Astronics Corp (ATRO) 2009 Q4 法說會逐字稿

Greetings and welcome to the Astronics Corporation fourth quarter 2009 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, Deborah Pawlowski, IR for the Astronics Corporation. Thank you. Ms. Pawlowski, you may begin.

Thank you, Christine; and good morning, everyone. We appreciate your time and interest in Astronics.

On our call today is Peter Gundermann, President and CEO; and Dave Burney, Chief Financial Officer. We will be covering the results, outlook and prospects for the Company on the call and then follow it with a question-and-answer period.

Should you not have the release that went out this morning, it is available on our Company's website at Astronics.com. As you are aware, we may make some forward-looking statements during the formal presentation and the question-and-answer portion of this teleconference.

These statements apply to future events which are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from where we are today. These factors are outlined in our earnings release as well as in documents filed by the Company with the Securities and Exchange Commission which can be found at the SEC website, SEC.gov, or the Company's website. So with that, let me turn it over to Pete to start the discussion. Peter?

Thanks, Debbie; and good morning, everybody. Thanks for tuning in.

I'm going to talk about our fourth quarter, talk about the year that just closed, turn it over to Dave for some financial details and then close the presentation with a discussion of 2010 and what our expectations are going forward. Q4 was obviously a challenging quarter for the Company.

Revenue was $45.6 million which was our weakest level in 2009. 80% of that total or $37 million came from our Aerospace segment. 20% of the total or $9 million came from our Test Systems segment. That is a ratio that we have been experiencing recently and we expect to continue in the indefinite future here, 80% Aerospace, 20% Test Systems.

On revenue of $45.6 million, we incurred a net loss of $9.7 million. As most of you are no doubt aware, we were impacted severely by a $19.1 million write-down of intangible assets related to the acquisition we did in January of 2009. I'll come back to this topic again in a minute.

Bookings during the quarter were also weak at $30 million with a book to bill ratio of 0.66. Almost all of the bookings were from the Aerospace segment. The Test Systems segment recorded less than $1 million of bookings in the quarter.

Let me come back to the impairment charge and talk about a few other kind of big global events that happened during the quarter and influenced our results. The impairment charge, I think I misspoke earlier. I said 19.1. It was actually $19.4 million, was a non-cash charge.

When we -- and it's shown on our balance sheet primarily in the intangible assets and goodwill line. If you compare the third-quarter balance sheet to the fourth-quarter balance sheet, you'll see it pretty clearly.

When we bought the DME business, the company came with a relatively low level of fixed or tangible assets. So in our opening balance sheet, the allocation of the purchase price resulted in some pretty high goodwill and intangible numbers at least compared to what our balance sheet has looked like historically.

The accounting rules say that those assets need to be tested at least annually. During the year, our bookings were lower than we expected them to be. As a result, our forecast is lower than we thought it would be. And when the experts do their analysis on our updated forecasts, they found that it was appropriate to write down those intangible assets and goodwill.

Dave talk about it more specifically in a minute, I would just like to add that this is not a sign that we are giving up on this business. It is a sign that if we had known then what we know now, we might not have paid the same price.

We thought we were paying a risk reduced price at the time. As it turns out, we paid $50 million for a company in the first year that contributed $51 million in revenues and we remain quite optimistic about the long-term prospects of the business but it's obviously been a year of tough sledding and it may continue to be a little bit of tough sledding going forward here.

Also related to our Test Systems segment during the quarter, we learned that the General Accounting Office, the GAO, had rejected our protest on a GRMATS award. GRMATS is a program that we have talked about before a little bit.

It has to do with a program the US Marines are running for software defined radio test systems. We filed a protest because we felt that the selection criteria was not adequately explained to us and that we felt there were some anomalies with respect to -- pricing integrity is a jargon that's used in military contracting.

Specifically a competitor [hired away] a few of our people that had data that we felt could have been used against us. The GAO disagreed with our analysis on the technical criteria used by the Marines to rank proposals from various suppliers and without directly addressing the price integrity issue, dismissed it based on a technicality from my perspective and that is this that there's an obligation as a supplier to report a suspected pricing integrity violation within a certain deadline.

It's a pretty short deadline. It's like 10 days. We are not aware of that rule and we did report it when we were firmly aware of it. But the GAO obviously felt we should have reported it earlier.

