Good afternoon, and welcome to the Astronics Corporation Second Quarter Fiscal Year 2023 Financial Results Conference Call. I would now like to turn the conference over to Deborah Pawlowski, Investor Relations for Astronics. Please go ahead.

Thank you, Anthony, 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 second quarter 2023 financial results, which just crossed the wires 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. So with that, let me turn it over to Pete to begin. Peter?

Thank you, Debbie, and good afternoon, everybody. Thank you for joining us. We are here to discuss our second quarter and our outlook for the remainder of the year. Overall, we believe our second quarter was a significant advancement for our company, marking the strongest quarter we've experienced since COVID-19 began in early 2020. There are three key themes that will repeatedly arise as we review our results. The first is that volume continues to increase. We are recovering our production rates, which is largely influenced by our supply chain. The second theme is that our supply chain, while not yet perfect, is improving notably over time, which is clearly reflected in our production volume. The third prominent theme is that demand for our products remains very robust, which gives us confidence in continued recovery as we progress through the upcoming quarters. In terms of specifics, we reported sales of $175 million, representing a 35% increase year-over-year and an 11% increase sequentially. This continues a strong recovery trend observed over the past several quarters. In the last four quarters, we had revenues of $131 million, $158 million, $157 million, and now $175 million. Our Aerospace segment was the main contributor to our results, with sales rising 45% year-over-year to $158 million. In contrast, our Test segment faced challenges, with sales declining 19% year-over-year to $16.1 million. Regarding our bottom line, we experienced a net loss of $12 million; however, our adjusted EBITDA was $15.8 million, which is 9.1% of sales. Dave will provide details on the major EBITDA adjustments shortly, but overall, it was a relatively straightforward quarter compared to others we've had recently, with no earnouts or AMJP grants. A notable item in our tax line stood out in the numbers and was similarly unusual last quarter, which will likely continue for the near future, and Dave will briefly explain that in a moment. All in all, our adjusted EBITDA of $15.8 million marks a significant improvement from a year ago when we had an adjusted EBITDA of just $129,000 or 1.6% of sales. On the demand front, our bookings of $207 million are essentially back to pre-pandemic levels, reminiscent of what we saw in 2018 and 2019, with a book-to-bill ratio of 1.19. Even with strong shipments, we have set a new record backlog of $611 million, of which $330 million is slated for shipments in the second half of the year. We'll revisit the second half in a moment, but that is a noteworthy figure for us. Our Aerospace orders in the second quarter performed particularly well, totaling $189 million with a book-to-bill ratio of 1.19, while our Test segment had decent bookings of $18.3 million and a book-to-bill of 1.14. We issued four notable press releases over the last quarter, and I want to briefly address each one to illustrate the developments in our business. Our Test segment received a significant order from the Handheld Radio Test Sets program with the U.S. Marine Corps, which we discussed previously. This program, valued at around $40 million over three to four years, had a major delivery order of $10 million in the second quarter. Although there have been smaller orders related to HHRTS prior, this $10 million is the first meaningful delivery order, which we are currently fulfilling. Another program we've previously mentioned is 4549/T for the U.S. Army. Over a year ago, we were selected as the winner of a technical competition for their next radio test platform. We expected a prompt progression into contract negotiations for a directed procurement to our company. To summarize, we're still awaiting that directed procurement, but it is indeed progressing. The connection between HHRTS and 4549/T is recognized by the armed forces, and we believe the Army contract should be awarded by the end of the year, which would be a beneficial addition to our fourth quarter results. The second press release I want to highlight involves electric aircraft, often referred to as eVTOLs. One of our areas of expertise is electrical power distribution and generation for small aircraft. There is a variety of eVTOL aircraft currently in development, and we've designed a range of products that can be utilized by original equipment manufacturers. We previously announced a partnership with Lilium, a leading player in the eVTOL space, and we've also attracted interest from several other companies, totaling about 10, with a projected contract value of approximately $20 million. While these may not be large orders at this stage, they are development orders that help us establish strong relationships in the industry. There were also press releases in early June about the Airbus A220 passenger service units, which represent one of our product specialties. The PSUs, located over passengers' heads in commercial airplanes, include reading lights, air handling systems, and emergency oxygen systems. This award from Airbus for the A220 marks our first project of this kind for an Airbus aircraft, and we believe it will be a substantial program that is now in production. Our products are expected to enter production towards the end of 2024 or early 2025. Lastly, we released information about a next-generation in-seat power system designed to provide USB Type A and Type C 60-watt power for narrow-body airplanes. This system was developed for Southwest Airlines during the pandemic, and we've successfully marketed it globally since then. The press release stated that we have commitments from over 12 airlines for about 1,100 narrow-body aircraft, with options for even more. We’re enthusiastic about transferring our franchise to narrow-body aircraft, and we have many candidates for this system. All of these products, including HHRTS, the eVTOL systems, the A220 PSUs, and the UltraLite G2 in-seat power system, were primarily developed during the pandemic. I'm pleased with our decisions to continue investing in promising programs, resulting in substantial incorporation into our backlog. We expect these initiatives to become significant components of our business in the coming months and years. Now, I'll hand it over to Dave to review some specifics regarding our income statement and balance sheet.

