Astronics Corporation (ATRO) Q2 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the Astronics Corporation Second Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Debbie Pawlowski, Investor Relations for Astronics Corporation. Thank you, Ms. Pawlowski. You may begin.

Thanks, Devon, and good morning, everyone, and thanks for joining us here today. On the call I have with me, Pete Gundermann, our President and CEO; and Dave Burney, our Chief Financial Officer. Peter is going to go through his planned remarks and then will open up the call for questions and answers. You should have in hand a news release that went out this morning, and it's also available on our website at astronics.com. As you are aware, we may make some forward-looking statements during the formal presentation as well as during the Q&A portion of this teleconference. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause the actual results to differ materially from where we are today. These factors are outlined in the earnings release as well as in documents filed by the company with Securities and Exchange Commission. So you can find those documents both at our website and at sec.gov. With that, let me turn the call over to Pete to begin. Peter?

Thank you, Debbie, and good day, everybody. We are going to do discuss our second quarter results and our outlook for the rest of the year, and then take questions as usual. The headlines for the quarter that we’re reporting today, I guess, are the following. The first is, it's a tough comparator quarter. Obviously those of you who have been following us for a while know that at the beginning of the year we realized our Test sales were going to be down substantially. That shows up strongly in the comparison numbers this quarter. As a sneak preview, it's going to look even worse next quarter because our third quarter last quarter was the high watermark so far for our Test business. But once we get pass that, in many respects, we feel the second quarter was a pretty good quarter, especially for our Aerospace business, which set all kinds of records in terms of revenue and operating profit and bookings. Those are really great quarter for our Aerospace business, and actually on an operational basis, a very good quarter for our Test business also. We'll talk a little bit about that when we go through the segments. Finally a headline, our expectations for the remainder of 2016 have softened a little bit. We feel it’s more a reality based on our scheduling of our backlog and some of our product development plans, rather than a fundamental softening of our markets, and we'll talk about that too. So the quarterly review. Revenue at $164.4 million was our highest in three quarters. On that, our bottom line results we felt were pretty reasonable. Net income of $15 million or 9.1% of sales, that's $0.57 per diluted share, down from $0.67 in the comparator quarter a year ago. Our E&D spending was $21.9 million, 13.3% of sales. That's a little bit higher than where we would expect to see it on a running basis. But again, our Test business is running at a lower than average volume these days. We would expect to see E&D continue to be in that 11%, 12%, 13% of sales range. Certainly one of the real highlights of the quarter were bookings. We had bookings in the quarter of $181.5 million. That is our highest level ever, except for the fourth quarter of 2014. So we were pretty pleased with that, and that was pretty much all on the Aerospace side, $164 million of the $181 million were Aerospace related. That is by far an Aerospace record for the company. Year-to-date revenue of $324 million, down 3% from $335 million last year, on that, net income was $26.5 million, 8.2% of sales, down slightly from 8.5% last year, translates into $1 per diluted share through the first two quarters versus $1.08 last year. 2016 bookings year-to-date, again, we feel pretty strong at $343 million, that's 106% of sales. And our backlog at the end of the quarter, again $294 million. So looking at our segments. Aerospace segment first. Quarter two revenues were $142.5 million, that's up almost 8% from last year and made 87% of our total revenues for the quarter or 87% Aerospace, 13% Test. That Aerospace revenue level set a solid record for the segment. Operating profit also was a record $24.9 million, 17.4% of sales. And keep the records going, bookings were $163.5 billion, again a new record for our Aerospace segment. Ending backlog of $235.8 million. Year-to-date Aerospace revenues of $280 million - just shy of $281 million, up 2.3% from last year. Operating profit of $43.5 million, basically flat with last year. If you look at our market or sales by market and sales by product line, you see a few things. We are 71% of our sales go to the commercial transport market. That's up marginally over last year, but there is some real shifts going on there. Our seat power and motion sales are up substantially, compensating for a drop in antenna system sales, which we talked about in our last conference call at some length. Our military sales are up quite a bit, only 8.1% of total, but up 32% over the first two quarters of last year. There is a range of products that go into that effort. Business Jet on the other hand is down pretty substantially, down 17% amounting to almost 4.5% of total sales. If you look at our sales by product line, Electrical Power & Motion sales through six months, $151 million. That's up just shy of 10% and made up 46%, 47% of our total sales. Lighting & Safety, $82 million, $83 million of total sales, up 3.2% - $82.5 million in sales, up 3.2% and 25.5% of our total sales. The sore point in our product line continues to be our Avionics product line, which includes our IFE systems for VVIP airplanes and our antenna systems, both of which are having a difficulty, $16.8 million in sales through two quarters, that’s down 42% and 5.2% of sales. Couple of significant customers, as usual Panasonic through six months, 22% of our total, just shy of $70 million of revenues; Boeing 15% of total, just shy of $50 million in revenues. We have some announcements that came out during the quarter, and they are tucked away safely at my desk, so lack of preparation here, I’m sorry. Help is on the way though, but from my memory, we announced some important continuation of program wins in our in-seat power product line in China. We announced an F-16 Night Vision Conversion win in Republic of Korea, and there is a third one, I'll come back to it. But let me, I guess, qualitatively talk a little bit about our Aerospace business. I mean, clearly we are not hitting on all cylinders. We talked in our last call quite a bit about our antenna system travails and we continue to invest pretty heavily in new products and we continue to be pretty excited about where that business is