Good afternoon, everyone, and welcome to the Astronics Corporation Third Quarter 2023 Financial Results Conference Call. Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Deborah Pawlowski, Investor Relations for Astronics. Please go ahead.

Thank you, Tammy, and good afternoon, everyone. We certainly appreciate your time today and your interest in Astronics. Joining me on the call are Peter Gundermann, our Chairman, President and CEO; and Dave Burney, our Chief Financial Officer. You should have a copy of our third 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. Pete?

Thank you, Debbie, and good afternoon, everyone. We appreciate you joining our call. We believe that the third quarter was a fairly strong period for our company. As is customary, Dave and I will share our prepared comments before moving to questions. Dave will cover the detailed aspects of the quarter, while I will focus on what I think is crucial for investors to understand about our company's growth trajectory, which is expected to remain significant in the upcoming quarters. It's essential to grasp this trajectory in terms of our past and future to truly understand our company. I’d like to begin by revisiting some history that may be familiar to many of you, but it’s important for context. Looking back to 2019, before the pandemic, our sales reached $773 million, with a significant portion of our business, about 70%, coming from the commercial transport airplane market, both OEM and retrofit applications. The arrival of COVID in early 2020 severely impacted the commercial transport industry, affecting companies like Astronics. Our revenue dropped to $455 million in 2021, marking a significant decline for us, though we did see an uptick in bookings that year, especially in the narrow-body market, resulting in a book-to-bill ratio of 1.3. Unfortunately, due to supply chain challenges, we were unable to convert those bookings into revenue as we had hoped, leaving us with that $455 million in 2021. In 2022, we began to see considerable improvement, with sales climbing to $535 million, a 20% increase as the supply chain started to recover. Throughout that year, bookings remained strong with a book-to-bill of 1.29. While the supply chain was improving, it still fell short of our needs. But a 20% growth in ordinary circumstances would generally be something to celebrate. Now, moving to 2023, we continue to witness recovery in both the airline industry and our supply chain. Based on our Q3 results and the updated guidance we issued today, we anticipate finishing the year with revenues ranging from $680 million to $690 million, which would represent a 28% increase compared to 2022. So while last year we had 20% growth, this year we're looking at 28%. Regarding our fourth quarter forecast of $185 million to $195 million, these figures are substantial compared to our performance over the last three years since the pandemic. Importantly, we have the backlog to support this projection. In fact, with the right circumstances, we could potentially exceed the higher end of that range. However, adopting a prudent approach, we believe that $185 million to $195 million is a sensible target. Furthermore, we are currently on track to reach these figures based on our performance over the past five weeks, which, while not publicly available yet, suggests we are moving in the right direction. Notably, this forecast marks a return to pre-pandemic performance levels from 2019, which is a significant milestone. During the pandemic, we maintained our focus on new programs, expecting that historical demand would eventually return to help offset our development costs, and we believe we are close to realizing that. Achieving our fourth-quarter revenue goals would provide an important assessment of our income statement and margin profile. Touching on our Q3 revenue, sales were $163 million, which fell slightly short of our expectations. However, at this point, we are not overly concerned, as this was largely a result of scheduling, supplier capacity, and our own production capabilities. We ended the second quarter strongly but entered the third quarter with low inventory heading into July 4th, which led to a weaker July. August also tends to be a slower month due to vacations. Despite these challenges, we gained momentum as the quarter progressed, and while recording $163 million in Q3 followed by a forecast of $190 million in Q4 might not be ideal, it does not concern us. Dave will elaborate on the specifics of Q3 shortly. Before he does, I want to briefly discuss our expectations for 2024. We’re nearing the end of the year, and although we typically issue revenue guidance around this time, we're still finalizing those figures. However, I want to convey that the revenue level we anticipate for the fourth quarter serves as a strong indication of our performance moving forward into 2024. We do not consider the fourth quarter figures of $185 million to $195 million to be an anomaly. We expect that when we provide our initial guidance for 2024, we will aim for a range above $750 million, which would represent significant growth compared to 2023. We are eager to share this guidance, likely by the end of the year. Now, I'll turn it over to Dave.