Thanks, Pete. Sales reached the upper end of our forecast, thanks to effective supply chain collaboration in June that led to a strong quarter-end performance. Our operating income for the quarter was $2.4 million, marking our first positive operating income since 2019, with a $4.8 million increase from the first quarter of this year and a $10.8 million rise compared to last year's second quarter. This improvement was somewhat offset by high legal expenses for the quarter, amounting to about $4.9 million, not counting an adjustment related to a lower interest rate that will apply to the penalties accrued from the German lawsuit. A 47% contribution margin on the increased aerospace sales compared to the first quarter boosted our margin improvement, underscoring that top line growth is crucial to our recovery. We have seen strong orders over the past three quarters and a record backlog, which are translating into increased sales and better margins. However, test margins remain low as the segment continues to face high costs relative to its revenue. In response, we announced a restructuring and headcount reduction during the first quarter earnings call that is expected to yield cost savings of about $1 million per quarter starting in Q3. Nevertheless, our cost structure remains prepared for anticipated revenue growth, which we expect to begin once the 4549/T Army radio test program contract is awarded and the Marine Corps HHRTS radio test program, for which we have recently received the first task order, begins. SG&A expenses remain elevated due to the legal costs associated with ongoing lawsuits, which totaled $4.9 million in the quarter. These were partially mitigated by a $1.3 million reduction in our legal reserve due to a slightly lower interest rate. The tax expense for the quarter was $8.1 million, which, as I’ve pointed out in previous quarters, does not accurately reflect a typical tax rate or cash tax rate. Due to our cumulative pretax loss over the past three years, we are required to record a valuation allowance for our deferred tax assets, leading to an unusual effective tax rate. We project our full-year cash tax rate to fall between $6 million and $8 million, driven by new rules that require R&D costs to be amortized over five years instead of being deducted as incurred. Normally, this would create a deferred tax asset that would lower the effective tax rate, but since we take a valuation allowance against that asset, it results in this atypical tax rate. Congress has discussed deferring or eliminating that aspect of the code, but no progress has been made yet. Regarding our balance sheet, liquidity remains tight as our inventory investment continues to increase in order to support our growing backlog. Cash flow from operations has significantly improved since the first quarter, but it still falls short of our expectations. In the second quarter, cash used in operations was $2 million, a notable improvement from the $19.2 million used in the first quarter. Our income statement has seen considerable improvement over the last few quarters, driven by sales growth. However, despite advancements in supply chain management, inefficiencies and prolonged lead times have resulted in higher inventory levels and stranded inventory awaiting final components for shipment. This, alongside a 35% year-over-year growth, has led to an increase in our inventory investment of $22.6 million year-to-date, with $9 million added in the second quarter alone. The large sales spike in the second quarter, particularly concentrated in the final month, led to an $18 million rise in receivables. These increases in inventory and receivables were somewhat balanced by rises in payables and accrued expenses. We forecast that our inventory levels have reached a peak and expect them to decline as we progress through the latter half of the year. We are compliant with our debt covenants and anticipate maintaining this compliance along with generating positive cash flow for the remainder of the year. Moving to the reconciliation of net loss to adjusted EBITDA on Page 8 of the release, it was a fairly straightforward quarter. The only two notable items were the high legal expenses of $4.9 million, which were partially offset by the adjustment to the legal reserve due to a lower interest rate dictated by a German court ruling that decreased legal costs by $1.3 million. Overall, it was a solid adjusted EBITDA quarter for us at $15.8 million, representing a significant improvement from last year's $2.1 million.