going to go, but we’re not there yet and it's moving more and more towards the end of the year. So it's one example of where our business is a little bit on the light side. We've got some other issues in VVIP products, where the world’s situation is tending to slow the flow of business for economic reasons. But overall, we continue to be pretty well positioned and we think the quarter is very reassuring for the strength that shows in our Aerospace business, even with those sore spots to have record revenues and record profits and record bookings to us is very encouraging. Moving to our Test business. I talked about it being a very tough comparator. That's pretty clear when you look at the numbers. Revenues in the second quarter were just shy of $22 million, down 46% from where they were in the second quarter last year and making up 13% of our consolidated sales, but again, this isn't really a surprise or it shouldn't be. Last year's news is pretty old news at this point as are our expectations for this year. We’ve been dependent in our Test business, especially on the semiconductor side, on a single program with a large customer, and that means that we are pretty dependent on that program driving us forward. And we knew at the beginning of the year that volume is going to be down quite a bit this year. Still on that kind of revenue drop, we had operating profit of $1.1 million. That's a lower operating profit level than we had in the first quarter, but to go through two quarters like we have at roughly that revenue level and maintain profitability, I think is actually a pretty good effort in transition being managed by our Test team. Year-to-date revenue is $43 million, and again down 28% from $60 million last year. And again the third quarter comparators will continue to be quite tough as the third quarter last year was pretty strong. Bookings year-to-date of $39 million. Book-to-bill of 0.91, and leaving us with a backlog at the end of the second quarter of $58 million. I think though the important thing to grasp and to understand about our Test business is, as we've talked before, it can be a little bit lumpy and it has certainly lived up to that billing, but to be successful it's got to also be lumpy on the bookings side and bookings are the result of current programs doing well in the future which we have hoped for but also getting new programs. And the encouraging news today is that we are very actively involved in our Test business in a range of new programs, none of which are solid enough to talk definitely about next year, but at this point, we are pretty high expectation for where this big business is going to be next year. We can't quantify it exactly at this point, but we are making a lot of progress with our important customers and they give us a lot of credit for our effort generally and the progress that we're making. And at this point, our expectation is that we will see a big recovery in our Test business next year. We would expect to filling in more details on this as the year progresses and as we are able to make more specific announcements. But the good news is that we do see a light at the end of this tunnel. We think we’re in a trough year this year. The balance sheet pretty much looks the same. Still healthy at the end of the second quarter. Cash on hand of $20.4 million. Total debt of $166 million. Net debt of $146 million. During the quarter, we purchased approximately 231,000 shares at a cost of $7.9 million. That's year-to-date 360,000 shares for a total cost of approximately $12.2 million. You'll remember that in February we announced the repurchase program authorization of $50 million to be used, as we saw appropriate, in the repurchase of our shares. So looking forward, if you read the press release, as I'm sure you did, you saw that we’re dropping our revenue guidance. My comments so far have been pretty robust and it's kind of strange to sit here and talk positively about our performance and positively about the quarter we just had, and at the same time, tell you that we’re lowering our guidance slightly, especially on the Aerospace side. The Test side, we’re leaving alone at this point. And a reasonable person might ask why is that? I think the best answer is if you review the last page of our press release, this table on our order and backlog trends, and if you look back to Aerospace bookings the second half of last year, they were particularly like we had these conference calls. We have them every quarter. And this came up in a number of different ways and we said at the time that we didn't see anything systematic in our weaker bookings in Aerospace but they certainly were weaker. We had $130 million in the third quarter last year and $122 million in the fourth quarter, and kind of true to our expectations, those bookings have bounced back pretty dramatically, $140 million in Q1 and $163 million, $164 million in Q2, and that's positive. And those increased bookings have done a lot to fill in our production schedule. But as it happens, we’re still sitting here with a little bit of a hole going into the second half especially in the current quarter, the third quarter. So we are expecting the third quarter to be a little bit lighter. We think that there is upside potential if we get strong bookings in the current quarter, which we’re only one month into. So we’re obviously going to watch that pretty closely, but we have those difficult booking quarters towards the end of last year. We've had some slower product launches than we were hoping for, so realistically we need to trim in our Aerospace expectations for the year. But again, I guess, I'd like to emphasize that we don't view it as a fundamental change in our markets. We remain pretty enthusiastic about what we’re seeing, both for new aircraft production and also for retrofit opportunities. It's a pretty dynamic time and a lot of our businesses are promoting very - are reporting very robust conditions in their markets. So we’re pretty optimistic but the reality is we have this, kind of, little lull in our backlog that’s going to slow us down a little bit. So we’re expecting the third quarter, for those of you who build models, to be on the top line consolidated pretty much similar to where we are this quarter but we’re expecting it to shift a little bit. Aerospace will be down a little bit. Tests will be up quite a bit. And we'll obviously report on bookings again in the third quarter, which will be a strong indication - or a good indicator as to where we’re going to end up by the end of the year in the fourth quarter. So I think with that as comments, Devon, would like to open it up for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] One moment please, while we poll for questions. Our first question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.