So the GRMATS loss was certainly something that hurts our near-term prospects. One might ask if we had won that program, would our write-down of intangible assets and goodwill have been eliminated. And I think the answer to that is probably no. We didn't run those numbers.

GRMATS have improved our short-term prospects. Not sure it would've changed our medium-term or long-term forecasts enough to eliminate that impairment charge. So they're somewhat linked but not directly related events.

Another comment for our Test Systems segment during the quarter. Test Systems used as a percentage of completion accounting systems and towards the end of the year, wrapped up a number of long-term programs. And at that point, it's appropriate to a align our estimated costs to complete with what becomes increasingly known costs to complete and that process resulted in a $2.3 million addition to revenue and profit during the quarter.

So lots of negative things affecting our Test Systems segment; that was something that positively affected during the quarter. It is not something that we would expect to necessarily be repeated in quarters going forward.

During the quarter, we had very positive cash flow again, $6 million from operations, capping a really strong cash year of where we generated $31.1 million. During the quarter we took advantage of the situation and paid down $8 million of our outstanding debt and as part of that payment opened up some covenants in our lending agreement to accommodate our short-term plans.

Dave will talk about that in a little bit more detail in a minute. After all that at the end of the year, we still had $15 million in cash on our balance sheet. We feel comfortable with our arrangements in the area of liquidity.

A final comment for those comparing our fourth quarter with our fourth quarter last year is that last year we had a pretty big anomaly also. We added a write-down of $10 million associated with the wrap-up of our involvement with Eclipse Aviation who had about that time basically ceased production of their small very light jet which has not been renewed since.

So switching from the quarter to the year, revenue was $191 million for the year 2009 which is a new record for the Company. We had from our organic business $140 million in revenue which on its own would've been down about 19% from our total in 2008.

The acquisition contributed $51 million. That's both our Test Systems segment and another operation which now reports through our Aerospace business of $51 million. So the 140 from organic and 51 from the acquisition gives us 191 total.

Another way to look at it is by our current segments. Aerospace sales were $155 million, 81% of total; and Test Systems was $35.6 million, 19% total; again that's 80/20 split between Aerospace and Test Systems.

Net loss for the year was $3.8 million or $0.35 per diluted share, largely due to the intangible write-down. Bookings were $146 million, a book to bill of 0.76. For the segments, that breaks down to $132 million for Aerospace and $13.7 million for Test Systems.

We are relatively comfortable with the Aerospace booking level where we remain somewhat concerned obviously about Test Systems. We will talk about that a little bit more when we look to 2010.

I wanted to close my 2009 comments by referring to the table on the top of page eight of our press release. Sales by market tells a little bit about what we are facing.

Again, Aerospace was 81% of our total sales at $155.6 million. Test Systems was 19% at $35.6 million. Within the Aerospace segment, our commercial transport sales and business jet sales in particular were down significantly, 15% for commercial transports and 36% for business jets.

Military on the other hand was up slightly. Commercial transport continues to be our single biggest market with 47% of total set of sales. Most of that sales remains our cabin electronics products, basically power for passengers, either directly for their laptops or personal electronic devices; or a combination of that and power for built-in in-flight entertainment systems and that part of our business continues we think to be subject to some slowdowns of production and some deferrals by airlines, but fundamentally strong from a competitive standpoint and poised to do well in the future as some new airplanes, including the 787 and A380, come online and as some anticipated retrofit efforts on the part of pretty significant airlines around the world continues to move forward.

I'll come back and talk about our expectations in a minute. In the meantime I want to turn it over to Dave to talk through some specifics on financials.

As Pete mentioned, in December we amended our credit facility, restructuring scheduled principal payments on our senior note that was related to the acquisition in January. We prepaid $8 million on the note and were able to relax some of the financial covenants for a few years to be more appropriate given our reduced revenue and cash flow forecast particularly for 2010 versus where we were at the beginning of the year and looking at the beginning of the year projections.

We were able to relax the minimum fixed charge coverage ratio and the maximum leverage ratios on those. Scheduled principal payments on the loan were also reduced by about $1 million per quarter for the period beginning April 2010 through October 2012. So the principal payments on that term note will be $1 million per quarter starting in April of 2010.

