Good afternoon, and welcome to the Astronics Corporation First Quarter Fiscal Year 2023 Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Debbie Pawlowski, Investor Relations for Astronics. Please go ahead.

Thank you, Priscilla, and good afternoon, everyone. We certainly appreciate your time today and your interest in Astronics. On the call here with me are Peter Gundermann, our Chairman, President and Chief Executive Officer; and Dave Burney, our Chief Financial Officer. You should have a copy of our first quarter 2023 financial results, which we just released after the market closed today. If you do not have the release, you can find it on our website at astronics.com. As you are aware, we may make some forward-looking statements during the formal discussion and the Q&A session of this conference call. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed with the Securities and Exchange Commission. You can find those documents on our website or at sec.gov. During today's call, we will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP measures with comparable measures in the tables that accompany today's release. With that, let me turn it over to Pete to begin.

Thank you, Debbie, and good afternoon, everyone. I appreciate you joining us today. Overall, we believe the first quarter marked a solid start to the year, with significant progress despite some challenges. We will start by discussing the positive developments and then address the challenges later. Sales increased by 35% year-over-year to $156 million, surpassing our previous estimates. The aerospace sector grew by 34% to $135 million. Our Test business experienced a 42% rise to $20.9 million, though this includes a $5.8 million non-operating addition, which we will elaborate on later. On the financial side, we reported a net loss of $4.4 million and an adjusted EBITDA of $6.1 million, representing 3.9% of sales. This reflects a significant improvement from the previous year when adjusted EBITDA was $1 million and also an increase compared to the fourth quarter’s adjusted EBITDA of $4 million on higher sales. Analyzing this quarter against last year's first quarter is somewhat complex due to several factors, including the non-operating revenue in our Test segment, an equity investment write-off of $1.8 million, and earn-out income from a prior semiconductor test sale. Additionally, we had $6 million in Aerospace grant receipts in the same quarter last year. Dave will address these specific items shortly. Demand remains robust, with bookings hitting $158 million, again setting a new record backlog at quarter's end. Aerospace orders were particularly strong at $150 million, resulting in a book-to-bill ratio of 1.11, while Test bookings were lighter at $7.8 million. We recognize that Test orders tend to fluctuate significantly from quarter to quarter, so we do not overly concern ourselves with a single quarter's performance in that area. In terms of new business, two important developments occurred shortly after the quarter ended. On April 6, the General Accounting Office dismissed the Lockheed protest regarding the Army's FLRAA program, allowing Textron's Bell to move forward. While we can't say too much about the program yet, we anticipate starting development work soon. This program could become one of the most significant in our company's history. Additionally, we were awarded the handheld radio test sets program by the Marine Corps in April. This long-awaited radio test program will operate under an indefinite delivery, indefinite quantity contract, and is expected to generate around $40 million in revenues over five years, primarily in the first three years. We expect to see a major task order of about $10 million in shipments in the coming weeks. This initiative complements the 4549/T program we discussed earlier, under which we won a contract for a radio test program for the U.S. Army last fall and are currently in contract negotiations. HHRTS represents the last major program pursuit we targeted before the pandemic began in early 2020. Throughout that period of uncertainty, we made a deliberate choice to retain resources and continue pursuing opportunities, even with the understanding that our business would face difficulties due to the impact on the aerospace industry. We have unexpectedly succeeded in winning most items on our list, barring a few that remain on indefinite hold. Looking ahead, we are maintaining our 2023 revenue forecast of $640 million to $680 million and providing second quarter guidance of $165 million to $175 million. At the midpoint, this suggests a 32% year-over-year growth and a 9% sequential increase. During much of the pandemic, we fluctuated between $100 million and $125 million in quarterly revenue. The last two quarters have been in the $155 million to $160 million range, but we feel we are on track to reach $170 million to $175 million or slightly higher for the rest of 2023. At this level, we anticipate being strongly cash positive and profitable. Regarding margins, we are fairly satisfied with the progress of our Aerospace segment. As volume increases, we expect the margin profile to improve, particularly since much of this growth is in the commercial aerospace market, which has historically been profitable for us. We are also making margin improvements in our Test business, although the first quarter results may not fully reflect this. We restructured the Test business in mid-April, cutting about $4 million to $5 million in annual costs, with savings expected to be evident in the third quarter after accounting for severance costs. This action was deemed necessary due to delays with some new programs we secured, such as in the radio test and HHRTS and 4549/T programs, along with slow progression in transit test work due to customer delays. We project these new programs will eventually contribute $20 million to $40 million in annual revenue, significantly boosting the current business revenue level of about $80 million per year, although progress has been slow. To manage the interim period, we felt it necessary to implement cost reductions, which will allow the business to achieve profitability at current revenue levels of $80 million to $85 million while we await the rollout of the new programs. The Test business has faced its share of challenges. Another significant challenge we face is working capital. The current increase in sales has led to larger receivable balances, and ongoing supply chain issues have resulted in excess inventory, particularly evident in the first quarter. We expect receivables to remain elevated in the near term as revenue continues to rise, but we believe we've reached a peak in inventory levels and anticipate a gradual decrease moving forward. Now, I'll pass it over to Dave to provide further insights into the topics I’ve discussed.

