Good day, and welcome to the Astronics Corporation First Quarter 2024 Financial Results Call. Please note this event is being recorded. I would now like to turn the conference over to Debbie Pawlowski, Investor Relations for Astronics Corporation. Please go ahead.

Thank you, Megan, and good afternoon, everyone. We certainly appreciate your time today and your interest in Astronics. Joining me on the call here today are Pete Gundermann, our Chairman, President and CEO; and Dave Burney, our Chief Financial Officer. You should have a copy of our first quarter 2024 financial results, which 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 these documents on our website or at sec.gov. During today's call, we will also discuss some non-GAAP 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 tables that accompany today's release. So with that, let me turn it over to Pete to begin. Peter?

Thanks, everyone, for joining us this afternoon. We believe our first quarter marked a solid start to 2024, which positions us well for an exciting year ahead. Our sales of $185 million were above both our guidance and internal forecasts, reflecting an 18% increase year-over-year, although there was a slight decrease from the $195 million we reported in the fourth quarter. Together, these figures indicate we're nearly back to pre-pandemic revenue levels, which is encouraging. Positive trends are helping us progress, particularly an improving supply chain, which had been a significant challenge over the past two years. Additionally, our workforce turnover has decreased since 2021 and 2022, and the efficiency of our team continues to improve. Despite recent issues with inflation, we are seeing a moderation, and price increases are positively impacting our results. While these improvements are ongoing, they are creating strong tailwinds that will benefit us as we move forward. Our adjusted EBITDA for the first quarter rose to 10.3%, compared to 3.9% a year ago, and we anticipate further improvement as our sales grow and we continue to experience the benefits from supply chain enhancements, workforce efficiency, and pricing. Now that we are operating near pre-pandemic levels, we reaffirm our business model, which generally works with a 40% marginal contribution. In terms of segment performance, our Aerospace division had a robust quarter with a 21% growth from last year and reported an operating profit of $12 million. In contrast, our Test segment grew by just 2% and recorded an operating loss of $3.1 million. We recognize that while Aerospace is on a promising trajectory, our Test business requires improvement. Recently, we executed a restructuring plan expected to save around $4 million annually, beginning in the third quarter, and we are consolidating facilities in our Test segment to streamline operations. We are also making progress on our radio test contract with the U.S. Army, which we anticipate could become a significant program valued between $200 million and $300 million. We expect some pre-award activities, including audits and pricing discussions, to conclude in the coming months, potentially in late Q2 or early Q3. Looking ahead, our demand remains strong, with Q1 bookings of $205 million, resulting in a book-to-bill ratio of 1.11. This growth is primarily due to a general rise in demand across our product lines. We ended the quarter with a record backlog of $612 million, and our bookings over the past 12 months totaled $772 million, which supports our 2024 guidance of $760 million to $795 million. It's still early this year, and several factors could influence our performance. We are monitoring the overall strength of the business and the encouraging demand trends. However, we are keeping an eye on the radio test program's impact on our 2024 revenue, which we estimate could range from $8 million to $10 million, provided we secure the contract by midyear. Additionally, we're aware of the production rates at Boeing, our largest customer, particularly concerning the MAX aircraft. Currently, we're planning for a production rate of about 35 units per month for the MAX, although this has been subject to uncertainty, and any slowdown could impact our revenue. Our forecast is at the high end of our revenue guidance, around the $795 million mark. If we consider a pessimistic view regarding the Army contract and a potential reduction of 20 MAX units per month, we could see our forecast adjusted to the midpoint of our range. Overall, given the strong demand, bookings, and backlog, we believe there is minimal downside risk to our forecast but potential for upside depending on how the MAX production and the Army contract progress. We will provide updates as the situation develops. Now, I will hand it over to Dave to discuss some detailed aspects of our performance.

