Greetings, and welcome to the Astronics Corporation Third Quarter 2020 Financial Results Call. At this time all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Deb Pawlowski, Investor Relations for Astronics Corporation. Thank you, you may begin.

Thanks, Melissa, and good morning, everyone. We certainly appreciate your time today and your interest in Astronics. Joining me on the call are Peter Gundermann, our Chairman, President, CEO; and David Burney, our Chief Financial Officer. You should have a copy of the third quarter 2020 financial results and the contract that was release -- that was released this morning. And if not, you can find them on our website at astronics.com. Let me mention first that we may make some forward-looking statements during this formal discussion as well as during the Q&A session. 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. These documents can be found on our website or @sec.gov. During today's call, we will also discuss some non-GAAP financial measures. We believe that these will be useful in evaluating our performance and should not consider the presentation of this additional information in isolation or as a substitute for results in accordance with GAAP. We have provided reconciliations of non-GAAP measures, comparable GAAP 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 morning, everybody. Thank you for joining us. We -- our agenda today is to first and foremost talk about our third quarter, which was a very light quarter, heavily impacted by the ongoing COVID-19 pandemic. We will talk a little bit about what we see happening in the future. We're coming up on the end of the year here. So the fourth quarter is something we can talk about with some level of a surety. We will review our major market segments or perspectives on the market and then we'll open it up for question and answers. Before we get going, though, just a quick review of our major overlying goals of the company as we work through our current situation. We have the ongoing objective of protecting our employees and the safety of our workplace. I think we're doing a pretty good job there. In general, we've learned to deal with a pandemic and work from home and all the stuff that comes along with it. We have little interruptions here and there, but for the most part, we continue to function and continue to operate pretty well. We certainly want to keep serving our customers with the level of service and productivity that they expect and need. That's been a little bit of an exercise through the pandemic as the goalposts keep moving, sometimes in sometimes out. But I think we're doing a pretty good job, in general, staying in front of our customers' requirements, which is important. And finally, we want to position the company not only for survival during the pandemic, but for success afterwards. We are not optimizing the company for our current level of volume or what the market is giving us currently, but we're keeping an eye on…

Thanks, Pete. Really, for the quarter was a pretty straightforward quarter. Not a whole lot of commentary from me, but walking through the operating results for the quarter, we had GAAP net loss of $5.3 million. That's net of an income tax benefit of $5.8 million, and a GAAP pre-tax loss of $11.1 million, and sales of $106.5 million, which as Pete mentioned, was our lowest level of sales since 2013. For the first time in a few quarters, we didn't have any large reserves or accruals affecting the quarter. The loss was simply a function of the low sales level for the quarter and representative of our margin profile and our current cost structure at this time. Roughly speaking, our EBITDA breakeven point is about this level of sales, but it can vary subject to mixes -- mix changes. The $6.3 million aerospace segment operating loss is reflective of the low sales level during the quarter, and our cost structure which supports our current product development initiatives, and an expectation that revenues will increase over the coming quarters. The test segment margins were lower than expected primarily due to higher legal costs and inventory reserve that, combined, total $1.3 million. Adjusted EBITDA for the quarter was roughly breakeven, as I mentioned at a $55,000 loss. And the adjusted EBITDA is reconciled to net income in a table on Page 11 of our press release. Regarding our liquidity. Managing liquidity is critical as we bridge to recovery. To that end, we believe we can hover around cash flow, breakeven and positive EBITDA at our current cost model over the foreseeable future, assuming no further declines in our markets. For the third quarter, cash flow from operations was a negative $10 million for the quarter and positive $31.5 million year-to-date. The…