As far as our expectation for interest rate going forward, we expect our composite interest rate to be about 6% for 2010 including the bank spread on the market based debt. The interest rate on approximately $25 million of our debt has been fixed through at least 2014 at rates averaging about 6% including the bank spread. Reflected in this year's interest expense is in connection with our amendment, and we wrote off deferred financing costs that we incurred earlier in the year of about $200,000 that's shown through our interest expense for 2009.

As Pete mentioned, also during the fourth quarter, we conducted our impairment testing. The result of the testing was an impairment charge to the Test Systems business that we acquired earlier in the year, as the carrying value on that business exceeded the calculated fair value by about $19 million.

The fair value is determined by basically a discounted cash flow projection. And the decrease in the estimated fair value is due to our downward revision of our revenue and cash flow expectations due to the continued low bookings for the Test Systems business relative to our earlier expectations when the business was acquired.

Another note, throughout the year -- actually beginning toward the end of last year, we undertook a number of cost-cutting initiatives across all areas of our Company. Primarily we have been able to reduce our headcount by about 25% from a high point back in the third quarter of 2008.

Additionally in 2009 we froze wages for all employees during 2009 and we reduced our discretionary company contribution to our retirement plan as well. We reduced travel and entertainment cost and have lowered our development spending for our legacy business compared with 2008.

So we are looking under every rock to try to find opportunities where we can remove costs from the business without -- keeping in mind we don't want to sacrifice the opportunities that our customers are presenting us right now to grow the business over the long haul. That's all my remarks, Pete.

Okay, looking forward to 2010, we are forecasting sales in the range of $170 million to $190 million. That's a pretty wide spread. I'll explain some of it in a second.

We expect the Aerospace segment sales to be in the $145 million to $255 million. Again in the year just closed, we were $155.6 million. So we're expecting that to be at current levels or down slightly.

Our Test Systems segment we are expecting to be in the range of $25 million to $35 million. Again for 2009, our Test Systems segment reported revenues of $35.6 million. So that's expected to be down somewhat also.

I'm not going to turn this into a treatise on the market, but we are fairly comfortable with our aerospace projections and believe that current production rates and current plans in the retrofit side that we are aware of are fairly stable. And I guess as kind of a qualitative comment, I would contribute that we have come across a few situations recently including one even earlier today where we have learned that certain business jet customers are actively hiring people back to ramp up production on some models that haven't seen much activity over the last eight months or six months.

And we consider that to be a pretty good sign. That's obviously the segment of the aerospace business that has hurt us the most in 2009 as well as many other companies in the industry and everybody's looking forward to some show of strength or at least stability in the business jet side. We view this hiring activity as a good sign.

Our Test Systems business frankly has some risk in 2010 and we think it's risk related to timing. We have a booking budget or a booking plan that is well in excess of our shipment plans to the tune of 30% or so or more. That is a sign of our optimism about the market that's out there.

The real question in our minds is one of timing, frankly. We have a backlog as of the end of last year for that segment that is less than $10 million. Obviously a backlog of $10 million isn't going to help us generate revenues of 430 million or whatever is in that range.

So we need to book orders to achieve that shipment level. And getting -- the question really is when those bookings are going to hit. Getting them in the fourth quarter doesn't help us a whole lot for 2010.

We feel obviously by putting this projection out there that we have some prospects and that the prospects are likely to line up with respect to timing in a way to support that shipment level. But obviously we have to execute that and that's a major thrust of our activities in our Test Systems business right now.

Final comment is we expect the year to start a little bit slower and accelerate as time goes on. Revenues in the first quarter we expect to be in the 40, 41, $42 million range which is below what our run rate has to be to support the forecast I just talked about.

But again, we think the business prospects are there to support that 170 to $190 million consolidated revenue level. I think that wraps up our prepared comments. Christine, I'd like to open it up for questions at this point.

(Operator Instructions) Michael Ciarmoli, Boenning Scattergood.

Pete, who advised you guys on the DME acquisition? It sounds like the company was valued essentially with the GRMATS contract when already baked into the future revenue streams. Is that how we are supposed to look at that transaction? Was that contract assumed to be one?

That was one of them. There were a few others timing-wise that we expected to contribute also. If I back up the clock, and frankly the summer of 2008 at this point seems like a lifetime ago, we paid $50 million for a business that that year did $87 million or something. Dave, help me. I don't have that right in front of me.