Thanks, Pete. As Pete mentioned, we had a strong start to 2024 with 18% sales growth. This was driven by 21% growth in our Aerospace segment. Test Systems sales were up modestly, but up against a tough comp that I'll talk about in a second here. The growth in aerospace and the higher volume through our facilities translated into margin expansion year-over-year. However, this was muted by the results of our Test segment. Consolidated operating income increased $4 million to $1.7 million. I should point out that the 2023 first quarter benefited from a $5.8 million liability reversal of a deferred revenue liability that increased sales and margins in the Test segment and consolidation. Adjusting for this, the leverage achieved on the incremental sales was about 37% on a consolidated basis, a little lower than our expected 40% incremental margin, but this was due primarily to the resumption of bonus plans in 2024. The increase in SG&A year-over-year to $32.5 million is nonetheless at a rate similar to the fourth quarter of last year. There are not any unusual items in the mix, but a couple of things to point out. For year-over-year comparison, we've reinstated a couple of bonus programs, which have been suspended. For the first quarter of 2024, our bonus expense amounted to about $3.6 million, which is likely to continue versus no bonus expense in the first quarter of last year. For a sequential comparison, I should point out that the corporate expenses of $7.7 million includes roughly $1 million of annual equity compensation granted in the quarter primarily to directors, which won't repeat in the remaining quarters of this year as it vested in the first quarter. We incurred $3.7 million in litigation expenses in the quarter, which we expect are likely to continue through the year. And this was, for the most part, in the Aerospace segment this quarter. Aerospace sales were up 21% compared with the first quarter last year. This increase was primarily in the commercial transport market, which increased $27 million or about 29%, demonstrating the continued strong recovery in the market. Sales to the military aerospace market were up $3 million or 21% and sales to the general aviation market were relatively flat at about $20 million. I should point out that the decline in the other category in Aerospace was related to the efforts to walk away from non-core contract manufacturing. We're filling our facilities with more profitable aerospace business as that business and that facility rebounds. Aerospace operating margin improved to 7.4%, a 440 basis point expansion over last year that's driven by higher sales, some improved pricing, and productivity gains. We expect our Aerospace segment operating income to improve as we move through the year. Higher volume will help as will continued improvements in productivity. Also, as new contracts roll on with improved pricing, we expect that to contribute to margin expansion as well. As I noted last quarter, the test segment continues to be challenged by underutilization and program mix. The Test business had prepared itself to meet the requirements of the very large U.S. Army radio test program that Pete mentioned. While it's progressing, the program has not yet started. In April, we restructured that business. Restructuring costs will be approximately $1 million, which is expected to translate into $4 million in annualized savings. Those savings will be split approximately 75% between cost of goods sold and 25% in SG&A. Total liquidity at the end of the quarter was $23 million. When we file our quarter-end paperwork next week with the lenders, we will free up an additional $5 million in liquidity. Inventory turns are stepping up with the 2024 goal of getting our inventory turns up to the mid-3 times per year and the 2025 goal of over 4 times per year, which would get us back to where we were prior to the pandemic. The rate of growth of our inventory has slowed measurably even as we plan for increasing levels of shipments in the latter half of the year. Despite a slight increase to our inventory in Q1, that was primarily related to a specific new program, we are forecasting our inventory levels to drop over the course of the year. We generated $2 million in cash from operations, and CapEx was just $1.6 million in the quarter. We are planning CapEx for the full year to be in the range of $17 million to $22 million, and we expect to pace that with improvements in cash generation. We paid down $5.9 million of debt during the quarter. We also executed a minor amendment to the credit agreement that established a $5 million accordion that had expired in January. Also, we updated covenants that had been established in January 2023 to reflect the actual results for the relevant trailing 12-month period as we move through the year. While we have approximately $8 million remaining at the ATM program, we do not plan on using it since our liquidity is improving as planned. As we're in a much better financial position now than in early 2023, we are reviewing our debt structure options with the objective to lower our interest rate and improve cash flow and reduce required debt amortization payments. We expect to have this completed midyear. This concludes my remarks. And Pete, back to you.

Just want to talk a little bit about the second quarter, specifically the current quarter that we're in. We are issuing guidance for this quarter of $185 million to $195 million. That would be at the midpoint of a marginal step-up from the first quarter. If you add the first quarter and the midpoint of the second quarter and subtracting the midpoint of the year range, you'd see that in the second half, we are planning for a step up of revenue to or above slightly $200 million a quarter. That would represent a complete return to pre-pandemic levels. We expect our income statement to strengthen considerably as we get into that neighborhood, and that is what we are very much looking forward to these days. So I think that ends our prepared remarks. Megan, maybe we open it up for questions at this point.

The first question comes from Michael Ciarmoli with Truist.

Pete, just can you walk me through, I mean, obviously, the MAX is a total moving equation here. I don't expect anybody to understand what's really happening. But how is your BFE content not impacted there? I mean, I typically think of that as some of the airline customers outfitting the interiors and the finishing stalls, just maybe can you just give us an assessment there? I mean, it sounds like it could be 120 planes or so coming out, but no BFE impact. How does that work?

That's a great question. If interest rates remain low for an extended period, there could be an impact on BFE. However, in the case of our BFE, particularly with narrow-body aircraft, our primary customers are airlines that are often in the process of retrofits. This allows them to shift resources from line fit to retrofit temporarily. Moreover, airlines are generally cautious about compromising their BFE commitments as they want to ensure everything is ready when the aircraft is operational. Therefore, they tend to be more conservative or slower to respond to changes in rates. The same principle applies to wide-body aircraft, where we primarily cater to in-flight entertainment integrators who work with customers globally, including ongoing retrofit projects. For a certain period, the hardware can be repurposed from line fit to retrofit. Hence, we do not expect significant rescheduling of BFE throughout 2024.

Okay. Got it. No, that makes sense. What about any shift or change that you're seeing on the 787? I mean, the wide-body seemingly still, I think, a good story, Airbus talking about raising rates. And it sounds like a couple of suppliers may be responsible for Boeing having slowed the 787 year. But any major swing to your P&L one way or the other for the year on that?

I don't think so. I mean they've been at a lower rate for quite a while, as you know, and we don't think that's a major driver. There is pretty substantial upside potential there for us if they ever get to where they want to go. We've got primarily BFE content to the tune of $250,000 of an airplane. So that's an important program for us. Similar with A350.