Thanks, Pete. So consolidated sales were up $31.5 million or 24% from last year's third quarter. The increase was across the board in all of our markets, but primarily driven by the commercial transport businesses. Global airlines have increased their retrofit programs and OEM build rates have increased. Other than that, the sales increase was consistent throughout the entire aerospace business, but clearly dominated by the growth in the commercial transport business. I'll jump to some significant items that had impact on our margins this quarter. The largest item was the unexpected sudden bankruptcy a few days ago of a non-core customer. We did contract design and manufacturing work for that goes back to 2021 and 2022. We've been in weekly contact with the customer regarding their sales pipeline and prospective customers' order pipeline for their product, and we're surprised by the filing. We had very minimal sales activity with this customer this year and have not been including any sales relating to them in our forecasts. The impact of this bankruptcy will have no impact on our operations beyond the reserves that we recorded this quarter related to inventory, all of which was purchased prior to 2023 and receivables, most of which were prior to 2023. Looking at gross profit for the quarter. Gross profit was $20.6 million or 12.7% on sales. Lower than expected on $163 million of sales, primarily as a result of the reserve for inventory related specifically to that customer bankruptcy, which added $3.6 million or 200 basis points to cost of sales. Absent this inventory reserve, gross profit would have been $24.2 million or 15%, up from 10.9% last year, but down sequentially from the second quarter due to the lower sales volume. SG&A of $35 million or 21.5% of sales was higher than expected due to the accounts receivable reserve for the customer's bankruptcy, which was $7.5 million. That equates to 460 basis points on sales. Legal costs continue to run high and were $4.6 million in the quarter. Absent the accounts receivable reserve, SG&A would have been $27.6 million or about 17% of sales. The loss from operations was $14.5 million. Absent the impact of the customer bankruptcy, the loss from operations would have been $3.4 million, a significant improvement compared with a loss from operations last year's third quarter of $14.3 million. Looking sequentially to bridging our second quarter operating income of $2.4 million to our third quarter operating loss of $14.5 million. We lost roughly $4.5 million to $5 million of contribution margin on the $11.5 million sales drop. The balance relates to the $11.1 million of reserves taken related to the customer bankruptcy. Interest rates remain a headwind. Our cash interest for the quarter was about $5.6 million, which equates to a rate of 12% on our debt, outstanding debt balance during the quarter. At the end of the quarter, we had outstanding debt of $174 million. Jumping over to the balance sheet, cash and cash flows. Cash used in operations in the quarter was $1.1 million, which is all an increase in net operating assets of $8.3 million that was largely offset by the net loss adjusted for non-cash expenses. On a positive note, our inventory level has stabilized and we are expecting from this point forward, we will begin to improve our inventory turnover, lowering inventory levels and generating cash flow as we move into next year. As liquidity remains tight and our working capital remains high, we were active using our at-the-market program to sell 835,000 shares at an average price of $16.70 that generated $13.6 million that was used to fund the working capital needed until we realize the cash flow from the growing sales. This equates to a dilution of about 2.5%. Looking into the future, in terms of deploying free cash flow, the first place we'll start to target is to delever our balance sheet. With our large fourth quarter sales forecast, we expect cash flow to improve significantly, but not until the first quarter of 2024. We are compliant with our debt covenants and are forecasting continued compliance. With that, back to you, Pete.

I think that ends our prepared comments. So Jamie, if you want to open it up for questions, now is the time.

Our first question today comes from Pete Osterland from Truist Securities. Please go ahead with your question.

Hey, good afternoon. I'm on for Mike Ciarmoli today. Thanks for taking our questions. So first, I just wanted to ask on the expectations for margins. If I look at your level of sales and EBITDA throughout the year, it would seem like in the fourth quarter, you should be able to put up at least low double-digit EBITDA margins based on that sales level and continuing that momentum into 2024. Is that reasonable? Or is there anything else you're currently seeing with costs or mix that would change how to think about the incrementals here?

Yes, this is Dave. We typically don't provide guidance on margins, but we believe that about 40% to 45% of our incremental sales will contribute to operating income. Therefore, it's reasonable to expect that we can approach that double-digit EBITDA number at that sales level. For your modeling purposes, you can consider using 40% as a quick estimate for what would drop to the operating income line from sales.

That’s very helpful. And then I just had a follow-up on the commercial aero build rates. Are you currently aligned with the stated OEM build rates that is publicly announced and have been talking about recently? Or are there any areas where you're currently lagging?