Thanks, Pete. As Pete mentioned, there are several unusual income and expense items to point out in the quarter and one in the comparable 2022 first quarter. For reference, you can see these items called out on Page 8 of the release in the table that reconciles adjusted EBITDA to GAAP net loss. First and most significant was a $5.8 million increase in sales, resulting from reversing an opening balance sheet contract liability created in one of our acquisitions a few years ago. The explanation is that we purchased a test company and assumed a $5.8 million deferred revenue liability related to a customer contract, which is no longer expected to occur. The second item is the reversal of another liability of $1.8 million that was recorded in other income this quarter. It pertains to an equity investment in another company that we are no longer required to pursue; it was a startup that failed to meet certain milestones. The third item is recognizing a final earn-out payment of $3.4 million from the sale of our semiconductor test product line a few years ago. In last year's first quarter, we recognized $11.3 million for the earn-out compared to $3.4 million this year. This was the final earn-out from that sale. The fourth item is our legal costs defending our positions in IP-related lawsuits, which were high in the quarter, amounting to $4.4 million, about $3.2 million higher than last year's first quarter. Finally, in last year's first quarter, we recognized $6 million from the AMJP grant program that Pete mentioned, which reduced cost of sales for that period, with no comparable grants since then. Considering all these factors, our adjusted EBITDA improved from $949,000 in the first quarter of 2022 to $6.1 million in this quarter, despite a $34 million increase in sales, excluding the adjustments related to the $5.8 million of nonoperating sales that I previously mentioned. I'd like to add that adjusted EBITDA also improved in comparison to the preceding fourth quarter of 2022. Looking at segments, our Aerospace business continues to see a strong recovery and is ramping to satisfy customer demand. Aerospace sales were $135.6 million, up $34.2 million or 33.7% from last year, with strong bookings at $150 million. We expect Aerospace sales to ramp to $150 million to $160 million in each of the final three quarters of the year, leading the segment to return to solid profitability. We're still expecting some spot buy expenses in the second quarter, which will affect margins. Aerospace operating margin for this quarter was $4.1 million or 3%. This is an improvement of $7 million compared to the first quarter of 2022 when excluding the impact of the $6 million AMJP grant from last year. Our Test business, on the other hand, had a mixed quarter. The top line of $20.9 million looks alright, but this includes the $5.8 million of nonoperating adjustment discussed by Pete. If we back out this adjustment, the Test results were not good. We expect sales to pick back up to $20 million in the second quarter and to maintain that for the rest of the year. After the quarter closed, we had a restructuring, which we previously discussed, where we expect to benefit from $4 million to $5 million annually. These benefits should start to materialize in the third quarter. The restructuring was necessary due to the slow takeoff of some higher dollar programs in the Test segment. Turning to debt and the balance sheet, cash flow continues to be a challenge due to inventory growth. Cash flow from operations was negative $19 million, driven primarily by $13.9 million in inventory growth and $4.2 million in receivable growth during the quarter. While the supply chain is improving, part shortages and last-minute reschedules from suppliers are hampering our efforts to reduce inventory and enhance inventory turnover. Receivable growth was mostly due to the timing of shipments weighed toward the last month of the quarter, as roughly 50% of shipments occurred in March. We remain compliant with our debt covenants and forecast continued compliance and positive cash flow for the balance of the year. Pete mentioned maintaining our revenue guidance of $640 million to $680 million for the year. That's all from me.

Okay. I think that almost concludes our prepared remarks. Overall, we feel that the first quarter was a reasonable start to the year. There are challenges, as always, but we believe the rest of 2023 is setting up to be an exciting time for our company. We will now open it up for questions, Priscilla.

Our first question comes from Jon Tanwanteng with CJS Securities.