Okay, thanks, Dave. So, we'll assess our markets and talk through some of the things that are included in the press release. So there will be some duplicity here, but for duplication, but we'll start with commercial aerospace. Commercial aerospace is our largest kind of single market. That's again, commercial airplanes, both the production of new airplanes and the operation of those airplanes or the maintenance of those airplanes. Those are about 70% of our business back in 2019, back in the good old days, roughly two-thirds of the 70% was related to the production of airplanes primarily at Boeing and Airbus. And one third was aftermarket related primarily to airlines, but also to leasing companies. Looking at those two parts of the commercial transport market, most people are aware, linefit -- or line fit production rates by Boeing and Airbus have been ratcheted down or are being ratcheted down roughly 30% to 50%. That's a pretty much across the board. For us, a special consideration is the 737 Max, which everybody knows remains uncertified. For us, that airplane right now is down 100%. We're basically on hold on that program. And last year in 2019, that was actually our biggest single production program. It's important, kind of looking forward here, that the MAX gets recertified as most of the world expects sometime in the next month or two, and that Boeing resumes production on a meaningful basis. We're kind of counting on that in the second half of next year to start being a positive impact on our business. The aftermarket is driven by airline spending. And for us, it's mostly in-flight entertainment and connectivity equipment, IFEC equipment, passenger amenities. Obviously, everybody knows no news here, airlines are having a very difficult time worldwide. Airlines are operating about 50%…

Thank you. [Operator Instructions] Our first question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.

Hey, good morning, guys. Thanks for taking my question. In your prepared --

Hey, Jon.

Good morning. In your prepared remarks, you said you expected [indiscernible]. To be fair, do you expect to pick up in OEM or aftermarket orders in Q4, especially as COVID surges across the globe or is this more of a comment that maybe other pieces of your business are going to pick up and make up for that?

It's a little bit of both, I think part of what was happening in the third quarter, Jon, it's hard for us to quantify this. But there's a bit of a destocking process that goes on as production rates drop. So we -- just the normal scheduling of orders turned out to be such that we were shorter in the third quarter than we expect to be in the fourth quarter. And then there is some pickup in business. The Xenex thing I was just talking about is actually something that we expect to contribute pretty significantly to the fourth quarter. And a lot of the things just the way that customers have scheduled their orders, we expect the fourth quarter to be stronger. We certainly need to see bookings pick up. And in order to support a reasonable business plan for 2021, one of the things that you can do or that we can do is go look at the stated production plans for the OEMs. And that should provide a floor for revenue expectations for us, assuming destocking is resolved as we work through the fourth quarter here. And I expect it will be with the possible exception of the 737. Because as best we know, that production rate is just really, really low. So the complex part is the aftermarket part. And for us again, that's mostly airlines, that's mostly IFEC equipment. And I don't think they know, at this point when they're going to be in a position to start pulling the trigger on some of those programs. I think they need to see some improvement in air traffic before that happens.

Got it. That's helpful, Pete. Thank you. And then just a follow-on on the Xenex order, is that all going to hit in Q4, that spread over a longer time period. And if that's successful, do you expect a follow-on order to that?

Good questions. I -- it's going to contribute to the fourth quarter. I think it'll dribble into the first quarter also. I believe at this point, we are expecting another order, but that will be a function of their success in the market and we're complimenting their capabilities from a manufacturing standpoint. So it's unclear when that would happen, or how large it would be. But at this point, we are hoping for a continuation of that line of work in the next year.

And maybe just a follow-on to that. What is the margin for that business? Is it your average? Or is there something special one-off about it?

It is not as good a margin from a -- compared to our aerospace business. So it's two ways to look at it. If you stack up the normal overheads and structures, it's really thin because it's contract manufacturing, after all. On the other hand, if you look at it on an incremental basis, we're expected to contribute.

Got it. That's helpful. And…

Just…

Sorry, what?

I was just -- I was going to ask Dave if he wanted to add any color there, but he passed.

Okay, got it. And just finally, on the transit business, congratulations on the Atlanta win. I was wondering how many more programs you have like that, like New York, like Atlanta in the pipeline? I'm just assuming the state and local budgets are getting hit going to nice next year. And you said it's not based on ticket sales. But with ridership down with the federal and state funding, an open question, I'm wondering how much that market can contribute in 2021?