Looking ahead, we are maintaining our 2023 revenue forecast at between $640 million and $680 million, with a focus on the top end of that range, which is $680 million. We reported first half sales of $331 million and entered the second half with a scheduled backlog of around $330 million. Together, these figures suggest we will reach approximately $660 million, the midpoint of our range. Scheduled backlog indicates we have confirmed orders, set delivery dates, and high confidence in our supply chain execution. If any of these elements are not in place, we categorize it differently. With $331 million in the first half and $330 million scheduled for the latter half, we anticipate a modest $20 million increase from further orders over the next six months, particularly in the fourth quarter. While predicting these adjustments can be challenging, we believe achieving this figure is realistic. If we look at each quarter separately, we expect the third quarter will be similar to the second, possibly slightly higher or lower, while the fourth quarter has more potential for significant change, which is why we are keeping our range unchanged. Additionally, due to supply chain inefficiencies—which are improving but still not ideal—we tend to ship a larger portion of our products in the last week of each quarter. Last quarter, for instance, about 20% was shipped during that period, which makes our final results sensitive to last-minute adjustments. We are also seeing continued margin improvements and a decline in material costs, primarily from fewer spot purchases as the supply chain conditions improve. The price increases we've been able to implement in some contracts are starting to yield benefits as well. We believe there is further room for margin improvement as we work on this over the long term, and we are pleased with our progress. Overall, we are optimistic about the remainder of 2023, with revenues nearing pre-pandemic levels and notable enhancements in our income statements. Now, if there are any questions, Anthony, we would like to address them.

Our first question will come from Jon Tanwanteng with CJS Securities.

Peter or Dave, at the high-end of the range, that's $175 million in revenue, which is similar to what you did in Q2, that doesn't give you the benefit of volume leverage to drive margins. So I'm wondering what kind of improvements are available just in the less spot buys, the price increases that you're talking about? And is volume actually going down as prices are increasing?

Yes. A few things are expected to start improving. The spot purchases are predicted to decrease, previously ranging from $1 million to $2 million for the quarter. Historically, they've been around $3 million, and they will continue to decline. New contracts and purchase orders will carry higher margins as we've accounted for inflation in our new agreements. Thus, we anticipate some leverage and continued improvement. Legal costs will fluctuate depending on the various port situations, so they are likely to decrease in the upcoming quarters based on those conditions. While we are being conservative at the upper end of projections, we have some programs in the pipeline that we hope will help us reach that upper end. However, given the current state of the supply chain, we are cautious about extending our forecasts too far. That's my perspective 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 kind of $200-plus million order run rate sustainable as you look at the ongoing air recovery? Or are there going to be fits and starts and a little bit of lumpiness as you go forward?

That's a great question, and it's important for us to monitor closely. If you refer to the table on the last page of our press release, you can see not just the four quarters but also the trend that has persisted since the pandemic began, as illustrated by the bar chart. While there are fluctuations, the overall direction is clear. We've secured several significant programs, which I've mentioned, and these are not truly reflected in our backlog at the moment. There are additional opportunities like this as well. Our goal is to surpass our pre-pandemic performance, but we need to reach those pre-pandemic levels first. This quarter, the bookings aspect felt strong with $773 million achieved in 2019. Naturally, if we could annualize the $200 million, that would position us above that rate, and this would stimulate shipments. We emphasize bookings more than many companies because we believe they serve as an excellent leading indicator of our business trajectory, which is why we focus on it so much internally and in our communications with the market.

Got it. Lastly, where do you foresee cash flow in the upcoming quarters? It appears to have been tighter than anticipated over the last two quarters. Is there any indication that it will improve based on your current observations?