And I will tell you that we were not the chosen bidder. We were put on the shelf and someone else went in, a big European conglomerate who ran into well-publicized problems. And then there was a second-place bidder which was a well-known US conglomerate that ran into well-publicized financial problems and then it came our turn.

And I would say at the time, the seller wasn't real happy about that turn of events as our price was significantly lower than others in line. Obviously things haven't gone exactly as we expected and if we had known then what we know now, we might have done it a little bit differently.

But we continue to think there are good prospects for the business. I guess that's the important thing I'd like to emphasize. I'm encouraged every time I go down there which is fairly frequent and we run through the list of prospects and I talk to the guys who are out pounding the pavement trying to make that happen. I think we will be okay if we can execute our plan.

What does the 2010 plan for DME related revenues look like? Should we assume it's kind of flat to down with the rest of the business?

DME as a company?

Yes.

I would say it's about the same as the rest of our business but I'm kind of guessing, Dave, we don't typically look at it like that anymore.

No, we haven't diced it like that for -- I don't have anything sitting in front of me right now that combines them like that.

So if we were just looking out, you know just to try and get a little -- dig a little deeper in the forecast, obviously the first half, lighter revenues I am assuming. Can you give us any sense as to what happens with engineering and development spending?

Just trying to understand how this might trickle down to the bottom line in your margins. We've seen gross margins kind of steadily decline since 2007 and based on the levels of activity, it sounds like cost cuts can only go so far.

Can you give us any help with sort of the modeling? It sounds like you're doing everything you can, so I would assume SG&A stays fairly constant maybe with some chance of dipping a little bit. But can you help on the engineering side with the plan?

I can give you (multiple speakers) Dave and I aren't in the same place. Why don't I take first cut here and then you can have the second cut if you want?

We are in this strange bubble, especially in the business jet world, where revenues have obviously taken a big hit. And with that, some development programs with our customers have been put on the shelf and we have been able in some cases to benefit from that by reducing our own spend.

At the same time, there are other programs which seem to be moving ahead at a pretty strong clip. And we, like has been the pattern over the last few years, are increasingly being considered for big portions of the business.

Now it's 2009-2010 and we are sitting here in this revenue trough in the business jet market compared to where it's been but we are being considered for pretty major roles for airplanes which will fly for 20 years. If we're going to get on them, now is the time we're going to get on them.

So our attitude is, especially with our cash position and the resources we have available, we are continuing to push those prospects. We published a range of E&D spending for this year which is pretty wide and that range is driven because if we win some of these programs, we obviously will incur greater costs. If we don't, they'll go down.

But our attitude is that we can't pass on those opportunities. Three or four years from now or whenever the market recovers, we hope to be a bigger and stronger company, we've got to win those programs now in order to get there then.

The other comment I would give to you is that it's early but there have been increasing signs or symptoms or evidence that programs that kind of went to sleep, not officially canceled but not really funded and actively pursued by various OEMs, are starting to wake up a little bit and starting to gain some funding internally.

And kind of -- I don't know how to -- wake up from a hibernation almost is how I kind of look at it. It's early but suppliers like us tend to see that and I guess I've been a little bit encouraged by feedback and interest that we have got from a range of companies that kind of disappeared the middle of last year.

So is E&D spending flat, up? It was a pretty big level last year at about close to $26 million. Are we talking the same level, slightly higher?

I think it's likely to be a little bit lower. Dave, what's your thought on that?

I would agree. But still kind of running in that 5 to $6 million per quarter type of thing.

One more question and I'll jump off here. Military revenues were down. I guess you guys cited tactical Tomahawk as being one of the factors. What's the outlook there?

Looking through the defense budget that was just published, Tomahawk volumes looked to be the same going forward. So is there a chance for that program to pick back up again or how do you see that?

I happen to have Mark Peabody on the line. I will let him chime in here but let me first answer that we -- the production rate at the macro level may be constant.

We happen to have a contract vehicle that rewarded us for delivering early. And so we built a lot of units on a lot of hardware that is now feeding production at that top OEM level. So that explains a little bit of the lag. We do expect to get more orders in the future, but those orders will largely not happen in 2010. Mark, you want to correct me on any of that?

Right. We had a multi-year buy that was basically seven years that we built in four. So we will probably see an uptick [at the end] in about two to two and a half years when we go back into production.