Yes, it's a very good question. And we are watching it very closely. So far, it appears that ridership is one thing and capital projects are another thing. And the capital projects are continuing, even though ridership is way down. That obviously is not a long term sustainable kind of thing, but I think the people who run New York City, for example, are kind of assuming that when 2024 comes around, they're not going to have a pandemic on their hands anymore. And they are going to have ridership back at pretty high levels. And they're -- as I understand it -- not to speak for them, but as I understand it, they have pretty pressing modernization needs overall. And I think that's, that's the balance that the municipalities have to deal with. So, yes, ridership is down. Yes, that means they may not buy as many cars or field as many test stations right now, but they are proceeding as best we can tell with those capital improvements. And I'll tell you that we are actively pursuing a number of other municipalities and other -- a number of other opportunities. So we don't see that slowing down at this point. Both the Marta program and the New York City program should contribute pretty well to our overall results in 2021. Maybe your question had to do with bookings. We would expect to have another win, maybe two, over the next 12 months, would say [ph].

Thank you very much. I'll jump back in the queue.

Sure.

Thank you. Our next question comes from the line of Ken Herbert with Canaccord Genuity. Please proceed with your question.

Yes, good morning.

Good morning.

Pete, with what -- the visibility you have now on the fourth quarter, with all the moving pieces, are -- is that business -- is the aerospace business profitable than the fourth quarter, at the segment level based on sort of your current thinking?

No -- fourth quarter?

Fourth-quarter.

Yes. No, we're -- on an adjusted EBITDA basis, we would like to think -- to the extent that that is an approximation for cash flow, we would like to think we can run the business cash neutral at those levels, but we would not expect our aerospace business to be profitable at that level. That's kind of the catch we're in, right? We've got a business that's structured for a much higher volume. We've won and are pursuing a number of what we think are very attractive development programs in the market. You know, last time on this call, we talked about our FARA and FLRAA exercise with Bell Textron, which is, we think, a premier program. And all of a sudden, we have kind of the legs cut out by the pandemic, such that the production side of the house goes way down and with that, some amount of engineering effort also goes down, but it's not proportional, not anywhere close. So it hurts margins.

Yes, can I -- it gets close to break even at that point. It could go slightly positive, it could go slightly negative. But it gets close to that GAAP breakeven point at the operating segment level for the fourth quarter.

Okay. Okay, that's helpful. And I appreciate all the additional detail, Dave and Pete, you continue to provide on the business. I'm just curious, as you look at the 70% of your business that's aerospace, is there any discernible difference in margins between the line fit side of the business and the aftermarket?

Not really. That's a common -- that's a good question. And I think we're a little different than most companies in that sense, but -- and the reason is that a lot of our lines that work is really sold to airlines, or sold to other prime suppliers, who in turn, provide both the linefit side of the business and the aftermarket. So I'll use American Airlines as an example. If they decide to standardize on our In-Seat Power for part of their fleet, say, the 737 fleet, they will put it on their existing airplanes, and they'll also have it installed online for applications up in Seattle. So it's the same price. Doesn't really matter whether it's going aftermarket or linefit. So it's not -- our aftermarket is not repair and overhaul, which is sometimes people hear aftermarket and they think repair and overhaul, it's really more of an upgrade aftermarket application, for the most part.

But within that, I'd imagine you get some spare parts sales, or provisioning sales, and who knows how those are classified, but spare parts sales into the aftermarket, which should be higher-margin, correct?

It's a very small part of our business, Ken. It is something that I expect will grow, but if you think about it, we're sitting here in 2020. If you go back five years, maybe a little more, our cabin power franchise, for example, was much smaller than it is today. So much of the install base has only been out there for five years or less. And our products are designed to last longer than that, and it's not -- so there is a spares element, but it's not anywhere near as big as you would think.

Very helpful.

