, funding this ongoing war, what should we expect for legal fees throughout then '22?

I think it's the same run rate as we've been going here. It doesn’t run consistent. It depends on what is actually happening in a given quarter and how much lawyer time is being spent during that quarter. Expect a ramp-up towards the end of the year here.

Got it. Peter, you gave some color on '22, and you talked about 1Q being slightly above, and I guess at your midpoint, 575 with 40%. That kind of puts you right at that 150. I mean, is that implying then you're not going to be profitable on the first half?

I think we've been running the business not necessarily to be profitable at the levels that we're experiencing in terms of demand. Our assumption has been that demand will return and volume will increase, and we felt it was important to continue to keep the capacity to execute on the programs like customers have trusted us with. For the most part, those programs did not go away with the pandemic, for better or for worse. So we're under an obligation to continue to execute and perform and we have them. What we need to do is have demand come back and have revenue come back to the point where we can cover those costs, then we would expect that to happen about mid-year. Dave, would you answer any differently?

Yeah, just I want to add. In the first quarter, remember Mike will have $6 million of AMJP grant trending come offsetting COGS for the first quarter. But absent that, yeah, we would not be running at a profit at that level of sales.

And we are.

Got it. Okay.

And the earn-out too.

And the earn-out, yeah. I'll jump back in the queue. Thanks, guys.

Thanks.

Our next question is coming from the line of John Tanwanteng with CJS Securities; please proceed with your questions.

Hi. Good morning. Thanks for taking my question. Pete, just one quick one for you. How bookings have tracked in Q1 so far; are you seeing a continuation of the increasing trend or is it more steady-state as you compared to Q4?

It's a good question. We have a bit of a way to go here. I don't expect we'll replicate the fourth quarter results in this quarter. It may be somewhat of a step back, but that doesn't concern me too much. Bookings can fluctuate quite a bit, but overall, if you gauge the sentiment of our salespeople, I believe they are all quite enthusiastic about the opportunities available. The outlook remains positive, even if we don't see the same growth in the first quarter.

Okay, great. And then you mentioned you're not seeing much improvement in supply chain. Just to clarify, do you expect any release through the year, or are you assuming the current status quo as we go from the first half to the second half?

The revenue guidance we provided does not reflect significant improvements. We experienced challenges in 2021 regarding lead times and have learned from that. Therefore, we are assuming that lead times will remain the same. We are placing orders ahead of time to prepare for future increases. This environment has been incredibly difficult, and we have faced various challenges in executing our plans when suppliers delay shipments significantly. Given this context, it's hard to say if conditions are getting better, and we cannot make that assertion. However, I hope the situation doesn't worsen. From my perspective, we seem to be experiencing the worst part right now based on my observations of the industry. While we would like to see a recovery, we are planning for stability throughout the year.

Okay. That's really helpful, and, yeah, I don't envy that job at all. Last one, you mentioned your engineering operations in Ukraine. How many people do you have there? What's the size of that business? Number one, and then number two, do you have actual direct exposure to Ukraine and Russia, either through their airlines or something else that we're not thinking of, maybe in the supply chain?

We currently have around 42 people in our engineering operation in Lviv, Ukraine. While it may be a small team, their work significantly influences various parts of our business. Lviv is relatively quiet compared to the eastern and central regions of Ukraine. Being about 45 to 50 miles from the Polish border, which is part of NATO, I believe that hostilities will likely remain low in that area. In terms of our operations in Russia, we aren't heavily reliant on them for raw materials, but we do engage in some business there. Russian airlines primarily serve Russian passengers, who appreciate connectivity with their personal devices during flights. Our revenue from Russia is modest, typically ranging from $5 million to $10 million in a typical year, though it can fluctuate based on new airline launches. Recently, we've done some work for the private jet sector in Russia, mainly through our French operations. There could be a slight impact if international business sentiment worsens and we face restrictions, though this hasn't occurred yet. We are monitoring the situation closely. In my view, our engineering operation in Lviv is more crucial for us than any potential lost sales in Russia, at least for the time being.

Okay, great. Thank you. And good luck to you all.

Thanks.

Our next question has come from the line of Dick Ryan with Colliers. Please proceed with your question.

Thank you. Pete, one last one on the legal side. This is the kind of settling old score. The patents you're talking about aren't on the current technology going forward; is that correct?

They've pretty much expired by now, so it doesn't really matter. I don’t have the specifics in front of me, but I believe they date back to around 1998. A lot happened before this issue even came to light, which is something I find frustrating. However, different regions have different regulations, so I suppose that's acceptable.

Okay. In Q3, you said you had a portion of $8 million to $10 million in revenue. Now, it's $15 million to $17 million. Is that the $8 million to $10 million just turned to $15 million to $17 million or is that on top of what was already there in Q3?