Hi, Pete. Thanks for taking my questions. Very nice quarter.

Thanks Jon.

Can you guys talk about which specific business or end-market is actually seeing that booking or scheduling gap in Q3?

I would say it's a little bit across the board. I mean, certainly bigger product - in order to have a lull like that, our bigger products have to have a lull, so we’re seeing some of it drop in - or a temporary reduction in our in-seat power products or seat motion products. But it's kind of across the board. And again, I guess, we kind of view it as just situational, just kind of the way the schedule falls, nothing systematic and how all the markets performing.

Okay, got it. And margins were actually pretty impressive in Aerospace in the quarter. I know you're thinking revenues probably to be down sequentially. Is that margin run rate going to continue? Should we expect to be down significantly compared to historical, what's the sequential expectation?

It's probably reasonable to expect margins to see some pressure with a drop in volume. But thanks for noticing the performance last quarter. There was really no special lifting there. I think that's what our business performs at when we get to those kind of volumes. So we’re hoping to see another couple of quarters of bookings and kind of lock-in at that production level or better even next year, which should be pretty good for the bottom line.

Okay, great. And then can you just revisit the exclusivity agreement that you had on the semiconductor side? Where does that stand now when you think of perhaps the second customer?

It's a little bit of a tricky question but let me answer it, I guess, generally to say that from our perspective there is a code of ethics about protecting customers’ proprietary information and proprietary data even when there are loose arrangements or contracts controlling that kind of information and we've been careful to stay on the right side both legally and ethically. At the same time, we've been able to more accurately or more specifically define what exactly is of concern in that situation, and we think that today we have a very clear understanding of it and we are - we don't view it as a restrictive issue in the sense that we are coming out with a fourth generation product. We've been at this for quite a while. There is system level test, and we think that unique customers have unique needs and certainly we've been able to bring that to bear with our named customer to-date. But we think there are other derivatives and other, I guess, adaptations that may be attracted to other customers. And the restrictions that we face with our named customer, we do not feel inhibit than the derivations of our capabilities that we can bring to market for other people. So that's probably the best way to answer it at this point.

Okay, great. Thank you very much.

Sure.