My first one is just wondering how much you left on the table in terms of sales because of stranded inventory, whether that's due to component shortages or timing of other issues?

Probably about $25 million. We have about $25 million of orders that are overdue at this point, most of which are due to part shortages.

Yes. Are you seeing releases in...

So we're seeing continued progress on our supply chain in general. We've been saying that for about 5 or 6 months, and it continues to improve, but it's still not perfect. So we end up in these situations. You never know what it'll be from period to period, or week to week, or month to month. But in general, $25 million is the number that we think is overdue. I should distinguish this a bit because we have a huge backlog, and customers would gladly take products sooner if we could deliver them faster. As our supply chain improves, sometimes it does so in fits and starts. Therefore, to give you some color on that, we're projecting guidance for the second quarter of $165 million to $175 million. We have scheduled orders well in excess of the high end of that range. We're considering our current supply chain performance and not making assumptions about significant improvements in the short-term. I might note that for each of the last two quarters, we've hit or exceeded the high end of our range. It's starting to come back, but unexpectedly, we saw inventory growth in the first quarter. So there's a negative aspect to that.

Got it. That's helpful. Just thinking about the run rate you forecast for the rest of the year, $150 million to $160 million on the Aerospace side and $20 million on the Test side, that already gets you to the high end of your range. I'm wondering if that's how you plan it in your guidance and what your expectations are. Secondly, what's the profitability you're expecting at that run rate, the $160 million to $170 million?

We don't typically provide bottom line guidance. However, as we reach that range, and you're correct, the numbers we’re forecasting put us at the high end of our expectations. We would expect to be positive cash flow and reasonably profitable in the latter half of this year, particularly. About our guidance range, we are maintaining $640 million to $680 million as mentioned. The supply chain and market unpredictability certainly carry risks for downside potential. Conversely, there’s also upside potential if the supply chain continues to improve. We have the business and orders, and customers will typically accept products earlier than agreed if possible. Thus, I believe the second half will be an exciting period for the company, as it will increasingly resemble what it looked like before the pandemic.

Generally, think about our contribution margin on incremental sales being close to 40%. We’ve had some spot buys that are continuing, but they’re much smaller than in previous years. Last year, some quarters saw costs of $3 million from spot buys. In the first quarter this year, that was about $1 million. These will decrease as we move into the latter half of the year, but the contribution margin should improve as we’ve been below 30% to 35% last year. We're moving towards that 40% level.

Okay. Great. Last one for me. Just within that $20 million run rate for the Test business, does that assume any pickup from the Army or Marine contracts that you landed, or is that more of a ramp in 2024?

They will significantly ramp in 2024. We have some lower level assumptions for 2023, primarily for test units and low-rate initial production units. We don’t have the HHRTS task order yet; we expect it partly, but that looks more like an early 2024 issue than 2023. On the other hand, we expect a formal contract award for 4549/T around August, September, and there will be positive impacts at that point from low-rate initial production units and reduced engineering costs once the contract is signed. But that will also ramp more significantly in 2024 than in 2023.

Our next question comes from Pete Oberland with Truist Securities.

I'm on from Mike Ciarmoli this evening. So first, I just wanted to ask on the Aerospace segment. Looking back historically at the revenue run rate you delivered this quarter, you've been able to generate segment operating margins that were more in the low teens. I was wondering how to think about the difference. How much of an impact do you estimate that the spot buys had in the first quarter? And where are the other biggest margin headwinds versus your cost structure pre-pandemic? I’m trying to get at potential drivers for margin expansion throughout the year aside from volume impacts.

Most of the spot buy costs were in the Aerospace segment, which was about $1 million. The top-line growth is what's going to drive operating margin for the segment throughout the year.

I don’t know how far back you had to go for that similar revenue run rate in our Aerospace business. However, today, we are a deeper company, and we frankly didn’t have the chance back then. The system we’re deploying on FLRAA is a great example of something that most of the industry didn’t believe we could do because of our past work with their previous two commercial helicopter projects. A program like FLRAA is something we couldn’t have achieved five or six years ago. We have more overhead in our business now, which I believe is manageable and will drive results, but it takes time to mature; FLRAA will be no exception to that.

That's very helpful. And as a follow-up, I wanted to ask a question on the labor front. Are you fully staffed to meet your full year revenue guidance, and have you seen any recent changes over the last few months regarding attrition or overall labor availability?