It's challenging to identify the details since there are many variables involved. Some items were delayed from the third quarter to the fourth quarter, while others were deferred from the fourth quarter to the first quarter. We decided to summarize the situation at the end of each period, highlighting how much work should have been completed under normal conditions. There was an increase in activity during the fourth quarter compared to previous periods. The overall situation has worsened throughout 2021, and we expect it to remain at this level into 2022.

Okay. Where does the strength in test orders come from? Was that from municipalities kicking back in or something different?

Good question. Overall, we were pursuing a variety of programs, but nothing substantial. You might recall that at the end of the second and third quarters, I mentioned bookings were low, but we were not losing orders; they were simply delayed, which we attributed largely to COVID. These orders typically come from defense bases globally or municipalities related to land mobile radio and transit train tests. With everyone working from home, progress stalled. However, in the fourth quarter, as people began returning to the office, at least until the emergence of Omicron, those orders started to be released. Looking ahead, I mentioned that there are significant opportunities out there. On the test side, we have two or three critical programs for us in 2022. While the timing of their impact may not significantly affect 2022, they should greatly benefit 2023. We expect one of them to materialize in the second quarter and two in the third quarter. It may take some time before I can discuss them in detail, but these are important targets we are focused on.

Okay. Can you talk about what your anticipation might be on the aero side? You talked about you haven't seen this sort of level of opportunity. I mean, is this the commercial side? Is there a potential military down-select? How does the business jet world look to you?

The opportunities are pretty broad-based. I talked about — well, airlines are waking up around the world, and some are deciding to go forward with major installations and major changes from what they've done in the past. The technology doesn't lie still even if the airplanes are. So we're seeing a surge in demand there, including some new customers which are impressive to me. I talked about eVTOL, electric vertical takeoff and landing opportunities and how that seems to be a good fit for the capabilities we've developed for flight critical electrical power for small aircraft. We don't have news today, but we are furthering our investigations there and extending our reach, and I expect program award announcements there in the near future. A third one, which is more public matter or public record, is we're teamed with Bell very closely on the FLRAA, future lift opportunity. That is a down select there; I think it's expected in the third quarter this year, mid-year stretching into the third quarter; and it's a team led by Bell against the team led by Sikorsky. We're firmly entrenched on the Bell side. If they win, that would be a very good program for us. If Sikorsky wins, we're not necessarily out of it, but we would expect our hope reasonably to have a much smaller role on their team. That’s an example of some of the things we're looking at. And again, nothing to announce today necessarily, but we would expect to see awards towards the middle of the year.

Great. Thank you.

Thank you.

Thank you. Our next question is coming from the line of Michael Ciarmoli with Truist Securities. Please proceed with your questions.

Hey, guys. Thanks for taking the follow-up. Maybe I'm pitched to dovetail in what you're expecting on test and some of these programs, but more broadly, I guess, pricing. Can you give any color as to how protected you can be on price, whether it's your supplier-furnished contracts with Boeing and Airbus versus buyer-furnished equipment with the airlines and any escalators? I guess, the short question is: Can you drive through significant price increases to bolt your average space and test customers?

In the short-term, about half of our business is relatively stable due to multi-year agreements on major programs. While these agreements offer some relief through escalator clauses, they don't fully address the price increases we're facing. This situation is likely common among most aerospace companies. The other half of our business has more flexibility with shorter-term programs that are generally based on purchase orders. In these cases, customers are generally accommodating to price adjustments. This trend may not bode well for inflation within the broader economy if similar responses are widespread, but we are seeing some opportunities. We also strive to manage costs as effectively as possible in this environment, but we've been doing this for a couple of years now, so there isn't much more room for additional cost-cutting. Dave, do you want to add anything?

Yes, the newer programs or contracts that we're quoting on, we certainly consider the increased cost structure when we price those. But as Pete said, a fair amount of what we have are up to the three or four-year programs, particularly with the larger OEMs.

Okay. I know it might be a little challenging for you, but regarding an aftermarket brake fix, we're hearing that many suppliers are seeing price increases ranging from the mid-to-high single digits up to the low 20%. You're having more success, and you have about 80% or 90% market share in certain product lines. Are you seeing price increases on the aftermarket side?

On the newer orders, we can, but a lot of aftermarket like pick a major airline. We tend to have established pricing with them for a period of time, and they can order from a price sheet. You can't necessarily change the price sheet in the middle of that order. But when it comes time to renegotiate a new vehicle, then you can.

Okay, got it. All right. Perfect. Thanks, guys.

Sure.

Thank you. There are no further questions at this time. I would now like to turn the call back over to Peter Gundermann for any closing comments.

No closing comments. Thank you for your interest. We're glad 2021 is over and we're glad to be in 2022, and it's going to be much more of a year of rebound. We look forward to reporting on it as it progresses. Have a good day. Talk to you next time.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.