Yes, that's the plan. It's been tight for the past two quarters. We experienced a significant increase in our working capital in the second quarter due to inventory and receivables. Those receivables are converted to cash fairly quickly. The challenge we are facing is with the inventory at this time. However, we are internally projecting to achieve positive cash flow for the remainder of the year.

Our next question will come from Sam Struhsaker with Truist Securities.

I'm on for Mike Ciarmoli tonight. I was curious, as 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 the same as you're getting in the past at this level, stronger, weaker?

They're going to start out being probably dependent on the period you're looking at.

I'm considering what we can expect in terms of margins once we return to those revenue levels that we had before the pandemic.

Yes, I believe we should be able to return to our pre-pandemic margins. We need the new programs we are winning and pricing at higher margins to take effect, which will occur as we move through next year and into the second half of this year. The mix isn’t significantly different, and there’s no major fundamental change. We are currently behind in incorporating the increased costs from last year in wages and materials into our new contracts, but that will catch up as we progress through next year.

Great. And then kind of going along the line of the inventory and supply chain, where exactly are you guys seeing the bigger issues on the supply chain in terms of getting parts in? Is it extended lead times? And is there any particular area that's worse than others that might be impacting guidance for the year?

A lot of what we do is related to electronics, so the answer to that question includes the general electronics challenges that the world has faced over the last couple of years. In some instances, we have extended supply chains that extend into various parts of Asia, which has affected us as well. It's not unusual for some of our more complex products to contain a few hundred components. If just one component is delayed, the other 199 components remain on the shelf until we have everything needed. The situation is improving as the overall responsiveness and lead times have decreased. The surprises we encounter today are mainly positive compared to a year or two ago when they were largely negative. Progress is being made, but there are still challenges. Our customers often want to place orders and receive parts within 20 weeks, while the components for those parts can have lead times of 40 to 50 weeks. This discrepancy creates risk in the system, which we are also managing. Overall, we believe things are improving. In terms of inventory management, different parts of our business are performing better, but we need to achieve more consistency across the entire company. This is a major focus for us, and we need to improve in this area.

Great. And if I could just sneak in one more. What's the update on the FLRAA program? Anything there?

There is activity. I'm not at liberty to discuss it in this context right now, but we are engaged and looking to make some public news about that shortly.

Our next question will be a follow-up from Jon Tanwanteng with CJS Securities.

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, what's the run rate that you expect going forward and if there's going to be an in any time soon?

We have a few ongoing legal situations that we have been managing for quite some time. The most prolonged involves our in-seat power product and electrical outlets, particularly in relation to a German competitor. This case has unfolded across four countries over the past decade: the U.S., France, the U.K., and Germany. The U.S. case has concluded in our favor a while ago. In France, we believe the case is nearing completion, contingent on whether the appeals court decides to hear the opposing appeal; however, we feel confident about the outcome. The situations in the U.K. and Germany are more complex. We lost the case in the U.K., and a penalty phase is forthcoming; we've accounted for our expectations regarding this, likely impacting 2024-2025. The German case has been ongoing for an extensive period and is also expected to reach a conclusion in late 2024 or 2025. Consequently, our legal expenses have been substantial over the last few months. Additionally, we are involved in a case within our Test segment that initially began as a patent dispute. Although we successfully had the patent dismissed, the matter has now transitioned into a copyright dispute. We believe the risks have decreased significantly, but we felt it necessary to seek legal remedies. This case may come to a close depending on court decisions by the end of this year, or it could extend until the end of next year.

Our next question will be a follow-up from Sam Struhsaker with Truist Securities.

Just, I have two quick clarifying questions. In your prepared remarks, you mentioned the systems for the eVTOLs. Was that $10 million total or per potential customer?

No, it's $20 million total for the 10 customers.

Yes. Got it. Okay. And then regarding the USB-C product you have on narrow-body aircraft, do you have an estimated dollar amount per aircraft for that?

It's quite variable, but generally, it depends on the configuration, as some aircraft prefer specific classes of seats. A very low-cost installation might be around $70,000 per aircraft, while a more standard installation could range from $130,000 to $140,000, with significant variance based on how the airline opts to arrange their cabin.

This concludes our question-and-answer session. I would like to turn the conference back over to Peter Gundermann 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 and close to the year, and we look forward to talking to you next time. Have a good day.

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