We have certain areas of the company where we face labor challenges. However, in general, labor is becoming easier to source. We experienced a lot of churn over the last few years, and we’re starting to see some returning talent. It seems the grass isn’t always greener on the other side. We have an easier time attracting people across most areas of our business. If all parts arrived right now, would we have all the necessary personnel? Probably not, but the main challenge lies with parts, not people.

Our next question comes from Tony Bancroft with Kibali Fund.

Could you remind us what the FLRAA program entails and what a potential full rate ship set looks like? Is there potential to secure more content on that program?

As you know, Tony, these programs can have a long and somewhat unpredictable timeline. Our involvement is not firmly defined yet. Although, I’ve mentioned this before, as our company has grown, our ship set content has increased as well. At one time, our business was based on around $10,000 per business jet; today, if you consider a wide-body aircraft outfitted with everything we can provide from a lighting, safety, in-seat power, antennas, and wireless perspectives, you might arrive at a ship set value of $750,000. Our FLRAA ship set content currently exceeds that amount, making it a major program. It is designed largely to replace or complement the Black Hawk, which means there's a substantial upgrade opportunity out there.

Could you also remind me about the FARA program? I know this program doesn’t have the same volume as FLRAA. Given your relationship with Bell, could you also have a presence in that program?

With Bell, we are indeed involved in their FARA program.

Given how transformational this contract is likely going to be, where do you see your company 5 years from now once this program matures?

We've been focused quarter-to-quarter on program delays and legal challenges. However, the FLRAA opportunity provides tremendous possibilities for our company. Before the pandemic, we were overwhelmingly targeted toward commercial transport, which suffered the most during that time. Now, we're leaning towards military aircraft, which opens the door to rebalance our business positively from a market diversification perspective. We foresee transformative changes for the company because of this.

Could you provide more insight into the aftermarket opportunities that are arising as aircraft fly longer than expected?

That’s a good observation, and it's a growing part of our business. Our overall business has expanded significantly over the years; however, we're still relatively young. I recall when our sales were about $4.5 million, and we hit $800 million before the pandemic. Much of that growth occurred over the last 10 to 13 years; many products driving that growth are now maturing and need replacing. We’re noticing an increase in spare and repair purchases, which have historically been minimal for us. As we grow, these products will naturally wear out and need attention, fostering market opportunities.

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

Regarding FLRAA, what margins do you expect from the development work?

We expect to be fully funded and achieve a reasonable return at a risk-reduced rate. This contract is still in negotiation, so it’s hard to provide specifics now. However, I anticipate we'll be engaged before our next conference call, allowing for more insights. The scope of activities over the next 15 months has varied quite a bit, making it difficult to determine exact requirements at this time.

As you scale in 2024, are there any concerns about your smaller business units that might detract from overall company performance?

No, not really. You have a long memory, Scott. However, I’d like to remind you that we made some significant restructuring changes to those three business units at the end of 2019, which I believe have been largely successful. We haven't discussed them much since but to generalize, they're performing well now. One of these units is currently one of the most profitable parts of our business, signifying major improvements.

It’s good to hear that. About the last significant military contract, the F-16 night vision cockpit, could you provide context on that project?

Yes, that was the F-16 retrofit program for night vision compatibility, which began in the late '90s. At that time, we were just two operations in New Hampshire and New York, and we were a $60 million company, but that contract scaled us significantly. It accounted for retrofitting 1,156 aircraft.

Our next question comes from Jon Tanwanteng with CJS Securities.

Just wanted to revisit the margin discussion. Do you expect to return to low teen operating margins in the Aerospace segment within the next five to seven quarters?

I think it might take a little longer than the next four to five quarters to reach low teens for operating margins. However, it is our expectation to get up to mid-teens for EBITDA margins as the top line grows, likely post this year, possibly the beginning of next year. I can foresee us achieving teens in operating income for the Aerospace segment, but probably not within the next year. Additionally, as the top line rises, we'll see new contract pricing begin to kick in more than it has recently. We’ve quoted many new pricing structures already, and those usually apply to year two or three contracts starting this year and moving into next year. New pricing reflects the inflation we’ve experienced over the past year, contributing to margin expansion.

That’s helpful. Could you provide insight into your legal costs for the remainder of the year and when you expect those to taper off?

That's challenging to predict. The costs may vary from quarter to quarter but are likely to fall within the $2 million to $4 million per quarter range. It might be $4 million one quarter and $1 million the next, depending on the progress of the lawsuits.

Could you remind us how much slack you have within your covenants now? In case we encounter further issues with receivables, inventory, or something else.

At present, regarding our minimum EBITDA compliance, we have approximately $9 million of room on that front.

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