Thank you. Our next question comes from the line of Dick Ryan with Dougherty & Company. Please proceed with your question.

Thank you. Pete on E&D spending, looks like $45 million year-to-date, is that in line with what you had in 2015, $90 million total, or should it stay in that range?

Yes, that's what we are expecting.

Okay. Moving to Test, you said a bump-up in Q3. Is that more typical seasonal pattern we see in back-end and then it would moderate in Q4, or is there something else at play for your Q3?

No, it’s the normal seasonal trend that we've observed with that program over the years. The volumes weighed down this year as you're very well aware and most of the delivery should occur in Q3.

What kind of timing would you think you’d have for follow-on orders to see a ramp in 2017?

Well, our typical expectation is that we would see orders by the end of the year. There is a lead time involved with a lot of this equipment and typically the customers understand that lead time and would expect to place orders towards the - by the end of the year. And going into the New Year, there may be increased expectations even for the existing product line, so that may get off its low volume and get something to a little bit of a higher expectation. That's our hope in addition to new programs which we may bring on board.

Okay, thanks. Say, when you talk about the strong orders for Aerospace - and I missed the first question, so maybe you addressed this already. What markets or products really drove that, and how are you looking at the pipeline for new orders right now?

I think we are - as I walk around our company and I talk to the various business units, I think it's pretty broad-based. We certainly have the weak spots again, but in general, I think we’re pretty enthusiastic about the opportunities that lie in front of us. So there is always a chance of a hiccup in bookings but we certainly like the trend over the last three quarters in Aerospace going $120 million to $140 million to $164 million. So not sure that will continue, but if we could stabilize somewhere around where we are, that would be okay with me for a while.

And real strong performance in in-seat power. Can you talk the retrofit new build, sort of dynamic that you're seeing out there?

No real changes. It’s business as usual. Another strong quarter of growth. A pretty good mix between OEM and field sales, increasing emphasis on narrow bodies. We announced that our China our programs are largely narrow bodies. It continues to be a very good environment.

Now China, is that the direct, or are you with OEMs there even though it's narrow-body versus wide-body platform?

It's a little bit of both, but it’s certainly a lot of direct sales.

Okay. Thank you.

Sure.

Thank you. Our next question comes from the line of Kevin Ciabattoni with KeyBanc. Please proceed with your question.

Thanks. Good morning. Nice quarter guys.

Thank you.

So Pete, just looking at the outlook in Aerospace, it seems like the weaker 3Q is tied to bookings in the back half of last year. I mean, it’s just a little confusing as to why that's driving the lower guidance today versus why you guys wouldn't have baked that into your initial outlook. Any color you can offer there?

Well…

I mean, just given how it’s looking [ph].

Yes, to a large extent that hole has been filled in. And the reason I'm hedging a little bit is compared to a lot of aerospace businesses, we feel that we are weighted a little bit more towards the aftermarket than most companies. So while it's relatively easy to predict production rates at the OEMs, they may change once in a while but they don't change dramatically quarter-by-quarter, aftermarket programs can and do change. So we have that big lull and we were kind of thinking and hoping and expecting that it would get filled in, and it largely has, but it hasn't completely. And so, I guess, that's the answer. Our business is a little bit harder to predict, at least the bigger parts of it to the extent that they are aftermarket-related. Some parts of our business are simply are largely OEM and we can get plus or minus 3% predicting out two or three quarters without much trouble. But unfortunately some of our bigger product lines are much harder to predict that far out, and that's part of why we end up, compared to most companies I suspect, with a wider revenue range at the beginning of the year in terms of forecasting and we narrow it down as we go. But I think our spot - when we had those thin quarters, we didn't see any shift in the market. We thought that the business would come in. It has largely come in, but it's come in with a schedule that is going to make things a little thin in the third quarter. And we don't do a whole lot of management of our revenue stream that way. If our customers want products, we ship them. If they don’t want them, we don’t ship them. So kind of by nature and by personality, that probably serves to accentuate our financial results just a little bit. But you know that. You’ve been following us long enough. But I think the answer is simple. The answer to your question - the short answer is that the aftermarket element of our business is a little harder to predict than the OEM part.

And that was pretty broad-based. That’s helpful. I mean, it was across in-seat power, lighting, kind of, across the board, military, commercial.