And on the -- if there are any spares on the inflight entertainment side of it, it's going to the same customer, in many respects that the original sale went to under the same pricing. On the lighting side of things, there's some margin opportunity, on the commercial transport side. But again, that's -- we're new into the exterior lighting on the commercial transports, relatively new and don't see a whole lot of volume there.

Right, to Dave's point, if I use my American 737 example, if they have a problem with a box on an airplane, they don't necessarily call us up and order replacement. They just go to their inventory. It's a modular product, they can repair it or replace it as they want to. So there's not much of a pricing opportunity for us in that context.

Okay, and just one final question on the MAX. It sounds like because of maybe inventory issues and just the little bill rates, that's really not -- or sounds immaterial in terms of its contribution here in the third and into the fourth quarter. Did I hear you correctly, Pete, that you don't really expect much or sort of a positive inflection in terms of your shipments on that program until mid-2021 or second half of next year?

You heard that correct. We're basically shut down and have been for -- we had a couple of false starts early in the year, but we've essentially been shut down for three months, three quarters since the end of last year.

Yes, I think starting end of the first quarter into the second quarter of next year, we'll start seeing some low single-digit chipsets go out the door.

But it's not meaningful early all the way until the second half. And that obviously, you know the story, Ken, it assumes that they get recertified. It assumes that they move a certain number of points of inventory, and it's based on discussions they've got ongoing with their customers, none of which we're really privy to.

Yes, perfect. All right. Well, thanks for all the detail.

All right, thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Michael Ciarmoli with Truist Securities. Please proceed with your question.

Hey, good morning, guys. Thanks for taking the questions here.

Good morning.

Maybe just on the destocking side, I mean, I know your company's different from clearly some of the other raw materials suppliers. But do you guys have the visibility? You kind of just used that analogy with Ken, that airlines got some inventory. Do you have a good line of sight into what, say the ISP providers, Panasonic has, what maybe Collins Aerospace and Saffron have, what Boeing has? And I guess, just trying to think about where production rates are. I mean, obviously, the MAX was shut down, but still, seems like such a wide body rates are flowing through the system here. I mean, do you have a good line of sight to see a path there? I know your inventory out there has kind of been soaked up, and we will see a restart or is it just trying to triangulate what's out there?

I would tell you, Michael, it's not -- we don't have great line of sight. It's hard to get an answer on a lot of this stuff.

Okay.

We -- our belief, or the most part, when it comes to widebody airplanes, most of our content is ISP related, that's through the big service providers. And we believe that, for the most part, that builds the order. Because if not standard product, so there's, there's not a big inventory bubble waiting to be built, or drawn down, it should be that if -- I don't know -- if Singapore is going to buy a certain number of A350s. And they want, say a Panasonic product that uses our power system on those A350s, if they're buying 10, they'll buy 10 chipsets from Panasonic, they'll buy 10 chipsets from us. So there shouldn't -- there's not really an obvious mechanism for a whole lot of inventory buildup there. I think where we're seeing it instead is when you have linefit product, which is for us, the 37, primarily. And 777, for better or for worse. That -- there's no destocking there because it's been whittled down over the last year or so pretty significantly. Business jets is another area where we could be seeing quite a bit of destocking because we're on pretty much every business jet that's out there, and not as high as ship set content, but a lot of standard product, and those rates are all coming down too. So, we're just going to have to wait and see. Clearly, we've got a shipment expectation in the market that is much higher than the bookings we've seen over the last two quarters. We would expect to see bookings come up to match that shipping level if that shipping levels were representative of the production plans that the OEMs are putting forward and we think that's got to happen.

Okay. I mean, you did have good sequential bookings growth from the second quarter. I mean, do you see -- should we expect the bookings, I mean, from what you're saying through this month, maybe other kind of quoting activity? I mean, do you have some confidence in that booking? Maybe not at the sequential level you just saw from June to September, but do you think bookings can continue to improve here?