Got it. Regarding the second half of the year, which is projected to exceed $200 million, if we compare this to pre-COVID levels, your operating margin was consistently in the double digits. You mentioned the contribution margin. Is there anything hindering your return to those levels? It seems like labor is becoming slightly more efficient with pricing. Will you need to hire additional employees to achieve those revenues? How should we consider the various factors affecting the margins?

I believe we are well positioned for this. Our cost structure remains largely unchanged. We will need to increase direct labor slightly, and we are actively addressing that. However, we've made several improvements to enhance our business efficiency, which we haven't emphasized much lately because we've been focused on more pressing issues in recent years. One specific instance is in our Test business, where we haven’t seen any consolidation in our facilities. I may discuss this further in the future. Over the past few years, particularly during the pandemic, we have streamlined our operations significantly. This presents a strong opportunity not just to return to our prior levels, but to improve our margins and efficiency as we move forward. Overall, we feel optimistic about the situation.

Okay. Okay. Good. Perfect. I'll jump back in the queue here.

Our next question comes from John Tanwanteng with CJS Securities.

Congrats on the strong quarter. I was wondering if you could talk about the opportunities for refinancing and how you're initially expecting that to shape up? What kind of recapitalization are you thinking about? And just thinking about the last time around, there was a lot of delays related to the lenders. And I was wondering if that might be something you were trying to avoid at this time.

Well, Jon, it's a different day and it's a better day. How is that? We have been playing a little bit of a game where the longer we wait, the better our financials and the better our results and the better our prospects are. I think we're, at the same time, sensitive to execution risk as we get closer to an election and some of the things that are going to be happening at year-end. So I think we are pulling the market. We're getting pretty good interest and pretty good results and we're kind of waiting to see what kind of final terms we can come up with. If we could act sooner, we could act later. But I think it's a 2024 event. Dave, I don't know if you want to expand on that at all?

No, that's exactly what I would have said.

Okay. Great. And then, Dave, just a quick clarification. Do you expect that run rate of stock comp and bonuses to continue through the rest of the year, minus the Director bonus at roughly $6 million to $7 million?

Yes. The stock comp, if you back out $1 million from that, then the remainder should be the run rate roughly for the next three quarters.

Got it. And Pete, is there any update on the litigation? And what do you think the outcomes might be?

No. It's been pretty quiet, actually. I think we're still of the opinion that we're beginning to see the light at the end of the tunnel with respect to LHT, Lufthansa, Saga. We're thinking that that could and should wrap up sometime next year 2025, assuming that an appeal that's going on right now in France is not successful. We're doing well in France, and they are appealing it, and we're waiting for their equivalent of a high court to get involved with it. But we're reasonably confident there. So then it's just a matter of cleaning up issues in the U.K. and in Germany, and we're thinking that should be able to happen in 2025.

Okay. And then finally, just any update on the flare program? I know last quarter or maybe intra-quarter, the Army made a decision to cancel Farand maybe put more money into flare. I was just wondering if there's any change there.

We are actively working on the Flora project and making progress with Bell on establishing an official contract. In the meantime, we are creating a temporary contract to get started. We are very excited about the program. The cancellation of Farand has turned out to be beneficial for us, as we are already busy with Flora, EVTOL, and other flight critical power projects. If we had been involved with Farand, it would have added to our workload, but given our current commitments with Flora, we are satisfied with how everything is progressing.

Our next question comes from Tony Bancroft with Gabelli Funds.

Great job managing through all the moving parts that have been going on in the last couple of years. Maybe could you just lay out for us and remind us again sort of the longer-term opportunities? I know you just talked about flare there. Maybe just on the IFE side power. I know that there's been discussions with the airline penalties for in-flight entertainment, WiFi not working? Could that positively impact you in the longer run, having more sort of higher fidelity WiFi to customers?

Absolutely. I think it's an interesting observation, Tony. I've long been of the opinion that one of the unique things about our business is that is the reality that consumer electronic product and technology life cycles turn really quickly compared to aerospace life cycles. And we are one of these companies where we kind of live in that junction, that space between consumer electronics and aerospace. So on the one hand, we've got the real quick turning things with cell phones and tablets and computers and communication and satellite connectivity. And on the other hand, we live in this world where the aerospace industry likes to be pretty conservative sometimes. And the reality is that people want to be able to do in airplanes the same kind of things they do in their living room. It's hard to keep up for aerospace, which means that we always have an opportunity to kind of replace ourselves or upgrade ourselves, and that happens fairly regularly. I mean power, people think of power as being a commodity like technology, but it's one of those things that's not easy to do a really good job at. And you think of how a 110-volt system is turned into USB Type A and now USB Type C; power is dynamic. It turns out in consumer electronics. Same thing with wireless access points, there are increasing requirements and upgrades for security and for performance. So many of the webs that are out there in service right now need to be replaced, and we're on the forefront of that also. They were fine; there's no problem with them, except they don't meet the current evolving requirements. So it's an interesting business as it grows. We've always looked at new markets, some new customers and new penetration, but it also is one of those where we're increasingly going to have the opportunity to replace ourselves or obsolete ourselves. And that's a good place to be.

Yes. Great answer. I think that's a pretty interesting place to be. Thanks so much, and have a great job.

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