Yes, but in those products especially that are aftermarket related.

Okay. All right. Kind of keeping with the outlook, it seems like you guys lowered the CapEx expectations for the year. Were there specific materials or specific projects there that didn’t materialize or just kind of set the bar high to begin with and bring it down?

Yes, I would put it in the category of fine-tuning. We go through a budgeting process at the beginning of the year, and I think we’re pretty accurate generally in this area but certainly there is a tendency to put something on the list thinking we may want to do it and then you get halfway through the year and realize we’re not going to get there. We don't have resources to do it or whatever, and the number tends to get sharpened. And in this case, this year it's coming down a little bit.

Okay, but nothing specific you can call out there?

No, not really. No.

Okay. Last one for me, obviously strong Aero bookings in the quarter, but are you starting to hear anything from, I guess, more specifically the European airlines in terms of the way they are thinking about retrofits going forward? I mean, just given the economic situation we've seen the number of European airlines look at slowing their capacity growth. Just wondering if you're seeing the impact of that at all in terms of cabin retrofits, maybe not right now but are you starting to hear any discussions around that?

No, we are really not, Kevin. I think I hear the discussion about managing capacity, I mean, that's clearly an issue in the industry. But when you start talking about hitting some of our products, what you're talking about is cutting back on amenities and that's a very different discussion. I think there is an onward march, a steady drumbeat towards expectations of the flying public to want more amenities, not less, regardless of what the capacity is of the airplanes in the sky. So we are continuing to see promising market conditions, even if there is some rationalization that potentially could happen on the capacity side. There are two different discussions from our perspective.

Okay. Thanks, Pete. That all I have.

Sure, thanks.

Thank you. [Operator Instructions] Our next question comes from the line of Ken Herbert with Canaccord. Please proceed with your question.

Good morning, guys. It’s actually John [ph] on for Ken. I had a question on Test margins and how we should expect margins to progress through the second of the year as volumes step-up?

That's a good question. The revenue level there has been jumping around enough, that it's pretty hard to predict. I said in my comments that given the drop-off in revenue just to maintain profitability at any level, we think it's actually a pretty good effort. What you don't see there is that even with revenue drop-off, there has been a sharpening and an improvement of skills and capabilities in that business. So it really is a pretty impressive story, but we would expect that with volume increases more so next year than this year. But with volume increases, we should see strong margin increases also. That is basically one of those stories where you cover your fixed costs and the contribution margin on incremental dollars gets very attractive very quickly. So it's been a good business, though we’ve obviously been dealing with the lumpy aspects of it this year, we would expect it to continue to perform pretty well next year.

Great. As far as partnership for success from Boeing, have you guys felt any of the impact? It’s been a call for debate some of your peers, but wanted to know if specifically if you guys have felt any of that?

Not really. We went through it to some extent when we were in our 777 negotiations back a year and a half ago, but we have - when say our peers, I'm guessing in general you're talking about companies that are substantially larger. There aren’t many public companies our size doing business directly with Boeing. So I'm guessing they are focusing their efforts elsewhere because I read about it and we hear about it in the corners in various conferences and things. But for the most part, we are being left alone. I would comment more qualitatively that we continue to enjoin very good relationships with Boeing. Couple of years ago, we did next to nothing with them on an OEM basis. We do quite a bit now primarily through our PECO acquisition and we continue to get - make progress in terms of getting looked at new pieces of business, so we are pretty excited about that. We think we’re on a good track with them.

Great. And then one last question. How do you guys view the impact of some of the wide-body production rate reductions out in ‘17 and ‘18?

Well, they don't help. I mean, more airplanes are better than less airplanes. That’s what I - fewer airplanes, that’s what I would say, especially those big ones. I mean, our products are the kind that scale substantially in those big airplanes, but realistically wide-body - the super wide-body, the A380s and the 747s have been at such a low rate that they never really were all that substantial for us. So I'm guessing that any drop-off will be more than compensated for with increases in other models including 350 and 777X and 787 and so forth. So we don't view that as a substantial challenge to the business.

All right, that's all I had. Thanks.

Sure.

There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

And our closing comments are simply to say thank you for attending and we look forward to talking to you next quarter. Have a good day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.