I sure hope so. And, again, the Marta-Stadler order is a fourth-quarter bookings, so that's a $30 million program. We're already -- that's a big chunk of what we did in the second quarter and the third quarter. So, yes, I would expect sequential improvement. It's a little early in the quarter to tell and the fourth quarter is always a little fluky, because you have the holidays and Thanksgiving and Christmas and everything, but -- so it's too early to tell, but we -- I don't see much room for it to go down, frankly; so I'm thinking it's got to go up.

Okay, and then, I'm sure I know the answer to this, but just an airline retrofit program. I mean, obviously, airlines are kind of saving money as best they can, cutting everything, but I think -- I thought I saw American is kind of proceeding with its A320 kind of interior -- they're not doing a lot. They're sort of doing them as they come up, but it's -- how are you guys thinking about the retrofit side of the market? I mean, do you -- are you seeing any signals or signs from certain airlines out there?

We are, we definitely are. We do work with some 300 Airlines around the world. You know, some of them are smaller, and primarily internationally based, or oriented. And those are the ones that are really struggling the most right now. The ones with bigger domestic routes in the US or wherever, China even, are a little bit more active in terms of thinking about, what are they going to do next, from a connectivity and a passenger entertainment standpoint. And we're involved in those discussions. They're not inclined to pull the trigger to spend millions of dollars to upgrade an airplane that is sitting in a desert somewhere. So they -- it's a little bit of a chicken and the egg thing. They want to do -- if they knew they were going to be returning another 50% increase in flights in the third quarter, we might see a lot more activity, but they want to see the activity before they spend that money. But there definitely are plans to move forward. And for better or for worse, a lot of our types of products have relatively short life cycles. So the phone that you use is very advanced compared to the phone that you used five years ago, if you're like most people. So people expect and require continual improvement in the ISP and entertainment capabilities in the airplane -- in airplanes and I think airlines in today's day and age understand that. Nobody's talking about ripping this stuff out and rebuilding their airline after the pandemic without any kind of ISP entertainment options for their customers. We think we'll pass that point as being an option.

Got it. All right, perfect. Thanks, guys.

Sure.

Thank you. Our next question comes from the line of [indiscernible]. Please proceed with your question.

Thank you. Hey, Pete, I understand the car -- all the caveats on the commercial aero side for 2021. But in test, and maybe outside of transit, you talked about some robust programs and the stability there, can you give us a sense of what you think tests can do in 2021?

We're still collecting that. But we -- there's -- Let me see. There's growth, if you back out the semiconductor part of their business has been pretty robust this year, and if you add the Stadler order to bookings, their book to bill ratio for the last trailing 12 months is very positive. It's like up 10%. So, it's one of those businesses as you know that it's not run rate business, it's -- you got to have big drinks. They're like camels, you got to -- they can go a long way without water, but when it finds a pond, it's got to feed up. So they get big chunks of business, and our revenues next year will be based on big bookings that they're pursuing. We call them whale hunts. And Stadler is definitely a whale, New York City was a whale. There are a couple of others that may fall in the near future and that will determine where they're going to be 2021. And we're not quite ready to issue guidance, but I think for the most part with our test business, which you've seen in the past, is the best indication of what we will see in the future -- in the near term here.

Okay. And just the tail mount and the business, just your tail mount antennae, what's currently going on or not going on there?

Well, we're running down the road. That is going pretty well. You know, we're a supplier to Collins Aerospace. They're marketing the program, and they're pursuing the sales. And in -- technically, we are having, we think, very good success from a performance perspective, and we're actually awaiting word now as to what Collins wants to do in terms of volume for 2021. We expect a significant uptick. It's just a little bit premature. You'll probably see a press release on that, I would guess, here sometime by the end of the year.

Okay. Thank you.

Sure.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Gundermann for any final comments.

No final comments. Thank you for your time and attention. We look forward to talking to you at the end of the fourth quarter, hopefully, with better news. Have a good day.

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