That's interesting. You have any other contracts there like that that we should be aware of that would factor in?

No, not multi-year, not in our division; no.

Okay, and then just one last one. As I think about the -- maybe strength in the back half of the year, can you talk maybe about the -- sort of some of the positive shaping up around the 787? I think you guys have roughly $200,000 of content on that airframe.

Is that going to be a factor in sort of some of the strength in the back half that you guys are looking at? Or if you could just tell us where you are in that program.

Well yes and no. We are very excited about the 787. Again, we are essentially providing power to whoever provides IFE to each 787 somebody buys. So somebody buys a 787, they are going to put either [Tallus] or Panasonic IFE systems. Either way, we're going to be doing the power.

So, yes, we think that's going to be a major program. It's not however going to be a major driver for us in 2010 in part because we had already shipped a fair amount of hardware to our customers.

We don't ship direct to Boeing. We are on contract at Panasonic and [Tallus] and like a lot of tier one suppliers, they were building to a production rate which didn't materialize. So they are holding a lot of hardware and we would expect early deliveries of 787s to be equipped with hardware we have already provided. That may change right towards the end of 2010, but it's not going to be an identifiable contributor to our 2010 revenues, Mark, correct?

Yes, we don't see anything significant in 2010 but we expect to see the uptick start in 2011.

(Operator Instructions) Scott Lewis, Lewis Capital Management.

On the test system business, Pete, on some of the bookings you hope to get later on this year; can you talk a little bit about where you think you might see those. whether they are VIPER/T, maybe GRMATS tp non-Marine militaries or commercial or whatever?

Well, we have -- it comes from a number of sources but the major thrust actually is very much GRMATS related. We have some technology which we call software defined radio test which we think is highly advantageous. And the whole reason in our view, a big part of the reason why the Marine purchase went forward is that we demonstrated technology and they really liked it and they created a competition for it.

We are continuing to promote that at various places around the world. And the best way to understand why it's advantageous is that we have some promotional materials which I obviously can't show over the phone here, but if you can somehow picture a rack of equipment used that would be needed to thoroughly and completely test a radio, it would be I'm going to guess 15 different boxes of test gear.

And in order to run those tests, you would need a fairly skilled technician who knew how to run each box and could manually test whatever parameter or element that he or she was looking to test that particular (inaudible) and the particular item under test with the test hardware. Our technology basically uses software to simulate those 15 dedicated test boxes and does it all in one box in an automated or a manual fashion, depending on what the operator wants to do.

And for militaries who are tasked with maintaining big radios, fleets so to speak, having the ability to do that testing quickly and easily is pretty exciting. And we are -- our plan all along was to win the GRMATS program and not stop there, take it elsewhere.

We didn't like the way GRMATS turned out. Not much we can do that at this point, but we do still have that list of prospects and we are pursuing that pretty aggressively. I also have Brian Price who runs our test system segment on the phone. And, Brian, I don't know if you want to add anything to that?

Yes, we basically have multiple opportunities going forward as Pete said with the radio test products with our GRMT type solution, both internationally and domestically and all those opportunities are in various stages of the procurement process now.

Okay, super. And then, Pete, one other DME acquisition question. The airfield lighting part of the business which now you don't break out, but would you or Dave care to kind of put a price on what you would have paid for that business standalone? And then we can back into maybe what the Test Systems standalone would've cost.

We actually do break out the airfield lighting revenues. In that chart on the top of page eight, there's an FAA airport line.

Right, right; you don't give operating income from that.

No, we don't do that; you're right. And we also don't -- there's another section in there which is kind of aircraft safety related and combined, that operation of DME does in the neighborhood of 16 to $18 million a year. Again, I don't have that in front of me but that's roughly the range. Is your question what would we have paid for that business separately?

Yes.

At the time, I think that business -- catching me really unprepared here -- but I would say that business probably would have fetched 15 to $20 million by itself at the time. Dave, you want to --?

No, that's a ballpark guess.

That's not a question I've had before.

There are no further questions in the queue at this time. I would now like to turn the floor back over to management for closing comments.

Okay, I don't have any closing comments. I would like to thank you all for tuning in, paying attention.

We look forward to -- frankly we're happy 2009 is over. We're looking forward to a better 2010, or at least one that prepares for a better future beyond that. So thanks for your attention. We look forward to talking with you at the end of the first quarter.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.