Well, sometimes we are aligned. I would say we are typically at this point on the narrow body MAX line, which is probably what you're asking about, we are running around mid to high-thirties. And so we are reasonably close to stated production rates at this point.

Okay. So given that rates are picking up and expected to make meaningful progress soon, are there any areas you'd call out where you saw meaningful challenges during the quarter within your manufacturing processes, whether it's labor productivity or anything with key suppliers. Just anything you call out there that you're kind of still seeing in the current quarter, in the fourth quarter?

No, I think it's safe to say that we continue to experience some supply chain challenges across our operations, but nothing has significantly hindered our major products in the third quarter. The larger issue was that we had an exceptionally strong second quarter with huge shipments right at the end. One of our concerns then was that we were in a cycle where everything was heavily weighted towards the end, resulting in a big push followed by empty factories at the beginning of the next period. This was exactly what happened as we transitioned from the second quarter to the third quarter. Additionally, many of our operations were shut down during the week of July 4th, which contributed to a weaker start to the third quarter and we never quite caught up. However, I believe this was the main issue. Overall, our supply chain is generally improving. Once we moved past July and into August and September, we ramped up and the operations became more routine at higher volumes. Now that we are in the fourth quarter with the volume we expect, things are picking up. Nonetheless, I cannot attribute the weakness of the third quarter to any specific supply chain issues.

Got it. Thanks, guys. I will leave it there.

Okay. Thank you.

Our next question comes from Jon Tanwanteng from CJS Securities. Please go ahead with your question.

Hi. Thanks for taking my questions, guys. I was just wondering today, how much excess is stranded inventory you're hanging on to and kind of what is the path or timing to work that down to more normalized levels?

I don't think we have a number for kind of the excess or stranded; it's definitely there and it's significant. And when we call it stranded, it just means that it's waiting for the rest of the parts to catch up with it so that the orders can be completed and shipped. So it's the contributor to our high inventory levels for sure. I don't have a number for you on that.

I would add some color, Jon, that there's stranded inventory and then there's slower moving inventory. And one of the things that happened as we went into the pandemic is the wide body world really slowed down. And we got caught with some inventory that's specific to wide bodies that we expect will start to burn down as we move through 2024 in the wide body production rates and markets continue to pick up. So I think we are going to see a reduction in inventory, both in the stranded variety and kind of the wide body variety. How to quantify those is difficult with our systems. But we would like to think that we could burn down our inventory by the end of the year, at least $20 million or $30 million. I think that's what we're thinking.

No, it will be less than that.

Okay, great. Thanks. I was wondering just next year, you gave kind of a range for what you expected on revenue just measured against Q4. But I was wondering what you thought about order rates going forward and what the demand you think is going to look like from your customers, and that's excluding whatever military, large military orders you're waiting for?

Well, that's certainly a watch item. I would think that we are going to at least stabilize around that higher $750 million or $800 million level, but we are going to have to watch bookings over the next couple of quarters pretty closely to confirm that. One of the things that has not happened as we hoped for was on our test business, we are still waiting for some very significant programs, been waiting for one of them for over a year now, the U.S. Army radio test program. And that is an example where it will have a significant impact on our bookings when it happens and a significant impact on our 2024 plan. So we obviously publish bookings because we think it's a leading indicator of where we are going to be as a business, and we've got a record backlog. So we feel we are pretty safe with the preliminary initial look in the 2024 that I talked about earlier. But where bookings come out beyond that is something we are going to have to watch.

Okay, great. And then is there any update just on the litigation that expenses you're incurring? When do you expect that to either let up or some kind of resolution to occur?

We have two major actions involved, one of which has been going on for over a decade, and that one we would expect to continue to move pretty hot and heavy through 2024. Hopefully, with some kind of resolution as we get into 2025, that's our thinking there. The other one is relatively recent, and there is a chance we believe that, that could be wrapped up pretty quickly and have minimal expense into 2024. We will know more about that as we get into year end here.

Okay. Great. Thank you.

And ladies and gentlemen, at this time, I’m showing no additional questions. We'll conclude today's question-and-answer session as well as today's presentation. We thank everyone for joining. You may now disconnect your lines.